AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON May 1, 2017
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
| ¨ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 |
OR
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2016
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ..................... to……………..
OR
| ¨ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Date of event requiring this shell company report……………….
Commission file number: 001 - 32535
BANCOLOMBIA S.A.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Republic of Colombia
(Jurisdiction of incorporation or organization)
Carrera 48 # 26-85, Avenida Los Industriales
Medellín, Colombia
(Address of principal executive offices)
Alejandro Mejia Jaramillo, Investor Relations Manager
Tel. +574 4041837, Fax + 574 4045146, e-mail: almejia@bancolombia.com
Carrera 48 # 26-85, Medellín, Colombia
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
| Title of each Class | Name of each exchange on which registered | |
| American Depositary Shares | New York Stock Exchange | |
| Preferred Shares | New York Stock Exchange* | |
| * | Bancolombia’s preferred shares are not listed for trading directly, but only in connection with its American Depositary Shares, which are evidenced by American Depositary Receipts, each representing four preferred shares. |
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
Not applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the
period covered by the annual report.
| Common Shares | 509,704,584 |
| Preferred Shares | 452,122,416 |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes x No ¨
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 of 15(d) of the Securities Exchange Act of 1934.
Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “accelerated filer and large, accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
| U.S. GAAP ¨ | International Financial Reporting Standards as issued by the International Accounting Standards Board x |
Other ¨ |
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 ¨ Item 18 ¨
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes ¨ No x
TABLE OF CONTENTS
Unless otherwise specified or if the context so requires, in this annual report:
References to “ADSs” refer to our American Depositary Shares (one ADS represents four preferred shares).
References to the “Annual Report” refer to this annual report on Form 20-F.
References to “ATM” refer to automatic teller machine.
References to “BAM” refer to Banco Agromercantil de Guatemala S.A., a banking institution organized under the laws of the Republic of Guatemala, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
References to “Banagrícola” refer to Banagrícola S.A., a company incorporated in Panama, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
References to “Banca de Inversión” refer to Banca de Inversión Bancolombia S.A. Corporación Financiera, a Subsidiary of Bancolombia S.A. organized under the laws of the Republic of Colombia that specializes in providing investment banking services.
References to “Banco Agrícola” refer to Banco Agrícola S.A., a banking institution organized under the laws of the Republic of El Salvador, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
References to “Bancolombia”, the “Bank”, “us” , “we” or “our” refer to Bancolombia S.A., a banking institution organized under the laws of the Republic of Colombia, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
References to “Bancolombia Panama” refer to Bancolombia Panamá S.A., a subsidiary of Bancolombia S.A. organized under the laws of the Republic of Panama that provides banking services to non-Panamanian customers.
References to “Banistmo” refer to Banistmo S.A., a banking institution organized under the laws of the Republic of Panama, including its subsidiaries on a consolidated basis, unless otherwise indicated or the context otherwise requires.
References to “Central Bank” refer to the Central Bank of Colombia (Banco de la República).
References to “Colombia” refer to the Republic of Colombia.
References to “Colombian banking GAAP” refer to generally accepted accounting Principles in Colombia as supplemented by the applicable regulations of the SFC.
References to “Conavi” refer to Conavi Banco Comercial y de Ahorros S.A. as it existed immediately before its merger with and into Bancolombia.
| i |
References to “Congress” refer to the national congress of Colombia.
References to "Consolidated Financial Statements" refer to the audited consolidated statements of financial position of the Bank as of December 31, 2016 and 2015 and the audited consolidated statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2016, 2015 and 2014 and related notes included in this Annual Report.
References to “Corfinsura” refer to Corporación Financiera Nacional y Suramericana S.A., as it existed immediately before its merger with and into Bancolombia.
References to “DTF” refer to the Depósitos a Término Fijo rate, the weighted average interest rate paid by finance corporations, commercial banks and financing companies in Colombia for time deposits with maturities of 90 days.
References to “Fiduciaria Bancolombia” refer to Fiduciaria Bancolombia S.A. Sociedad Fiduciaria, a Subsidiary of Bancolombia organized under the laws of Colombia which provides trust and fund management services.
References to “Grupo Agromercantil” refer to Grupo Agromercantil Holding S.A., a company organized under the laws of the Republic of Panama and the parent company of Banco Agromercantil of Guatemala, and its consolidated subsidiaries, unless the context otherwise requires.
References to “IRS” refer to U.S. Internal Revenue Service.
References to “Leasing Bancolombia” refer to Leasing Bancolombia S.A. Compañía de Financiamiento, a Subsidiary of Bancolombia S.A. organized under the laws of Colombia that specialized in leasing activities, offering a wide range of financial leases, operating leases, loans, time deposits and bonds. On September 30, 2016, Leasing Bancolombia merged with and was absorbed by Bancolombia S.A.
References to “NYSE” refer to the New York Stock Exchange.
References to “OCI” refers to Other Comprehensive Income.
References to “peso”, “pesos” or “COP” refer to the lawful currency of Colombia.
References to “preferred shares” and “common shares” refer to our issued outstanding and fully paid-in preferred and common shares, designated as acciones con dividendo preferencial sin derecho a voto and acciones ordinarias, respectively.
References to “Renting Colombia” refer to Renting Colombia S.A., a Subsidiary of Bancolombia S.A. organized under the laws of Colombia which provides operating lease and fleet management services for individuals and companies.
| ii |
References to “Representative Market Rate” refer to Tasa Representativa del Mercado, the U.S. dollar representative market rate, certified by the SFC. The Representative Market Rate is an economic indicator of the daily exchange rate on the Colombian market spot of currencies. It corresponds to the arithmetical weighted average of the rates for the purchase and sale of currencies by certain financial institutions (including Bancolombia) authorized to engage in foreign exchange transactions in Colombia.
References to “SEC” refer to the U.S. Securities and Exchange Commission.
References to “SMEs” refer to Small and Medium Enterprises.
References to “SMMLV” refer to Salario Mínimo Mensual Legal Vigente, the effective legal minimum monthly salary in Colombia. In 2016, the effective legal minimum monthly salary in Colombia was COP 689,454.
References to “Subsidiaries” refer to entities in which Bancolombia S.A. holds, directly or indirectly, more than 50% of the outstanding voting shares.
References to “Superintendency of Finance” or “SFC” refer to the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia), a technical entity under the Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público) with functions of inspection, supervision and control over the entities involved in financial activities, capital markets, insurance and any other services related to the management, use or investment of resources collected from the public.
References to “U.S.” or “United States” refer to the United States of America.
References to “U.S. dollar”, “USD”, and “US$” refer to the lawful currency of the United States.
References to “UVR” refer to Unidades de Valor Real, a Colombian inflation-adjusted monetary index calculated by the board of directors of the Central Bank and generally used for pricing home-mortgage loans.
References to “Valores Bancolombia” refer to Valores Bancolombia S.A. Comisionista de Bolsa, a Subsidiary of Bancolombia S.A. organized under the laws of the Republic of Colombia that provides brokerage and asset management services.
The term “billion” means one thousand million (1,000,000,000).
The term “trillion” means one million million (1,000,000,000,000).
Our fiscal year ends on December 31, and references in this annual report to any specific fiscal year are to the 12-month period ended December 31 of such year.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements which may constitute forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are not based on historical facts but instead represent only the Bank’s belief regarding future events, many of which, by their nature, are inherently uncertain and outside the Bank’s control. The words “anticipate”, “believe”, “estimate”, “expect”, “intend”, “plan”, “predict”, “target”, “forecast”, “guideline”, “should”, “project” and similar words and expressions are intended to identify forward-looking statements. It is possible that the Bank’s actual results may differ, possibly materially, from the anticipated results indicated in or implied by these forward-looking statements.
Information regarding important factors that could cause actual results to differ, perhaps materially, from those in the Bank’s forward-looking statements appear in a number of places in this Annual Report, principally in Item 3. “Key Information – D. Risk Factors” and Item 5. “Operating and Financial Review and Prospects”. These factors include, but are not limited to: (i) changes in general economic, business, political, social, fiscal or other conditions in Colombia, or in any of the other countries where the Bank operates; (ii) changes in capital markets or in markets in general that may affect policies or attitudes towards lending; (iii) unanticipated increases in financing and other costs or the inability to obtain additional debt or equity financing on attractive terms; (iv) inflation, changes in foreign exchange rates and/or interest rates; (v) sovereign risks; (vi) liquidity risks; (vii) increases in delinquencies by the Bank’s borrowers; (viii) lack of acceptance of new products or services by the Bank’s targeted customers; (ix) competition in the banking, financial services, credit card services, insurance, asset management, remittances, business and other industries in which the Bank operates; (x) adverse determination of legal or regulatory disputes or proceedings; (xi) changes in official regulations and the Colombian government’s banking policy as well as changes in laws, regulations or policies in other jurisdictions in which the Bank does business; (xii) regulatory issues relating to acquisitions; and (xiii) changes in business strategy.
Forward-looking statements speak only as of the date they are made and are subject to change, and the Bank does not intend, and does not assume any obligation, to update these forward-looking statements in light of new information or future events arising after the date of this Annual Report.
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PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
Accounting Principles
The audited consolidated statements of financial position of the Bank as of December 31, 2016 and 2015 and the audited consolidated statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2016, 2015 and 2014 and related notes (the “Consolidated Financial Statements”) included in this Annual Report were prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board (“IASB”) and the related interpretations issued by the International Financial Reporting Interpretations Committee (“IFRIC”). All data included in this report has been prepared in accordance with IFRS as issued by the IASB, except for the data included in Item 4. B.7 Competition, which has been prepared in accordance with the local GAAP of each subsidiary.
The Consolidated Financial Statements include entities which the Bank controls, directly or indirectly. See Item 4. “Information on the Company – C. Organizational Structure” for an organizational chart depicting Bancolombia and its subsidiaries.
Currencies
The Consolidated Financial Statements are presented in Colombian pesos, which is the functional currency for Bancolombia S.A., and the presentation currency for the Consolidated Financial Statements. The Consolidated Financial Statements as of December 31, 2016 and 2015 and for the three fiscal years ended December 31, 2016, 2015 and 2014 contained in this Annual Report are expressed in millions of pesos.
This Annual Report translates certain pesos amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, such peso amounts have been translated at the rate of COP 3,000.71 per USD 1.00, which corresponds to the Representative Market Rate calculated on December 31, 2016. The SFC also calculates and certifies the average Representative Market Rate for each month for purposes of preparing financial statements and converting amounts in foreign currency to pesos. Such conversion should not be construed as a representation that the peso amounts correspond to, or have been or could be converted into, U.S. dollars at that rate or any other rate. On April 28, 2017, the Representative Market Rate was COP 2,944.31 per USD 1.00.
Rounding Comparability of Data
Certain monetary amounts, percentages and other figures included in this Annual Report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.
The Bank maintains an internet site at http://www.grupobancolombia.com/. In addition, certain of the Bank’s Subsidiaries referred to in this Annual Report maintain separate internet sites. For example, Banco Agrícola and Banistmo maintain internet sites at http://www.bancoagricola.com/ and http://www.banistmo.com/, respectively.Information included on or accessible through Bancolombia’s internet site or the internet site of any of the Subsidiaries of the Bank is not part of this Annual Report. All references in this Annual Report to these and other internet sites are inactive textual references to these URLs, or “uniform resource locators”, and are for your informational reference only.
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| ITEM 1. | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS |
Not applicable.
| ITEM 2. | OFFER STATISTICS AND EXPECTED TIMETABLE |
Not applicable.
| ITEM 3. | KEY INFORMATION |
| A. | SELECTED FINANCIAL DATA |
The selected consolidated statement of financial position data as of December 31 2016 and 2015, and the selected consolidated statement of income data for each of the periods ended December 31, 2016, 2015 and 2014, set forth below have been derived from the Consolidated Financial Statements under IFRS as issued by the IASB included in this Annual Report, except for the figures translated to U.S. dollars, which are presented for the convenience of the reader.
The selected consolidated statement of financial position data as of December 31, 2014 have been derived from audited consolidated financial statements previously filed with the SEC as part of the Bank’s Annual Report on Form 20-F for the year ended December 31, 2015.
The selected consolidated financial data should be read in conjunction with, and is qualified in its entirety by reference to the Consolidated Financial Statements, including the notes thereto, and the audit reports of the Bank’s independent registered public accounting firms.
The Consolidated Financial Statements of the Bank as of December 31, 2016 were audited by Deloitte and Touche Ltda, while the Consolidated Financial Statements of the Bank as of December 31, 2015 and December 31, 2014 were audited by PricewaterhouseCoopers Ltda.
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| As of and for the year ended December 31, | ||||||||
| 2016 (1) | 2016 | 2015 | 2014 | |||||
| In millions of COP and thousands of USD, except per share and per ADS amounts | ||||||||
| SELECTED CONSOLIDATED STATEMENT OF INCOME DATA: | ||||||||
| Total interest and valuation | USD | 5,248,360 | COP | 15,748,805 | COP | 11,269,644 | COP | 9,172,163 |
| Interest expenses | (2,017,223) | (6,053,100) | (4,037,941) | (3,164,611) | ||||
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 3,231,137 | 9,695,705 | 7,231,703 | 6,007,552 | ||||
| Credit impairment charges on loans and financial leases, net. | (881,028) | (2,643,710) | (1,667,680) | (843,597) | ||||
| Credit impairment charges on off balance sheet credit instruments | (29,140) | (87,442) | (7,421) | (25,608) | ||||
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 2,320,969 | 6,964,553 | 5,556,602 | 5,138,347 | ||||
| Total other operating income (2) | 1,327,279 | 3,982,779 | 3,577,320 | 3,084,942 | ||||
| Total operating expenses | (2,325,800) | (6,979,050) | (5,898,287) | (5,118,695) | ||||
| Profit before tax | 1,322,448 | 3,968,282 | 3,235,635 | 3,104,594 | ||||
| Income tax | (392,185) | (1,176,832) | (649,250) | (737,676) | ||||
| Profit for the year from continuing operations | 930,263 | 2,791,450 | 2,586,385 | 2,366,918 | ||||
| Net income from discontinued operations | 54,486 | 163,497 | 22,513 | 62,867 | ||||
| Net income | 984,749 | 2,954,947 | 2,608,898 | 2,429,785 | ||||
| Net income attributable to equity holders of the parent company | USD | 954,883 | COP | 2,865,328 | COP | 2,518,890 | COP | 2,387,086 |
| Non-controlling interest | 29,866 | 89,619 | 90,008 | 42,699 | ||||
| Weighted average of Preferred and Common Shares outstanding (3) | 961,827,000 | 961,827,000 | 941,936,589 | |||||
| Basic and Diluted earnings per share to common shareholders (3) | 1.01 | 3,040 | 2,680 | 2,591 | ||||
| From continuing operations | 0.96 | 2,870 | 2,656 | 2,524 | ||||
| From discontinued operations | 0.06 | 170 | 24 | 67 | ||||
Basic and Diluted earnings per ADS (2) |
4.05 | 12,160 | 10,720 | 10,364 | ||||
| From continuing operations | 3.83 | 11,480 | 10,624 | 10,096 | ||||
| From discontinued operations | 0.23 | 680 | 96 | 268 | ||||
| Cash dividends declared per share | 950 | 888 | 830 | |||||
| Cash dividends declared per share (stated in US Dollars) | 0.32 | 0.28 | 0.26 | |||||
| Cash dividends declared per ADS | 3,800 | 3,552 | 3,320 | |||||
| Cash dividends declared per ADS (stated in US Dollars) | 1.27 | 1.13 | 1.05 | |||||
(1) Translated for convenience only using the representative market rate as computed and certified by the Superintendency of Finance of COP 3000,71 per U.S. 1.00 at December 31, 2016.
(2) Includes total fees and commissions, net, other operating income and Dividends received, and share of profits of equity method investees. See Consolidated Statement of income to the Consolidated Financial Statements.
(3)The weighted average of preferred and common shares outstanding for the fiscal years ended December 31, 2016 and 2015 reflects 452,122,416 preferred shares and 509,704,584 common shares, and for the fiscal year ended December 31, 2014 reflects 432,232,005 preferred shares and 509,704,584 common shares.
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| As of December 31, | ||||||||
| 2016(1) | 2016 | 2015 | 2014 | |||||
| In millions of COP and thousands of USD, except per share and ADS amounts | ||||||||
| SELECTED CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA: | ||||||||
| Assets: | ||||||||
| Cash and cash equivalents | USD | 6,818,468 | COP | 20,460,245 | COP | 18,597,614 | COP | 13,466,783 |
| Financial assets investments | 4,352,521 | 13,060,653 | 14,277,824 | 12,784,223 | ||||
| Derivative financial instruments | 559,191 | 1,677,970 | 2,382,168 | 1,448,845 | ||||
| Loans and advances to customers and financial Institutions | 50,570,527 | 151,747,486 | 145,620,639 | 115,173,653 | ||||
| Allowance for loans and advances and lease losses | (2,206,781) | (6,621,911) | (5,248,755) | (4,789,257) | ||||
| Assets held for sale and inventories | 91,041 | 273,187 | 1,950,808 | 97,744 | ||||
| Investment in associates and joint ventures | 432,646 | 1,298,246 | 546,549 | 1,349,697 | ||||
| Investment property | 527,105 | 1,581,689 | 1,505,046 | 1,114,180 | ||||
| Premises and equipment, net (2) | 1,038,320 | 3,115,697 | 3,052,266 | 2,646,321 | ||||
| Goodwill and Intangible assets, net | 2,230,817 | 6,694,037 | 7,092,255 | 4,585,849 | ||||
| Deferred tax, net | 74,270 | 222,862 | 170,482 | 187,737 | ||||
| Other assets | 916,744 | 2,750,883 | 3,025,971 | 1,564,106 | ||||
| Total assets | USD | 65,404,869 | COP | 196,261,044 | COP | 192,972,867 | COP | 149,629,881 |
| Liabilities and equity | ||||||||
| Deposits by customers | 41,531,508 | 124,624,011 | 121,802,028 | 94,769,319 | ||||
| Borrowings from other financial institutions | 6,300,457 | 18,905,843 | 19,721,184 | 13,852,284 | ||||
| Debt securities in issue | 6,233,461 | 18,704,809 | 19,435,865 | 14,527,403 | ||||
| Other liabilities(3) | 3,848,889 | 11,549,401 | 11,605,871 | 9,114,395 | ||||
| Total Equity | 7,490,554 | 22,476,980 | 20,407,919 | 17,366,480 | ||||
| Total liabilities and equity | USD | 65,404,869 | COP | 196,261,044 | COP | 192,972,867 | COP | 149,629,881 |
(1) Translated for convenience only using the representative market rate as computed and certified by the Superintendency of Finance of COP 3000,71 per U.S. 1.00 at December 31, 2016.
(2) The Group previously classified land and buildings that were acquired through foreclosure of loans with net carrying amount of COP 189,296 million as of December 31, 2015 in premises and equipment. At December 31, 2016 and 2015, such assets were reclassified to other assets as they are intended for immediately sale or disposition.
(3) Includes interbank deposits, repurchase agreements and other similar secured borrowing, derivative financial instruments, preferred shares, current tax, deferred tax, net, employees benefit plans and other liabilities See Consolidated statement of financial position to the Consolidated Financial Statements.
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See Item 8. “Financial Information – A. Consolidated Statements and Other Financial Information – A.3. Dividend Policy”, for information about the dividends declared per share in both pesos and U.S. dollars during the fiscal years ended December 31, 2016, 2015, 2014, 2013 and 2012.
SELECTED RATIOS
| As of and for the year ended December 31, | |||
| 2016 | 2015 | 2014 | |
| Percentages, except for operating data | |||
| SELECTED RATIOS: (1) | |||
| Profitability ratios: | |||
| Net interest and valuation income after provisions for loans, financial leases and off-balance sheet credit instruments margin from continuing operations (2) | 5.96 | 5.25 | 5.30 |
| Return on average total assets from continuing operations (3) | 1.49 | 1.53 | 1.72 |
| Return on average stockholders‘ equity attributable to the owners of the parent company (4) | 14.52 | 13.62 | 14.81 |
| Efficiency ratio: | |||
| Operating expenses to net operating income from continuing operations | 51.02 | 54.57 | 56.30 |
| Operating expenses to average total assets from continuing operations | 3.64 | 3.62 | 3.80 |
| Operating expenses to interest-earning assets from continuing operations | 4.29 | 4.28 | 4.51 |
| Capital ratios: | |||
| Technical capital to risk weighted assets (5)(6) | 13.26 | 12.46 | N/A |
| Credit quality data: | |||
| Past due loans to loans principal (7) | 3.31 | 2.98 | 2.62 |
| “C”, “D” and “E” loans as a percentage of loans principal | 5.07 | 3.95 | 3.81 |
| Allowances for loan and lease losses to past due loans (8) | 125.90 | 115.16 | 145.55 |
| Allowance for loan and lease losses as a percentage of “C”, “D” and “E” loans (8) | 82.08 | 87.00 | 100.09 |
| Allowance for loan and lease losses as a percentage of total loans | 4.17 | 3.43 | 3.81 |
| Operating data: | |||
| Number of branches (9) | 1,247 | 1,274 | 1,067 |
| Number of employees (10) | 31,598 | 34,390 | 30,158 |
| (1) | Average balances used to calculate the ratios shown above have been calculated as follows: for the years ended December 31, 2016 and 2015, for each month, the actual month-end balances were established. The average consolidated balance for such periods is the average of 13 month-end balances. For the year ended December 31, 2014, the average balances have been calculated using five quarterly balances under IFRS, as we believe such balances are representative of our operations and it would be too costly to produce average balances using monthly balances under IFRS. |
| (2) | Net interest income divided by average interest-earning assets. |
| (3) | Net income divided by average total assets. |
| (4) | Net income divided by average total stockholders’ equity attributable to the owners of the parent company. |
| (5) | For an explanation of risk-weighted assets and Technical Capital, see Item 4. “Information on the Company – B. Business Overview – B.8. Supervision and Regulation” and Item 5 “Operation and Financial Review and Prospects - B. Liquidity and Capital Resources – B.1. Liquidity and Funding – Capital Adequacy". |
| (6) | N/A: not applicable. The Bank’s consolidated capital adequacy as of December 31, 2014, was computed considering balance accounts maintained under Colombian Banking GAAP. The Bank´s consolidated capital adequacy as of December 31, 2016 and 2015, was computed considering balance accounts maintained under IFRS. |
| (7) | Loans that are past due more than 30 days to loans principal. |
| (8) | The variation between 2015 and 2014 is mainly generated by the inclusion of Grupo Agromercantil’s loan portfolio at fair value during 2015. |
| (9) | Number of branches includes branches of the Bank’s Subsidiaries. For some subsidiaries, the central office is considered a branch. Representative offices are included. For the year 2014, Tuya S.A (a discontinued operation) had 4 branches. |
| (10) | The number of employees includes employees of the Bank’s consolidated Subsidiaries. At December 31, 2015 and 2014 Tuya S.A had 3.020 and 2.639 employees, respectively. |
| 9 |
Exchange Rates
On March 31 2017, the Representative Market Rate was COP 2,885.57 per USD 1.00. The Federal Reserve Bank of New York does not report a rate for pesos; the SFC calculates the Representative Market Rate based on the weighted average of the buy/sell foreign exchange rates quoted daily by certain financial institutions, including Bancolombia, for the purchase and sale of U.S. dollars.
The following table sets forth the low and high peso per U.S. dollar exchange rates and the peso/U.S. dollar representative market rate on the last day of the month, for each of the last six months:
| Recent exchange rates of pesos per U.S. dollars | |||
| Month | Low | High | Period-End |
| March 2017 | 2,880.24 | 3,004.43 | 2,885.57 |
| February 2017 | 2,851.98 | 2,919.17 | 2,919.17 |
| January 2017 | 2,908.53 | 3,000.71 | 2,921.90 |
| December 2016 | 2,964.56 | 3,068.34 | 3,000.71 |
| November 2016 | 2,984.78 | 3,187.97 | 3,085.60 |
| October 2016 | 2,905.93 | 2,998.55 | 2,998.55 |
Source: SFC.
The following table sets forth the peso/U.S. dollar representative market rate on the last day of the year and the average peso/U.S. dollar representative market rate (calculated by using the average of the Representative Market Rates on the last day of each month during the year) for each of the five most recent financial years.
| Representative Market Rate | ||
| Period | Period-End | Average |
| Peso/USD 1.00 | ||
| 2016 | 3,000.71 | 3,039.23 |
| 2015 | 3,149.47 | 2,773.43 |
| 2014 | 2,392.46 | 2,019.38 |
| 2013 | 1,926.83 | 1,881.04 |
| 2012 | 1,768.23 | 1,798.08 |
Source: SFC.
| B. | CAPITALIZATION AND INDEBTEDNESS |
Not applicable.
| C. | REASONS FOR THE OFFER AND USE OF PROCEEDS |
Not applicable.
| 10 |
| D. | RISK FACTORS |
Investors should consider the following risks and uncertainties, and the other factors presented in this Annual Report. In addition, the information referred to below, as well as all other information presented in this Annual Report, should be considered by investors when reviewing any forward-looking statements contained in this Annual Report, in any document incorporated by reference in this Annual Report, in any of the Bank’s future public filings or press releases, or in any future oral statements made by the Bank or any of its officers or other persons acting on its behalf. If any of the following risks occur, the Bank’s business, results of operations and financial condition, its ability to raise capital and its ability to access funding could be materially and adversely affected. These risk factors should not be considered a complete list of potential risks that may affect Bancolombia.
Risk Factors Relating to Colombia and Other Countries Where the Bank Operates.
Changes in economic and political conditions in Colombia, El Salvador, Panama, and Guatemala or in the other countries where the Bank operates may adversely affect the Bank’s financial condition and results of operations.
The Bank’s financial condition, results of operations and asset quality are significantly dependent on the macroeconomic and political conditions prevailing in Colombia, El Salvador, Panama, Guatemala and the other jurisdictions in which the Bank operates. Accordingly, decreases in the growth rate, periods of negative growth, increases in inflation, changes in policy, or future judicial interpretations of policies involving exchange controls and other matters such as currency depreciation, inflation, interest rates, taxation, banking laws and regulations and other political or economic developments in such jurisdictions may affect the overall business environment and may in turn negatively affect the Bank’s financial condition and results of operations.
In particular, the governments of Colombia, Panama, Guatemala and El Salvador have historically exercised substantial influence on their economies, and they are likely to continue to implement policies that will have an important impact on the business and results of operations of the entities in such countries (including the Bank), market conditions and prices and rates of return on securities of local issuers (including the Bank’s securities). Potential changes in laws, public policies and regulations may cause instability and volatility in Colombia, Panama, Guatemala and El Salvador, and their respective markets. Future developments in government policies could negatively affect the Bank’s business and financial condition and the market value of its securities.
Although Colombia and Panama currently have investment grade credit ratings from international rating agencies, El Salvador and Guatemala do not. As of the date of this Annual Report, El Salvador has a long-term debt rating of Caa1 (stable) from Moody’s, and was recently downgraded to CCC- (negative watch) by S&P. Guatemala has ratings of Ba1 (stable) and BB (negative) from Moody’s and S&P, respectively. Further downgrades in the ratings of either country, or the failure of Colombia or Panama to maintain investment grade credit ratings, could increase the Bank’s financing costs and adversely affect our results of operation and financial condition.
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The economies of the countries in which the Bank operates are vulnerable to external effects that could be caused by significant economic difficulties experienced by their major regional trading partners or by more general contagion effects, which could have a material adverse effect on economic growth in these countries and their ability to service their public debt.
A significant decline in economic growth or a sustained economic downturn of any of Colombia’s, El Salvador’s, Panama’s or Guatemala’s major trading partners (i.e., the European Union, the United States, China and other Latin American countries for Colombia and the United States and European Union for El Salvador and Panama) could have a material adverse impact on Colombia’s, El Salvador’s, Guatemala’s and Panama’s balance of trade and remittances inflows, resulting in lower economic growth.
Deterioration in the economic and political situation in neighboring countries could adversely affect the economy and cause instability in Colombia, Panama, El Salvador and Guatemala by disrupting their diplomatic or commercial relationships with neighboring countries. Any future tensions may cause political and economic uncertainty, instability, market volatility, low confidence levels and higher risk aversion by investors and market participants that may negatively affect economic activity in any of those jurisdictions.
Events occurring in a market where we do not operate may cause international investors to have an increased risk perception of an entire region or class of investment, which could in turn negatively affect market prices and liquidity of securities issued or owned by the Bank.
Any additional taxes resulting from changes to tax regulations or the interpretation thereof in Colombia, El Salvador, Panama, Guatemala or other countries in which the Bank operates, could adversely affect the Bank’s consolidated results.
Uncertainty relating to tax legislation poses a constant risk to the Bank. Changes in legislation, regulation and jurisprudence can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting deductions and exemptions, and eliminating incentives and non-taxed income. Notably, the Salvadorian government has significant fiscal deficits that may result in future tax increases. Higher taxes could negatively affect the Bank’s results of operations and cash flow. In addition, national or local taxing authorities may not interpret tax regulations in the same way that the Bank does. Differing interpretations could result in future tax litigation and associated costs.
Exchange rate fluctuations may adversely affect the Colombian economy, the market price of the Bank’s ADSs, and the dividends payable to holders of the Bank’s ADSs.
Colombia has adopted a floating exchange rate system. The Central Bank maintains the power to intervene in the exchange market in order to consolidate or dispose of international reserves, and to control any volatility in the exchange rate. From time to time, including during 2016, there have been significant fluctuations in the exchange rate between the Colombian peso and the U.S. dollar. Unforeseen events in the international markets, fluctuations in interest rates, volatility of the oil price in the international markets, or changes in capital flows, may cause exchange rate instability that could generate sharp movements in the value of the peso. Because a portion of the Bank’s assets and liabilities are denominated in, or indexed to, foreign currencies, especially the U.S. dollar, sharp movements in exchange rates may negatively impact the Bank’s results. In addition, exchange rate fluctuations may adversely impact the value of dividends paid to holders of the Bank’s ADSs as well as the market price and liquidity of ADSs.
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Colombia has experienced several periods of violence and instability that could affect the economy and the Bank.
Colombia has experienced periods of criminal violence over the past four decades, primarily due to the activities of guerilla groups and drug cartels. In response, the Colombian government has negotiated a peace treaty with the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia or “FARC”). Additionally, the Colombian government is currently in the process of negotiating a peace treaty with the National Liberation Army (Ejercito de Liberación Nacional or “ELN”). Despite these efforts, the peace treaty with the FARC or the peace negotiations with the ELN may not lead to a lasting decrease in violence or drug-related crime in Colombia or the successful integration of former guerilla members into Colombian society. An escalation of violence or drug-related crime may have a negative impact on the Colombian economy and on the Bank.
Risk Factors relating to the Bank’s Business and the Banking Industry
Our financial results may be negatively affected by changes to accounting standards.
We report our results and financial position in accordance with IFRS as issued by the IASB. Changes to IFRS or interpretations thereof may cause our future reported results and financial position to differ from current expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a retrospective basis. Such changes may also affect our regulatory capital and ratios. We monitor potential accounting changes and when possible, we determine their potential impact and disclose significant future changes in our financial statements that we expect as a result of those changes. Currently, there are a number of issued but not yet effective IFRS changes, as well as potential IFRS changes, some of which could be expected to impact our reported results, financial position and regulatory capital in the future. In particular, IFRS 9, when fully adopted, will require us to record credit losses on a loans at inception net of expected loss basis instead of recording credit losses on an incurred loss basis. For further information about developments in financial accounting and reporting standards, see Note 2 to the Consolidated Financial Statements, “Significant Accounting Policies”.
Our financial results may be negatively affected by changes to assumptions supporting the value of our goodwill.
We test the goodwill that we have recognized on the respective balance sheets of our operating segments for impairment at least annually. Our impairment test in respect of the assets recognized as of December 31, 2016 indicated that our respective goodwill balances are not impaired. The impairment test requires that we make assumptions regarding estimated earnings, discount rates and long-term growth rates impacting the recoverable amount of the goodwill associated with each operating segment and on estimates of the carrying amounts of the operating segments to which the goodwill relates. If the actual results in future periods deviate from the earnings and other assumptions on which our impairment testing is based, the value of the goodwill in any one or more of our businesses may become impaired in the future, resulting in charges to income.
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Changes in banking laws and regulations in Colombia and in other jurisdictions in which the Bank operates could adversely affect the Bank’s consolidated results.
Banking laws and regulations, or in their official interpretation, in Colombia and in other jurisdictions in which the Bank operates, have a material effect on the Bank’s business and operations. Banking laws and regulations may change frequently, and changes may adopted, enforced or interpreted in a manner that may have an adverse effect on the Bank’s business.
Moreover, regulators in the jurisdictions in which Bancolombia operates may be the current regulatory capital requirements to which Bancolombia is subject and thereby require equity increases that could dilute existing stockholders, lead to required asset sales or adversely impact the return on stockholders’ equity and/or the market price of the Bank’s common and preferred shares.
Furthermore, banking laws and regulations may create new types of financial entities whose services could compete with the segments or services offered by the Bank. Increased competition could lead to lower margins for affected products and services, and could adversely affect the Bank’s results of operations.
The Bank is subject to regulatory inspections, examinations, inquiries or audits in Colombia and in other countries in which it operates, and any sanctions, fines and other penalties resulting from such inspections, examinations, inquiries or audits could materially and adversely affect the Bank’s business, financial condition, results of operations and reputation.
The Bank is subject to comprehensive regulation and supervision by the banking authorities of Colombia, El Salvador, Guatemala, Panama and the other jurisdictions in which the Bank operates. These Banking authorities have broad powers to adopt regulations and impose other requirements affecting or restricting virtually all aspects of the Bank’s capitalization, organization and operations, including the imposition of anti-money laundering measures and the authority to regulate the terms and conditions on which the banks can extend credit. In the event of non-compliance with applicable regulations, the Bank could be subject to fines, sanctions or the revocation of licenses or permits to operate its business. In Colombia, for instance, if the Bank encounters significant financial problems or becomes insolvent or in danger of becoming insolvent, banking authorities would have the power to take over the Bank’s management and operations . Any sanctions, fines and other penalties resulting from non-compliance with regulations in Colombia, El Salvador, Guatemala, Panama and other jurisdictions in which the Bank operates could materially and adversely affect the Bank’s business, financial condition, results of operations and reputation.
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An increase in constitutional public interest actions (acciones populares), class actions (acciones de grupo) and other legal actions involving claims for significant monetary awards against financial institutions may affect the Bank’s businesses and results of operations.
Under the Colombian Constitution, individuals may initiate constitutional public interest or class actions to protect their collective or class rights, respectively. Colombian financial institutions, including the Bank, have experienced a high number of these actions. The great majority of such actions have been related to fees, financial services and interest rates, and their outcome is uncertain. Pursuant to Law 1425 of 2010, monetary awards for plaintiffs in constitutional actions or class actions were eliminated as of January 1, 2011. Nevertheless, individuals continue to have the right to initiate these actions against the Bank.
Future restrictions on interest rates or banking fees could negatively affect the Bank’s profitability.
In the future, regulations in the jurisdictions where the Bank operates could impose limitations regarding interest rates or fees the Bank may charge. Any such limitations could materially and adversely affect the Bank’s results of operations and financial situation.
As of the date of this Annual Report, the Congress is considering a bill to eliminate the ability of banks to charge fees for ATM withdrawals made by its customers. If adopted, this legislation would negatively affect the Bank´s profits generated by the financial inclusion products, such as “Ahorro a la Mano”, “Plan Crecer, Crédito de Bajo Monto” and “Nequi”, among others.
Additionally, in past years, the Congress and the SFC have considered various regulatory initiatives regarding banking fees. Although no such initiatives have been adopted in the past, there are new initiatives to impose similar restrictions on banking fees. If the Bank is prohibited from continue to charge for certain services or types of transactions to its clients, or from imposing charges with respect to new services that might be introduced, the Bank’s results of operations and financial condition could be adversely affected.
Furthermore, in June 2016, the board of directors of the Colombian Central Bank issued a regulation (External Resolution No. 5 of 2016) regarding the net open foreign currency position of local financial institutions, which could have an adverse effect on the Bank’s ability to manage its foreign currency risk. This regulation will become effective in June 2017. The scope of the rule will depend on future implementing regulations. If those regulations require changes to the way the Bank calculates its “value at risk,” or VaR, the conduct of operations conducted in foreign currency could require more capital, which could adversely affect the Bank’s return on capital.
Financial Conglomerates
A current legislative initiative in Colombia would establish supervisory and regulatory standards applicable to financial conglomerates, including the identification of such conglomerates and the holding company. If this initiative becomes law, Bancolombia may become part of a financial conglomerate that would have Grupo de Inversiones Suramericana S.A. as its holding company. The initiative would also subject financial conglomerates to a regime of enhanced supervision and regulation in areas such as corporate governance principles, risk management, and capital adequacy requirements, among others.
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Colombian tax haven regulation could adversely affect the Bank’s business and financial results.
Decree 1966 of 2014, as modified by Decree 2095 of 2014, designates 37 jurisdictions as tax havens for Colombian tax purposes although neither Panama nor other countries in which the Bank operates, were included on this list. As a result of the tax haven regulation the Bank’s clients who are residents in such jurisdictions would be subject to (i) higher withholding tax rates including a higher withholding rate on interest and dividends derived from investments in the Colombian securities market, (ii) the transfer pricing regime and its reporting duties, (iii) enhanced ability on the part of Colombian authorities to qualify a conduct as abusive under tax regulations, (iv) non-deductibility of payments made to such residents or entities located in tax havens, unless the required tax amount has been withheld and (v) additional information disclosure requirements, any of which could have a negative impact on Bancolombia’s business and financial results.
In order to avoid Panama’s designation as a tax haven, Colombia and Panama signed a memorandum of understanding which establishes that both countries will negotiate a treaty for the avoidance of double taxation. This treaty is expected to include provisions regarding the exchange of information between Colombian and Panamanian tax authorities. Failure to execute a treaty, or the designation of Panama as a tax haven, could result in a negative impact on the Bank’s customer base and, therefore, a potential negative impact on the Bank’s results of operations and financial condition. On April 28, 2016, the Colombian Ministry of Finance and Public Credit announced the successful conclusion of the negotiations between Colombia and Panama. The two countries stated their intention to enter into a treaty for the avoidance of double taxation by June 2016, with the treaty expected to take effect in 2018. However, as of the date of this Annual Report, the treaty had not been entered into.
Tax Reform
During 2016, the Colombian congress enacted Law 1819 containing a structural tax reform. Changes included (i) an increase in the VAT from 16% up to 19%, (ii) a reduction in the Corporate Income Tax rate and an obligation to make advance payment of a portion of the Corporate Income Tax on account of the tax payable in the immediately succeeding period, (iii) a Dividend Tax for residents (at a rate that varies from 0 to 10%) and for non-residents (at a rate of 5%),, if the profits were taxed at the corporate level, and of 35% rate for both residents and non-residents when dividends are paid out of untaxed profits, except where treaty relief is available. In addition, the Financial Transactions Tax was also made permanent, among other changes. The Tax Reform further contemplates a new criminal offense for tax evasion or providing inaccurate information to tax authorities with respect to assets in an amount equal to or above 7,250 SMMLV. In addition, pursuant to the new regulation, the IFRS accounting standards IFRS are to be used in order to interpret tax matters. Pending regulations by relevant authorities pursuant to this recently enacted Tax Reform could have a negative impact on Bancolombia’s business and financial results. For further details related to this tax reform, please see Note 11 to the Financial Statements, “Income Tax”.
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The Bank and most of its Subsidiaries are subject to the U.S. Foreign Account Tax Compliance Act of 2010.
Bancolombia and most of its subsidiaries are considered foreign financial institutions (“FFIs”) under the Foreign Account Tax Compliance Act of 2010 (“FATCA”) (see “Item 4. Information on the Company – B. Business Overview – B.8. Supervision and Regulation – International regulations applicable to Bancolombia and its subsidiaries”). Given the size and the scope of the Bank’s international operations, we intend to take all necessary steps to comply with FATCA, including transmitting to such authorities the reports required under FATCA.
However, if the Bank cannot enter into such agreements or satisfy the requirements thereunder, certain payments to Bancolombia or its Subsidiaries may be subject to withholding under FATCA. The possibility of such withholding and the need for accountholders and investors to provide certain information may discourage some customers or potential customers from banking with us, thereby adversely affecting our results of operations and financial condition. In addition, compliance with the terms of agreements entered into with the IRS and with FATCA and any other regulations or intergovernmental agreements (“IGA”) may increase our compliance costs. Legislation and regulations implementing FATCA and the related IGAs in the countries in which the Bank operates remain under development, and the reporting dates vary depending on the jurisdiction.
The Bank is subject to credit risk, and estimating exposure to credit risk involves subjective and complex judgments.
A number of our products expose the Bank to credit risk. These products include loans, financial leases, guarantees and lending commitments.
The Bank estimates and establishes reserves for credit risk and potential credit losses. This process involves subjective and complex judgments, including projections of economic conditions and assumptions about the ability of our borrowers to repay their loans. This process is also subject to human error as the Bank’s employees may not always be able to assign an accurate credit rating to a client, which may result in the Bank’s exposure to higher credit risk than indicated by the Bank’s risk rating system. The Bank may not be able to timely detect these risks before they occur, or due to limited resources or available infrastructure, the Bank’s employees may not be able to effectively implement its credit risk management system, which may increase its exposure to credit risk. Moreover, the Bank’s failure to continuously refine its credit risk management system may result in a higher risk exposure for the Bank, which could materially and adversely affect its results of operations and financial position.
Overall, if the Bank is unable to effectively control the level of non-performing or poor credit quality loans in the future, or if its loan loss reserves are insufficient to cover future loan losses, the Bank’s financial condition and results of operations may be materially and adversely affected.
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In addition, the amount of the Bank’s non-performing loans may increase in the future as a result of factors beyond the Bank’s control, such as changes in the income levels of the Bank’s borrowers, increases in the inflation rate or an increase in interest rates, the impact of macroeconomic trends and political events affecting Colombia and other jurisdictions in which the Bank operates or has exposure (especially Panama, El Salvador and Guatemala) or events affecting specific industries. Any of these developments could have a negative effect on the quality of the Bank’s loan portfolio, requiring the Bank to increase provisions for loan losses and resulting in reduced profits or in losses.
The Bank is subject to credit risk with respect to its non-traditional banking businesses including investing in securities and entering into derivatives transactions.
Non-traditional sources of credit risk can arise from, among other things: investing in securities, entering into derivative contracts under which counterparties have obligations to make payments to the Bank, and executing securities, futures, currency or commodity trades from the Bank’s proprietary trading desk that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. Any significant increases in exposure to any of these non-traditional risks, or a significant decline in the credit quality or the insolvency of any of the counterparties, could materially and adversely affect the Bank’s results of operations and financial position.
The Bank is exposed to risks associated with the mortgage loan market.
The Bank is a leader in the mortgage loan markets in which it operates. Colombia’s mortgage loan market is highly regulated and has historically been affected by various macroeconomic factors, as have the mortgage loan markets of Panama, Guatemala and El Salvador. Although interest rates have decreased during recent years, periods of sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased defaults in outstanding loans and deterioration in the quality of assets.
The Bank is subject to concentration of default risks in its loan portfolio. Problems with one or more of its largest borrowers may adversely affect its financial condition and results of operations.
As of December 31, 2016, the aggregate outstanding principal amount of the Bank’s 25 largest credit exposures, on a consolidated basis, represented 10.76% of the Bank’s loan portfolio. No single exposure represented more than 3% of the loan book and all of those loans were corporate loans. Problems with one or more of the Bank’s largest borrowers could materially and adversely affect its results of operations and financial position, see “Item 4. Information on the Company – E. Selected Statistical Information – E.3. Loan Portfolio – Borrowing Relationships”.
The value of the collateral or guarantees securing the outstanding principal and interest balance of the Bank’s loans may not be sufficient to cover such outstanding principal and interest. In addition, the Bank may be unable to realize the full value of the collateral or guarantees securing the outstanding principal and interest balance of its loans.
The Bank’s loan collateral primarily includes real estate, assets pledged in financial leasing transactions and other assets that are located primarily in Colombia, El Salvador, Panama and Guatemala, the value of which may significantly fluctuate or decline due to factors beyond the Bank’s control. Such factors include market factors, environmental risks, natural disasters, macroeconomic factors and political events affecting the local economy. In addition, the Bank may face difficulties in enforcing its rights as a secured creditor. In particular, timing delays and procedural problems in enforcing against collateral and local protectionism may make foreclosures on collateral and enforcement of judgments difficult, Any decline in the value of the collateral securing the Bank’s loans may result in a reduction in the recovery from collateral realization and may have an adverse impact on the Bank’s results of operations and financial condition.
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The Bank is subject to market risk.
The Bank is directly and indirectly affected by changes in market conditions. Market risk, or the risk of losses in positions arising from movements in market prices, is inherent in the products and instruments associated with our operations, including loans, deposits, securities, bonds, long-term debt, short-term borrowings, proprietary trading in assets and liabilities and derivatives. Changes in market conditions that may affect our financial condition and results of operations include fluctuations in interest and currency exchange rates, securities prices, changes in the implied volatility of interest rates and foreign exchange rates, among others.
The Bank’s results of operations are sensitive to fluctuations in interest rates.
The Bank holds a substantial portfolio of loans and debt securities that have both fixed and floating interest rates. Therefore, changes in interest rates could adversely affect our net interest margins as well as the value of the debt securities. Increases in interest rates may reduce the market value of the Bank’s debt securities, leading to smaller gains or larger losses on these investments. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. On the other hand, decreases in interest rates may cause margin compression and lower net interest income as the Bank usually maintains more assets than liabilities at variable rates. Decreasing interest rates also may trigger loan prepayments which could negatively affect the Bank’s net interest income. Generally, in a declining interest rate environment, prepayment activity increases, reducing the weighted average maturity of the Bank’s interest earning assets and adversely affecting its operating results. Prepayment risk also has a significant adverse impact on our earnings from our credit card and collateralized mortgage obligations, since prepayments could shorten the weighted average life of these portfolios, which may result in a mismatch in funding or in reinvestment of the prepayment proceeds at lower yields.
The Bank’s income from its proprietary trading activities is highly volatile.
The Bank derives a portion of its profits from its proprietary trading activities. Income from this activity is highly volatile and depends on numerous factors beyond the Bank’s control, such as the general market environment, overall market trading activity, interest rate levels, fluctuations in exchange rates and general market volatility. A significant decline in the Bank’s trading income, or the incurrence of a trading loss, could adversely affect the Bank’s results of operations and financial position.
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The Bank has significant exposure to sovereign risk, and especially Colombian risk, and the Bank’s results could be adversely affected by decreases in the value of its sovereign debt securities.
The Bank’s debt securities portfolio is primarily composed of sovereign debt securities, including securities issued or guaranteed by the Colombian Government. Therefore, the Bank’s results are exposed to credit, market, and liquidity risk associated with sovereign debt. As of December 31, 2016, the Bank’s total debt securities represented 5.95% of its total assets, and 42.01% of these securities were issued or guaranteed by the Colombian Government. A significant decline in the value of the securities issued or guaranteed by the Colombian Government could adversely affect the Bank’s debt securities portfolio and consequently the Bank’s results of operations and financial position.
The Bank is subject to market, operational and structural risks associated with its derivative transactions.
The Bank enters into derivative transactions for hedging purposes and on behalf of its customers. The Bank is subject to market and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder). In addition, the market practice and documentation for derivative transactions is less developed in the jurisdictions in which the Bank operates as compared to other more economically developed countries, and the court systems in such jurisdictions have limited experience in dealing with issues related to derivative transactions. As a result, there are increased operating and structural risks associated with derivatives transactions in these jurisdictions.
In addition, the execution and performance of derivatives transactions depend on the Bank’s ability to develop adequate control and administrative systems, and to hire and retain qualified personnel. Moreover, the Bank’s ability to adequately monitor, analyze and report these derivative transactions depends, to a great extent, on its information technology systems. These factors may further increase the risks associated with these transactions and could materially and adversely affect the Bank’s results of operations and financial position.
The Bank is subject to operational risks and losses.
The Bank’s businesses are dependent on the ability to process a large number of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee errors, technological failures and failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure of external systems. The Bank has adopted procedures to prevent and manage each of the operational risks, but there can be no assurance that our procedures will be sufficient to prevent losses resulting from these risks.
In addition, the Bank’s businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of financial institutions have suffered material losses due to the actions of employees and third parties. The precautions the Bank takes to prevent and detect employee and third-party misconduct may not always be effective.
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The Bank’s businesses rely heavily on data collection, processing and storage systems, the failure of which could materially and adversely affect the effectiveness of its risk management, reputation and internal control system as well as its financial condition and results of operations.
All of the Bank’s principal businesses are highly dependent on the ability to timely collect and process a large amount of financial and other information at its various branches across numerous markets, at a time when transaction processes have become increasingly complex with increasing volume. The proper functioning of financial control, accounting or other data collection and processing systems is critical to the Bank’s businesses and to its ability to compete effectively. A partial or complete failure of any of these primary systems could materially and adversely affect the Bank’s decision-making process, its risk management and internal control systems, the quality of its service, and the Bank’s ability to respond on a timely basis to changing market conditions. If the Bank cannot maintain an effective data collection and management system, its business operations, financial condition, reputation and results of operations could be materially and adversely affected. The Bank is also dependent on information systems to operate its website, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. The Bank may experience operational problems with its information systems as a result of system failures, viruses, computer hackers or other causes. Any material disruption or slowdown of its systems could cause information, including data related to customer requests and other client information, to be lost, compromised, or to be delivered to the Bank’s clients with delays or errors, which could reduce demand for the Bank’s services and products, resulting in additional costs for the Bank and potentially fines and penalties by regulators which could materially and adversely affect the Bank’s results of operations and financial position.
The Bank is subject to cyber-security risk.
The Bank is subject to cyber-security risk, which includes the unauthorized access to privileged information, technological assaults on the infrastructure of the Bank with the aim of stealing information, committing fraud or interfering with regular service, and the interruption of the Bank’s services to some of its clients or users due to the exploitation and materialization of these vulnerabilities. Cyber-security risks for financial institutions have significantly increased because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties.
The Bank’s business is highly dependent on the security and efficacy of our infrastructure, computer and data management systems, as well as those of service providers, and others with whom we interact.
The Bank has implemented several measures to anticipate, identify, and offset these threats, including perimeter defenses, security backups, special 24/7 teams and continuous security tests (including ethical hacking, among others). However, we can give no assurance that these measures will be effective to prevent or mitigate potential future attacks or threats to our technology infrastructure. Any failure by the Bank to detect or present cyber-security risk in a timely manner could result in a negative impact on the Bank’s results of operations and financial position, or in problems with information, including data related to customers to be lost, compromised, or to be delivered to the Bank’s clients with delays or errors.
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Any failure to effectively improve or upgrade the Bank’s information technology infrastructure and management information systems in a timely manner could adversely affect the Bank’s competitiveness, financial condition and results of operations.
The Bank’s ability to remain competitive will depend in part on its ability to upgrade the Bank’s information technology infrastructure on a timely and cost-effective basis. The information available to and received by the Bank’s management through its existing information systems may not be timely and sufficient to manage risks or to plan for and respond to changes in market conditions and other developments in its operations. The Bank is currently undertaking a project to update its information technology platform (“IT platform”) that will result in significant changes in the Banks Branch and ATM networks. Any failure to effectively improve or upgrade the Bank’s information technology infrastructure and information management systems in a timely and cost-effective manner could materially and adversely affect the Bank’s competitiveness, financial condition and results of operations.
The occurrence of natural disasters in the regions in which the Bank operates could impair its ability to conduct business effectively and could impact its results of operations.
The Bank is exposed to the risk of natural disasters such as earthquakes, volcanic eruptions, tornadoes, tropical storms, floods, wind and hurricanes in the regions where it operates. Although the Bank has implemented disaster recovery systems, in the event of a natural disaster, unanticipated problems with said systems could have a material adverse effect on the Bank’s ability to conduct business in the affected region, particularly if those problems affect its computer-based data processing, transmission, storage and retrieval systems and destroy valuable data. In addition, if a significant number of the Bank’s local employees and managers became unavailable due to a natural disaster, the Bank’s ability to effectively conduct business could be severely compromised. In addition, the Bank may face added credit risk if its clients located in the affected region are not able to make timely payment on outstanding loans or other obligations to the Bank. A natural disaster or multiple catastrophic events could have a material adverse effect on the Bank’s business and results of operations in the affected region.
Acquisitions and strategic partnerships may not perform in accordance with expectations or may disrupt the Bank’s operations and adversely affect its profitability.
An element of the Bank’s business strategy is to identify and pursue growth-enhancing strategic opportunities. The Bank may base assessments of potential acquisitions and partnerships on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect, and any future acquisitions, investments and alliances may not produce the anticipated synergies or perform in accordance with the Bank’s expectations which could adversely affect its operations and profitability.
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The Bank’s concentration in and reliance on short-term deposits may increase its funding costs.
The Bank’s principal source of funds is short-term deposits, which on a consolidated basis represented 71.7% of total liabilities at the end of 2016 compared to 70.58% at the end of 2015. Because the Bank relies primarily on short-term deposits for its funding, in the event of a sudden or unexpected shortage of funds in the banking systems and money markets in which the Bank operates, the Bank may not be able to maintain its current level of funding without incurring higher costs or selling assets at prices below their prevailing market value.
The Bank’s policies and procedures may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could damage the Bank’s reputation and expose the Bank to fines and other liabilities.
The Bank is required to comply with applicable anti-money laundering, anti-terrorism laws and other regulations. These laws and regulations require the Bank, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious and large transactions to the applicable regulatory authorities. While the Bank has adopted policies and procedures aimed at detecting and preventing the use of its banking network for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures have in some cases been adopted only recently and may not completely eliminate the risk that the Bank may be used by other parties to engage in money laundering and other illegal or improper activities. If the Bank fails to fully comply with applicable laws and regulations, it may face fines and other penalties, including restrictions on its ability to conducts business. In addition, the Bank’s business and reputation could suffer if customers use the Bank for money laundering or illegal or improper purposes.
The Bank is subject to increasing competition which may adversely affect its results of operations.
The Bank operates in a highly competitive environment and management expects competition to increase in the jurisdictions where the Bank operates. Intensified merger activity in the financial services industry produces larger, better capitalized and more geographically diverse firms that are capable of offering a wider array of financial products and services at more competitive prices. The Bank’s ability to maintain its competitive position depends mainly on its ability to fulfill new customers’ needs through the development of new products and services and the Bank’s ability to offer adequate services and strengthen its customer base through cross-selling. The Bank’s business will be adversely affected if the Bank is not able to maintain efficient service strategies. In addition, the Bank’s efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected or if the profitability of opportunities is undermined by competitive pressures.
Downgrades in our credit ratings would increase our cost of borrowing funds and make our ability to raise new funds, attract deposits or renew maturing debt more difficult.
Our credit ratings are an important component of our liquidity profile, and our ability to successfully compete depends on various factors, including our financial stability as reflected by our credit ratings. A downgrade in our credit ratings would increase our cost of raising funds from other banks or in the capital markets. Purchases of our securities by institutional investors could be reduced if we suffer a decline in our credit ratings. Our ability to renew maturing debt could become restricted and the terms for such renewal more expensive if our credit rating were to decline. Our lenders and counterparties in derivative transactions are sensitive to the risk of a credit rating downgrade. A downgrade in our credit rating may adversely affect perception of our financial stability and our ability to raise deposits, which could make us less successful when competing for deposits and loans in the market place.
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The Central Bank may impose requirements on our (and other Colombian residents) ability to obtain loans in foreign currency.
The Central Bank may impose certain mandatory deposit requirements in connection with foreign currency denominated loans obtained by Colombian residents, including the Bank, although no such mandatory deposit requirement is currently in effect. We cannot predict or control future actions by the Central Bank in respect of deposit requirements, which may involve the establishment of a mandatory deposit percentage, and the use of such measures by the Central Bank may raise our cost of raising funds and reduce our financial flexibility.
Risks Relating to the Preferred Shares and the ADSs.
Preemptive rights may not be available to holders of American Depositary Receipts (“ADRs”) evidencing ADSs.
The Bank’s by-laws and Colombian law require that, whenever the Bank issues new shares of any outstanding class, it must offer the holders of each class of shares (including holders of ADRs) the right to purchase a number of shares of such class sufficient to maintain their existing percentage ownership of the aggregate capital stock of the Bank. These rights are called preemptive rights. United States holders of ADRs may not be able to exercise their preemptive rights through The Bank of New York Mellon, which acts as depositary (the “Depositary”) for the Bank’s ADR facility, unless a registration statement under the Securities Act is effective with respect to such rights and class of shares or an exemption from the registration requirement thereunder is available. The Bank is obligated to file a registration statement or find a corresponding exemption only if it determines to extend the rights to holders of the ADRs. Although it is not obligated to, do so, the Bank intends to consider at the time of any rights offering the costs and potential liabilities associated with any such registration statement, the benefits to the Bank from enabling the holders of the ADRs to exercise those rights and any other factors deemed appropriate at the time before it makes a decision as to whether to file a registration statement. Accordingly, the Bank may in some cases decide not to file a registration statement. For example, in connection with rights offering in January 2012, the Bank did not file such a registration statement.
Under the deposit agreement between the Bank and the Depositary, only the Depositary is entitled to exercise preemptive rights, and the Depositary has no obligation to make available preemptive rights to holders of ADRs. If the Bank offers or causes to be offered to the holders of any deposited securities, including preferred shares of the Bank, any rights to subscribe for additional preferred shares of the Bank or any rights of any other nature, the Depositary has discretion as to the procedure to be followed in making such rights available to any holders of ADRs or in disposing of such rights on behalf of any holders of ADRs and making the net proceeds available to such holders of ADRs. If by the terms of such rights offering or for any other reason, the Depositary may not either make such rights available to any holders of ADRs or dispose of such rights and make the net proceeds available to such holders of ADRs, then the Depositary will allow the rights to lapse. Whenever the rights are sold or lapse, the equity interests of the holders of ADRs will be proportionately diluted.
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The Bank’s preferred shares have limited voting rights.
The Bank’s corporate affairs are governed by its by-laws and Colombian law. Under the Bank’s by-laws and Colombian law, the Bank’s preferred stockholders may have fewer rights than stockholders of a corporation incorporated in a U.S. jurisdiction. Holders of the Bank’s ADRs and preferred shares are not entitled to vote for the election of directors or to influence the Bank’s management policies. Under the Bank’s by-laws and Colombian corporate law, holders of preferred shares (and, consequently, holders of ADRs) have no voting rights in respect of preferred shares, other than in limited circumstances as described in Item 10. “Additional Information – B. Memorandum and Articles of Association – Voting Rights – Preferred Shares”.
Holders of the Bank’s ADRs may encounter difficulties in the exercise of dividend and voting rights.
Holders of the Bank’s ADRs may encounter difficulties in the exercise of some of their rights with respect to the shares underlying ADRs. If the Bank makes a distribution to holders of underlying shares in the form of securities, the Depositary is allowed, in its discretion, to sell those securities on behalf of ADR holders and instead distribute the net proceeds to the ADR holders. Also, even in those limited instances in which the preferred shares represented by the ADRs have the power to vote, under some circumstances, ADR holders may not be able to vote by giving instructions to the depositary. This may occur if ADR holders do not receive from the Depositary a notice of meeting sufficiently prior to the instruction date to ensure that the Depositary will vote the preferred shares represented by the ADRs in accordance with instructions received from such holders. There are no circumstances in which holders of ADRs may vote in a way other than by providing instructions to the Depositary.
Relative illiquidity of the Colombian securities markets may impair the ability of an ADR holder to sell preferred shares.
The Bank’s common and preferred shares are listed on the Colombian Stock Exchange, which is relatively small and illiquid compared to stock exchanges in major financial centers. In addition, a small number of issuers represent a disproportionately large percentage of market capitalization and trading volume on the Colombian Stock Exchange. A liquid trading market for the Bank’s securities might not develop on the Colombian Stock Exchange. A limited trading market could impair the ability of an ADR holder to sell preferred shares (obtained upon withdrawal of such shares from the ADR facility) on the Colombian Stock Exchange in the amount and at the price and time such holder desires, and could increase the volatility of the price of the ADRs.
ADRs do not have the same tax benefits as other equity investments in Colombia.
Although ADRs represent Bancolombia’s preferred shares, they are held through a fund of foreign capital in Colombia which is subject to a specific tax regulatory regime. Accordingly, the tax benefits applicable in Colombia to equity investments, in particular those relating to dividends and profits from sale, are not applicable to ADRs, including the Bank’s ADRs. For more information see Item 10. “Additional Information. –E. Taxation –Colombia Taxation”.
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| ITEM 4. | INFORMATION ON THE COMPANY |
| A. | HISTORY AND DEVELOPMENT OF THE COMPANY |
Bancolombia is Colombia’s leading financial institution, with presence in other jurisdictions such as Panama, El Salvador, Puerto Rico, Guatemala, the Cayman Islands, and Peru, providing a wide range of financial products and services to a diversified individual, corporate, and government customer base throughout Colombia, Latin America and the Caribbean region.
Bancolombia is a stock company (sociedad anónima) domiciled in Medellin, Colombia and operates under Colombian laws and regulations, mainly the Colombian Commercial Code, Decree 663 of 1993 and Decree 2555 of 2010. Bancolombia was incorporated in Colombia in 1945, under the name Banco Industrial Colombiano S.A. or “BIC”, and is incorporated until 2044. In 1998, the Bank merged with Banco de Colombia S.A., and changed its legal name to Bancolombia S.A. On July 30, 2005, Conavi and Corfinsura merged with and into Bancolombia, with Bancolombia as the surviving entity. Through this merger, Bancolombia gained important competitive advantages in retail and corporate banking which materially strengthened Bancolombia’s multi-banking franchise.
In May 2007, Bancolombia Panama acquired Banagrícola, which controls several subsidiaries, including Banco Agrícola in El Salvador, and is dedicated to banking, commercial and consumer activities and brokerage. Through its first international acquisition, Bancolombia gained a leadership position in the Salvadorian market.
In October 2013, Bancolombia acquired a 100% percent interest in the ordinary voting shares, and 1,325,780 preferred shares of Banistmo, a Panamanian banking entity and its subsidiaries involved in the securities brokerage, trust, consumer finance, and leasing businesses.
Also in October 2013, Bancolombia Panama acquired a 40% interest in Grupo Agromercantil, the parent company of Banco Agromercantil de Guatemala, and certain other companies dedicated to securities brokerage, insurance, and other financial businesses. Bancolombia Panama acquired an additional 20% interest and control of Grupo Agromercantil on December 30, 2015.
Since 1995, Bancolombia has maintained a listing on the NYSE, where its ADSs are traded under the symbol “CIB”, and on the Colombian Stock Exchange, where its preferred shares are traded under the symbol “PFBCOLOM”. Since 1981 Bancolombia’s common shares have been traded on the Colombian Stock Exchange under the symbol “BCOLOMBIA”. See Item 9. “The Offer and Listing”.
Bancolombia has grown substantially over the years, both through organic growth and acquisitions.
As of December 31, 2016, Bancolombia and its consolidated subsidiaries had:
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COP 196,261 billion in total assets;
COP 145,126 billion in total net loans and advances to customers and financial institution, net;
COP 124,624 billion in total deposits from customers; and
COP 21,268 billion in stockholders’ equity attributable to the owners of the parent company.
Bancolombia’s consolidated net income attributable to equity holders of the parent company. For the year ended December 31, 2016 was COP 2,865 billion, representing a return on average total equity of 14.52% and a return on average total assets of 1.49%.
The address and telephone numbers of the Bank’s headquarters are as follows: Carrera 48 # 26-85, Medellín, Colombia; telephone + (574) 404-1837. Our agent for service of process in the United States is Puglisi & Associates, presently located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
RECENT DEVELOPMENTS
Acquisition of Valores Bancolombia Panama S.A. by Securities Banistmo S.A., and subsequent Merger Between Valores Bancolombia Panama S.A. and Securities Banistmo S.A.
On June 14, 2016, Securities Banistmo S.A. acquired 100% of the outstanding capital of Valores Bancolombia Panama S.A. At the time of the transaction, Valores Bancolombia Panama S.A. was owned by Valores Bancolombia S.A. The purchase price was COP 52,603 million.
On October 4, 2016, Securities Banistmo S.A. merged into Valores Bancolombia Panamá S.A., which changed its legal name to Valores Banistmo S.A., whose sole shareholder is Banistmo S.A.
Merger between Bancolombia and Leasing Bancolombia
On September 30, 2016, Leasing Bancolombia S.A (“Leasing”) merged with and was absorbed by Bancolombia and, thus, ceased to exist from a legal standpoint. Bancolombia, as the surviving entity, assumed responsibility for managing Leasing´s existing portfolio of products and services.
The merger seeks to take advantage of a regulatory authorization granted by Law 1328 of 2009 that allows Banks to provide leasing products and services that prior to the enactment of this law could only be offered by leasing companies.
Completion of Disposal of 50% stake of Compañía de Financiamiento Tuya S.A.
On October 31, 2016, Bancolombia, Fondo de Empleados of Grupo Bancolombia - FEBANC and Fundacion Bancolombia, transferred their 50% stake in Compañía de Financiamiento Tuya (“Tuya”) to Almancenes Éxito S.A. and Almacenes Éxito Inversiones S.A.S. As a result of this transaction, Compañía de Financiamiento Tuya S.A. (“Tuya”) became jointly controlled by Bancolombia and Almancenes Exito S.A. and Almacenes Exito Inversiones S.A.S. as strategic partners. The total purchase price of the transaction was COP 79,017 million. For further details related to this transaction, please see Note 30 to the Consolidated Financial Statements, “Discountinued Operations”.
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Bancolombia´s 44.62% stake in Tuya was transferred to Banca de Inversión Bancolombia S.A. Corporación Financiera.
Change in Chief Executive Officer
On March 7, 2016, Carlos Raul Yepes Jimenez resigned as Chief Executive Officer of Bancolombia and the board of directors appointed Juan Carlos Mora Uribe as his replacement.
Entering into an alliance “Alianza Lealtad” related to the loyalty program of Bancolombia
On April 19, 2017, Bancolombia entered into an agreement with Almacenes Exito S.A. for the creation of a new loyalty program for its clients called “Puntos Colombia” (Puntos Colombia).
Once implemented, Puntos Colombia will be the loyalty program through which the clients of both companies, and of other allies related to the program, will accumulate and redeem points on the loyalty ecosystem. Puntos Colombia will replace the existing loyalty programs of Bancolombia and Grupo Exito.
The program Puntos Colombia will begin during the first half of 2018 and will be managed by an independent company located in Colombia, which will be 50% owned by Banca de Inversion Bancolombia S.A Corporacion Financiera, a subsidiary of Bancolombia. The capital investment to be made by the subsidiary in the new Company is equivalent to COP 9,000 million, which will be paid within the next 12 months following incorporation.
Through the alliance, Bancolombia will buy Puntos Colombia for its clients in the same way as it currently buys points and/or miles through its current loyalty programs.
PUBLIC TAKEOVER OFFERS
In 2016, and as of the date of this Annual Report, there have been no public takeover offers by third parties with respect to the Bank’s shares or by the Bank in respect to another company’s shares.
CAPITAL ACQUISITIONS AND DIVESTITURES
During 2016, total capital expenditures amounted to COP 317 billion. Such investments were mainly focused on IT related projects (COP 39 billion), the expansion of the Bank’s branch and ATM network (COP 31 billion), the purchase of fixed assets (COP 22 billion), and other miscellaneous projects, including new software modules, upgrade of web contents, automation of reports, and construction of data centers (COP 225 billion).
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In 2016, Bancolombia funded its capital expenditures with its own resources and plans to continue to fund those currently in progress in the same manner.
During 2017, the Bank expects to invest approximately COP 273 billion as follows: COP 30 billion in connection with the expansion of the Bank’s branch and ATM network, COP 42 billion in connection with the purchase hardware for the expansion, updating and replacement of the current IT equipment, COP 40 billion in connection with other fixed assets and COP 160 billion in connection with strategic projects. These figures represent only an estimate and may change according to the continuing assessment of the Bank’s project portfolio. No assurance can be given, however, that all such capital expenditures will be made and, if made, that such expenditures will be in the amounts currently expected.
The following table summarizes the Bank’s capital acquisitions and divestitures in interests in other companies, for the years ending December 31, 2016, 2015 and 2014:
| Capital Acquisitions (1) | For the year ended December 31, | |||||
| 2016 | 2015 | 2014 | Total | |||
| In millions of COP | ||||||
| PA Viva Malls | 388,595 | - | - | 388,595 | ||
| Grupo ARGOS S.A. | 92,966 | - | - | 92,966 | ||
| Asociación Gremial de Instituciones Financieras Credibanco S.A. | 82,258 | - | - | 82,258 | ||
| PA Clínica del Prado | 41,069 | - | - | 41,069 | ||
| Fideicomiso PA Acqua Power Center | 21,649 | - | - | 21,649 | ||
| Compañía de Financiamiento Tuya S.A | 15,977 | - | - | 15,977 | ||
| Fideicomiso Corpacero S.A.S | 11,111 | - | - | 11,111 | ||
| PA Plesco | 10,935 | - | - | 10,935 | ||
| Fondos SURA SAF SAC | 3,307 | - | - | 3,307 | ||
| ETB S.A. E.S.P | 1,986 | - | - | 1,986 | ||
| Equifax centroamerica S.A. De C.V | 1,615 | 1,695 | - | 3,310 | ||
| Gestora de Fondos de Inversión Banagricola S.A. | 1,471 | (2) | - | - | 1,471 | |
| Inversiones ARGOS S.A. | 37 | 1,076 | - | 1,113 | ||
| Grupo Agromercantil Holding S.A. DE C.V | - | 477,145 | (3) | 79,339 | (4) 556,484 | |
| Internacional Ejecutiva de Aviación S.A.S. | - | 8,121 | - | 8,121 | ||
| Compañía de Procesamiento de Medios de Pago Guatemala, S.A. | - | 5,562 | - | 5,562 | ||
| Grupo Nutresa | - | 2,644 | - | 2,644 | ||
| Grupo AVAL | - | 2,618 | - | 2,618 | ||
| Banco DAVIVIENDA S.A | - | 2,180 | - | 2,180 | ||
| ECOPETROL S.A | - | 1,785 | - | 1,785 | ||
| Transacciones y Transferencias, S.A. | - | 1,315 | - | 1,315 | ||
| Interconexión Eléctrica S.A. | - | 1,107 | - | 1,107 | ||
| Reintegra S.A.S. | - | 950 | - | 950 | ||
| Cementos ARGOS S.A. | - | 667 | - | 667 | ||
| Garantias y Servicios S.G.R.SA.DE C.V. | - | 531 | - | 531 | ||
| Imágenes Computarizadas de Guatemala, S.A. | - | 476 | - | 476 | ||
| Citigruop Inc. | - | 461 | - | 461 | ||
| Inversiones Inmobiliaria Arauco Alameda S.A. | - | - | 15,082 | 15,082 | ||
| Titularizadora Colombia S.A. | - | - | 11,902 | 11,902 | ||
| Others | 2,415 | 1,709 | - | 4,124 | ||
| Total Acquisitions | 675,391 | 510,042 | 106,323 | 1,291,756 | ||
| (1) | The amounts disclosed in this table correspond to the consideration paid as a result of the acquisition of each investment. |
| (2) | The amount of USD 500 thousand has been converted at the rate of COP 2,942.16 per USD 1,00, which is the Representative Market Rate calculated on May 5, 2016, (the date of the completion of the transaction) as reported by the SFC. |
| (3) | The amount of USD 151,5 million has been converted at the rate of COP 3,149.47 per USD 1,00, which is the Representative Market Rate calculated on Decembre 31, 2015, as reported by the SFC. |
| (4) | The amount of USD 40 million has been converted at the rate of COP 1,983.48 per USD 1.00, which is the Representative Market Rate calculated on January 23, 2014, as reported by the SFC. |
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| Capital Divestitures (1) | As of December 31, | |||||
| 2016 | 2015 | 2014 | Total | |||
| In millions of COP | ||||||
| Grupo Odinsa S.A. | 101,371 | 1,442 | - | 102,813 | ||
| Compañía de Financiamiento Tuya S.A | 79,017 | - | - | 79,017 | ||
| CIFIN S.A | 46,432 | - | - | 46,432 | ||
| ISAGEN S.A. E.S.P. | 8,489 | - | - | 8,489 | ||
| Multiactivos S.A | 4,101 | - | - | 4,101 | ||
| Concesiones Urbanas S.A | 2,361 | - | - | 2,361 | ||
| Davivienda S.A. Preferencial | 2,180 | - | - | 2,180 | ||
| Trust found | 2,077 | - | - | 2,077 | ||
| Equifax centroamerica S.A. De C.V | 1,695 | - | - | 1,695 | ||
| Cementos ARGOS S.A. | 2,601 | - | - | 2,601 | ||
| Inversiones Inmobiliarias Arauco Alameda S.A.S | - | 216,598 | - | 216,598 | ||
| Prosicol S.A.S. " En Liquidación" (2) | - | - | 992 | 992 | ||
| Others | 2,267 | 2,426 | - | 4,693 | ||
| Total Divestitures | 252,591 | 220,466 | 992 | 474,049 | ||
| (1) | The amounts disclosed in this table correspond to the consideration received as a result of the sale of each investment. |
| (2) | Refund of the investment. |
| B. | BUSINESS OVERVIEW |
| B.1. | GENERAL |
COMPANY DESCRIPTION, PRODUCTS AND SERVICES
Bancolombia is a full service financial institution that offers a wide range of banking products and services to a diversified individual and corporate customer base of nearly 11 million customers. Bancolombia delivers its products and services through its regional network comprising Colombia’s largest non-Government owned banking network, on the basis of gross loans, El Salvador’s leading financial conglomerate by gross loans, Guatemala’s fourth-largest bank by gross loans, Panama’s second-largest bank by gross loans and off-shore banking subsidiaries in Panama, Cayman and Puerto Rico, as well as subsidiaries in Peru.
Bancolombia and its subsidiaries offer the following products and services:
Savings and Investment: The Bank offers its customers checking accounts, savings accounts, fixed term deposits and a diverse variety of investment products that fit the specific transactional needs of each client and their income bracket. The Bank also offers its clients and users the service of tax collection in all its branches, and through electronic channels.
Ahorro a la Mano: This is a mobile phone based savings account specially designed to serve low-income clients and those with no prior experience with banking products.
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Financing: The Bank offers its customers a wide range of credit alternatives which include: trade financing, loans funded by domestic development banks, working capital loans, credit cards, personal loans, vehicle loans, payroll loans and overdrafts, among others.
Mortgage Banking: The Bank is a leader in the mortgage market in Colombia, providing full financial support to construction firms and mortgages for individuals and companies.
Factoring: Bancolombia offers its clients solutions for handling their working capital and maximizing their assets turnover through comprehensive solutions to manage their accounts receivable financing.
Financial and Operating Leases: The Bank offers financial and operating leases specifically designed for acquiring fixed assets.
Capital Markets: The Bank assists its clients in mitigating market risk through hedging instruments such as, futures, forwards, options and swaps.
Trading: The bank offers an internet-based trading platform, available for retail and institutional clients, which allows them to buy/sell securities in the Colombian Stock Exchange.
The Bank also performs inter-bank lending, repurchase agreements (repos), foreign exchange transactions, as well as sovereign and corporate securities sales and trading. Bancolombia is an active player in the “Market-makers” scheme for trading Colombian sovereign debt (TES bonds).
The Bank offers its clients direct access to local and international capital markets through a full range of Brokerage and Investment Advisory Services that cover equities and fixed income securities, proprietary and third party asset management products, such as mutual funds, private equity funds, and privately managed investment accounts for institutional, corporate and private bank clients.
Cash Management: The Bank provides support to its clients through efficient cash management, offering a portfolio of standard products that allows clients to make payments and collections through different channels. Our payables and receivables services provide solutions to process and reconcile transactions accurately, efficiently, and in a timely manner. We also offer a comprehensive reporting solution, providing the data that is required by customers’ internal processes. In addition, the Bank designs and creates custom-made products in order to address our clients’ specific payment and collection needs. These include a variety of real time web services, straight through processing (STP) and messaging through Swift Net solutions.
Foreign Currency and Trade Finance: The Bank offers its clients specialized solutions to satisfy their investment, financing and payment needs with regard to foreign currency transactions. The Bank also provides trade finance solutions with products such as Letters of Credit, Standby Letters of Credit and Bills Collection.
Bancassurance and Insurance: The Bank distributes diverse insurance products (life, auto, commercial, and homeowner’s insurance) written by Compañía Suramericana de Seguros, one of the main insurance companies in Colombia. In addition, Bancolombia offers unemployment insurance written by Sure General Cardif Colombia S.A.
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Investment Banking: The Bank, through its subsidiary Banca de Inversión, offers a wide variety of value-added services, including project and acquisition finance, debt and equity capital markets, principal investments (in real estate, industrials, construction), M&A, restructurings and structured corporate lending across all economic sectors.
Trust and Fiduciary Services: The Bank, through its subsidiary Fiduciaria Bancolombia offers a broad and diversified portfolio of services for companies and individuals, meeting their needs with tailored services. These services include managing escrow accounts, multiple investment funds, and real estate funds.
NEW PRODUCTS OR SERVICES
Bancolombia continues its efforts to diversify and innovate in its product portfolio. Below is a brief description of the new products and services introduced in 2016:
Nequi (Digital Bank): In June 2016, the Bank launched its signature pilot project Nequi, a 100% digital bank that operates independently from the Bancolombia brand. This product is completely paperless; users interact with the platform exclusively by mobile phone, with no contact with Bancolombia’s branch network. Nequi users can open a savings account, transfer cash, make payments, withdraw cash from Bancolombia ATMs, and recharge their prepaid cell phone plans. As of December 31, 2016, this app had over 122,713 downloads, 29,771 total users and 6,834 active users who have made at least one transaction over the last three months.
MAIN LINES OF BUSINESS
The Bank manages its business through nine main operating segments: Banking Colombia, Banking Panama, Banking El Salvador, Banking Guatemala, Trust, Investment Banking, Brokerage, Off Shore, and All other.
For a description and discussion of these segments, please see “Item 5. Operating and Financial Review and Prospects – A. Operating Results – Results by Segment”.
| B.2. | OPERATIONS |
See Note 3 to the Consolidated Financial Statements as of December 31, 2016 included in this Annual Report for a description of the principal markets in which the Bank competes, including a breakdown of total interest and valuation income by category of activity and geographic market for each of the last two fiscal years.
| B.3. | SEASONALITY OF DEPOSITS |
Historically, the Bank has experienced some seasonality in its demand deposits, with higher average balances at the end of the year and lower average balances in the first quarter of the year. This behavior is explained primarily by the increased liquidity provided by the Central Bank and the Colombian National Treasury at year end, as economic activity tends to be higher during this period resulting in a greater number of transactions. However, we do not consider the seasonality of demand deposits to have a significant impact on our business.
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| B.4. | RAW MATERIALS |
The Bank is not dependent on sources or availability of raw materials.
| B.5. | DISTRIBUTION NETWORK |
Bancolombia provides its products and services through a traditional branch network, sales and customer representatives as well as through mobile branches (or “Puntos de Atención Móviles”), an ATM network, online and computer banking, telephone banking, mobile phone banking services, and points of sale (or “Puntos de Atención Cercano”), among others. Transactions performed through electronic channels represented more than 91.02% of all transactions in 2016, up from 83.6% of all transactions in 2015. In addition, as of December 31, 2016, Bancolombia had a sales force of approximately 13,374 employees.
The following are the distribution channels offered by Bancolombia as of December 31, 2016.
Branch Network
As of December 31, 2016, Bancolombia’s consolidated branch network consisted of 1,247 offices, including 817 from Bancolombia S.A., 97 from Banco Agricola, 45 from Banistmo, 208 from BAM and 80 from other subsidiaries.
| Company* | Number of branches 2016 |
Number of branches 2015 |
Number of branches 2014 |
Number of branches 2013 |
| Bancolombia S.A.(unconsolidated) | 817 | 827 | 826 | 844 |
| Bancolombia Panama | 1 | 1 | 1 | 1 |
| Bancolombia S.A. Panama Branch | 1 | 1 | 1 | 1 |
| Leasing Bancolombia (1) | 20 | 21 | 21 | 21 |
| Renting Colombia | 22 | 23 | 19 | 17 |
| Valores Bancolombia | 6 | 7 | 11 | 11 |
| Valores Bancolombia Panamá S.A. | 1 | 1 | 1 | 1 |
| Banca de Inversión | 2 | 2 | 2 | 2 |
| Fiduciaria Bancolombia | 6 | 5 | 7 | 7 |
| Bancolombia Puerto Rico International Inc. | 1 | 1 | 1 | 1 |
| SUFI | 3 | 3 | 3 | 6 |
| Arrendamiento Operativo CIB S.A.C. (2) | 1 | 1 | 1 | 1 |
| Fondo Inversión Arrend.Operativo Renting Perú I (2) | - | 1 | 1 | 1 |
| Inversiones CFNS S.A.S. | 2 | 2 | 2 | 2 |
| Banco Agrícola | 97 | 97 | 98 | 98 |
| Arrendadora Financiera S.A. | 1 | 1 | 1 | 1 |
| Valores Banagricola, S.A. de C.V. | 1 | 1 | 1 | 1 |
| Capital Investments SAFI S.A. | 1 | 1 | 1 | 1 |
| Transportempo S.A.S | 1 | 1 | 1 | 1 |
| Leasing Perú S.A. | 1 | 1 | 1 | 1 |
| FiduPerú S.A. Sociedad Fiduciaria (previously Fiduciaria GBC S.A.) | 1 | 1 | 1 | 1 |
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| Company* | Number of branches 2016 |
Number of branches 2015 |
Number of branches 2014 |
Number of branches 2013 |
| Banistmo | 45 | 47 | 50 | 50 |
| Financomer | 8 | 8 | 7 | 8 |
| BAM (Guatemala) (3) | 208 | 220 | - | - |
| Tuya S.A. Compañía de Financiamiento (4) | - | - | 4 | 6 |
| Factoring Bancolombia S.A. (5) | - | - | - | 1 |
| Seguros Banitsmo (6) | - | - | 4 | 4 |
| Uff Móvil S.A.S. (7) | - | - | 1 | 1 |
| Total | 1,247 | 1,274 | 1,067 | 1,090 |
* For some subsidiaries, their central office is considered a branch.
| (1) | On September 30, 2016, Leasing Bancolombia S.A. was absorbed by Bancolombia. Bancolombia, as the surviving entity, became the holder of the rights and liabilities of Leasing, and assumed responsibility for managing Leasing´s existing portfolio of products and services.Leasing Bancolombia assigned to Bancolombia the “Leasing Bancolombia” trademark, which has thereafter been used to identify a division of Bancolombia. |
| (2) | Renting Perú S.A.C. changed its legal name to Arrendamiento Operativo CIB S.A.C. The offices operated for the Localiza franchise in Peru are included in the total number of branches reported for Arrendamiento Operativo CIB S.A.C. |
| (3) | Bancolombia Panama acquired an additional 20% interest in GAH on December 30, 2015, reaching 60% and consolidating the full operation in 2016. |
| (4) | Bancolombia S.A. sold 50% of its stake in Compañía de Financiamiento Tuya S.A. on October 31, 2016. Bancolombia S.A. will no longer consolidate such company, although it will still own 50% of the company’s common equity. |
| (5) | On October 15, 2014, Factoring Bancolombia completed the transfer of all of its assets, liabilities and commercial agreements to Bancolombia S.A., its parent company. Factoring Bancolombia assigned to Bancolombia the “Factoring Bancolombia” trademark, which has thereafter been used to identify a division of Bancolombia. |
| (6) | On February 23, 2015, Banistmo S.A. sold its insurance operation to Suramericana S.A. |
| (7) | Bancolombia S.A. sold its 80.59% stake in Uff Movil S.A.S. in 2015. |
Banking Correspondents
A banking correspondent is a platform which allows non-financial institutions, such as stores open to the public, to provide financial services and transactions in towns where banks and financial institutions have limited or no presence. As of December 31, 2016, Bancolombia has a total of 8,746 banking correspondents, including 8,080 in Colombia, 128 in Panama and 538 in El Salvador.
Puntos de Atención Móviles “PAM”
PAMs consist of commercial advisors who visit small towns in Colombia periodically to offer Bancolombia’s products and services. As of December 31, 2016, there were a total of 627 PAMs.
Kiosks
Kiosks, which are used only in El Salvador, are located inside the Bank’s agencies, malls, and other public places and are used to provide the Bank’s clients the possibility of conducting a variety of self-service transactions. As of December 31, 2016, there were a total of 226 kiosks.
Automatic Teller Machines “ATMs”
Bancolombia has a total of 5,418 ATMs, including 4,307 in Colombia, 574 in El Salvador, 358 in Panama, and 179 in Guatemala.
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Online/Computer Banking
We offer multiple online and computer-based banking alternatives designed to fit the specific needs of our different client segments. Through a variety of platforms (computer and Internet-based solutions) our clients can review their account balances and monitor transactions in their deposit accounts, loans, and credit cards, make virtual term investments, access funds from pre-approved loans, make payroll and supplier payments, make purchases and bill payments, negotiate stocks, learn about products and services and complete other transactions in real time.
Telephone Banking
We provide customized and convenient advisory services to customers of all segments through automatic interactive voice response (IVR) operations and a 24/7 contact center.
Electronic Funds Transfer at Point of Sale or Punto de Atención Cercano “PAC”
Through our own network of 5,694 PACs our customers may carry out a variety of transactions including transfer of funds, bill payments, and changes to debit card PINs, among others.
Mobile Phone Banking Service
Our clients can conduct a variety of transactions using their cell phones, including fund transfers between Bancolombia accounts, account balance inquiries, purchase of prepaid cell phone air time and payment of bills and invoices.
| B.6. | PATENTS, LICENSES AND CONTRACTS |
The Bank is not dependent on patents or licenses, nor is it substantially dependent on any industrial, commercial or financial contracts (including contracts with customers or suppliers). However, the contracts with service providers described below are important to the Bank’s business:
The online banking platform of the Bank is provided by Todo1 Services Inc., a company specialized in providing services to financial institutions for their mobile and internet banking platforms.
The Bank’s call center and telephone banking services are provided by Allus Global BPO Center, a company specialized in providing business process outsourcing, or BPO solutions.
The Bank’s check processing and settlement service is provided by IQ Outsourcing S.A., a Colombian company specialized in processing checks issued by customers of the Colombian financial institutions, through the Central Bank.
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The Bank’s software for processing credit card services is provided by First Data Corp., an electronic commerce and payment processing services provider for financial institutions.
The Bank’s technology platform infrastructure and management is provided by Tata Consultancy Services Ltd., a company specialized in providing technology services.
If we were required to replace any of Todo1 Services Inc., Allus Global BPO Center, IQ Outsourcing S.A., First Data Corp. or Tata Consultancy Services Ltd., as service providers of the Bank, or if any of those service providers were not to fulfill their respective contractual obligations, our business could suffer, and we might be required to incur additional costs to find replacement providers.
| B.7. | COMPETITION |
Description of the Colombian Financial System
Overview
During the last decade, the Colombian banking system has been undergoing a period of expansion, given the series of mergers and acquisitions that have taken place within the sector. More specifically, several mergers and acquisitions took place in 2007, mainly due to the global economic situation. Colombian banks made several investments allowing some entities to become big players in the Latin American market; Bancolombia, completed the acquisition of Banagrícola in El Salvador. In 2010, Banco de Bogotá acquired BAC-Credomatic, which operates in several countries in Central America; and, in October 2011, Canadian Scotiabank purchased a stake in Colpatria. In 2012, the most relevant event regarding the presence of foreign banks in Colombia was the acquisition of Banco Santander Colombia S.A. in July 2012 by Corpbanca (Chile). Also, Davivienda acquired the subsidiaries of HSBC in Costa Rica, Honduras and El Salvador.
In 2013, Bancolombia continued its internationalization process with the acquisition of the banking and insurance operations of HSBC in Panama for USD 2,234 million. In addition, Bancolombia Panama acquired 40% of the common shares of Grupo Agromercantil for USD 217 million. In 2013, Grupo Aval acquired 100% of the Guatemalan Reformador Financial Group (the transaction was valued at USD 411 million) and acquired BBVA Panama for USD 490 million. In 2013, some competitors started operations in Colombia: Itau BBA entered the market with an investment bank, as did BNP Paribas; Credicorp acquired Correval (a local brokerage firm); Brazilian broker-dealer BTG Pactual acquired Bolsa y Renta; Banco Santander returned to the Colombian market with a bank; and the Chilean company Larrain Vial started operations with a brokerage firm. During 2014, the entry of new entities continued as the financing company Hipotecaria, specialized in mortgage loans, which began operations in March 2014; also, in June 2014, Corpbanca completed the acquisition of Helm Bank, keeping Corpbanca’s brand; additionally, in 2014 the bank GNB Sudameris acquired 99.9% of the capital of HSBC Colombia and now operates under the brand GNB Colombia. In October 2014, GNB Sudameris acquired GNB Colombia. In 2015, the Chilean group CorpBanca merged with the Itaú of Brazil and Bancolombia sold 50% of its shares in Tuya SA to Grupo Exito. In December 2015, Bancolombia also acquired an additional 20% interest in Grupo Agromercantil, bringing its interest to 60% in total.
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As of December 31, 2016, according to the SFC, the main participants in the Colombian financial system were 25 commercial banks (14 domestic private banks, 10 foreign banks, and 1 domestic state-owned bank), 5 financial corporations and 16 financing companies (4 leasing companies and 12 traditional financing companies). In addition, trust companies, cooperatives, insurance companies, insurance brokerage firms, bonded warehouses, special state-owned institutions, and pension and severance pay funds also participate in the Colombian financial system.
Market and Credit Institutions’ Evolution in 2016
During 2016, the Colombian economy continued its downward trend, with an annual GDP growth of 2%, lower than the 3.1% of 2015, but above the expectations of the market analysts. The economic activities that contributed to GDP growth were financial services, construction and manufacturing industry. The economic activity that subtracted from GDP growth was mining and quarrying. Inflation in 2016 was 5.75%, 102bp less than 2015, and still above the target range of the Central Bank by 175bp. Food and housing groups were the main contributors to this gap, however among cost categories health care rose the most, by 8.14% compared to 2015. Due to the Colombian Central Bank's (CCB) objective inflation policy and the expectations of rate hikes given by the Federal Reserve in the United States, among other reasons, CCB continued raising the interest rate to 7.75% during the first half of 2016. In response to signals of recovery in macroeconomic indicators, CCB lowered rates in the second half of the year, ending 2016 with the rate at 7.25%. In 2016, the Colombian peso appreciated 4.72%. In spite of this, the trade deficit narrowed by 25.8% due to a larger drop in imports (17%) compared to the reduction in exports (13%).
In 2015, Colombian financial institutions began reporting their consolidated financial results under IFRS. However, in the case of credit institutions (including banks, financial corporations, financing companies and financial cooperatives), the SFC has allowed the presentation of stand-alone financial statements under Colombian Banking GAAP, following Decree 1851 of August 2013, which regulates the Law 1314 of 2009 concerning the technical regulatory framework for the institutions that report their financial results. Accordingly, following information includes figures are under Colombian Banking GAAP regulation, as reported by Colombian credit institutions to the SFC. Loan growth at Colombian credit institutions was 7.86% in 2016, compared to 16.85% in 2015. Commercial loans grew by 4.35% in 2016, compared to 12.97% in the previous year. Consumer loans increased 13.18% in 2016, less than the 13.95% in 2015. Mortgage loans continued performing well, with increases of 13.50% compared with 52.16% in 2015, but small business loans grew by only 6.66% in 2016, down from 16.82% in 2015.
The credit institutions’ level of past-due loans as a percentage of the total loan portfolio increased from 2.86% in December 2015 to 3.19% in December 2016. The coverage, measured by the ratio of allowances for loans losses (principal) to PDLs (overdue 30 days), ended 2016 at 154.29%, compared to 156.85% at the end of 2015.
At the end of 2016, the loans portfolio represented 64.94% of the credit institutions’ total assets, down from 65.52% at the end of 2015. Investments and derivatives, as a percentage of total assets increased from 19.78% in 2015 to 20.85% in 2016. Deposits as a percentage of the total balance of gross loans decreased from 88.27% in 2015 to 85.75% in 2016.
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As of December 31, 2016, credit institutions recorded COP 635.5 trillion in total assets, representing a 15.58% increase compared to a year earlier. Based on total assets held by Colombian credit institutions, banks had a market share of 95.40%, followed by financial corporations with 2.22%, financing companies with 1.88%, and financial cooperatives with 0.49%.
The capital adequacy ratio (Tier 1 + Tier 2) for credit institutions was 15.85% in December 2016 (including banks, financial corporations, financing companies and financial cooperatives), which is well above the minimum legal requirement of 9%. With the effectiveness of Decree 1771 of 2012 and the external circular 20 of 2013 of the Financial Superintendence, a new capital regime for credit institutions was established in order to strengthen the quality of equity of financial institutions to ensure they have the capacity to absorb losses in the development of their activities.
Bancolombia and its Competitors
The following table shows the key profitability, capital adequacy ratios and loan portfolio quality indicators for Bancolombia unconsolidated and its main competitors unconsolidated, based on information under Colombian Banking GAAP regulation and published by the SFC.
| ROE(1) | ROA(2) | Past-due loans/ Total loans |
Allowances/ Past-due loans |
Capital Adequacy | ||||||
| Dic-16 | Dic-15 | Dic-16 | Dic-15 | Dic-16 | Dic-15 | Dic-16 | Dic-15 | Dic-16 | Dic-15 | |
| Bancolombia | 13.31% | 13.06% | 1.96% | 2.13% | 2.95% | 2.78% | 189.20% | 177.11% | 16.20% | 15.76% |
| Banco de Bogotá | 26.72% | 15.74% | 5.33% | 2.99% | 2.55% | 2.31% | 133.51% | 140.48% | 20.80% | 20.69% |
| Davivienda | 17.37% | 15.73% | 2.12% | 1.92% | 2.95% | 2.39% | 141.31% | 176.02% | 13.95% | 14.20% |
| BBVA | 12.79% | 15.81% | 0.99% | 1.20% | 2.66% | 2.20% | 148.47% | 153.57% | 12.87% | 13.51% |
| Banco de Occidente | 12.95% | 12.49% | 1.61% | 1.50% | 2.96% | 2.72% | 140.42% | 135.43% | 13.23% | 11.30% |
| Banco Corpbanca | (4.22%) | 8.59% | (0.49%) | 1.01% | 2.90% | 2.18% | 179.61% | 185.70% | 12.96% | 12.96% |
| Banco Colpatria | 15.87% | 15.84% | 1.38% | 1.38% | 4.46% | 4.45% | 134.50% | 130.13% | 11.36% | 11.32% |
Source: SFC.
| (1) | ROE is return on average stockholders’ equity. |
| (2) | ROA is return on average assets. |
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The following tables illustrate the market shares for Bancolombia S.A. (on an unconsolidated basis) and its main competitors with respect to various key products, based on figures published by the SFC as of December 31, 2016, 2015 and 2014:
Total
Net Loans
Market Share
| Total Net Loans – Market Share (%) | 2016 | 2015 | 2014 |
| Bancolombia | 25.05% | 22.69% | 23.04% |
| Banco de Bogotá | 13.25% | 13.78% | 13.86% |
| Davivienda | 14.46% | 13.82% | 13.50% |
| BBVA | 10.14% | 10.61% | 10.29% |
| Banco de Occidente | 6.71% | 7.31% | 6.91% |
| Banco Corpbanca | 5.41% | 6.06% | 6.34% |
| Banco Colpatria | 4.98% | 5.16% | 5.34% |
Source: Ratios are calculated by Bancolombia based on figures published by the SFC.
Checking
Accounts
Market Share
| Checking Accounts – Market Share (%) | 2016 | 2015 | 2014 |
| Bancolombia | 22.47% | 25.28% | 23.72% |
| Banco de Bogotá | 24.55% | 19.23% | 19.82% |
| Davivienda | 9.20% | 9.94% | 10.23% |
| BBVA | 10.86% | 9.73% | 9.89% |
| Banco de Occidente | 11.01% | 11.39% | 11.51% |
| Banco Corpbanca | 3.54% | 4.20% | 4.24% |
| Banco Colpatria | 3.21% | 3.51% | 3.54% |
Source: Ratios are calculated by Bancolombia based on figures published by the SFC.
Time
Deposits
Market Share
| Time Deposits – Market Share (%) | 2016 | 2015 | 2014 |
| Bancolombia | 21.68% | 15.23% | 14.59% |
| Banco de Bogotá | 12.16% | 14.67% | 17.01% |
| Davivienda | 13.34% | 13.53% | 12.58% |
| BBVA | 13.27% | 11.17% | 12.11% |
| Banco de Occidente | 4.76% | 4.51% | 5.94% |
| Banco Corpbanca | 8.16% | 9.27% | 8.69% |
| Banco Colpatria | 6.36% | 7.42% | 6.61% |
Source: Ratios are calculated by Bancolombia based on figures published by the SFC.
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Saving
Accounts
Market Share
| Saving Accounts – Market Share (%) | 2016 | 2015 | 2014 |
| Bancolombia | 23.94% | 22.70% | 23.09% |
| Banco de Bogotá | 13.07% | 13.14% | 11.67% |
| Davivienda | 14.28% | 12.37% | 12.54% |
| BBVA | 10.63% | 12.44% | 11.86% |
| Banco de Occidente | 5.68% | 6.29% | 6.67% |
| Banco Corpbanca | 3.98% | 6.42% | 5.66% |
| Banco Colpatria | 4.41% | 4.08% | 4.52% |
Source: Ratios are calculated by Bancolombia based on figures published by the SFC.
Banco Agrícola and its Competitors
In 2016, Banco Agricola continued to lead the Salvadorian financial system and ranked first in terms of total assets, loans, deposits, stockholders equity and profits. The information presented in the following tables relates to Banco Agrícola and its competitors on a stand-alone basis and was prepared based on El Salvador accounting standards. The following table illustrates the market share for the main institutions of the Salvadorian financial system for the year ended on December 31, 2016:
| Assets | Stockholders` Equity | Loans | Deposits | Profits | |
| Banco Agrícola | 27.4% | 26.5% | 27.2% | 26.9% | 46.8% |
| Cuscatlán | 8.8% | 12.6% | 8.5% | 9.1% | (0.5%) |
| Davivienda | 14.5% | 14.0% | 14.9% | 13.3% | 16.4% |
| Scotiabank | 12.9% | 14.8% | 14.1% | 12.8% | 11.5% |
| BAC | 12.6% | 11.2% | 13.0% | 12.8% | 15.6% |
| Promerica | 6.7% | 5.0% | 6.8% | 7.2% | 9.3% |
| Others | 17.1% | 15.9% | 15.5% | 17.8% | 0.9% |
Sources: ABANSA (Asociación Bancaria Salvadoreña) and SSF (Superintendencia del Sistema Financiero de El Salvador).
The following tables illustrate the market share of Banco Agricola and its main competitors, based on figures published by the Salvadorian Banking Association (ABANSA), as of December 31, 2016 and 2015:
Total
Loans
Market Share
| Total Loans - Market Share (%) | 2016 | 2015(1) |
| Banco Agrícola | 27.2% | 27.9% |
| Cuscatlán | 8.5% | 9.2% |
| Davivienda | 14.9% | 15.1% |
| Scotiabank | 14.1% | 14.8% |
| BAC | 13.0% | 12.0% |
| Promerica | 6.8% | 6.9% |
| Others | 15.5% | 14.1% |
Source: Ratios are calculated by Banco Agricola based on figures published by ABANSA and SSF.
| (1) | The participation in 2015 varies from the one presented in the 20F of 2015 because Banco Industrial was included into ABANSA in 2016 therefore there was a restatement of the information reported in 2015 in order to be comparable with 2016. Banco Industrial is included in “Others” line. |
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Checking
Accounts
Market Share
| Checking Accounts - Market Share (%) | 2016 | 2015(1) |
| Banco Agrícola | 22.3% | 23.0% |
| Cuscatlán | 13.3% | 19.1% |
| Davivienda | 10.4% | 11.4% |
| Scotiabank | 9.4% | 7.7% |
| BAC | 20.2% | 19.5% |
| Promerica | 7.1% | 7.5% |
| Others | 17.3% | 11.8% |
Source: Ratios are calculated by Banco Agricola based on figures published by ABANSA and SSF.
| (1) | The participation in 2015 varies from the one presented in the 20F of 2015 because Banco Industrial was included into ABANSA in 2016 therefore there was a restatement of the information reported in 2015 in order to be comparable with 2016. Banco Industrial is included in “Others” line. |
Time
Deposits
Market Share
| Time Deposits - Market Share (%) | 2016 | 2015(1) |
| Banco Agrícola | 21.3% | 21.8% |
| Cuscatlán | 5.6% | 5.4% |
| Davivienda | 15.2% | 14.9% |
| Scotiabank | 15.1% | 16.3% |
| BAC | 10.7% | 10.6% |
| Promerica | 9.7% | 10.3% |
| Others | 22.4% | 20.8% |
Source: Ratios are calculated by Banco Agricola based on figures published by ABANSA and SSF.
| (1) | The participation in 2015 varies from the one presented in the 20F of 2015 because Banco Industrial was included into ABANSA in 2016 therefore there was a restatement of the information reported in 2015 in order to be comparable with 2016. Banco Industrial is included in “Others” line. |
Saving
Accounts
Market Share
| Saving Account - Market Share (%) | 2016 | 2015(1) |
| Banco Agrícola | 39.0% | 38.3% |
| Cuscatlán | 9.9% | 11.5% |
| Davivienda | 13.3% | 14.4% |
| Scotiabank | 12.9% | 13.6% |
| BAC | 8.7% | 8.8% |
| Promerica | 4.1% | 4.2% |
| Others | 12.1% | 9.3% |
Source: Ratios are calculated by Banco Agricola based on figures published by ABANSA and SSF.
| (1) | The participation in 2015 varies from the one presented in the 20F of 2015 because Banco Industrial was included into ABANSA in 2016 therefore there was a restatement of the information reported in 2015 in order to be comparable with 2016. Banco Industrial is included in “Others” line. |
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Banistmo and its Competitors
Banistmo, a leading company in Panama, is the second largest bank in the country, with 10.8% market share based on outstanding loans. The information presented in the following tables was prepared based on Panama accounting standards. The following table illustrates the market shares for the main institutions of the Panamanian financial system as of and for the year ended December 31, 2016.
| MARKET SHARE | |||||
| Assets | Equity | Loans | Deposits | Profits | |
| Banistmo | 9.1% | 9.2% | 10.8% | 12.0% | 3.0% |
| Banco General | 14.7% | 10.4% | 15.1% | 20.6% | 22.1% |
| Global Bank | 6.5% | 4.7% | 8.4% | 5.7% | 4.1% |
| Banesco | 4.0% | 3.2% | 4.1% | 6.5% | 3.3% |
| BAC | 7.3% | 22.2% | 5.4% | 6.0% | 27.8% |
| Others | 58.4% | 50.3% | 56.2% | 49.2% | 39.7% |
Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)
The following tables illustrate the market share of Banistmo stand-alone and its main competitors, based on figures published by the Superintendency of Banks of Panama, in accordance with Panamanian banking regulations, as of December 31, 2016 and 2015:
Total Loans
Market Share
| Total Loans - Market Share (%) | 2016 | 2015 |
| Banistmo | 10.8% | 10.7% |
| Banco General | 15.1% | 14.3% |
| Global Bank | 8.4% | 7.9% |
| Banesco | 4.1% | 4.3% |
| BAC | 5.4% | 5.2% |
| Others | 56.2% | 57.6% |
Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)
Saving Accounts
Market Share
| Saving Account - Market Share (%) | 2016 | 2015 |
| Banistmo | 13.0% | 13.8% |
| Banco General | 25.8% | 24.4% |
| Global Bank | 5.4% | 5.4% |
| Banesco | 13.1% | 14.5% |
| BAC | 3.1% | 3.1% |
| Others | 39.6% | 38.8% |
Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)
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Checking Accounts
Market Share
| Checking Accounts - Market Share (%) | 2016 | 2015 |
| Banistmo | 12.2% | 13.0% |
| Banco General | 24.6% | 22.8% |
| Global Bank | 3.8% | 3.9% |
| Banesco | 4.7% | 4.6% |
| BAC | 9.0% | 8.9% |
| Others | 45.7% | 46.8% |
Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)
Time Deposits
Market Share
| Time Deposits - Market Share (%) | 2016 | 2015 |
| Banistmo | 11.6% | 11.1% |
| Banco General | 16.8% | 16.5% |
| Global Bank | 6.6% | 6.6% |
| Banesco | 4.4% | 4.4% |
| BAC | 6.0% | 6.1% |
| Others | 54.6% | 55.3% |
Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)
Banco Agromercantil de Guatemala, S.A. and its Competitors
In 2016, Banco Agromercantil maintained its position as the fourth-largest bank in Guatemala in terms of assets, loans, deposits and stockholders’ equity. The Guatemalan financial system has a total of 18 banks. The information presented in the following tables was prepared in accordance with Guatemalan banking regulations, as reported to the SIB (Superintendencia de Bancos de Guatemala). The following table illustrates the market share for the main institutions of the financial system as of and for the year ended December 31, 2016:
| MARKET SHARE | |||||
| Assets | Stockholders’ Equity | Loans | Deposits | Profits | |
| Banco Industrial | 27.9% | 23.0% | 27.6% | 24.3% | 32.2% |
| Banrural | 20.7% | 23.9% | 20.0% | 23.5% | 21.8% |
| Banco G&T Continental | 18.1% | 15.1% | 15.8% | 18.1% | 15.3% |
| Banco Agromercantil | 8.3% | 8.8% | 10.7% | 7.7% | 5.7% |
| BAC-Reformador | 6.6% | 7.2% | 8.4% | 7.1% | 4.4% |
| Bantrab | 6.4% | 7.2% | 6.5% | 6.9% | 11.6% |
| Citibank | 2.2% | 2.7% | 2.6% | 2.5% | 1.1% |
| Others* | 9.8% | 12.1% | 8.4% | 9.9% | 7.9% |
Source: SIB (Superintendencia de Bancos de Guatemala).
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The following tables illustrate the market share of Banco Agromercantil and its main competitors, based on figures published by the SIB as of December 31, 2016 and 2015:
Total Loans
Market Share
| Total Loans - Market Share (%) | 2016 | 2015 |
| Banco Industrial | 27.6% | 27.1% |
| Banrural | 20.0% | 21.4% |
| Banco G&T Continental | 15.8% | 16.5% |
| Banco Agromercantil | 10.7% | 10.6% |
| BAC-Reformador | 8.4% | 8.1% |
| Bantrab | 6.5% | 5.4% |
| Citibank | 2.6% | 2.7% |
| Others* | 8.4% | 8.2% |
Source: SIB (Superintendencia de Bancos de Guatemala).
Checking
Accounts
Market Share
| Checking Accounts - Market Share (%) | 2016 | 2015 |
| Banco Industrial | 31.3% | 31.2% |
| Banrural | 22.0% | 20.2% |
| Banco G&T Continental | 17.3% | 17.9% |
| Banco Agromercantil | 7.8% | 7.9% |
| BAC-Reformador | 9.9% | 10.0% |
| Bantrab | 1.2% | 1.3% |
| Citibank | 1.9% | 2.8% |
| Others* | 8.6% | 8.7% |
Source: SIB (Superintendencia de Bancos de Guatemala).
Time Deposits
Market Share
| Time Deposits - Market Share (%) | 2016 | 2015 |
| Banco Industrial | 18.4% | 19.9% |
| Banrural | 21.6% | 20.7% |
| Banco G&T Continental | 17.1% | 17.0% |
| Banco Agromercantil | 7.2% | 7.4% |
| BAC-Reformador | 5.6% | 6.0% |
| Bantrab | 13.5% | 13.2% |
| Citibank | 3.4% | 2.1% |
| Others* | 13.2% | 13.7% |
Source: SIB (Superintendencia de Bancos de Guatemala).
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Saving Accounts
Market Share
| Saving Accounts - Market Share (%) | 2016 | 2015 |
| Banco Industrial | 24.1% | 24.6% |
| Banrural | 30.0% | 29.2% |
| Banco G&T Continental | 21.4% | 21.5% |
| Banco Agromercantil | 8.3% | 8.7% |
| BAC-Reformador | 5.2% | 5.3% |
| Bantrab | 3.6% | 3.8% |
| Citibank | 1.5% | 1.7% |
| Others* | 5.9% | 5.2% |
* Others. .. Includes the followings banks: Internacional, Promerica, Crédito Hipotecario Nacional, Ficohsa, Azteca, Inmobiliario, De Antigua, Vivibanco, Citibank, N.A. de Guatemala, De Crédito, Inv.
| B.8. | SUPERVISION AND REGULATION |
Colombian Banking Regulators
Pursuant to Colombia’s Constitution, Congress has the power to prescribe the general legal framework within which the Government may regulate the financial system. The agencies vested with the authority to regulate the financial system are the board of directors of the Central Bank, the Ministry of Finance and Public Credit (the “Ministry of Finance”), the SFC, the Superintendency of Industry and Commerce (the “SIC”) and the Self-Regulatory Organization (Autoregulador del Mercado de Valores or “AMV”).
Central Bank
The Central Bank exercises the customary functions of a central bank, including price stabilization, monetary policy, regulation of currency circulation, regulation of credit, exchange rate monitoring and management of international reserves. Its board of directors is the regulatory authority for monetary, currency exchange and credit policies, and is responsible for the direction of the Central Bank’s duties. The Central Bank also acts as lender of last resort to financial institutions.
Ministry of Finance
One of the functions of the Ministry of Finance is to regulate all aspects of finance and insurance activities. As part of its duties, the Ministry of Finance issues decrees relating to financial matters that may affect banking operations in Colombia. In particular, the Ministry of Finance is responsible for regulations relating to capital adequacy, risk limitations, authorized operations, disclosure of information and accounting of financial institutions on a high level, which matters are then regulated in detail by the SFC.
Superintendency of Finance
The SFC is the authority responsible for supervising and regulating financial institutions, including commercial banks such as the Bank, finance corporations, financing companies, financial services companies and insurance companies, all of which require prior authorization of the SFC before commencing operations. Regulations issued by the SFC must comply with decrees issued by the Ministry of Finance. The SFC has broad discretionary powers to supervise financial institutions, including the authority to impose fines on financial institutions and their directors and officers for violations of applicable regulations. The SFC can also conduct on-site inspections of Colombian financial institutions.
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The SFC is also responsible for monitoring and regulating the market for publicly traded securities in Colombia and for monitoring and supervising securities market participants, including the Colombian Stock Exchange, brokers, dealers, mutual funds and issuers.
Violations of the financial system rules and regulations are subject to administrative and, in some cases, criminal sanctions.
Other Colombian regulators
Self- Regulatory Organization
The AMV is a private entity responsible for the regulation of entities participating in the Colombian capital markets. The AMV may issue mandatory instructions to its members and supervise its members’ compliance and impose sanctions for violations.
All capital market intermediaries, including the Bank, must become members of the AMV and are subject to its regulations.
Superintendency of Industry and Commerce
The SIC is the authority responsible for supervising and regulating competition in several industrial sectors, including financial institutions. The SIC is authorized to initiate administrative proceedings and impose sanctions on banks, including the Bank, whenever the financial entity behaves in a manner considered to be anti-competitive.
Regulatory Framework for Colombian Banking Institutions
The basic regulatory framework of the Colombian financial sector is set forth in Decree 663 of 1993, as modified by among others, Law 510 of 1999, Law 546 of 1999, Law 795 of 2003 and Law 1328 of 2009.
Decree 663 of 1993 defined the structure of the Colombian financial system, establishes a set of permitted activities wilthin the system and defines several forms of business entities, including: (i) credit institutions (establecimientos de crédito) (which are further categorized into banking institutions, such as the Bank, finance corporations (corporaciones financieras), financing companies (compañias de financiamiento) and finance cooperatives (cooperativas financieras)); (ii) financial services entities (sociedades de servicios financieros); (iii) capitalization corporations (sociedades de capitalización); (iv) insurance companies (entidades aseguradoras); and (v) insurance intermediaries (intermediarios de seguros). Furthermore, Decree 663 of 1993 sets forth (i) the procedure applicable for mergers and acquisitions, spin-offs, and other corporate reorganizations of the aforementioned entities, (ii) specific regulations that apply to the issuance and sale of shares and other securities by such entities, and (iii) certain rules regarding the activies of officers and ]directors of such institutions, among others. Finally, Decree 663 of 1993 provides that no financial, banking or credit institution may operate in Colombia without the prior approval of the SFC.
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Law 510 of 1999 improved the solvency standards and stability of Colombia’s financial institutions by providing rules for their incorporation and regulating permitted investments of credit institutions, insurance companies and investment companies.
Law 546 of 1999 was enacted to regulate the system of long-term home loans.
Law 795 of 2003 broadened the scope of permitted activities for financial institutions, to update regulations with some of the then-latest principles of the Basel Committee and to increase the minimum capital requirements in order to incorporate a financial institution (for more information, see “Minimum Capital Requirements” below). Law 795 of 2003 also provided authority to the SFC to take preventive measures, consisting mainly of preventive interventions with respect to financial institutions whose capital falls below certain thresholds.
Law 1328 of 2009 provided a set of rights and responsibilities for customers of the financial system and a set of obligations for financial institutions in order to minimize disputes. This law also gives foreign banks more flexibility to operate in Colombia through “branches”. Following its adoption, credit institutions were allowed to operate leasing businesses and banks were allowed to extend loans to third parties so that borrowers could acquire control of other companies.
The SFC has authority to implement applicable regulations and, accordingly, from time to time issues administrative resolutions and circulars. By means of External Circular 029 of 2014, the SFC compiled the rules and regulations applicable to financial institutions and other entities under its supervision. Likewise, by means of External Circular 100 of 1995 (the “Basic Accounting Circular”), it compiled all accounting rules applicable to financial institutions and its other supervised entities.
Financial institutions are subject to further rules if they engage in additional activities. Law 964 of 2005 (securities market law) regulates securities intermediation activities, which may be performed by banks, and securities offerings. External Resolution 8 of 2000 (foreign exchange regulations), and Resolution 4 (as hereinafter defined) issued by the board of directors of the Central Bank, defined the different activities that banks, including the Bank, may perform as currency exchange intermediaries, including lending in foreign currencies and investing in foreign securities.
Additionally, Decree 2555 of 2010 compiled regulations that were dispersed in separate decrees, including regulations regarding securities market activities, capital adequacy requirements, principles in the determination, diffusion and publicity of rates and prices of products and financial services, and lending activities.
Violations of any of the above statutes and their relevant regulations are subject to administrative sanctions and, in some cases, criminal sanctions.
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Key interest rates
Colombian commercial banks, finance corporations and consumer financing companies are required to provide the Central Bank, on a weekly basis, with data regarding the total volume (in pesos) of certificates of deposit issued during the prior week and the average interest rates paid for certificates of deposit with maturities of 90 days. Based on such reports, the Central Bank computes Depósitos a Término Fijo (“DTF”) rate, which is published at the beginning of the following week, for use in calculating interest rates payable by financial institutions. The DTF is the weighted average interest rate paid by finance corporations, commercial banks and consumer financing companies for certificates of deposit with maturities of 90 days. For the week of April 24, 2017, the DTF was 6.48%.
Article 884 of the Colombian Commercial Code provides for a limit on the amount of interest that may be charged in commercial transactions. The limit is 1.5 times the current banking interest rate, or Interés Bancario Corriente, certified and calculated by the SFC as the average rate of interest ordinarily charged by banks for loans made during a specified period. The current banking interest rate for small business loans and for all other loans is certified by the SFC. As of December 31, 2016, the banking interest rate for small business loans was 36.73% and for all other loans was 22.34%.
Capital adequacy requirements
Capital adequacy requirements for Colombian financial institutions (as set forth in Decree 2555 of 2010, as amended) are based on applicable Basel Committee standards. Some of the highlights of this regulation are as follows:
| · | The technical capital is calculated as the sum of Ordinary Basic Capital (common equity Tier I), Additional Basic Capital (additional Tier I), and Additional Capital (Tier II capital). |
| · | Criteria for debt and equity instruments to be considered ordinary basic capital, additional basic capital, and additional capital were established. Additionally, the SFC must review whether a given instrument adequately complies with these criteria in order for an instrument to be considered Tier I or Tier II capital, upon request of the issuer. Debt and equity instruments that have not been classified by the SFC as basic or additional capital are not be considered Tier I or Tier II capital for purposes of capital adequacy requirements. |
| · | The total solvency ratio is set at a minimum of 9% of the financial institution’s total risk-weighted assets; however, each entity must comply with a minimum basic solvency ratio of 4.5%, which is defined as the ordinary basic capital after deductions divided by the financial institution’s total risk-weighted assets. |
In 2014, the Ministry of Finance issued Decree 1648 of 2014 and Decree 2392 of 2015 establishing criteria for hybrid instruments to be considered additional basic capital (Additional Tier I).
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As of December 31, 2016, the Bank’s technical capital ratio was 13.26%, exceeding the requirements of the Colombian government and the SFC by 426 basis points. As of December 31, 2015, the Bank’s technical capital ratio was 12.46%.
For more information, see Item 5. “Operating and Financial Review and Prospects - B1 Liquidity and Funding. Capital Adequacy.”
The minimum capital requirement for banks on an unconsolidated basis is established in Article 80 of Decree 633 of 1993. The minimum capital requirement for banks, including Bancolombia S.A., for 2016 is COP 85,240 million. Failure to meet such requirement can result in the taking of possession (toma de posesión) of the Bank by the SFC (see “Bankruptcy Considerations”).
Capital Investment Limit
For entities incorporated in Colombia, all investments in subsidiaries and other authorized capital investments, excluding those made in order to abide by legal requirements, may not exceed 100% of the total aggregate capital, equity reserves and the equity re-adjustment account of the respective bank, financial corporation or commercial finance company excluding unadjusted fixed assets and including deductions for accumulated losses.
Mandatory Investments
Central Bank regulations require financial institutions, including the Bank, to hold minimum mandatory investments in debt securities issued by Fondo para el Financiamiento del Sector Agropecuario (“Finagro”), a Colombian public financial institution that finances production and rural activities to support the agricultural sector. The amount of these mandatory investments is calculated by applying a fixed percentage (ranging from 4.3% to 5.8%, depending on the type of liability) to the quarterly average of the end of day balances of certain liabilities, primarily, deposits and short-term debt. The investment balance is computed at the end of each quarter. Any required adjustment (due to a change in the quarterly average between periods) results in the purchase of additional securities or may result in redemption by Finagro at of securities in excess of the requirement. The purchase of additional securities takes place during the month following the date as of which the computation was performed.
Foreign Currency Position Requirements
According to External Resolution 9 of 2013 issued by the board of directors of the Central Bank as amended or suppplemented (“Resolution 9”), a financial institution’s foreign currency position (posición propia en moneda extranjera) is the difference between such institution’s foreign currency-denominated assets and liabilities (including any off-balance sheet items), actual or contingent, including those that may be converted into Colombian legal currency.
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Resolution 9 provides that the average of a bank’s foreign currency position for three business days cannot exceed the equivalent in pesos of 20% of the bank’s technical capital. Currency exchange intermediaries such as the Bank are permitted to hold a three business days’ average negative foreign currency position not exceeding the equivalent in foreign currency of 5% of its technical capital (with penalties being payable after the first business day).
Resolution 9 also defines the foreign currency position in cash (posición propia de contado en moneda extranjera) as the difference between all foreign currency-denominated assets and liabilities. A bank’s three business days average foreign currency position in cash cannot exceed 50% of the bank’s technical capital. In accordance with Resolution 9, the three business days’ average must be calculated on a daily basis and the foreign currency position in cash for any single business day can be negative as long as it does not exceed 20% of the bank’s technical capital.
Finally, Resolution 9 requires banks to comply with a gross position of leverage (posición bruta de apalancamiento) as it relates to its foreign currency position. Gross position of leverage is defined as (i) the value of term contracts denominated in foreign currency, plus (ii) the value of transactions denominated in foreign currency to be settled within two days in cash, plus (iii) the value of the exchange rate risk exposure associated with exchange rate options and derivatives. According to Resolution 9 the three business days’ average of the gross position of leverage cannot exceed 550% of the technical capital.
Reserve Requirements
Credit institutions are required to satisfy reserve requirements with respect to deposits and other cash demands which are held by the Central Bank in the form of cash deposits. According to Resolution 11 of 2008 issued by the board of directors of the Central Bank, as amended, the reserve requirements for Colombian banks are measured bi-weekly and the amount depends on the class of deposits.
Credit institutions must maintain reserves of 11% over private demand deposits, government demand deposits, other deposits and liabilities and savings deposits; of 4.5% over term deposits with maturities fewer than 540 days and 0% over term deposits with maturities equal to or more than 540 days.
Foreign Currency Loans
According to External Resolution 8 of 2000, residents of Colombia may obtain foreign currency loans from foreign residents, and from Colombian currency exchange intermediaries (such as the Bank) or by placing debt securities abroad. Foreign currency loans must be either disbursed through a foreign exchange intermediary or deposited in special purpose offshore accounts.
Colombian residents who borrow funds in foreign currency my be required to post with the Central Bank non-interest bearing deposits for a specified term, but currently although the size of the required deposit is currently zero. Such deposits would not be required in certain cases, including foreign currency loans aimed at financing Colombian investments abroad, or for short-term exportation loans, provided that these loans are disbursed against the funds of Banco de Comercio Exterior – Bancoldex.
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External Resolution 8 of 2000 sets forth a number of restrictions and limitations as to the use of proceeds in the case of foreign currency loans obtained by Colombian currency exchange intermediaries for the purpose of avoiding the deposit requirement described above. Such foreign currency loans may be used, among others, for lending activities in a foreign currency with a tenor equal to, or shorter than, the tenor of the foreign financing.
Finally, pursuant to Law 9 of 1991, the board of directors of the Central Bank is entitled to impose conditions and limitations on the incurrence of foreign currency indebtedness, as an exchange control policy, in order to avoid pressure in the currency exchange market.
Non-Performing Loan Allowance
The SFC maintains rules on non-performing loan allowances for financial institutions. These rules apply for Bancolombia’s financial statements on a stand-alone basis for Colombian regulatory purposes. Non-performing loan allowances in the Consolidated Financial Statements are calculated according to IFRS.
Lending Activities
Decree 2555 of 2010, as amended, sets forth the maximum amounts that a financial institution may lend to a single borrower (including for this purpose all related fees, expenses and charges). These maximum amounts may not exceed 10% of a bank’s Technical Capital. However, there are several circumstances under which the limit may be raised. In general, the limit is raised to 25% when amounts lent above 5% of Technical Capital are secured by guarantees that comply with the financial guidelines provided in Decree 2555 of 2010, as amended. Also, a bank may not make loans to any shareholder that holds directly more than 10% of its capital stock for one year after such shareholder reaches the 10% threshold. In no event may a loan to a shareholder holding directly or indirectly 20% or more of the Bank’s capital stock exceed 20% of the Bank’s Technical Capital. In addition, no loan to a single financial institution may exceed 30% of the Bank’s Technical Capital, with the exception of loans funded by Colombian development banks which are not subject to such limit.
Decree 2555 of 2010 also sets a maximum limit of 30% of the Bank’s technical capital for single-party risk, the calculation of which includes loans, leasing operations and equity and debt investments.
The Central Bank also has the authority to establish maximum limits on the interest rates that commercial banks and other financial institutions may charge on loans. However, interest rates must also be consistent with market terms with a maximum limit certified by the SFC.
Ownership and Management Restrictions
The Bank is organized as a stock company (sociedad anónima). Its corporate existence is subject to the rules applicable to commercial companies, principally the Colombian Commercial Code which requires stock companies (such as the Bank) to have a minimum of five shareholders at all times and provides that no single shareholder may own 95% or more of the Bank’s subscribed capital stock. Article 262 of the Colombian Commerce Code prohibits the Bank’s subsidiaries from acquiring stock of the Bank.
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Pursuant to Decree 663 of 1993, as amended, any transaction resulting in an individual or entity holding 10% or more of the outstanding shares of any Colombian financial institution, including, in the case of the Bank, transactions resulting in holding ADRs representing 10% or more of the subscribed capital stock of the Bank, is subject to the prior authorization of the SFC. For that purpose, the SFC must evaluate the proposed transaction based on the criteria and guidelines specified in Decree 663 of 1993. Transactions entered into without the prior approval of the SFC are null and void and cannot be recorded in the institution’s stock ledger. These restrictions apply equally to Colombian and foreign investors.
Bankruptcy Considerations
Colombian banks and other financial institutions are not subject to the laws and regulations that generally govern the insolvency, restructuring and liquidation of industrial and commercial companies, but rather are subject to special rules, the most important details of which are summarized below.
Pursuant to Colombian banking law, the SFC has the power to intervene in the operations of a bank in order to prevent it from, or to control and reduce the effects of, a bank failure. The SFC also conducts periodic visits to financial institutions and may impose capital or solvency obligations on financial institutions without taking control.
The SFC may intervene in a bank’s business: (i) prior to the liquidation of the bank, in order to prevent the bank from entering into a state where the SFC would need to take possession by taking one of the following recovery measures (institutos de salvamento): (a) submitting the bank to a special supervision regime; (b) issuing a mandatory order to recapitalize the bank; (c) placing the bank under the management of another authorized financial institution, acting as trustee; (d) ordering the transfer of all or part of the assets, liabilities and contracts of the bank to another financial institution; (e) ordering the bank to merge with one or more financial institutions that consent to the merger; (f) ordering the adoption of a recovery plan by the bank pursuant to guidelines approved by the government; (g) ordering the exclusion of certain assets and liabilities by requiring the transfer of such assets and liabilities to another institution designated by the SFC; or (h) ordering the progressive unwinding (desmonte progresivo) of the operations of the bank; or (ii) at any time, by taking possession of the bank to either administer the bank or order its liquidation, depending on how critical the situation is found to be by the SFC.
The following grounds for a taking of possession are considered to be “automatic” in the sense that, if the SFC discovers their existence, the SFC must step in and take over the financial institution: (i) if the financial institution’s Technical Capital falls below 40% of the legal minimum; or (ii) upon the expiration of the term of any then-current recovery plans or the non-fulfillment of the goals set forth in such plans.
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Additionally, and subject to the approval of the Ministry of Finance and the opinion of its advisory council (Consejo Asesor del Superintendente), the SFC may, at its discretion, initiate intervention procedures against a bank under the following circumstances: (i) suspension of payments; (ii) failure to pay deposits; (iii) refusal to submit its files, accounts and supporting documentation for inspection by the SFC; (iv) refusal to be interrogated under oath regarding its business; (v) repeated failure to comply with orders and instructions from the SFC; (vi) repeated violations of applicable laws and regulations or of the bank’s by-laws; (vii) unauthorized or fraudulent management of the bank’s business; (viii) reduction of the bank’s net worth below 50% of its subscribed capital; (ix) existence of serious inconsistencies in the information provided to the SFC that, at its discretion, impedes the SFC to accurately understand the situation of the bank; (x) failure to comply with the minimum capital requirements set forth in Decree 663 of 1993; (xi) failure to comply with the recovery plans that were adopted by the bank; (xii) failure to comply with the order of exclusion of certain assets and liabilities to another institution designated by the SFC; and (xiii) failure to comply with the order of progressive unwinding (desmonte progresivo) of the operations of the bank.
Within two months (extensible for two additional months) from the date in which the SFC takes possession of a bank, the SFC must decide which measures to adopt. The decision is to be made with the purpose of permitting depositors, creditors and investors to obtain full or partial payment of their credits and must be submitted to Fondo de Garantías de Instituciones Financieras’ (Fogafin) previous opinion.
Upon the taking of possession of a bank, depending on the bank’s financial situation and the reasons that gave rise to such measure, the SFC may (but is not required to) order the bank to suspend payments to its creditors. The SFC has the power to determine that such suspension will affect all of the obligations of the bank, or only certain types of obligations or even obligations up to or in excess of a specified amount.
As a result of the taking of possession, the SFC must appoint as special agent the person or entity designated by Fogafin to administer the affairs of the bank while such process lasts and until it is decided whether to liquidate the bank.
As part of its duties following the taking of possession by the SFC, Fogafin must provide the SFC with the plan to be followed by the special agent in order to meet the goals set for the fulfillment of the measures that may have been adopted. If the underlying problems that gave rise to the taking of possession of the bank are not resolved within a term not to exceed two years, the SFC must order the liquidation of the bank.
During the taking of possession (which period ends when the liquidation process begins), Colombian banking laws prevent any creditor of the bank from: (i) initiating any procedure for the collection of any amount owed by the bank; (ii) enforcing any judicial decision rendered against the bank to secure payment of any of its obligations; (iii) constituting a lien or attachment over any of the assets of the bank to secure payment of any of its obligations; or (iv) making any payment, advance or compensation or assuming any obligation on behalf of the bank, with the funds or assets that may belong to it and are held by third parties, except for payments that are made by way of set-off between regulated entities of the Colombian financial and insurance systems.
In the event that the bank is liquidated, the SFC must, among other measures, provide that all term obligations owed by the bank are due and payable as of the date when the order to liquidate becomes effective.
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During the liquidation process bank deposits and certain other types of saving instruments will be excluded from the liquidation process and paid prior to any other liabilities. The remainder of resources will be distributed among creditors whose claims are recognized in accordance with the following rank: (i) the first class of claims includes the court expenses incurred in the interest of all creditors, wages and other obligations related with employment contracts and tax authorities’ credits regarding national and local taxes; (ii) the second class of claims comprises the claims secured by a security interest on movable assets; (iii) the third class of claims includes the claims secured by real estate collateral, such as mortgages; (iv) the fourth class of claims contains some other claims of the tax authorities against the debtor that are not included in the first class of claims and claims of suppliers of raw materials and input to the debtor and (v) finally, the fifth class of claims includes all other credits without any priority or privilege, provided, however, that among credits of the fifth class, subordinated debt will be ranked junior to the external liabilities (pasivos externos) and senior only to capital stock. Each category of creditors will collect in the order indicated above, whereby distributions in one category will be subject to the full satisfaction of claims in the prior category.
Deposit insurance—Troubled Financial Institutions
Subject to specific limitations, Fogafin is authorized to provide equity (whether or not reducing the par value of the recipient’s shares) and/or secured credits to troubled financial institutions, and to insure deposits of commercial banks and certain other financial institutions.
To protect the customers of commercial banks and certain financial institutions, Resolution 1 of 2012 of the board of directors of Fogafin, as amended, requires mandatory deposit insurance. Banks must pay an annual premium of 0.3% of total funds received on saving accounts, checking accounts, certificates of deposit and other deposits, which is paid in four quarterly installments. If a bank is liquidated, the deposit insurance will cover the funds deposited by an individual or corporation with such bank up to a maximum of COP 20 million regardless of the number of accounts held.
Risk Management Systems
Commercial banks must have risk administration systems to meet the SFC minimum standards for compliance and to avoid and mitigate the following risks: (i) credit; (ii) liquidity; (iii) market; (iv) operational; and (v) money laundering and terrorism.
Commercial banks generally have several risk measurement methods, including the risk weighted assets measurement which is calculated according to weight percentages assigned to different types of assets, which may be 0%, 20%, 50% and 100%. There are some exceptions in which the weight percentage is higher and is calculated based on the associated risk perception of the evaluated asset. Provisions, which are calculated on a monthly basis, are another risk measurement method. For commercial and consumer loans, the SFC issues a provision reference model, according to which the probability of default depends on an assigned rating (AA, A, BB, B, CC and default). For mortgage loans and small business loans, provisions are calculated based on ratings (A, B, C, D and E) assigned depending on the time elapsed since the client’s default.
With respect to market risks, commercial banks must follow the provisions of the Basic Accounting Circular, which defines criteria and procedures for measuring a bank’s exposure to interest rate, foreign exchange, and market risks. Under such regulations, banks must submit to the SFC information on the net present value, duration, and interest rate of its assets, liabilities, and derivative positions. Colombian banks are required to calculate, for each position on the statement of financial position, a volatility rate and a parametric value at risk (“VaR”), which is calculated based on net present value, modified duration and a risk factor computed in terms of a basis points change. Each risk factor is calculated and provided by the SFC.
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With respect to liquidity risk, financial entities must meet a liquidity coverage test that ensures their ability to hold liquid assets sufficient to cover potential net cash outflows for a period of 30 days. Net cash outflows for this purpose are contractual maturities of assets (interbank borrowings, financial assets investments, loans and advances to customers, derivative financial instruments) minus contractual maturities of liabilities (demand deposits, time deposits, interbank deposits borrowings from other financial institutions, debt securities, derivative financial instruments) occurring within a period of 30 days. For purposes of this calculation, liabilities does not include projections of future transactions. The maturity of the loan portfolio is affected by the historical default indicator and the maturity of deposits is modeled according to the regulation.
With respect to operational risk, commercial banks must assess, according to principles provided by the Basic Accounting Circular, each of their business lines (such as corporate finance, purchases and sales of securities, commercial banking, asset management, etc.) in order to record the risk events that may occur and result in fraud, technology problems, legal and reputational problems and problems associated with labor relations at the bank.
Anti-Money Laundering Provisions
The regulatory framework to prevent and control money laundering is contained in, among others, Decree 663 of 1993 and External Circular 029 of 2014 issued by the SFC, as well as Law 599 of 2000, and the Colombian Criminal Code, as amended.
Colombian laws adopt the latest guidelines related to anti-money laundering and other terrorist activities established by the Financial Action Task Force on Money Laundering (“FATF”). Colombia, as a member of the GAFI-SUD (a FATF-style regional body), follows all of FATF’s 40 recommendations and eight special recommendations. External Circular 029 of 2014 requires the implementation by financial institutions of a system of controls for money laundering and terrorism financing. These rules emphasize “know your customer” policies and knowledge of customers and markets, and other customer identification and monitoring processes.
Financial institutions must cooperate with the appropriate authorities to prevent and control money laundering and terrorism financing. Finally, the Colombian Criminal Code introduced criminal rules and regulations to prevent, control, detect, eliminate and adjudicate all matters related to financing terrorism and money laundering, including the omission of reports on cash transactions, mobilization or storage of cash, and the lack of controls.
Regulatory Framework for Subsidiaries that are Non-Participants in the Financial Sector
All of Bancolombia’s Colombian subsidiaries that are not part of the financial services are governed by the laws and regulations embodied in the Colombian Civil Code and the Colombian Commercial Code as well as any regulations issued by the Colombian Superintendency of Industry and Commerce and the Superintendency of Corporations or any other type of special regulations that may be applicable to the commercial and industrial activities carried out by said subsidiaries.
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International regulations applicable to Bancolombia and its subsidiaries
FATCA
FATCA, which is U.S. federal tax legislation enacted in 2010, imposes a 30% withholding tax on ‘withholdable payments’ made to non-U.S. financial institutions that do not participate in the FATCA program or that fail (or, in some cases, that have affiliates in which they hold an interest of more than 50% and which are also non-U.S. financial institutions that fail) to provide certain information regarding their U.S. accountholders and/or certain U.S. investors (such U.S. accountholders and U.S. investors, “U.S. accountholders”) to the IRS. FATCA also requires participating FFIs to withhold on “passthru payments” (which include both “withholdable payments” and certain non-U.S.-source payments) made to account holders who do not provide information to the FFIs to determine their U.S. accountholder’s status – “recalcitrant accountholders” – and to FFIs that do not sign an FFI Agreement with the IRS (such FFIs, “nonparticipating FFIs”). “Withholdable payments” generally include, among other items, payments of U.S.-source interest and dividends and the gross proceeds from the sale or other disposition of property that may produce U.S.-source interest and dividends. This withholding will take effect on a “phased” schedule, which started in July 2014 with respect to certain payments.
Among the countries where Bancolombia operates, Colombia, the Cayman Islands, and Panama have signed an IGA Model 1. Peru has reached an agreement in substance with the IRS, and consented to be treated as having an IGA in effect. In addition, certain subsidiaries of Bancolombia located in other countries have transmitted directly to the IRS the information required pursuant to FATCA, since they have not entered into an IGA.
Financial Regulation in Panama
The banking business in Panama is regulated by the Law Decree 9 of 1998, subsequently amended by Law Decree 2 of 2008. In accordance with the Law Decree, as amended, the Superintendency of Banks of the Republic of Panama, as the banking supervisor, has the power to issue agreements and resolutions to regulate the banking system. These regulations are mainly focused on matters such as licensing of banks, corporate governance, banking supervision (consolidated and individual or sub-consolidated), capital requirements, capital adequacy, liquidity requirements, risk management (credit, market, liquidity, country, asset and liability, operational, information technology, electronic banking), external audit, on-site inspections, reporting, compliance, change of control, mergers and acquisitions, confidentiality, money laundering, voluntary wind up, administrative and operational control, reorganization, bankruptcy, penalties, customers protection and dispute resolution.
In order to implement Basel III capital standards, the Superintendency of Banks of the Republic of Panama issued in January 2015 an agreement on Capital Adequacy. This agreement sets forth the new composition of a banking institution’s capital base, as well as the new capital adequacy ratio, including tier 1 core capital ratio and tier 1 capital ratio, all consistent with Basel III standards. This agreement became effective in June 2016, and the new standards will be implemented, progressively, from that date until they are fully applicable in January 2019.
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With respect to liquidity, banks operating under a general banking license, or General License Banks, are currently required to maintain 30% of their global deposits in liquid assets (which include short-term loans to other banks and other liquid assets) of the type prescribed by the Superintendency of Banks. Additionally, General License Banks are required to maintain assets in Panama of no less than 85% of their local deposits or any other percentage fixed by the Superintendency of Banks. Under the Banking Law, deposits from central banks and other similar depositories of the international reserves of sovereign states are immune from attachment or seizure proceedings.
Panamian regulations also require all financial institutions to maintain a legal reserve for certain obligations. The Superintendency of Banks may require additional marginal reserves. The exact level and method of calculation of these reserve requirements is set by the Superintendency of Banks.
As for credit risk, in March, 2016, the Superintendency of Banks of the Republic of Panamá issued Accord No.3-2016, which sets forth new risk weights applicable to on and off-balance sheet credit exposures, which are more risk sensitive in line with Basel II. The Accord introduces the treatment of counterparty exposures in derivatives transactions, as well as credit risk mitigation techniques, such as the treatment of financial collaterals.
In Panama, banks are prohibited from granting, directly or indirectly, to any individual or legal person, including any entity that is part of the economic group of a bank, any loan or credit facility, guarantee or any other obligation (other than credit facilities fully secured by deposits in the bank) (“Credit Facilities”) in favor of said person exceeding at any time, individually or jointly, 25% of the total regulatory capital of the bank. Obligations to related parties (as such term is defined in the applicable regulations) that exceed (i) 5% of its total capital, in the case of unsecured transactions, and (ii) 10% of its total capital, in the case of secured transactions (other than loans secured by deposits in the bank), are prohibited.
Banks and banking groups (defined as the holding company and all direct and indirect subsidiaries of the holding company) are subject to inspection by the Superintendency of Banks, which must take place at least once every two years. The Superintendency of Banks is empowered to request from any bank or any company that belongs to the economic group of which a bank in Panama is a member, the documents and reports pertaining to its operations and activities. The Superintendency of Banks can assume the administrative and operating control of a bank, including possession of its assets and seizure of its management in order to defend the best interest of the bank’s depositors and creditors, under any of the following grounds: (i) at the request of the bank; (ii) if the bank may not continue operations without endangering the interests of the depositors; (iii) as a consequence of the evaluation of an advisor’s report; (iv) noncompliance with the measures ordered by the Superintendency of Banks; (v) if the bank carries out its operations in an illegal, negligent or fraudulent manner; (vi) if the bank has suspended payment of its obligations; and (vii) if the Superintendency of Banks confirms that capital adequacy, solvency or liquidity of the bank has deteriorated in such a way as to require the Superintendency of Banks intervention. Upon expiration of the period of administrative control, the Superintendent will decide whether to proceed with the reorganization of the bank, the compulsory liquidation of the bank or the return of administrative and operating control to the directors or legal representatives of the bank, as the case may be.
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The Superintendency of Banks of the Republic of Panama is also in charge of the supervision and oversight of the trust business, regulated by Law 1 of 1984 and the Executive Decree 16 of 1984, which set forth aspects such as minimum requirements of trust agreements, characteristics of trusts, rights and responsibilities of grantors, trustees and beneficiaries, licensing of trustees, inspection and reporting of trustees, confidentiality and penalties.
Other Regulations in Panama
Securities market activities in Panama are subject to the supervision, control and oversight of the Superintendency of the Securities Market. These activities are primarily regulated by Law Decree 1 of 1999, as amended by several laws, which established important changes in order to strengthen the regulatory framework of the Panamanian securities market and increase investors’ confidence. Among the most important changes introduced by these recent amendments are the following:
1. The establishment of a coordination and cooperation system between the financial supervisors. This system also enables a more comprehensive supervision of financial conglomerates operating in multiple areas of the financial industry.
2. The establishment of the Superintendency of the Securities Market, as the supervising entity replacing the previous National Securities Commission.
3. The authority given to the Superintendency of the Securities Market to carry the consolidated supervision, as home supervisor, of intermediaries having agencies abroad, and to enter into cooperation agreements with foreign supervisors to facilitate the consolidated supervision.
4. The regulation of foreign currency exchange as a securities activity and the regulation of certain actors of the securities market, such as securities price suppliers, risk rating agencies and Administrative Service Suppliers of the securities market.
5. The introduction of provisions regarding clearing and settlement of securities and financial instruments, which will bring more stability and security to transactions;
6. The creation of new participants to promote over-the-counter transactions, such as entities acting as central counterparties, and infrastructure providers for the over-the-counter market.
The principal aspects of the securities business covered by the Law-Decree 1 of 1999 as amended, and the agreements and resolutions issued by the Superintendency of the Securities Market of the Republic of Panama are (i) licensing requirements of securities brokers, investment advisors, fund administrators and self-regulated organizations, (ii) registration requirements of risk rating agencies, securities price suppliers, securities, public offerings, funds and administrative service suppliers of the securities market, (iii) authorization for requesting voting powers regarding registered securities, (iv) notification requirements of public offerings for the acquisition of registered shares, (v) options, futures contracts and derivatives, (vi) custody, clearing and settlement of securities, (vii) penalization procedures and penalties, (viii) voluntary wind up, reorganization and bankruptcy of securities brokers, self-regulated organizations, funds, and fund administrators, (ix) reporting of issuers of registered securities, securities brokers, investment advisors, funds, fund administrators, self-regulated organization and other registered entities, (x) on-site inspection of securities brokers, investment advisors, self-regulated organizations, funds, fund administrators, administrative service suppliers of the securities market, securities price suppliers and rating agencies, (xi) capital requirements, liquidity requirements, risk assessment, confidentiality, conflict of interest, suitability, compliance and money laundering of securities brokers and (xii) communication of events of importance by issuers of registered securities.
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Panama has also enacted a series of laws in order to prevent, detect and punish money-laundering activities. In Panama, anti-money laundering requirements are primarily regulated by (i) Executive Decree No. 136 of June 9, 1995, which created a Financial Analysis Unit (“UAF”) for the Prevention of Money Laundering, and (ii) Law No. 23 of April 27, 2015 (“Law 23”), regulated by Executive Decree No. 363 of August 13, 2015, whereby banks and trust corporations, among other financial institutions, are required to perform their operations with due diligence and due care conducive to preventing said operations, to be performed with funds, or over funds, generated from activities related to money laundering.
Law 23 and Accord No. 7-2015 provide that the following entities are deemed to be “supervised entities” for purposes of money laundering, financing of terrorism or any other illicit activity: (i) banks; (ii) bank groups; (iii) trust corporations; (iv) leasing companies; (v) factoring companies; (vi) credit, debit or pre-paid card processing entities; (vii) companies engaged in remittances or wire transfers; and (viii) companies that provide any other service related to trust companies. These entities must take necessary measures to prevent their operations and/or transactions from being used for money laundering, financing of terrorism or any other illicit activity. Non-compliance with Law 23, or those dictated by the pertinent authorities of supervision of each activity for which there is no specific sanction established, is subject to fines ranging from US$5,000 to US$1,000,000.
Financial Regulation in El Salvador
In 2011, Decree 592, entitled “Supervision and Regulation of the Financial System” (Ley de Supervisión y Regulación del Sistema Financiero) was enacted in order to strengthen the State’s organization, adapting all supervision and regulatory institutions to the economic reality of the financial system. Decree 592 states that the Superintendency of the Financial System and the Central Reserve Bank of El Salvador are mandated to supervise all members of the financial system and to approve the necessary regulation for the adequate application of Decree 592.
Decree 592’s main objectives are to maintain stability in the Salvadorian financial system, to guarantee efficiency, transparency, security and solidity within the system, and to bring all its members in compliance with this law, and other applicable laws and regulations, all in accordance with best international practices.
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The Superintendency of the Financial System is responsible for the supervision of the individual and consolidated activities of all the members in the Salvadorian financial system, as well as the people, operations and entities described in the law. Decree 592 establishes all the powers and duties of the Superintendency, some of which are: (i) to fulfill and enforce the regulations applicable to the entities subject to its supervision and issue all the necessary instructions for compliance of the laws applicable to the system; (ii) to authorize the establishment, function, operation, intervention, suspension, modification, revocation of authorizations and closure of all members of the system, in accordance with regulations. In the event of closure, the Superintendency will coordinate with the entities involved the actions established by the law; (iii) risk prevention through the monitoring and management of the members within the system with a view toward the prudential management of liquidity and capital adequacy; (iv) facilitation of an efficient, transparent and organized financial system; (v) to require that all supervised entities and institutions be managed in accordance with the best international practices of risk management and corporate governance; and (vi) all other legal requirements.
In 2015, the Salvadorian congress amended Decree 592 in order to include within the scope of the supervision of the Superintendency of the Financial System all legal entities dedicated to the money transfer business. In 2016 another was amendment to Decree 592 was enacted in order to define the requirements that must be met by valuation experts when elaborating valuation reports in connection with guarantees of loans granted by financial entities.
Banking Law of El Salvador
On 1999, The Congress of the Republic of El Salvador enacted Decree 697, which regulates the financial intermediation activities and other operations performed by banks. Banks are required to establish the regulatory reserve requirements set by the Superintendency of the Financial System in accordance with the deposits and liabilities of each bank.
According to the Salvadorian Superintendency of Financial System’s regulations, the reserve requirements for Salvadorian banks as of December 31, 2016 are:
| Ordinary Reserve Requirements % | |
| Checking accounts | 25.0% |
| Saving accounts | 20.0% |
| Time deposits | 20.0% |
| Borrowings from foreign banks | 5.0% |
| Long-term debt (1) | 15.0% - 20.0% |
(1) 15% for long-term debt with maturity above one year and 20% for long-term debt with maturity less than one year.
Monetary Integration Law of El Salvador
The Monetary Integration Law adopted the U.S. dollar as the legal currency, establishing a fixed exchange rate of 8.75 Colones per USD 1.00. The colón continues to have unrestricted legal circulation, but the Central Reserve Bank has been replacing it with the U.S. dollar each time colón bills and coins are used in commercial transactions.
Since the implementation of the Monetary Integration Law, all financial operations, such as bank deposits, loans, pensions, securities offerings and any other activities performed through the financial system, as well as the accounting records, must be expressed in U.S. dollars. The operations or transactions of the financial system made or agreed in Colones before the effective date of the Monetary Integration Law are expressed in U.S. dollars at the exchange rate established in such law.
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Financial Transactions Tax
In 2014, the Congress the Republic of El Salvador enacted the "Financial Transactions Tax Law". Pursuant to the financial transactions tax law, financial entities act as withholding agents for the tax to be applied on financial transactions and of the liquidity control tax, each of which are calculated at the time the customer conducts financial transactions. The financial transactions tax is 0.25% on taxable transactions exceeding USD 1,000. The tax for liquidity control is 0.25% on cash transactions of deposit, withdrawals and payments in excess of a monthly aggregate amount of USD 5,000.
The transactions subject to the financial transactions tax are: (i) payments of goods and services by checking or debit card, (ii) payments by wire transfers, (iii) transfers to third parties by any means, and (iv) transactions between financial entities based on any statement of their customers. In December 2016, the aforementioned law was amended in order to exclude from its scope certain transactions executed in the Salvadorian stock market. Such amendment was enacted in order to stimulate investment in the local stock market.
Investment Funds Law
The investment funds law seeks to encourage economic activity by providing small investors with access to capital markets, diversification of their investments and channeling their savings into productive sectors, in order to generate higher economic growth.
This Law sets forth the regulatory framework for the supervision of investment funds, their share of participation and companies that administer such funds and their operations; as well as other participants to which it refers. Additionally, it regulates the marketing of participation shares in foreign investment funds.
This Law also provides for the creation of investment fund managers who are responsible for performing all acts, contracts and operations necessary for the administration and operation of investment funds.
In 2016, The Central Bank enacted Technical Standards (“Normas Técnicas”) in order to apply this Law. Such technical standards include, standards regarding the investment funds permitted transactions, standards related to the disclosure of information, etc.
Financial Regulation in Guatemala
Decree 16 of 2002 sets forth the scope of the activities of Banco de Guatemala in its capacity as Central Bank of the country, establishing as its fundamental purpose contributing to the creation and maintenance of the most favorable conditions for an orderly development of the national economy, for which it shall facilitate the monetary, foreign exchange and credit conditions that promote stability in general prices.
Pursuant to Decree 16 of 2002, the Guatemalan Central Bank’s main objectives are to (i) be the national currency issuer, (ii) assure the effective functioning of the national payments system, (iii) assure an adequate liquidity level in the banking system, (iv) receive in deposit bank reserve requirements and statutory deposits, (v) manage international reserves.
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Furthermore, Decree 16 of 2002 regulates the activities of the Monetary Board as governing body of the Central Bank and the Guatemalan financial system. Pursuant to Decree 16 of 2002, the Monetary Board has the following attributions with respect to the Guatemalan financial system: (i) determine and assess the monetary, currency exchange and credit policies of the country; (ii) ensure liquidity and solvency of the national banking system; (iii) regulate aspects related to bank reserves and statutory deposits; (iv) regulate the Banking Clearing House Chamber; (v) authorize the investment policy of international monetary reserves; (vi) establish the minimum reserves required in order to strengthen the Central Bank´s net worth; (vii) issue regulations with respect to the financial system and financial activities, and; (viii) approve any provisions or rules submitted for its consideration by the Superintendency of Banks or by the Central Bank, as applicable.
The Superintendency of Banks is created and regulated by Decree 18 of 2002. The Decree establishes the scope of the Superintendency´s regulatory and supervisory activities within the financial system. Thus, the Superintendency of Banks is in charge of the supervision of entities such as the Central Bank, banks, financial corporations, credit institutions, bond entities, insurance entities, warehouse deposit companies, currency exchange offices, financial groups and holding companies of financial groups, and other entities as mentioned by law.
Pursuant to Decree 18 of 2002, the Superintendency of Banks, in order to achieve its purpose, shall exercise the following functions:
| a) | Supervise financial entities so they can maintain adequate liquidity and solvency levels that enable them to timely and fully perform their obligations, and to assess and properly manage their risks. |
| b) | Issue instructions intended to remediate any deficiencies or irregularities found in the activities of financial entities. |
| c) | Impose any applicable penalties and fines to financial institutions in accordance to applicable the laws and regulations. |
| d) | Supervise and inspect with the broadest attributions all sources and systems of information of the supervised financial entities, including, but not limited to, accounting records, reports, contracts, documents and any other information the Superintendence deems necessary. |
| e) | Require information on any of the financial entities´ activities, acts, trust operations and financial condition, either individually, or where appropriate, in a consolidated manner. |
| f) | Perform its supervision activities on a consolidated basis. |
| g) | Assess risk policies, procedures, standards and systems of financial entities, and in general terms, ensure that they have integral risk management processes. |
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| h) | Ensure overall and uniform compliance with the accounting standards, in compliance with the regulations issued for such purposes by the Monetary Board. |
| i) | Ensure compliance with the regulations issued by the Monetary Board requiring financial entities to provide sufficient, trustworthy and timely information to the public on their activities and their financial situation, individually, and where applicable, in a consolidated manner. |
| j) | Publish sufficient, trustworthy and timely information on the financial situation of the financial entities subject to its supervision, either individually or in a consolidated manner. |
The following are some of the main considerations taken into account by the Superintendency of Banks in determining compliance with applicable regulations:
| a) | Minimum Reserve Requirements: Banking institutions are subject to a minimum reserve requirement of 14.6% over the deposits received by the institution, which must be kept in the form of immediately available deposits with the Guatemalan Central Bank. To verify compliance with the regulation, banking institutions must provide the Superintendence of Banks with a daily report detailing the minimum reserve requirement. |
| b) | Loan Loss Reserves: In accordance with limitations specified by the Banks and Financial Groups Law and regulations issued by the Monetary Board, banking institutions, financial service entities, offshore entities and other financial institutions must carry out quarterly delinquency assessments of their credit and record reserves based on estimates of non-recoverability. Banking institutions and financial corporations must provide to the Superintendence of Banks monthly reports concerning outstanding credits in effect and movements and appraisals of credit portfolios in accordance with criteria specified by the Monetary Board. Additionally, the Superintendence of Banks carries out on-site reviews in which it evaluates payment ability and payment fulfillment of debtors and requests the institutions to record that necessary reserves be based on the non-payment risk. |
| c) | Capital Requirements: As specified in regulations issued by the Monetary Board, banking institutions in Guatemala must have a minimum capital adequacy ratio (risk-weighted assets to equity) of 10%, which is consistent with the Basel I guidelines. Banks must submit a weekly report to the Superintendence of Banks for monitoring compliance with this requirement. |
| d) | Related Party Transactions: In its on-site reviews the Superintendence of Banks verifies that financial institutions are in compliance with Monetary Board regulations limiting transactions between related parties. Related parties may transact business with one another provided they do so in accordance with their normal standards of business. |
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In addition, when a bank has a deficit in its regulatory capital (deficiencia patrimonial), it must immediately report it to the Superintendence of Banks. The Monetary Board will immediately order the suspension of operations of a bank that has suspended payment of its obligations and has a deficit in regulatory capital that exceeds 50% of equity, or if it has not submitted to the Superintendence of Banks a recovery plan, or if such plan has been rejected or has not been complied with. In such a case, the Monetary Board will name an Assets and Liabilities Exclusion Board which will be responsible for suspending the obligations of the entity and closing its operations. If, after suspension of operations, the Board of Assets and Liabilities Exclusion reports to the Monetary Board that dissolution is inevitable, the Monetary Board must then instruct the Superintendence of Banks to request a judicial declaration of bankruptcy. Once bankruptcy proceedings commence, the Savings Protection Fund participates as the entity in charge of the recovery of depositor funds.
Decree 19 of 2002 regulates the creation, organization, merging, activities, operations, functioning, suspension of operations and winding up of banks and financial entities, as well as the establishment and closure of branches and representation offices of foreign banks in Guatemala.
Decree 19 of 2002 also establishes that the members of the board of directors and general managers of the above-mentioned entities shall be held civilly, administrative and criminally accountable for the performance of their duties and, therefore, will respond unlimitedly with their personal assets with respect to liability for fines, damages and other monetary sanctions, directors and general managers are subject to potentially unlimited personal liability.
This decree also allows financial entities to form financial groups or conglomerates under the common control of a holding entity or to designate one of the financial entities of the group as its holding company. The identification as a financial group does not entail that the financial group becomes a separate legal entity, rather, the purpose of such identification is to allow the Superintendency of Banks to perform its supervision tasks on a consolidated basis.
Other Regulations in Guatemala
Decree 94 of 2000 permits and regulates the use, transfer and payment in foreign currencies, as well as the use of foreign currency accounts and deposits within the Guatemalan financial system. Corporations and other entities that wish to offer securities denominated in foreign currencies must obtain prior authorization from the Monetary Board.
The Anti-Money Laundering Law (Ley Contra el Lavado de Dinero u Otros Activos) was enacted to prevent and control money laundering in connection with criminal activities. Regulations issued by the Superintendency of Banks in accordance with this law went into effect on April 26, 2002. Among other things, the law and regulations created the Financial Intelligence Unit within the Superintendence of Banks under the name of Special Verification Intendence (Intendencia de Verificación Especial – IVE). The Special Verification Intendence has been developing a national network for the prevention, control and surveillance of money-laundering activities. Penalties for non-compliance with anti-money laundering laws and regulations, which are set forth in the Superintendence of Banks Resolution 43-2002, include fines or jail time for bank directors or employees and the suspension or cancellation of a financial institution’s license.
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In August 2005, Guatemala’s Congress approved Decree No. 58-2005 which contains the Law to Prevent and Repress Terrorism Financing. This law is based on the requirements and recommendations of the United Nation’s International Convention for the suppression of Terrorism Financing, the UN’s 1373 Resolution from the Security Council and the FATF 9 Special Recommendations. Approval of the Law to Prevent and Repress Terrorism Financing places Guatemala as the first country in Central America and second in Latin America to have specific legislation concerning terrorist financing. The law provides penalties such as seizure of assets, imprisonment or imposition of fines to any director, officer, stockholder or owner of financial entities found guilty of violating it.
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| C. | ORGANIZATIONAL STRUCTURE |
The following are the subsidiaries of Bancolombia:
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The following is a list of subsidiaries of Bancolombia as of December 31, 2016:
SUBSIDIARIES
| Entity | Jurisdiction of Incorporation |
Business | Shareholding Directly and Indirectly |
| Fiduciaria Bancolombia S.A. Sociedad Fiduciaria | Colombia | Trust | 98.81% |
| Banca de Inversión Bancolombia S.A. Corporación Financiera | Colombia | Investment banking | 100% |
| Valores Bancolombia S.A. Comisionista de Bolsa | Colombia | Securities brokerage | 100% |
| Renting Colombia S.A. | Colombia | Operating leasing | 100% |
| Transportempo S.A.S. | Colombia | Transportation | 100% |
| Valores Simesa S.A. | Colombia | Investments | 68.57% |
| Inversiones CFNS S.A.S. | Colombia | Investments | 99.94% |
| BIBA Inmobiliaria S.A.S. | Colombia | Real estate broker | 100% |
| FCP Fondo Colombia Inmobiliario. | Colombia | Real estate broker | 62.55% |
| Prosicol S.A.S. (In liquidation) | Colombia | Pre-operating stage | 68.57% |
| Fideicomiso "Lote Abelardo Castro". | Colombia | Mercantil trust | 68.23% |
| Bancolombia Panamá S.A. | Panama | Banking | 100% |
| Sistemas de Inversiones y Negocios S.A. Sinesa | Panama | Investments | 100% |
| Banagrícola S.A. | Panama | Investments | 99.16% |
| Banistmo S.A. | Panama | Banking | 100% |
| Banistmo Investment Corporation S.A. | Panama | Trust | 100% |
| Financomer S.A. | Panama | Financial services | 100% |
| Banistmo Asset Management Inc. (non-operational stage) | Panama | Purchase and sale of securities | 100% |
| Banistmo Capital Markets Group Inc. (non-operational stage) | Panama | Purchase and sale of securities | 100% |
| Van Dyke Overseas Corp. (non-operational stage) | Panama | Real estate broker | 100% |
| Inmobiliaria Bickford S.A. (non-operational stage) | Panama | Real estate broker | 100% |
| Williamsburg International Corp. (non-operational stage) | Panama | Real estate broker | 100% |
| Leasing Banistmo S.A. | Panama | Leasing | 100% |
| Anavi Investment Corporation S.A. (non-operational stage) | Panama | Real estate broker | 100% |
| Desarrollo de Oriente S.A. (non-operational stage) | Panama | Real estate broker | 100% |
| Steens Enterpresies S.A. (non-operational stage) | Panama | Portfolio holder | 100% |
| Ordway Holdings S.A. (non-operational stage) | Panama | Real estate broker | 100% |
| Valores Banistmo S.A. | Panama | Purchase and sale of securities | 100% |
| Banco Agrícola S.A. | El Salvador | Banking | 97.36% |
| Arrendadora Financiera S.A. Arfinsa | El Salvador | Leasing | 97.36% |
| Credibac S.A. de C.V. | El Salvador | Credit card services | 97.36% |
| Valores Banagrícola S.A. de C.V. | El Salvador | Securities brokerage | 98.89% |
| Inversiones Financieras Banco Agrícola S.A IFBA | El Salvador | Investments | 98.89% |
| Gestora de Fondos de Inversión Banagricola S.A. | El Salvador | Administers investment funds | 98.89% |
| Arrendamiento Operativo CIB S.A.C. | Peru | Operating leasing | 100% |
| Fondo de Inversión en Arrendamiento Operativo - Renting Perú | Peru | Car Rental | 100% |
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| Entity | Jurisdiction of Incorporation |
Business | Shareholding Directly and Indirectly |
| Capital Investments SAFI S.A. | Peru | Trust | 100% |
| FiduPerú S.A. Sociedad Fiduciaria | Peru | Trust | 98.81% |
| Leasing Perú S.A. | Peru | Leasing | 100% |
| Banagrícola Guatemala S.A. | Guatemala | Outsourcing | 99.16% |
| Grupo Financiero Agromercantil Holding S.A. | Guatemala | Holding | 60.00% |
| Banco Agromercantil de Guatemala S.A. | Guatemala | Banking | 60.00% |
| Mercom Bank Ltd. | Guatemala | Banking | 60.00% |
| Seguros Agromercantil de Guatemala S.A. | Guatemala | Insurance company | 59.17% |
| Financiera Agromercantil S.A. | Guatemala | Financial services | 60.00% |
| Agrovalores S.A. | Guatemala | Securities brokerage | 60.00% |
| Tarjeta Agromercantil S.A. (In liquidation) | Guatemala | Credit Card | 60.00% |
| Arrendadora Agromercantil S.A. | Guatemala | Operating Leasing | 60.00% |
| Agencia de Seguros y Fianzas Agromercantil S.A. | Guatemala | Insurance company | 60.00% |
| Asistencia y Ajustes S.A. | Guatemala | Services | 60.00% |
| Serproba S.A. | Guatemala | Maintenance and remodelling services | 60.00% |
| Servicios de Formalización S.A. | Guatemala | Loans formalization | 60.00% |
| Conserjería, Mantenimiento y Mensajería S.A. | Guatemala | Maintenance services | 60.00% |
| Media Plus S.A. | Guatemala | Advertising and marketing | 60.00% |
| New Alma Enterprises Ltd. | Bahamas | Investments | 60.00% |
| Bancolombia Puerto Rico Internacional Inc. | Puerto Rico | Banking | 100% |
| Bancolombia Caymán S.A. | Islas Cayman | Banking | 100% |
| Bagrícola Costa Rica S.A. | Costa Rica | Outsourcing | 99.16% |
| D. | PREMISES AND EQUIPMENT |
As of December 31, 2016, the Bank owned COP 3,116 billion in premises and equipment (including assets that are part of our operating leasing business). COP 1,520 billion correspond to land and buildings, of which approximately 96.73% are used for administrative offices and branches in 58 municipalities in Colombia, 25 municipalities in El Salvador, 9 municipalities in Guatemala and 4 municipalities in Panama. Likewise, COP 717 billion correspond to computer equipment, of which 11.18% relate to the central computer and servers of the Bank and the rest relate to personal computers, ATMs, telecommunications equipment and other equipment.
In addition to its own branches, the Bank occupies 858 rented offices.
The following table illustrate the amount of premises and equipment for each country as of December 31, 2016:
| Country | Amount |
| In millions of COP | |
| Colombia | 2,236,601 |
| Costa Rica | 98 |
| El Salvador | 283,866 |
| Guatemala | 165,573 |
| Panamá | 321,004 |
| Perú | 108,009 |
| Puerto Rico | 546 |
| Total | 3,115,697 |
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The Bank does not have any liens on its property.
| E. | SELECTED STATISTICAL INFORMATION |
The following information should be read in conjunction with the Consolidated Financial Statements as well as Item 5, “Operating and Financial Review and Prospects”. This information has been prepared based on the Bank’s financial records, which are prepared in accordance with IFRS as issued by the IASB and the related interpretations issued by the IFRIC.
The consolidated selected statistical information as of and for the year ended December 31, 2014 includes the selected statistical information of Bancolombia and its Subsidiaries, without reflecting any pro-forma calculation of the effect of the acquisition of the majority ownership of Grupo Agromercantil, while consolidated selected statistical information as of and for the years ended December 31, 2016 and 2015 corresponds to the Bank and its Subsidiaries, including all Subsidiaries as to which Bancolombia acquired control as a result of the 2015 acquisition of additional shares of Grupo Agromercantil.
| E.1. | DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL |
Average balances have been calculated as follows: for the years ended December 31, 2016 and 2015, for each month, the actual month-end balances were established. The average balance for each period is the arithmetic average of the monthly balances. The Bank has calculated the average balances using quarterly IFRS balances for the year ended December 31, 2014, as we believe such balances are representative of our operations and it would be too costly to produce average balances using monthly balances under IFRS for 2014.
In addition, the interest rate subtotals are based on the weighted average of domestic and foreign assets and liabilities.
Average statement of financial position
The following tables show for the years ended December 31, 2016, 2015 and 2014, respectively: (i) average balances for all of the Bank’s assets and liabilities; (ii) interest earned and interest paid amounts; and (iii) average nominal interest rates/yield for the Bank’s interest-earning assets and interest-bearing liabilities.
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| Average statement of financial position and Income from Interest-Earning Assets for the Fiscal Year Ended December 31, (1) | |||||||||
| 2016 | 2015 | 2014 | |||||||
| Average Balance |
Interest Earned |
Average Yield / Rate |
Average Balance |
Interest Earned |
Average Yield / Rate |
Average
Balance |
Interest
Earned |
Average Yield / Rate | |
| In millions of COP, except percentages | |||||||||
| ASSETS | |||||||||
| Interest-earning assets | |||||||||
| Funds sold and securities purchased under agreements to resell | |||||||||
| Domestic activities | 1,434,974 | 119,889 | 8.4% | 1,180,507 | 74,237 | 6.3% | 909,396 | 105,614 | 11.6% |
| Foreign activities | 1,905,163 | 41,113 | 2.2% | 1,594,096 | 20,752 | 1.3% | 1,937,558 | 17,473 | 0.9% |
| Total | 3,340,137 | 161,002 | 4.8% | 2,774,603 | 94,989 | 3.4% | 2,846,954 | 123,087 | 4.3% |
| Investment securities (2) | |||||||||
| Domestic activities | 7,114,398 | 481,316 | 6.8% | 7,929,171 | 253,161 | 3.2% | 8,627,917 | 322,438 | 3.7% |
| Foreign activities | 5,364,736 | 262,644 | 4.9% | 3,684,896 | 113,608 | 3.1% | 2,665,992 | 141,154 | 5.3% |
| Total | 12,479,134 | 743,960 | 6.0% | 11,614,067 | 366,769 | 3.2% | 11,293,909 | 463,592 | 4.1% |
| Loans and Financial Leases (3) | |||||||||
| Domestic activities | 87,289,606 | 11,494,684 | 13.2% | 79,835,468 | 8,739,998 | 10.9% | 68,434,591 | 7,388,145 | 10.8% |
| Foreign activities | 57,291,045 | 3,815,489 | 6.7% | 45,190,581 | 2,521,782 | 5.6% | 31,028,592 | 1,704,084 | 5.5% |
| Total | 144,580,651 | 15,310,173 | 10.6% | 125,026,049 | 11,261,780 | 9.0% | 99,463,183 | 9,092,229 | 9.1% |
| Total interest-earning assets | |||||||||
| Domestic activities | 95,838,978 | 12,095,889 | 12.6% | 88,945,146 | 9,067,396 | 10.2% | 77,971,904 | 7,816,197 | 10.0% |
| Foreign activities | 64,560,944 | 4,119,246 | 6.4% | 50,469,573 | 2,656,142 | 5.3% | 35,632,142 | 1,862,711 | 5.2% |
| Total | 160,399,922 | 16,215,135 | 10.1% | 139,414,719 | 11,723,538 | 8.4% | 113,604,046 | 9,678,908 | 8.5% |
| Total non-interest-earning assets | |||||||||
| Domestic activities | 15,656,149 | 10,050,646 | 10,149,131 | ||||||
| Foreign activities (4) | 17,411,162 | 15,383,212 | 11,674,133 | ||||||
| Total Assets | 33,067,311 | 25,433,858 | 21,823,264 | ||||||
| Total interest and non-interest earnings assets | |||||||||
| Domestic activities | 111,495,127 | 12,095,889 | 98,995,792 | 9,067,396 | 88,121,035 | 7,816,197 | |||
| Foreign activities (4) | 81,972,106 | 4,119,246 | 65,852,785 | 2,656,142 | 47,306,275 | 1,862,711 | |||
| Total Assets (5) | 193,467,233 | 16,215,135 | 164,848,577 | 11,723,538 | 135,427,310 | 9,678,908 | |||
(1) The Bank average total assets and total liabilities and stockholder's equity were calculated considering the last 13 monthly IFRS balances
(2) Tax-exempt income of tax-exempt investment securities has not been calculated on a tax equivalent basis because the effect of such calculation would not be material.
(3) Includes performing loans only.
(4)The percentage of total average assets attributable to foreign activities was 42.4%, 39.9% and 34.9% respectively, for the fiscal years ended December 31, 2016, 2015 and 2014.
(5) As of December 31, 2016, 2015 and 2014 the Bank average total assets includes the assets of the discontinued operation.
| 70 |
| Average statement of financial position and Interest Paid on Interest-Bearing Liabilities for the Fiscal Year Ended December 31, (1) | |||||||||
| 2016 | 2015 | 2014 | |||||||
| Average Balance |
Interest Paid |
Average Yield / Rate (2) |
Average Balance |
Interest Paid |
Average Yield / Rate (2) |
Average Balance |
Interest Paid |
Average Yield / Rate (2) | |
| In millions of COP, except percentages | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||
| Interest-bearing liabilities: | |||||||||
| Checking deposits | |||||||||
| Domestic activities | 10,960,605 | 15,175 | 0.1% | 11,034,571 | 17,778 | 0.2% | 10,877,728 | 19,929 | 0.2% |
| Foreign activities | 10,511,089 | 42,473 | 0.4% | 7,538,081 | 16,060 | 0.2% | 5,587,845 | 2,800 | 0.1% |
| Total | 21,471,694 | 57,648 | 0.3% | 18,572,652 | 33,838 | 0.2% | 16,465,573 | 22,729 | 0.1% |
| Savings deposits | |||||||||
| Domestic activities | 33,763,375 | 866,387 | 2.6% | 30,937,835 | 528,806 | 1.7% | 28,097,124 | 442,206 | 1.6% |
| Foreign activities | 12,653,306 | 192,413 | 1.5% | 9,837,665 | 142,111 | 1.4% | 6,904,204 | 103,498 | 1.5% |
| Total | 46,416,681 | 1,058,800 | 2.3% | 40,775,500 | 670,917 | 1.6% | 35,001,328 | 545,704 | 1.6% |
| Time deposits | |||||||||
| Domestic activities | 27,813,915 | 2,128,861 | 7.7% | 23,284,367 | 1,322,738 | 5.7% | 21,273,104 | 1,061,542 | 5.0% |
| Foreign activities | 23,375,945 | 720,532 | 3.1% | 18,944,955 | 443,488 | 2.3% | 13,131,180 | 305,107 | 2.3% |
| Total | 51,189,860 | 2,849,393 | 5.6% | 42,229,322 | 1,766,226 | 4.2% | 34,404,284 | 1,366,649 | 4.0% |
| Funds purchased and securities sold under agreements to repurchase | |||||||||
| Domestic activities | 2,514,533 | 130,912 | 5.2% | 2,795,234 | 128,858 | 4.6% | 1,332,438 | 96,847 | 7.3% |
| Foreign activities | 529,575 | 6,492 | 1.2% | 450,720 | 3,327 | 0.7% | 419,069 | 5,087 | 1.2% |
| Total | 3,044,108 | 137,404 | 4.5% | 3,245,954 | 132,185 | 4.1% | 1,751,507 | 101,934 | 5.8% |
| Borrowings from development and other domestic banks (3) | |||||||||
| Domestic activities | 5,228,949 | 232,899 | 4.5% | 4,603,982 | 130,156 | 2.8% | 4,402,506 | 241,206 | 5.5% |
| Foreign activities | 598,092 | 17,232 | 2.9% | 270,205 | 7,475 | 2.8% | 71,804 | 7,472 | 10.4% |
| Total | 5,827,041 | 250,131 | 4.3% | 4,874,187 | 137,631 | 2.8% | 4,474,310 | 248,678 | 5.6% |
| Interbank borrowings (3) (4) | |||||||||
| Domestic activities | - | - | 0.0% | - | - | 0.0% | - | - | 0.0% |
| Foreign activities | 14,004,249 | 307,178 | 2.2% | 10,502,220 | 183,555 | 1.7% | 7,679,133 | 135,635 | 1.8% |
| Total | 14,004,249 | 307,178 | 2.2% | 10,502,220 | 183,555 | 1.7% | 7,679,133 | 135,635 | 1.8% |
| Long-term debt | |||||||||
| Domestic activities | 5,885,689 | 613,321 | 10.4% | 5,907,501 | 495,168 | 8.4% | 4,884,212 | 353,695 | 7.2% |
| Foreign activities | 13,556,293 | 738,827 | 5.5% | 10,735,079 | 580,314 | 5.4% | 7,947,893 | 442,133 | 5.6% |
| Total | 19,441,982 | 1,352,148 | 7.0% | 16,642,580 | 1,075,482 | 6.5% | 12,832,105 | 795,828 | 6.2% |
| Total interest-bearing liabilities | |||||||||
| Domestic activities | 86,167,066 | 3,987,555 | 4.6% | 78,563,490 | 2,623,504 | 3.3% | 70,867,112 | 2,215,425 | 3.1% |
| Foreign activities | 75,228,549 | 2,025,147 | 2.7% | 58,278,925 | 1,376,330 | 2.4% | 41,741,128 | 1,001,732 | 2.4% |
| Total | 161,395,615 | 6,012,702 | 3.7% | 136,842,415 | 3,999,834 | 2.9% | 112,608,240 | 3,217,157 | 2.9% |
| Total non-interest bearing liabilities | |||||||||
| Domestic activities | 8,541,148 | - | - | 5,744,793 | - | - | 3,760,403 | - | - |
| Foreign activities (5) | 2,657,346 | - | - | 3,366,523 | - | - | 3,573,771 | - | - |
| Total | 11,198,494 | - | - | 9,111,316 | - | - | 7,334,174 | - | - |
| 71 |
| Average statement of financial position and Interest Paid on Interest-Bearing Liabilities for the Fiscal Year Ended December 31, (1) | |||||||||
| 2016 | 2015 | 2014 | |||||||
| Average Balance |
Interest Paid |
Average Yield / Rate (2) |
Average Balance |
Interest Paid |
Average Yield / Rate (2) |
Average Balance |
Interest Paid |
Average Yield / Rate (2) | |
| In millions of COP, except percentages | |||||||||
| Stockholders' equity | |||||||||
| Domestic activities | 15,715,483 | - | - | 15,512,136 | - | - | 14,756,128 | - | - |
| Foreign activities (5) | 5,157,640 | - | - | 3,344,666 | - | - | 252,887 | - | - |
| Total | 20,873,123 | - | - | 18,856,802 | - | - | 15,009,015 | - | - |
| Total interest and non-interest bearing liabilities and stockholders’ equity | |||||||||
| Domestic activities | 110,423,697 | 3,987,555 | - | 99,820,419 | 2,623,504 | - | 89,383,643 | 2,215,425 | - |
| Foreign activities (5) | 83,043,535 | 2,025,147 | - | 64,990,114 | 1,376,330 | - | 45,567,786 | 1,001,732 | - |
| Total Liabilities and Stockholders’ Equity (6) | 193,467,232 | 6,012,702 | - | 164,810,533 | 3,999,834 | - | 134,951,429 | 3,217,157 | - |
| (1) | The Bank average total assets and total liabilities and stockholder's equity were calculated considering the last 13 monthly IFRS balances. |
| (2) | See Item 4. “Information on the Company – E. Selected Statistical Information – E.1 Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential”. |
| (3) | Includes both short-term and long-term borrowings. |
| (4) | Includes borrowings from banks located outside Colombia. |
| (5) | The percentage of total average liabilities attributable to foreign activities was 45.1%, 42.2% and 37.8% respectively, for the fiscal years ended December 31, 2016, 2015 and 2014. |
| (6) | As of December 31, 2016, 2015 and 2014 the Bank average total liabilities and stockholder's equity includes the liabilities and stockholder's equity of the discontinued operation. |
CHANGES IN NET INTEREST INCOME AND EXPENSES—VOLUME AND RATE ANALYSIS
The following table allocates, for domestic and foreign activities, changes in the Bank’s net interest income to changes in average volume, changes in nominal rates and the net variance caused by changes in both average volume and nominal rate for the fiscal year ended December 31, 2016 compared to the fiscal year ended December 31, 2015; and the fiscal year ended December 31, 2015, compared to the fiscal year ended December 31, 2014. Volume and rate variances have been calculated based on movements in average balances over the period and changes in nominal interest rates on average interest-earning assets and average interest-bearing liabilities. Net changes attributable to changes in both volume and interest rate have been allocated to the change due to changes in volume.
| 72 |
|
2015-2016 Increase (Decrease) Due To Changes in: |
2014-2015 Increase (Decrease) Due To Changes in: | |||||
| Volume | Rate | Net Change | Volume | Rate | Net Change | |
| In millions of COP | ||||||
| Interest-earning assets | ||||||
| Funds sold and securities purchased under agreements to resell | ||||||
| Domestic activities | 16,002 | 24,392 | 40,394 | 17,049 | (48,426) | (31,377) |
| Foreign activities | 4,049 | 13,648 | 17,697 | (4,471) | 7,750 | 3,279 |
| Total | 20,051 | 38,040 | 58,091 | 12,578 | (40,676) | (28,098) |
| Investment securities (1) | ||||||
| Domestic activities | (26,014) | 283,277 | 257,263 | (22,309) | (46,968) | (69,277) |
| Foreign activities | 51,791 | 66,795 | 118,586 | 31,414 | (58,960) | (27,546) |
| Total | 25,777 | 350,072 | 375,849 | 9,105 | (105,928) | (96,823) |
| Loans and financial leases | ||||||
| Domestic activities | 816,043 | 1,773,092 | 2,589,135 | 1,248,112 | 103,741 | 1,351,853 |
| Foreign activities | 675,245 | 487,836 | 1,163,081 | 790,285 | 27,413 | 817,698 |
| Total | 1,491,288 | 2,260,928 | 3,752,216 | 2,038,397 | 131,154 | 2,169,551 |
| Total interest-earning assets | ||||||
| Domestic activities | 806,031 | 2,080,761 | 2,886,792 | 1,242,852 | 8,347 | 1,251,199 |
| Foreign activities | 731,085 | 568,279 | 1,299,364 | 817,228 | (23,797) | 793,431 |
| Total | 1,537,116 | 2,649,040 | 4,186,156 | 2,060,080 | (15,450) | 2,044,630 |
| Interest-bearing liabilities: | ||||||
| Checking deposits | ||||||
| Domestic activities | (119) | (2,501) | (2,620) | 253 | (2,404) | (2,151) |
| Foreign activities | 6,334 | 14,400 | 20,734 | 4,155 | 9,105 | 13,260 |
| Total | 6,215 | 11,899 | 18,114 | 4,408 | 6,701 | 11,109 |
| Savings deposits | ||||||
| Domestic activities | 48,296 | 265,076 | 313,372 | 48,555 | 38,045 | 86,600 |
| Foreign activities | 40,674 | 7,486 | 48,160 | 42,376 | (3,763) | 38,613 |
| Total | 88,970 | 272,562 | 361,532 | 90,931 | 34,282 | 125,213 |
| Time deposits | ||||||
| Domestic activities | 257,315 | 459,434 | 716,749 | 114,256 | 146,940 | 261,196 |
| Foreign activities | 103,726 | 140,465 | 244,191 | 136,096 | 2,285 | 138,381 |
| Total | 361,041 | 599,899 | 960,940 | 250,352 | 149,225 | 399,577 |
| Funds purchased and securities sold under agreements to repurchase | ||||||
| Domestic activities | (12,940) | 16,668 | 3,728 | 67,434 | (35,423) | 32,011 |
| Foreign activities | 582 | 2,198 | 2,780 | 234 | (1,994) | (1,760) |
| Total | (12,358) | 18,866 | 6,508 | 67,668 | (37,417) | 30,251 |
| Borrowings from development and other domestic banks | ||||||
| Domestic activities | 17,668 | 74,907 | 92,575 | 5,696 | (116,746) | (111,050) |
| Foreign activities | 9,071 | 310 | 9,381 | 5,489 | (5,486) | 3 |
| Total | 26,739 | 75,217 | 101,956 | 11,185 | (122,232) | (111,047) |
| 73 |
|
2015-2016 Increase (Decrease) Due To Changes in: |
2014-2015 Increase (Decrease) Due To Changes in: | |||||
| Volume | Rate | Net Change | Volume | Rate | Net Change | |
| In millions of COP | ||||||
| Interbank borrowings | ||||||
| Domestic activities | - | - | - | - | - | - |
| Foreign activities | 61,208 | 46,807 | 108,015 | 49,341 | (1,421) | 47,920 |
| Total | 61,208 | 46,807 | 108,015 | 49,341 | (1,421) | 47,920 |
| Long-term debt | ||||||
| Domestic-activities | (1,828) | 120,426 | 118,598 | 85,772 | 55,701 | 141,473 |
| Foreign-activities | 152,508 | 4,755 | 157,263 | 150,669 | (12,488) | 138,181 |
| Total | 150,680 | 125,181 | 275,861 | 236,441 | 43,213 | 279,654 |
| Total interest-bearing liabilities | ||||||
| Domestic-activities | 308,392 | 934,010 | 1,242,402 | 321,966 | 86,113 | 408,079 |
| Foreign-activities | 374,103 | 216,421 | 590,524 | 388,360 | (13,762) | 374,598 |
| Total | 682,495 | 1,150,431 | 1,832,926 | 710,326 | 72,351 | 782,677 |
(1) Tax-exempt income of tax-exempt investment securities has not been calculated on a tax equivalent basis because the effect of such calculation would not be material.
INTEREST-EARNING ASSETS — NET INTEREST MARGIN AND SPREAD
The following table presents the levels of average interest-earning assets and net interest income of the Bank and illustrates the comparative net interest margin and interest spread obtained for the fiscal years ended December 31, 2016, 2015 and 2014, respectively.
| Interest-Earning
Assets-Yield For the Fiscal Year Ended December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP, except percentages | |||
| Total average interest-earning assets | |||
| Domestic activities | 95,838,978 | 88,945,146 | 77,971,904 |
| Foreign activities | 64,560,944 | 50,469,573 | 35,632,142 |
| Total | 160,399,922 | 139,414,719 | 113,604,046 |
| Net interest income (1) | |||
| Domestic activities | 8,108,334 | 6,443,892 | 5,600,772 |
| Foreign activities | 2,094,099 | 1,279,812 | 860,979 |
| Total | 10,202,433 | 7,723,704 | 6,461,751 |
| Average yield on interest-earning assets | |||
| Domestic activities | 12.62% | 10.19% | 10.02% |
| Foreign activities | 6.38% | 5.26% | 5.23% |
| Total | 10.11% | 8.41% | 8.52% |
| Net interest margin (2) | |||
| Domestic activities | 8.46% | 7.24% | 7.18% |
| Foreign activities | 3.24% | 2.54% | 2.42% |
| Total | 6.36% | 5.54% | 5.69% |
| Interest spread (3) | |||
| Domestic activities | 7.99% | 6.86% | 6.90% |
| Foreign activities | 3.69% | 2.90% | 2.83% |
| Total | 6.38% | 5.49% | 5.66% |
| (1) | Net interest income is loan interest income less interest accrued and includes interest earned on investments. |
| (2) | Net interest margin is net interest income divided by total average interest-earning assets. |
| (3) | Interest spread is the difference between the average yield on interest-earning assets and the average rate accrued on interest-bearing liabilities. |
| 74 |
| E.2. | INVESTMENT PORTFOLIO |
The Bank acquires and holds investment securities, including fixed income debt and equity securities, for liquidity and other strategic purposes, or when it is required by law.
The International Financial Reporting Standard 9 (IFRS 9) requires investments to be classified as either amortized cost or fair value. The classification is based on: (a) the entity’s business model for managing the financial assets, and (b) the contractual cash flow characteristics of the financial asset. Accordingly, an investment is classified and measured as amortized cost if: (i) the asset is held within a business model whose objective is to hold assets in order to collect contractual cash flows and (ii) the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Indicators that the financial asset is impaired include historical performance data, particular characteristics of the borrower, fair value of collateral, the borrower’s debt to other entities, macroeconomic factors and financial information, a significant financial difficulty of the customers, or if they are likely to declare bankruptcy or financial restructuring, or if there is a breach of contract, such as a default or delinquency in interest or principal payments.
For purposes of measurement and recognition of impairment in subsidiaries, affiliates, associates and joint ventures in separated financial statements, the controlled companies apply the impairment test in accordance with IAS 36 once indicators of impairment from IAS 39 are identified.
As of December 31, 2016, Bancolombia’s debt securities investment portfolio had carrying value of COP 11,672 billion.
The following table sets forth the carrying value of the Bank‘s investments in Colombian Government and foreign Governments and corporate securities and certain other financial investments as of the dates indicated (1).
| As of December 31, | |||
| 2016 (2) | 2015 (2) | 2014 (2) | |
| In millions of COP | |||
| Foreing currency-denominated | |||
| Securities issued by foreign Governments | 3,413,867 | 4,443,307 | 1,789,280 |
| Securities issued or secured by other financial entities | 615,299 | 905,171 | 663,209 |
| Securities issued or secured by Colombian Government | 263,275 | 188,618 | 205,572 |
| Securities issued or secured by the El Salvador Central Bank | - | 43,913 | 23,638 |
| Securities issued or secured by Government entities | 12,376 | 9,997 | 7,830 |
| Corporate bonds | 480,713 | 531,044 | 148,017 |
| Subtotal | 4,785,530 | 6,122,050 | 2,837,546 |
| Peso-denominated | |||
| Securities issued or secured by other financial entities | 666,592 | 838,769 | 876,180 |
| Securities issued or secured by the Colombian Government | 4,640,877 | 4,644,051 | 6,333,255 |
| Securities issued or secured by Government entities | 1,532,312 | 1,475,055 | 1,423,619 |
| Corporate bonds | 47,170 | 33,218 | 32,337 |
| Subtotal (3) | 6,886,951 | 6,991,093 | 8,665,391 |
| Total | 11,672,481 | 13,113,143 | 11,502,937 |
| 75 |
| (1) | For further information, see Note 5 “Financial assets investments and derivatives” to the Consolidated Financial Statements. |
| ((2) | Includes debt securities only. Investments in equity securities were COP 1,388,172 million, COP 1,164,681 million and COP 1,281,286 million as of December 31, 2016, 2015 and 2014, respectively. |
| (3) | As of December 31, 2015, Compañía de Financiamiento Tuya S.A. a discontinued operation, had debt securities amounting to COP 30,271 million, which were classified in 'Securities issued or secured by Government entities' item. For further information see note 30 'Discontinued Operations”. |
As of December 31, 2016, 2015 and 2014, Bancolombia held securities issued by foreign Governments in the following amounts:
| As of December 31, | Issuer | Investment Amount–Book Value - (In millions of COP) |
Investment Amount–Book Value (thousands of U.S. dollars)(1) |
| 2016 | Republic of Guatemala | 1,428,337 | 476,000 |
| Republic of Panama | 818,987 | 272,931 | |
| U.S. Treasury | 319,966 | 106,630 | |
| Republic of Mexico | 197,161 | 65,705 | |
| Republic of Costa Rica | 47,575 | 15,855 | |
| Republic of El Salvador | 569,479 | 189,781 | |
| Republic of Brazil | 32,358 | 10,784 | |
| 2015 | Republic of Guatemala | 1,670,390 | 530,372 |
| Republic of Panama | 923,470 | 293,214 | |
| U.S. Treasury | 523,707 | 166,284 | |
| Republic of Mexico | 479,304 | 152,186 | |
| Republic of Costa Rica | 123,196 | 39,117 | |
| Republic of El Salvador | 688,522 | 218,615 | |
| Republic of Brazil | 34,718 | 11,023 | |
| 2014 | Republic of Panama | 811,489 | 339,186 |
| U.S. Treasury | 203,223 | 84,943 | |
| Republic of Mexico | 449,018 | 187,680 | |
| Republic of Costa Rica | 74,968 | 31,335 | |
| Republic of El Salvador | 184,053 | 76,930 | |
| Republic of Brazil | 57,292 | 23,947 | |
| Republic of Chile | 9,237 | 3,861 |
(1)These amounts have been translated at the rate of COP 3,000.71 per USD 1.00 at December 31, 2016, COP 3,149.47 per USD 1.00 at December 31, 2015 and COP 2,392.46 per USD 1.00 at December 2014, which corresponds to the Representative Market Rate calculated on December 31, the last business day of the year.
As of December 31, 2016, the Bank’s peso-denominated debt securities portfolio amounted to COP 6,887 billion, reflecting a 1.49% decrease compared to December 31, 2015. The decrease resulted mainly from a reduction in holdings of Securities issued or secured by Government and financial entities. Peso-denominated debt securities issued by the Colombian government represented 67% of the Bank’s peso-denominated debt securities portfolio as of December 31, 2016.
Also, as of December 31, 2016, Bancolombia’s portfolio of securities issued by foreign governments amounted to COP 3,414 billion, a 23% decrease compared to December 31, 2015. This reduction resulted from a decrease in the Bank’s position in Mexican, Guatemalan and U.S. government bonds.
| 76 |
INVESTMENT SECURITIES PORTFOLIO MATURITY
The following table summarizes the maturities and weighted average nominal yields of the Bank’s investment securities as of December 31, 2016:
| As of December 31, 2016 (1) | ||||||||||
| Maturity less than 1 year |
Maturity between 1 and 5 years |
Maturity between 5 and 10 Years |
Maturity more than 10 years |
Total | ||||||
| Balance | Yield %(2) | Balance | Yield %(2) | Balance | Yield %(2) | Balance | Yield %(2) | Balance | Yield %(2) | |
| In millions of COP, except yields | ||||||||||
Securities issued or secured by: Foreign currency.-denominated (3): |
||||||||||
| Foreign Governments | 1,029,388 | 4.60% | 1,338,424 | 2.16% | 850,622 | 2.11% | 195,433 | 0.06% | 3,413,867 | 2.77% |
| Other financial entities | 129,884 | 2.65% | 219,082 | 2.27% | 39,054 | 4.38% | 227,278 | 0.00% | 615,298 | 1.64% |
| Colombian Government | 207,404 | 1.43% | - | 0.00% | 27,035 | 3.02% | 28,835 | 3.32% | 263,274 | 1.80% |
| Other Government entities | - | 0.00% | 12,376 | 4.71% | - | 0.00% | - | 0.00% | 12,376 | 4.71% |
| Corporate bonds | 10,204 | 5.50% | 80,645 | 4.08% | 332,282 | 5.95% | 57,582 | 4.25% | 480,713 | 5.42% |
| Subtotal | 1,376,880 | 3.94% | 1,650,527 | 2.29% | 1,248,993 | 3.22% | 509,128 | 0.69% | 4,785,528 | 2.84% |
| Securities issued or secured by Peso-denominated (3) | ||||||||||
| Other financial entities | 100,310 | 7.70% | 114,488 | 10.45% | 330,832 | 12.00% | 76,085 | 11.22% | 621,715 | 10.93% |
| Colombian Government | 1,049,926 | 7.02% | 2,835,118 | 6.59% | 222,503 | 7.09% | 41,455 | 6.77% | 4,149,002 | 6.73% |
| Other Government entities | 1,523,648 | 3.32% | 4,734 | 7.16% | 3,930 | 10.74% | - | 0.00% | 1,532,312 | 3.35% |
| Corporate bonds | 5,614 | 6.76% | 13,856 | 9.68% | 27,700 | 10.96% | - | 0.00% | 47,170 | 10.09% |
| Subtotal | 2,679,498 | 4.94% | 2,968,196 | 6.76% | 584,965 | 10.07% | 117,540 | 9.65% | 6,350,199 | 6.35% |
| Securities issued or secured by UVR-denominated (3) | ||||||||||
| Other financial entities | - | 0.00% | 1,890 | 2.21% | 42,988 | 10.09% | - | 0.00% | 44,878 | 9.76% |
| Colombian Government | 461,996 | 1.42% | 29,880 | 2.69% | - | 0.00% | - | 0.00% | 491,876 | 1.50% |
| Subtotal | 461,996 | 1.42% | 31,770 | 2.66% | 42,988 | 10.09% | - | 0.00% | 536,754 | 2.19% |
| Total (COP) | 4,518,374 | 4,650,493 | 1,876,946 | 626,668 | 11,672,481 | |||||
(1) Includes debt securities only. Investments in equity securities were COP 1,388,172 million, COP 1,164,681 million and COP 1,281,286 million as of December 31, 2016, 2015 and 2014, respectively.
(2) Yield was calculated using the internal rate of return (IRR) as of December 31, 2016.
(3) Yields on tax-exempt obligations have not been calculated on a tax equivalent basis because the effect of such calculation would not be material.
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As of December 31, 2016, the Bank had the following investments in securities of issuers that exceeded 10% of the Bank‘s equity:
| As of December 31, | |||
| 2016 | |||
| Securities issued or secured by: | Issuer | Book Value | Fair value |
| In millions of COP | |||
| Colombian Government | Ministry of Finance | 4,776,670 | 4,776,670 |
| Total | 4,776,670 | 4,776,670 | |
| E.3. | LOAN PORTFOLIO |
Types of loans
The following table shows the Bank’s loan portfolio classified into corporate, retail (including small and medium enterprise loans), financial leases and mortgage loans:
| As of December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Domestic | |||
| Corporate (1) | |||
| Trade financing | 3,479,077 | 3,380,106 | 2,896,799 |
| Loans funded by development banks | 1,861,669 | 1,306,888 | 703,152 |
| Working capital loans | 41,432,921 | 42,632,934 | 36,157,009 |
| Credit cards | 65,852 | 54,694 | 47,197 |
| Overdrafts | 121,555 | 126,888 | 67,060 |
| Total corporate | 46,961,074 | 47,501,510 | 39,871,217 |
| Retail (1) | |||
| Credit cards | 4,277,498 | 3,629,539 | 4,831,945 |
| Personal loans | 8,552,243 | 7,104,076 | 6,568,264 |
| Vehicle loans | 2,553,815 | 2,517,925 | 2,477,992 |
| Overdrafts | 226,575 | 203,439 | 210,283 |
| Loans funded by development banks | 1,033,879 | 884,490 | 783,610 |
| Trade financing | 404,481 | 372,339 | 424,596 |
| Working capital loans | 14,342,558 | 13,078,764 | 11,909,314 |
| Total retail | 31,391,049 | 27,790,572 | 27,206,004 |
| Financial Leases | 20,685,823 | 19,898,665 | 17,197,752 |
| Mortgage | 10,170,163 | 8,712,892 | 7,353,372 |
| Total loans and leases | 109,208,109 | 103,903,639 | 91,628,345 |
| Allowance for loans and advances and lease losses | (5,529,506) | (4,312,564) | (4,028,866) |
| Total domestic loans, net | 103,678,603 | 99,591,075 | 87,599,479 |
| Foreign | |||
| Corporate (1) | |||
| Trade financing | 15,474,410 | 15,192,611 | 6,248,364 |
| Loans funded by development banks | 9,375 | 12,576 | 6,162 |
| Working capital loans | 8,409,213 | 8,793,603 | 6,188,503 |
| Credit cards | 38,596 | 25,748 | 9,978 |
| Overdrafts | 9,232 | 6,661 | 7,140 |
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| As of December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Total corporate | 23,940,826 | 24,031,199 | 12,460,147 |
| Retail (1) | |||
| Credit cards | 1,582,942 | 1,429,351 | 746,691 |
| Personal loans | 6,242,800 | 6,106,241 | 4,134,873 |
| Vehicle loans | 595,399 | 637,047 | 373,478 |
| Overdrafts | 64,085 | 74,492 | 53,213 |
| Loans funded by development banks | 77,284 | 66,149 | 41,242 |
| Trade financing | 312,542 | 242,403 | 128,668 |
| Working capital loans | 79,710 | 71,316 | 45,246 |
| Total retail | 8,954,762 | 8,626,999 | 5,523,411 |
| Financial Leases | 658,100 | 652,911 | 367,477 |
| Mortgage | 8,985,689 | 8,405,891 | 5,194,273 |
| Total loans and leases | 42,539,377 | 41,717,000 | 23,545,308 |
| Allowance for loans and advances and lease losses | (1,092,405) | (936,191) | (760,391) |
| Total foreign loans, net | 41,446,972 | 40,780,809 | 22,784,917 |
| Total Foreign and Domestic Loans | 145,125,575 | 140,371,884 | 110,384,396 |
(1) Corporate loans in this table are lower than the balances presented in Note 6 to Consolidated Financial Statements as Commercial loans in COP 15,357,808 and COP 14,360,043, as of 31 December 2016 and 2015, respectively. These amounts are presented as Retail loans in this table. Similarly, Retail loans also include the amounts presented in Note 6 to Consolidated Financial Statements as Small Business Loans for COP 1,062,724 and COP 886,913 and Consumer loans for COP 23,925,279 and COP 21,170,615 as of 31 December 2016 and 2015, respectively.
This difference in presentation is because loans are aggregated for marketing and selling purposes in a different way than they are aggregated for risk management purposes. Types of loans in this section follow the marketing and selling aggregation, whereas Note 6 to Consolidated Financial Statements follows risk management aggregation.
As of December 31, 2016, the Bank’s total loan portfolio amounted to COP 151,747 billion, up 4.21% as compared to COP 145,621 billion in 2015. Loan volume performance during 2016 was impacted by the devaluation of Peso against the Dollar and the moderate volume growth. For further discussion of some of these trends, please see Item 5. "Operating and Financial Review and Prospects-D. Trend information".
As of December 31, 2016, corporate loans amounted to COP 70,902 billion, or 46.72% of loans, and decreased 0.88% from COP 71,533 billion at the end 2015. The decrease in 2016 is mainly explained by significant prepayments by customers and amortization of existing loans. These prepayments are associated with domestic dollar denominated loans in Colombia that clients preferred to cancel in advance of the original contractual obligation due to increased uncertainty in the exchange rate. Additionally, due to weaker demand in our operations outside Colombia, the pace of origination of new domestic corporate loans was not fast enough to offset the scheduled amortization of the foreign portion of the corporate book.
Retail loans totaled COP 40,346 billion, or 26.59% of total loans, of which COP 14,795 billion were consumer loans (9.75% of total loans) and COP 14,422 billion were working capital loans (9.50% of total loans). Retail loans increased 10.79% over the year. During 2016, the demand for consumer credit was centered on credit cards and personal loans, but increasing interest rates during the first half of the year resulted in only moderate growth.
Corporate and retail loans totaled COP 111,248 billion in 2016. These loan categories correspond to the portfolio categories described in the consolidated financial statements as commercial, consumer and small business loans portfolio, which amounted to COP 86,260 billion, COP 23,925 billion and COP 1,063 billion, respectively, as of December 31, 2016. The difference is mainly explained by the classification of credit cards granted by the corporate saleforce, working capital loans and overdrafts, which are considered corporate loans for marketing and selling purposes, but are separated into such three different markets segments for purposes of impairment assessments.
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Financial leases totaled COP 21,344 billion as of December 31, 2016, up 3.86% from COP 20,552 billion in 2015.
Mortgage loans totaled COP 19,156 billion and increased 11.90% over the year. This moderate growth is explained by the lower rate of economic growth in 2016, which in turn affected household disposable income and was reflected in lower demand for housing.
Borrowing Relationships
As of December 31, 2016, the aggregate outstanding principal amount of the Bank’s 25 largest credit exposures, on a consolidated basis, represented approximately 10.76% of the loan portfolio of the Bank and no single exposure represented more than 3% of the loan book. In addition, 100% of those loans were corporate loans.
Maturity and Interest Rate Sensitivity of Loans
The following table shows the maturities of the Bank’s loan portfolio as of December 31, 2016:
| Maturity of one year or less |
Maturity of one to five years |
Maturity of more than five years |
Total | |
| In millions of COP | ||||
| Domestic loans and financial leases | ||||
| Corporate | ||||
| Trade financing | 3,467,677 | 11,400 | - | 3,479,077 |
| Loans funded by development banks | 13,642 | 507,168 | 1,340,859 | 1,861,669 |
| Working capital loans | 8,865,733 | 12,859,251 | 19,707,937 | 41,432,921 |
| Credit cards | 13,907 | 24,681 | 27,264 | 65,852 |
| Overdrafts | 121,555 | - | - | 121,555 |
| Total corporate | 12,482,514 | 13,402,500 | 21,076,060 | 46,961,074 |
| Retail | ||||
| Credit cards | 208,234 | 2,292,675 | 1,776,589 | 4,277,498 |
| Personal loans | 295,083 | 6,816,248 | 1,440,912 | 8,552,243 |
| Vehicle loans | 66,045 | 1,857,768 | 630,002 | 2,553,815 |
| Overdrafts | 226,575 | - | - | 226,575 |
| Loans funded by development banks | 80,015 | 579,735 | 374,129 | 1,033,879 |
| Trade financing | 399,211 | 4,691 | 579 | 404,481 |
| Working capital loans | 3,356,652 | 8,166,482 | 2,819,424 | 14,342,558 |
| Total retail | 4,631,815 | 19,717,599 | 7,041,635 | 31,391,049 |
| Financial leases | 3,383,574 | 5,419,459 | 11,882,790 | 20,685,823 |
| Mortgage | 32,283 | 323,066 | 9,814,814 | 10,170,163 |
| Total domestic loans and financial leases | 20,530,186 | 38,862,624 | 49,815,299 | 109,208,109 |
| Foreign loans and financial leases: | ||||
| Corporate | ||||
| Trade financing | 1,553,608 | 9,130,111 | 4,790,691 | 15,474,410 |
| Loans funded by development banks | - | 1,973 | 7,402 | 9,375 |
| Working capital loans | 41,515 | 5,150,278 | 3,217,420 | 8,409,213 |
| Credit cards | 2 | 32,794 | 5,800 | 38,596 |
| Overdrafts | 9,232 | - | - | 9,232 |
| Total corporate | 1,604,357 | 14,315,156 | 8,021,313 | 23,940,826 |
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| Maturity of one year or less |
Maturity of one to five years |
Maturity of more than five years |
Total | |
| In millions of COP | ||||
| Retail | ||||
| Credit cards | 7,252 | 1,447,081 | 128,609 | 1,582,942 |
| Personal loans | 71,276 | 1,764,863 | 4,406,661 | 6,242,800 |
| Vehicle loans | 4,132 | 391,148 | 200,119 | 595,399 |
| Overdrafts | 16,052 | 48,033 | - | 64,085 |
| Loans funded by development banks | 825 | 11,979 | 64,480 | 77,284 |
| Trade financing | 6,841 | 148,412 | 157,289 | 312,542 |
| Working capital loans | 7,938 | 60,226 | 11,546 | 79,710 |
| Total retail | 114,316 | 3,871,742 | 4,968,704 | 8,954,762 |
| Financial leases | 5,533 | 468,195 | 184,372 | 658,100 |
| Mortgage | 4,787 | 116,529 | 8,864,373 | 8,985,689 |
| Total foreign loans and financial leases | 1,728,993 | 18,771,622 | 22,038,762 | 42,539,377 |
| Total loans | 22,259,179 | 57,634,246 | 71,854,061 | 151,747,486 |
In general, the term of a loan will depend on the type of guarantee or collateral, the credit history of the borrower and the purpose of the loan. As of December 31, 2016, 52.65% of the Bank’s loan portfolio has a maturity of five years or less.
Loans interest rate sensitivity
The following table shows the interest rate sensitivity of the Bank’s loan portfolio due after one year and within one year or less as of December 31, 2016:
| As of December 31, 2016 | |
| In millions of COP | |
| Loans with term of 1 year or more: | |
| Variable Rate | |
| Domestic-denominated | 64,582,756 |
| Foreign-denominated | 27,366,565 |
| Total | 91,949,321 |
| Fixed Rate | |
| Domestic-denominated | 24,095,167 |
| Foreign-denominated | 13,443,819 |
| Total | 37,538,986 |
| Loans with term of less than 1 year: | |
| Domestic-denominated | 20,530,186 |
| Foreign-denominated | 1,728,993 |
| Total | 22,259,179 |
| Total loans | 151,747,486 |
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Loans by Economic Activity
The following table summarizes the Bank’s loan portfolio, for the periods indicated, by the principal activity of the borrower using the primary Standard Industrial Classification (SIC) codes:
| As of December 31, | ||||||
| 2016 | % | 2015 | % | 2014 | % | |
| In millions of COP, except percentages | ||||||
| Domestic | ||||||
| Agricultural | 3,360,479 | 3.1% | 4,330,757 | 4.2% | 4,030,994 | 4.4% |
| Mining products and oil | 1,670,126 | 1.5% | 1,791,910 | 1.7% | 2,559,701 | 2.8% |
| Food, beverage and tobacco | 4,992,305 | 4.6% | 5,141,738 | 5.0% | 4,148,724 | 4.5% |
| Chemical production | 3,184,196 | 2.9% | 2,871,547 | 2.8% | 3,028,095 | 3.3% |
| Government | 3,426,089 | 3.1% | 3,131,339 | 3.0% | 2,030,749 | 2.2% |
| Construction | 14,122,163 | 12.9% | 14,577,061 | 14.0% | 11,515,240 | 12.6% |
| Trade and tourism | 15,953,310 | 14.6% | 14,934,712 | 14.4% | 13,380,359 | 14.6% |
| Transportation and communications | 7,484,105 | 6.9% | 8,189,789 | 7.9% | 5,200,661 | 5.7% |
| Public services | 5,013,469 | 4.6% | 4,881,297 | 4.7% | 4,832,527 | 5.3% |
| Consumer services | 28,673,632 | 26.3% | 22,439,817 | 21.6% | 21,109,019 | 23.0% |
| Commercial services | 15,186,857 | 13.9% | 15,956,430 | 15.3% | 14,299,832 | 15.6% |
| Other industrial and manufacturing products | 6,141,378 | 5.6% | 5,657,242 | 5.4% | 5,492,444 | 6.0% |
| Total domestic loans | 109,208,109 | 100.0% | 103,903,639 | 100.0% | 91,628,345 | 100.0% |
| Foreign | ||||||
| Agricultural | 2,210,219 | 5.2% | 1,942,147 | 4.7% | 752,267 | 3.2% |
| Mining products and oil | 96,463 | 0.3% | 355,825 | 0.9% | 501,236 | 2.1% |
| Food, beverage and tobacco | 556,798 | 1.3% | 330,038 | 0.8% | 323,446 | 1.4% |
| Chemical production | 218,010 | 0.5% | 331,651 | 0.8% | 109,137 | 0.5% |
| Government | 204,429 | 0.5% | 668,463 | 1.6% | 309,947 | 1.3% |
| Construction | 4,496,434 | 10.6% | 5,424,291 | 13.0% | 3,609,264 | 15.3% |
| Trade and tourism. | 6,056,928 | 14.2% | 5,833,248 | 14.0% | 3,362,533 | 14.3% |
| Transportation and communications | 740,379 | 1.7% | 1,588,048 | 3.8% | 716,974 | 3.1% |
| Public services | 4,626,201 | 10.9% | 4,807,362 | 11.5% | 2,757,506 | 11.7% |
| Consumer services | 13,116,938 | 30.8% | 12,634,026 | 30.2% | 8,580,530 | 36.4% |
| Commercial services | 5,753,166 | 13.5% | 3,049,918 | 7.3% | 56,333 | 0.2% |
| Other industrial and manufacturing products | 4,463,412 | 10.5% | 4,751,983 | 11.4% | 2,466,135 | 10.5% |
| Total foreign loans | 42,539,377 | 100.0% | 41,717,000 | 100.0% | 23,545,308 | 100.0% |
| Total Foreign and Domestic Loans | 151,747,486 | 100.0% | 145,620,639 | 100.0% | 115,173,653 | 100.0% |
Credit Categories
For the purpose of credit risk evaluation, loans and financial lease contracts are classified in accordance with the regulations of the SFC. For further details please see Note 31 to the Consolidated Financial Statements, section b. Credit Quality Analysis - Loans and Financial Leases.
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The following table shows the Bank’s loan portfolio by type of loan for the relevant periods:
| Loan Portfolio by Type of Loan As of December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Commercial | 86,259,708 | 85,892,752 | 65,473,755 |
| Consumer | 23,925,279 | 21,170,615 | 18,927,154 |
| Small Business Loans | 1,062,724 | 886,913 | 659,870 |
| Financial Leases | 21,343,923 | 20,551,576 | 17,565,229 |
| Mortgage | 19,155,852 | 17,118,783 | 12,547,645 |
| Total loans and financial leases | 151,747,486 | 145,620,639 | 115,173,653 |
| Total allowance for loans and advances and lease losses | (6,621,911) | (5,248,755) | (4,789,257) |
| Total loans and advances to customers and financial institutions, net | 145,125,575 | 140,371,884 | 110,384,396 |
Risk categories
The SFC provides the following minimum risk classifications, according to the financial situation of the borrower or the past-due days of the obligation. For further details please see Note 31 to the Consolidated Financial Statements, section b. Credit Quality Analysis - Loans and Financial Leases.
| As of December 31, | ||||||
| 2016 | % | 2015 | % | 2014 | % | |
| In millions of COP, except percentages | ||||||
| “A” Normal Risk | 136,471,216 | 89.9% | 131,999,143 | 90.6% | 105,475,511 | 91.6% |
| “B” Acceptable Risk | 7,319,360 | 4.8% | 7,682,616 | 5.3% | 4,978,602 | 4.3% |
| “C” Appreciable Risk | 3,582,671 | 2.4% | 2,438,541 | 1.7% | 1,865,897 | 1.6% |
| “D” Significant Risk | 2,499,271 | 1.7% | 1,821,582 | 1.3% | 1,504,125 | 1.3% |
| “E” Unrecoverable Risk | 1,874,968 | 1.2% | 1,678,757 | 1.1% | 1,349,518 | 1.2% |
| Total loans and financial leases | 151,747,486 | 100.0% | 145,620,639 | 100.0% | 115,173,653 | 100.0% |
| Loans classified as “C”, “D” and “E” as a percentage of total loans | 5.24% | 4.08% | 4.10% | |||
The following table illustrates Bancolombia’s past-due loan portfolio by type of loan:
| As of December 31, | ||||||
| 2016 | % | 2015 | % | 2014 | % | |
| In millions of COP, except percentages | ||||||
| Domestic | ||||||
| Corporate | ||||||
| Trade financing | 4,059 | 0.1% | 24,733 | 0.7% | 464 | 0.0% |
| Loans funded by development banks | - | 0.0% | 3,567 | 0.1% | 4,264 | 0.2% |
| Working capital loans | 579,989 | 15.2% | 613,922 | 17.0% | 461,505 | 16.9% |
| Credit cards | 750 | 0.0% | 1,167 | 0.0% | 1,795 | 0.1% |
| Overdrafts | 2,090 | 0.1% | 1,339 | 0.0% | 3,509 | 0.1% |
| Total corporate | 586,888 | 15.4% | 644,728 | 17.8% | 471,537 | 17.3% |
| Retail | ||||||
| Credit cards | 238,975 | 6.3% | 231,865 | 6.4% | 343,521 | 12.6% |
| Personal loans | 370,686 | 9.7% | 265,802 | 7.4% | 239,261 | 8.7% |
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| As of December 31, | ||||||
| 2016 | % | 2015 | % | 2014 | % | |
| In millions of COP, except percentages | ||||||
| Vehicle loans | 201,852 | 5.3% | 133,846 | 3.7% | 144,213 | 5.3% |
| Overdrafts | 29,404 | 0.8% | 24,994 | 0.7% | 29,418 | 1.1% |
| Loans
funded by development banks |
49,331 | 1.3% | 30,119 | 0.8% | 40,132 | 1.5% |
| Trade financing | 2,347 | 0.1% | 1,759 | 0.1% | 1,198 | 0.0% |
| Working capital loans | 954,934 | 25.1% | 755,713 | 21.0% | 702,065 | 25.6% |
| Total retail | 1,847,529 | 48.6% | 1,444,098 | 40.1% | 1,499,808 | 54.8% |
| Financial Leases | 620,686 | 16.3% | 936,382 | 26.0% | 259,048 | 9.4% |
| Mortgage | 750,164 | 19.7% | 582,010 | 16.1% | 507,588 | 18.5% |
| Total domestic past due loans | 3,805,267 | 100.0% | 3,607,218 | 100.0% | 2,737,981 | 100.0% |
| Foreign | ||||||
| Corporate | ||||||
| Trade financing | 261,943 | 16.6% | 301,674 | 22.7% | 97,646 | 12.6% |
| Loans funded by development banks | - | 0.0% | 291 | 0.0% | - | 0.0% |
| Working capital loans | 72,341 | 4.6% | 99,330 | 7.5% | 75,205 | 9.7% |
| Credit cards | 748 | 0.0% | 1,316 | 0.1% | 170 | 0.0% |
| Overdrafts | - | 0.0% | 149 | 0.0% | 36 | 0.0% |
| Total Corporate | 335,032 | 21.2% | 402,760 | 30.3% | 173,057 | 22.3% |
| Retail | ||||||
| Credit cards | 107,791 | 6.9% | 79,573 | 6.0% | 37,427 | 4.9% |
| Personal loans | 341,619 | 21.6% | 277,596 | 20.9% | 203,487 | 26.4% |
| Vehicle loans | 46,586 | 3.0% | 41,015 | 3.1% | 22,638 | 2.9% |
| Overdrafts | 1,112 | 0.1% | 2,755 | 0.2% | 1,773 | 0.2% |
| Loans
funded by development banks |
96 | 0.0% | 2,792 | 0.2% | 1,249 | 0.2% |
| Trade financing | 26,518 | 1.7% | 11,639 | 0.9% | 7,184 | 0.9% |
| Working capital loans | 32,868 | 2.1% | 4,912 | 0.4% | 4,132 | 0.5% |
| Total retail | 556,590 | 35.3% | 420,282 | 31.7% | 277,890 | 36.0% |
| Financial Leases | 27,620 | 1.7% | 23,381 | 1.8% | 9,892 | 1.4% |
| Mortgage | 659,524 | 41.8% | 480,469 | 36.2% | 311,389 | 40.3% |
| Total foreign past due loans. | 1,578,766 | 100.0% | 1,326,892 | 100.0% | 772,228 | 100.0% |
| Total Foreign and Domestic past due loans | 5,384,033 | 100.0% | 4,934,110 | 100.0% | 3,510,209 | 100.0% |
Policies for the granting and review of credit
The Bank’s credit standards and policies aim to achieve a high level of credit quality in the Bank’s loan portfolio, efficiency in the processing of loans and the specific assignment of responsibilities for credit risk. . For further details please see Note 31 of Consolidated Financial Statements, section a. Credit Risk Management - Loans and Financial Leases.
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| E.4. | SUMMARY OF LOAN LOSS EXPERIENCE |
ALLOWANCE FOR LOANS AND ADVANCES AND LEASE LOSSES
The Bank records an allowance for loans and advances and lease losses in accordance with IFRS as issued by the IASB. For further details regarding the regulation and methodologies for the calculation of such allowances please see Note 2 to Consolidated Financial Statements.
The following table sets forth the changes in the allowance for loans and advances and lease losses:
| Year Ended December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Balance at beginning of period | 5,248,755 | 4,789,257 | 4,473,562 |
| Domestic | 4,254,754 | 4,028,866 | 3,766,387 |
| Foreign | 994,001 | 760,391 | 707,175 |
| Domestic Discontinued Operations (1) | - | (282,098) | |
| Allowance for loan of PA Leasing | 27,825 | - | - |
| Domestic | 27,825 | - | - |
| Provisions for loan losses, net | 2,930,239 | 1,884,859 | 1,308,825 |
| Domestic | 2,415,771 | 1,642,914 | 1,236,594 |
| Foreign | 514,468 | 241,945 | 72,231 |
| Charge-offs | (1,533,202) | (1,422,055) | (1,178,748) |
| Domestic | (1,168,844) | (1,134,928) | (974,115) |
| Foreign | (364,358) | (287,127) | (204,633) |
| Effect of difference in exchange rate | (51,706) | 278,792 | 185,618 |
| Foreign | (51,706) | 278,792 | 185,618 |
| Balance at end of year | 6,621,911 | 5,248,755 | 4,789,257 |
| Domestic | 5,529,506 | 4,254,754 | 4,028,866 |
| Foreign | 1,092,405 | 994,001 | 760,391 |
(1) As of December 31, 2015, Compañía de Financiamiento Tuya S.A. is considered a discontinued operation.
Recoveries of written-off loans are recorded in the consolidated statement of income and are not included in provisions for loan losses.
The following table sets forth the allocation of the Bank’s allowance for loans and advances and lease losses by type of loan using the classification of the SFC:
| As of December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Commercial loans | 3,499,791 | 2,694,965 | 2,360,488 |
| Consumer loans | 1,791,123 | 1,321,281 | 1,479,460 |
| Small business loans | 110,015 | 80,586 | 76,560 |
| Financial leases | 567,046 | 579,151 | 415,766 |
| Mortgage | 653,936 | 572,772 | 456,983 |
| Total allowance for loans and advances and lease losses | 6,621,911 | 5,248,755 | 4,789,257 |
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The following table sets forth the allocation of the Bank‘s allowance for loans and advances and lease losses by type of loan:
| As of December 31, | ||||||
| 2016 | % | 2015 | % | 2014 | % | |
| In millions of COP, except percentages | ||||||
| Domestic | ||||||
| Corporate | ||||||
| Trade financing | 54,372 | 1.0% | 35,387 | 0.8% | 14,759 | 0.4% |
| Loans funded by development banks | 49,008 | 0.9% | 23,552 | 0.5% | 5,772 | 0.1% |
| Working capital loans | 1,713,735 | 31.0% | 1,183,378 | 27.4% | 1,006,493 | 25.0% |
| Credit cards | 1,596 | 0.0% | 2,218 | 0.1% | 1,995 | 0.1% |
| Overdrafts | 3,226 | 0.1% | 3,318 | 0.1% | 5,759 | 0.1% |
| Total corporate | 1,821,937 | 33.0% | 1,247,853 | 28.9% | 1,034,778 | 25.7% |
| Retail | ||||||
| Credit cards | 482,278 | 8.7% | 343,057 | 8.0% | 589,702 | 14.6% |
| Personal loans | 595,253 | 10.8% | 441,225 | 10.2% | 422,649 | 10.5% |
| Vehicle loans | 242,230 | 4.4% | 180,408 | 4.2% | 224,481 | 5.6% |
| Overdrafts | 30,544 | 0.5% | 27,668 | 0.6% | 36,345 | 0.9% |
| Loans funded by development banks | 49,038 | 0.9% | 38,274 | 0.9% | 39,235 | 1.0% |
| Trade financing. | 9,606 | 0.2% | 13,531 | 0.3% | 12,972 | 0.3% |
| Working capital loans | 1,316,302 | 23.8% | 1,084,698 | 25.2% | 969,557 | 24.1% |
| Total retail | 2,725,251 | 49.3% | 2,128,861 | 49.4% | 2,294,941 | 57.0% |
| Financial leases | 546,710 | 9.8% | 553,317 | 12.8% | 388,115 | 9.6% |
| Mortgage | 435,608 | 7.9% | 382,533 | 8.9% | 311,032 | 7.7% |
| Total domestic allowance for loans and advances and lease losses | 5,529,506 | 100.0% | 4,312,564 | 100.0% | 4,028,866 | 100.0% |
| Foreign | ||||||
| Corporate | ||||||
| Trade financing | 242,490 | 22.2% | 82,777 | 8.8% | 83,306 | 10.9% |
| Loans funded by development banks | 329 | 0.0% | 568 | 0.1% | 175 | 0.0% |
| Working capital loans | 149,392 | 13.7% | 256,244 | 27.4% | 227,915 | 30.0% |
| Credit cards | 1,253 | 0.1% | 838 | 0.1% | 361 | 0.1% |
| Overdrafts | 635 | 0.1% | 656 | 0.1% | 548 | 0.1% |
| Total corporate. | 394,099 | 36.1% | 341,083 | 36.5% | 312,305 | 41.1% |
| Retail | ||||||
| Credit cards | 101,066 | 9.3% | 66,582 | 7.1% | 42,433 | 5.6% |
| Personal loans | 316,387 | 29.0% | 277,094 | 29.6% | 221,627 | 29.2% |
| Vehicle loans | 20,058 | 1.8% | 14,076 | 1.5% | 12,533 | 1.7% |
| Overdrafts | 7,884 | 0.7% | 10,780 | 1.1% | 8,237 | 1.1% |
| Loans funded by development banks | 2,932 | 0.3% | 2,731 | 0.3% | 1,514 | 0.2% |
| Trade financing | 5,598 | 0.5% | 3,450 | 0.4% | 2,728 | 0.4% |
| Working capital loans | 5,717 | 0.5% | 5,305 | 0.6% | 4,867 | 0.6% |
| Total retail | 459,642 | 42.1% | 380,018 | 40.6% | 293,939 | 38.8% |
| Financial leases | 20,336 | 1.9% | 24,848 | 2.6% | 8,217 | 1.0% |
| Mortgage | 218,328 | 19.9% | 190,242 | 20.3% | 145,930 | 19.1% |
| Total foreign allowance for loans and advances and lease losses | 1,092,405 | 100.0% | 936,191 | 100.0% | 760,391 | 100.0% |
| Total foreign and domestic allowance for loans and advances and lease losses | 6,621,911 | 100.0% | 5,248,755 | 100.0% | 4,789,257 | 100.0% |
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As of December 31, 2016, allowances for loans and advances and lease losses amounted to COP 6,622 billion (4.36% of total loans), up 26% as compared to COP 5,249 billion (3.60% of total loans) at December 31, 2015.
Coverage, measured by the ratio of allowances for loans and advances and lease losses to past-due loans (overdue 30 or more days), was 126% at December 31, 2016, up from 115% at December 31, 2015. The increase in the coverage ratio is mainly explained by the increase in allowances of corporate loans portfolio, most specifically some individually evaluated borrowers for which the model suggested higher coverage.
CHARGE-OFFS
The following table shows the allocation of the Bank’s charge-offs of domestic and foreign loans by type of loan as of December 31, 2016, 2015 and 2014:
| Year ended December 31, | |||
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Domestic | |||
| Trade financing | 734 | 1,220 | 12,452 |
| Loans funded by development banks | 12,335 | 23,852 | 10,078 |
| Working capital loans | 447,673 | 457,097 | 279,701 |
| Credit cards | 214,800 | 145,350 | 325,475 |
| Personal loans | 285,462 | 209,211 | 197,973 |
| Vehicle loans | 100,224 | 81,140 | 79,527 |
| Overdrafts | 16,050 | 13,947 | 10,276 |
| Mortgage and other | 15,823 | 167,718 | 13,818 |
| Financial leases | 75,743 | 35,393 | 44,815 |
| Total domestic charge-offs | 1,168,844 | 1,134,928 | 974,115 |
| Foreign | |||
| Trade financing | 1,028 | - | 72 |
| Loans funded by development banks | - | - | - |
| Working capital loans | 20,038 | 28,317 | 33,170 |
| Credit cards | 55,836 | 37,938 | 40,640 |
| Personal loans | 259,434 | 198,283 | 113,685 |
| Vehicle loans | 14,471 | 9,968 | 5,211 |
| Overdrafts | 270 | 726 | 3,743 |
| Mortgage and other | 8,796 | 11,761 | 8,112 |
| Financial leases | 4,485 | 134 | - |
| Total foreign charge-offs | 364,358 | 287,127 | 204,633 |
| Total Foreign and Domestic charge-offs | 1,533,202 | 1,422,055 | 1,178,748 |
The ratio of charge-offs to average outstanding loans for the years ended December 31, 2016, 2015 and 2014, was as follows:
| Year ended December 31, | |||
| 2016 | 2015 | 2014 | |
| Ratio of charge-offs to average outstanding loans | 1.03% | 1.14% | 1.19% |
The Bank charges off loans that are classified as “unrecoverable”. For further details please see Note 2 of Consolidated Financial Statements, section 7.6.1 “Written-Off loan portfolio balances and related allowances”.
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All write-offs must be approved by the Board of Directors, regardless of the amount to be written-off. Even if a loan is written off, management remains responsible for decisions in respect of the loan, and neither the Bank nor its Subsidiaries are released from their obligation to pursue recovery as appropriate.
POTENTIAL PROBLEM LOANS
In order to carefully monitor the credit risk associated with clients, the Bank has established a committee that meets periodically to identify current situations or anticipate future situations that might generate a possible deterioration in the client’s ability to pay. In general, the clients are placed on this watch list when they could face difficulties in the future in the repayment of their obligations with the Bank but who have had a good record of payment behavior. The reasons for placing a client on the watch list could relate to financial weakness factors specific to the client, or to factors such as the general level of economic activity, or any other external or internal events that could affect the client’s business.
As of December 31, 2016, performing loans included on the watch list amounted to COP 9.8 billion. The increase from COP 5.9 billion at December 31, 2015, was driven by significant customers of the corporate segment that were classified in Level 3 High risk at December 31, 2016.
| Watch List 2016 | |||
| Level | Amount (COP million) |
% | Allowance (COP million) |
| Level 1 - Low Risk | 3,738,353 | 3% | 124,139 |
| Level 2 - Medium Risk | 1,623,733 | 3% | 46,627 |
| Level 3 - High Risk | 4,461,571 | 30% | 1,316,480 |
| Total | 9,823,657 | 15% | 1,487,246 |
IMPAIRED LOANS
A loan is considered an impaired loan when there is an objective evidence of impairment that has an effect on the cash flow of the loan. This category also includes loans that had been restructured because of the financial difficulties of the borrower, and for that reason, the Bank granted a concession to the borrower, that it would not otherwise consider ("trouble debt restructuring loans" or TDRs). Under IFRS, all loans are accounted for on an accrual basis, although they are classified as “impaired loans”.
The following table presents the recorded investment for impaired loans:
| As of December 31, | |||||||||
| 2016 | 2015 | 2014 | |||||||
| Domestic | Foreign | Total | Domestic | Foreign | Total | Domestic | Foreign | Total | |
| In millions of COP | |||||||||
| Commercial | |||||||||
| Corporate | 3,001,953 | 1,104,935 | 4,106,888 | 1,468,122 | 401,920 | 1,870,042 | 1,245,373 | 185,292 | 1,430,665 |
| SME | 1,499,054 | 138,604 | 1,637,658 | 1,114,816 | 128,125 | 1,242,941 | 997,605 | 75,695 | 1,073,300 |
| Others | 894,642 | 151,274 | 1,045,916 | 661,481 | 187,413 | 848,894 | 677,435 | 100,199 | 777,634 |
| Total Commercial | 5,395,649 | 1,394,813 | 6,790,462 | 3,244,419 | 717,458 | 3,961,877 | 2,920,413 | 361,186 | 3,281,599 |
| Consumer | |||||||||
| Credit card | 308,158 | 177,073 | 485,231 | 554,725 | 392,490 | 947,215 | 168,562 | 206,879 | 375,441 |
| Vehicle loans | 244,618 | 19,567 | 264,185 | 201,456 | 9,886 | 211,342 | 160,021 | 67,019 | 227,040 |
| Payroll loan | 127,866 | 469,494 | 597,360 | 118,015 | 24,002 | 142,017 | 100,626 | 130,885 | 231,511 |
| Others | 371,018 | 103,617 | 474,635 | 223,080 | 138,428 | 361,508 | 196,045 | 111,766 | 307,811 |
| Total Consumer | 1,051,660 | 769,751 | 1,821,411 | 1,097,276 | 564,806 | 1,662,082 | 625,254 | 516,549 | 1,141,803 |
| Residential Mortgage | |||||||||
| Vis (1) | 156,747 | 54,439 | 211,186 | 136,628 | 305 | 136,933 | 130,188 | 342 | 130,530 |
| No Vis | 356,181 | 647,694 | 1,003,875 | 291,128 | 571,248 | 862,376 | 239,177 | 357,879 | 597,056 |
| Total residential mortgage | 512,928 | 702,133 | 1,215,061 | 427,756 | 571,553 | 999,309 | 369,365 | 358,221 | 727,586 |
| Small Business Loans | 81,769 | 22,705 | 104,474 | 58,875 | 1,365 | 60,240 | 52,660 | 57,581 | 110,241 |
| Financial leases | 1,237,165 | 34,061 | 1,271,226 | 865,412 | 12,547 | 877,959 | 289,926 | 2,629 | 292,555 |
| Total | 8,279,171 | 2,923,463 | 11,202,634 | 5,693,738 | 1,867,729 | 7,561,467 | 4,257,618 | 1,296,166 | 5,553,784 |
| (1) | VIS refers in Spanish to “Vivienda de Interés Social”, a term used to describe residential mortgages granted by financial institutions in amounts that are less than 135 legal minimum monthly salaries in Colombia ( as of December 31, 2016 COP 93 million). |
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The following table shows the TDRs classified into foreign and domestic loans, the gross interest income that would have been recorded in the period ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination and the amount of interest income on those loans that were included in net income for the period:
| 2016 | 2015 | |||||
| In millions of COP | ||||||
| Domestic | Foreign | Total | Domestic | Foreign | Total | |
| Interest income recognized in net income for the period. | 490,536 | 333,519 | 824,055 | 471,226 | 116,355 | 587,581 |
| The gross interest income that would have been recorded in the period that ended if the loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period. | 511,828 | 382,116 | 893,944 | 472,862 | 117,148 | 590,010 |
CROSS-BORDER OUTSTANDING LOANS AND INVESTMENTS
As of December 31, 2016, 2015, and 2014, total cross-border outstanding loans and investments amounted to USD 15,966 million, USD 16,082 million, USD 11,878 million, respectively. As of December 31, 2016, total outstanding loans to borrowers in foreign countries amounted to USD 14,508 million, and total investments were USD 1,459 million. As of December 31, 2016, total cross-border outstanding loans and investments represented 24.41% of total assets.
The Bank had no cross-border outstanding acceptances, interest-earning deposits with other banks or any other monetary assets denominated in pesos or other non-local currencies, in which the total exceeded 1% of consolidated total assets at December 31, 2016, 2015 and 2014.
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The following table presents information with respect to the Bank’s cross-border outstanding loans and investments at December 31, 2016, 2015 and 2014:
| As of December 31, | ||||||
| 2016 | 2015 | 2014 | ||||
| thousands of U.S. dollars | ||||||
| Governments and official institutions | ||||||
| Guatemala | USD | 476,000 | USD | 529,834 | USD | 40,000 |
| Panama | 340,631 | 373,540 | 447,939 | |||
| El Salvador | 189,781 | 233,096 | 86,811 | |||
| United States | 106,630 | 166,284 | 84,943 | |||
| Mexico | 65,705 | 152,186 | 187,680 | |||
| Costa Rica | 15,855 | 39,117 | 32,598 | |||
| Brazil | 10,784 | 11,023 | 23,947 | |||
| Chile | - | - | 3,861 | |||
| Banks and other financial institutions | ||||||
| Panama | USD | 112,430 | USD | 216,788 | USD | 134,876 |
| Guatemala | 58,647 | 26,786 | 2,620 | |||
| Costa Rica | 34,416 | 30,119 | 26,653 | |||
| El Salvador | 26,836 | 43,766 | 41,555 | |||
| Venezuela | 22,120 | 30,164 | 27,179 | |||
| Chile | 14,286 | 14,951 | 15,478 | |||
| United States | 11,069 | 10,002 | - | |||
| Peru | 10,095 | 13,281 | 17,227 | |||
| Honduras | 7,485 | 751 | - | |||
| Brazil | 4,702 | 7,705 | 27,537 | |||
| Mexico | - | 3,041 | 6,043 | |||
| Commercial and industrial loans | ||||||
| Panama | USD | 3,183,641 | USD | 3,138,755 | USD | 2,834,901 |
| Guatemala | 2,009,213 | 2,941,396 | 353,280 | |||
| El Salvador | 889,980 | 563,534 | 1,154,395 | |||
| Peru | 284,576 | 420,341 | 490,910 | |||
| Costa Rica | 162,028 | 249,819 | 223,115 | |||
| Puerto Rico | 151,223 | 100,474 | 101,012 | |||
| United States | 127,321 | 260,041 | 266,004 | |||
| Dominican Republic | 104,444 | 100,035 | 5,008 | |||
| Honduras | 72,602 | 87,036 | 11,283 | |||
| Nicaragua | 55,251 | 8,917 | 12,869 | |||
| Ecuador | 49,178 | 56,545 | 4,039 | |||
| Mexico | 21,369 | 3,636 | 10,403 | |||
| Chile | 18,997 | 41,192 | 30,314 | |||
| Belize | 16,426 | - | - | |||
| British Virgin Islands | 13,837 | 15,234 | 32,523 | |||
| Brazil | 3,784 | 13,002 | 13,063 | |||
| Guyana | 3,604 | 4,906 | 22,342 | |||
| Republic of China | 3,167 | - | 9,952 | |||
| U.S. Virgin Islands | - | 27,835 | 46,186 | |||
| Uruguay | - | 10,768 | 69,512 | |||
| Barbados | - | 4,021 | 4,867 | |||
| Marshall Islands | - | - | 45,109 | |||
| Belgium and Luxembourg | - | - | 40,297 | |||
| New Zealand | - | - | 12,000 | |||
| Bahamas | - | - | 7,759 | |||
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| As of December 31, | ||||||
| 2016 | 2015 | 2014 | ||||
| thousands of U.S. dollars | ||||||
| Others | 6,869 | 1,243 | 6,765 | |||
| Other loans | ||||||
| Panama | USD | 3,896,328 | USD | 3,319,118 | USD | 2,863,633 |
| El Salvador | 2,177,723 | 2,471,002 | 1,648,990 | |||
| Guatemala | 883,186 | 115,215 | 70,746 | |||
| Costa Rica | 164,760 | 79,351 | 95,251 | |||
| United States | 61,001 | 32,617 | 61,784 | |||
| Peru | 15,500 | 44,947 | 35,298 | |||
| Nicaragua | 13,286 | 18,523 | 18,713 | |||
| Spain | 10,939 | 14,249 | 19,219 | |||
| Mexico | 6,827 | 1,770 | 10,851 | |||
| Argentina | 5,072 | - | - | |||
| Uruguay | 4,236 | - | - | |||
| England | 3,953 | 5,501 | 7,181 | |||
| Australia | 3,832 | 1,010 | 1,634 | |||
| Canada | 3,686 | 2,989 | 3,678 | |||
| Brazil | 2,783 | 8,333 | 8,443 | |||
| Ecuador | 2,746 | 1,218 | - | |||
| Chile | 2,662 | 5,468 | 5,496 | |||
| Belgium and Luxembourg | 2,640 | 3,203 | 3,896 | |||
| Venezuela | 2,564 | 2,429 | 2,602 | |||
| France | 2,128 | - | 1,256 | |||
| Honduras | 2,087 | - | - | |||
| Bolivia | 1,900 | - | - | |||
| Germany | 1,527 | - | - | |||
| Italy | 1,438 | - | - | |||
| Others | 8,586 | 3,811 | 4,446 | |||
| Total Cross-Border Outstanding Loans and Investments | USD | 15,966,372 | USD | 16,081,918 | USD | 11,877,972 |
| E.5. | DEPOSITS |
The following table shows the composition of the Bank’s deposits for 2016, 2015 and 2014:
| As of December 31, | |||
| 2016 | 2015(1) | 2014 | |
| In millions of COP | |||
| Non-interest bearing deposits: | |||
| Checking deposits | 16,189,259 | 16,823,024 | 14,598,804 |
| Other deposits | 1,813,922 | 1,627,981 | 1,387,199 |
| Total | 18,003,181 | 18,451,005 | 15,986,003 |
| Interest bearing deposits: | |||
| Checking deposits | 5,253,743 | 6,823,554 | 3,548,221 |
| Time deposits | 52,673,385 | 48,713,789 | 36,105,096 |
| Savings deposits | 48,693,702 | 47,813,680 | 39,129,999 |
| Total | 106,620,830 | 103,351,023 | 78,783,316 |
| Total deposits | 124,624,011 | 121,802,028 | 94,769,319 |
(1) Includes deposits amounting to COP 1,266,305 million held by Compañía de Financiamiento Tuya S.A., which deposits are considered as assets held for sale as of December 31, 2015.
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The following table shows the time deposits held by the Bank as of December 31, 2016, classified by amount and maturity:
| At December 31, 2016 | |||
| Peso - Denominated |
Foreign
Exchange- Denominated |
Total | |
| In millions of COP | |||
| Time deposits higher than USD 100,000 | |||
| Up to 3 months | 3,896,383 | 6,962,822 | 10,859,205 |
| From 3 to 6 months | 2,227,718 | 3,042,354 | 5,270,072 |
| From 6 to 12 months | 4,596,473 | 4,365,522 | 8,961,995 |
| More than 12 months | 11,595,621 | 6,165,017 | 17,760,638 |
| Time deposits higher than USD 100,000(1) | 22,316,195 | 20,535,715 | 42,851,910 |
| Time deposits less than USD 100,000 (1) | 6,623,837 | 3,197,638 | 9,821,475 |
| Total | 28,940,032 | 23,733,353 | 52,673,385 |
(1) Approximately COP 300 million at the Representative Market Rate as of December 31, 2016.
As of December 31, 2016, the time deposits greater than USD 100,000 collected by foreign subsidiaries amounted to COP 19,885,656 million.
For a description of the average amount and the average rate paid for deposits, see “Item 4. Information on the Company – E. Selected Statistical Information – E.1. Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential”.
| E.6. | RETURN ON EQUITY AND ASSETS |
The following table presents certain selected financial ratios of the Bank for the periods indicated:
| Return on equity and assets (1) | Year Ended December 31, | ||
| 2016 | 2015 | 2014 | |
| In percentages | |||
| Net income as a percentage of: | |||
| Average total assets (2) | 1.49 | 1.58 | 1.79 |
| Return on average stockholders‘ equity attributable to the owners of the parent company | 14.52 | 13.62 | 14.81 |
| Average equity | 14.16 | 13.84 | 16.19 |
| Dividends declared per share as a percentage of net income per share (3) | 31.25 | 32.46 | 32.03 |
| Average stockholders’ equity as a percentage of average total assets | 10.79 | 11.44 | 11.08 |
| Return on interest-earning assets (4) | 10.11 | 8.41 | 8.52 |
| (1) | The Bank´s average total assets and stockholder's equity were calculated considering the last 13 monthly IFRS balances. |
| (2) | As of December 31, 2015 and 2014 the Bank’s average total assets were calculated considering the assets of the discontinued operation. |
| (3) | Dividends are paid based on unconsolidated earnings prepared under Colombia Banking GAAP. Net income per share is calculated using the average number of common outstanding during the year. |
| (4) | Defined as total interest earned divided by average interest-earning assets. |
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| E.7. | SHORT-TERM BORROWINGS |
The following table sets forth certain information regarding the short-term borrowings by the Bank for the periods indicated:
| As of December 31, (1) | |||||||||
| 2016 | 2015 | 2014 | |||||||
| Amount | Rate (2) | Amount | Rate (2) | Amount | Rate (2) | ||||
| In millions of COP, except percentages | |||||||||
| End of period | 9,951,438 | 2.95% | 11,129,652 | 1.68% | 7,466,814 | 2.39% | |||
| Weighted average during period | 10,122,686 | 2.90% | 8,527,033 | 2.20% | 6,495,626 | 2.75% | |||
| Maximum amount of borrowing at any month end | 11,067,435 | (3) | 11,129,652 | (4) | - | 7,466,814 | (4) | - | |
| Interest paid during the year | 293,348 | 187,185 | - | 178,675 | - | ||||
| (1) | Short-term borrowings are borrowings with other financial institutions with remaining maturity less than one year. For further information see Note 16 borrowings with other financial institutions to the Financial Statements. |
| (2) | Corresponds to the ratio of interest paid during the period to short-term borrowings. |
| (3) | The amount corresponds to the end of February. |
| (4) | The amount corresponds to the end of December. |
| ITEM 4 A. | UNRESOLVED STAFF COMMENTS |
As of the date of the filing of this Annual Report, there are no unresolved written comments from SEC staff regarding the Bank’s periodic reports required to be filed under the Exchange Act of 1934.
| ITEM 5. | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
| A. | OPERATING RESULTS |
The following discussion should be read in conjunction with Part II, Item 6 “Selected Financial Data” of this Annual Report and our Consolidated Financial Statements and the related notes thereto included in this Annual Report.
The following discussion includes information regarding future financial performance and plans, targets, aspirations, expectations, and objectives of management, which constitute forward-looking statements within the meaning of the safe harbor provisions of the U.S. Private Securities Litigation Reform Act of 1995. It is possible that the Bank’s actual results may differ materially from the results discussed in the forward-looking statements because of a number of risks and uncertainties. In addition, please refer to the discussion in Item 3. “Key Information – D. Risk Factors” for a description of risks and uncertainties affecting our business and financial results.
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IMPACT OF ECONOMIC AND MONETARY POLICIES ON BANCOLOMBIA’S RESULTS
Bancolombia’s results of operations are affected by macroeconomic factors principally in Colombia, but also in the other countries in which the Bank operates. The most important variables include GDP growth, interest rates, inflation and exchange rates, principally the COP-USD rate. The following discussion summarizes the trends of these measures in Colombia in 2016.
Economic activity
Colombia’s GDP growth was 2.0% in 2016, significantly lower than the 3.1% reached in 2015. This growth was better than in many countries in the region, which experienced lower or negative GDP expansion. We believe this figure demonstrates the resilience and fundamental macoreconomic soundness of the Colombian economy.
Key GDP components performed as follows in 2016 compared to 2015: investment decreased 4.5%, consumption increased 2.0%, imports decreased 6.2% and exports decreased 0.9%. In 2016, gross capital formation represented 25.5% of GDP, household consumption represented 62.7%, government consumption 18.4%, exports 14.0% and imports 20.6%.
The activities that led growth during the year were financial services (5.0% increase) and construction (4.1% increase).
In summary, during 2016, the Colombian economy continued with the process of deceleration that started in 2015. This lower economic dynamism was characterized by the stagnation of the internal demand, especially in concern to consumer demand and government spending, and a considerable decrease in net exports. Also the labor market weakened, which led to a deceleration in private consumption.
Interest Rates
As of December 31, 2016, following steady rate hikes during the first half of the year, the Colombian Central Bank’s benchmark interest rate stood at 7.50%, following a 25 bps cut in December 2016. This rate reduction, which reflected an attempt to stimulate growth in a slower-paced economy, ended the Central Bank’s series of rate increases of 300 basis points since September 2015. Interest rates have continued to decline in 2017, with the benchmark rate at 7.00% as of the date of this Annual Report.
The Central Bank aims to maintain inflation rates over time within the long-term targeted range (between 2% and 4%). In order to do so, the Central Bank may continue to reduce interest rates to promote economic activity, credit expansion, consumption or curb inflation expectations.
Inflation
The year-end inflation rate for 2016 was 5.75%, lower than the 6.77% recorded for 2015.
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The components that led inflation in 2016 were health care (8.1% increase), food (7.2% increase) and education (6.3% increase).
The 12-month core inflation rate for 2016 came at 5.05%, which exceeded the Central Bank’s targeted inflation range of 2% to 4%. The price increases were mainly due to the El Niño phenomenon as well as the national truck strike in July 2016, which lasted 46 days.
The upward trend in inflation observed during 2016 reached its maximum level in July, when the annual inflation rate was 8.97%, 497 basis points above the upper limit of the inflation target range of the Central Bank (2% - 4%). However, this trend changed in the subsequent months, when inflation started to moderate. Inflation thus far in 2017 continues on this downward trajectory as of March 31, 2017, the annual inflation rate was 4.69%.
Exchange rate
The Colombian Peso appreciated 5% versus the U.S. dollar during 2016, compared to a depreciation of 32% during 2015.
The appreciation of the Colombian Peso is explained by a normalization of economic conditions, with more stability in oil prices, and an effective absorption by the Colombian economy of external shocks, such as that caused by the U.S. Presidential elections.
Outlook
Future prospects for the Colombian financial sector in general, and for Bancolombia in particular, are expected to depend on the factors listed below:
| Favorable
factors for the Colombian economy – medium- term |
Unfavorable
factors for the Colombian economy – medium term |
Benefits derived from past monetary policies aimed at achieving objective inflation targets.
Declining inflationary pressures with the necessary fiscal adjustments.
Investment grade rating given to Colombia by Standard and Poor’s, Moody’s and Fitch.
Large investments in 4G projects and in the broader economy.
Stronger local capital markets, with little exposure to “toxic assets” and with low currency mismatches.
Better prospects for growth in the near term, derived from improving macroeconomic conditions.
A well-capitalized banking system. |
Underdeveloped infrastructure that continues to constrain growth.
Oil and gas dependent export activity.
Despite successful efforts to diversify export markets, continued concentration in specific export destinations, particularly the United States (which could change as a result of the new U.S. administration).
Exchange rate volatility and depreciation that directly impacts inflation and economic growth.
Large current account deficit and fiscal pressures.
Introduction of additional tax reform measures due to fiscal burden in the near term.
High tax environment for Colombian corporate sector compared to other countries in the region
|
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| Favorable
factors for the Colombian economy – medium- term |
Unfavorable
factors for the Colombian economy – medium term |
|
Well-developed supervision and regulation of the financial system.
Adequate international reserves compared to the level of short-term debt. |
Uncertainties regarding the future post-conflict.
Political fragmentation.
Higher unemployment and household indebtedness.
Political fragmentation and instabilitiy before presidential and congress elections taking place in 2018. |
GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2016 VERSUS 2015
Summary
During 2016, Bancolombia continued to benefit from its strong competitive position and full-service financial model, including the diversity of its leading franchises. For the year 2016, net income attributable to equity holders of the parent company totaled COP 2,865 billion (COP 2,979 per share, USD 3.97 per ADR), which represents an increase of 14% as compared to COP 2,519 billion of net income attributable to equity holders of the parent company for the fiscal year 2015.
Bancolombia’s return on average stockholders’ equity for 2016 was 14.52%, up from 13.62% in 2015.
The net interest and valuation income after provisions for loans, financial leases and off-balance sheet credit instruments margin from continuing operations increased significantly in 2016 and stood at 5.96% for the year, up from 5.25% in 2015.
Credit impairment charges, on loans and financial leases, net of recoveries, totaled COP 2,731 billion for 2015, up 63.04% from COP 1,675 billion. The higher amount of provisions was the result of generalized loan deterioration in the consumer and SME loan books, especially during the second half of the year. Most of the provisions regarding Conalvías (the major infrastructure company that filed for bankruptcy) had already been accounted for in 2015.
Loans and advances to customers and financial Institutions leases grew 4% during the year. This performance was driven primarily by mortgage demand from individuals and corporate loans. The total loan book in Colombia grew 10% while the loan growth in USD- denominated loans was 0% for the year.
Allowance for loans and advances and lease losses represented 4.2% of total loans and 126% of past-due loans at the end of 2016 compared with 3.4% of total loans and 115% of past-due loans in December 31, 2015. The bank expects that this higher coverage ratio will provide solid protection in a potential downside scenario in which loan quality continues to deteriorate. Capital adequacy was 13.3% (Tier 1 ratio of 9.02%), higher than the 12.5% (Tier 1 ratio of 7.51%) reported at the end of 2015.
Deposits by customers increased 2% during 2016, while the ratio of net loans to deposits (including borrowings from commercial banks) was 101.11% at the end of the year, up slightly from 99.19% in December 31, 2015.
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Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments
For 2016, net margin and valuation income on financial instruments, before impairment on loans and financial leases and off balance sheet credit instruments, totaled COP 9,696 billion, up 34.1% from COP 7,232 billion in 2015. This performance is the result of growth in the Colombia loan portfolio during the year as well as increasing interest margins. During 2016, the Central Bank increased its reference rate from 5.75% to 7.50% in response to higher inflation, decreasing money supply and a substantial reduction in liquidity in the economy. Although interest rates on the Bank’s borrowings increased during 2016, and despite more difficult macroeconomic conditions in Colombia, the Bank was able to control its funding costs, in a manner that protected spreads.
Interest on loans and financial leases reflected an increase in the rates on loans in 2016. The weighted average nominal interest rate on loans and financial leases ended at 10.6% in 2016 up from 9.0% in December 31, 2015. As a result, interest income, which is the sum of interest on loans, financial leases, overnight funds and interest and valuation income from investment securities, totaled COP 15,749 billion in 2016, up 40% as compared to COP 11,270 billion in 2015.
Interest on investment securities, which includes, among other items, the interest paid or accrued on debt securities and mark-to-market valuation adjustments, totaled COP 707 billion in 2016, up 134% as compared to 2015. Investment securities gained value throughout the year due to a pronounced rally during the middle of the year, specifically of Colombian government debt (TES bonds) as investors sought the higher rates offered.
The net interest and valuation income after provisions for loans, financial leases and off-balance sheet credit instruments margin from continuing operations expanded 71 basis points from 5.25% to 5.96% during the year due to the faster repricing of assets than liabilities, while funding costs were kept relatively stable. Bancolombia was very active in the deposits markets to secure the necessary funding. Interest rates rose during the second half of the year. Increasing interest rates tend to lead to an improved net interest margin, because of the asset-sensitive nature of the Bank’s balance sheet. Management’s outlook going forward is more neutral as rates begin to come down (benchmark rates have decreased by 50 basis points so far in 2017) and the Bank aims to keep interest spreads stable in 2017.
Regarding interest expenses, interest incurred on liabilities totaled COP 6,053 billion in 2015, up 50% as compared to COP 4,038 billion in 2015. The increase in interest expenses is explained by the increase in volumes of deposits and bonds, as well as a higher cost on each type of funding source. Overall, the average interest rate paid on interest-bearing liabilities increased to 3.7% in 2016 from 2.9% in 2015.
Net Fees and Commissions
For the year 2016, total net fees and commissions totaled COP 2,319 billion, up 16% as compared to COP 1,993 billion in 2015. This increase was driven primarily by increases in the performance of commission from banking services, credit and debit cards fees, collections and payments fees, bancassurance, and trust activities which presented a higher number of transactions. In particular, the Bank actively sought to promote and increase credit and debit card transactions through strategic initiatives with retailers as well as commercial incentives. This strategy involved advertisements campaigns, alliances and discounts at merchants if Bancolombia’s credit cards were used as method of payment, more reward and loyalty points with certain credit cards issued by Bancolombia, etc.
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The following table lists the main revenue-producing fees for the years 2016 and 2015 along with the corresponding year-to-year variations:
Main Fees and Commissions Income
| Year | Growth | ||||
| 2016 | 2015 | 2016-2015 | |||
| In millions of COP | |||||
| Credit and debit card fees | 1,092,919 | 1,015,253 | 7.65% | ||
| Banking services | 816,839 | 630,616 | 29.53% | ||
| Bancassurance | 336,692 | 260,224 | 29.39% | ||
| Trust | 294,499 | 265,215 | 11.04% | ||
| Payments and Collections | 229,940 | 203,772 | 12.84% | ||
| Acceptances, Guarantees and Standby letters of credits | 55,724 | 44,539 | 25.11% | ||
| Checks | 51,974 | 55,861 | (6.96%) | ||
| Brokerage | 23,431 | 23,453 | (0.09%) | ||
| Others | 383,217 | 291,624 | 31.41% | ||
| Fees and commissions income | 3,285,235 | 2,790,557 | 17.73% | ||
Fees and commissions expenses
| Year | Growth | ||
| 2016 | 2015 | 2016-2015 | |
| In millions of COP | |||
| Banking services | (354,640) | (298,415) | 18.84% |
| Call Center and Website | (345,336) | (254,769) | 35.55% |
| Credit and debit card fees | (54,126) | (85,798) | (36.91%) |
| Others | (212,169) | (158,531) | 33.83% |
| Fees and commissions expenses | (966,271) | (797,513) | 21.16% |
| Total fees and commissions income, net | 2,318,964 | 1,993,044 | 16.35% |
The sale of Compañia de Financiamiento Tuya S.A took place on October 31, 2016. The amounts recognized until that date are presented in the line “Net income from discontinued operations” of the Statement of Income. The Net fees and income from services attributable to this company for the periods shown were as follows:
| Year | Growth | ||
| 2016 | 2015 | 2016-2015 | |
| In millions of COP | |||
| Fees and commissions income | 361,988 | 388,306 | (6.78%) |
| Fees and commissions expenses | (117,795) | (152,500) | (22.76%) |
| Total fees and commissions income, net (1) | 244,193 | 235,806 | (3.56%) |
(1) See note 30 to the Bank’s Consolidated Financial Statements
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Other Operating Income
For 2016, total other operating income was COP 1,487 billion, 8% higher than the COP 1,373 billion in 2015.
The variation in this line item is explained by the significant improvement in net foreign exchange, which recorded COP 132 billion in 2016, 184% higher than the COP (158) billion reported in 2015. The 5% appreciation of the Colombian Peso against the U.S. Dollar during 2016 caused the foreign exchange gains and gains on forward contracts in foreign currency to have opposite variations compared to what occurred in 2015.
Operating expenses
For 2016, operating expenses totaled COP 6,979 billion, up 18% as compared to COP 5,898 billion in 2015.
Salaries and employee benefits totaled COP 2,809 billion in 2016, up 25% as compared to 2015. This performance was primarily driven by the combined effect of the consolidation of GAH (which accounted for 7% of the growth in operating expenses), wage increments during 2016, and bonus payments. In December, Bancolombia recorded the annual bonuses paid to employees whenever the return on equity exceeds cost of capital as determined by the bank’s compensation policies.
Other administrative and general expenses totaled COP 2,651 billion in 2016, up 18% as compared to 2015 driven by increased taxes other than income tax. The impact of GAH is the primary explanation for the uptick in this expense line. Depreciation and amortization expenses totaled COP 518 billion in 2016, increasing by 8% as compared to COP 477 billion in 2015. This increase was driven by the growth in the operating lease business of Bancolombia.
The following table summarizes the principal components of Bancolombia’s operating expenses for the last three fiscal years:
| Year ended December 31, | Growth | ||
| 2016 | 2015 (1) | 2016-2015 | |
| In millions of COP | |||
| Operating expenses | |||
| Salaries and employee benefits | 2,808,931 | 2,255,391 | 24.54% |
| Other administrative and general expenses | 2,651,334 | 2,237,598 | 18.49% |
| Wealth tax, contributions and other tax burden | 741,184 | 675,387 | 9.74% |
| Impairment, depreciation and amortization | 517,809 | 477,285 | 8.49% |
| Other expenses | 259,792 | 252,626 | 2.84% |
| Total operating expenses | 6,979,050 | 5,898,287 | 18.32% |
(1) For the year ended December 31, 2015, Compañía de Financiamiento Tuya S.A. as a discontinued operation had operating expenses amounting to COP 219,532 million.
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Provision Charges and Credit Quality
For the year 2016, credit impairment charges on loans and advances and financial leases (net of recoveries) totaled COP 2,731 billion (or 1.8% of average loans), which represents an increase of 63% as compared to COP 1,675 billion (or 1.3% of average loans) in 2015. The obvious increase in the level of provisions was driven by the formation of new past due loans and deterioration of consumer and SME loans. Moreover, lower and middle income individuals began to default on loans as unemployment began to go up and household indebtedness reached higher than expected levels.
Net loan charge-offs totaled COP 1,533 billion in 2016, up 7.8% from the 1,422 billion in 2015. Past-due loans amounted to COP 5,384 billion in 2016, up 9.12% as compared to COP 4,934 billion in 2015.
The delinquencies ratio (loans overdue more than 30 days divided by total loans) reached 3.31% as of December 31, 2016, up from 2.98% at December 31, 2015. The uptick in delinquency occurred primarily in the consumer segment during the second half of the year and as a consequence the bank tightened the underwriting standards of certain segments (lower income individuals and SMEs).
Income Tax Expenses
Income tax expense for the fiscal year 2016 totaled COP 1,177 billion, up 81% from COP 649 billion in 2015. Income tax increased significantly, due to the impact the peso’s appreciation had on fiscal accounting on a consolidated level. The tax rate volatility caused by fluctuations in exchange rates will be eliminated in 2017 due to the new tax reform approved and passed by Congress on December 30, 2016.
GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2015 VERSUS 2014
Summary
During 2015, Bancolombia strengthened its competitive position and full-service financial model, and benefited from the diversity of its leading franchises. For the year 2015, net income attributable to equity holders of the parent company totaled COP 2,519 billion (COP 2,736 per share, USD 3.48 per ADR), which represents an increase of 6% as compared to COP 2,387 billion of net income attributable to equity holders of the parent company for the fiscal year 2014.
Bancolombia’s return on average stockholders’ equity for 2015 was 13.62%, down from 14.81% in 2014.
The net interest and valuation income after provisions for loans, financial leases and off-balance sheet credit instruments margin from continuing operations decreased slightly in 2015 and was 5.25% for the year, down from 5.30% in 2014.
Credit impairment charges, net of recoveries, totaled COP 1,675 billion for 2015, up 92.72% from COP 869 billion in 2014. The higher amount of provisions was the result of generalized loan deterioration, especially during the second half of the year. The majority of the new past due loans are related to the commercial and consumer loans and are responsible for most of the provision charges for the year.
Loans and advances to customers and financial Institutions leases grew 26% during the year. This performance was driven primarily by mortgage demand from individuals and corporate loans as well as by the consolidation of GAH, which contributed 7.8% of this growth.
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Allowance for loans and advances and lease losses represented 3.4% of total loans and 115% of past-due loans at the end of 2015 compared with 3.8% of total loans and 146% of past-due loans at December 31, 2014. Capital adequacy was 12.5% (Tier 1 ratio of 7.51%), lower than the 13.3% (Tier 1 ratio of 7.71%) reported at the end of 2014.
Deposits by customers increased 29% during 2015, while the ratio of net loans to deposits (including borrowings from development banks and other non-financial entities) was 99.19% at the end of the year, down from 101.62% in December 31, 2014.
Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments
For 2015, net margin and valuation on financial instruments totaled COP 7,232 billion, up 20.4% as compared to COP 6,008 billion in 2014. This performance is explained by the combined effect of steady growth in the loan portfolio during the year as well as stable interest margins. During 2015, the Central Bank increased its reference rate from 4.50% to 5.75% in response to higher inflation, decreasing money supply and a substantial reduction in liquidity in the economy. Although interest rates on the Bank’s borrowings increased during 2015, the Bank was able to control its funding costs, in a manner that protected spreads, in spite of the tougher macroeconomic conditions as well as the continuation of the integration and deployment of strategies in Banistmo (acquired in 2013). The net interest margin and valuation on financial instruments was 5.25% for the year, down from 5.30% in 2014. Net margin and valuation on financial instruments represented 67% of net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments plus net credit impairment charges in 2015, compared to 66% for 2014.
Interest on loans and financial leases reflected an increase in the loan portfolio in 2015. The weighted average nominal interest rate on loans and financial leases was 9.0% in 2015 as compared to 9.1% in 2014. As a result, interest income, which is the sum of interest on loans, financial leases, overnight funds and interest and valuation income from investment securities, totaled COP 11,270 billion in 2015, up 23% as compared to COP 9,172 billion in 2014.
Interest on investment securities, which includes, among other items, the interest paid or accrued on debt securities and mark-to-market valuation adjustments, totaled COP 302 billion in 2015, down 47% as compared to 2014.
The net interest margin and valuation on financial instruments contracted 5 basis points from 5.30% to 5.25% during the year due to increased funding costs and liquidity pressures during the second half of the year. Bancolombia was very active in the deposits markets to secure the necessary funding. Interest rates began to rise in the second half of the year, which at first constrains financial margins, however, in the near term management expects margins to expand due to the asset re-pricing that is already taking place. Management’s outlook going forward is positive and the higher rate environment provides an upside for the net interest margin.
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Regarding interest expenses, interest incurred on liabilities totaled COP 4,038 billion in 2015, up 28% as compared to COP 3,165 billion in 2014. The increase in interest expenses is explained by the increase in volumes of deposits and bonds, as well as a higher cost on each type of funding source. Overall, the average interest rate paid on interest-bearing liabilities increased to 2.92% in 2015 from 2.85% in 2014.
Net Fees and Commissions
For the year 2015, total net fees and commissions totaled COP 1,993 billion, up 9% as compared to COP 1,826 billion in 2014. This increase was driven primarily by increases in the performance of commission from banking services, credit and debit cards fees, collections and payments fees, bancassurance, and trust activities.
The following table lists the main revenue-producing fees for the years 2015 and 2014 along with the corresponding year-to-year variations:
Main Fees and Commissions Income
| Year | Growth | ||
| 2015 | 2014 | 2015-2014 | |
| In millions of COP | |||
| Credit and debit card fees | 1,015,253 | 801,403 | 26.68% |
| Banking services | 630,616 | 653,513 | (3.50%) |
| Bancassurance | 260,224 | 212,223 | 22.62% |
| Trust | 265,215 | 203,608 | 30.26% |
| Payments and Collections | 203,772 | 182,669 | 11.55% |
| Acceptances, Guarantees and Standby letters of credits | 44,539 | 60,998 | (14.22%) |
| Checks | 55,861 | 51,923 | (8.42%) |
| Brokerage | 23,453 | 23,784 | (1.39%) |
| Others | 291,624 | 305,296 | (4.48%) |
| Fees and commissions income | 2,790,557 | 2,495,417 | 11.83% |
Fees and commissions expenses
| Year | Growth | ||
| 2015 | 2014 | 2015-2014 | |
| In millions of COP | |||
| Banking services | (298,415) | (245,581) | 21.51% |
| Call Center and Website | (254,769) | (230,501) | 10.53% |
| Credit and debit card fees | (85,798) | (95,172) | (9.85%) |
| Others | (158,531) | (98,453) | 61.02% |
| Fees and commissions expenses | (797,513) | (669,707) | 19.08% |
| Total fees and commissions income, net | 1,993,044 | 1,825,710 | 9.17% |
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The Net fees and commissions attributable to Compañía de Financiamiento Tuya S.A., presented in the line "Net income from discontinued operations" of the Consolidated Statement of Income for the periods shown were as follows:
| Year | Growth | ||
| 2015 | 2014 | 2015-2014 | |
| In millions of COP | |||
| Fees and commissions income | 388,306 | 341,601 | 13.67% |
| Fees and commissions expenses | (152,500) | (69,397) | 119.75% |
| Total fees and commissions income, net (1) | 235,806 | 272,204 | (13.37%) |
(1) See note 30 to the Bank’s Consolidated Financial Statements
Other Operating Income
For 2015, total other operating income was COP 1,373 billion, 21% higher than the COP 1,137 billion in 2014.
Net foreign exchange had a significant impact in the other operating income line of COP (158) billion in 2015, 148% lower than the COP 332 billion reported in 2014. The 32% depreciation of the Colombian Peso against the U.S. Dollar during 2015 caused the foreign exchange gains and gains on forward contracts in foreign currency to show certain variations.
Operating expenses
For 2015, operating expenses totaled COP 5,898 billion, up 15% as compared to COP 5,119 billion in 2014.
Personnel expenses (the sum of salaries and employee benefits, bonus plan payments and indemnities) totaled COP 2,255 billion in 2015, up 14% as compared to 2014. This performance was primarily driven by the combined effect of a slight increase in headcount, wage increments during 2015, and bonus payments.
Administrative and other expenses totaled COP 2,238 billion in 2015, up 15% as compared to 2014 driven by increased taxes other than income tax. Depreciation and amortization expenses totaled COP 477 billion in 2015, increasing by 4% as compared to COP 460 billion in 2014. This increase was driven by the growth in the operating lease business of Bancolombia.
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The following table summarizes the principal components of Bancolombia’s operating expenses for the fiscal years ended December 31, 2015 and 2014:
| Year ended December 31, | Growth | ||
| 2015 (1) | 2014 | 2015-2014 | |
| In millions of COP | |||
| Operating expenses | |||
| Salaries and employee benefits | 2,255,391 | 1,973,467 | 14.29% |
| Other administrative and general expenses | 2,237,598 | 1,947,375 | 14.90% |
| Wealth tax, contributions and other tax burden | 675,387 | 438,711 | 53.95% |
| Impairment, depreciation and amortization | 477,285 | 459,703 | 3.82% |
| Other expenses | 252,626 | 299,439 | (15.63%) |
| Total operating expenses | 5,898,287 | 5,118,695 | 15.23% |
(1) For the year ended December 31, 2015, Compañía de Financiamiento Tuya S.A. as a discontinued operation had operating expenses amounting to COP 219,532 million.
Provision Charges and Credit Quality
For the year 2015, credit impairment charges (net of recoveries) totaled COP 1,675 billion (or 1.3% of average loans), which represents an increase of 93% as compared to COP 869 billion in 2014. The higher level of provisions was driven by the formation of past due loans and the growth of the loan portfolio.
Net loan charge-offs totaled COP 1,422 billion in 2015, up 21% from the COP 1,179 billion in 2014. Past-due loans amounted to COP 4,934 billion in 2015, up 40.57% as compared to COP 3,510 billion in 2014.
The delinquencies ratio (loans overdue more than 30 days divided by total loans) reached 2.98% as of the end of 2015, up from 2.62% at the end of 2014.
Income Tax Expenses
Income tax expense for the fiscal year 2015 totaled COP 649 billion, down 12% from COP 738 billion in 2014. Income tax decreased despite the higher statutory income tax rate, because of certain differences between fiscal accounting and financial accounting.
RESULTS BY SEGMENT
The Bank manages its business through 9 main operating segments: Banking Colombia, Banking El Salvador, Banking Panama, Banking Guatemala, Trust, Investment Banking, Brokerage, Off Shore and All Other.
In 2015, Bancolombia eliminated “Insurance” segment as a result of the sale of the insurance operation in Banistmo S.A. to Suramericana S.A. on February 23.
In 2016, Bancolombia included “Banking Guatemala” as new segment because of the acquisition of additional 20% of Banco Agromercantil and its subsidiaries by Bancolombia Panama on December 30, 2015.
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Also in 2016, Bancolombia eliminated “Leasing” segment as a result of the merger between Leasing Bancolombia S.A. and Bancolombia S.A. on September 30. As a result of this merger the “Leasing” segment disappeared and the “Banking Colombia” and “All other” segments changed their composition. The data for the “Banking Colombia” and “All other” segments for 2014 and 2015 was restated in order to be on a comparable basis to the segment information for 2016.
Banking Colombia: This segment provides retail and corporate banking products and services to individuals, companies and national and local governments in Colombia. The Bank’s strategy in Colombia is to grow with these clients based on value added and long-term relationships. In order to offer specialized services to individuals and small and medium size enterprises (SMEs), the Bank´s retail sales force targets the clients classified as: Personal, Private, Entrepreneurs, Foreign Residents and SMEs. The Bank´s corporate and government sales force targets and specializes in companies with more than COP 16,000 million in revenue in nine economic sectors: Agribusiness, Commerce, Manufacturing of Supplies and Materials, Media, Financial Services, Non-Financial Services, Construction, Government and Natural Resources.
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Colombia.
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 11,586,785 | 8,992,368 | 7,510,647 | 28.85% | 19.73% |
| Interest expenses | (4,542,701) | (3,192,822) | (2,580,194) | 42.28% | 23.74% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 7,044,084 | 5,799,546 | 4,930,453 | 21.46% | 17.63% |
| Total credit impairment charges, net | (1,797,848) | (1,509,519) | (869,260) | 19.10% | 73.66% |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 5,246,236 | 4,290,027 | 4,061,193 | 22.29% | 5.63% |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (65,915) | (68,915) | (20,928) | (4.35%) | 229.30% |
| Total fees and commission, net | 1,269,298 | 1,347,999 | 1,271,506 | (5.84%) | 6.02% |
| Other operating income | 603,860 | 483,556 | 357,597 | 24.88% | 35.22% |
| Dividends received, and share of profits of equity method investees | (264,715) | (40,115) | (57,981) | 559.89% | (30.81%) |
| Total operating income, net | 6,788,764 | 6,012,552 | 5,611,387 | 12.91% | 7.15% |
| Operating expenses | (4,150,984) | (3,836,019) | (3,320,789) | 8.21% | 15.52% |
| Impairment, depreciation and amortization | (147,261) | (247,446) | (274,120) | (40.49%) | (9.73%) |
| Total operating expenses | (4,298,245) | (4,083,465) | (3,594,909) | 5.26% | 13.59% |
| Profit before tax | 2,490,519 | 1,929,087 | 2,016,478 | 29.10% | (4.33%) |
| Segment assets | 122,595,540 | 116,827,269 | 102,275,184 | 4.94% | 14.23% |
Analysis of 2016 versus 2015
In 2016, profit before taxes for Banking Colombia increased by 29.1% to COP 2,491 billion.
Total interest and valuation increased 29.0% to COP 11,587 billion. This strong growth resulted from an expansion of the net interest margin and valuation on financial instruments and from higher volumes of peso-denominated loans. Interest income from corporate loans grew by 39.7%, mortgages by 20.2% and consumer loans by 2.9%. Demand for commercial loans was mainly driven by large corporate loans, and rediscount and factoring operations.
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Total credit impairment charges net, increased by 19.1% to COP 1,798 billion. This increase resulted from specific defaults related to a few corporate clients, as well as some deterioration in the consumer segment.
Total fees and commission net, decreased by 6.0% to COP 1,269 billion, due to the exclusion of the fee income and fee expenses of TUYA. In addition, some of the commissions from banking services were transfered to a Joint Venture with First Data, and therefore, the commisions for banking Colombia declined during 2016. The benefits of this Joint venture were reflected thought the valuation of the equity investment by equity method.
Other operating income increased 25.0% during 2016 because of gains from the sale of premises and equipment and some assets held for sale.
Total operating expenses increased by 5.3% to COP 4,298 billion, due to increases in labor costs as well as bonuses.
Assets attributable to Banking Colombia grew by 5.0% during the year, mainly driven by growth in cash and an increase in investments and interbank deposits, as well as by the incorporation of assets previously held by Leasing Bancolombia.
Analysis of 2015 versus 2014
In 2015, profit before taxes for Banking Colombia decreased by 4.3% to COP 1,929 billion.
Total interest and valuation increased 19.7% to COP 8,992 billion, explained by greater volumes in net loans and by a stable net interest margin. Interest income from corporate loans grew by 26.2%, mortgages by 15.5% and consumer loans by 10.5%. Demand for commercial loans were mainly driven by credit cards, rediscount and factoring operations.
Total credit impairment charges net, increased by 73.6% to COP 1,509 billion. This increase resulted from specific defaults related to a few corporate clients, as well as some deterioration in the consumer segment.
Total fees and commission net, decreased by 6.0% to COP 1,348 billion, mainly due to credit card and banking services fees, which include branch network services and check remittances.
Other operating income increased 35.2% during 2016 to COP 484 billion, because of realized gains received in operations with peso/dollar derivatives and gains from the sale of some assets held for sale.
Total operating expenses increased by 13.6% to COP 4,083 billion, due to increases in labor costs as well as in contributions and taxes.
Assets attributable to Banking Colombia grew by 14.2% during the year to COP 116,827 billion, mainly driven by the growth in loans and the incorporation of assets previously held by Leasing Bancolombia.
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Banking El Salvador through Banco Agrícola S.A.: This segment provides retail and commercial banking products and services to individuals, companies and national and local governments in El Salvador. Banking El Salvador also includes operations of the following subsidiaries: Arrendadora Financiera S.A., Credibac S.A. de C.V., Valores and Banagricola S.A. de C.V.
This segment is also responsible for the management of the Bank’s proprietary trading activities in El Salvador, liquidity management activities and distribution of treasury products and services to its client base in El Salvador.
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 901,757 | 728,582 | 506,575 | 23.77% | 43.83% |
| Interest expenses | (252,011) | (187,743) | (109,353) | 34.23% | 71.69% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 649,746 | 540,839 | 397,222 | 20.14% | 36.16% |
| Total credit impairment charges, net | (55,985) | (26,933) | (44,808) | 107.87% | (39.89%) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 593,761 | 513,906 | 352,414 | 15.54% | 45.82% |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (3,054) | (8,475) | (3,529) | (63.96%) | 140.15% |
| Total fees and commission, net | 158,262 | 140,398 | 103,585 | 12.72% | 35.54% |
| Other operating income | 1,302 | 24 | 7,101 | 5325.00% | (99.66%) |
| Dividends received, and share of profits of equity method investees | 711 | 1,716 | (797) | (58.57%) | (315.31%) |
| Total operating income, net | 750,982 | 647,569 | 458,774 | 15.97% | 41.15% |
| Operating expenses | (390,309) | (330,362) | (220,715) | 18.15% | 49.68% |
| Impairment, depreciation and amortization | (50,323) | (27,761) | (18,334) | 81.27% | 51.42% |
| Total operating expenses | (440,632) | (358,123) | (239,049) | 23.04% | 49.81% |
| Profit before tax | 310,350 | 289,446 | 219,725 | 7.22% | 31.73% |
| Segment assets | 12,978,212 | 13,094,026 | 9,567,903 | (0.88%) | 36.85% |
Analysis of 2016 versus 2015
In 2016, profit before taxes for Banking El Salvador increased by 7.2% to COP 310 billion.
Total interest and valuation increased by 24.0% to COP 902 billion, due to a growth in the loan portfolio mainly in consumer and commercial loans, as well as higher revenues from interest received on debt investments. Interest income from commercial loans grew by 18.0% and consumer loans by 34.0%. Income from debt investments increased by 47.0%.
Total credit impairment charges net, were COP 56 billion, increasing by 108.0% from the level in 2015. Credit impairment charges in 2015 were abnormally low due to the reversion of provisions. Charges in 2016 reflected increases in the reserves for loans in the consumer and mortgage segment.
| 107 |
Total fees and commission net, increased by 13.0% to COP 158 billion mainly due to fees from banking services, which include acceptances, guarantees and Standby letters of credits, check remittances and trust products.
Total operating expenses increased by 23.0% to COP 441 billion, mainly explained by the increase in personnel, administrative and general expenses. Also, the appreciation of the U.S. dollar versus the Colombian Peso during 2016 contributed to the increase. Assets attributable to Banking El Salvador decreased by 0.9% during the year.
Analysis of 2015 versus 2014
In 2015, profit before taxes for Banking El Salvador increased by 31.7% to COP 289 billion.
Total interest and valuation increased by 43.8% to COP 729 billion, due to a growth in the loan portfolio mainly in commercial loans, as well as greater revenues in debt investments. Also, the appreciation of the U.S. dollar versus the Colombian Peso during 2015 contributed to the increase.
Total credit impairment charges net, were COP 27 billion, compared with COP 45 billion for 2014, due to higher recoveries of non-performing loans. This variation is also explained by lower charges for credit impairment and a reversal of the impairment of foreclosed assets, as well as, the appreciation of the U.S. dollar versus the Colombian Peso during 2015.
Total fees and commission net, increased by 35.5% to COP 140 billion mainly due to fees from banking services, which include Electronic services and ATM and check remittances.
Total operating expenses grew by 49.8% to COP 358 billion, mainly due to increased personnel, administrative and general expenses. Also, the appreciation of the U.S. dollar versus the Colombian Peso during 2015 contributed to the increase.
Assets attributable to Banking El Salvador increased by 36.8% during the year, mainly driven by the appreciation of the U.S. dollar versus the Colombian Peso and the growth of the loan portfolio of Banco Agrícola. The loan portfolio denominated in U.S. dollar terms grew 2.7% during 2015. Consumer and Mortgage loans led the growth in 2015 and at the end of the period accounted for 56.3% of the loan portfolio. Corporate loans are 43.5% of the total loans.
Banking Panama: This segment provides retail and commercial banking products and services to individuals and companies in Panama through the Banistmo operation. This segment includes all the operations of Banistmo and its subsidiaries as they are managed and monitored by the chief operating decision maker on a consolidated basis.
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Panama.
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| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 1,399,852 | 1,119,540 | 807,547 | 25.04% | 38.63% |
| Interest expenses | (457,611) | (363,373) | (256,795) | 25.93% | 41.50% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 942,241 | 756,167 | 550,752 | 24.61% | 37.30% |
| Total credit impairment charges, net | (367,781) | (82,344) | 69,703 | 346.64% | (218.14%) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 574,460 | 673,823 | 620,455 | (14.75%) | 8.60% |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (20,600) | (6,098) | (1,831) | 237.82% | 233.04% |
| Total fees and commission, net | 180,286 | 136,372 | 140,189 | 32.20% | (2.72%) |
| Other operating income | 18,828 | 104,448 | 72,406 | (81.97%) | 44.25% |
| Dividends received, and share of profits of equity method investees | 4,692 | 69,127 | 13,919 | (93.21%) | 396.64% |
| Total operating income, net | 757,666 | 977,672 | 845,138 | (22.50%) | 15.68% |
| Operating expenses | (589,535) | (606,582) | (470,862) | (2.81%) | 28.82% |
| Impairment, depreciation and amortization | (62,459) | (49,590) | (57,902) | 25.95% | (14.36%) |
| Total operating expenses | (651,994) | (656,172) | (528,764) | (0.64%) | 24.10% |
| Profit before tax | 105,672 | 321,500 | 316,374 | (67.13%) | 1.62% |
| Segment assets | 27,195,988 | 27,895,156 | 20,099,028 | (2.51%) | 38.79% |
Analysis of 2016 versus 2015
In 2016, profit before taxes for Banking Panama decreased by 67.1% to COP 106 billion.
Total interest and valuation increased by 25.0% to COP 1,400 billion, due to a growth in the loan portfolio mainly in consumer loans and mortgages, as well as an increase in leasing, overnight and market funds and debt investments. Interest income from commercial loans grew 19.0%, consumer loans 23.1%, mortgages 31.0% and leasing 69.1%.
Total credit impairment charges net, were COP 368 billion, compared with COP 82 billion for 2015. This increase is explain mainly by deterioration in some commercial clients and consumer loans.
Total fees and commission net, increased by 32.2% to COP 180 billion due to higher commissions from banking services and trust products.
Total operating expenses decreased by 0.6% to COP 652 billion, mainly due to tighter control on the growth in expenses during the year.
Assets attributable to Banking Panama decreased by 2.5% during the year.
On June 14, 2016, Securities Banistmo S.A. acquired 100% of the outstanding capital of Valores Bancolombia Panama S.A. formerly owned by Valores Bancolombia S.A.
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On October 4, 2016, Securities Banistmo S.A. merged into Valores Bancolombia Panamá S.A. which changed its legal name to Valores Banistmo S.A., whose sole shareholder is Banistmo S.A.
Analysis of 2015 versus 2014
In 2015, profit before taxes for Banking Panama increased by 1.62% to COP 321 billion.
Total interest and valuation increased by 38.6% to COP 1,119 billion, due to growth in the loan portfolio mainly in commercial and consumer loans, as well as a greater increase in leasing and debt investments.
Total credit impairment charges net, were COP 82 billion, compared with COP 69 billion positive for 2014. In 2014, the loans recoveries were higher than the provision charges by COP 60 billion. In 2015, the loan recoveries decreased by 8.6% while the provision charges grew by 47%.
Total fees and commission net, decreased by 2.7% to COP 136 billion due to higher commission expenses.
Total operating expenses grew by 24.1% to COP 656 billion, mainly due to increased personnel, administrative and general expenses. Also, the appreciation of the U.S. dollar versus the Colombian Peso during 2015 contributed to the increase.
Assets attributable to Banking Panama increased by 38.8% during the year. This increase is explained by the organic growth of the loan portfolio and the strengthening of the U.S. dollar versus the Colombian Peso which caused dollar denominated assets represent more pesos when converted.
Banking Guatemala: This segment provides retail and commercial banking and insurance products and services to individuals, companies and national and local governments in Guatemala. Banking Guatemala also includes operations of the following subsidiaries: Banco Agromercantil de Guatemala S.A., Mercom Bank Ltd., Seguros Agromercantil S.A., Financiera Agromercantil S.A., Agrovalores S.A., and Tarjeta Agromercantil S.A.
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Guatemala.
| Year ended December 31, | |
| 2016 | |
| In millions of COP | |
| Total interest and valuation | 869,329 |
| Interest expenses | (348,219) |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 521,110 |
| Total credit impairment charges, net | (127,839) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 393,271 |
| Revenues (Expenses) from transactions with other operating segments of the Bank | 701 |
| Total fees and commission, net | 58,745 |
| Other operating income | 55,942 |
| Dividends received, and share of profits of equity method investees | 779 |
| Total operating income, net | 509,438 |
| Operating expenses | (323,001) |
| Impairment, depreciation and amortization | (112,429) |
| Total operating expenses | (435,430) |
| Profit before tax | 74,008 |
| Segment assets | 11,765,670 |
| 110 |
During 2016, assets of the Banking Guatemala segment grew at a moderate pace, mainly explained by the origination of new loans. The expansion of the loan portfolio permitted growth of the net interest income.
Fees declined slightly due to lower demand for financial services, while operating expenses experienced an increase during the year. As a result of these factors, net income of the segment declined during 2016.
Because the Banking Guatemala segment started in January 2016, its contribution to the results are presented only in 2016.
Trust: This segment provides trust services and asset management to clients in Colombia and Peru through Fiduciaria Bancolombia and FiduPerú S.A. The main products offered by this segment include money market accounts, mutual and pension funds, private equity funds, payment trust, custody services and corporate trust.
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 827 | 626 | 12,852 | 32.11% | (95.13%) |
| Interest expenses | (20) | (367) | (321) | (94.55%) | 14.33% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 807 | 259 | 12,531 | 211.58% | (97.93%) |
| Total credit impairment charges, net | (164) | (3,204) | 319 | (94.88%) | (1104.39%) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 643 | (2,945) | 12,850 | (121.83%) | (122.92%) |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (22,893) | (21,833) | (34,036) | 4.86% | (35.85%) |
| Total fees and commission, net | 238,745 | 218,190 | 199,806 | 9.42% | 9.20% |
| Other operating income | 13,500 | 16,507 | (19,595) | (18.22%) | (184.24%) |
| Dividends received, and share of profits of equity method investees | 16,873 | 13,573 | 26,121 | 24.31% | (48.04%) |
| Total operating income, net | 246,868 | 223,492 | 185,146 | 10.46% | 20.71% |
| Operating expenses | (87,951) | (85,918) | (84,102) | 2.37% | 2.16% |
| Impairment, depreciation and amortization | (612) | (466) | (387) | 31.33% | 20.41% |
| Total operating expenses | (88,563) | (86,384) | (84,489) | 2.52% | 2.24% |
| Profit before tax | 158,305 | 137,108 | 100,657 | 15.46% | 36.21% |
| Segment assets | 124,472 | 154,485 | 164,571 | (19.43%) | (6.13%) |
Analysis of 2016 versus 2015
In 2016, profit before taxes for the Trust segment increased by 15.5% to COP 158 billion.
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Total fees and commission net, increased by 9.4% to COP 239 billion driven by higher value of assets under management and corporate trust fees.
Assets attributable to the Trust segment decreased by 19.4% during the year to COP 124 billion, mainly driven by the decrease in debt investments issued by foreign issuers and cash, as well as, lower valuations of equity investments.
Analysis of 2015 versus 2014
In 2015, profit before taxes for the Trust segment increased by 36.2% to COP 137 billion.
Total fees and commission net, increased by 9.2% to COP 218 billion driven by higher value of assets under management and corporate trust fees.
Assets attributable to the Trust segment decreased by 6.1% during the year to COP 154 billion, mainly driven by the decrease in debt investments of Fiduciaria Bancolombia S.A.
Investment Banking: This segment provides corporate and project finance advisory, underwriting, capital markets services and private equity management through Banca de Inversión Bancolombia. Its customers include private and publicly held corporations as well as Government institutions.
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 136 | 287 | 249 | (52.61%) | 15.26% |
| Interest expenses | - | (236) | (200) | (100.00%) | 18.00% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 136 | 51 | 49 | 166.67% | 4.08% |
| Total credit impairment charges, net | (423) | 127 | (157) | (433.07%) | (180.89%) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | (287) | 178 | (108) | (261.24%) | (264.81%) |
| Revenues (Expenses) from transactions with other operating segments of the Bank | 12,891 | 2,355 | 961 | 447.39% | 145.06% |
| Total fees and commission, net | 19,821 | 29,327 | 22,985 | (32.41%) | 27.59% |
| Other operating income | 2,285 | 2,080 | 2,092 | 9.86% | (0.57%) |
| Dividends received, and share of profits of equity method investees | 202,062 | 40,018 | (4,215) | 404.93% | (1049.42%) |
| Total operating income, net | 236,772 | 73,958 | 21,715 | 220.14% | 240.58% |
| Operating expenses | (26,662) | (22,635) | (22,946) | 17.79% | (1.36%) |
| Impairment, depreciation and amortization | (93) | (93) | (92) | 0.00% | 1.09% |
| Total operating expenses | (26,755) | (22,728) | (23,038) | 17.72% | (1.35%) |
| Profit before tax | 210,017 | 51,230 | (1,323) | 309.95% | (3972.26%) |
| Segment assets | 215,281 | 128,301 | 122,716 | 67.79% | 4.55% |
| 112 |
Analysis of 2016 versus 2015
In 2016, profit before taxes for the Investment Banking segment increased to COP 210 billion from COP 51 billion in 2015.
Total interest and valuation decreased by 53.0% to COP 136 million, due to lower investments valuation in debt investments.
Dividends received, and share of profits of equity method investees, increased to COP 202 billion from COP 40 billion in 2015, due to higher valuations of financial instruments, higher profits in equity investments, and higher dividends received from associates due to higher generation of profits in those associates.
Total operating expenses increased by 18.0% to COP 27 billion, due to higher personal expenses mainly salaries and incentive compensation plan.
Assets attributable to Investment Banking increased by 68.0% to COP 215 billion due to the acquisition of the 50% of the stocks of TUYA S.A. from Bancolombia S.A.
Analysis of 2015 versus 2014
In 2015, profit before taxes for the Investment Banking segment increased to COP 51 billion.
Total interest and valuation increased by 15.2% to COP 287 million, due to higher valuation of debt and equity investments.
Total fees and commission net, increased by 27.6% to COP 29 billion, led by higher fees generated by corporate finance advisory services and capital markets related fees.
Dividends received, and share of profits of equity method investees increased to COP 40 billion mainly due to sales of real estate assets.
Total operating expenses decreased by 1.3% to COP 23 billion, due to lower administration and general expenses.
Assets attributable to Investment Banking increased by 4.5% during the year to COP 128 billion, due to a capitalization approved by the shareholders.
Brokerage: This segment provides brokerage, investment advisory and private banking services to individuals and institutions through Valores Bancolombia. It sells and distributes equities, futures, foreign currencies, fixed income securities, mutual funds and structured products.
| 113 |
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 17,160 | 21,157 | 19,833 | (18.89%) | 6.68% |
| Interest expenses | (33) | (652) | (784) | (94.94%) | (16.84%) |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 17,127 | 20,505 | 19,049 | (16.47%) | 7.64% |
| Total credit impairment charges, net | (25) | (177) | (1,829) | (85.88%) | (90.32%) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 17,102 | 20,328 | 17,220 | (15.87%) | 18.05% |
| Revenues (Expenses) from transactions with other operating segments of the Bank | 38,677 | 31,734 | 46,068 | 21.88% | (31.11%) |
| Total fees and commission, net | 80,060 | 78,124 | 81,733 | 2.48% | (4.42%) |
| Other operating income | (9,923) | (6,325) | 5,446 | 56.89% | (216.14%) |
| Dividends received, and share of profits of equity method investees | 32,567 | (1,473) | (1,188) | (2310.93%) | 23.99% |
| Total income net | 158,483 | 122,388 | 149,279 | 29.49% | (18.01%) |
| Operating expenses | (110,317) | (111,255) | (105,880) | (0.84%) | 5.08% |
| Impairment, depreciation and amortizatio | (1,980) | (1,274) | (899) | 55.42% | 41.71% |
| Total operating expenses | (112,297) | (112,529) | (106,779) | (0.21%) | 5.38% |
| Profit before tax | 46,186 | 9,859 | 42,500 | 368.47% | (76.80%) |
| Segment assets | 136,471 | 224,020 | 248,150 | (39.08%) | (9.72%) |
Analysis of 2016 versus 2015
In 2016, profit before taxes for the Brokerage segment increased to COP 46 billion from COP 10 billion in 2015.
Total interest and valuation decreased by 19.0% to COP 17 billion, due to losses in operations relating to futures contracts over securities.
Total fees and commission net, which are the most important component of revenues, increased by 2.5% to COP 80 billion, due to higher fees related to distribution and intermediation of securities, trust products and asset management.
Total operating expenses decreased by 0.2% to COP 112 billion, mainly due to tighter control on expenses during the year.
Assets attributable to the Brokerage segment decreased by 39.1% during the year, mainly driven by the sale of Valores Bancolombia Panama to Banistmo S.A. (Banking Panama segment).
Analysis of 2015 versus 2014
In 2015, profit before taxes for the Brokerage segment decreased by 76.8% to COP 10 billion, due to higher expenses and less operating income.
Total interest and valuation increased by 6.7% to COP 21 million, due to higher investments valuation.
| 114 |
Total fees and commission net, which are the most important component of revenues, presented a decrease of 4.4% to COP 78 billion, due to higher expenses related to distribution and intermediation of securities and asset management.
Other operating income decreased to a loss of COP (6) billion from income of COP 5 billion, due mainly to higher costs of securities exchange services and deposit and custody of securities.
Total operating expenses increased by 5.4% to COP 112 billion, due to higher labor cost increases and higher taxes other than income taxes, as well as higher depreciation due to the shortening of the useful life of fixed assets.
Assets attributable to the Brokerage segment decreased by 9.7% during the year, mainly driven by the reduction of repurchase agreement operations.
Off Shore: This segment provides a complete line of offshore banking services to Colombian and foreign customers through Bancolombia Panamá S.A., Bancolombia Caymán S.A., and Bancolombia Puerto Rico International, Inc. It offers loans to private sector companies, trade financing, leases financing and financing for industrial projects, as well as a complete portfolio of cash management products, such as checking accounts, international collections and payments. Through these subsidiaries, the Bank also offers investment opportunities in U.S. dollars, savings and checking accounts, time deposits, and investment funds to its high net worth clients and private banking customers.
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 | Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 442,107 | 291,249 | 188,934 | 51.80% | 54.15% |
| Interest expenses | (252,030) | (215,592) | (152,601) | 16.90% | 41.28% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 190,077 | 75,657 | 36,333 | 151.24% | 108.23% |
| Total credit impairment charges, net | (52,294) | (49,830) | (21,160) | 4.94% | 135.49% |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 137,783 | 25,827 | 15,173 | 433.48% | 70.22% |
| Revenues (Expenses) from transactions with other operating segments of the Bank | 99,914 | 95,495 | 53,519 | 4.63% | 78.43% |
| Total fees and commission income, net | 27,502 | 32,325 | 28,776 | (14.92%) | 12.33% |
| Other operating income | 15,961 | 16,281 | 6,750 | (1.97%) | 141.20% |
| Dividends received, and share of profits (losses) of equity method investees | (269,096) | (141,261) | (159,515) | 90.50% | (11.44%) |
| Total operating income, net | 12,064 | 28,667 | (55,297) | (57.92%) | (151.84%) |
| Operating expenses | (60,688) | (73,425) | (38,652) | (17.35%) | 89.96% |
| Impairment, depreciation and amortization | (972) | (17,254) | (636) | (94.37%) | 2612.89% |
| Total operating expenses | (61,660) | (90,679) | (39,288) | (32.00%) | 130.81% |
| Loss before tax | (49,596) | (62,012) | (94,585) | (20.02%) | (34.44%) |
| Segment assets | 10,847,782 | 11,667,606 | 8,488,021 | (7.03%) | 37.46% |
| 115 |
Analysis of 2016 versus 2015.
In 2016, profit before taxes for the Off Shore segment decreased by 20.0% to COP 50 billion.
Total interest and valuation increased by 52.0% to COP 442 billion, driven by higher revenues from commercial loans and leasing operations due to higher pricing of loans, as well as higher revenues from debt investments due to higher market interest rates. Interest income from commercial loans grew 42.4% and leasing 25.1%.
Total fees and commission net, decreased by 15.0% to COP 28 billion mainly due to more expensive banking services in Bancolombia Panama.
Other operating income decreased by 2.0% to COP 16 billion, due to losses in forwards COP/USD and other currencies.
Total operating expenses decreased by 32.0% to COP 62 billion, due to tighter control over expenses during the year.
Assets attributable to the Off Shore segment decreased by 7.0% to COP 10,848 billion, as a result of the sale of debt securities of foreign and local issuers and; lower mark to market valuations on interest rates swaps.
The jurisdictions where operations of the Off Shore segment are conducted have no corporate income taxes.
Analysis of 2015 versus 2014.
In 2015, profit before taxes for the Off Shore segment decreased by 34.4% to COP 62 billion.
Total interest and valuation increased by 54.1% to COP 291 billion, driven by higher revenues from commercial loans, consumer loans and debt investments.
Total fees and commission net, increased by 12.3% to COP 32 billion mainly due to higher fees and lower expenses from banking services.
Total operating expenses increased by 130.8% to COP 91 billion, due to the growth of labor and administration and general expenses.
Assets attributable to the Off Shore segment increased by 37.5% during the year, mainly driven by the strengthening of the U.S. dollar versus the Colombian Peso and the organic growth of loans.
The jurisdictions where operations of the Off Shore segment are conducted have no corporate income taxes.
All Other: This segment provides financial and operational leases activities, including cross-border and international leasing services to clients in Colombia, Central America, Mexico and Brazil. Bancolombia offers these services mainly through the following Subsidiaries: Renting Colombia S.A., Arrendamiento Operativo CIB S.A.C., Leasing Perú S.A., Transportempo S.A.S., Capital Investment Safi S.A. and Fondo de Inversión en Arrendamiento Operativo Renting Perú. This segment also includes results from small operation of particular investment vehicles of Bancolombia: Valores Simesa S.A., BIBA Inmobiliaria S.A.S., Inversiones CFNS S.A.S., Sistema de Inversiones y Negocios S.A. Sinesa, Banagrícola S.A., Inversiones Financieras Banco Agrícola and others.
| 116 |
| Year ended December 31, | |||||
| 2016 | 2015 | 2014 |
Change 2016-2015 |
Change 2015-2014 | |
| In millions of COP | |||||
| Total interest and valuation | 30,299 | 112,858 | 154,107 | (73.15%) | (26.77%) |
| Interest expenses | (99,991) | (77,156) | (64,309) | 29.60% | 19.98% |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | (69,692) | 35,702 | 89,798 | (295.20%) | (60.24%) |
| Total credit impairment charges, net | 871 | (3,219) | (2,012) | (127.06%) | 59.99% |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | (68,821) | 32,483 | 87,786 | (311.87%) | (63.00%) |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (39,721) | (24,263) | (40,224) | 63.71% | (39.68%) |
| Total fees and commission income, net | 13,724 | 10,334 | (6,409) | 32.80% | (261.24%) |
| Other operating income | 874,978 | 772,959 | 679,608 | 13.20% | 13.74% |
| Dividends received, and share of profits of equity method investees | (175,595) | (159,583) | (121,800) | 10.03% | 31.02% |
| Total operating income, net | 604,565 | 631,930 | 598,961 | (4.33%) | 5.50% |
| Operating expenses | (400,243) | (354,811) | (398,293) | 12.80% | (10.92%) |
| Impairment, depreciation and amortization | (137,672) | (133,401) | (107,333) | 3.20% | 24.29% |
| Total operating expenses | (537,915) | (488,212) | (505,626) | 10.18% | (3.44%) |
| Profit before tax | 66,650 | 143,718 | 93,335 | (53.62%) | 53.98% |
| Segment assets | 4,600,424 | 5,203,576 | 4,678,018 | (11.59%) | 11.23% |
Analysis of 2016 versus 2015.
In 2016, profit before taxes for All Other decreased by 53.6% to COP 67 billion.
Other operating income, which is the most significant revenue line, increased by 13.2% to COP 875 billion, driven by the growth in revenues from services and translation adjustment of the equity investment portfolio.
Assets attributable to All Other decreased by 12.0% to COP 4,600 billion, due to a decrease in debt and equity investments.
Analysis of 2015 versus 2014.
In 2015, profit before taxes for All Other increased by 53.9% to COP 144 billion.
Other operating income, which is the most significant revenue line, increased by 13.7% to COP 773 billion, driven by the growth in revenues of real estate investment and the strengthening of the U.S. dollar versus the Colombian Peso in 2015.
Assets attributable to All Other increased by 11.2% to COP 5,204 billion, due to an increase in the value of investments.
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| B. | LIQUIDITY AND CAPITAL RESOURCES |
| B.1. | LIQUIDITY AND FUNDING |
Liquidity Management
The Asset and Liability Management Committee, or ALCO, sets the main policies of liquidity and funding of the Bank in accordance with the Bank’s desired statement of financial position structure.
The Bank uses a variety of funding sources to generate liquidity, taking into consideration market conditions, interest rates, liquidity needs and the desired maturity profile of funding instruments. Consequently, policies are designed to achieve an optimal match between assets and liabilities profile regarding maturities, interest rates and currency exposure.
One of the Bank’s main strategies is to maintain a solid liquidity position, thus, the ALCO has established a minimum amount of liquid assets, based on calculations of maximum expected withdrawals of deposits, disbursements and other obligations in order to guarantee the proper operation of banking activities and protect capital. The ALCO has delegated the short-term liquidity assessment task to the Liquidity Committee, which sets strategies and policies regarding liquidity.
Stress tests scenarios are simulated periodically to guarantee the Bank has sufficient time to raise funds under adverse market conditions. In addition, the Bank has defined a contingency liquidity plan that allows the organization to raise funds under stressed market scenarios.
Liquid Assets
During 2016, the Bank maintained a solid liquidity position. As mentioned above, the Bank seeks the optimum level of liquid assets to assure not only the proper operation under normal conditions but also to operate under stress market scenarios.
The following table shows the composition of the liquid assets in the last two years:
| Liquid Assets(1) | December 31, 2016 | December 31, 2015 |
| High quality liquid assets | ||
| Cash | 15,821,823 | 13,594,073 |
| High quality liquid securities | 7,844,716 | 8,901,316 |
| Other Liquid Assets | ||
| Other securities | 2,557,679 | 2,800,345 |
| Total Liquid Assets | 26,224,218 | 25,295,734 |
| (1) | Feature possesses the high liquidity available in all cases, and those liquid assets received by the Central Bank for its operations expansion and monetary contraction. Liquid assets are adjusted by a haircut. | |
The following are considered liquid assets: cash, repos held for trading and investments held for trading in listed shares in Colombia’s stock exchange, in investments funds units or in other trading debt securities. High-quality liquid assets are comprised by cash and shares that are eligible to be reportable or repo operations, in addition to those liquid assets that the Central Bank receives for its monetary expansion and contraction. |
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The Bank measures liquid assets on a daily basis and compares this result to an objective target set by the ALCO. Under this rule, daily liquid assets must be equal to or higher than this target. In the event the limit is not reached, there is a five-day period to increase liquidity levels.
Cash is important to guarantee branch and ATM operations. The Bank’s expansion across the Colombian territory requires considerable levels of cash; however, cash levels are daily monitored in order to minimize opportunity costs. Additionally, cash is taken into account in the mandatory bank reserve established by the Central Bank.
Securities that comprise liquid assets are reviewed by the ALCO in light of the Bank’s liquidity objective. Debt securities in the table shown are not affected by haircuts. Even though available for sale and held to maturity debt securities cannot be sold, they can be pledged as collateral in repurchase agreements. Some of them are mandatory investments that are posted to the Central Bank as collateral.
The SFC requires financial entities to have liquid assets greater than the contractual liquidity accumulative one-month gap. This contractual gap reflects the maturity of the current positions of assets and liabilities and does not reflect projections of future operations. The maturity of the loan portfolio for this purpose is affected by the historical default indicator and the maturity of deposits is modeled according to the regulation. All of Bancolombia’s Colombian banking subsidiaries met this regulatory limit throughout the year of assets and liabilities.
The Bank’s management believes that the current level of liquidity is adequate and will seek to maintain its solid deposit base and the access to alternative sources of funding such as borrowings from domestic development banks, repurchase agreements, bond issuances, overnight funds and Central Bank funds, in light of market conditions, interest rates and the desired maturity profile of liabilities.
Funding Structure
As of December 31, 2016, the Bank’s liabilities reached COP 173,784 billion, a 0.71% increase compared to December 31, 2015. The funding composition changed, liabilities denominated in Colombian Pesos increased by 6.13 percentage points, and liabilities denominated in U.S. dollars liabilities decreased by 5.4 percentage points. This change is principally the result of the 4.72% appreciation of the Peso against the U.S. dollar during 2016, by an increase in COP denominated time deposits and saving accounts and by declines in COP and USD denominated checking accounts, USD denominated time deposits, saving accounts, and borrowings from financial institutions and by a decrease in the outstanding amount of USD denominated debt securities.
| As of December 31, | ||
| 2016 | 2015 | |
| In millions of COP, except percentages | ||
| Total funding | ||
| Peso-denominated | 97,019,386 | 91,418,612 |
| Dollar-denominated. | 76,764,678 | 81,146,336 |
| Total Liabilities | 173,784,064 | 172,564,948 |
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In 2016, the Bank experienced a growth in deposits which reached COP 124,624 billion at year-end, an increase of COP 2,821 billion, or 2.32% compared to the level at December 31, 2015. COP denominated deposits increased by 7.45%, explained mainly by the rise in COP denominated time deposits and saving accounts, while USD denominated deposits decreased by 5.17% as a result of the COP, appreciation during 2016 and the decline in USD denominated checking accounts, time deposits and saving accounts. The ratio of deposits to total assets was 63.50%, increasing by 0.38 percentage points compared to 2015.
| As of December 31, | ||
| 2016 | 2015 | |
| In millions of COP | ||
| Total Deposits | 124,624,011 | 121,802,028 |
The following table sets forth checking accounts, savings accounts and time deposits as a percentage of the Bank’s total liabilities for the years 2016 and 2015.
| 2016 | 2015 | |
| Checking deposits | 12.3% | 13.7% |
| Time deposits | 30.3% | 28.2% |
| Savings deposits | 28.0% | 27.7% |
| Other deposits | 1.0% | 1.0% |
| Percentage of Total Liabilities | 71.6% | 70.6% |
The Bank’s principal sources of funding are deposits, which are mainly composed of checking accounts, time deposits and savings accounts.
Deposits as a percentage of the Bank’s total liabilities in 2016 were 71.7%, increasing from 70.6% of total liabilities at year-end 2015.
The ratio of net loans to deposits (including borrowing from commercial banks) was 101.11% at the end of 2016, increasing from 99.19% as compared to 2015. This change is primarily explained by the increase in loans and advances to customers which rose from COP 145,620 billion in 2015 to COP 151,747 billion in 2016.
| As of December 31, | ||
| 2016 | 2015 | |
| Net Loans to Deposits | 101.11% | 99.19% |
The Bank funds its operations in part with borrowings from domestic development banks which amounted to COP 4,921 billion at the end of 2016. Management believes these borrowings represent a good quality source of funding provided mainly by governmental entities in order to promote lending activities within specific sectors of the Colombian economy.
In addition to the main sources of funding described above, the Bank uses borrowings from other financial institutions and debt securities.
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Debt securities in issue
In 2016, Banco Agrícola issued notes in amounts of USD 89 million.
As of December 31, 2016, the total outstanding aggregate principal amount of bonds issued by the Bank was COP 18,704 billion.
The following table shows the Bank´s debt securities in issue maturity profile:
| 2017 | 2018 | 2019 | 2020 | 2021 and thereafter | Total | |
| In millions of COP | ||||||
| Debt securities in issue | 1,764,757 | 937,208 | 1,614,974 | 3,241,260 | 11,146,610 | 18,704,809 |
The following table sets forth the components of the Bank’s liabilities for the years 2016 and 2015:
| As of December | ||||
| 2016 | % of total funding |
2015 | % of total funding | |
| In millions of COP, except percentages | ||||
| Checking accounts | ||||
| Peso-denominated | 11,407,661 | 6.60% | 12,822,977 | 7.40% |
| Dollar-denominated | 10,035,341 | 5.80% | 10,823,601 | 6.30% |
| Total | 21,443,002 | 12.40% | 23,646,578 | 13.70% |
| Time deposits | ||||
| Peso-denominated | 28,940,030 | 16.70% | 24,152,124 | 14.00% |
| Dollar-denominated | 23,733,355 | 13.70% | 24,561,665 | 14.20% |
| Total | 52,673,385 | 30.40% | 48,713,789 | 28.20% |
| Savings accounts | ||||
| Peso-denominated | 36,354,465 | 20.90% | 34,451,787 | 20.00% |
| Dollar-denominated | 12,339,237 | 7.10% | 13,361,893 | 7.70% |
| Total | 48,693,702 | 28.00% | 47,813,680 | 27.70% |
| Other deposits | ||||
| Peso-denominated | 932,945 | 0.50% | 826,557 | 0.50% |
| Dollar-denominated | 880,977 | 0.50% | 801,424 | 0.50% |
| Total | 1,813,922 | 1.00% | 1,627,981 | 1.00% |
| Interbank Deposits | ||||
| Peso-denominated | 12,597 | 0.00% | 5,516 | 0.00% |
| Dollar-denominated | 329,259 | 0.20% | 394,546 | 0.20% |
| Total | 341,856 | 0.20% | 400,062 | 0.20% |
| Derivate financial instruments-Liabilities | ||||
| Peso-denominated | 1,283,481 | 0.70% | 1,882,322 | 1.10% |
| Dollar-denominated | 28,969 | 0.00% | 48,287 | 0.00% |
| Total | 1,312,450 | 0.70% | 1,930,609 | 1.10% |
| Borrowings from other financial institutions (1) | ||||
| Peso-denominated | 4,921,950 | 2.80% | 5,153,378 | 3.00% |
| Dollar-denominated | 13,983,893 | 8.00% | 14,567,806 | 8.40% |
| Total | 18,905,843 | 10.80% | 19,721,184 | 11.40% |
| Debt securities in issue | ||||
| Peso-denominated | 5,498,303 | 3.20% | 5,222,568 | 3.00% |
| Dollar-denominated | 13,206,506 | 7.60% | 14,213,297 | 8.30% |
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| As of December | ||||
| 2016 | % of total funding |
2015 | % of total funding | |
| In millions of COP, except percentages | ||||
| Total | 18,704,809 | 10.80% | 19,435,865 | 11.30% |
| Repurchase agreements and other similar secured borrowing | ||||
| Peso-denominated | 1,686,316 | 1.00% | 919,394 | 0.50% |
| Dollar-denominated | 237,694 | 0.10% | 313,062 | 0.20% |
| Total | 1,924,010 | 1.10% | 1,232,456 | 0.70% |
| Other liabilities | ||||
| Peso-denominated | 5,981,638 | 3.50% | 5,981,989 | 3.50% |
| Dollar-denominated | 1,989,447 | 1.10% | 2,060,755 | 1.20% |
| Total | 7,971,085 | 4.60% | 8,042,744 | 4.70% |
| Total funding | ||||
| Peso-denominated | 97,019,386 | 55.90% | 91,418,612 | 53.00% |
| Dollar-denominated | 76,764,678 | 44.10% | 81,146,336 | 47.00% |
| Total Liabilities | 173,784,064 | 100% | 172,564,948 | 100% |
(1) Includes borrowings from commercial banks and other non-financial entities.
Consolidated Statement of Cash Flows
The following table shows net cash provided by (used in) operating activities, net cash (used in) provided by investing activities and net cash used in (provided by) financing activities, for the years ended December 31, 2016, 2015 and 2014:
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Operating activities | 3,601,418 | 1,856,726 | (6,667,416) |
| Investing activities | (1,027,627) | 141,985 | 934,112 |
| Financing activities | (343,839) | (231,474) | 1,630,077 |
| Increase (decrease) in cash and cash equivalents | 2,229,952 | 1,767,237 | (4,103,227) |
Operating Activities
In 2016, operating activities resulted in positive net cash as a result of the increase in deposits to COP 5,117 billion and the COP 14,370 billion of interest received. The increase in loans was COP 10,853 billion and interest paid was COP 5,229 billion of cash. The value of investment securities recognized at fair value through profit and losses decreased by COP 1,487 billion.
Net income has been positive; COP 2,954 billion, COP 2,608 billion and COP 2,429 billion for 2016, 2015 and 2014, respectively.
Investing Activities
In 2016, investing activities used cash; purchases of debt securities at amortized cost used COP 2,077 billion and purchases of property, plant and equipment used COP 1,082 billion; while proceeds from maturities of debt securities provided COP 2,365 billion.
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The proceeds from sales of investments in subsidiaries used COP 219 billion of cash, corresponding to the sale of Tuya - Compañia de Financiamiento that closed on October 31, 2016. At the time of the sale the cash the company had (COP 228 billion) was significantly higher than the amount of cash received (COP 9 billion) for the sale, resulting in a negative net cash flow.
The investing activities related to equity securities at fair value through other comprehensive income used net cash of COP 434 billion during 2016. Investing activities related to property, plant and equipment used net cash of COP 530 billion, compared with COP 672 billion used during 2015, and COP 296 billion in 2014.
Financing Activities
Financing activities required cash during 2016.; Overnight funds, which complement the Bank’s funding strategy, increased by COP 706 billion, compared with 2015 when overnight funding decreased by COP 898 but decreased compared to 2014, when the increase was COP 1,015 billion. Borrowings and issuance of long-term debt provided COP 13,594 billion and COP 3,039 billion respectively, while the repayment of borrowings and payments of long-term debt used COP 13,744 billion and COP 3,099 billion respectively. Cash was also used to pay dividends to stockholders in the amount of COP 840 billion.
Long-term debt is also an important part of the Bank’s funding structure. During 2016, the long-term debt financing activities used net cash of COP 59 billion. This value decreased significantly as compared to 2015, when the issuance of new long-term debt, less repayments and prepayments of outstanding debt provided COP 1,079 billion of net cash. The net cash used by long term debts in 2016 when compared to 2014 decreased. This value for 2014 was COP 299 billion.
Payments of dividends to stockholders have increased at least in line with inflation; in 2016 COP 840 billion were distributed, while in 2015 this value was COP 785 billion and in 2014 was COP 713 billion, representing 28%, 30% and 29% of the Bank’s net income, respectively.
Capital Adequacy
The Bank and its subsidiaries comply with the capital adequacy requirements in their respective countries of operation.
Stockholders’ equity attributable to the owners of the parent company amounted to COP 21,268 billion at December 31, 2016, up 10% from COP 19,279 billion at December 31, 2015. This increase reflects the net effect of dividend payments, earnings during the year 2016 and all the other transactions that directly affect the stockholders’ equity attributable to the owners of the parent company.
The Bank’s capital adequacy ratio on a consolidated basis was 13.26% as of December 31, 2016, up from 12.46% in 2015. The Bank’s capital adequacy ratio exceeded the requirements of the Colombian government and the SFC by 426 basis points. The basic capital ratio (Tier 1) was 9.02% and the tangible capital ratio, which is equal to the ratio of the difference between equity and goodwill and intangible assets to tangible assets, was 7.54% at the end of 2016. For a full description of our capital adequacy requirements, please see Item 4. “Information on the Company – B. Business Overview – B.8 –Supervision and Regulation”.
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The following table sets forth certain information regarding the Bank’s consolidated capital adequacy as of December 31, 2016 and 2015:
| As
of December 31, 2016 |
As
of December 31, 2015 | |
| In millions of COP, except percentages | ||
| Long-term senior indebtedness | 12,031,505 | 11,831,968 |
| Subscribed capital | 480,914 | 480,914 |
| Legal reserve | 14,719,576 | 15,576,989 |
| Non-controlling interest | 1,040,521 | 627,654 |
| Financial statements translation adjustment | 2,994,508 | - |
| Less: | ||
| Long-term investments | (185,579) | (191,435) |
| Intangibles assets acquired after August 23, 2012 | (4,007,543) | (3,940,516) |
| Treasury stock | - | (983) |
| Primary capital (Tier I) | 15,042,397 | 12,552,623 |
| Subordinated bonds | 6,673,304 | 7,603,897 |
| Other comprenhensive income related to investments at fair value | (12,434) | (32,325) |
| Non-controlling interest | 168,876 | 493,591 |
| Legal reserve | 239,702 | 203,725 |
| Computed secondary capital (Tier II) | 7,069,448 | 8,268,888 |
| Technical Capital (1) | 22,111,845 | 20,821,511 |
| Capital Ratios | ||
| Primary capital to risk-weighted asets (Tier I) | 9.02% | 7.51% |
| Secondary capital to risk-weighted asets (Tier II) | 4.24% | 4.95% |
| Risk-weighted assets included market risk | 166,781,426 | 167,168,400 |
| Technical capital to risk-weighted assets (2) | 13.26% | 12.46% |
(1) Technical capital is the sum of basic and additional capital.
(2) Capital adequacy is technical capital divided by risk weighted assets.
| B.2. | FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES |
The Bank’s treasury division is able to carry out all transactions in local or foreign currencies that are legally authorized in Colombia. These include derivative transactions, purchase and sale of fixed income securities and indexed securities, repurchase or resale transactions, short sales, temporary securities transfers, simultaneous transactions and transactions on the foreign currency exchange market.
The Bank monitors treasury division activities through policies regarding management of liquidity, market, legal, credit and operational risks. Such policies are monitored by the Vice President of Risk Management. In order to be able to control market and liquidity risks, the Bank sets limits intended to keep its exposure levels and losses within certain ranges determined by the Bank’s Board of Directors. The Bank’s investment policies do not include restrictions regarding the maturity of the securities held in the portfolio, except those related to the liquidity portfolio and over the counter (“OTC”) derivatives transactions.
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Before taking any additional positions, the Bank’s treasury division also verifies, with respect to investments in local and in foreign currencies, the availability of funds for investment and each investment’s compatibility with the Bank’s liquidity structure.
As further described in Item 11. “Quantitative and Qualitative Disclosure About Market Risk”, the market risk stated in the treasury book is measured using methodologies of value at risk (VaR), and the position limits are based on the results of these methodologies. The Bank has defined VaR limits that follow a hierarchical structure, which avoids the concentration of market risk in certain groups of assets and also take advantage of portfolio diversification. In addition to VaR limits, the Bank also uses stop loss advisories to inform senior management when losses are close to certain established thresholds in the trading book. Moreover, for the options portfolio, the Bank has set limits based on the sensitivity of the portfolio to the underlying volatility, underlying foreign currency and interest rates.
As part of its operations, the Bank holds cash and cash equivalents primarily in Colombian pesos and U.S. dollars, those positions, as well as any other currency position, are determined by the treasury division in connection with the Bank’s currency risk assessment and management. Specifically, the Bank’s exposure to currency risk primarily arises from changes in the U.S. dollar/COP exchange rate. The exposure to currency risk is managed by the Bank’s treasury division. The Bank uses a VaR calculation to limit the exposure to currency risk of its balance sheet. These limits are supervised on a daily basis by the Bank’s Market Risk Management Office. The Bank’s treasury division manages a derivative portfolio which includes forward agreements in foreign currency with the purpose, among others, of hedging its currency exposure.
| B.3. | COMMITMENT FOR CAPITAL EXPENDITURES |
See Item 4. “Information on the Company - A. History and Development of the Company – Capital Expenditures and Divestitures”.
| C. | RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. |
Not Applicable
| D. | TREND INFORMATION |
During 2016, net interest and valuation income grew 25% as credit volumes slowed compared to 2015. Total credit impairment charges, net increased significantly over the past year. Future levels of loan volumes, interest margins and cost of credit will be key drivers of the Bank’s performance. The following is a brief discussion of recent trends with regard to those three elements.
Loan Volume Performance
Gross loans and financial leases (i.e., before allowance for loans and financial lease losses) increased 4% during 2016.
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Economic activity in Colombia and consumer confidence weakened during the second half of the year. As a result, the pace of origination of new loans slowed and even the dynamic mortgage market slowed late in the year. During 2016, commercial loans grew 3%, consumer loans grew 13%, mortgages increased 1%, and Small Business Loans expanded 20%.
Economic growth in El Salvador was slow in 2016 and Banco Agrícola’s loan book expanded only 2% as there was weak demand from corporates and individuals due to the weaker macroeconomic conditions in the country. This slow growth generated a negative effect in the Bank’s overall book.
Credit demand in Banistmo was moderate, due to the slowdown in economic growth over the last year. The total loan book grew 7%, which was expected in last year’s more challenging environment. This growth level is more in line with growth in Guatemala and should pick up as macroeconomic conditions improve in the region.
Loan growth in Guatemala was the highest in Central America, growing 9% for 2016. Guatemala is Central America’s largest country, and provides a favorable growth environment.
Foreign-denominated loans were flat during 2016. Corporations in Colombia and off shore financing, particularly in Central America demanded less in a weaker economic environment.
Credit demand is expected to remain stable in 2017 as the economy in Colombia is expected to gradually gain traction, individuals and corporations demand consumer and commercial loans, and as the economy in El Salvador continues to recover from the crisis of 2008 – 2010, showing growth above 2%, while mitigating additional external pressures from the likely more domestically focused U.S. foreign policy under the new administration.
Net Interest Margin and Valuation
The majority of the Bank’s loan book has a variable rate (60% of loans have a maturity of more than one year and earn interest at variable rates) and the re-pricing pace of our assets tends to be faster than that of our liabilities. The increase in the bank’s cost of funding during the second half of the year contributed to the Bank’s slightly lower net interest margins. As a result, the net interest and valuation income after provisions for loans, financial leases and off-balance sheet credit instruments margin from continuing operations increased from 5.25% in the fourth quarter of 2015 to 5.96% in the fourth quarter of 2016.
The bank’s strategy during the year was to support the net interest margin and valuation on financial instruments by changing the mix of deposits and increasing the proportion of average demand deposits (savings and checking accounts) which are less expensive than time deposits and also maintaining funding costs as low as possible on each type of deposits.
More liquidity, a more favorable deposit mix (one with a greater proportion of demand deposits) and consistent increases in the interest rates in the U.S. economy point towards improving net interest margins in 2017 in these geographies.
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Cost of credit
For the year 2016, the cost of credit was 1.8% of average loans, which marks a substantial increase when compared to the 1.3% shown in 2015. This credit cost was explained by a generalized deterioration in consumer and SME loans especially during the second half of the year.
| E. | OFF-BALANCE SHEET ARRANGEMENTS |
The following are the off-balance sheet arrangements in which The Bank is involved: standby letters of credit, letters of credit and bank guarantees.
Letters of credit and bank guarantees are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The Bank typically has recourse to recover from the customer any amounts paid under these guarantees. In addition, the Bank may hold cash or other highly liquid collateral to support these guarantees. We include these guarantees in our impairment loss allowance assessment with other forms of credit exposure amounting to COP 87,442, COP 7,421 and COP 25,608, for the years ended as of December 31, 2016, 2015 and 2014, respectively.
Those off-balance sheet arrangements are required to be considered into the total solvency ratio computation. As of December 31, 2016, the total Bank’s technical capital ratio was 13.26%, exceeding the requirements of the Colombian government and the SFC by 426 basis points. In the event the off-balance sheet arrangements were not considered in the computation, the total ratio would be boosted by approximately 92 basis points.
At December 31, 2016 and 2015, the fees and other income related to Guarantees and Standby letters of credits amounted to COP 55,724 and COP 44,539, respectively.
At December 31, 2016 and 2015, outstanding letters of credits and bank guarantees issued by the Bank totaled COP 6,609,254 million and COP 7,164,613 million, respectively. Additionally, the Banks is not involved in any interest retained and other indebtedness related to those instruments besides the credit risk aforementioned.
The table below summarizes all guarantees issued by the Bank as of December 31, 2016 and 2015. The total amount outstanding represents maximum potential amount (notional amounts) that could be lost under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Such amounts greatly exceed anticipated losses.
Unused credit lines amounted to COP 9,404,528 million and COP 10,516,134 million at December 31, 2016 and 2015.
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|
Off-balance Sheet
|
Expire within one year at December 31, |
Expire after one year at December 31, |
Total amount outstanding at December 31, |
Maximum potential amount of future losses at December 31, | ||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| In millions of COP | ||||||||
| Bank guarantees and letters of credit | 4,863,596 | 4,845,119 | 1,745,658 | 2,319,494 | 6,609,254 | 7,164,613 | 6,609,254 | 7,164,613 |
| Total | 4,863,596 | 4,845,119 | 1,745,658 | 2,319,494 | 6,609,254 | 7,164,613 | 6,609,254 | 7,164,613 |
For more information on standby letters of credit and bank guarantees, please see Note 20, “Provisions and Contingent Liabilities” and Note 24.3, “Fees and Commissions” to Consolidated Financial Statements.
| F. | TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS |
The following table shows the Bank´s contractual obligations as of December 31, 2016:
| Contractual Obligations | Total | Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
| In millions of COP | |||||
| Time deposits (1) | 52,673,385 | 34,442,445 | 10,698,266 | 5,401,074 | 2,131,600 |
| Borrowings from other financial institutions | 18,905,843 | 10,511,684 | 3,355,928 | 1,483,821 | 3,554,410 |
| Debt securities in issue | 18,704,809 | 1,764,757 | 2,552,182 | 6,816,422 | 7,571,448 |
| Derivative financial liabilities | 1,312,450 | 520,122 | 449,712 | 148,006 | 194,610 |
| Post-employment benefit plans | 699,372 | 38,015 | 121,272 | 139,009 | 401,076 |
| Operating Lease Obligations | 4,379 | 1,634 | 2,745 | - | - |
| Total | 92,300,238 | 47,278,657 | 17,180,105 | 13,988,332 | 13,853,144 |
(1) Savings and checking accounts and other deposits do not have a specific maturity date and therefore are excluded from this table.
The amounts shown in the table include interest costs on debt. The Bank does not have any uncertain tax positions to report.
Our liabilities recognized on the consolidated statement of financial position as Deposits by customers other than time deposits, Interbank deposits, Repurchase agreements and other similar secured borrowing, Preferred shares and Other liabilities are not presented in the table above. Refer to Notes 14, 15 and 19 to Consolidated Financial Statements for more information on these liabilities.
| G. | CRITICAL ACCOUNTING POLICIES AND ESTIMATES |
The preparation of consolidated financial statements requires the Bank's management to make judgments, estimates and assumptions that affect the application of accounting policies and the recognized amounts of assets, liabilities, income and expenses.
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The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgments or changes in assumptions are disclosed in the notes to the consolidated financial statements. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.
The critical accounting policies that the Bank uses in preparing the consolidated financial statements, given their significant impact on the financial condition and operating performance of the Bank are detailed below:
| 1. | Impairment testing of CGU including goodwill: |
The Bank tests goodwill recognized upon business combinations for impairment at least annually. The impairment test for goodwill involves estimates and significant judgments, including the identification of cash generating units and the allocation of goodwill based on the expectations of which the Bank will benefit from the acquisition. The fair value of the acquired companies is sensitive to changes in the valuation models assumptions. Adverse changes in any of the factors underlying these assumptions could lead the Bank to record a goodwill impairment charge. Management believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued. See Note 8, for further information related to carrying amount, valuation methodologies, key assumptions and the allocation of goodwill.
| 2. | Deferred tax: |
The Bank recognizes, when appropriate, deferred tax assets and liabilities by the future estimate of tax effects attributable to differences between book values of assets, liabilities and their tax bases. Deferred tax assets and liabilities, identified as temporary differences, are only recognized if it is considered likely that the entities are going to have sufficient taxable income in the future that allow it to be recovered. Due to the continuous modifications to tax laws, their interpretation and economic conditions, the calculation of deferred tax assets and liabilities and future net earnings requires judgments and estimates to be applied.
Deferred tax assets and liabilities are measured based on the tax rate, in accordance with the enacted tax laws in each country that must be applied in the year in which the deferred tax assets and liabilities are realized or settled.
Regarding current taxes, Bancolombia and its Colombian subsidiaries apply the fiscal regulations of Colombia. In the case of companies based in Peru, Guatemala, El Salvador and Panama (the latter applies only to Banistmo and its subsidiaries), and the corresponding taxes are calculated according to Peruvian, Guatemalan, Salvadorian, and Panamanian tax law.
The application of the tax legislation is subject to varying interpretations by the taxpayer and the tax authorities.
The accounting policies for deferred tax assets and liabilities are considered critical accounting policies, because the determination of these amounts requires estimates of future revenues, expenses and tax rates that may be affected by changes in the economic conditions of the countries, constant regulatory changes, new legislation and different interpretations of the law. Please see Note 11 to the Consolidated Financial Statements for further information related to the nature of the deferred tax assets recognized by the Bank and their carrying amount.
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| 3. | Provisions and contingent liabilities: |
The Bank is subject to contingent liabilities, including those arising from judicial, regulatory and arbitration proceedings and tax and other claims arising from the conduct of the Bank’s business activities. These contingencies are evaluated based on management’s best estimates and provisions are established for legal and other claims by assessing the likelihood of the loss actually occurring as probable, possible or remote. Provisions are recorded when all the information available indicates that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation before the statement of financial position date and the amounts may be reasonably estimated. The Bank engages internal and external experts in assessing probability and in estimating any amounts involved.
Throughout the life of a contingency, the Bank may learn of additional information that can affect assessments regarding probability or the estimates of amounts involved; changes in these assessments can lead to changes in recorded provisions.
The Bank considers the estimates used to determine the provisions for contingent liabilities are critical estimates because the probability of their occurrence and the amounts that the Bank may be required to pay are based on the Bank’s judgment and its internal and external experts, which will not necessarily coincide with the future outcome of the proceedings. For further information regarding legal proceedings and contingencies and its carrying amounts. See Note 20.
| 4. | Impairment for credit risk: |
Determining the allowance for loan losses requires a significant amount of management judgment and estimates in, among others, identifying impaired loans, determining customers’ ability to pay and estimating the fair value of underlying collateral or the expected future cash flows to be received. The Bank assesses if an asset or a group of financial assets is impaired and if impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The estimates are considered as critical accounting judgments because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between the Bank’s estimated losses (as reflected in the provisions) and actual losses would require the Bank to record provisions which, if significantly different, could have a material impact on its future financial condition and results of operations. The Bank’s assumptions about estimated losses are based on past performance, past customer behavior, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses.
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As described in Note 2.F.7.4.5.1, to the Consolidated Financial Statements, the Bank assesses impairment losses for homogeneous loan portfolios on collective basis, using historical information. During 2016, enhancements to the estimation process were done, including the fact that information reflecting recoveries of defaulted loans for an entire economic cycle became available. The Bank, therefore, used the latest internal information to calculate the Loss Given Default parameter, that provides a better estimate of its borrowers credit risk. In prior periods, internal and external information (including finance sector data) was used. This change in accounting estimate resulted in a decrease of the allowance for loan losses amounting to 183.125 million at December 31, 2016.
| 5. | Fair value of financial assets and liabilities: |
Financial assets and liabilities recorded at fair value on the Bank’s statement of financial position include debt and equity securities and derivatives classified at fair value through profit or loss and equity securities which the Bank has made an irrevocable election to present in other comprehensive income changes in its fair value.
To increase consistency and comparability in fair value measurements and related disclosures, IFRS 13 Fair value measurement specifies different levels of inputs that may be used to measure the fair value of financial instruments. In accordance with this standard, financial instruments are classified as follows:
Level 1: Assets and liabilities are classified as Level 1 if there are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
Instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions.
Level 2: Assets and liabilities are classified as Level 2 if in the absence of a market price for a specific financial instrument, its fair value is estimated using models whose input data are observable for recent transactions of identical or similar instruments.
Level 3: Assets and liabilities are classified as level 3 if unobservable input data were used in the measurement of fair value that are supported by little or no market activity and that are significant to the fair value of these assets or liabilities.
All transfers between the aforementioned levels are assumed to occur at the end of the reporting period.
The measurement of the fair value of financial instruments generally involves a higher degree of complexity and requires the application of judgments especially when the models use unobservable inputs (level 3) based on the assumptions that would be used in the market to determinate the price for assets or liabilities.
For further details, as carrying amount and sensitivity disclosures, please see Note 29 “Fair value of assets and liabilities”.
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For the periods ended December 31, 2016 and 2015 there have been no significant changes in estimates and judgements made at end-year other than those indicated in the Consolidated Financial Statements.
| 6. | Measurement of Employee benefits: |
The measurement of post-employment benefit obligations and long-term employee benefits carries a wide variety of premises and it is dependent upon a series of assumptions of future events. The projected unit credit method is used to determine the present value of the obligation for the defined benefits and its associated cost. Future measurements of obligations may differ to those presented in the financial statements, among others, due to changes in economic and demographic assumptions and significant events. For further information, see Note 18.
| 7. | Consolidation of structured entities: |
A Structured entity (SE) is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
To determine whether the Bank controls and consequently consolidates an entity that has been designed as a SE, the Bank asseses the design and the purpose of the entity. It is also considered whether the Bank, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others.
Whenever there is a change in the substance of the relationship with the SE the Bank performs a re-assessment of control to determine if consolidation is applicable.
The total assets of unconsolidated SE in which the Bank had an interest at the reporting date and its maximum exposure to loss in relation to those interests is presented in Note 23 Consolidated Financial Statements, “Unconsolidated structured entities”.
For further information about the Bank´s accounting policies read Note 2 to the Consolidated Financial Statements, “Significant Accounting Policies”.
| ITEM 6. | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES |
| A. | DIRECTORS AND SENIOR MANAGEMENT |
The following persons acted as directors and senior management of the Bank:
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Directors
David Emilio Bojanini García was born in 1956. Mr. Bojanini holds a degree in industrial engineering from Universidad de los Andes and an MBA with emphasis on actuary from University of Michigan. He has held several positions in the private sector such as CEO of Administradora de Fondos de Pensiones y Cesantías Protección S.A. from 1991 to 2006, and Gerente Actuaría in Suramericana de Seguros S.A. where he worked for 11 years. He has been CEO of Grupo de Inversiones Suramericana S.A. since 2006. Mr. Bojanini is a member of the following boards of directors: Grupo Nutresa S.A., Bancolombia S.A., Grupo Argos S.A., Suramericana S.A. and SURA Asset Management. He is the Chairman of the Board of Trustees of the Proantioquia Foundation, and serves as a director for the Colombian Private Council for Competitiveness (Consejo Privado de Competitividad), the "Businessmen for Education" Foundation (Fundación Empresarios por la Educación), Fedesarrollo and the Colombia International Corporation.
Gonzalo Alberto Pérez Rojas was born in 1958. Mr. Pérez holds a law degree from Universidad de Medellín and a post-graduate degree in insurance from Swiss Re, Zurich and a CEO management program certificate from the Kellogg School of Management. He is CEO of Suramericana S.A. and has held different management positions at Compañía Suramericana de Seguros S.A. since 1981, such as Vice President of Corporate Businesses and Vice President of Insurance and Capitalization. Mr. Pérez is currently a member of the boards of directors of Grupo Nutresa S.A., Celsia S.A., Federación Nacional de Aseguradores Colombianos- FASECOLDA, Fundación Suramericana and Fundación Nutresa. He also is a member of the board of directors of Suramericana Panama.
Hernando José Gómez Restrepo was born in 1957. Mr. Gómez holds a cum laude degree in economics from Universidad de los Andes. He is a PhD candidate in economics and holds a Master’s in philosophy and arts and a post-graduate degree in currency, banking and international economics from Yale University. Mr. Gómez has been a Professor at Universidad de los Andes and INALDE Business School, and an Assistant Professor at Yale University. He has held the position of member of the Board of Governors of the Central Bank, CEO of Consejo Privado de Competitividad, Chief of the Colombian Government Negotiation Team for the Free Trade Agreement with the United States of America, the National Planning Director of Colombia, among other positions. Mr. Gómez is an independent member of the Bank’s Board of Directors since his appointment in 2013.
Roberto Ricardo Steiner Sampedro was born in 1959. Mr. Steiner holds a bachelor's degree in economics from the Universidad de los Andes and is a PhD candidate from Columbia University. Mr. Steiner has held several positions at the Central Bank, such as Director of the Economic´s Research Department. He has also served as Deputy Director and Executive Director at Fedesarrollo, Director of the Economic Development Studies Center at the Universidad de los Andes. From 2002 to 2007 he was an Alternate Executive Director at the IMF. He is currently a Research Associate at Fedesarrollo. Mr. Steiner has been a Professor at Universidad de los Andes, Columbia University, Universidad Javeriana and Universidad Nacional as well as Visiting Scholar at the IMF and at Lehigh University. He has been a consultant for the IDB, the World Bank, the IMF and the ECLAC and has been member of several Board of Directors, including the Bogota Stock Exchange, ING Barings Corporación Financiera, Generalli Seguros and Ecopetrol. Mr. Steiner has sat on the Editorial Board of Latin American Economic Policy Review and of Cuadernos de Economía, the journal of Universidad Católica de Chile, and has published several books and articles both at a national and international level.
Luis Fernando Restrepo Echavarría was born in 1958. Mr. Restrepo holds a bachelor's degree in industrial management from the Georgia Institute of Technology and a Master’s degree in business administration from the University of Chicago. He has held several positions in the Marmon Group of Chicago, and was also a part of the Leadership Rotational Program in Chicago at the Rego Company (Production planning and industrial engineering), Hammond Organ Company (accountability) and Marmom Keystone (sales). He began in Crystal S.A.S as International Vice President, then he became an Executive Vice President until 2003, and since 2004 he has acted as CEO. He is a member of the board of directors of Andi-Antioquia (Asociacion Nacional Industriales de Colombia), Conconcreto, Etiflex and MAS S.A.S.
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Arturo Condo Tamayo was born in 1967. Mr. Condo has a PhD in business strategy and competitiveness from Harvard Business School, and holds degree in Electric Engineering from Escuela Superior Politecnica del Litoral Ecuador. He also obtained a Master’s degree in business administration from INCAE. Mr. Condo is a professor and held the position of principal of INCAE Business School between 2007 and 2015. Previously, he was the dean of masters, the Dean of Research and Development and Director of the Centro Latinoamericano para la Competitividad y el Desarrollo Sostenible (CLACDS). He is currently a consultant in companies located in Latin America and Asia in strategic planning and competitiveness strategy. He has also been consultant of multilateral organizations as Inter-American Development Bank (IDB) and the World Bank. He is the CEO of Keyword Centroamérica, a strategic information company he created in 2014.
Andrés Felipe Mejía Cardona was born in 1962. Mr. Mejía is an economist from Michigan University. He holds certificates in strategic planning from Barcelona University, senior management from Universidad de los Andes and Expro program in business administration from Centrum Bevordering Import Ontw.Landn, in Rotterdam. He has been the CEO of MU Mecanicos Unidos S.A.S since 1983 and a member of the board of directors of Fedemetal, Edatel, ISA, Isagen, Fabricato, Internexa and Proteccion.
For additional information regarding the Board of Directors and its functions, see Item 10 “Additional Information – B. Memorandum and Articles of Association – Board of Directors”.
Senior Management
Juan Carlos Mora Uribe was born in 1965. He has been the CEO of Bancolombia since May 2016. Prior to his appointment as CEO of Bancolombia, he was the Corporate Innovation and Digital Transformation Vice President since 2015. He holds a B.A degree from Universidad Eafit and an M.B.A degree from Babson College. Mr. Mora has experience in diverse areas of corporate finance and investment banking and was Vice President of Operations of Corfinsura in 2004. Most recently, Mr. Mora performed the role of Vice President of Risk in 2005, and then he was appointed as Chief Corporate Services Officer until 2015.
Jaime Alberto Velasquez Botero was born in 1960. He has been the Vice President of Strategy and Finance of Bancolombia since April 2012. Previously, he held the position of Vice President of Finance of Bancolombia from 1997 to 2012. From 1989 through 1997, he held several managerial positions in the Economic Department and Investor Relations Department of the Bank. Previously, he worked at C.I. Banacol from 1987 to 1989. Mr. Velásquez holds an economics degree from Universidad de Antioquia.
Rodrigo Prieto Uribe was born in 1973. He was appointed as Vice President of Risk Management in March 2011. Mr. Prieto has worked at Bancolombia for 12 years holding several positions at different departments of Bancolombia such as analyst, manager of risk administration, planning manager and manager of Capital allocation and risk quantification. Most recently he was the director of planning and projects. He has also been a professor at several universities including Universidad EAFIT, Escuela de Ingenieria de Antioquia and Universidad de los Andes. Mr. Prieto is a civil engineer and has a Master’s degree in economics from Universidad de los Andes and a Master’s degree in finance from Instituto Tecnológico y de Estudios Superiores de Monterrey.
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Jaime Alberto Villegas Gutierrez was born in 1965. He has been the Vice President of Corporate Services since 2016. He holds an industrial engineering degree from Universidad de los Andes and a graduate degree in finance from the same University. He has worked in the financial, operations and technology department of financial institutions such as Standard Chartered Bank, in Colombia, Peru, United Arab Emirates and Singapore.
Mauricio Rosillo Rojas was born in 1969. He has been the Legal Vice President of Bancolombia since December 2008. Mr. Rosillo holds a law degree from Pontificia Universidad Javeriana, obtained a post-graduate degree in financial law from Universidad de Los Andes, and a Master’s degree in commercial and economic law from the University of Georgia. Mr. Rosillo has held several positions in the public and private sectors, including secretary general of Fedeleasing, Interim Colombian Superintendent of Cooperatives (“Superintendente de Economia Solidaria (encargado)”), director of financial regulation of the Colombian Ministry of Finance, supervisor of the securities market of the Colombian Stock Exchange and president of AMV.
Carmenza Henao Tisnes was born in 1960. She was appointed Vice President of Internal Audit in April 2011. Mrs. Henao has worked at Bancolombia for 28 years holding several positions at different departments of Bancolombia such as analyst and manager of audit technology. Most recently she was the Audit National Manager of Bancolombia branches. She has also been a professor at various universities including Universidad EAFIT, Universidad Pontificia Bolivariana, Universidad de Medellin and Universidad San Buenaventura. Mrs. Henao is a system engineer and has a post-graduate degree in Finance from Universidad EAFIT.
Maria Cristina Arrastia Uribe was born in 1965. She has been the Vice President of Retail and SMEs Banking since October 2015. Mrs. Arrastia is a Business Administrator graduated from Eafit University in Medellin. She has performed various roles in Bancolombia, such as Sub-Manager of the trading desk, and Regional Manager of the Corporate Banking of Antioquia. Between 1998 and 2009 she was appointed as Regional Manager for Personal and SME Banking in Antioquia. In 2009 she was appointed as General Manager of Sufi until 2011 when she was appointed to the position of Vice President of Consumer and Housing Credit.
Gonzalo Toro Bridge was born in 1960. He has been Vice President of Corporate Banking of Bancolombia since 2003. From 1988 to 1994, he was the Assistant to the Vice Presidency of Corporate and International Banking and from 1994 to 2003 he was the Vice President of Corporate and International Banking. Mr. Toro holds a B.A. degree from Universidad EAFIT and a certificate of attendance from the advanced management program for overseas bankers of the University of Pennsylvania.
Enrique Gonzalez Bacci was born in 1965. He has been the Vice President of Human Resources since 2015. He holds a law degree from the Universidad Externado de Colombia and holds a degree in business law from the same university. He has taken the Advanced Program in Human Resource Management from the Anderson School at UCLA, and also holds certifications in geopolitics from Universidad EAFIT and a Top Management Program from Universidad de los Andes. In several occasions, he has participated as technical counselor before the International Labour Organization’s International Labour Conference. His career at Grupo Bancolombia started at Conavi and later at BIC – today Bancolombia – holding different positions within the human resources department.
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There are no family relationships between the directors and senior management of Bancolombia listed above.
No arrangements or understandings have been made by major shareholders, customers, suppliers or others pursuant to which any of the above directors or members of senior management were selected.
| B. | COMPENSATION OF DIRECTORS AND OFFICERS |
In 2016 the Bank paid each director a fee of approximately COP 5.8 million per month for sitting on the Board, and another fee of approximately COP 5.8 million for attending each session of the committees.
The directors received no other compensation or benefits. There is no stock option plan for directors. Consistent with Colombian law, the Bank does not publish information regarding the compensation of the Bank’s individual officers. The Bank’s stockholders may request that information during the period preceding the annual general stockholders’ meeting. The aggregate amount of remuneration paid by the Bank and consolidated subsidiaries to all directors, alternate directors and senior management during the fiscal year ended December 31, 2016 was COP 63.64 billion. Additionally, the bank has established a retirement bonus for senior management, and at the end of 2016 the provision to this effect was COP 41.27 billion. A total of COP 13.99 billion was paid by the Bank in 2016 to senior managers who retired during the year.
The Board of Directors approves the salary increases for corporate vice presidents and authorizes the Chief Executive Officer to readjust the salary of the remaining employees.
The Bank has established an incentive compensation plan that awards bonuses annually or semi-annually to its management employees. In determining the amount of any bonuses, the Bank takes into consideration the overall return on equity of the Bank and its executives’ achievement of established goals. The Bank’s variable compensation has deferred elements and, depending on the amount awarded, the bonuses are payable in cash and as a combination of cash, a right to receive in three years an amount in cash determined with reference to the value of the Bank’s stocks and an entitlement to a share in a pool of unvested bonuses. The pool of unvested bonuses is an account of preliminary bonuses, payable once it is established that the results that are the basis of such bonuses have been sustained over time and were not the result of a particular, extraordinary transaction that does not reflect better performance, according to guidelines designed by the Bank. Such elements are solely paid when certain future profits are obtained. This incentive compensation plan is not in the form of stock options.
The Bank paid a total of COP 1,931 billion for salaries of personnel employed directly by the Bank and senior management of its affiliates. Such amount includes the sum of approximately COP 242.54 billion spent in connection with the incentive compensation plan in Colombia.
As of December 31, 2016, the Bank had provisioned 100% of its actuarial obligation corresponding to retirement pension’s payable by the Bank, which amounted to COP 123.28 billion, in accordance with Decree 2496 of December 23, 2015.
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| C. | BOARD PRACTICES |
The following table reflects the composition of the Board of Directors as of December 31, 2016.
| Name | Elected to the Board | Term Expires |
| David Bojanini García | 2006 | 2018 |
| Roberto Ricardo Steiner Sampedro | 2014 | 2018 |
| Gonzalo Alberto Pérez Rojas (1) | 2004 | 2018 |
| Hernando José Gómez Restrepo | 2013 | 2018 |
| Luis Fernando Restrepo Echavarría | 2016 | 2018 |
| Arturo Condo Tamayo | 2016 | 2018 |
| Andrés Felipe Mejía Cardona | 2016 | 2018 |
| (1) | Gonzalo Alberto Pérez Rojas had previously served as the Bank’s Director during the period 1990-1994. |
Messrs. Hernando José Gómez Restrepo, Roberto Ricardo Steiner Sampedro, Luis Fernando Restrepo Echavarría, Arturo Condo Tamayo and Andres Felipe Mejía Cardona act as independent directors in accordance with the Bank’s by-laws and other applicable laws. Consequently, the majority of the Board of Directors is composed of independent directors.
Neither the Bank nor its Subsidiaries have any type of agreement with the Bank’s directors providing for benefits upon termination of their term.
The following are the current terms of office and the period during which the members of senior management have acted as such in Bancolombia. There are no defined expiration terms. The members of senior management can be removed by a decision of the Board of Directors.
| Name | Period Served |
| President | |
| Juan Carlos Mora Uribe | Since 2016 |
| Vice Presidents | |
| Jaime Alberto Velásquez Botero | Since 1997 |
| Mauricio Rosillo Rojas | Since 2008 |
| Maria Cristina Arrastia Uribe | Since 2015 |
| Gonzalo Toro Bridge | Since 2003 |
| Jaime Alberto Villegas Gutierrez | Since 2016 |
| Rodrigo Prieto Uribe | Since 2011 |
| Carmenza Henao Tisnes | Since 2011 |
| Enrique Gonzalez Bacci | Since 2015 |
For further information about the Bank’s corporate governance practices please see Item 16. “Reserved – B. Corporate Governance and Code of Ethics.”
Audit Committee
In accordance with Colombian regulations, the Bank has an audit committee whose main purpose is to support the Board of Directors by supervising the effectiveness of the Bank’s internal controls. The committee consists of three independent directors, one of whom must be a financial expert, who are elected by the board of directors for a period of two years.
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The audit committee is composed of Hernando José Gómez Restrepo, Andrés Felipe Mejia Cardona and Arturo Condo Tamayo.
Pursuant to applicable U.S. laws for foreign private issuers, Mr. Hernando José Gómez Restrepo serves as the financial expert of the audit committee.
As established by the SFC, the audit committee has a charter approved by Board of Directors which establishes its composition, organization, objectives, duties, responsibilities and extension of its activities. The Board of Directors also establishes the remuneration of the members of the audit committee. The audit committee must meet at least quarterly and must present a report of its activities at the general stockholders’ meeting.
The Bank currently complies with the requirements of the Sarbanes-Oxley Act of 2002 and the rules promulgated thereunder, as applicable to foreign private issuers with respect to the composition and functions of its audit committee.
Designation, Compensation and Development Committee
This committee is composed of three (3) members of the Board of Directors elected by it. The Vice President of Human Resourses of the Bank acts as secretary of this committee.
The designation, compensation and development committee determines the policies and provisions for the hiring, remuneration, compensation, and development of management and key personnel of the Bank. Likewise, it continuously surveys the goals of the different compensation programs with regard to the performance of the officers, and it assesses the efficacy of such programs.
The duties of the designation, compensation and development committee are: (i) defining the administration policies of human resources, establishing the selection, evaluation, compensation, and development processes for top management, determining their goals; (ii) determining the objective criteria under which the Bank hires its principal officers; (iii) proposing objective criteria under which the Bank hires senior management and designs succession plans; (iv) evaluating the performance of senior management; and (v) issuing recommendations for the Board of Directors concerning appointments and compensation of the president and senior management.
The members of the designation, compensation and development committee are Gonzalo Perez Rojas, Luis Fernando Restrepo Echavarria and Andres Felipe Mejia Cardona.
Good Governance Committee
The Good Governance Committee consists of at least three (3) members of the Board of Directors, one of them being an independent member. Bancolombia’s President attends this committee on a permanent basis.
The Good Governance Committee has internal regulation to govern aspects such as composition and guests to the meetings, competences, and responsibilities of the Committee and its internal regulations.
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The main purpose of this Committee is to assist Bancolombia’s Board of Directors in overseeing compliance with the Corporate Governance measures and review any potential change to such measures.
This Committee shall also support the Board of Directors in cases related to the implementation of succession policies of the Board of Directors and its remuneration.
This Committee furnishes reports on the activities performed by the Bank’s Board of Directors, and approves a yearly report on Corporate Governance, to be submitted before the Shareholders General Meeting.
The members of the Good Governance Committee are David Bojanini García, Roberto Ricardo Steiner and Luis Fernando Restrepo Echavarria.
| D. | EMPLOYEES |
The following table sets forth the number of employees of the Bank for the last three fiscal years:
| As of December 31 | Total
number of employees employed by Bancolombia and its consolidated Subsidiaries |
Number
of employees employed by Bancolombia |
| 2016 | 30,158 | 20,440 |
| 2015 | 34,390 | 19,544 |
| 2014 | 31,598 | 18,867 |
As of December 31, 2016, Bancolombia and its consolidated subsidiaries had 34,567 employees, of which 20,440 were employed directly by the Bank. Of the 20,440 employees directly contracted by the Bank, 13,044 are operations personnel and 7,396 are management employees. Of the 20,440 employees, approximately 22.90% are located in the Bogota Region, 11.03% in the South Region, 14.05% in the Antioquia Region, 30.49% in the Medellin headquarters, 11.84% in the Central Region and 9.71% in the Caribbean Region. During 2016, the Bank employed an average of 349 employees per month through temporary personnel service companies.
Of the employees directly employed by Bancolombia, approximately 24.51% are part of a labor union called Sintrabancol, 14.99% are members of an industry union called Uneb, 1.41% belong to an industry labor union called Sintraenfi, 0.09% belong to an industry labor union called Uprofin, 0.12% belong to an industry labor union called USF and 0.20% belong to an industry labor union called Aceb. A collective bargaining agreement was reached with Uneb and Sintrabancol in October, 2014. The agreement has been in effect since November 1, 2014 and is set to expire on October 31, 2017. This agreement applies to approximately 12,833 employees regardless of whether they are members of an union or not and it extends to operating personnel employed by the subsidiaries Banca de Inversión Bancolombia, Valores Bancolombia, and Fiduciaria Bancolombia. Sintranefi, the labor union composed of approximately 289 employees, did not take part in the collective bargaining agreement. Sintraenfi has made a request for an arbitration court to settle this dispute, which was finally settled by the respective judicial authorities on June 15, 2016 and only covers the members of the union. Sintraenfi also submitted a list of petitions on October 31, 2016 without reaching an agreement in the stage of direct settlement. To date, Sintraenfi has not requested the intervention of an arbitral tribunal to solve this pending petition. In the meantime, the terms of the agreement reached with UNEB and Sintrabancol apply as well to the members of the Sintraenfi union.
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With the execution of this agreement, the Bank, Uneb and Sintrabancol continue to work on the consolidation of long-term labor relationships based on mutual trust and respect.
The most important economic aspects of the Agreement are:
1. A pay increase of 7% for the first year. For the second year, the increase (8.77%) was equal to the variation in the Colombian consumer price index (“IPC”), as certified by the Colombian statistical bureau (“DANE”) for the period between November 2014 and October 2015, plus 200 basis points. For the third year, the increase (8.98%) was equal to the variation in the Colombian consumer price index (“IPC”), as certified by the Colombian statistical bureau (“DANE”) for the period between November 2015 and October 2016, plus 250 basis points.
For the salary increases corresponding to the second and the third year in which the current collective bargaining agreement is in place, the Bank will apply whichever is greatest between the variation of the national Consumer Price Index (IPC) for the twelve months ended on October 31 and December 31 of the year in question. The same criteria will be applied for the subsidies and benefits associated to salary increases.
2. Improved benefits, such as, immediate right to access first home loan after 4 years of tenure, increased amounts to the first home loans, improved health insurance coverage, transportation and food assistance. Increase in tuition assistance and a new tuition loan.
Providing welfare conditions and contributing to the improvement of the quality of the life of the bank employees and their basic family group are fundamental guidelines of the Agreement. In line with these guidelines, housing loans are a priority in the portfolio of employee benefits. After four years of tenure, employees can access conventional housing loans.
Additionally, there are other loan types available to employees with low interest rates. We also offer financial education programs, which allows employees to develop a culture of healthy financial discipline.
We guide our benefits policies in the promotion, prevention and preservation of the health and welfare of our employees, their families and other stakeholders.
We implement systematic, planned and proactive strategies to improve the health of our employees, through good practices related the social environment of the organization, work life balance strategies, and others. We believe this generates positive results and allows us to pursue organizational excellence and contribute to social responsibility.
Benefits offered to employees include life insurance, health insurance and loans for higher education, educational aid, food aid, family death aid, birth aid, notary expenses aid for those who purchase housing, among others. These aids are primarily granted to those employees who earn up to 4 legal minimum salaries per month.
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| E. | SHARE OWNERSHIP |
The following directors and members of the senior management owned common shares in Bancolombia as of December 31, 2016: David Bojanini García, Gonzalo Alberto Pérez Rojas and Gonzalo Toro Bridge.
The following directors and members of senior management owned preferred shares in Bancolombia as of December 31, 2016: Roberto Ricardo Steiner Sampedro and Gonzalo Toro Bridge.
None of the directors and members of senior management’s shareholdings, individually or in the aggregate, exceed 1% of Bancolombia’s outstanding common shares, preferred shares or a combination of both classes of shares.
As of December 31, 2016, there are no stock options to acquire any of Bancolombia’s outstanding common shares or preferred shares or share-based payment to any employee.
| ITEM 7. | MAJOR STOCKHOLDERs AND RELATED PARTY TRANSACTIONS |
| A. | MAJOR STOCKHOLDERS |
In accordance with the Bank’s by-laws, there are two classes of stock authorized and outstanding: common shares and preferred shares. Each common share entitles its holder to one vote at meetings of the Bank’s stockholders, and there are no differences in the voting rights conferred by any of the common shares. Under the Bank’s by-laws and Colombian corporate law, holders of preferred shares (and consequently, holders of ADRs) have no voting rights in respect of preferred shares, other than in limited circumstances as described in “Item 10. Additional Information – B. Memorandum and Articles of Association – Description of Share Rights, Preferences and Restrictions – Voting Rights – Preferred Shares”.
The following table sets forth, solely for purposes of United States securities laws, certain information regarding the beneficial ownership of Bancolombia’s capital stock by each person known to Bancolombia to own beneficially more than 5% of each class of Bancolombia’s outstanding capital stock as of March 31, 2017. A beneficial owner includes anyone who has the power to receive the economic benefit of ownership of the securities.
| % Ownership | % Ownership | % Ownership | |||
| Common | Preferred | of Common | of Preferred | of Total | |
| Name | Shares | Shares | Shares(1) | Shares(1) | Shares(1) |
| Grupo de Inversiones Suramericana S.A (2) | 236,792,135 | - | 46.46% | 0.00% | 24.62% |
| ADR Program | - | 236,472,426 | 0.00% | 52.30% | 24.59% |
| Fondo de Pensiones Obligatorias Protección | 24,331,436 | 52,393,707 | 4.77% | 11.59% | 7.98% |
| Fondo de Pensiones Obligatorias Porvenir Moderado | 61,661,071 | 27,710,556 | 12.10% | 6.13% | 9.29% |
| (1) | Common shares have one vote per share; preferred shares have limited voting rights under certain circumstances specified in the by-laws of Bancolombia filed as Exhibit 1 to this Annual Report. |
| (2) | Represents ownership of Grupo de Inversiones Suramericana S.A. directly and through its subsidiaries: Grupo de Inversiones Suramericana Panamá S.A., Inversiones y Construcciones Estrategicas S.A., CIA. Suramericana de Seguros de Vida S.A., Cia. Suramericana de Seguros S.A., Suratep. |
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As of March 31, 2017, a total of 509,704,584 common shares and 452,122,416 preferred shares were registered in the Bank’s stockholder registry in the name of 43,203 stockholders. A total of 236,472,426 representing 52.30% of preferred shares were part of the ADR Program and were held by 38 record holders registered in The Bank of New York Mellon’s registered stockholder list. Given that some of the preferred shares and ADSs are held by nominees, the number of record holders may not be representative of the number of beneficial owners.
During the past year, the Bank’s ADR program changed its percentage ownership of the Bank, increasing from 21.83% as of March 31, 2016 to 24.59% by the end of March 2017 as depositary receipts were created throughout the period. In addition, Fondo de Pensiones Obligatorias Protección, a Colombian private pension fund manager, increased its percentage ownership to 7.98% as of March 31, 2017 compared to 7.60% as of March 31, 2016; and Fondo de Pensiones Obligatorias Porvenir Moderado a Colombian private pension fund manager held its percentage of ownership constant at 9.29% in March 31, 2017, compared to the same period a year ago.
There are no significant changes in the percentage ownership held by major shareholders during the past three years.
There are no arrangements known to the Bank which may at a subsequent date result in a change in control of the company.
To the extent known to the Bank, and in accordance with Colombian law, Bancolombia is not directly or indirectly owned or controlled by any other entity or person.
| B. | RELATED PARTY TRANSACTIONS |
The Bank’s Corporate Governance Code provides that, in any event, any transaction regarding Bancolombia’s shares that is carried out by any officer, director or manager may not be executed for speculative purposes, which would be presumed if the following three conditions were met: (a) if suspiciously short lapses of time exist between the purchase and the sale of shares; (b) if situations arise proving to be exceptionally favorable for the Bank; and (c) if significant profits are obtained from this transaction.
All transactions that the Bank enters into with its directors, officers and senior executives are subject to the limitations and conditions set forth by the applicable law governing the prevention, handling and resolution of conflicts of interest.
Over time, Bancolombia has granted loans and engaged in other transactions with related parties. Such loans were made in the ordinary course of business, on substantially the same terms, including interest rates and required collateral, as those prevailing at the time for comparable transactions with other persons, and did not involve more than the normal risk of collectability, and do not present any additional unfavorable terms for the Company.
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Bancolombia, on a non-consolidated basis, had a total amount of COP 673,483 million in loans outstanding to related parties as of February 28, 2017. The principal amounts outstanding as of February 28, 2017 included in this amount are:
| Entitiy | Amount outstanding | Accrued Interest | Average Interest rate |
| In millions of COP, except percentages | |||
| Renting Colombia S.A. | 481,874 | 5,644 | 10.25% |
| FCP Fondo Inmobiliario Colombia | 142,080 | 429 | 9.71% |
| 2016 | ||
| Statement of financial position: | Entities
that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Bank and associates |
Key management personnel |
| In millions of COP | ||
| Statement of financial position: | ||
| Investment securities | 1,688,543 | - |
| Loans | 282,507 | 15,709 |
| Other Assets | 64,078 | 389 |
| Total | 2,035,128 | 16,098 |
| Deposits | 375,442 | 3,750 |
| Bonds | - | - |
| Other Liabilities | 31,941 | - |
| Total | 407,383 | 3,750 |
| Transactions Income: | ||
| Interest and fees | 15,040 | 931 |
| Dividends received | 49,627 | - |
| Other income | 51,586 | - |
| Total | 116,253 | 931 |
| Expenses: | ||
| Interest | 14,342 | 767 |
| Fees | 5 | 1,001 |
| Other expenses | 37,370 | - |
| Total | 51,717 | 1,768 |
| 2015 | ||
| Statement of financial position: | Entities
that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Bank and associates |
Key management personnel |
| In millions of COP | ||
| Statement of financial position: | ||
| Investment securities | 974,366 | - |
| Loans | 16,660 | 20,194 |
| Other Assets | 5,063 | - |
| Total | 996,089 | 20,194 |
| Deposits | 149,916 | 1,496 |
| Bonds | 2,031 | 16 |
| Other Liabilities | - | - |
| Total | 151,947 | 1,512 |
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| 2015 | ||
| Statement of financial position: | Entities that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Bank and associates |
Key management personnel |
| In millions of COP | ||
| Transactions Income: | ||
| Interest and fees | 22,588 | 1,389 |
| Dividends received | 45,736 | - |
| Other income | 14 | - |
| Total | 68,338 | 1,389 |
| Expenses: | ||
| Interest | 4,895 | 23 |
| Fees | - | 792 |
| Other expenses | 1,006 | - |
| Total | 5,901 | 815 |
| 2014 | ||
| Statement of financial position: | Entities
that directly or indirectly through one or more intermediaries, control or are controlled by, or are under common control with, the Bank and associates |
Key management personnel |
| In millions of COP | ||
| Transactions Income: | ||
| Interest and fees | 21,891 | 913 |
| Dividends received | 16,043 | - |
| Other income | 141 | - |
| Total | 38,075 | 913 |
| Expenses: | ||
| Interest | 5,800 | 15 |
| Fees | - | 776 |
| Other expenses | 13,336 | 94 |
| Total | 19,136 | 885 |
For additional information regarding the Bank’s related party transactions, please see Note 27 to the Consolidated Financial Statements, “Related party transactions”.
| C. | INTEREST OF EXPERTS AND COUNSEL |
Not applicable.
| ITEM 8. | FINANCIAL INFORMATION |
| A. | CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION |
| A.1. | CONSOLIDATED FINANCIAL STATEMENTS |
Reference is made to pages F-1 through F-170.
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| A.2. | LEGAL PROCEEDINGS |
The Bank is involved in normal collection proceedings and restructuring proceedings with respect to certain borrowers as well as other legal proceedings. For further information regarding legal proceedings, see Note 20 to the Consolidated Financial Statements,”Provisions and Contingent Liabilities”.
| A.3. | DIVIDEND POLICY |
The declaration, amount and payment of dividends are based on Bancolombia’s unconsolidated earnings. Dividends must be approved at the ordinary annual shareholders’ meeting upon the recommendation of the Board of Directors. Under the Colombian Commercial Code, after payment of income taxes and appropriation of legal and other reserves, and after setting off losses from prior fiscal years, Bancolombia must distribute to its stockholders at least 50% of its annual net income or 70% of its annual net income if the total amount of reserves exceeds its outstanding capital. Such dividend distribution must be made to all stockholders, in cash or in issued stock of Bancolombia, as may be determined by the stockholders, and within a year from the date of the ordinary annual stockholders’ meeting in which the dividend was declared. According to Colombian law, the minimum dividend per share may be waived by an affirmative vote of the holders of 78% of the voting shares present at the stockholders’ meeting.
The annual net profits of Bancolombia must be applied as follows: (i) first, an amount equal to 10% of Bancolombia’s net profits to a legal reserve until such reserve is equal to at least 50% of the Bank’s paid-in capital; (ii) second, to the payment of the minimum dividend on the preferred shares (for more information, see Item 10. "Additional Information – B. Memorandum and Articles of Association”); and (iii) third, as may be determined in the ordinary annual stockholders’ meeting by the vote of the holders of a majority of the shares entitled to vote.
The following table sets forth the annual cash dividends paid on each common share and each preferred share during the periods indicated:
| Dividends declared with respect to net income earned in: |
Cashdividends per share (1)(2) |
Cash dividends per share (1)(3) |
| (COP) | (U.S. dollars) | |
| 2016 | 950 | 0.329 |
| 2015 | 888 | 0.267 |
| 2014 | 830 | 0.319 |
| 2013 | 776 | 0.394 |
| 2012 | 754 | 0.412 |
(1)Includes common shares and preferred shares.
(2)Cash dividends for 2016, 2015, 2014, 2013 and 2012 were paid in quarterly installments.
(3)Amounts have been translated from pesos at the Representative Market Rate in effect at the end of the month in which the dividends were declared (March).
| B. | SIGNIFICANT CHANGES |
There have not been any significant changes since the date of the annual Consolidated Financial Statements included in this document.
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| ITEM 9. | THE OFFER AND LISTING |
| A. | OFFER AND LISTING DETAILS |
Bancolombia’s ADRs, each representing four preferred shares, have been listed on the New York Stock Exchange (“NYSE”) since 1995, where they are traded under the symbol “CIB”. Bancolombia’s preferred shares are also listed on the Colombian Stock Exchange.
The table below sets forth, for the periods indicated, the reported high and low market prices and share trading volume for the preferred shares on the Colombian Stock Exchange. The table also sets forth the reported high and low market prices and the trading volume of the ADRs on the NYSE for the periods indicated:
| Colombian Stock Exchange | New York Stock Exchange | ||||
| COP Per Preferred Share | USD per ADS | Trading Volume (Number of ADSs) | |||
| High | Low | High | Low | ||
| Year Ending | |||||
| December 31, 2016 | 30,200 | 20,700 | 42.20 | 25.12 | 92,864,900 |
| December 31, 2015 | 28,880 | 20,080 | 48.56 | 23.69 | 111,797,200 |
| December 31, 2014 | 31,300 | 22,000 | 66.78 | 42.50 | 104,278,406 |
| December 31, 2013 | 31,460 | 23,380 | 70.62 | 47.59 | 63,665,433 |
| December 31, 2012 | 30,600 | 24,220 | 69.50 | 53.78 | 100,220,776 |
| December 31, 2011 | 31,100 | 25,160 | 69.87 | 53.56 | 83,520,522 |
| December 31, 2010 | 31,820 | 20,400 | 69.44 | 40.10 | 92,823,574 |
Source: NYSENet (Composite Index), Yahoo Finance, and Colombian Stock Exchange.
| Colombian Stock Exchange | New York Stock Exchange | |||||
| COP
Per Preferred Share |
Trading Volume (Number of Shares) |
USD per ADS | Trading Volume (Number of ADSs) | |||
| High | Low | High | Low | |||
| (in nominal pesos) | ||||||
| 2017 | ||||||
| First Quarter | 29,140 | 26,840 | 35,321,489 | 40.48 | 36.18 | 18,464,800 |
| 2016 | ||||||
| First Quarter | 26,800 | 20,700 | 48,443,358 | 34.31 | 25.12 | 20,403,900 |
| Second Quarter | 28,500 | 25,140 | 43,374,259 | 39.31 | 32.50 | 26,911,800 |
| Third Quarter | 30,200 | 25,320 | 52,822,136 | 42.20 | 33.51 | 20,905,100 |
| Fourth Quarter | 29,140 | 25,640 | 45,667,336 | 39.15 | 32.49 | 24,644,100 |
| 2015 | ||||||
| First quarter | 28,880 | 23,800 | 44,059,256 | 48.07 | 36.65 | 32,658,000 |
| Second quarter | 27,920 | 25,500 | 31,944,253 | 46.51 | 39.31 | 21,519,900 |
| Third quarter | 28,000 | 24,100 | 35,368,754 | 41.88 | 29.90 | 22,562,300 |
| Fourth quarter | 28,000 | 20,300 | 48,224,705 | 39.23 | 24.04 | 35,057,000 |
| 2014 | ||||||
| First quarter | 27,440 | 22,000 | 58,591,558 | 56.48 | 42.77 | 31,239,335 |
| Second quarter | 28,100 | 25,540 | 52,735,647 | 59.60 | 53.20 | 23,039,202 |
| Third quarter | 31,300 | 27,100 | 37,993,293 | 66.78 | 56.06 | 18,297,717 |
| Fourth quarter | 30,400 | 26,020 | 37,548,935 | 58.15 | 42.50 | 31,702,152 |
Source: NYSENet (Composite Index), Yahoo Finance, and Colombian Stock Exchange.
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| Colombian Stock Exchange | New York Stock Exchange | ||||
| COP Per Preferred Share | USD per ADS | Trading Volume | |||
| High | Low | High | Low | (Number of ADSs) | |
| Month | |||||
| March 2017 | 29,140 | 27,100 | 40.48 | 36.18 | 7,216,400 |
| February 2017 | 27,840 | 26,840 | 39.02 | 37.35 | 5,178,400 |
| January 2017 | 28,380 | 27,120 | 38.39 | 37.21 | 6,070,000 |
| Month | |||||
| March 2016 | 26,980 | 24,500 | 34.56 | 29.85 | 8,765,600 |
| February 2016 | 25,200 | 23,600 | 30.42 | 27.51 | 6,232,600 |
| January 2016 | 24,000 | 20,460 | 29.54 | 24.69 | 5,405,700 |
| March 2015 | 26,220 | 23,740 | 41.30 | 36.23 | 10,999,516 |
| February 2015 | 28,880 | 25,760 | 48.39 | 40.93 | 8,209,348 |
| January 2015 | 28,880 | 26,680 | 48.56 | 43.81 | 13,450,841 |
Source: NYSENet (Composite Index), Yahoo Finance, and Colombian Stock Exchange.
ADRs evidencing ADSs are issuable by The Bank of New York Mellon (the “Depositary”), as Depositary, pursuant to the Deposit Agreement, dated as of July 25, 1995, entered into by Bancolombia, the Depositary, the owners of ADRs from time to time and the owners and beneficial owners from time to time of ADRs, pursuant to which the ADSs are issued (as amended, the “Deposit Agreement”). The Deposit Agreement was amended and restated on January 14, 2008. Copies of the Deposit Agreement are available for inspection at the Corporate Trust Office of the Depositary, currently located at 101 Barclay Street, New York, New York 10286, and at the office of Fiduciaria Bancolombia, as agent of the Depositary, currently located at Carrera 48, No. 26 - 85, Medellin, Colombia or Calle 30A No. 6-38, Bogotá, Colombia. The Depositary’s principal executive office is located at One Wall Street, New York, New York 10286.
On September 30, 1998, Bancolombia filed a registration statement on Form F-3 with the SEC to register ADSs evidenced by ADRs, each representing four preferred shares, issued in connection with the merger between BIC and Banco de Colombia for resale by the holders into the U.S. public market from time to time. On January 24, 2005, the Board determined to deregister the unsold ADSs registered under the registration statement on Form F-3. On March 14, 2005, Bancolombia filed an amendment to the registration statement deregistering the remaining unsold ADSs. On August 8, 2005, Bancolombia filed, through the Depositary, a registration statement on Form F-6 registering 50,000,000 ADSs evidenced by ADRs in connection with the Conavi/Corfinsura merger. On May 14, 2007, Bancolombia filed an automatic shelf registration statement on Form F-3 with the SEC to register an indeterminate amount of debt securities, preferred shares and rights to subscribe for preferred shares in connection with the subsequent offerings which took place in the second and third quarter of 2007. On January 14, 2008, by filing the Form F-6 with the SEC, Bancolombia increased the amount of its ADR program up to 400,000,000 American Depositary Shares, and registered some amendments to the Depositary Agreement of ADSs between Bancolombia and The Bank of New York Mellon. On July 13, 2010, Bancolombia filed an automatic shelf registration statement on Form F-3 with the SEC to register an indeterminate amount of debt securities, preferred shares, American Depositary Shares representing preferred shares and rights to subscribe for preferred shares in connection with the subsequent offering of subordinated debt securities which took place on July 19, 2010. On February 6, 2012, Bancolombia priced a public offer of 63,999,997 preferred shares without voting rights, which represented an aggregate amount of approximately COP 1,680 billion. On March 3, 2014, Bancolombia priced a public offer of 110,000,000 preferred shares without voting rights, which represented an aggregate amount of approximately COP 2,656 billion. .
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On May 2, 2016, Bancolombia filed an automatic shelf registration statement on Form F-3 with the SEC to register an indeterminate amount of debt securities, preferred shares and rights to subscribe for preferred shares.
| B. | PLAN OF DISTRIBUTION |
Not applicable.
| C. | MARKETS |
The Colombian Stock Exchange is the principal non-U.S. trading market for the preferred shares and the sole market for the common shares. As of March 31, 2017, the market capitalization for Bancolombia’s preferred shares based on the closing price in the Colombian Stock Exchange was COP 12,976 billion (Bancolombia’s total market capitalization, which includes the common and preferred shares, was COP 26,361 billion or USD 9.15 billion as of the same date).
There are no official market makers or independent specialists on the Colombian Stock Exchange to ensure market liquidity and, therefore, orders to buy or sell in excess of corresponding orders to sell or buy will not be executed. The aggregate equity market capitalization of the Colombian Stock Exchange, as of March 31, 2017, was COP 303,370 billion (USD 105.3 billion), with 82 companies listed as of that date.
| D. | SELLING STOCKHOLDERS |
Not applicable.
| E. | DILUTION |
Not applicable.
| F. | EXPENSES OF THE ISSUE |
Not applicable.
| ITEM 10. | ADDITIONAL INFORMATION |
| A. | SHARE CAPITAL |
Not applicable.
| B. | MEMORANDUM AND ARTICLES OF ASSOCIATION |
Set forth below is certain information concerning the Bank’s capital stock and a brief summary of certain significant provisions of the Bank’s bylaws and Colombian corporate law. This description does not purport to be complete and is qualified by reference to the Bank’s bylaws (an English translation of which is attached as Exhibit 1 to this Annual Report) and to Colombian corporate law.
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Bancolombia’s Corporate Purpose
Pursuant to Article 4 of its bylaws, Bancolombia’s corporate purpose consists of all kinds of banking operations, business, acts and services. Subject to applicable law, Bancolombia may carry out all the activities and investments authorized to banks. Bancolombia is also authorized to participate in the capital stock of other companies, subject to any restrictions imposed by applicable law.
Board of Directors
As of the date of filing of this Annual Report, Bancolombia’s board of directors is composed of seven directors, elected for a two-year term, with no alternate directors. For additional information regarding Bancolombia’s current directors please see Item 6.A, “Directors and Senior Management”.
After being designated, all of the members of the Board of Directors need an authorization from the Superintendency of Finance. The SFC assesses whether the director has an adequate profile for the position according to the requirements under Colombian Law.
According to Decree 3923 of 2006, the election of independent directors must be in a separate ballot from the ballot to elect the rest of directors, unless the reaching of the minimum number of independent directors required by law or by the by-laws is assured, or when there is only one list that includes the minimum number of required independent directors.
According to Law 964 of 2005, 25% of the members of the board of directors shall be independent. An “independent director” is a director who is NOT: (i) an employee or director of the issuer or any of its parent or subsidiary companies, including all those persons acting in said capacity during the year immediately preceding that in which they were appointed, except in the case of an independent member of the board of directors being re-elected; (ii) shareholders, who either directly or by virtue of an agreement direct, guide or control the majority of the entity’s voting rights or who determine the majority composition of the administration, the board of directors or other corporate bodies of this same entity; (iii) a partner or employee of any association or firm that provides advisory or consultancy services to the issuer or to companies who belong to the same economic group to which the issuer in question belongs, in the event that income obtained from such services represent for said association or firm twenty percent (20%) or more of its total operating income; (iv) an employee or director of a foundation, association or institution that receives significant donations from the issuer. The term “significant donations” is quantified as being twenty percent (20%) or more of the total amount of donations received by the respective institution; (v) an administrator of any entity on whose board of directors a legal representative of the issuer participates; and (vi) any person who receives from the issuer any kind of remuneration different from fees as a member of the board of directors, of the audit committee or any other committee set up by the board of directors.
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Elections are made under a proportional representation voting system. Under that system: (i) each holder of common shares is entitled at the annual general shareholders’ meeting to nominate for election one or more directors; (ii) each nomination of one or more directors constitutes a group for the purposes of the election; (iii) each group of nominees must be listed in the order of preference for nominees in that group to be elected; (iv) once all groups have been nominated, holders of common shares may cast one vote for each common share held in favor of a particular group of nominees. Votes may not be cast for particular nominees in a group; they may be cast only for the entire group; (v) the total number of votes casted in the election is divided by the number of directors to be elected. The resulting quotient is the quota of votes necessary to elect particular directors. For each time that the number of votes cast for a group of nominees is divisible by the quota of votes, one nominee from that group is elected, in the order of the list of that group; and (vi) when no group has enough remaining votes to satisfy the quota of votes necessary to elect a director, any remaining board seat or seats are filled by electing the highest remaining nominee from the group with the highest number of remaining votes cast until all available seats have been filled.
The directors of Bancolombia must abstain from participating, directly or through an intermediary, on their own behalf or on behalf of a third party, in activities that may compete against the Bank or in conflict-of-interest transactions that may generate a conflict of interest situation, unless the general shareholders meeting expressly authorizes such transactions. For such purposes, the directors shall provide the shareholders’ meeting with all the relevant information necessary for the shareholders to reach a decision. If the director is a shareholder, his or her vote shall be excluded from the respective decision process. In any case, the general shareholders meeting could only grant its authorization if the act does not adversely affect Bancolombia’s interests.
In the general annual shareholders meeting the shareholders are responsible for determining, the compensation of the members of the board of directors.
Pursuant to the by-laws of Bancolombia, the board of directors has the power to authorize the execution of any agreement, within the corporate purpose of Bancolombia, and to adopt the necessary measures in order for the Bank to accomplish its purpose.
The Corporate Governance Code of Bancolombia provides an age limit requirement of 65 years regarding retirement for senior management.
Description of Share Rights, Preferences and Restrictions
Bancolombia’s bylaws provide for an authorized capital stock of COP 700 billion divided into 1,400,000,000 shares of a par value of COP 500 each, which must belong to one of the following classes: (i) common shares, (ii) privileged shares; and (iii) shares with preferred dividend and no voting rights (“preferred shares”). Pursuant to Article 8 of the bylaws, all shares issued shall have the same nominal value.
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As of December 31, 2016, Bancolombia had 509,704,584 common shares and 452,122,416 preferred shares outstanding and a shareholders’ equity of COP 21,268 billion divided into 961,827,000 shares.
Voting Rights
Common Shares
The holders of common shares are entitled to vote on the basis of one vote per share on any matter subject to approval at a general shareholders’ meeting. These general meetings may be ordinary meetings or extraordinary meetings.
Ordinary general shareholder’s meetings occur at least once a year but no later than three months after the end of the prior fiscal year, for the following purposes: (i) to consider the approval of Bancolombia’s annual report, including the financial statements for the preceding fiscal year; (ii) to review the annual report prepared by the external auditor; (iii) to determine the compensation for the members of the board of directors, and the external auditor (iv) to elect directors, the client representative (defensor del consumidor financiero). The client representative’s primary duty is to solve the individual complaints submitted by clients and users and serve as their spokesman, and the external auditor (each for a two-year term); and (v) to determine the dividend policy and the allocation of profits, if any, of the preceding fiscal year, as well as any retained earnings from previous fiscal years.
Extraordinary general shareholders’ meetings may take place when duly called for a specified purpose or purposes, or, without prior notice, when holders representing all outstanding shares entitled to vote on the issues presented are present at the meeting.
Quorum for both ordinary and extraordinary general shareholders’ meetings to be convened at first call requires the presence of two or more shareholders representing at least half plus one of the outstanding shares entitled to vote at the relevant meeting. If a quorum is not present, a subsequent meeting is called at which the presence of one or more holders of shares entitled to vote at the relevant meeting constitutes a quorum, regardless of the number of shares represented. General shareholders’ meetings may be called by the board of directors, the President or the external auditor of Bancolombia. In addition, two or more shareholders representing at least 20% of the outstanding shares have the right to request that a general meeting be convened. Notice of ordinary meetings and extraordinary meetings convened to approve fiscal year-end financial statements, the reduction of the outstanding capital, the merger, spin-off or sale of more than 25% of the assets, liabilities and contracts, must be published in one newspaper of wide circulation at Bancolombia’s principal place of business at least 30 calendar days prior to such meeting. Notice of other extraordinary meetings, must be published in one newspaper of wide circulation at Bancolombia’s principal place of business at least 15 calendar days prior to such meeting listing the matters to be addressed at such meeting.
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Except when Colombian law or Bancolombia’s bylaws require a special majority, action may be taken at a general shareholder’s meeting by the vote of two or more shareholders representing a majority of common shares present. Pursuant to Colombian law and/or Bancolombia’s bylaws, special majorities are required to adopt the following corporate actions: (i) a favorable vote of at least 70% of the shares represented at a general shareholders’ meeting is required to approve the issuance of shares without preemptive rights available for shareholders; (ii) a favorable vote of at least 78% of the holders of represented common shares to decide not to distribute as dividend at least 50% of the annual net profits of any given fiscal year; (iii) a favorable vote of at least 80% of the holders of represented common shares and 80% of the holders of outstanding preferred shares to approve the payment of the dividend in shares; and (iv) a favorable vote of at least 70% of the holders of common shares and of outstanding preferred shares to effect a decision to impair the conditions or rights established for such preferred shares, or a decision to convert those preferred shares into common shares.
If the Superintendency of Finance determines that any amendment to the bylaws fails to comply with Colombian law, it may demand that the relevant provisions be modified accordingly. Under these circumstances, Bancolombia will be obligated to comply in a timely manner.
Preferred Shares
The holders of preferred shares are not entitled to receive notice of, attend to or vote at any general shareholders’ meeting except as described below.
The holders of preferred shares will be entitled to vote on the basis of one vote per share at any shareholders’ meeting, whenever a shareholders vote is required on the following matters, in addition to those indicated above: (i) when voting the anticipated dissolution, merger or transformation of the corporation or change of its corporate purpose. (ii) when the preferred dividend has not been fully paid during two consecutive annual terms. In this event, holders of such shares shall retain their voting rights until the corresponding accrued dividends have been fully paid to them. (iii) if at the end of a fiscal period, the Bank’s profits are not enough to pay the minimum dividend and the Superintendency of Finance, by its own decision or upon petition of holders of at least ten percent (10%) of preferred shares, determines that benefits were concealed or shareholders were misled with regard to benefits received from the Bank by the Bank’s directors or officers decreasing the profits to be distributed, the Superintendency of Finance may resolve that holders of preferred shares should participate with speaking and voting rights at the general shareholders’ meeting, in the terms established by law. (iv) when the registration of shares at the Colombian Stock Exchange or at the Superintendency of Finance, is suspended or canceled. In this event, voting rights shall be maintained until the irregularities that resulted in such cancellation or suspension are resolved.
Bancolombia must cause a notice of any meeting at which holders of preferred shares are entitled to vote to be mailed to each record holder of preferred shares. Each notice must include a statement stating: (i) the date of the meeting; (ii) a description of any resolution to be proposed for adoption at the meeting on which the holders of preferred shares are entitled to vote; and (iii) instructions for the delivery of proxies.
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Dividends
Common Shares
Once the Consolidated Financial Statements are approved by the general shareholders meeting, the appropriation for the payment of taxes of the corresponding taxable year has been made, and the transfers to the reserves have been performed, then they can determine the allocation of distributable profits, if any, of the preceding year.
Under the Colombian Commercial Code, a company must distribute at least 50% of its annual net profits to all shareholders, payable in cash, or as determined by the shareholders, within a period of one year following the date on which the shareholders determine the dividends. If the total amount segregated in all reserves of a company exceeds its outstanding capital, this percentage is increased to 70%. The minimum common stock dividend requirement of 50% or 70%, as the case may be, may be waived by a favorable vote of the holders of 78% of a company’s common stock present at the meeting.
Under Colombian law and Bancolombia’s bylaws annual net profits are to be applied as follows: (i) first, an amount equivalent to 10% of net profits is segregated to build a legal reserve until that reserve is equal to at least 50% of Bancolombia’s paid-in capital; (ii) second, payment of the minimum dividend on the preferred shares; and (iii) third, allocation of the net profits is determined by the holders of a majority of the common shares entitled to vote on the recommendation of the board of directors and the President and may, subject to further reserves required by the by-laws, be distributed as dividends. Under the Bank’s bylaws, the dividends payable to the holders of common shares cannot exceed the dividends payable to holders of the preferred shares. Bancolombia’s bylaws requires to maintain a reserve fund equal to 50% of paid-in capital. All common shares that are fully paid in and outstanding at the time a dividend or other distribution is declared are entitled to share equally in that dividend or other distribution. Common shares that are only partially-paid participate in a dividend or distribution in the same proportion than the shares that have been fully paid in at the time of the dividend or distribution.
The general shareholders’ meeting may allocate a portion of the profits to welfare, education or civic services, or to support economic organizations of the Bank’s employees.
Preferred Shares
Holders of preferred shares are entitled to receive dividends based on the profits of the preceding fiscal year, after deducting losses affecting the capital and once the amount that shall be legally set apart for the legal reserve has been deducted, but before creating or accruing for any other reserve, of a minimum preferred dividend equal to one percent (1%) yearly of the subscription price of the preferred share, provided this dividend is higher than the dividend assigned to common shares, if this is not the case, the dividend shall be increased to an amount that is equal to the per share dividend on the common shares. The dividend received by holders of common shares may not be higher than the dividend assigned to preferred shares.
Payment of the preferred dividend shall be made at the time and in the manner established in the general shareholders’ meeting and with the priority indicated by Colombian law.
In the event that the holders of preferred shares have not received the minimum dividend for a period in excess of two consecutive fiscal years, they will acquire certain voting rights. See Item 10.B. “Memorandum and Articles of Association – Description of Share Rights, Preferences and Restrictions – Voting Rights – Preferred Shares”.
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General Considerations Relating to Dividends
The dividend periods may be different from the periods covered by the statement of financial position. In the general shareholders’ meeting, shareholders will determine such dividend periods, the effective date, the system and the place for payment of dividends.
Dividends declared on the common shares and the preferred shares will be payable to the record holders of those shares, as they are recorded on Bancolombia’s stock registry, on the appropriate record dates as determined in the general shareholders’ meeting.
Any dividend in shares payable by Bancolombia will be paid in common shares to the holders of common shares and in preferred shares to the holders of preferred shares. Nonetheless, Shareholders at the general shareholders’ meeting may authorize the payment in common shares to all shareholders.
Any dividend in shares requires the approval of 80% or more of the shares present at a shareholders’ meeting, which will include 80% or more of the outstanding preferred shares. In the event that such voting majority is not obtained, shareholders may individually elect to receive a stock dividend or a cash dividend.
Liquidation Rights
Bancolombia will be dissolved if certain events take place, including the following: (i) its term of existence, as stated in the by-laws, expires without being extended by the shareholders prior to its expiration date; (ii) losses cause the decrease of its shareholders’ equity below 50% of its outstanding capital stock, unless one or more of the corrective measures described in the Colombian Commercial Code are adopted by the shareholders within six months; (iii) by decision at the general shareholders’ meeting;and (iv) in certain other events expressly provided by law and in the by-laws.
Upon dissolution, a liquidator must be appointed by the general shareholders’ meeting to wind up its affairs. In addition, the Superintendency of Finance has the power to take over the operations and assets of a bank and proceed to its liquidation under certain circumstances and in the manner prescribed in the Estatuto Orgánico del Sistema Financiero, Decree 663 of 1993. For more information see Item 4. “Information on the Company – B. Business Overview – B.8. Supervision and Regulation – Bankruptcy Considerations”.
Preemptive Rights and Other Anti-Dilution Provisions
Under the Bank’s bylaws, the holders of common shares determine in their meeting the amount of authorized capital stock, and the board of directors has the power to (a) order the issuance and regulate the terms of subscription of common shares up to the total amount of authorized capital stock and (b) regulate the issuance of shares with rights to a preferential dividend but without the right to vote, when expressly delegated at the general shareholders’ meeting. The issuance of preferred shares must always be first approved at the general shareholders’ meeting, which shall determine the nature and extent of any privileges, according to the bylaws and Colombian law.
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The Bank’s bylaws and Colombian law require that, whenever the Bank issues new shares of any outstanding class, it must offer the holders of each class of shares the right to purchase a number of shares of such class sufficient to maintain their existing percentage ownership of the aggregate capital stock of the Bank. These rights are called preemptive rights. See Item 3. “Key Information – D. Risk Factors – Preemptive rights may not be available to holders of American Depositary Receipts (“ADRs”) evidencing ADSs”.
Shareholders at a general meeting of shareholders may suspend preemptive rights with respect to a particular capital increase by a favorable vote of at least 70% of the shares represented at the meeting. Preemptive rights must be exercised within the period stated in the share placement terms of the increase, which cannot be shorter than 15 business days following the publication of the notice of the public offer of that capital increase. From the date of the notice of the share placement terms, preemptive rights may be transferred separately from the corresponding shares.
The Superintendency of Finance will authorize decreases in the outstanding capital stock decided by the holders of common shares only if: (i) Bancolombia has no liabilities; (ii) Bancolombia’s creditors consent in writing; or (iii) the outstanding capital stock remaining after the reduction represents at least twice the amount of Bancolombia’s liabilities.
Limits on Purchases and Sales of Capital Stock by Related Parties
Pursuant to the Colombian Commerce Code, the members of the Bank’s board of directors and certain of our principal executive officers may not, directly or undirectly, buy or sell shares of our capital stock while they hold their positions, except when dealing with nonspeculative operations and in that case they need to obtain the prior authorization of the board of directors passed with the vote of two-thirds of its members (excluding, in the case of transactions by a director, such director’s vote) or when deemed relevant by the Board of Directors of the Bank with the authorization of the Shareholders Meeting the affirmative vote of the ordinary majority foreseen in the bylaws, excluding the vote of the petitioner.
No Redemption
Colombian law prohibits Bancolombia from repurchasing shares of its capital stock, including the preferred shares.
Limitations on the Rights to Hold Securities
There are no limitations in our by-laws or Colombian law on the rights of Colombian residents or foreign investors to own the shares of the Bank, or on the right to hold or exercise voting rights with respect to those shares.
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Restrictions on Change of Control Mergers, Acquisitions or Corporate Restructuring of the Company
Under Colombian law and our bylaws, the general shareholders’ meeting has full and exclusive authority to approve any corporate restructuring including, mergers, acquisitions or spin-offs upon authorization by the Colombian Superintendency of Finance.
Ownership Threshold Requiring Public Disclosure
We must disclose to the Superintendency of Finance at the end of each fiscal quarter the names of the shareholders of our company, indicating at least, the twenty shareholders with the highest number of shares.
Colombian securities regulations set forth the obligation to disclose any material event or relevant fact. Any transfer of shares equal or greater than 5% of our capital stock or any person acquiring a percentage of shares that would make him the beneficial owner of 5% or more of our capital stock, is a material event, and therefore, must be disclosed to the Superintendency of Finance.
Changes in the Capital of the Company
There are no conditions in our by-laws governing changes in our capital stock that are more stringent than those required under Colombian law.
| C. | MATERIAL CONTRACTS |
Bancolombia has not entered into any contract, other than those entered in the ordinary course of business or that are not considered to be material, to which it or any of its subsidiaries is a party, for the two years immediately preceding the date of this Annual Report.
| D. | EXCHANGE CONTROLS |
The Central Bank has consistently made foreign currency available to Colombian private sector entities to meet their foreign currency obligations. Nevertheless, in the event of shortages, foreign currency may not be available to private sector companies and the amounts needed by the Bank to service foreign currency obligations may not be purchased in the open market without substantial additional costs.
The Foreign Exchange Statute, Law 9 of 1991, outlines the Colombian foreign exchange regime which relates to matters such as imports and exports of goods, foreign indebtedness, and guarantees in foreign currencies, among others. Additionally, Decree 1068 of 2015, as amended, sets forth an International Investments Regime which provides for rules applicable to foreign residents who invest in the Colombian securities markets and undertake other types of investments, prescribes registration with the Central Bank of certain foreign exchange transactions, and specifies procedures pursuant to which certain types of foreign investments are to be authorized and administered. Both, the Foreign Exchange Statute and the International Investments Regime are regulated by External Resolution No. 8 of 2000 and External Regulating Circular DCIN 83 of 2006, both as amended, of the Board of Directors of the Central Bank.
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Under Colombian law and the Bank’s by-laws, foreign investors receive the same treatment as Colombian citizens with respect to ownership and the voting rights of ADSs and preferred shares. For a detailed discussion of ownership restrictions see Item 4. “Information on the Company - B. Business Overview - B.8. Supervision and Regulation – Ownership and Management Restrictions”.
| E. | TAXATION |
Colombian Taxation
For purposes of Colombian taxation, an individual is considered as a resident if he or she meets any of the following conditions:
| · | Continuous or discontinuous presence in Colombia for more than 183 calendar days including entry and departure days from the country, within any period of 365 consecutive calendar days, provided that, when the continuous or discontinuous presence in the country is exercised in more than one fiscal year, the individual would be considered as a resident in the second fiscal year. |
| · | Those persons working for the Colombian Foreign Service or those serving the Colombian Foreign Service and which, by virtue of the Vienna Conventions on Diplomatic and Consular Relations, are exempt from taxation on all or part of their income and occasional earnings in the country in which they are serving during the respective tax year or period. |
| · | Is a Colombian citizen and during the applicable fiscal year: |
| a) | The spouse or permanent life partner, or underage dependent children, are residents in Colombia for tax purposes; or, |
| b) | 50% or more of their income has a Colombian source; or, |
| c) | 50% or more of their assets are managed in Colombia; or, |
| d) | 50% or more of their assets are held or deemed to be held in Colombia; or, |
| e) | The Colombian taxation authority has requested evidence of the foreign residency status, and it is not provided by the individual; or |
| f) | Had fiscal residence in a tax haven jurisdiction as defined by Colombian regulations. |
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Colombian citizens are not considered a tax resident if they meet any of the above conditions and fulfill at least one of the following:
| a) | 50% or more of their annual income has its source in the jurisdiction in which they are domiciled; or, |
| b) | 50% or more of their assets are located in the jurisdiction where they are domiciled. |
Entities:
| · | For purposes of Colombian taxation, a legal entity is a resident of Colombia if its principal office is located in Colombia. For this purpose, the principal office means the place where material commercial and management decisions are made. |
| · | Companies and entities that comply with any of the following conditions are also considered to be nationals for tax purposes: |
| a) | Primary domicile in Colombia; or |
| b) | Incorporated in Colombia, in accordance with Colombian laws. |
Foreign companies, foreign investment funds, and individuals that are not Colombian residents are not required by law to file an income tax return in Colombia when their income has been previously subject to withholding tax, provided that such income results from payments of dividends, capital gains or labor related income.
Pursuant to the International Investments Regime (see Item 10. “Additional Information – D. Exchange Controls”), the preferred shares deposited under the Deposit Agreement constitute a Foreign Institutional Capital Investment Fund (the “Fund”). Under Article 18-1 of the Fiscal Statute, modified by the Law 1607 of 2012, profits of the Fund, excluding dividends, are subject to withholding tax. The applicable taxation rate is 14%, provided that the Depositary is not located in a tax haven, in which case, the applicable taxation rate is 25%. The withholding is 25% in the case of dividends if they relate to untaxed company earnings.
If the Depositary sells, or otherwise negotiates, the preemptive rights it would be entitled to in the event of a new issue of shares (see Item 3. “Key Information - D. Risk Factors-Risks Relating to the Preferred Shares and the ADSs”), the profits obtained from such disposal will be subject to withholding tax.
Regulations applicable to the taxation of dividends, other than those in the International Investment Regime, were modified under Law 1819 of 2016, as follows:
A dividend tax was created, which will be collected by at-source withholdings at the time they are paid out. This new tax applies to dividends distributed based on earnings obtained starting in the 2017 tax year.
| · | The rates for non-residents of Colombia are: |
| a) | 5% if the distributed dividends relate to earnings taxed at the parent company (notwithstanding the application of any double taxation treaty signed by Colombia). |
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| b) | 35% if the distributed dividends relate to earnings not taxed at the parent company. A further 5% will be applied to the difference to be distributed (for a total of 38.25%). The above is notwithstanding the application of double taxation treaties signed by Colombia. |
| · | The rates for residents of Colombia are: |
| a) | The at-source withholding rate for domestic companies continues to be 20% when the dividends are distributed against taxed earnings. |
| b) | The tax will be as follows for natural persons: |
| - | Between 0%, 5% and 10% if the dividends are distributed against earnings taxed at the parent company. |
| - | 35% if the dividends are distributed against earnings not taxed at the parent company. A further 5% will be applied to the difference to be distributed (for a total of 38.25%). |
| · | Preferred shares |
Preferred shares will have the same treatment as financial liabilities for the issuer's tax purposes. The treatment will be the same as financial assets for the holder. This treatment will not be applicable to listed shares that do not comply with the rest of the requirements established by Article 33-3 of the Tax Statute.
Other Tax Considerations
As of the date of this report, there is no income tax treaty and no inheritance or gift tax treaty in effect between Colombia and the United States. Transfers of ADSs from non-residents or residents to non-residents of Colombia by gift or inheritance are not subject to Colombian income tax. Transfers of ADSs or preferred shares by gift or inheritance from residents to residents or from non-residents to residents will be subject to Colombian income tax at the income tax rate applicable for occasional gains obtained by residents of Colombia. Transfers of preferred shares by gift or inheritance from non-residents to non-residents or from residents to non-residents are also subject to income tax in Colombia at the applicable rate. There are no Colombian stamps, issue, registration, transfer or similar taxes or duties payable by holders of preferred shares or ADSs.
United States Federal Income Taxation Considerations
This section describes the material United States federal income tax consequences generally applicable to a U.S. holder (as defined below) of owning preferred shares or ADSs. It applies to you only if you hold your preferred shares or ADSs as capital assets for tax purposes. This section does not apply to you if you are a member of a special class of holders subject to special rules, including:
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| · | a dealer in securities, |
| · | a trader in securities that elects to use a mark-to-market method of accounting for securities holdings, |
| · | a tax-exempt organization, |
| · | a life insurance company, |
| · | a person liable for alternative minimum tax, |
| · | a person that actually or constructively owns 10% or more of our voting stock, |
| · | a person that holds preferred shares or ADSs as part of a straddle or a hedging or conversion transaction, |
| · | a person that purchases or sells preferred shares or ADSs as part of a wash sale for tax purposes, or |
| · | a person whose functional currency is not the U.S. dollar. |
This section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations, published rulings and court decisions. These laws are subject to change, possibly on a retroactive basis. There is currently no comprehensive income tax treaty between the United States and Colombia. In addition, this section is based in part upon the representations of the Depositary and the assumption that each obligation in the Deposit Agreement and any related agreement will be performed in accordance with its terms.
If a partnership holds the preferred shares or ADSs, the United States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the partnership. A partner in a partnership holding the preferred shares or ADSs should consult its tax advisor with regard to the United States federal income tax treatment of an investment in the preferred shares or ADSs.
You are a U.S. holder if you are a beneficial owner of preferred shares or ADSs and you are:
| · | a citizen or resident of the United States, |
| · | a domestic corporation, |
| · | an estate whose income is subject to United States federal income tax regardless of its source, or a trust if a United States court can exercise primary supervision over the trust’s administration and one or more United States persons are authorized to control all substantial decisions of the trust. |
In general, and taking into account the earlier assumptions, for United States federal income tax purposes, if you hold ADRs evidencing ADSs, you will be treated as the owner of the preferred shares represented by those ADRs. Exchanges of preferred shares for ADRs, and ADRs for preferred shares generally will not be subject to United States federal income tax.
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Taxation of Dividends and Distributions
Under the United States federal income tax laws, and subject to the passive foreign investment company (“PFIC”) rules discussed below, the gross amount of any dividend we pay out of our current or accumulated earnings and profits (as determined for United States federal income tax purposes) is subject to United States federal income taxation. If you are a non-corporate U.S. holder, dividends paid to you that constitute qualified dividend income will be taxable to you at preferential rates applicable to long-term capital gains provided that you hold the preferred shares or ADSs for more than 60 days during the 121-day period beginning 60 days before the ex-dividend date (or, if the dividend is attributable to a period or periods aggregating over 366 days, provided that you hold the preferred shares or ADSs for more than 90 days during the 181-day period beginning 90 days before the ex-dividend date) and meet other holding period requirements. Dividends we pay with respect to the ADSs generally will be qualified dividend income provided that, in the year that you receive the dividend, the ADSs are readily tradable on an established securities market in the United States. The Bank believes that its ADSs, which are listed on the NYSE, are readily tradable on an established securities market in the United States; however, there can be no assurance that the Bank’s ADSs will continue to be readily tradable on an established securities market. Because the preferred shares are not listed on any United States securities market, it is unclear whether dividends we pay with respect to the preferred shares will also be qualified dividend income. If dividends we pay with respect to our preferred shares are not qualified dividend income, then the U.S. dollar amount of such dividends received by a U.S. holder (including dividends received by a non-corporate U.S. holder) will be subject to taxation at ordinary income tax rates.
You must include any Colombian tax withheld from the dividend payment in this gross amount even though you do not in fact receive it. The dividend is taxable to you when you, in the case of preferred shares, or the Depositary, in the case of ADSs, receive the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that you must include in your income as a U.S. holder will be the U.S. dollar value of the Colombian Peso payments made, determined at the spot Colombian Peso / U.S. dollar rate on the date the dividend distribution is includible in your income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date you include the dividend payment in income to the date you convert the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. The gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes. Distributions in excess of current and accumulated earnings and profits, as determined for United States federal income tax purposes, will be treated as a non-taxable return of capital to the extent of your basis in the preferred shares or ADSs and thereafter as capital gain. However, we do not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Accordingly, you should expect to generally treat distributions with respect to preferred shares or ADSs as dividends.
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Subject to certain limitations, the Colombian tax withheld and paid over to Colombia will be creditable or deductible against your United States federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to preferential rates. To the extent a refund of the tax withheld is available to you under Colombian law, the amount of tax withheld that is refundable will not be eligible for credit against your United States federal income tax liability. The rules governing foreign tax credits are complex, and U.S. holders should consult their tax advisors regarding the creditability of foreign taxes in their particular circumstances.
For foreign tax credit purposes, dividends will be income from sources outside the United States and will, depending on your circumstances, be either “passive” or “general” income for purposes of computing the foreign tax credit allowable to you.
Taxation of Capital Gains
Subject to the PFIC rules discussed below, if you sell or otherwise dispose of your preferred shares or ADSs, you will recognize capital gain or loss for United States federal income tax purposes equal to the difference between the U.S. dollar value of the amount that you realize and your tax basis, determined in U.S. dollars, in your preferred shares or ADSs. Capital gain of a non-corporate U.S. holder is generally taxed at preferential rates where the property is held for more than one year. The deductibility of capital losses is subject to limitations. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
PFIC Rules
We believe that preferred shares and ADSs should not be treated as stock of a PFIC for United States federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If we were to be treated as a PFIC, unless you elect to be taxed annually on a mark-to-market basis with respect to your preferred shares or ADSs, the following rules would apply. With certain exceptions, your preferred shares or ADSs would be treated as stock in a PFIC if we were a PFIC at any time during your holding period in your preferred shares or ADSs.
Any “excess distributions,” which would include any distributions during a taxable year that are greater than 125% of the average annual distributions received by you in respect of the preferred shares or ADSs during the three preceding taxable years or, if shorter, your holding period for the preferred shares or ADSs, and any gain realized on the sale or other disposition of your preferred shares or ADSs would be allocated ratably over your holding period for the preferred shares or ADSs and would generally be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. Any gain recognized would not be treated as capital gain.
If you own preferred shares or ADSs in a PFIC that are treated as marketable stock, you may make a mark-to-market election. If you make this election, you will not be subject to the PFIC rules described above. Instead, in general, you will include as ordinary income each year the excess, if any, of the fair market value of your preferred shares or ADSs at the end of the taxable year over your adjusted basis in your preferred shares or ADSs. These amounts of ordinary income will not be eligible for the favorable tax rates applicable to qualified dividend income or long-term capital gains. You will also be allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of your preferred shares or ADSs over their fair market value at the end of the taxable year (but only to the extent of the net amount of previously included income as a result of the mark-to-market election). Your basis in the preferred shares or ADSs will be adjusted to reflect any such income or loss amounts.
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In addition, notwithstanding any election you make with regard to the preferred shares or ADSs, dividends that you receive from us would not be eligible for the special tax rates applicable to qualified dividend income if we are treated as a PFIC with respect to you either in the taxable year of the distribution or the preceding taxable year, but instead would be taxable at rates applicable to ordinary income.
Medicare Tax
A U.S. holder that is an individual or estate, or a trust that does not fall into a special class of trusts that is exempt from such tax, is subject to a 3.8% tax (the “Medicare tax”) on the lesser of (1) the U.S. holder’s “net investment income” (or “undistributed net investment income” in the case of an estate or trust) for the relevant taxable year and (2) the excess of the U.S. holder’s modified adjusted gross income for the taxable year over a certain threshold (which in the case of individuals is between USD 125,000 and USD 250,000, depending on the individual’s circumstances). A holder’s net investment income generally includes its dividend income and its net gains from the disposition of preferred shares or ADSs, unless such dividend income or net gains are derived in the ordinary course of the conduct of a trade or business (other than a trade or business that consists of certain passive or trading activities). If you are an individual, estate or trust, you are urged to consult your tax advisors regarding the applicability of the Medicare tax to your income and gains in respect of your investment in the preferred shares or ADSs.
Information with Respect to Foreign Financial Assets
Owners of “specified foreign financial assets” with an aggregate value in excess of USD 50,000 (and in some circumstances, a higher threshold) may be required to file an information report with respect to such assets with their tax returns. “Specified foreign financial assets” include any financial accounts maintained by foreign financial institutions, as well as any of the following, but only if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-United States persons (including the preferred shares and ADSs), (ii) financial instruments and contracts that have non-United States issuers or counterparties, and (iii) interests in foreign entities. U.S. holders are urged to consult their tax advisors regarding the application of this reporting requirement to their ownership of the preferred shares or ADSs.
| F. | DIVIDENDS AND PAYING AGENTS |
Not applicable.
| G. | STATEMENT BY EXPERTS |
Not applicable.
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| H. | DOCUMENTS ON DISPLAY |
Bancolombia files reports and other information with the SEC pursuant to the rules and regulations of the SEC that apply to foreign private issuers. You may read and copy any document that Bancolombia files at the SEC’s public reference room at 100 F Street NE, Washington, D.C. 20549. Some of the Bank’s SEC filings are also available to the public from the SEC’s website at http://www.sec.gov.
| I. | SUBSIDIARY INFORMATION |
Not applicable.
| ITEM 11. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Introduction
The following section describes the market risks to which Bancolombia is exposed and the tools and methodology used to measure these risks as of December 31, 2016. Bancolombia faces market risk as a consequence of its lending, trading and investments businesses. Market risk represents the potential loss due to adverse changes in market prices of financial instruments as a result of movements in interest rates, foreign exchange rates, and equity prices, among others.
Bancolombia’s risk management strategy, called the Integrated Risk Management Strategy, is based on principles set by international bodies and by Colombian regulations, and is guided by Bancolombia’s corporate strategy. The main objective of the Integrated Risk Management Strategy is to identify measure, coordinate, monitor, report and propose policies for market and liquidity risks of the Bank, which in turn serve to facilitate the efficient administration of Bancolombia’s assets and liabilities. Bancolombia’s board of directors and senior management have formalized the policies, procedures, strategies and rules of action for market risk administration in its “Market Risk Manual”. This manual defines the roles and responsibilities within each subdivision of the Bank and their interaction to ensure adequate market risk administration.
The Bank’s Market and Liquidity Risk Management Office is responsible for: (a) identifying, measuring, monitoring, analyzing and controlling the market risk inherent in the Bank’s businesses, (b) analyzing the Bank’s exposure under stress scenarios and confirming compliance with Bancolombia’s risk management policies, (c) analyzing the methodologies for valuation of the market value securities and financial instruments design by the official price vendor, (d) reporting to senior management and the board of directors any violation of Bancolombia’s risk management policies, (e) reporting to the senior management on a daily basis the levels of market risk associated with the trading instruments recorded in its treasury book (the “Treasury Book”), and (f) proposing policies to the board of directors and to senior management that ensure the maintenance of predetermined risk levels. The Bank has also implemented an approval process for new products across each of its subdivisions. This process is designed to ensure that every subdivision is prepared to incorporate the new product into their procedures, that every risk is considered before the product is incorporated and that approval is obtained from the board of directors before the new product can be sold.
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The Bank’s assets include both trading and non-trading instruments. Trading instruments are recorded in the Treasury Book and include fixed income securities and derivatives, foreign exchange and bond futures, and over-the-counter plain vanilla and exotic derivatives. Trading in derivatives includes forward contracts in foreign currency operations, plain vanilla options and Asian options on U.S. dollar/COP currency, foreign exchange swaps and interest rate swaps. Non-trading instruments are recorded in the Bank’s banking book (the “Banking Book”), which includes primarily loans, time deposits, checking accounts and savings accounts.
The Bank uses a value at risk (“VaR”) calculation to limit its exposure to the market risk of its Treasury Book. The board of directors is responsible for establishing the maximum VaR based on its assessment of the appropriate level of risk for Bancolombia. The Risks Committee is responsible for establishing the maximum VaR by type of investment (e.g., fixed income in public debt) and by type of risk (e.g., currency risk). These limits are supervised on a daily basis by the Market Risk Management Office.
To manage the interest rate risk from banking activities, the Bank analyzes the interest rate mismatches between its interest earning assets and its interest bearing liabilities. In addition, the foreign currency exchange rate exposures arising from the Banking Book are provided to the Treasury Division where these positions are aggregated and managed.
Trading Instruments Market Risk Measurement
The Bank currently measures the Treasury Book exposure to market risk as well as the currency risk exposure of the Banking Book, which is provided to the Treasury Division, using a VaR methodology established in accordance with “Chapter XXI of the Basic Accounting Circular”, issued by the SFC.
The VaR methodology established by SFC is based on the model recommended by the Amendment to the Capital Accord to Incorporate Market Risks of Basel Committee of 2005, focuses on the Treasury Book and excludes investments measured under amortized cost that are not being provided as collateral and any other investment included in the Banking Book, such as non-trading positions. In addition, the methodology aggregates all risks by the use of correlations, through an allocation system based on defined zones and bands, affected by given sensitivity factors.
The total market risk for the Bank is calculated by the arithmetical aggregation of the VaR calculated for each subsidiary. The aggregated VaR is reflected in the Bank’s Capital Adequacy (Solvency) ratio, in accordance with Decree 1771 of 2012.
For purposes of VaR calculations, a risk exposure category is any market variable that is able to influence potential changes in the portfolio value. Taking into account a given risk exposure, the VaR model assesses the maximum loss not exceeded at a specified confidence level over a given period of time. The fluctuations in the portfolio’s VaR depend on volatility, modified duration and changes in positions relating to the different instruments that are subject to market risk.
The relevant risk exposure categories for which VaR is computed by Bancolombia according to “Chapter XXI, appendix 1 of the Basic Accounting Circular” are: (i) interest rate risks relating to local currency, foreign currency and UVR; (ii) currency risk; (iii) stock price risk; and (iv) fund risk.
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Interest Rate Risk (Treasury Book):
The interest rate risk is the probability of decrease in the market value of the position due to fluctuations in market interest rates. Bancolombia calculates the interest rate risk for positions in local currency, foreign currency and UVR separately; in accordance with Chapter XXI of the Basic Accounting Circular. The calculation of the interest rate risk begins by determining the net position in each instrument and estimating its sensitivity by multiplying its net present value (“NPV”) by its “modified duration” and by the estimated interest rate estimated fluctuation (as defined by the SFC). The interest rate’s fluctuations are established by the SFC according to historical market performance, as shown in the following table:
Figure 1. Interest Risk – Sensitivity by Bands and Zones
| Zone | Band | Modified Duration | Interest rate fluctuations (basis points) | |||
| Low | High | Pesos | URV | USD | ||
| Zone 1 | 1 | 0 | 0.08 | 274 | 274 | 100 |
| 2 | 0.08 | 0.25 | 268 | 274 | 100 | |
| 3 | 0.25 | 0.5 | 259 | 274 | 100 | |
| 4 | 0.5 | 1 | 233 | 274 | 100 | |
| Zone 2 | 5 | 1 | 1.9 | 222 | 250 | 90 |
| 6 | 1.9 | 2.8 | 222 | 250 | 80 | |
| 7 | 2.8 | 3.6 | 211 | 220 | 75 | |
| Zone 3 | 8 | 3.6 | 4.3 | 211 | 220 | 75 |
| 9 | 4.3 | 5.7 | 172 | 200 | 70 | |
| 10 | 5.7 | 7.3 | 162 | 170 | 65 | |
| 11 | 7.3 | 9.3 | 162 | 170 | 60 | |
| 12 | 9.3 | 10.6 | 162 | 170 | 60 | |
| 13 | 10.6 | 12 | 162 | 170 | 60 | |
| 14 | 12 | 20 | 162 | 170 | 60 | |
| 15 | 20 | - | 162 | 170 | 60 | |
Once the sensitivity factor is calculated for each position, the modified duration is then used to classify each position within its corresponding band. A net sensitivity is then calculated for each band, by determining the difference between the sum of all long-positions and the sum of all short-positions. Then a net position is calculated for each zone (which consists of a series of bands) determined by the SFC. The final step is to make adjustments within each band, across bands and within each zone, which results in a final number that is the interest rate risk VaR by currency. Each adjustment is performed following the guidelines established by the SFC.
The Bank’s exposure to interest risk primarily arises from investments in Colombian government’s treasury bonds (TES).
The interest rate risk VaR decreased from COP 276 billion on December 31, 2015 to COP 252 billion on December 31, 2016, due to reduction in the position in Colombian government’s treasury bonds (TES). During the year 2016, the average interest rate risk VaR was COP 266 billion, the maximum value COP 309 billion, and the minimum value COP 239 billion
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Currency (Treasury and Banking Book), Equity (Treasury Book) and Fund Risk (Treasury Book):
The VaR model uses a sensitivity factor to calculate the probability of loss due to fluctuations in the price of stocks, funds and currencies in which the Bank maintains a position. As previously indicated, the methodology to measure such risk consists of computing VaR, which is derived by multiplying the position by the maximum probable variation in the price of such positions (“∆p”). The ∆p is determined by the SFC, as shown in the following table:
Figure 2. Sensitivity Factor for Currency Risks, Equity Risks and Fund Risks
| USD | 5.50% |
| Euro | 6.00% |
| Other currencies | 8.00% |
| Funds | 14.70% |
| Stock Price | 14.70% |
The currency risk VaR drop from COP 349 billion as of December 31, 2015 to COP 247 billion as of December 31, 2016 was due to the decrease of 38.1% in the net position in U.S. dollars in Bancolombia. During the year 2016, the average currency risk VaR was COP 332 billion, the maximum value COP 393 billion, and the minimum value COP 247 billion.
The equity risk VaR increased from COP 55 billion as of December 31, 2015 to COP 61 billion as of December 31, 2016, due to the surge in the trading positions at Valores Bancolombia. During the year 2016, the average equity VaR was COP 62 billion, the maximum value COP 76 billion, and the minimum value COP 55 billion.
The fund risk, which arises from investment in mutual funds, decreased from COP 41 billion as of December 31, 2015 to COP 37 billion as of December 31, 2016. During the year 2016, the average fund risk VaR was COP 45 billion, the maximum value COP 113 billion, and the minimum value COP 37 billion.
The estimated interest rate fluctuations and the sensitivity factors for currency, equity and fund risk used in the model are established by the SFC according to historical market performance, and have not changed since March 2011.
Total Market Risk VaR in Trading Instruments
The total market risk VaR in trading instruments is calculated as the algebraic sum of the interest rate risk, the currency risk, the stock price risk and the fund risk.
The chart below provides information about Bancolombia’s consolidated VaR for trading instruments at the end of December 2015 and December 2016.
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| As of December 31, | ||
| 2016 | 2015 | |
| In millions of COP | ||
| Interest Rate Risk VaR | 251,904 | 276,405 |
| Currency Risk VaR | 247,047 | 348,815 |
| Equity Risk VaR | 62,120 | 54,947 |
| Fund Risk VaR | 36,915 | 40,675 |
| Total VaR | 596,987 | 720,842 |
Includes Grupo Agromercantil’s market risk exposure at a 100%
The total market risk VaR, decreased by 20%, to COP 597 billion as of December 31, 2016, from COP 721 billion in December 31, 2015 due mainly to the decreases in currency risk and interest rate risk mentioned above.
During the year 2016, the average Total VaR was COP 705 billion, the maximum value COP 828 billion, and the minimum value COP 597 billion.
Assumptions and Limitations of VaR Models:
Although VaR models represent a recognized tool for risk management, they have inherent limitations, including reliance on historical data that may not be indicative of future market conditions or trading patterns. Accordingly, VaR models should not be viewed as predictive of future results. The Bank may incur in losses that could be materially in excess of the amounts indicated by the models on a particular trading day or over a period of time, and there have been instances when results have fallen outside the values generated by the Bank’s VaR models. A VaR model does not calculate the greatest possible loss. The results of these models and analysis thereof are subject to the reasonable judgment of the Bank’s risk management personnel.
Non-Trading Instruments Market Risk Measurement
The Banking Book’s relevant risk exposure is interest rate risk, which is the probability of unexpected changes in net interest income as a result of a change in market interest rates. Changes in interest rates affect Bancolombia’s earnings as a result of timing differences on the repricing of the assets and liabilities. The Bank manages the interest rate risk arising from banking activities in non-trading instruments by analyzing the interest rate mismatches between its interest earning assets and its interest bearing liabilities. The foreign currency exchange rate exposures arising from the Banking Book are provided to the Treasury Division where these positions are aggregated and managed.
Interest Risk Exposure (Banking Book)
The Bank has performed a sensitivity analysis of market risk sensitive instruments estimating the impact on the net interest income of each position in the Banking Book, using a repricing model and assuming positive parallel shifts of 100 basis points (bps).
The table 1 provides information about Bancolombia’s interest rate sensitivity for the statement of financial position items comprising the Banking Book:
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Table 1. Sensitivity to Interest Rate Risk of the Banking Book
The chart below provides information about Bancolombia’s interest rate risk sensitivity in local currency (COP) at December 31, 2016 and 2015:
| Interest Rate Risk | ||
| As of December 31, | ||
| 2016 | 2015 | |
| In millions of COP | ||
| Assets sensitivity 100 bps | 614,268 | 579,393 |
| Liabilities sensitivity 100 bps | 366,262 | 332,079 |
| Net interest income sensitivity 100 bps | 248,005 | 247,314 |
The chart below provides information about Bancolombia’s of interest rate risk sensitivity in foreing currency (US dollars) at December 31, 2016 2015
| Interest Rate Risk | ||
| As of December 31, | ||
| 2016 | 2015 | |
| In thousands of US dollars | ||
| Assets sensitivity 100 bps | 78,173 | 74,228 |
| Liabilities sensitivity 100 bps | 71,401 | 69,869 |
| Net interest income sensitivity 100 bps | 6,772 | 4,359 |
A positive net sensitivity denotes a higher sensitivity of assets than of liabilities and implies that a rise in interest rates will positively affect the Bank´s net interest income. A negative sensitivity denotes a higher sensitivity of liabilities than of assets and implies that a rise in interest rates will negatively affect the Bank´s net interest income. In the event of a decrease in interest rates, the impacts on net interest income would be opposite to those described above.
Total Exposure:
As of December 31, 2016, the net interest income sensitivity in local currency for the banking book instruments, entered into for other than trading purposes with positive parallel shifts of 100 basis points was COP 248 million, which is not a significant difference between 2015 and 2016.
On the other hand, the net interest income sensitivity in foreign currency, assuming the same parallel shift of 100 basis points, was USD 6.8 million at December 31, 2016, compared with USD 4.4 million at December 31, 2015. The increased net interest income sensitivity due to interest rate risk between 2015 and 2016 occurred due to the increase in the sensitivity of the loan portfolio, because of the decrease in their repricing frecuency.
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Assumptions and Limitations:
Net interest income sensitivity analysis is based on the repricing model and consider the following key assumptions: (a) does not consider prepayments, new operations, defaults, etc., (b); the fixed rate instruments sensitivity, includes the amounts with maturity lower than one year and assumes these will be disbursed at market interest rates and (c) changes in interest rate occur immediately and parallel in the yield curves from assets and liabilities for different maturities.
Structural Equity Risk Exposure (Banking Book)
Bancolombia’s investment banking affiliate, in its role of financial corporation, has, directly and through its affiliated companies, structural equity investments. These positions are maintained mostly in energy and construction sectors. Smaller positions are held on the financial sector. The market value of those investments decreased by 56% during the year, to COP 114 billion as of December 31, 2016 from COP 262 billion as of December 31, 2015, as a result of the sale of a portion of the investments in the construction sector.
The structural equity positions are exposed to equity price risk. Sensitivity calculations are made for those positions:
| As of December 31, | ||
| 2016 | 2015 | |
| In millions of COP | ||
| Market Value | 113,835 | 261,648 |
| Delta | 14.7% | 14.7% |
| Sensitivity | 16,734 | 38,462 |
A negative impact of 14.7%, applied to the market value, produces a decrease of COP 16 billion on the structural equity investments market value, which would decrease from COP 114 billion to COP 97 billion.
| ITEM 12. | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES |
| D. | American Depositary Shares |
| D.3. | Fees and charges applicable to holders of American Depositary Receipts |
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
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The following are the fees charged by the depositary:
| Persons depositing or withdrawing shares must pay: | For: |
| USD 5.00 per 100 ADSs (or portion of 100 ADSs) | • Issuance of ADSs, including issuances resulting from a distribution of shares or rights or other property.
• Cancellation of ADSs for the purpose of withdrawal, including if the deposit agreement terminates. |
| Registration or transfer fees | • Transfer and registration of shares on our share register to or from the name of the depositary or its agent when you deposit or withdraw shares. |
| Expenses of the depositary | • Cable, telex and facsimile transmissions (when expressly provided in the deposit agreement). • Converting foreign currency to U.S. dollars. |
| Taxes and other Governmental charges the depositary or the custodian has to pay on any ADSs or share underlying a ADSs, for example, stock transfer taxes, stamp duty or withholding taxes. | • As necessary. |
| Any charges incurred by the depositary or its agents for servicing the deposited securities. | • As necessary. |
| D.4.i. | FEES INCURRED IN PAST ANNUAL PERIOD |
From January 1, 2016 to December 31, 2016, the depositary reimbursed Bancolombia USD 550,000 for expenses related to the administration and maintenance of the ADR facility, investor relations activities, annual listing fees and any other ADR program-related expenses incurred by Bancolombia directly associated with the Bank’s preferred share ADR program. In addition, Fiduciaria Bancolombia, a subsidiary of the Bank, received COP 243 million from The Bank of New York Mellon during the same period in connection with its role as local custodian of the depositary bank.
| D.4.ii. | FEES TO BE PAID IN THE FUTURE |
The Bank of New York Mellon, as depositary, has agreed to reimburse the Bank for expenses incurred that are related to establishment and maintenance expenses of the ADS program. The depositary has agreed to reimburse the Company for its continuing annual stock exchange listing fees. The depositary has also agreed to pay the standard out-of-pocket maintenance costs for the ADRs, which consist of the expenses of postage and envelopes for mailing annual and interim financial reports, printing and distributing dividend checks, electronic filing of U.S. federal tax information, mailing required tax forms, stationery, postage, facsimile, and telephone calls. It has also agreed to reimburse the Company annually for certain investor relationship programs or special investor relations promotional activities. In certain instances, the depositary has agreed to provide additional payments to the Company based on any applicable performance indicators relating to the ADR facility. There are limits on the amount of expenses for which the depositary will reimburse the Company, but the amount of reimbursement available to the Company is not necessarily tied to the amount of fees the depositary collects from investors.
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing shares or surrendering ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system accounts of participants acting for them. The depositary may generally refuse to provide fee-attracting services until its fees for those services are paid.
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| ITEM 13. | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES |
There has not been any default, arrearage or delinquency neither in the payment of principal, interest, a sinking or purchase fund installment, nor in any payment relating to indebtedness or dividends by the Bank or any of its subsidiaries.
| ITEM 14. | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS |
There has not been any modification to the rights of security holders and use of proceeds.
| ITEM 15. | CONTROLS AND PROCEDURES |
The Bank carried out an evaluation under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. As a result, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of the period covered by this report, the disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports the Bank files and submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and regulations of the SEC and to provide reasonable assurance that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding disclosure.
There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures.
Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Bank's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with IFRS.
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The Bank's internal control over financial reporting includes those policies and procedures that:
| · | Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Bank; |
| · | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Bank are being made only in accordance with authorizations of the Bank's management and directors; and |
| · | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Bank's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of internal control over financial reporting as of December 31, 2016 based on criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 Framework version). On this assessment, management concluded that the Bank's internal control over financial reporting was effective as of December 31, 2016.
The effectiveness of the Bank's internal control over financial reporting as of December 31, 2016 has been audited by Deloitte&Touche Ltda, an independent registered public accounting firm, which report is included on page F-4 of this annual report.
In addition, there were no changes in Bank´s internal control over financial reporting occurred during the period covered by this annual report that has materially affected, or is reasonable likely to materially affect the bank´s internal control over financial reporting.
| ITEM 16. | RESERVED |
| A. | AUDIT COMMITTEE FINANCIAL EXPERT |
The board of directors of Bancolombia appointed Hernando Jose Gomez Restrepo as the “audit committee financial expert” in accordance with SEC rules and regulations.
Our audit committee financial expert, along with the other members of our audit committee, is considered to be independent according to applicable NYSE criteria.
Mr. Gomez has served as the Bank’s audit committee financial expert since April 2016. There is no business relationship between him and the Bank, except for standard personal banking services. Further, there is no fee arrangement between Mr. Gomez and the Bank, except in connection with his capacity as a member of the Bank’s board of directors and as a member of the audit committee. Mr. Gomez is considered an independent director under Colombian law and the Bank’s Corporate Governance Code, as well as under NYSE’s director independence standards. For more information regarding our audit committee, see Item 6. “Directors, Senior Management and Employees— C. Board Practices—Audit Committee”.
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| B. | CORPORATE GOVERNANCE AND CODE OF ETHICS |
Bancolombia has adopted a Code of Ethics and a Corporate Governance Code, both of which apply to all employees, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, as well as to the directors of the Bank.
English translations of the Ethics Code and the Corporate Governance Code are posted at Bancolombia’s website at www.grupobancolombia.com.co. The Spanish versions of these codes will prevail for all legal purposes.
The Bank also has a phone line called “ethics line” (línea ética) which is available for anonymous reporting of any evidence of improper conduct.
Under the NYSE’s Corporate Governance Standards, Bancolombia, as a listed foreign private issuer, must disclose any significant ways in which its corporate governance practices differ from those followed by U.S. companies under NYSE listing standards. See Item 16. “G Corporate Governance”.
| C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Audit Fees
The aggregate fees billed under the caption audit fees for professional services rendered to Bancolombia for the audit of its financial statements and for services that are normally provided to Bancolombia, in connection with statutory or regulatory filings or engagements totaled COP 14,781 million and COP 14,082 million by Deloitte & Touche Ltda and PricewaterhouseCoopers Ltda. for the years ended December 31, 2016 and 2015, respectively.
Additionally, in connection with the audit engagement performed by Deloitte & Touche Ltda for the fiscal year ended December 31, 2016, fees amounting to COP 2,693 will be billed in 2017.
Audit-Related Fees
In 2016 and 2015, Bancolombia paid no other audit related fees.
Tax Fees
For the year ended December 31, 2015, Bancolombia and its subsidiaries paid COP 28 million for concept of tax fees for professional services related to transfer pricing advice provided by PricewaterhouseCoopers Ltda. In 2016, the Bank did not contract professional services related with tax compliance, tax advice or tax planning rendered by Deloitte & Touche Ltda.
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All Other Fees
In 2016 and 2015, Bancolombia paid no other fees to Deloitte & Touche Ltda and PricewaterhouseCoopers Ltda.
Pre-Approval Policies and Procedures
The Bank’s audit committee charter includes the following pre-approval policies and procedures, which are included in the audit committee’s charters:
In those events in which additional services are required to be provided by the external auditors, such services must be previously approved by the audit committee. Whenever this approval is not obtained at a meeting held by the audit committee, the approval will be obtained through the Legal Vice Presidency, who will be responsible for soliciting the consent from each of the audit committee members. The approval will be obtained with the favorable vote of the majority of its members.
Every request of approval of additional services must be adequately supported, including complete and effective information regarding the characteristics of the service that will be provided by the external auditors.
During 2016, there were no services approved by the audit committee pursuant to paragraph (c) (7) (i) (C) of Rule 2-01 of Regulation S-X.
| D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES |
There are no exceptions from the listing standards for audit committees.
| E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS |
There have not been any purchases by Bancolombia or any affiliated purchaser (as defined in 17CFR240.10b-18(a) (3)) of shares or any other units of any class of equity securities issued by Bancolombia.
Colombian law prohibits the repurchase of shares issued by entities supervised by the SFC. Therefore, neither Bancolombia nor any of its Subsidiaries that are under supervision of such Superintendency may repurchase securities issued by them.
| F. | CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT |
Not Applicable.
| G. | CORPORATE GOVERNANCE |
Bancolombia, as a listed company that qualifies as a foreign private issuer under the NYSE listing standards in accordance with the NYSE corporate governance rules, is permitted to follow home-country practice in some circumstances in lieu of the provisions of the corporate governance rules contained in Section 303A of the NYSE Listed Company Manual that are applicable to U.S. companies. The Bank follows corporate governance practices applicable to Colombian companies and those described in the Bank’s Corporate Governance Code, which in turn follows Colombian corporate governance rules. An English translation of the Corporate Governance Code is available at Bancolombia’s website at www.grupobancolombia.com.co. The Spanish prevails for all legal purposes.
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In Colombia, a series of laws and regulations set forth corporate governance requirements. External Circular 029 of 2014, issued by the SFC, contains the corporate governance standards to be followed by companies issuing securities that may be purchased by Colombian pension funds, and determines that entities under supervision of the SFC, when making investment decisions, must take into account the recommendations established by the “Country Code” (Código País) and the corporate governance standards followed by the entities who are beneficiaries of the investment.
Additionally, Law 964 of 2005 established mandatory corporate governance requirements for all issuers whose securities are publicly traded in the Colombian market, and Decree 2555 of 2010 regulates the information disclosure requirements for the Colombian securities market SIMEV (Sistema Integral de Información del Mercado de Valores). Bancolombia’s corporate governance standards comply with these legal requirements and Bancolombia has implemented additional corporate governance measures pursuant to regional recommendations including the Organization for Economic Cooperation and Development’s (OECD) White Paper on Corporate Governance for Latin America and the Andean Development Corporation’s (CAF) Corporate Governance Code.
The following is a summary of the significant differences between the corporate governance practices followed by Bancolombia and those applicable to domestic issuers under the NYSE listing standards:
| · | Independence of Directors. Under NYSE corporate governance rules, a majority of a U.S. company’s board of directors must be composed of independent directors. Regarding Colombian legislation, Law 964 of 2005 requires that at least 25% of the members of the Bank’s board of directors are independent directors, and Decree 3923 of 2006 regulates their election. Additionally, Colombian law requires that all directors exercise independent judgment under all circumstances. Bancolombia’s Corporate Governance Code includes a provision stating that directors shall exercise independent judgment and requires that Bancolombia’s management recommend to its shareholders lists of director nominees of which at least 25% are independent directors. As of December 31, 2016, the Bank’s board of directors included a majority of independent members (5 members of 7). For the independence test applicable to directors of Bancolombia, see Item 10. “Additional Information. – B. Memorandum and Articles of Association – Board of Directors”. |
| · | Non-Executive Director Meetings. Pursuant to the NYSE listing standards, non-executive directors of U.S. listed companies must meet on a regular basis without management present. There is no prohibition under Colombian regulations for officers to be members of the board of directors; however, it is customary for Colombian companies to maintain separation between the directors and management. Bancolombia’s board of directors does not include any management members; however, the CEO attends the monthly meetings of the Bank’s board of directors, and members of senior management may attend the meetings of the board of directors and committees to guarantee an adequate flow of information between employees, management and directors; in both cases, the CEO and members of senior management are not allowed to vote. In accordance with Law 964 of 2005 and the Bank’s by-laws, no executive officer can be elected as chairman of the Bank’s board of directors. |
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| · | Committees of the Board of Directors. Under NYSE listing standards, all U.S. companies listed on the NYSE must have an audit committee, a compensation committee, and a nominating/corporate governance committee and all members of such committees must be independent. In each case, the independence of directors must be established pursuant to highly detailed rules enacted by the NYSE and, in the case of the audit committee, the NYSE and the SEC. The Bank’s board of directors has a Designation, Compensation and Development Committee, a Corporate Governance Committee, a Risk Committee and an Audit Committee, each of which is composed exclusively of directors. For a description of the Designation, Compensation and Development Committee, Corporate Governance Committee and Audit Committee, see Item 6. “Directors, Senior Management and Employees – C. Board Practices”. |
| · | Stockholders’ Approval of Dividends. While NYSE corporate governance standards do not require listed companies to have stockholders approve or declare dividends, in accordance with the Colombian Code of Commerce, all dividends must be approved by Bancolombia’s stockholders. |
| H. | MINE SAFETY DISCLOSURES |
Not applicable.
| ITEM 17. | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 18. | FINANCIAL STATEMENTS |
Not applicable.
| ITEM 19. | EXHIBITS |
The following exhibits are filed as part of this Annual Report.
| 1.1 | English translation of the corporate by-laws (estatutos sociales) of the registrant, as amended on October 30, 2015.(1) |
| 2.1 | Deposit Agreement entered into between Bancolombia and The Bank of New York, as amended and restated on January 14, 2008.(2) |
| 2.2 | Instruments defining the rights of the holders of long-term debt issued by Bancolombia S.A. and its subsidiaries. |
| The Bank agrees to furnish to the SEC upon request, copies of the instruments, including indentures, defining the rights of the holders of our long-term debt and of our subsidiaries’ long-term debt. | |
| 7.1 | Selected Ratios’ Calculation. |
| 8.1 | List of Subsidiaries. |
| 12.1 | CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 1, 2017. |
| 12.2 | CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated May 1, 2017. |
| 13.1 | CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 1, 2017. |
| 13.2 | CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated May 1, 2017. |
| 15.1 | Consent of Deloitte & Touche Ltda. |
| 15.2 | Consent of PricewaterhouseCoopers Ltda. |
| (1) | Incorporated by reference to our annual report on Form 20-F (File No. 001 – 32535) filed on April 22, 2016. |
| (2) | Incorporated by reference to the Registration Statement in Form F-6, filed by Bancolombia on January 14, 2008. |
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SIGNATURE
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
BANCOLOMBIA S.A.
/s/ JAIME ALBERTO VELASQUEZ BOTERO
Name: Jaime Alberto Velasquez Botero
Title: Vice President, Strategy and Finance
Date: May 1, 2017
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Deloitte & Touche Ltda. Calle 16 sur No. 43A – 49 Piso 9 - 10 Nit. 860.005.813-4 Medellín Colombia Tel: +57 (4) 313 8899 Fax: +57 (4) 313 9343 www.deloitte.com/co |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Bancolombia S.A.:
Medellin, Colombia.
We have audited the accompanying consolidated statement of financial position of BANCOLOMBIA S.A. and subsidiaries (the “Group”) as of December 31, 2016 and the related consolidated statement of income, statement of comprehensive income, statement of changes in equity and statement of cash flow for the year ended December 31, 2016. These consolidated financial statements are the responsibility of the Group’s Management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such 2016 consolidated financial statements present fairly, in all material respects, the consolidated financial position of BANCOLOMBIA S.A. and subsidiaries as of December 31, 2016, and the consolidated results of their operations and their cash flows for the year ended December 31, 2016, in conformity with the International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS – IASB”).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Group’s internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated May 1, 2017 expressed an unqualified opinion on the Group’s internal control over financial reporting.
/s/ Deloitte & Touche Ltda.
Medellín, Colombia
May 1, 2017
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Deloitte se refiere a una o más de las firmas miembro de Deloitte Touche Tohmatsu Limited (“DTTL”), una compañía privada del Reino Unido limitada por garantía (“DTTL”), su red de firmas miembro, y a sus entidades relacionadas. DTTL y cada una de sus firmas miembro son entidades legalmente separadas e independientes. DTTL (también denominada “Deloitte Global”) no presta servicios a clientes. Una descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro puede verse en el sitio web www.deloitte.com/about.
© 2016. For information, contact Deloitte Touche Tohmatsu Limited. |
| F-1 |
| |
Deloitte & Touche Ltda. Calle 16 sur No. 43A – 49 Piso 9 - 10 Nit. 860.005.813-4 Medellín Colombia Tel: +57 (4) 313 8899 Fax: +57 (4) 313 9343 www.deloitte.com/co |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of Bancolombia S.A.:
Medellin, Colombia
We have audited the internal control over financial reporting of BANCOLOMBIA S.A. and subsidiaries (the “Group”) as of December 31, 2016, based on criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Group’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Group’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards, as issued by the International Accounting Standards Board (“IFRS – IASB”). A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS – IASB, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Deloitte se refiere a una o más de las firmas miembro de Deloitte Touche Tohmatsu Limited (“DTTL”), una compañía privada del Reino Unido limitada por garantía (“DTTL”), su red de firmas miembro, y a sus entidades relacionadas. DTTL y cada una de sus firmas miembro son entidades legalmente separadas e independientes. DTTL (también denominada “Deloitte Global”) no presta servicios a clientes. Una descripción detallada de la estructura legal de Deloitte Touche Tohmatsu Limited y sus firmas miembro puede verse en el sitio web www.deloitte.com/about.
© 2016. For information, contact Deloitte Touche Tohmatsu Limited. |
| F-2 |
In our opinion, the Group maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on the criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2016 of the Group and our report dated May 1, 2017 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche Ltda.
Medellin, Colombia
May 1, 2017
| F-3 |
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of Bancolombia S. A.
In our opinion, the consolidated statement of financial position as of December 31, 2015 and the related consolidated statement of income, and other comprehensive income, changes in equity and of cash flows for each of the two years in the period ended December 31, 2015 and 2014 present fairly, in all material respects, the financial position of Bancolombia S. A. and its subsidiaries as of December 31, 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2015 and 2014, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. These financial statements are the responsibility of the Bank's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers Ltda.
Bogotá, Colombia
April 22, 2016
PricewaterhouseCoopers Ltda., Calle 100 No. 11A-35, Bogotá, Colombia
Tel: (57-1) 634 0555, Fax: (57-1) 218 8544, www.pwc.com/co
| F-4 |
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
As of December 31, 2016 and 2015
(Stated in millions of Colombian pesos)
| Note | December 31, 2016 | December 31, 2015 | |
| ASSETS | |||
| Cash and cash equivalents | 4 | 20,460,245 | 18,597,614 |
| Financial assets Investments | 5.1 | 13,060,653 | 14,277,824 |
| Derivative financial instruments | 5.2 | 1,677,970 | 2,382,168 |
| Financial assets investments and derivative financial instruments | 14,738,623 | 16,659,992 | |
| Loans and advances to customers and financial Institutions | 151,747,486 | 145,620,639 | |
| Allowance for loans and advances and lease losses | (6,621,911) | (5,248,755) | |
| Loans and advances to customers and financial institutions, net | 6 | 145,125,575 | 140,371,884 |
| Assets held for sale and inventories | 12 | 273,187 | 1,950,808 |
| Investment in associates and joint ventures | 7 | 1,298,246 | 546,549 |
| Investment property | 10 | 1,581,689 | 1,505,046 |
| Premises and equipment, net | 9 | 3,115,697 | 3,052,266 |
| Goodwill and intangible assets, net | 8 | 6,694,037 | 7,092,255 |
| Deferred tax, net | 11.3.3 | 222,862 | 170,482 |
| Other assets | 13 | 2,750,883 | 3,025,971 |
| TOTAL ASSETS | 196,261,044 | 192,972,867 | |
| LIABILITIES AND EQUITY | |||
| LIABILITIES | |||
| Deposits by customers | 14 | 124,624,011 | 121,802,028 |
| Interbank deposits | 15 | 341,856 | 400,062 |
| Repurchase agreements and other similar secured borrowing | 15 | 1,924,010 | 1,232,456 |
| Liabilities relating to assets held for sale | 30 | - | 1,605,133 |
| Derivative financial instruments | 5.2 | 1,312,450 | 1,930,609 |
| Borrowings from other financial institutions | 16 | 18,905,843 | 19,721,184 |
| Debt securities in issue | 17 | 18,704,809 | 19,435,865 |
| Preferred shares | 581,972 | 580,959 | |
| Current tax | 124,802 | 193,949 | |
| Deferred tax, net | 11.3.3 | 1,325,354 | 834,392 |
| Employees benefit plans | 18 | 650,802 | 546,422 |
| Other liabilities | 19 | 5,288,155 | 4,281,889 |
| TOTAL LIABILITIES | 173,784,064 | 172,564,948 | |
| EQUITY | |||
| Share capital | 21 | 480,914 | 480,914 |
| Additional paid-in-capital | 4,857,454 | 4,857,454 | |
| Appropriated reserves | 22 | 7,472,409 | 5,877,379 |
| Retained earnings | 6,380,657 | 5,850,588 | |
| Accumulated other comprehensive income (loss), net of tax | 2,076,149 | 2,213,114 | |
| STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO THE OWNERS OF THE PARENT COMPANY | 21,267,583 | 19,279,449 | |
| Non-controlling interest | 1,209,397 | 1,128,470 | |
| TOTAL EQUITY | 22,476,980 | 20,407,919 | |
| TOTAL LIABILITIES AND EQUITY | 196,261,044 | 192,972,867 |
The accompanying notes form an integral part of these Consolidated Financial Statements.
| F-5 |
CONSOLIDATED STATEMENT OF INCOME
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the years ended December 31, 2016, 2015 and 2014
(Stated in millions of Colombian pesos, except EPS)
| Note | 2016 | 2015 | 2014 | |
| Interest on loans and financial leases | ||||
| Commercial | 7,952,627 | 5,487,993 | 3,889,542 | |
| Consumer | 3,069,124 | 2,333,173 | 1,997,319 | |
| Small business loans | 236,979 | 188,438 | 158,344 | |
| Mortgage | 1,767,761 | 1,396,002 | 1,372,337 | |
| Leasing | 1,993,851 | 1,547,634 | 1,172,218 | |
| Interest income on loans and financial leases | 15,020,342 | 10,953,240 | 8,589,760 | |
| Interest income on overnight and market funds | 20,968 | 14,564 | 11,122 | |
| Interest and valuation on investments | 24.1 | 707,495 | 301,840 | 571,281 |
| Total interest and valuation | 15,748,805 | 11,269,644 | 9,172,163 | |
| Interest expenses | 24.2 | (6,053,100) | (4,037,941) | (3,164,611) |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 9,695,705 | 7,231,703 | 6,007,552 | |
| Credit impairment charges on loans and advances and financial leases, net | 6 | (2,643,710) | (1,667,680) | (843,597) |
| Credit impairment charges on off balance sheet credit instruments | (87,442) | (7,421) | (25,608) | |
| Total credit impairment charges, net | (2,731,152) | (1, 675,101) | (869,205) | |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 6,964,553 | 5,556,602 | 5,138,347 | |
| Fees and commission income | 24.3 | 3,285,235 | 2,790,557 | 2,495,417 |
| Fees and commission expenses | 24.3 | (966,271) | (797,513) | (669,707) |
| Total fees and commission, net | 24.3 | 2,318,964 | 1,993,044 | 1,825,710 |
| Other operating income | 24.4 | 1,487,123 | 1,372,702 | 1,136,543 |
| Dividends received, and share of profits of equity method investees | 176,692 | 211,574 | 122,689 | |
| Total operating income, net | 10,947,332 | 9,133,922 | 8,223,289 | |
| Operating expenses | ||||
| Salaries and employee benefits | (2,808,931) | (2,255,391) | (1,973,467) | |
| Other administrative and general expenses | 25.1 | (2,651,334) | (2,237,598) | (1,947,375) |
| Wealth tax, contributions and other tax burden | (741,184) | (675,387) | (438,711) | |
| Impairment, depreciation and amortization | 25.2 | (517,809) | (477,285) | (459,703) |
| Other expenses | (259,792) | (252,626) | (299,439) | |
| Total operating expenses | (6,979,050) | (5,898,287) | (5,118,695) | |
| Profit before tax | 3,968,282 | 3,235,635 | 3,104,594 | |
| Income tax | 11.3.5 | (1,176,832) | (649,250) | (737,676) |
| Profit for the year from continuing operations | 2,791,450 | 2,586,385 | 2,366,918 | |
| Net income from discontinued operations | 30, 11.3.5 | 163,497 | 22,513 | 62,867 |
| Net income | 2,954,947 | 2,608,898 | 2,429,785 | |
| Net income attributable to equity holders of the Parent Company | 2,865,328 | 2,518,890 | 2,387,086 | |
| Non-controlling interest | 89,619 | 90,008 | 42,699 | |
| Basic and Diluted earnings per share to common shareholders | 26 | 3,040 | 2,680 | 2,591 |
| From continuing operations | 2,870 | 2,656 | 2,524 | |
| From discontinued operations | 170 | 24 | 67 |
The accompanying notes form an integral part of these Consolidated Financial Statements.
| F-6 |
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
As of December 31, 2016, 2015 and 2014
(Stated in millions of Colombian pesos)
| Note | 2016 | 2015 | 2014 | |
| Net income | 2,954,947 | 2,608,898 | 2,429,785 | |
| Other comprehensive (loss) ⁄ income that will not be reclassified to net income | ||||
| Remeasurement loss related to defined benefit liability | 626 | (59,434) | (27,297) | |
| Related tax | (10,966) | 9,312 | 6,407 | |
| Net of tax amount | 11.2 | (10,340) | (50,122) | (20,890) |
| Investments at fair value through other comprehensive income (FVTOCI): | ||||
| Unrealized gain or (loss) | 250,690 | 128,271 | (120,627) | |
| Gain on investments transferred to retained earnings upon disposal (1) | (42,414) | - | - | |
| Related tax | 24,341 | 9,052 | (3,110) | |
| Net of tax amount | 11.2 | 232,617 | 137,323 | (123,737) |
| Total other comprehensive income (loss) that will not be reclassified to net income, net of tax | 222,277 | 87,201 | (144,627) | |
| Other comprehensive profit that may be reclassified to net income | ||||
| Foreign currency translation adjustments: | ||||
| Exchange differences arising on translating the foreign operations | (672,684) | 3,091,491 | 1,769,767 | |
| Gain or loss on net investment hedge in foreign operations | 327,272 | (1,665,422) | (1,024,386) | |
| Gain reclassified to statement of income on acquisition of a foreign operation (2) | - | (18,394) | - | |
| Net of tax amount | (345,412) | 1,407,675 | 745,381 | |
| Net gain on cash flow hedges (3) | (12,112) | 6,378 | 5,734 | |
| Net of tax amount | (12,112) | 6,378 | 5,734 | |
| Unrealized (loss) or gains on investments in associates and joint ventures using equity method | 7 | (1,718) | (23,781) | 34,021 |
| Net of tax amount | (1,718) | (23,781) | 34,021 | |
| Total other comprehensive gains that may be reclassified to net income, net of tax | (359,242) | 1,390,272 | 785,136 | |
| Other comprehensive income, net of tax | (136,965) | 1,477,473 | 640,509 | |
| Total comprehensive income attributable to: | 2,817,982 | 4,086,371 | 3,070,294 | |
| Equity holders of the Parent Company | 2,728,363 | 3,996,363 | 3,037,906 | |
| Non-controlling interests | 89,619 | 90,008 | 32,388 |
| (1) | On May 31, 2016, the Bank completed the process for the sale of all of its minority stake in Cifin S.A. This sale, involved various financial institutions as sellers, including Bancolombia S.A., and TransUnion Netherlands II B.V., as buyer. |
| (2) | On December 30, 2015 the Bank acquired an additional 20% equity interest of the Grupo Agromercantil Holding (GAH) from BAM Financial Corporation, obtaining control. This item corresponds to the reclassification of the respective currency traslation adjustment in the GAH investment as an associate as of December 31, 2015. See Note 8 Goodwill and Intangible assets, net. |
| (3) | In 2016 the Bank's subsidiary, Banistmo, discontinued cash flow hedge accounting. For further information see Note 5.2. Derivatives Financial Instruments. |
The accompanying notes form an integral part of these Consolidated Financial Statements
| F-7 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the years ended December 31, 2016, 2015 and 2014
(Stated in millions of Colombian pesos, except per share amounts)
| Attributable to owners of Parent Company | ||||||||||||
| Other comprehensive income | ||||||||||||
| Attributable | ||||||||||||
| Share | Appropiated | Investments | Cash flow | To owners | Non- | |||||||
| Capital | Additional | Reserves | Translation | At fair value | Hedge | Employee | Retained | Of Parent | Controlling | Total | ||
| (Note 21) | Paid in capital | (Note 22) | adjustment | Through OCI | Reserve | Associates | Benefits | earnings | Company | interest | equity | |
| Balance as of December 31, 2015 | 480,914 | 4,857,454 | 5,877,379 | 2,153,056 | 108,012 | 12,112 | 10,240 | (70,306) | 5,850,588 | 19,279,449 | 1,128,470 | 20,407,919 |
| Dividend payment corresponding to 509,704,584 common shares and 452,122,416 preferred shares without voting rights, subscribed and paid as of December 31, 2015, at a rate of COP 888 per share. | - | - | - | - | - | - | - | - | (796,517) | (796,517) | - | (796,517) |
| Legal reserve movements | - | - | 1,554,425 | - | - | - | - | - | (1,554,425) | - | - | - |
| Release of reserves by law | - | - | (377,471) | - | - | - | - | - | 377,471 | - | - | - |
| Increase of reserves by law | - | - | 421,730 | - | - | - | - | - | (421,730) | - | - | - |
| Sale of financial instruments | - | - | - | - | (42,414) | - | - | - | 42,414 | - | - | - |
| Non-controlling interest | - | - | - | - | - | - | - | - | - | (8,692) | (8,692) | |
| Other reserves(1) | - | - | (3,654) | - | - | - | - | - | 3,654 | - | - | - |
| Net income | - | - | - | - | - | - | - | - | 2,865,328 | 2,865,328 | 89,619 | 2,954,947 |
| Other comprehensive income | - | - | - | (345,412) | 275,031 | (12,112) | (1,718) | (10,340) | 13,874 | (80,677) | - | (80,677) |
| Balance as of December 31, 2016 | 480,914 | 4,857,454 | 7,472,409 | 1,807,644 | 340,629 | - | 8,522 | (80,646) | 6,380,657 | 21,267,583 | 1,209,397 | 22,476,980 |
| (1) | This item corresponds to the dynamic reserves of Banistmo S.A. |
The accompanying notes form an integral part of these Consolidated Financial Statements.
| F-8 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the years ended December 31, 2016, 2015 and 2014
(Stated in millions of Colombian pesos, except per share amounts)
| Attributable to owners of Parent Company | ||||||||||||
| Other comprehensive income | ||||||||||||
| Share | Investments | Cash | Attributable | |||||||||
| Capital | Additional | Appropiated | At fair value | flow | To owners | Non- | ||||||
| (Note | Paid in | Reserves | Translation | Through | Hedge | Employee | Retained | Of Parent | Controlling | Total | ||
| 21) | capital | (Note 22) | adjustment | OCI | Reserve | Associates | Benefits | earnings | Company | interest | equity | |
| Balance as of December 31, 2014 | 480,914 | 4,857,454 | 5,130,861 | 745,381 | (29,311) | 5,734 | 34,021 | (20,184) | 5,667,037 | 16,871,907 | 494,573 | 17,366,480 |
| Dividend payment corresponding to 509,704,584 common shares and 452,122,416 preferred shares without voting rights, subscribed and paid as of December 31, 2014, at a rate of COP 830 per share. | - | - | - | - | - | - | - | - | (798,316) | (798,316) | - | (798,316) |
| Legal reserve movements | - | - | 308,442 | - | - | - | - | - | (308,442) | - | - | - |
| Release of reserves by law | - | - | (288,386) | - | - | - | - | - | 288,386 | - | - | - |
| Increase of reserves by law | - | - | 377,470 | - | - | - | - | - | (377,470) | - | - | - |
| Non-controlling interest (1) | - | - | - | - | - | - | - | - | 543,889 | 543,889 | ||
| Other movements (2) | - | - | 348,992 | - | - | - | - | - | (348,992) | - | ||
Recognition of GAH´s gross put obligation(3) |
- | - | - | - | - | - | - | - | (368,776) | (368,776) | - | (368,776) |
| Net income | - | - | - | - | - | - | - | - | 2,097,161 | 2,097,161 | 90,008 | 2,187,169 |
| Other comprehensive income | - | - | - | 1,407,675 | 137,323 | 6,378 | (23,781) | (50,122) | - | 1,477,473 | - | 1,477,473 |
| Balance as of December 31, 2015 | 480,914 | 4,857,454 | 5,877,379 | 2,153,056 | 108,012 | 12,112 | 10,240 | (70,306) | 5,850,588 | 19,279,449 | 1,128,470 | 20,407,919 |
| (1) | The increase in the category of non-controlling interest is due to the inclusion of GAH in the consolidated financial statements, see Note 8. Goodwill and Intangible Assets, net. |
| (2) | This item includes appropriation of profits at the end of the first semester of the Bank’s subsidiaries that have prepared semi-annual financial statements. |
| (3) | Due to contractual terms, the non-controlling interest of GAH is entitled to sell its interest to the Bank. See Note 8. Goodwill and Intagible Assets, net. |
The accompanying notes form an integral part of these Consolidated Financial Statements.
| F-9 |
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the years ended December 31, 2016, 2015 and 2014
(Stated in millions of Colombian pesos, except per share amounts)
| Attributable to owners of Parent Company | ||||||||||||
| Other comprehensive income | ||||||||||||
| Investments | Cash | Attributable | ||||||||||
| Additional | at fair value | flow | to owners | Non- | ||||||||
| Share | paid in | Appropriated | Translation | through | hedge | Employee | Retained | of Parent | controlling | Total | ||
| Capital | capital | Reserves | adjustment | OCI | reserve | Associates | benefits | earnings | Company | interest | equity | |
| Balance as of January 1, 2014 | 425,914 | 2,571,399 | 4,372,669 | - | 84,115 | - | - | 706 | 4,726,819 | 12,181,622 | 462,185 | 12,643,807 |
| Issuance of preferred shares | 55,000 | 2,286,055 | - | - | - | - | - | - | - | 2,341,055 | - | 2,341,055 |
| Dividend payment corresponding to 509,704,584 common shares and 342,122,416 preferred shares without voting rights, subscribed and paid as of December 31, 2013 and a dividend corresponding to a number up to 110 million preferred shares without voting rights that might be subscribed in the share issuance | - | - | (212,955) | - | - | - | - | - | (475,721) | (688,676) | - | (688,676) |
| Legal reserve movements | - | - | 913,838 | - | - | - | - | - | (913,838) | - | - | - |
| Release of reserves by law | - | - | (267,739) | - | - | - | - | - | 267,739 | - | - | - |
| Increase of reserves by law | - | - | 288,386 | - | - | - | - | - | (288,386) | - | - | - |
| Other movements (1) | - | - | 36,662 | - | - | - | - | - | (36,662) | - | - | - |
| Net income | - | - | - | - | - | - | - | - | 2,387,086 | 2,387,086 | 42,699 | 2,429,785 |
| Other comprehensive income | - | - | - | 745,381 | (113,426) | 5,734 | 34,021 | (20,890) | - | 650,820 | (10,311) | 640,509 |
| Balance as of December 31, 2014 | 480,914 | 4,857,454 | 5,130,861 | 745,381 | (29,311) | 5,734 | 34,021 | (20,184) | 5,667,037 | 16,871,907 | 494,573 | 17,366,480 |
| (1) | This item includes appropriation of profits at the end of the first semester of the Bank’s subsidiaries that have prepared semi-annual financial statements. |
The accompanying notes form an integral part of these Consolidated Financial Statements
| F-10 |
CONSOLIDATED STATEMENT OF CASH FLOW
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the years ended December 31, 2016, 2015 and 2014
(Stated in millions of Colombian pesos)
| 2016 | 2015 | 2014 | ||
| Net income | 2,954,947 | 2,608,898 | 2,429,785 | |
| Adjustments to reconcile net income to net cash provided by (used in) operating activities: | ||||
| Depreciation and amortization | 482,902 | 481,558 | 435,214 | |
| Equity method | (60,254) | (122,477) | (60,547) | |
| Deferred tax expense | 457,611 | 296,535 | 270,277 | |
| Credit impairment charges on loans and advances and financial leases | 3,248,517 | 2,190,333 | 1,308,825 | |
| Allowances for credit losses on off balance sheet credit instruments | 92,453 | 26,254 | (1,229) | |
| Gain on sales on assets held for sale | (60,294) | (8,453) | 229,371 | |
| Gains on sale of mortgage loans and other assets | - | (2,247) | (35,776) | |
| Valuation gain on investment securities | (721,984) | (478,387) | (502,047) | |
| (Gain) Loss on sale of investment in subsidiary | (260,279) | 18,643 | - | |
| Valuation gain on derivative contracts | (159,422) | (558,972) | 134,488 | |
| Goodwill impairment | - | - | 3,179 | |
| Wealth tax (expenses) | 146,931 | 162,302 | 94,615 | |
| Income tax (expenses) | 821,796 | 351,648 | 467,399 | |
| Other non-cash ítems | (1,170) | (45,408) | 4,539 | |
| Net interest | (9,389,915) | (7,140,043) | (5,715,922) | |
| Change in operating assets and liabilities: | ||||
| (Increase) Decrease in derivatives | 263,966 | 64,456 | (483,881) | |
| (Increase) Decrease in accounts receivable | 263,871 | (680,752) | (478,288) | |
| Increase in loans and financial leases | (10,853,224) | (15,036,979) | (13,008,841) | |
| Increase in other assets | (47,200) | (465,403) | (215,422) | |
| (Decrease) Increase in accounts payable | 445,570 | (359,628) | (554,738) | |
| (Decrease) Increase in other liabilities | 263,729 | 535,817 | 21,561 | |
| Increase in deposits | 5,117,996 | 9,797,802 | 2,869,712 | |
| (Decrease) Increase in estimated liabilities and provisions | (56,741) | (7,842) | 101,402 | |
| Net changes in investment securities recognized at fair value through profit or loss | 1,485,514 | 1,729,280 | 381,104 | |
| Proceeds from sales of assets held for sale | 272,830 | 185,777 | - | |
| Others | - | - | 26,095 | |
| Wealth tax paid | (146,931) | (162,302) | (94,615) | |
| Income tax paid | (192,045) | (159,795) | (79,036) | |
| Dividend received | 90,569 | 192,911 | 31,582 | |
| Interest received | 14,370,840 | 12,214,438 | 8,957,399 | |
| Interest paid | (5,229,165) | (3,771,238) | (3,203,620) | |
| Net cash provided by (used in) operating activities | 3,601,418 | 1,856,726 | (6,667,416) | |
| Cash flow from investment activities: | ||||
| Purchases of debt securities at amortized cost | (2,077,078) | (1,768,079) | (3,018,016) | |
| Proceeds from maturities of debt securities at amortized cost | 2,365,976 | 1,713,200 | 4,297,720 | |
| Purchase of Grupo Agromercantil Holding, net of cash acquired | - | 783,803 | - | |
| Purchases of equity instruments and interests in joint ventures | (487,782) | (9,602) | - | |
| Proceeds from equity instruments and interests in joint ventures | 53,488 | 229,488 | - | |
| Purchases of premises and equipment and investment property | (1,082,522) | (961,827) | (774,976) | |
| Proceeds from sales of premises and equipment and investment property | 552,471 | 289,721 | 478,356 | |
| Proceeds from sales of investments in subsidiaries, net of cash sold | (219,218) | (1) | (248) | - |
| Proceeds from liquidation of investments in subsidiaries | (93) | - | - | |
| Purchase of other long-term assets | (132,869) | (134,471) | (48,972) | |
| Net cash (used in) provided by investing activities | (1,027,627) | 141,985 | 934,112 | |
| Cash flows from financing activities: | ||||
| Increase (Decrease) in Repurchase agreements and other similar secured borrowing | 706,341 | (898,652) | 1,015,052 | |
| Proceeds from borrowings from other financial institutions | 13,594,292 | 13,533,749 | 7,549,533 | |
| Repayment of borrowings from other financial institutions | (13,744,676) | (13,132,534) | (8,547,097) | |
| Placement of debt securities in issue | 3,039,485 | 2,452,213 | 1,560,804 | |
| Payment of debt securities in issue | (3,099,039) | (1,372,837) | (1,860,121) | |
| Issuance of preferred shares | - | - | 2,625,585 | |
| Redemption of preferred shares by Banistmo | - | (28,081) | - | |
| Dividends paid | (840,242) | (785,332) | (713,679) | |
| Net cash (used in) provided by financing activities | (343,839) | (231,474) | 1,630,077 | |
| Effect of exchange rate changes on cash and cash equivalents | (575,284) | 3,571,557 | 2,124,033 | |
| Increase (Decrease) in cash and cash equivalents | 2,229,952 | 1,767,237 | (4,103,227) | |
| Cash and cash equivalents at beginning of year | 18,805,577 | 13,466,783 | 15,445,977 | |
| Cash and cash equivalents at end of year(2) | 20,460,245 | 18,805,577 | 13,466,783 |
| (1) | Corresponds to the net amount of cash received from the sale of Compañía de Financiamiento TUYA S.A. amounting to COP 9,517 and the balance of cash and cash equivalents held by the company at the transaction date amounting to COP 228,735. |
| (2) | COP 18,805,577 includes cash and cash equivalents related to assets held for sale amounting to COP 207,963. See Note 30 Discontinued Operations. |
These consolidated statements of cash flows include the following non-cash transactions for the years 2016, 2015 and 2014:
| a. | Restructured loans and returned goods that were transferred to foreclosed assets and inventories amounting to COP 487,122, COP 185,042 and 169,798, respectively. |
| b. | Foreclosed assets donation amounting to COP 4,539 in 2014; during 2016 and 2015 there were no foreclosed assets donations |
The accompanying notes form an integral part of these Consolidated Financial Statements.
| F-11 |
NOTE 1. REPORTING ENTITY
Bancolombia S.A., hereinafter the Parent Company, is a credit establishment, listed in the Colombia Stock Exchange (BVC) and, as well as in New York Stock Exchange (NYSE), since 1981 and 1995, respectively. The Parent Company's main location is in Medellin (Colombia), main address Carrera 48 # 26-85, Avenida Los Industriales, was originally constituted under the name Colombian Industrial Bank (BIC) according to public deed number 388, dated January 24, 1945, from the First Notary's Office of Medellin, authorized by the Superintendence of Finance of Colombia (“SFC”). On April 3, 1998, by means of public deed No. 633, BIC merged with Bank of Colombia S.A., and the resulting organization of that merger was named Bancolombia S.A.
Bancolombia S.A.’s business purpose is to carry out all operations, transactions, acts and services inherent to the Banking business through banking establishments that carry its name and according to all applicable legislation. The Parent Company may own interests in other corporations, wherever authorized by law, according to all terms and requirements, limits or conditions established therein.
The Parent Company and its subsidiaries (on consolidated basis referred to as the “Bank”) include the following operating segments: Banking Colombia, Banking Panama, Banking El Salvador, Banking Guatemala, Trust, Investment banking, Brokerage, Off Shore and Others. The activities carried out by each operating segment of the Bank are described in Note 3, Operating segments.
The duration of the Parent Company contemplated in the bylaws is until December 8, 2044, but it can be dissolved or renewed before the conclusion of that period. The operating license was authorized definitively by the SFC according to Resolution number 3140 on September 24, 1993. Concerning amendments to the bylaws, in 2015 and by means of public deed number 6,290 dating November 27, 2015 from Notary's Office 25 of Medellin, an amendment to the bylaws was formalized, whose main changes were the increase of the authorized capital to COP 700,000, represented by 1,400 millions of shares with nominal value of COP 500 each share and adjustments regarding Corporate Governance.
Through public deed number 1,124 of September 30, 2016, from the fourthteenth Notary’s Office of Medellin, duly registered in the Camara de Comercio de Medellín, a merger was completed between the Parent Company (absorbing entity) and Leasing Bancolombia S.A. (absorbed entity). As a result of the merger, the Parent Company became the holder of all the rights and obligations of Leasing Bancolombia S.A. and continues to offer its clients the portfolio of leasing products and services under the brand "Leasing Bancolombia, una marca Bancolombia".
| F-12 |
The Bank has 34,567 employees, and operates through 817 offices, 8,080 banking Correspondents and 558 Mobile service spots in Colombian territory.
The Bank also has an agency in Panama City, Panama, and representative offices in Peru and Guatemala.
NOTE 2. SIGNIFICANT ACCOUNTING POLICIES
| A. | Basis for preparation |
The consolidated financial statements of the Bank are prepared in accordance with the International Financial Reporting Standards (hereinafter, IFRS) issued by the International Accounting Standards Board (hereinafter, IASB), as well as the interpretations issued by the International Financial Reporting Interpretations Committee (hereinafter, IFRIC).
The preparation of financial statements in conformity with IFRS requires the use of accounting estimates which, by definition, will seldom equal the actual results. Therefore, the estimates and assumptions are constantly reviewed, recognizing the revision in the same period if it affects the reviewed period; or in the reviewed period and future periods if it affects all the current and future periods.
Assets and liabilities are measured at cost or amortized cost, except for some financial assets and liabilities and investment properties that are measured at fair value. Financial assets and liabilities measured at fair value comprise those classified as assets and liabilities at fair value through profit or loss, equity investments measured at fair value through other comprehensive income (“OCI”) and derivative instruments. Likewise the carrying value of assets and liabilities recognized that are designated as hedged items in a fair value hedge, is adjusted for changes in fair value attributable to the hedged risk.
The consolidated financial statements are stated in Colombian pesos and its figures are stated in millions, except earnings per share, diluted earning per share and the market exchange rate, which are stated in Colombian pesos, while other currencies (dollars, euro, pounds, etc.) are stated in thousands.
The Parent Company’s financial statements, which have been prepared in accordance with “Normas de Contabilidad e Información Financiera” (NCIF) applicable to separated financial statements, are those that serve as the basis for the distribution of dividends and other appropriations by the stockholders.
| B. | Presentation of financial statements |
The Bank presents the consolidated statement of financial position ordered by liquidity and the consolidated statement of income is prepared based on the nature of expenses. Revenues and expenses are not offset, unless such compensation is permitted or required by any accounting standard or interpretation, and are described in the Bank's policies.
The statement of comprehensive income presents net income and items of other comprehensive income classified by nature and grouped into those that will not be reclassified subsequently to profit or loss and those that will be reclassified when specific conditions are met. The Bank discloses the amount of income tax relating to each item of OCI.
| F-13 |
The consolidated statement of cash flows was prepared using the indirect method, whereby net income is adjusted for the effects of transactions of a non-cash nature, changes during the period in operating assets and liabilities, and items of income or expense associated with investing or financing cash flows.
| C. | Consolidation |
| 1. | Subsidiaries |
The consolidated financial statements include the financial statements of Bancolombia S.A. and its subsidiaries as of and for the periods ended on December 31, 2016, 2015 and 2014. The Parent Company consolidates the financial results of the entities on which it exerts control.
In accordance with IFRS 10, a subsidiary is an organization controlled by any of the companies that comprise The Bank, as long as it has:
| · | Power over the investee that give it the ability to direct their relevant activities that significantly affect its performance. |
| · | Exposure or rights to variable returns for its involvement with the investee. |
| · | Ability to use its power over the investee to affect the investor return amounts. |
The Parent Company has the following subsidiaries making up the Bank´s organizational structure, which is currently registered as a corporate group:
| ENTITY | JURISDICTION OF INCORPORATION |
BUSINESS | SHAREHOLDING DIRECTLY AND INDIRECTLY 2016 |
SHAREHOLDING DIRECTLY AND INDIRECTLY 2015 |
SHAREHOLDING DIRECTLY AND INDIRECTLY 2014 |
| Leasing Bancolombia S.A. Compañía de Financiamiento (1) | Colombia | Leasing | - | 100% | 100% |
| Fiduciaria Bancolombia S.A. Sociedad Fiduciaria | Colombia | Trust | 98.81% | 98.81% | 98.81% |
| Banca de Inversión Bancolombia S.A. Corporación Financiera | Colombia | Investment banking | 100% | 100% | 100% |
| Valores Bancolombia S.A. Comisionista de Bolsa | Colombia | Securities brokerage | 100% | 100% | 100% |
| Compañía de Financiamiento Tuya S.A. (2) | Colombia | Financial services | - | 99.99% | 99.99% |
| Renting Colombia S.A.S. (before Renting Colombia S.A.) | Colombia | Operating leasing | 100% | 100% | 100% |
| Transportempo S.A.S. | Colombia | Transportation | 100% | 100% | 100% |
| Valores Simesa S.A. | Colombia | Investments | 68.57% | 68.57% | 68.57% |
| Inversiones CFNS S.A.S. | Colombia | Investments | 99.94% | 99.94% | 99.94% |
| CFNS Infraestructura S.A.S. (3) | Colombia | Investments | - | - | 99.94% |
| BIBA Inmobiliaria S.A.S. | Colombia | Real estate broker | 100% | 100% | 100% |
| Vivayco S.A.S. (4) | Colombia | Portfolio Purchase | - | 74.95% | 74.95% |
| Uff Móvil S.A.S. (5) | Colombia | Mobile network operator | - | - | 75.05% |
| FCP Fondo Colombia Inmobiliario. | Colombia | Real estate broker | 62.55% | 50.21% | 50.21% |
| Patrimonio Autonomo Cartera LBC. (6) | Colombia | Loan management | - | 100% | 100% |
| Prosicol S.A.S. (In liquidation) | Colombia | Pre-operating stage | 68.57% | 68.57% | 68.57% |
| Fideicomiso "Lote Abelardo Castro". | Colombia | Mercantil trust | 68.23% | 68.23% | 68.23% |
| Bancolombia Panamá S.A. | Panama | Banking | 100% | 100% | 100% |
| Valores Bancolombia Panamá S.A. (7) | Panama | Securities brokerage | - | 100% | 100% |
| Suvalor Panamá Fondo de Inversión S.A. Fondo de Inversión (7) | Panama | Holding | - | 100% | 100% |
| Sistemas de Inversiones y Negocios S.A. Sinesa | Panama | Investments | 100% | 100% | 100% |
| Banagrícola S.A. | Panama | Investments | 99.16% | 99.16% | 99.16% |
| Banistmo S.A. | Panama | Banking | 100% | 100% | 98.12% |
| Banistmo Investment Corporation S.A. | Panama | Trust | 100% | 100% | 98.12% |
| Financomer S.A. | Panama | Financial services | 100% | 100% | 98.12% |
| Leasing Banistmo S.A. | Panama | Leasing | 100% | 100% | 98.12% |
| Valores Banistmo S.A. (before Valores Bancolombia Panamá S.A.) | Panama | Purchase and sale of securities | 100% | - | - |
| Banistmo Capital Markets Group Inc. (8) | Panama | Purchase and sale of securities | 100% | 100% | 98.12% |
| Williamsburg International Corp. (8) | Panama | Real estate broker | 100% | 100% | 98.12% |
| Van Dyke Overseas Corp. (8) | Panama | Real estate broker | 100% | 100% | 98.12% |
| Anavi Investment Corporation S.A. (8) | Panama | Real estate broker | 100% | 100% | 98.12% |
| Desarrollo de Oriente S.A. (8) | Panama | Real estate broker | 100% | 100% | 98.12% |
| Steens Enterpresies S.A. (8) | Panama | Portfolio holder | 100% | 100% | 98.12% |
| Ordway Holdings S.A. (8) | Panama | Real estate broker | 100% | 100% | 98.12% |
| Banistmo Asset Management Inc. (8) | Panama | Purchase and sale of securities | 100% | 100% | 98.12% |
| Inmobiliaria Bickford S.A. (8) | Panama | Real estate broker | 100% | 100% | 98.12% |
| Financiera Flash S.A. (9) | Panama | Financial services | - | 100% | 98.12% |
| Grupo Financomer S.A. (9) | Panama | Financial services | - | 100% | 98.12% |
| Securities Banistmo S.A. (10) | Panama | Purchase and sale of securities | - | 100% | 98.12% |
| Bienes Raices Armuelles S.A.(11) | Panama | Real estate broker | - | - | 98.12% |
| M.R.C Investment Corp. (12) | Panama | Real estate broker | - | - | 98.12% |
| Seguros Banistmo S.A. (13) | Panama | Insurance company | - | - | 98.12% |
| Banco Agrícola S.A. | El Salvador | Banking | 97.36% | 97.36% | 97.36% |
| Arrendadora Financiera S.A. Arfinsa | El Salvador | Leasing | 97.36% | 97.36% | 97.36% |
| Credibac S.A. de C.V. | El Salvador | Credit card services | 97.36% | 97.36% | 97.36% |
| Valores Banagrícola S.A. de C.V. | El Salvador | Securities brokerage | 98.89% | 98.89% | 98.89% |
| Inversiones Financieras Banco Agrícola S.A. IFBA | El Salvador | Investments | 98.89% | 98.89% | 98.89% |
| Gestora de Fondos de Inversión Banagricola S.A. | El Salvador | Administers investment funds | 98.89% | - | - |
| Arrendamiento Operativo CIB S.A.C. | Peru | Operating leasing | 100% | 100% | 100% |
| F-14 |
| ENTITY | JURISDICTION OF INCORPORATION |
BUSINESS | SHAREHOLDING DIRECTLY AND INDIRECTLY 2016 |
SHAREHOLDING DIRECTLY AND INDIRECTLY 2015 |
SHAREHOLDING DIRECTLY AND INDIRECTLY 2014 |
| Fondo de Inversión en Arrendamiento Operativo - Renting Perú | Peru | Car Rental | 100% | 100% | 100% |
| Capital Investments SAFI S.A. | Peru | Trust | 100% | 100% | 100% |
| FiduPerú S.A. Sociedad Fiduciaria | Peru | Trust | 98.81% | 98.81% | 98.81% |
| Leasing Perú S.A. | Peru | Leasing | 100% | 100% | 100% |
| Banagrícola Guatemala S.A. | Guatemala | Outsourcing | 99.16% | 99.16% | 99.16% |
| Grupo Financiero Agromercantil Holding S.A. (14) | Guatemala | Holding | 60.00% | 60.00% | - |
| Banco Agromercantil de Guatemala S.A. (14) | Guatemala | Banking | 60.00% | 60.00% | - |
| Mercom Bank Ltd. (14) | Guatemala | Banking | 60.00% | 60.00% | - |
| Seguros Agromercantil de Guatemala S.A. (14) | Guatemala | Insurance company | 59.17% | 59.17% | - |
| Financiera Agromercantil S.A. (14) | Guatemala | Financial services | 60.00% | 60.00% | - |
| Agrovalores S.A. (14) | Guatemala | Securities brokerage | 60.00% | 60.00% | - |
| Tarjeta Agromercantil S.A. (In liquidation) (14) | Guatemala | Credit Card | 60.00% | 60.00% | - |
| Arrendadora Agromercantil S.A. (14) | Guatemala | Operating Leasing | 60.00% | 60.00% | - |
| Agencia de Seguros y Fianzas Agromercantil S.A. (14) | Guatemala | Insurance company | 60.00% | 60.00% | - |
| Asistencia y Ajustes S.A. (14) | Guatemala | Services | 60.00% | 60.00% | - |
| Serproba S.A. (14) | Guatemala | Maintenance and remodelling services | 60.00% | 60.00% | - |
| Servicios de Formalización S.A. (14) | Guatemala | Loans formalization | 60.00% | 60.00% | - |
| Conserjeria, Mantenimiento y Mensajería S.A. (14) | Guatemala | Maintenance services | 60.00% | 60.00% | - |
| Media Plus S.A. (14) | Guatemala | Advertising and marketing | 60.00% | 60.00% | - |
| New Alma Enterprises Ltd. (14) | Bahamas | investments | 60.00% | 60.00% | - |
| Bancolombia Puerto Rico Internacional Inc. | Puerto Rico | Banking | 100% | 100% | 100% |
| Sulesing International USA Inc. (15) | United States | Leasing | - | - | 100% |
| Bancolombia Caymán S.A. | Cayman Islands | Banking | 100% | 100% | 100% |
| Bagrícola Costa Rica S.A. | Costa Rica | Outsourcing | 99.16% | 99.16% | 99.16% |
| (1) | Investment absorbed by Bancolombia S.A. Corp during 2016. |
| (2) | During 2016, the Bank sold 50% of the shares of the Compañía de Financiamiento Tuya S.A.to Grupo Exito, therefore it became a joint business of Grupo Bancolombia. See Note 7: 'Investments in associates and Joint Ventures'. |
| (3) | Investment liquidated by Inversiones CFNS S.A.S. during 2015. |
| (4) | Investment liquidated by Inversiones CFNS S.A.S. during 2016. |
| (5) | Investment sold by Inversiones CFNS S.A.S. during 2015. |
| (6) | Investment liquidated as result of fusion of Bancolombia S.A. and Leasing Bancolombia during 2016. |
| (7) | Investment initially acquired by Banistmo S.A. and subsequently merged with Valores Banistmo S.A during 2016. |
| (8) | Investments in non-operational stage |
| (9) | Investment absorbed by Financomer S.A. during 2016. |
| (10) | Investment absorbed by Valores Banistmo S.A. during 2016. |
| (11) | Investment absorbed by Van Dyke Overseas Corp during 2015. |
| (12) | Investment liquidated for Banistmo S.A. during 2015. |
| (13) | Investment sold for Banistmo S.A. during 2015 |
| (14) | See Note 8 “Goodwill and intangible assets, net” |
| (15) | Investment liquidated by Bancolombia Panamá S.A. during 2015. |
When necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies into line with the Bank’s accounting policies.
| F-15 |
All intragroup assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Bank are eliminated in full on consolidation.
Non-controlling interests in controlled entities are presented in equity separately from the Parent Company stockholders equity. When the Bank loses control over a subsidiary, any residual interest remaining on the Bank’s balances is measured at fair value; gains or losses arising from this measurement are recognized in net income.
There are restrictions on the ability of the Parent Company to obtain distributions of capital, due to the regulatory requirements of its subsidiaries in Panama. Banistmo and Bancolombia Panama have net assets before intercompany eliminations amounting to COP 6,360,729 and COP 6,013,944, at December 31, 2016 and 2015, respectively.
The loans and financial leases granted by those subsidiaries are subject to prudential regulation in Panama issued by the Panamanian Superintency of Banks to maintain minimum reserves as a countercyclical capital buffer. For the years ended at December 31, 2016 and 2015, the reserves recognized amounted to COP 523,106 and COP 427,867. These requirements restrict the ability of the aforementioned subsidiaries to make remittances of dividends to Bancolombia S.A., the ultimate parent, except in the event of liquidation.
| 2. | Transactions between entities under common control |
Combination of entities under common control, ie transactions in which all the combining entities are under the control of the Bank both before and after the combination, and that control is not transitory, are outside the scope of the IFRS 3- Business combinations. Currently, there is no specific guidance for these transactions under IFRS, therefore, as permitted by IAS 8, the Bank has developed an accounting policy considering pronouncement of other standard-setting bodies. The assets and liabilities recognized as a result of transactions between entities under common control are recognized at the carrying value of the acquiree’s financial statements. The Bank presents the net assets received prospectively from the date of the transfer.
| 3. | Investments in associates and joint ventures |
An associate is an entity over which the Bank has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.
A joint venture is an entity that the Bank controls jointly with other participants, where the parties maintain a contractual agreement that establishes joint control over the relevant activities of the entity (which only exists when decisions about those activities require unanimous consent of the parties sharing control) and the parties have rights to the net assets of the joint arrangement.
At the acquisition date, the excess of the acquisition cost of the associate or joint venture shares exceeding the Bank´s share of the net fair value of identifiable assets and liabilities of the investee is recognized as goodwill. Goodwill is included in the carrying amount of the investment and it is not amortized. The requirements of IAS 39 are applied to determine whether it is necessary to recognize any impairment loss with respect to the Bank’s investment in an associate or a joint venture. When necessary, the entire carrying amount of the investment (including goodwill) is tested for impairment in accordance with IAS 36 Impairment of Assets as a single asset. Impairment losses are recognized in net income and are calculated as the difference between the recoverable amount of the associate or joint venture, using the higher value between its value in use and its fair value less costs of disposal, and their carrying value.
| F-16 |
The results and assets and liabilities of associates or joint ventures are incorporated in the consolidated financial statements using the equity method of accounting, except when the investment, or a portion thereof, is classified as held for sale, in which case it is accounted for in accordance with IFRS 5. When an investment in an associate or joint venture is held by, or is held indirectly through, an entity that is a venture capital organization, or a mutual fund, unit trust or similar entities, and such investment is measured at fair value through profit or loss in that entity, the Bank may elect to measure investments in those associates and joint ventures at fair value through profit or loss in the consolidated financial statements. This election is applied on an investment by investment basis.
Under the equity method, the investment is initially recorded at cost and adjusted thereafter to recognize the Bank’s share of the profits or loss and other comprehensive income of the associate or join venture. When the Bank's share of losses of an associate or joint venture exceeds the Bank's interest in that associate or joint venture (which includes any long-term interests that, in substance, form part of the Bank's net investment in the associate or joint venture), the Bank discontinues recognizing its share of further losses. Additional losses are recognized only to the extent that the Bank has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture.
When the equity method is applicable, adjustments are considered in order to adopt uniform accounting policies of the associate or joint venture with the Bank. The portion that corresponds to the Bank for changes in the investee´s other comprehensive income items is recognized in the consolidated statement of comprehensive income and gains or losses of the associate or joint venture are recognized in the consolidated statement of income as “Dividends received and share of profits of equity method investees”, in accordance with the Bank's participation. Gains and losses resulting from transactions between the Bank and its associate or joint venture are recognized in the Bank´s consolidated financial statements only to the extent of unrelated investor´s interest in the associate or joint venture. The equity method is applied from the acquisition date until the significant influence or joint control over the entity is lost.
The Bank’s share of the other comprehensive income of associates and joint ventures is presented in the consolidated statement of comprehensive income, net of tax. Changes in the investment´s participation recognized directly in equity and other comprehensive income of the associate or joint venture are considered in the consolidated statement of equity and consolidated statement of comprehensive income.
The dividends received in cash from the associate or joint venture reduce the investment carrying value.
When the significant influence on the associate or the joint venture is lost, the Bank measures and recognizes any residual investment that remained at its fair value. The difference between the associate or joint venture carrying value (taking into account the relevant items of other comprehensive income), the fair value of the retained residual investment and any proceeds from disposing of a part interest in the associate or joint venture, is recognized in net income. The currency translation adjustments recognized in equity are reclassified to net income at the moment of disposal.
| 4. | Joint operations |
A joint operation is a joint arrangement whereby the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement.
| F-17 |
The Bank recognizes and measures assets, liabilities, revenues and expenses in relation to its interest in the arrangements in accordance with the IFRSs applicable for the particular assets, liabilities revenues and expenses.
If the Bank acquires an interest in a joint operation in which the activity constitutes a business, as defined in IFRS 3 Business Combinations or when an existing business is contributed to the joint operation on its formation by one of the parties that participate in the joint operation, The Bank will apply all of the principles on business combinations accounting in IFRS 3. In this case the Bank recognizes goodwill in the event that consideration transferred exceeds the net of the acquisition date amounts of the identifiable assets acquired and the liabilities assumed. At least once per year goodwill is tested for impairment.
When the Bank transacts with a joint operation in which the Parent Company or its subsidiaries is a joint operator (such as a sale or contribution of assets), the Bank is considered to be conducting the transaction with the other parties to the joint operation, and gains and losses resulting from the transactions are recognized in the Bank’s consolidated financial statements only to the extent of other parties’ interests in the joint operation.
When the Bank transacts with a joint operation in which the Parent Company or its subsidiaries is a joint operator (such as a purchase of assets), the Bank does not recognize its share of the gains and losses until it resells those assets to a third party.
| 5. | Funds administration |
The Bank manages assets held in mutual funds and other forms of investment. Assets managed by the Bank’s subsidiaries and owned by third parties are not included in the consolidated financial statements unless control exists as structured entities.
The Bank consolidates the following funds:
| Name | Country | % of ownership interest |
Assets managed | |
| December 2016 |
December 2015 | |||
| FCP Fondo Colombia Inmobiliario S.A. | Colombia | 62.55% | 2,009,382 | 1,550,219 |
| PA Cartera LCB | Colombia | 100% | - | 1,214,044 |
| Su valor Panamá Fondo de Inversión | Panamá | 100% | - | 236 |
| Fideicomiso “lote Abelardo Castro” | Colombia | 68.23% | 10,172 | 8,994 |
| Fondo de Inversión en Arrendamiento Operativo Renting Perú | Perú | 100% | 31 | 53,939 |
For all the aforementioned funds, the Bank has participated in the design of the structured entity, establishes operating and financial decisions of the funds and it is exposed to variable returns such as dividends or returns paid in quarterly installments.
The commissions earned by the management of funds that are not consolidated are included in the statement of income as “Fees and commission income”.
| F-18 |
| 6. | Non-controlling interest |
Non-controlling interests in the net assets of consolidated subsidiaries are presented separately within the Bank’s equity. Similarly net income and other comprehensive income are also attributed to non-controlling interest and equity holders of the Parent Company. The amount of non-controlling interest may be initially measured either at fair value or at the non-controlling interest’s proportionate share of the acquiree’s identifiable net assets. The option for recognition is made on a investment by investment basis.
Any purchase or sale of shares in subsidiaries that does not imply a loss or gain of control is directly recognized in equity.
| 6.1. | Significant non-controlling interest |
As of December 31, 2016 and 2015, the portion of ownership in the FCP Colombia Inmobiliario S.A. was 35.47% and 49.72%, respectively, reason for which is considered as a significant non-controlling interest for the Bank and its subsidiaries. The principal place of business of FCP Colombia Inmobiliario is Bogotá (Colombia).
As of December 31, 2016 and 2015, there were no dividends declared by this subsidiary. In contrast, there were returns paid in quarterly installments due to the nature of its business, which mainly comprises long- term investment in real state, considered as low-risk portfolio.
The following table summarizes the assets, liabilities, net assets, net income and cash flows as of December 31, 2016, 2015 and 2014, related to the FCP Colombia Inmobiliario:
| December 31, 2016 | December 31, 2015 | December 31, 2014 | ||
| In millions of COP | ||||
| Assets | 2,009,382 | 1,550,219 | 1,348,833 | |
| Liabilities | 655,315 | 661,973 | 590,191 | |
| Net assets | 1,354,067 | 888,247 | 758,642 | |
| Condensed statement of income | ||||
| Income | ||||
| Valuation gains | 2,113 | 29,127 | 18,974 | |
| Rents | 120,811 | 104,379 | 84,270 | |
| Other income | 65,949 | 94,303 | 50,195 | |
| Total Income | 188,873 | 227,809 | 153,439 | |
| Expenses | ||||
| Interest on loans | 67,558 | 52,451 | 57,475 | |
| Trust fees | 9,004 | 8,819 | 7,225 | |
| Other expenses | 49,078 | 36,936 | 16,955 | |
| Total Expenses | 125,640 | 98,206 | 81,655 | |
| Net Income | 63,233 | 129,603 | 71,784 | |
| Condensed cash flow | ||||
| Net cash provided by (used in) operating activities | (372) | (82) | 230 | |
| Net cash (used in) provided by investing activities | - | - | - | |
| Net cash (used in) provided by financing activities | 375 | 82 | 230 | |
| Cash and cash equivalents at beginning of year | - | - | - | |
| Cash and cash equivalents at end of year | 3 | - | - | |
The information above is the amount before inter-company eliminations.
As of December 31, 2016, 2015 and 2014, the profit allocated to non-controlling interest amounted to COP 23,701, COP 69,074 and COP 31,238, respectively.
As of December 31, 2016, 2015 and 2014, the accumulated non-controlling interest of the FCP Colombia Inmobiliario S.A. amounted to COP 507,115, COP 442,314 and COP 372,812, respectively.
| F-19 |
On December 30, 2015 the Bank Acquired 60% of Grupo Agromercantil Holding S.A. (GAH). As of December 30, 2016, the portion of ownership in GAH by the non controlling interest was 40%, reason for which is considered as a significant non-controlling interest for the Bank and its subsidiaries. Guatemala is the principal place of business of Grupo Agromercantil and its subsidiaries.
The following table summarizes the assets, liabilities, equity, net income and cash flows as of December 31, 2016 and 2015 of Grupo Agromercantil Holding.
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Assets | 11,795,358 | 12,137,258 |
| Liabilities | 10,477,427 | 10,792,953 |
| Equity | 1,317,931 | 1,344,305 |
| Condensed statement of income | ||
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 393,972 | - |
| Total fees and commission, net | 58,745 | - |
| Other operating income | 55,942 | - |
| Dividends received and equity method | 779 | - |
| Total operating income, net | 509,438 | - |
| Operating expenses | (435,430) | - |
| Income tax | (11,197) | - |
| Net income | 62,811 | - |
| Condensed cash flow | ||
| Net cash provided by (used in) operating activities | (136,878) | - |
| Net cash (used in) provided by investing activities | (4,157) | - |
| Net cash (used in) provided by financing activities | (77,684) | - |
| Cash and cash equivalents at beginning of year | (1,359,176) | - |
| Cash and cash equivalents at end of year | 1,140,457 | - |
| Other comprehensive income | ||
| Investments at fair value through OCI | (3,682) | - |
| Translation adjustment | 64,195 | (537,196) |
| Others | (6,959) | - |
| Total other comprehensive income | 53,554 | (537,196) |
For the year 2016 and 2015, the dividends received from Grupo Agromercantil amounted to COP 46,416 and COP 33,403, respectively. The acquisition of this subsidiary was a step acquisition that took place in December 2015, and is detailed in Note 8 Goodwill and intangible assets, net.
| D. | Use of estimates and judgments |
The preparation of consolidated financial statements requires the Bank's management to make judgments, estimates and assumptions that affect the application of accounting policies and the recognized amounts of assets, liabilities, income and expenses.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the revision and future periods if the revision affects both current and future periods. Judgments or changes in assumptions are disclosed in the notes to the consolidated financial statements. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under current circumstances. Actual results may differ from these estimates if assumptions and conditions change.
| F-20 |
The significant accounting policies that the Bank uses in preparing its consolidated financial statements are detailed below:
| 1. | Impairment testing of CGU including goodwill: |
The Bank tests goodwill recognized upon business combinations for impairment at least annually. The impairment test for goodwill involves estimates and significant judgments, including the identification of cash generating units and the allocation of goodwill based on the expectations of which the Bank will benefit from the acquisition. The fair value of the acquired companies is sensitive to changes in the valuation models assumptions. Adverse changes in any of the factors underlying these assumptions could lead the Bank to record a goodwill impairment charge. Management believes that the assumptions and estimates used are reasonable and supportable in the existing market environment and commensurate with the risk profile of the assets valued. See Note 8, for further information related to carrying amount, valuation methodologies, key assumptions and the allocation of goodwill.
| 2. | Deferred tax: |
The Bank recognizes, when appropriate, deferred tax assets and liabilities by the future estimate of tax effects attributable to differences between book values of assets, liabilities and their tax bases. Deferred tax assets and liabilities, identified as temporary differences, are only recognized if it is considered likely that the entities are going to have sufficient taxable income in the future that allow it to be recovered. Due to the continuous modifications to tax laws, their interpretation and economic conditions, the calculation of deferred tax assets and liabilities and future net earnings requires judgments and estimates to be applied.
Deferred tax assets and liabilities are measured based on the tax rate, in accordance with the enacted tax laws in each country that must be applied in the year in which the deferred tax assets and liabilities are realized or settled.
Regarding current taxes, Bancolombia and its Colombian subsidiaries apply the fiscal regulations of Colombia. In the case of companies based in Peru, Guatemala, El Salvador and Panama (the latter applies only to Banistmo and its subsidiaries), and the corresponding taxes are calculated according to Peruvian, Guatemalan, Salvadoran, and Panamanian tax law.
The application of the tax legislation is subject to varying interpretations by the taxpayer and the tax authorities.
The accounting policies for deferred tax assets and liabilities are considered critical accounting policies, because the determination of these amounts requires estimates of future revenues, expenses and tax rates that may be affected by changes in the economic conditions of the countries, constant regulatory changes, new legislation and different interpretations of the law. Please see Note 11 to the Consolidated Financial Statements for further information related to the nature of the deferred tax assets recognized by the Bank and their carrying amount.
| 3. | Provisions and contingent liabilities: |
The Bank is subject to contingent liabilities, including those arising from judicial, regulatory and arbitration proceedings and tax and other claims arising from the conduct of the Bank’s business activities. These contingencies are evaluated based on management’s best estimates and provisions are established for legal and other claims by assessing the likelihood of the loss actually occurring as probable, possible or remote. Provisions are recorded when all the information available indicates that it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation before the statement of financial position date and the amounts may be reasonably estimated. The Bank engages internal and external experts in assessing probability and in estimating any amounts involved.
| F-21 |
Throughout the life of a contingency, the Bank may learn of additional information that can affect assessments regarding probability or the estimates of amounts involved; changes in these assessments can lead to changes in recorded provisions.
The Bank considers the estimates used to determine the provisions for contingent liabilities are critical estimates because the probability of their occurrence and the amounts that the Bank may be required to pay are based on the Bank’s judgment and its internal and external experts, which will not necessarily coincide with the future outcome of the proceedings. For further information regarding legal proceedings and contingencies and its carrying amounts. See Note 20.
| 4. | Impairment for credit risk: |
Determining the allowance for loan losses requires a significant amount of management judgment and estimates in, among others, identifying impaired loans, determining customers’ ability to pay and estimating the fair value of underlying collateral or the expected future cash flows to be received. The Bank assesses if an asset or a group of financial assets is impaired and if impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a 'loss event') and that loss event (or events) has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
The estimates are considered as critical accounting judgments because: (i) they are highly susceptible to change from period to period as the assumptions about future default rates and valuation of potential losses relating to impaired loans and advances are based on recent performance experience, and (ii) any significant difference between the Bank’s estimated losses (as reflected in the provisions) and actual losses would require the Bank to record provisions which, if significantly different, could have a material impact on its future financial condition and results of operations. The Bank’s assumptions about estimated losses are based on past performance, past customer behavior, the credit quality of recent underwritten business and general economic conditions, which are not necessarily an indication of future losses. (See section Risk Management).
As described in Note 2.F.7.4.5.1, the Bank assesses impairment losses for homogeneous loan portfolios on collective basis, using historical information. During 2016, enhancements to the estimation process were done, including the fact that information reflecting recoveries of defaulted loans for an entire economic cycle became available. The Bank, therefore, used the latest internal information to calculate the Loss Given Default parameter, that provides a better estimate of its borrower’s credit risk. In prior periods, internal and external information (including finance sector data) was used. This change in accounting estimate resulted in a decrease of the allowance for loan losses amounting to 183.125 million at December 31, 2016.
| 5. | Fair value of financial assets and liabilities: |
Financial assets and liabilities recorded at fair value on the Bank’s statement of financial position include debt and equity securities and derivatives classified at fair value through profit or loss and equity securities which the Bank has made an irrevocable election to present in other comprehensive income changes in its fair value.
| F-22 |
To increase consistency and comparability in fair value measurements and related disclosures, IFRS 13 Fair value measurement specifies different levels of inputs that may be used to measure the fair value of financial instruments. In accordance with this standard, financial instruments are classified as follows:
Level 1: Assets and liabilities are classified as Level 1 if there are observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. An active market is one in which transactions occur with sufficient volume and frequency to provide pricing information on an ongoing basis.
Instruments are valued by reference to unadjusted quoted prices for identical assets or liabilities in active markets where the quoted price is readily available, and the price represents actual and regularly occurring market transactions.
Level 2: Assets and liabilities are classified as Level 2 if in the absence of a market price for a specific financial instrument, its fair value is estimated using models whose input data are observable for recent transactions of identical or similar instruments.
Level 3: Assets and liabilities are classified as level 3 if unobservable input data were used in the measurement of fair value that are supported by little or no market activity and that are significant to the fair value of these assets or liabilities.
All transfers between the aforementioned levels are assumed to occur at the end of the reporting period.
The measurement of the fair value of financial instruments generally involves a higher degree of complexity and requires the judgments application especially when the models use unobservable inputs (level 3) based on the assumptions that would be used in the market to determinate the price for assets or liabilities.
For further details, as carrying amount and sensitivity disclosures, please see Note 29 ‘Fair value of assets and liabilities’.
For the periods ended December 31, 2016 and 2015 there have been no significant changes in estimates and judgements made at end-year other than those indicated in financial statements.
| 6. | Measurement of Employee benefits: |
The measurement of post-employment benefit obligations and long-term employee benefits carries a wide variety of premises and it is dependent upon a series of assumptions of future events. The projected unit credit method is used to determine the present value of the obligation for the defined benefits and its associated cost. Future measurements of obligations may differ to those presented in the financial statements, among others, due to changes in economic and demographic assumptions and significant events. For further information, see Note 18.
| 7. | Consolidation of structured entities: |
Structured entity (SE) is an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity, such as when any voting rights relate to administrative tasks only and the relevant activities are directed by means of contractual arrangements.
| F-23 |
To determine whether the Bank controls and consequently consolidates an entity that has been designed as a SE, the Bank asseses the design and the purpose of the entity. It is also considered whether the Bank, or another involved party with power over the relevant activities, is acting as a principal in its own right or as an agent on behalf of others.
Whenever there is a change in the substance of the relationship with the SE the Bank performs a re-assessment of control to determine if consolidation is applicable.
The total assets of unconsolidated SE in which the Bank had an interest at the reporting date and its maximum exposure to loss in relation to those interests is presented in Note 23 unconsolidated structured entities.
| E. | Recently Issued Accounting Pronouncements |
| 1. | Accounting Pronouncements Applicable in 2016 |
During 2016, the following standards have been adopted by the Bank without having a significant impact:
Amendments to IFRS 11 Joint arrangements: The amendment provides guidance to account the acquisition of an interest in a joint operation that is a business.
Amendments to IAS 1 Presentation of financial statements: The amendment states that an entity can decide how it aggregates or disaggregates the information of its financial statements, taking special care not to group in items without relevance, items that have different nature or function.
IFRS 10 and IAS 28 Sale or contribution of assets between an investor and its associate or join venture: The amendments state that gains or losses resulting from the loss of control of a subsidiary that does not contain a business in a transaction with an associate or a joint venture that is accounted for using the equity method, are recognised in the parent’s profit or loss only to the extent of the unrelated investors’ interests in that associate or joint venture. Similarly, gains and losses resulting from the remeasurement of investments retained in any former subsidiary (that has become an associate or a joint venture that is accounted for using the equity method) to fair value are recognised in the former parent’s profit or loss only to the extent of the unrelated investors’ interests in the new associate or joint venture.
Annual improvements 2012-2014:
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations: Changes in methods of disposal.
The amendment specifies the treatment to follow when a disposal asset changes directly from being held for sale to being held for distribution to owners, or directly from being held for distribution to owners to being held for sale. That change in classification is considered a continuation of the original plan of disposal, the measurement remains at the lower of its carrying amount, or its fair value less costs to sell or costs to distribute as appropriate in accordance with the reclassification, the difference that is generated will be recognized as impairment or recovery of impairment, without exceeding the initial value of the asset.
| F-24 |
IFRS 7 Financial Instruments -Disclosures: Servicing contracts, Applicability of the amendments to IFRS 7 to condensed interim financial statements. When an entity transfers a financial asset, if the entity retain the right to service that financial asset for a fee that is included the entity will assess the servicing contract to decide whether the entity has continuing involvement as a result of the servicing contract for the purposes of the discloser requirements.
IAS 19 Employee Benefits: Discount rate, regional market issue: The amendments clarify that the rate used to discount post-employment benefit obligations should be determined by reference to market yields at the end of the reporting period on high quality corporate bonds. The assessment of the depth of a market for high quality corporate bonds should be at the currency level. For currencies for which there is no deep market in such high quality corporate bonds, the market yields as the end of the reporting period on government bonds denominated in that currency should be instead.
| 2. | Recently Issued Accounting Pronouncements Applicable in Future Periods |
IFRS 9, Financial Instruments: In July 2014 the IASB issued the final version of IFRS 9 that completed the replacement project of IAS 39 –Financial instruments. Classification and measurement mainly introducing new criteria for classification and subsequent measurement of financial assets and liabilities, impairment requirements related to expected loss accounting and hedge accounting. The effective application of the final version of this IFRS will be from January 1, 2018.
• Classification and measurement: IFRS 9 establishes the categories amortized cost, fair value through profit or loss and fair value with changes in other comprehensive income to classify financial assets, based on the entity's business model to manage such assets and the characteristic of the flows that they grant. The last category has been introduced for individual simple debt instruments and equity instruments for which the entity irrevocably designates its variations in other comprehensive income from the initial recognition.
The classification of financial liabilities and their subsequent measurement has remained unchanged in relation to IAS 39, except for those liabilities designated at fair value through profit and loss for which it is stipulated how to account for the changes in the credit risk in other comprehensive income.
The Bank has early adopted IFRS 9 as issued in November 2013, which includes only Fair value through profit or loss and amortized cost as measurement categories attributable to financial assets, based on the business model and the contractual cash flow characteristics; In addition, the option to make an irrevocable election at initial recognition for particular investments in equity instruments to present subsequent changes in fair value in other comprehensive income. Based on the analysis performed to date on the incorporation of the new classification and measurement category, it is expected that debt instruments currently classified as fair value through profit or loss and held within a business model whose objective is achieved by both collecting contractual cash flows and selling financial assets, will be reclassified to fair value through other comprehensive income.
The impacts that financial statements would have by the incorporation of the fair value through other comprehensive income, applicable to debt instruments, are being evaluated.
• Impairment methodology: IFRS 9 raises significant changes in the assessment of impairment of financial instruments and therefore their associated risk. Particularly, the standard proposes a new criterion that pursues the identification of Significant Increase in Credit Risk (SICR) in an instrument prior to the identification of Objective Evidence of Impairment (OEI).
Taking this into account, The bank has advanced in the construction of quantitative and qualitative criteria to identify Significant Increase in Credit Risk of an instrument. Although a quantitative criterion is used as the main principle for assessing SICR, qualitative criteria has also been developed if the quantitative criterion cannot be applied or used in specific portfolios. In addition, the Bank has defined homogeneous and corporate criteria for the identification of OEI, aligning these criteria with those proposed and issued by global supervisory entities. During the first half of 2017, the implementation of the criteria for identification and transition of impairment is expected, along with the employment of technological software in which The bank has completed an investment sponsoring robustness and efficiency in information management, risk parameter estimation, calculation of loss allowances and financial reporting.
The impairment-related requirements apply to financial assets measured at amortized cost and Fair Value through Other Comprehensive Income (FVOCI) whose business model is hold to collect (i.e. contractual cash flows) and sell (as well as for lease receivables, loan commitments and financial guarantees). The notion of loss recognition evolves from an incurred credit loss model to an expected credit loss model, which considers a prospective nature of the loss allowances for the instruments based on the future behavior expectations.
The bank, in accordance with IFRS 9, will estimate their Expected Credit Loss (ECL) based on the present value of the difference between contractual cashflows and expected cash flows of the instrument (in the special case of loan commitments, the Bank will associate the expectation of materialization of the commitment within the expected cash flows). The ECL will be updated on each reporting date to reflect changes in the portfolio's credit risk since initial recognition.
Likewise, a more detailed credit loss distinction and valuation is proposed in accordance with the inherent credit risk of the instruments. In this way, an assessment of the credit risk profile of the instrument will be performed to determine the allocation of an instrument at a given stage, and consequently a specific ECL estimation model:
Stage 1. Financial instruments that have not significantly deteriorated in their credit quality since their initial recognition or that have low credit risk at the reporting date. The ECL will be recognized over a 12 month time horizon and interest income over the gross carrying amount of the asset.
Stage 2. Financial instruments that have deteriorated significantly in their credit risk since their initial recognition (unless they have low credit risk at reporting date) but do not present objective evidence of a credit loss event. The ECL will be recognized over the lifetime of the asset and interest income will also be calculated on the gross carrying amount of the asset.
Stage 3. Instruments that have objective evidence of impairment at the reporting date. The ECL will be recognized over the lifetime of the asset and the interest income will be calculated on the net carrying amount of the asset.
The bank is currently in the adapting process towards an expected loss model, which properly complies with the impairment requirements. Consequently, the Bank has incorporated a methodological implementation program, which contains the necessary adaptations to IFRS 9. During 2016, assessment of the current development of the entities of the Bank has been carried out in the fields of risk parameters, loss estimation models, collective and individual methodologies, segmentation, among others. Based on this, a gap analysis was performed, which consisted in identifying the necessary adaptations and defining activities to meet the proposed adaptations.
During first half of 2017, the construction of 12 month PD and lifetime PD is intended, with respective adaptations and modifications (point-in-time [PiT], application and incorporation of forward-looking criteria, rebuttable presumptions, among others). The bank, aware of the complexity in the requirement to estimate a lifetime PD, has dedicated specific resources for the study, construction and implementation of this criterion, taking into consideration model assessment, input data, parameters modelization, etc. The Bank has also made progress in defining the required adaptations to the LGD parameters (collateral valuation, discount at effective interest rate, incorporation of future economic effects, etc.) and EAD (product valuation, accounts amortization, etc.). Likewise, the entity and its subsidiaries are currently defining issues relative to specific requirements in which the standard does not present defined guidelines and in which according to the industry consensus there might be gray areas (exposure in revolving products, identification of interest accrual methodologies, specific definitions for cash flows, amortized cost, among others).
The development of activities of the implementation plan for IFRS 9 in The bank considers the implementation of the loss allowance calculation for the second half of 2017, as well as the construction of an accounting parallel (versus the loss allowance calculation under IAS 39) . Although at the moment minor impacts have been identified in terms of preliminary risk parameter values, The bank anticipates changes in the value of loss allowance under the expected loss model, driven mainly by the incorporation of lifetime PD parameter on the ECL for instruments with increased credit risk. However, reliable quantitative impacts can only be analyzed and reported once risk parameters models and ECLs are implemented and validated.
• Hedge accounting: These requirements align hedge accounting more closely with risk management, establish a more principle-based approach to hedge accounting and address inconsistencies and weaknesses in the hedge accounting model in IAS 39. Entities have been provided with an accounting policy option between applying the hedge accounting requirements of IFRS 9 or continuing with the application of the existing hedge accounting requirements of IAS 39 for all hedge accounting, as the project on macro hedge accounting has not yet been completed. In consequence, the Bank opted for continuing the application of IAS 39 requirements for hedge accounting.
| F-25 |
The bank’s "IFRS 9" Project
Regarding IFRS 9 publication by the IASB and the issuance of the Colombian regulation decree 2496 of 2015, the "IFRS 9" project was launched in January 2016 at Bancolombia S.A. and its subsidiaries, which aims to prepare the financial entities of Bank for the adaptation and implementation of the standard.
Governance, Organization and Scope
The "IFRS 9" project is led by Bancolombia S.A., whose sponsor and principal responsible is the Corporate Chief Risk Officer, which seeks to guarantee the homogeneous implementation of methodologies and criteria in the Bank's subsidiaries. The management of the project is comprised by a work cell which includes different areas of the organization: International Standard Loss Allowance Office, Strategic Services Implementation Office, Project Service Office (IT) and Project Management Office (PMO).
Methodologically, a preliminary project-guide was defined to set the scope, responsibilities, functions, and general activities for all involved areas in the Bank. In addition, methodological and technological collaborations with third parties and implementation plan for IFRS 9 at consolidated level was defined. Subsequently, in September 2016, IFRS 9 adaptation and implementation project was approached, through the conformation of functional and technical operational cells according to the corresponding activities. During the preliminary project-guide and implementation project, the Accounting Implementation Office and Accounting Standard Office were also included as strategic areas for the normative adaptation of financial and accounting requirements.
The scope defined for the "IFRS 9" project is corporative, so it involves the adaptation and implementation in both Bancolombia S.A. as well as in the subsidiaries subject to the standard: Banistmo, Bancolombia Panamá, Bancolombia Puerto Rico; Bancolombia Peru, Banco Agricola in El Salvador, and Banco Agro Mercantil in Guatemala.
IFRS 15, Revenue from contracts with customers: On May 28, 2014, the IASB issued IFRS 15, which clarifies how an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Likewise, entities are required to provide more useful information related to significant judgments, nature and costs to obtain or fulfil a contract with a customer.
An entity recognizes revenue in accordance whit that core principle by applying the following five steps; 1) Identify the contract(s) with a costumer, 2) Identify the performance obligations in the contract, 3) Determine the transactions prince 4) Allocate the transaction price to the performance obligations in the contract, 5) recognize revenue when (or as) the entity satisfies a performance obligations. IFRS 15 replaces IAS 11, IAS 18 and related interpretations. The standard must be applied in an entity’s IFRS financial statements for annual reporting periods beginning on or after 1 January 2018. Earlier application is permitted. It is expected that a significant proportion of the Bank’s revenue will be outside the scope of IFRS 15 because most of revenues come from the operations of financial instruments.
Management is currently evaluating the impacts of adoption of IFRS 15 on the Bank’s financial statement and disclosures, however, it is not yet practicable to quantify the effect of the statement on the consolidated financial statements
IFRS 16, Leases: In January, 2016, the IASB issued IFRS 16 to replace IAS 17. Accounting for finance leases will remain substantially the same. Operating leases will be brought on balance sheet through the recognition of assets representing the contractual rights of use and liabilities will be recognized for the contractual payments. Applying that model, a lessee is required to recognize:
| (a) | Assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and |
| (b) | Depreciation of lease assets separately from interest on lease liabilities in the statement of income. The effective date is January 1, 2019. |
Management is currently evaluating the impact the changes from adopting IFRS 16 would have on the Bank’s financial statement and disclosures, however, it is not practicable to quantify the affect as at the date of the publication of these financial statements
Amendment to IAS 7 Cash Flow Statement: In January 2016, the IASB issued guidance requiring accompanying disclosures to the statement of cash flow that include a reconciliation of changes in liabilities arising from financial activities, considering both cash and non-cash transactions. The amendment is effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. Any possible impacts arising from adopting these changes are being evaluated and will be completed up to the date this standard comes into force.
Amendment to IAS 12 Tax income: The IASB issued guidance about recognition of deferred tax assets for unrealized losses related to debt instruments measured at fair value, for which their tax base is the cost; The estimation of future taxable profits, in which the entity may be assumed that an asset will be recovered for a value that exceeds its carrying amount; And the exclusion of the taxable base resulting from the reversal of the deductible temporary differences to analyze their recoverability and compare them with the future economic benefits. The amendment is effective for annual periods beginning on or after January 1, 2017, with early adoption permitted. Any possible impacts arising from adopting these changes are being evaluated and will be completed up to the date this standard comes into force.
Amendments to IAS 28 Investment in associates and joint ventures: Issued in December 2016, these amendments establish that a gain or loss must be recognized for the full amount when the transaction involves assets that constitute a business (whether the business is housed in a subsidiary or not). When the transaction involves assets that do not constitute a business, a partial gain or loss is recognized, even if these assets are housed in a subsidiary.
The impact of this modification on the bank’s financial statements and disclosures is being evaluated.
| F-26 |
Amendments to IAS 40 - Investment Property: IASB clarifies when a change of use occurs that may lead to the transfer of a property to or from investment property. Change of use occurs when the property meets, or meets no longer, the definition of investment property and there is evidence of change of use. In isolation, a change in management's intentions to use a property does not provide evidence of a change of use. This amendment is effective as of January 1, 2018, allowing early adoption.
The impact of this modification on the Bank´s financial statements and disclosures is being evaluated.
Modification to IFRS 12: Disclosure of Stakes in Other Entities - Scope: Issued in December 2016, the amendment provides clarity about the scope of IFRS 12 when an entity has interests in a subsidiary, joint venture or an associate (or part of its participation in a joint venture or associate) that is classified as held for sale in accordance with IFRS 5 - Non-current assets held for sale and discontinued operations. For interests classified as such, requirements of IFRS 12 are applicable, except for those related to summarized financial information to be disclosed.
The impact of this modification on the Bank´s financial statements and disclosures is being evaluated.
IFRIC 22 Transactions in Foreign Currency and Advance Payments: This interpretation is issued to determining the exchange rate to be used for the recognition of income from ordinary activities when an entity has received an anticipated consideration in foreign currency. The date of the transaction to determine the exchange rate to be used in the initial recognition of the related asset, expense or income is the date on which an entity initially recognizes the non-monetary asset or non-monetary liability arising from payment or collection of the anticipated consideration. This interpretation is effective as of January 1, 2018, allowing early adoption.
The impact of this modification on the Bank´s financial statements and disclosures is being evaluated.
| F. | Significant Accounting Policies |
The significant accounting policies that the Bank uses in preparing its consolidated financial statements are detailed below:
| 1. | Functional and presentation currency |
Items included in the financial statements of each of the Bank’s entities are measured using the currency of the primary economic environment in which the entity operates (‘the functional currency’). The consolidated financial statements are presented in Colombian pesos, which is the functional currency for the Parent Company, and the presentation currency for the consolidated financial statements. All transactions and balances in other currency than pesos are considered as foreign currency.
| 2. | Transactions and balances in foreign currency |
Foreign currency transactions are translated into the functional currency using the exchange rates at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies at period end exchange rates are generally recognized in net income. They are deferred in equity if they relate to qualifying cash flow hedges and qualifying net investment hedges or are attributable to part of the net investment in a foreign operation.
| F-27 |
Non-monetary items that are measured at cost are held at the exchange rate of transaction date, while those which are measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value was determined. When a gain or loss on a non-monetary item is recognized in other comprehensive income, any exchange component of that gain or loss is recognized in other comprehensive income. Conversely, when a gain or loss on a non-monetary item is recognized in net income, any exchange component of that gain or loss shall be recognized in net income.
| 3. | Foreign subsidiaries |
The results and financial position of foreign operations (none of which has the currency of a hyperinflationary economy) that have a functional currency different from the Bank´s presentation currency are translated into the presentation currency as follows:
| · | assets and liabilities for each statement of financial position presented are translated at the closing rate at the date of that statement of financial position |
| · | income and expenses for each statement of income and statement of other comprehensive income are translated at average exchange rates, and |
| · | All resulting exchange differences are recognized in other comprehensive income in Translation adjustment reserve. |
As part of the consolidation process, exchange differences arising from debt securities in issue and the portion of other financial instruments designated as hedges of foreign operations that are determined to be an effective hedge, are recognized in other comprehensive income in Translation adjustment reserve. When a foreign operation is sold or any debt securities in issue forming part of the net investment are repaid, the associated exchange differences are reclassified to net income, as part of the gain or loss on sale.
Goodwill and fair value adjustments arising on the acquisition of a foreign operation are treated as assets and liabilities of the foreign operation and translated at the closing exchange rate.
The table below sets forth the exchange rate used by the Bank and its subsidiaries to convert statement of financial position accounts and transactions in U.S. dollar into Colombian pesos:
| December 31, 2016 | December 31, 2015 | |
| Closing exchange rate | 3,000.71 | 3,149.47 |
| Average rate for the period ended at | 3,053.20 | 2,746.55 |
| 4. | Cash and cash equivalents |
The Bank considers cash and cash equivalents to include cash and balances at central bank, interbank assets and reverse repurchase agreements and other similar secured lending that have original maturities since its acquisition date up to 90 days, as shown in Note 4.
| F-28 |
| 5. | Security deposits. |
Security deposits are assets pledged as collateral that correspond to cash guarantees made by the Bank to other financial institutions. The carrying amount is increased when there is a margin call to deposit additional money or securities; conversely, it is decreased when the pledged assets are larger than what is needed. The security deposits are recognized as other assets in the consolidated statement of financial position at the amount paid in favor of the counterpart and this assets are not subjet to interest recognition.
| 6. | Business combinations and goodwill |
Business combinations are those transactions where an acquirer obtains control of a business (e.g. an acquisition or merger).
Business combinations are accounted for using the acquisition method as follows: a) Identifiable acquired assets, liabilities and contingent liabilities assumed in the acquisition are recognized at fair value at the date of acquisition; b) Acquisition costs are recognized in the consolidated statement of income as expenses in the periods in which the costs are incurred and the services are received; c) and goodwill is recognized as an asset in the consolidated statement of financial position.
The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred to the former owners of the acquiree and the equity interests issued by the Bank (If any).
Goodwill is measured as the excess of the sum of the consideration transferred, the value of any non-controlled interest and, when applicable, the fair value of any previous equity interest in the acquiree, over the net fair value of the acquired assets, liabilities or contingent liabilities assumed at the date of acquisition.
For each business combination, at the date of acquisition, the Bank measures the non-controlling interest by the proportional share of the identifiable assets acquired, as well as liabilities and contingent liabilities assumed by the acquired company, or by their fair value.
Any contingent consideration in a business combination is classified as a liability or as equity and is recognized at fair value at the date of acquisition, the liability is remeasured at subsequent reporting dates in accordance with IAS 37, Provisions, Contingent Liabilities and Contingent Assets, and the consideration classified as equity is not remeasured at subsequent reporting dates and its subsequent settlement is accounted for within equity.
The goodwill acquired in a business combination is allocated, at the date of acquisition, to the Bank's cash-generating units (or group of cash generating units) which are expected to benefit from the combination, regardless of whether other assets or liabilities of the acquiree are assigned to those units or group of units.
For business combinations achieved in stages, any previous equity interest held by the Bank in the acquiree is remeasured at its fair value at the date of acquisition and any resulting gain (or loss) is reported in the consolidated statement of income or other comprehensive income, as appropriate. Amounts previously recognized in other comprehensive income that must be recycle through net income in relation with such investments are reclassified to the consolidated statement of income, as if such investment had been sold. When the associate has other comprehensive income, which is not reclassified to profit or loss, the amounts are not reclassified when the investment is sold.
| F-29 |
When the Bank enters into a option contract to acquire totally o partially the amount of shares in a subsidiary held by non-controlling interest, that entitles the non-controlling interest to sell its interest in the subsidiary to the Bank, the Bank analyzes whether the ownership risks and rewards remain with the non-controlling interest or have been transferred to the Bank. The non-controlling interest is recognized to the extent the risks and rewards of ownership of those shares remain with them. Irrespective of whether the non-controlling interest is recognized, a financial liability is recorded for the present value of the redemption amount. Subsequent changes to the liability are recognized in net income. The Bank will reclassify the liability to equity if the put option expires unexercised.
| 7. | Financial instruments |
A financial instrument is a contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
| 7.1. | Recognition of financial assets and liabilities |
Financial assets and liabilities are recognized in the statement of financial position when the Bank becomes a party of the contractual provisions of the instrument. This includes conventional purchases and sales, which are those purchases and sales of financial assets that require the delivery of assets within the time frame established by regulation or convention in the marketplace. The Bank uses settlement date accounting for regular way contracts when recording financial asset transactions.
| 7.2. | Offsetting of financial instruments |
Financial assets and financial liabilities are reported on a net basis on the statement of financial position if and only if (i) there is currently a legally enforceable right to set off the recognized amounts and (ii) there is intention to settle on a net basis, or to realize the asset and settle the liability simultaneously. The Bank does not offset income and expenses, unless required or permitted by an IFRS.
| 7.3. | Fair value |
The fair value of all financial assets and liabilities is determined at the statement of financial position date, for recognition or disclosure in the notes to the financial statements.
To determine fair value, characteristics of the asset or liability are taken into account in the same way that market participants would use when pricing the asset or liability at the measurement date; at stimating, is taken into consideration:
− Based on quoted prices (unadjusted) in active markets for identical assets or liabilities to which the Bank can access at the measurement date (level 1).
− Based on inputs of valuation methodologies commonly used by the market participants, these inputs are other than quoted prices included with in level 1 that are observable for the assets or liabilities, either directly or indirectly; considering inputs as quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities like interest rates and yield curves observable at commonly quoted intervals, implied volatilities and credit spreads, and market-corroborated inputs (level 2).
| F-30 |
− Based on internal valuation techniques of discounted cash flow and other valuation methodologies, using unobservable inputs estimated by the Bank for the assets or liabilities, in the absence of observable inputs (level 3).
The accounting judgments used in determining fair value related to matters such as liquidity risk, credit risk and volatility. The changes in estimates related to these factors could affect the recognized fair value of the financial instruments.
In Note 29 Fair Value Measurement an analysis is provided of the fair values of financial instruments and non-financial assets and liabilities, including further details about the measurement of fair value.
| 7.4. | Financial assets |
At initial recognition, the Bank measures financial assets at fair value plus, in the case of a financial asset that is not measured at fair value through profit or loss, the transaction costs directly attributable to the acquisition of the financial assets. Financial assets are then classified considering their subsequent measurement at fair value or amortized cost, respectively, on the basis of the business model for managing the financial assets and the contractual cash flow characteristics of the instrument. In addition, for particular investments in equity instruments, in accordance with IFRS 9, the Bank made the irrevocable election to present subsequent changes in fair value in other comprehensive income.
| 7.4.1 | Money market operations |
Interbank assets and interbank deposits
These are funds that the Bank lends to other financial institutions or borrows from the Central Bank and other financial institutions. The transactions in an asset position with maturity of up to ninety days are measured at fair value and classified as cash equivalents. The operations in an asset position with maturity greater than ninety days and all the operations in a liability position are measured at amortized cost and presented as “Other assets” or “interbank deposits”, respectively.
Repurchase agreements and other similar secured transactions
| · | Asset Position |
Asset position refers to transactions accounted for as collateralized lending in which the Bank purchases securities with an agreement to resell them back to the seller at a stated price plus interest at a specified date, not exceeding one year. Repos in asset position are initially recognized at the consideration paid and they are subsequently measured at amortized cost. The difference between the purchase value and resale price is recorded in net interest income and accrued over the life of the agreement using the effective interest rate method.
| · | Liability Position |
Liability position refers to transactions accounted for as collateralized borrowing in which the Bank sells debt securities with an agreement to repurchase them back from the buyer at a stated price plus interest at a specified date, not exceeding one year.
| F-31 |
The securities sold under those agreements are not derecognized from the statement of financial position when the Bank substantially retains all of the risks and rewards of the securities. However, the securities are disclosed as pledged assets. The amounts received are initially recognized, at fair value, as a financial liability and subsequently measured at amortized cost. The difference between the sale value and the repurchase value is treated as interest expense and accrued over the life of the agreement by the effective interest rate method.
| 7.4.2 | Debt and equity securities |
Securities at amortized cost
Debt securities are classified at amortized cost only if the asset is maintained within a business model whose objective is to hold it in order to collect contractual cash flows and the contractual terms of the security give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding; Its interest income is recognized using the effective interest rate method.
The effective interest method is a method used to calculate the amortized cost of an asset and to assign the income or cost in interest during the relevant period. The effective interest rate is the discount rate at which the present value of future estimated cash payments or those received through the expected life of the financial instrument, or, when appropriate, in a shorter time frame, are equal to the net carrying value at the beginning. To calculate the effective interest rate, the Bank estimates cash flows considering all the contractual terms of the financial instrument, including transaction costs and premiums granted minus commissions and discounts, but without considering future credit losses.
Securities at fair value through profit or loss
These are equity securities and debt securities tha are not subsequently measured at amortized cost. The difference between the current fair value and the immediately preceding fair value of the respective security is recorded as a higher or lower value of the asset, affecting the statement of income.
| 7.4.3 | Equity instruments at fair value through other comprehensive income |
The Bank has made an irrevocable election to present in other comprehensive income, subsequent changes in fair value of some equity instruments that are not hold for trading; dividends from this type of instrument is recognized in net income only when the entity’s right to receive payment of the dividend is established.
| 7.4.4 | Loans and advances to customers and financial institutions, leases and other receivables |
These are financial assets that consist primarily of corporate loans, personal loans (including mainly consumer finance and overdrafts), residential mortgage loans and financial leases. The Bank established that loans, advances to customers and other receivables are held within a business model whose objective is to hold them in order to collect contractual cash flows and the contractual terms give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. They are initially measured at fair value, plus transaction costs and origination fees that are directly attributable to the acquisition. They are subsequently measured at amortized cost using the effective interest rate method.
| 7.4.5 | Impairment of financial assets at amortized cost |
At the end of every period, the Bank assesses whether there is objective evidence that a financial asset or group of financial assets measured at amortized cost are impaired; impairment is recognized as a result of one or more events that occurred, after the initial recognition of the financial asset, where the loss event has an impact on the estimated future cash flows of the financial asset or group of financial assets that can be reliably estimated.
| F-32 |
Indicators that the financial asset is impaired include historical performance data, particular characteristics of the borrower, fair value of collateral, the borrower’s debt to other entities, macroeconomic factors and financial information, a significant financial difficulty of the borrower, whether the borrower will likely to declare bankruptcy or financial restructuring, or any breach of contract, such as a default or delinquency in interest or principal payments.
| 7.4.5.1 | Impairment of loans |
The Bank individually evaluates for impairment loans which exceed COP 2,000 million (USD 1 million for foreign subisidiaries). When these significant financial assets are identified as impaired, the amount of the loss is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows, including the fair value of any collateral, discounted at the financial asset’s original effective interest rate. When it is determined that the significant financial asset will be substantially recovered solely from the value of collaterals or guarantees, the Bank estimates the impairment loss as the difference between the carrying amount of the loan and the current fair value of the collateral or guarantee less the estimated selling costs when applicable.
For loans that are not considered individually significant and loans individually significant that are not considered impaired, a collective assessment is carried out. Portfolios of financial assets with similar credit risk characteristics are grouped together, using statistical techniques based on the analysis of historical loss experience. The historical losses information used in the process is adjusted to include the most recent data regarding current economic conditions, the performance trends by industry or region, or the concentration of obligations in each portfolio of financial assets by segment, and any other relevant information that may affect the allowance for loans and advances and lease losses.
Financial assets are classified as impaired when the loans are typically three months or more past due as well as in cases where there is other objective evidence of impairment.
Quantification of the losses based on historical loss experience takes into account three fundamental factors: exposure at default, the probability of default and the loss given default:
| · | Exposure at default: This is defined as the current balance of the principal, interest receivable accounts and other receivables regarding consumer and commercial loans at the statement of financial position date. In the case of loans which include a revolving line of credit that is susceptible to be used in its entirety in the form of loan contracts, this parameter includes the Bank’s expectations of future drawdowns even though the corresponding provisions for committed credit lines are included as liabilities on the statement of financial position. |
| · | Probability of default (PD): The likelihood that a customer will fail to make full and timely repayment of credit obligations over a one year horizon. The PD estimated for a period of 12 months is adjusted by the loss identification period (LIP) in order to estimate the point in time probability of default at the statement of financial position date as follows: |
- The parameter “point-in-time,” which converts the probability of cycle-adjusted default required for regulatory purposes (defined as the average probability of default in a complete economic cycle) to the probability of default on a given date required by IFRS; known as “point-in-time” probability.
- LIP is the period from the occurrences of a loss event to the moment in which that loss becomes evident at an individual loan level. LIP is calculated based on homogeneous groups.
| F-33 |
In the case of doubtful assets, the probability of default is 100%. The qualification of an asset as "doubtful" is caused by a delinquency equal to or greater than 90 days, as well as in these cases where there is no delinquency, but exists doubts about the solvency of the debtor.
| · | Loss given default (LGD): This is defined as the loss the Bank would incur in the event of any instance of default. This depends mainly upon the characteristics of the debtor and the value of the guarantees or collateral. The LGD parameter is calculated based on homogeneous groups. |
Once a loan or group of loans is classified as impaired, interest income continues to be recognized using the interest rate applied to discount future cash flows of the loan in order to assess its impairment losses.
| 7.4.6 | Restructured financial assets |
Loan restructuring is an alternative to achieve a proper collection management. It must be understood as an exceptional resource to standardize the behavior of a portfolio, using a new contractual agreement between the parties. Such agreement aims to modify the originally established conditions in order to allow the accurate attention to the loan in the light of the real or potential impairment in the debtor’s payment ability. The loan restructuring is implemented through amendments to the contractual terms, rates and payment terms. In any case, at the restructuring time, all the collateral must be preserved and if possible, the Bank’s position should be improved by obtaining new guarantees or guarantors that support the obligations.
In the restructuring, real and personal property can be received as foreclosed assets to cancel partially the obligations. Likewise, the Bank can grant discounts on interest or other related receivables. If necessary, the discount can be applied to loan principal, either because the guarantees or payment sources do not have coverage on total loan or because the agreement does not permit full recovery of the total balance. The terms are reviewed in each negotiation to determine if the client should continue in the portfolio and if so, the terms to restore the business relationship after a certain time.
If as a result of restructuring, the financial asset is derecognized, costs and fees are recognized in net income, as well the difference between the value in the balance sheet and the consideration received. In the case in which the modified financial asset is not derecognized, the costs and fees are deferred and will be amortized by the remaining life of the modified asset.
Before the commencement of the restructuring process, the Bank should perform an analysis of the debtor’s projected cash flow in order to evaluate the capacity to pay the proposed plan. Restructuring loans are classified as follows:
Private Agreement
These are restructuring based on agreement with the client resulting from, after negotiations between the two parties, without any legal special scheme adopted by the debtor.
| F-34 |
Regulated by the law agreements
These are restructuring that result from legal bankruptcy and insolvency procedures or corporate restructuring agreements acquired by the client.
| 7.4.7 | Leasing |
| 7.4.7.1 | The Bank as lessee |
The assets taken for lease under financial leases are recognized at the lower of the fair value of the leased assets and the present value of the minimum lease payments. Such assets are recognized as premises and equipment in the statement of financial position.
The assets leased under financial leases are depreciated throughout their life using the straight line method. However, if there is no reasonable certainty that the Bank will obtain the property at the end of the lease term, the asset is depreciated throughout its life or the lease term, whichever is shorter. The lease payments are divided between interest and debt reduction. The finance charges are recorded in the consolidated statement of income.
The payments for operating leases are recognized on a straight line basis over the term of the lease as expenses in the statement of income during the lease term. Lease incentives received are recognized as an integral part of the total lease expenses over the term of the lease.
| 7.4.7.2 | The Bank as lessor |
The lease agreements entered into by the Bank are classified at the initial recognition as financial or operating leases.
The Bank classifies a lease as a financial lease when according to the agreement substantially, all the inherent risks and benefits are transferred to the lessee and are recognized as the sum of the minimum payments to be received and any unguaranteed residual value discounted at the lease interest rate is recorded as part of the loan. Otherwise, the lease is classified as an operating lease, which is classified in the statement of financial position as premises and equipment. The initial direct costs incurred in the negotiation of an operating lease are added to the carrying value of the leased assets and recorded as a cost during the lease term on the same basis as the lease income. The contingent rents of the leases are recorded as income in the period in which they are obtained.
Among the risks transferred are the possibilities of losses through underutilization, technological obsolescence, decrease in profitability or changes in the economic environment. Among the benefits derived from the use are the expectation of profit over the economic life of the asset and eventually, the appreciation of its residual value or realization of the asset.
The following are indications of transfer of risk and rewards of ownership to the lessee:
| · | The agreement indicates that the lessee has the option to purchase the asset at a price that is expected to be equal to or less than 10% of the fair value of the asset upon termination of the lease. |
| · | The term of the lease covers most of the economic life of the asset when the minimum lease term represents 75% or more of the economic life of the leased asset. |
| · | At the inception of the lease, the present value of the minimum lease payments amounts to at least 90% of the fair value of the leased asset. |
| F-35 |
| · | The leased assets are of such a specialized nature that only the lessee has the possibility of using them without making significant modifications. |
If during the lease term, the lessor and the lessee decide to modify the initial conditions, and the agreed changes result in a different classification, then the modified agreement will be considered a new lease with new clauses that will lead to the classification of a financial or operating lease, as appropriate.
| 7.5. | Financial liabilities |
At initial recognition, the Bank measures its financial liabilities at fair value. The transaction costs that are directly attributable to the financial liability are deducted from its fair value if the instruments are subsequently recognized at amortized cost, or will be recognized in the statement of income if the liabilities are measured at fair value.
Derivative liabilities are measured at fair value through profit and loss and the gains or losses of those liabilities are recognized in the statement of income for subsequent measurements. Non-derivative financial liabilities are measured at amortized cost using the effective interest rate. Interest expenses are recognized in the statement of income unless it is a financial liability designated as at fair value through profit or loss, for which is required to present the effects of changes in the liability’s credit risk in other comprehensive income.
Compound financial instruments that comprise both a liability and equity component must be separated and accounted for separately. Therefore, for initial measurement, the liability component is the fair value of a similar liability which doesn´t have an equity component (determined by discounting future cash flows using the market rate at the date of the issuance). The difference between the fair value of the liability component and the fair value of the compound financial instrument considered as a whole is the residual value assigned to the equity component. Subsequent to initial recognition, the liability component of a compound financial instrument is measured at amortized cost using the effective interest method. The equity component of a compound financial instrument is not re-measured subsequent to initial recognition. Preferred shares issued by the Bank are a compound financial instrument. The liability component corresponds to the preferred dividend related to 1% of the subscription price, which is the payment of the minimum dividend on the preferred shares for each period in accordance with the Bank’s bylaws.
| 7.5.1 | Financial guarantee contracts and loan commitments |
In order to meet the needs of its customers, the Bank issues financial standby letters of credit, bank guarantees and loan commitments. The financial guarantee contracts issued by the Bank are contracts that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due to accordance with the original or modified terms of a debt instrument.
Financial guarantee contracts are initially recognized as liability at fair value, which is normally the fee received, adjusted for the directly attributable transaction costs incurred. Such contracts are measured at the higher between the provision amount measured on the basis of incurred credit losses model set for in 7.4.5, according to IAS 37 provisions, contingent liabilities and contingent assets and the amount initially recognized less the accumulated amortization.
Income derived from guarantees is recognized as fees and commission income in the statement of income over the term of the contract.
| F-36 |
Loan commitments are not recognized in the consolidated statement of financial position. Provision is made for loan commitments, following the methodology described in 7.4.5 for impairment of loans, if it is probable that the facililty will be drawn and the resulting loan will be recognized at a value less than the cash advanced.
| 7.6 | Derecognition of financial assets and liabilities |
Financial assets are derecognized when the rights to receive cash flows from the financial assets have expired or have been transferred and the Bank has transferred substantially all the risks and rewards of ownership or in which the Bank neither transfers nor retains substantially all of the risks and rewards of ownership and it does not retain control of the financial asset.
On derecognition of a financial asset, the difference between: (a) the carrying amount (measured at the date of derecognition) and (b) the consideration received (including any new asset obtained less any new liability assumed) is recognized in net income.
In transactions in which the Bank neither transfers nor retains substantially all the risks and rewards of ownership of a financial asset, the Bank continues to recognize the asset to the extent of its continuing involvement, determined by the extent to which it is exposed to changes in the value of the transferred financial asset.
A financial liability is removed from the statement of financial position when it is extinguished, that is when the obligation is discharged, cancelled or expired.
| 7.6.1 | Written-Off loan portfolio balances and related allowances |
Loans are written off when the Bank concludes there is no a realistic expectation of recovery of the principal and receivables balances from a client or third party. In general, this characteristic will be fulfilled when the following delinquency conditions are present:
| Type | Length of delinquency |
| Consumer | 180 days |
| Commercial | 360 days |
| Small Business Loan | 180 days |
| Mortgage | 1.620 days. For Banistmo and Banco Agrícola from 720 days |
Among the reasons underlying the portfolio's non-recoverability are the estimated recovery time of the obligation and the probable recovery percentage given the existence or lack of collaterals. When default conditions are present, it is initially necessary to evaluate whether the collaterals that support the loan generate a reasonable expectation of recovery; if so, the necessary steps are taken to realize of the collateral prior to writing-off; in cases where the collateral net fair value indicates that there are no reasonable expectations of recovery, loans are written-off. In most mortgage loan cases, there is still a high probability of recovery after the delinquency.
| 7.7. | Derivatives financial instruments |
A financial derivative is an instrument whose value changes in response to changes in a variable such as an interest rate, exchange rate, the price of a financial instrument, a credit rating or a credit index. This instrument requires no initial investment or it is smaller than would be required for other financial instruments with a similar response to changes in market conditions, and it is generally settled at a future date.
| F-37 |
The Bank carries out derivative transactions to facilitate the business of clients related to the management of their market and credit risk; managing the exposure in its own position to changes in interest rates and risks in exchange rates; or to obtain benefits from changes in valuations experienced by these instruments in the market. Derivatives are recognized and measured at fair value through profit or loss, unless such derivatives are designated as hedging instruments in cash flow hedges or in a hedge of a net investment in a foreign operation. In those cases, the effective portion of changes in the fair value of the derivatives are recognized in other comprehensive income.
| 7.7.1 | Hedge accounting |
Fair value hedges are used by the Bank, through its Panamanian subsidiary, Banistmo, to protect against changes in the fair value of investment securities that are attributable to interest rate variability. Cash flow hedges are used mainly to reduce the variability in cash flows of deposits issued by Banistmo caused by interest rate changes. When the hedging relationship is considered to be highly effective, the changes in value of the hedging derivative are accounted for according to their classification as fair value hedges, cash flow hedges and hedges of net investment in foreign operations, as set in the paragraph below.
The Bank assesses at the inception of the hedge and on a monthly basis during the life of the instrument, whether the hedge used in the transaction is expected to be highly effective (prospective effectiveness), and considers the actual effectiveness of the hedge on an ongoing basis (retrospective effectiveness). The Bank discontinues the hedge accounting when the hedging instrument expires or is sold, terminated or exercised, the hedge no longer meets the criteria for hedge accounting or if hedge designation is revoked. When hedge accounting for a fair value hedge is terminated the previous adjustments related to the changes in fair value of the hedged item are subsequently recorded in the consolidated statement of income in the same manner as other components of the carrying amount of that asset.
Before the establishment of the hedge accounting, The Bank documents the relationship between hedged items and hedging instruments, as well as its risk management objectives and hedging strategies, which are approved by the Risk Management Committee as the body designated by the Board of Directors.
Hedge relationships, are classified and accounted for in the following way:
– Fair value hedges are designated to protect against the exposure to changes in the fair value of recognized assets or liabilities or unrecognized firm commitments.
Changes in the fair value of derivatives that are designated and qualify as hedging instruments in fair value hedges are recorded in the statement of income as interest and valuation on investments. The change in fair value of the hedged item attributable to the hedged risk is uncluded as part of the carrying value of the hedged item, and it is also recognized in the aforementioned item of statement of income.
| F-38 |
For fair value hedges that are related to items accounted for at amortized cost, the adjustments to the carrying value are amortized through the statement of income during the remaining term until their expiry. The amortization of the effective interest rate will be able to begin as long as there is an adjustment to the carrying value of the hedged item, but it will have to begin at the latest when the hedged item is no longer adjusted by changes to its fair value attributable to the risk that is being hedged. The amortization of the adjustments to the carrying value is based on the effective interest rate recalculated on the starting date of the amortization. If the hedged item is derecognized, the non-amortized fair value is recognized immediately in the statement of income. If the hedge instrument expires or it is sold, terminated or exercised, or when the hedge no longer meets the criteria for hedge accounting, the Bank discontinues prospectively the hedge accounting. For the items hedged at amortized cost, the difference between the carrying value of the item hedged at the completion of the hedge and the nominal value are amortized using the effective rate method during the time surplus of the original terms of the hedge. If the hedged item is derecognized, the remaining value to amortize is recognized immediately in the statement of income.
When an unrecognized firm commitment is designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged risk is recognized as an asset or liability with corresponding gain or loss recognized in net income.
– Cash flow hedges are used mainly to manage the exposition to variability related to the cash flow attributable of a specific risk associated with an asset or liability recognized on statement of financial position or to a highly probable forecast transaction.
The portion of the gain or loss on the hedging instrument that is determined to be an effective hedge is recognized in other comprehensive income. The ineffective portion of the gain or loss on the hedging instrument is recognized in the statement of income.
If the hedging instrument expires or is sold, terminated or exercised, without replacement or rollover into another hedging instrument, or if it’s hedging designation is revoked, any accumulated gain or loss previously recognized in OCI remains in OCI, until the planned operation or the firm commitment affects the result.
Hedge accounting is discontinued when the Bank revokes the hedging relationship, when the hedging isntrument expires or is sold, terminated, or excercised, or when no longer quilifies for hedge accounting. Any gain or loss recognised in other comprehensive income and accumulated in equity at that time remains in equity and is recognised in other comprehensive income when the forecast transaction is ultimately recognised in net income. When a forecast transaction is no longer expected to occur, the gain or loss acumulated in equity is recognised inmediately in net income.
– Hedges of a net investment in a foreign operation:
In accordance with IFRS 9 ‘Financial instruments’ and IFRIC 16 ‘Hedges of a net investment in a foreign operation’, the Bank has decided to apply the hedge accounting of the foreign currency risk arising from its net investment in Banistmo, designating as a hedging instrument certain debt securities issued by the Parent Company. Considering the hedge accounting relationship, in the case of the net investment, the gain or loss derived from the foreign exchange differences related to the debt securities that is determined to be an effective hedge is recognized in other comprehensive income, as well as the currency translation adjustment of the Banistmo operation into the presentation currency as required by IAS 21 as detailed in F.2. ‘Functional and presentation currency’.
| 8. | Premises and equipment and depreciation |
Premises and equipment include tangible items that are held for use, for rental to others, or for administrative purposes and are expected to be used for more than one period.
| F-39 |
Items of premises and equipment are expressed at cost less accumulated depreciation and impairment losses. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. The depreciable amount is the cost of an asset less its residual value. The estimated useful lives for each asset group are:
|
Asset group |
Useful life range |
| Buildings | 10 to 75 years |
| Furniture and fixtures | 5 to 20 years |
| Computer equipment | 3 to 20 years |
| Equipment and machinery | 3 to 40 years |
| Vehicles | 3 to 6 years |
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the end of each reporting period. When there is a significant change, the depreciation and the charge to the statement of income are adjusted based on the new estimation.
Assets classified as premises and equipment are subject to impairment tests when events or circumstances occur indicating that the carrying amount of the assets may not be recoverable
An impairment loss is recognized for the amount by which the asset’s carrying amount exceeds its recoverable amount and is recognized in the statement of income as ‘ impairment, depreciation and amortization’.
When the carrying value exceeds the recoverable value, the carrying value is adjusted to its recoverable value, modifying the future charges for depreciation, according to its new remaining useful life.
In a similar way, when indications exist that the value of an asset has been recovered, reversal of an impairment loss is recognized immediately in net income and consequently the future charges for the asset’s depreciation are adjusted. In any case, the reversal of the impairment loss of assets cannot increase its carrying value above the amount that it would have if impairment losses in previous periods had not been recognized.
For the purposes of assessing impairment, assets are grouped at the smallest identifiable group that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets (cash-generating units). The evaluation can be carried out at individual asset level when the fair value less the cost of sale can be reliably determined and the value in use is estimated to be close to its fair value less costs to sell and fair value less costs to sell can be determined.
Maintenance expenses of the premises and equipment are recognized as an expense in the period in which they are incurred and are registered in the consolidated statement of income as other administrative and general expenses.
Gains and losses in the sale of premises and equipment are registered in the consolidated statement of income as other operating income or other expenses.
| 9. | Investment properties |
Land and buildings that the Bank holds to earn rentals or for capital appreciation or both rather than for their use in the supply of services or sale in the ordinary course of business are recognized as investment properties.
The investment properties are measured initially at cost, including the transaction costs. The carrying value includes the cost of replacement or substitution of a part of an investment property at the time in which the cost is incurred, if the cost meets the recognition criteria; and it excludes the daily maintenance costs of the investment property which are included in the statement of income as “Other expenses”.
| F-40 |
After the initial recognition, the investment properties are measured at fair value which reflects the market conditions at the statement of financial position date. The gains and losses that arise from changes in the fair values of investment properties are included in the statement of income as ‘Other operating income’.
The investment properties are derecognized, either at the moment of their disposal, or when they are permanently withdrawn from use and no future economic benefits are expected. The difference between the net disposal proceeds of the investment properties and the carrying value is recognized in net income in the period the disposal occurs.
Transfers to or from the investment properties are only made when there is a change in its use. For a transfer from an investment property to premises and equipment, the cost taken into account for its subsequent accounting is the fair value at the time of the change in use. If a premises and equipment becomes an investment property, it will be accounted for at its fair value.
| 10. | Intangible assets |
An intangible asset is an identifiable non-monetary asset with no physical appearance. Separately acquired intangible assets are measured initially at their cost. The cost of intangible assets acquired in business combinations is their fair value at the date of acquisition. After the initial recognition, the intangible assets are accounted for at cost less any accumulated amortization and any accumulated impairment loss. The costs of internally generated intangible assets, excluding the costs from development that meet the recognition criteria, are not capitalized and the expense is reflected in the statement of income as it is incurred.
The useful lives of intangible assets are determined as finite or indefinite. The intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives. The Bank assesses its intangible assets in order to identify whether any indications of impairment exist, as well as possible reversal of previous impairment losses. The amortization period and the amortization method for intangible assets with a finite useful life are reviewed at least at the close of each period. The expected changes in the useful life or in the pattern of consumption of the future economic benefits of the asset are accounted for when changing the period or amortization method, as appropriate, and they are treated as changes in the accounting estimates. The amortization expense of intangible assets with finite useful lives is recognized in the statement of income. The useful lives of the intangible assets with finite life ranges between 1 and 10 years.
Intangible assets with indefinite useful lives are not subject to amortization, but are periodically tested in order to identify any impairment, either individually or at the cash-generating unit level. The assessment of the indefinite life is reviewed annually to determine if it continues being valid. In the event that the assessment were not valid, the change from indefinite useful life to finite useful life is recognized prospectively.
The gain or loss that arises when an intangible asset is derecognized are measured as the difference between the disposal value and the carrying value of the asset, and is recognized in the statement of income.
The Bank’s intangible assets comprise mainly intangibles of finite useful life: licenses, software and computer applications, client relationships and the legal stability agreement signed with the Ministry of Finance and Public Credit (See Note 11. Income Tax), customer relationships and patents. Intangibles of indefinite useful life comprise Goodwill.
| F-41 |
| 10.1 | Research and development costs |
The research costs are recorded as expenses as they are incurred. Costs directly related to the development of a stand-alone project are recognized as intangible assets when the following criteria are met:
| · | It is technical feasible of to complete the intangible asset so that it will be available for use or sale; |
| · | Management intends to complete the intangible asset and use or sell it; |
| · | There is an ability to use or sell the intangible asset; |
| · | It can be demonstrated how the asset will generate probable future economic benefits; |
| · | Adequate technical, financial and other resources to complete the development and to use or sell the intangible asset are available; and |
| · | The expenditure attributable to the intangible asset during its development can be reliably measured. |
In the statement of financial position, the related capitalized costs are recorded at cost less accumulated depreciation and accumulated impairment losses.
Costs are capitalized during the application development stage and amortized on a straight line basis since the beginning of the production stage over the period of expected future economic benefits. During the development period, the asset is subjected to annual impairment tests to determine if impairment indications exists. The research and development costs that do not qualify for capitalization are recorded as expenses in the income of the period.
| 11. | Inventories |
The inventories of returned property are those assets that come from an early termination of a lease (returned property) or those upon which the lease has already concluded (premises and equipment), which are expected to be sold in the normal course of business. These are controlled by the Bank and are expected to generate future economic benefits.
The inventory of returned property is recognized as an asset from the date in which the Bank assumes the risks and benefits of the inventories. The cost of it can be reliably measured and it is probable that it will generate future economic benefits.
The inventories of returned property are valued using the specific identification method and their costs include the carrying value at the time the asset is returned.
The carrying value of returned property is measured at the lower of cost and net realisable value (NRV). The net realisable value is the estimated selling price in the ordinary course of business less its estimated costs to make the sale. The adjustment in the carrying value to reflect the NVR, is recognized in the statement of income of the period in which the goods are returned. The value of any reversion that comes from an increase in the NVR in which the increase occurs is recognized as a lower expense in the period.
Other new inventories are measured initially at acquisition cost which comprises the sum of the purchase price, the import costs (if applicable), the non-recoverable taxes paid, the storage, the transport costs, and other attributable or necessary costs for their acquisition, less discounts, reductions or similar items. Those inventories do not include selling costs.
| F-42 |
The Bank must review the NRV of its inventories, at least annually or whenever necessary by market conditions. Any write-down adjustment must be recognized directly in the statement of income.
| 12. | Non-current assets held for sale and discontinued operations |
Non-current assets and disposal groups are classified as held for sale if their carrying value will be recovered through a sale transaction, rather than through continuing use. These assets or groups of assets are shown separately in the statement of financial position at the lower of their carrying value and their fair value less costs to sell and they are not depreciated nor amortized from the date of their classification.
The held for sale condition is met if the assets or group of assets are available, in their current condition, for immediate sale and the sale transaction is highly probable and is expected to be completed within the year following the date of classification.
The Bank perform the measurement of the assets held for sale at the statement of financial position date. However these assets are evaluated quarterly if exist impairment indicators that imply review of the carrying value recorded in the accounts. If those indications are identified, impairment losses are recognized for the difference between the carrying and recoverable amount of an asset as ‘Impairment, depreciation and amortization’ in the statement of income.
A discontinued operation is a component of an entity that has been disposed of, or is classified as held for sale and, represents a separate major line of business or a geographical area of operations, is part of a single coordinated and individual plan to dispose a separate major line of business or geographical area of operations or is a subsidiary acquired exclusively with a view to resale.
Income and expenses coming from a discontinued operation must be disclosed separately from those coming from continued operations, in a single item after the income tax, in the consolidated statement of income of the current period and comparatively with previous period even though the Bank retains a non-controlling interest in the subsidiary after the sale.
| 13. | Impairment of non-financial assets, cash-generating units and goodwill |
The Bank evaluates whether there is any indication that on a stand-alone basis, cash-generating units are impaired at the end of each period. If some indication of impairment does exist, the Bank estimates the recoverable amount of the assets and the loss by impairment. Regardless of whether impairment indicators exist, goodwill must be tested annually for impairment.
If an asset does not generate cash flows that are independent from the rest of the assets or group of assets, the recoverable amount is determined by the cash-generating unit to which the asset belongs.
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.
The amount of impairment losses recognized in net income during the period are included in the Statement of income as “Impairment, depreciation and amortization”.
| 14. | Other assets |
The bank presents as other assets, among other things, (a) the expenses paid in advance incurred in the development of its business, in order to receive future services, which are amortized during the period in which services are received or the costs or expenses are recorded and (b) foreclosed assets that do not comply with what is required to be recognized as non-current assets held for sale and that there are no plans to use it in the supply of services or for administrative purposes.
| F-43 |
Foreclosed assets are initially recognized at the lower of net amount of the charge-off financial assets and net realizable value of the foreclosed asset (the net realizable value will be the estimated selling price of the asset or its awarding value, less the estimated costs necessary to carry out its sale), pending the obtaining of a plan for its commercialization. For this group of assets, it is evidence of impairment that they remain in the statement of financial position for a period greater than one year from their reception date without obtaining a buyer, despite permanently seeking their realization, even adjusting their selling price.
Foreclosed assets are subsequently assessed to determine whether an impairment loss must be recognized. In the case of arising events that are beyond the control of the Bank and that make remote the realization of these assets, they are identified as "non-tradable" and an impairment charge is recognized for their full carrying amount.
| 15. | Employee benefits |
| 15.1 | Short term benefits |
The Bank grants to its employee’s short term benefits such as bonuses, salaries, accrued performance costs and social security that are expected to be wholly settled within 12 months. Expenses related to these benefits are recognized over the period in which the employees provide the services to which the payments relate.
| 15.2 | Other long term employee benefits |
The Bank grants to its employees seniority bonuses as long term employee benefits whose payment is not expected within the 12 months following the end of the annual period in which the employees have rendered their services. These benefits are projected up to the date of payment and are discounted through the Projected Unit Credit method. The cost of long term employee benefits is allocated across the period from the time the employee was hired the Bank and the expected date of obtaining the benefit.
| 15.3 | Pensions and other post-employment benefits |
| − | Defined contribution plans |
The Bank pays contribution monthly to pension funds, due to legal requirements and it will have no legal obligation to pay further contributions.
The Bank recognizes contributions in the statement of income. Any contributions unpaid at the statement of financial position date are included as a liability.
| − | Defined benefit plans |
They are post-employment benefit plans in which the Bank has the legal or implicit obligation to take responsibility for the payments of benefits that have agreed. The Bank makes an actuarial valuation on the base of the projected unit credit method and a risk-free rate which reflects current market assessments of the time value of money in each country.
| F-44 |
| 16. | Provisions, contingent liabilities and contingent assets |
Provisions are recorded when the Bank has a present obligation (legal or constructive) as a result of past events, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation.
Provisions are determined by the management’s best estimate of the expenditure required to settle the present obligation at the end of the reporting period and it is discounted using a risk-free rate which reflects current market assessments of the time value of money in each country, treasury bonds (TES)1 for Colombia. The corresponding expense of any provision is recorded in the statement of income, net of all expected reimbursement. The increase of the provision due to the time value of money is recognized as a financial expense.
The amounts recognized in the statement of income, correspond mainly to:
| − | Provisions for loan commitments and financial guarantee contracts; and |
| − | Provisions for legal proceedings, classified as probable to be decided against the Bank. |
Possible obligations that arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Bank, or a present obligation that arise from past events but are not recognized because it is not probable, that an outflow of resources embodying economic benefits will be required to settle the obligations or the amount of the obligations cannot be measured with sufficient reliability are not recognized in the financial statement but instead are disclosed as contingent liabilities, unless the possibility of an outflow of resources embodying economic benefits is remote, in which case no disclosure is required.
Possible assets that arise from past events whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events, not wholly within the control of the Bank, are not recognized in the financial statement; instead are disclosed as contingent assets where an inflow of economic benefits is probable. When the realization of income is virtually certain, then the related asset is not a contingent asset and its recognition is appropriate.
| 17. | Customer loyalty program |
The Bank maintains a credit card loyalty program to provide incentives to its customers. The program allows customers to purchase goods and services, based on the exchange of awards points, which are awarded based on purchases using the Bank's credit cards and the fulfillment of certain conditions established in such program. Miles redemption for prizes is carried out by a third party. According to IFRIC 13, the expenses of the Bank's commitments with its clients arising from this program are recognized as a lower value of the fee and other service income, considering the total number of points that can be redeemed over the accumulated prizes and taking into account the probability of redemptions.
| 18. | Revenue recognition |
Revenue is recognized to the extent that it is probable that the economic benefits flow to the Bank and that the revenue can be measured reliably.
1 It refers to the interest rate of treasury bonds (TES), representative of the nation's public debt.
| F-45 |
| 18.1. | Interest income and expenses |
For all financial instruments measured at amortized cost, interest income and interest expenses are recognized using the effective interest rate. The effective interest rate is the rate that exactly discounts future estimated cash flows payments through the expected life of the financial instrument or, when appropriate, a shorter period to the net carrying value of the financial liability or asset. The computation takes into account all the contractual conditions of the financial instrument (for example, prepayment options) and includes incremental fees or expenses that are directly attributed to the instrument and are an integral part of the Effective Interest Rate (EIR), but not future credit losses.
For debt securities at fair value, gains and losses arising from changes in fair value are included in the statement of income as ‘Interest and valuation on investments’.
| 18.2. | Fees and commission income |
The Bank charges fees and commission for services rendered to its clients. If they are not an integral part of the effective interest rate, they are recognized when the service is provided or on the performance of a significant act as follows:
| · | Fees and commission recognized when the service is provided |
These are commissions earned from the provision of services over a period of time. These payments include commissions for assets management, custody and other administration and consulting services.
Commissions from loan commitments that are likely to be used and other payments related with the loan are deferred (along with any incremental expense) and recognized in the statement of income. When it is not possible to demonstrate the likelihood that a loan will be used, the commissions from the origination of the loan are recognized during the commitment period on a straight line basis.
| · | Fee and commission recognized on the performance of a significant act |
Fees arising from the negotiation or participation in the negotiation of a transaction for a third party, such as the acquisition of shares or other securities or the purchase or sale of businesses, are recognized at the closing of the underlying transaction. Commissions or fee components that are linked to a specified performance are recognized after the corresponding criteria are met.
| 18.3. | Dividend revenue |
For the investments that are not associates or joint ventures, dividends are recognized when the right to payment of the Bank is established, which is generally when the stockholders declares the dividend. These are included in the statement of income as Dividends received and share of profits of equity method investees.
| 18.4. | Total operating income, net |
The income derived from commercial operations (trading) includes all profits and losses from variations in the fair value and revenue or expenses for related interests from financial liabilities or assets. This includes any ineffectiveness registered in the hedging transactions.
| F-46 |
| 19. | Income tax |
The Bank recognizes, when appropriate, deferred tax assets and liabilities by the future estimate of tax effects attributable to differences between book values of assets, liabilities and their tax bases. Deferred tax assets and liabilities are measured based on the tax rate, in accordance with the enacted tax laws in each country that must be applied in the year in which the deferred tax assets and liabilities are realized or settled. The future effects of changes in tax laws or tax rates are recognized in the deferred taxes as from the date of publication of the law providing for such changes.
Tax bases for deferred tax must be calculated taking into account the definition provided by IAS 12 and the value of the assets and liabilities that will be realized or settled in the future according to the enacted tax laws of each of the countries where the Bank has its operations.
Deferred tax liabilities due to deductible temporary differences associated with investments in subsidiary and associated entities or shares in joint ventures, are recognized except when the Bank is able to control the period in which the deductible temporary difference is reverted and it is likely that it will not be reverted in the foreseeable future.
Deferred tax assets, identified as temporary differences, are only recognized if it is considered likely that the entities are going to have sufficient taxable income in the future that allow it to be recovered.
Tax credit from fiscal losses and surplus amounts from the presumptive income over the net income are recognized as a deferred asset, provided that it is likely that the entities will generate future net income to allow their offset.
Deferred tax income must be recorded in accordance with the transaction outcome as deferred tax assets or deferred tax liability. However, for disclosure purposes in the Statement of Financial Position they must be disclosed on a net basis.
The income tax expense is recognized on the consolidated statement of income in the line ‘Income Tax’, except when referring to amounts directly recognized in Other Comprehensive Income (OCI).
Regulatory changes in tax laws and in tax rates are recognized in the consolidated statement of income in the line ‘Income tax’ in the period when such regulatory change becomes enforceable. Interest and fines are recognized on the consolidated statement of income in the line other administrative and general expenses.
In determining the amount of current and deferred tax, the Bank considers the impact of tax exposures, including whether additional taxes and interest may be due. This assessment relies on estimates and assumptions and may involve a series of judgments about future events. New information may become available that causes the Bank to change its judgment regarding the adequacy of existing tax liabilities; such changes to tax liabilities would impact tax expense in the period in which such a determination is made.
Revisions of tax returns must be documented, as well as any uncertain tax positions that are taken in them.
| 20. | Operating segments |
Operating segments are defined as components of the Bank for which separate financial information is available that is regularly used by the chief operating decision maker in deciding how to allocate resources and assessing performance.
| F-47 |
The Bank manages and measures the performance of its operations through the operating segments using the same accounting policies described in the summary of significant accounting policies described in Note 2.
| 21. | Earnings per share |
The basic earnings per share are calculated by dividing net income attributable to the ordinary equity holders of the Parent Company by the weighted average number of ordinary shares outstanding during the period.
To calculate diluted earnings per share, the net income attributable to ordinary equity holders, and the weighted average number of outsanding shares is adjusted by the dilutive effects inherent to potential ordinary shares.
| 22. | Paid-in capital |
Corresponds to the greater amount paid by the shareholders on the nominal value of the share.
NOTE 3. OPERATING SEGMENTS
Operating segments are defined as components of an entity about which separate financial information is available that is evaluated regularly by the chief operating decision maker (CODM) in deciding how to allocate resources and assessing performance. The segment information has been prepared following the Bank’s accounting policies as described in the summary of significant accounting policies in Note 2 Significant accounting policies and presented consistently with the internal reports provided to the CODM.
The CODM uses a variety of information and key financial data on a segment basis to assess the performance and make decision regarding the investment and allocation of resources, such as:
| · | Net interest margin (Net margin on financial instruments divided by average interest-earning assets). |
| · | Return on average total assets (Net income divided by average total assets). |
| · | Return on average stockholders’ equity. |
| · | Efficiency ratio (Operating expenses as a percentage of interest, fees, services and other operating income). |
| · | Asset Quality and loans coverage ratios. |
The Bank includes the following segments: Banking Colombia, Banking Panama, Banking El Salvador, Banking Guatemala, Trust, Investment Banking, Brokerage, Off Shore and All other segments. The factors used to identify the Bank’s reportable segments are the nature of the products and services provided by the subsidiaries and the geographical locations where the subsidiaries are domiciled, in line with the CODM’s operating decisions related to the results of each segment.
As of December 31, 2015 and 2014, the segments’ results have been restated due to the change in the Bank’s organizational structure according to the merger between Leasing Bancolombia S.A. and Bancolombia S.A. that took place on September 30, 2016. For further information see Note 27 Related party transactions.
The Bank’s operating segments are comprised as follows:
| · | Banking Colombia |
This segment provides retail and corporate banking products and services to individuals, companies and national and local governments in Colombia. The Bank’s strategy in Colombia is to grow with these clients based on value added and long-term relationships. In order to offer specialized services to individuals and small and medium size enterprises (SMEs), the Bank´s retail sales force targets the clients classified as: Personal, Private, Entrepreneurs, Foreign Residents and SMEs. The Bank´s corporate and government sales force targets and specializes in companies with more than COP 16,000 million in revenue in nine economic sectors: Agribusiness, Commerce, Manufacturing of Supplies and Materials, Media, Financial Services, Non-Financial Services, Construction, Government and Natural Resources.
| F-48 |
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Colombia.
| · | Banking Panama |
This segment provides retail and commercial banking products and services to individuals and companies in Panama through the Banistmo operation. This segment includes all the operations of Banistmo and its subsidiaries, which are managed and monitored by the CODM on a consolidated basis.
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Panama.
| · | Banking El Salvador |
This segment provides retail and commercial banking products and services to individuals, companies and national and local governments in El Salvador. Banking El Salvador also includes operations of the following subsidiaries: Arrendadora Financiera S.A., Credibac S.A. de CV, Valores Banagricola S.A. de C.V.
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in El Salvador.
| · | Banking Guatemala |
This segment provides retail and commercial banking and insurance products and services to individuals, companies and national and local governments in Guatemala. Banking Guatemala also includes operations of the following subsidiaries: Banco Agromercantil de Guatemala S.A., Mercom Bank Ltd., Seguros Agromercantil S.A., Financiera Agromercantil S.A., Agrovalores S.A., Tarjeta Agromercantil S.A.
This segment is also responsible for the management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to its client base in Guatemala.
| · | Trust |
This segment provides trust and asset management services to clients in Colombia and Peru through Fiduciaria Bancolombia and FiduPerú S.A. Sociedad Fiduciaria. The main products offered by this segment include money market accounts, mutual and pension funds, private equity funds, payment trust, custody services, and corporate trust.
| · | Investment banking |
This segment provides corporate and project finance advisory, underwriting, capital markets services and private equity management through Banca de Inversión Bancolombia S.A. Its customers include private and publicly-held corporations as well as government institutions.
| F-49 |
| · | Brokerage |
This segment provides brokerage, investment advisory and private banking services to individuals and institutions through Valores Bancolombia S.A. Comisionista de Bolsa. It sells and distributes equities, futures, foreign currencies, fixed income securities, mutual funds and structured products.
| · | Off Shore |
This segment provides a complete line of offshore banking services to Colombian and foreign customers through Bancolombia Panamá S.A., Bancolombia Caymán S.A., and Bancolombia Puerto Rico International, Inc. It offers loans to private sector companies, trade financing, leases financing and financing for industrial projects, as well as a complete portfolio of cash management products, such as checking accounts, international collections and payments. Through these subsidiaries, the Bank also offers investment opportunities in U.S. dollars, savings and checking accounts, time deposits, and investment funds to its high net worth clients and private banking customers.
| · | All other segments |
This segment provides financial and operational leases activities, including cross-border and international leasing services to clients in Colombia, Central America, Mexico and Brazil. Bancolombia offers these services mainly through the following Subsidiaries: Renting Colombia S.A.S., Arrendamiento Operativo CIB S.A.C., Leasing Perú S.A., Transportempo S.A.S., Capital Investment Safi S.A. and Fondo de Inversión en Arrendamiento Operativo Renting Perú. This segment also includes results from small operation of particular investment vehicles of Bancolombia: Valores Simesa S.A., BIBA Inmobiliaria S.A.S., Inversiones CFNS S.A.S., Sistema de Inversiones y Negocios S.A. Sinesa, Banagrícola S.A., Inversiones Financieras Banco Agrícola and others.
| F-50 |
Financial performance by operating segment:
The CODM reviews the performance of the Bank using the following financial information by operating segment:
| For the year ended December 31, 2016 | ||||||||||||
| Banking Colombia | Banking Panama | Banking El Salvador | Banking Guatemala (1) | Trust | Investment banking | Brokerage | Off shore | All other segments | Total before eliminations | Adjustments for consolidation(2) | Total after eliminations | |
| In millions of COP | ||||||||||||
| Total interest and valuation | 11,586,785 | 1,399,852 | 901,757 | 869,329 | 827 | 136 | 17,160 | 442,107 | 30,299 | 15,248,252 | 500,553 | 15,748,805 |
| Interest expenses | (4,542,701) | (457,611) | (252,011) | (348,219) | (20) | - | (33) | (252,030) | (99,991) | (5,952,616) | (100,484) | (6,053,100) |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 7,044,084 | 942,241 | 649,746 | 521,110 | 807 | 136 | 17,127 | 190,077 | (69,692) | 9,295,636 | 400,069 | 9,695,705 |
| Total credit impairment charges, net | (1,797,848) | (367,781) | (55,985) | (127,839) | (164) | (423) | (25) | (52,294) | 871 | (2,401,488) | (329,664) | (2,731,152) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 5,246,236 | 574,460 | 593,761 | 393,271 | 643 | (287) | 17,102 | 137,783 | (68,821) | 6,894,148 | 70,405 | 6,964,553 |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (65,915) | (20,600) | (3,054) | 701 | (22,893) | 12,891 | 38,677 | 99,914 | (39,721) | - | - | - |
| Total fees and commission income, net | 1,269,298 | 180,286 | 158,262 | 58,745 | 238,745 | 19,821 | 80,060 | 27,502 | 13,724 | 2,046,443 | 272,521 | 2,318,964 |
| Other operating income | 603,860 | 18,828 | 1,302 | 55,942 | 13,500 | 2,285 | (9,923) | 15,961 | 874,978 | 1,576,733 | (89,610) | 1,487,123 |
| Dividends received, and share of profits of equity method investees | (264,715) | 4,692 | 711 | 779 | 16,873 | 202,062 | 32,567 | (269,096) | (175,595) | (451,722) | 628,414 | 176,692 |
| Total operating income, net | 6,788,764 | 757,666 | 750,982 | 509,438 | 246,868 | 236,772 | 158,483 | 12,064 | 604,565 | 10,065,602 | 881,730 | 10,947,332 |
| Operating expenses (3) | (4,150,984) | (589,535) | (390,309) | (323,001) | (87,951) | (26,662) | (110,317) | (60,688) | (400,243) | (6,139,690) | (321,551) | (6,461,241) |
| Impairment, depreciation and amortization | (147,261) | (62,459) | (50,323) | (112,429) | (612) | (93) | (1,980) | (972) | (137,672) | (513,801) | (4,008) | (517,809) |
| Total operating expenses | (4,298,245) | (651,994) | (440,632) | (435,430) | (88,563) | (26,755) | (112,297) | (61,660) | (537,915) | (6,653,491) | (325,559) | (6,979,050) |
| Profit before tax | 2,490,519 | 105,672 | 310,350 | 74,008 | 158,305 | 210,017 | 46,186 | (49,596) | 66,650 | 3,412,111 | 556,171 | 3,968,282 |
| (1) | Banking Guatemala aggregates Grupo Agromercantil Holding and its subsidiaries as a result of the acquisition of an additional 20% interest on December 30, 2015. The Bank has a controlling stake of 60% of this company. |
| (2) | Includes provisions, dividends, gains on sales and non-controlling interest and reclassification according to the analysis process used by the CODM. |
| (3) | Includes staff costs, other administration and general expenses, contributions and other tax burdens and others. |
| F-51 |
| For the year ended December 31, 2015 | |||||||||||
| Banking Colombia | Banking Panama | Banking El Salvador | Trust | Investment banking | Brokerage | Off shore | All other segments | Total before eliminations | Adjustments for consolidation(1) | Total after eliminations | |
| In millions of COP | |||||||||||
| Total interest and valuation | 8,992,368 | 1,119,540 | 728,582 | 626 | 287 | 21,157 | 291,249 | 112,858 | 11,266,667 | 2,977 | 11,269,644 |
| Interest expenses | (3,192,822) | (363,373) | (187,743) | (367) | (236) | (652) | (215,592) | (77,156) | (4,037,941) | - | (4,037,941) |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments | 5,799,546 | 756,167 | 540,839 | 259 | 51 | 20,505 | 75,657 | 35,702 | 7,228,726 | 2,977 | 7,231,703 |
| Total credit impairment charges, net | (1,509,519) | (82,344) | (26,933) | (3,204) | 127 | (177) | (49,830) | (3,219) | (1,675,099) | (2) | (1,675,101) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments | 4,290,027 | 673,823 | 513,906 | (2,945) | 178 | 20,328 | 25,827 | 32,483 | 5,553,627 | 2,975 | 5,556,602 |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (68,915) | (6,098) | (8,475) | (21,833) | 2,355 | 31,734 | 95,495 | (24,263) | - | - | - |
| Total fees and commission income, net | 1,347,999 | 136,372 | 140,398 | 218,190 | 29,327 | 78,124 | 32,325 | 10,334 | 1,993,069 | (25) | 1,993,044 |
| Other operating income | 483,556 | 104,448 | 24 | 16,507 | 2,080 | (6,325) | 16,281 | 772,959 | 1,389,530 | (16,828) | 1,372,702 |
| Dividends received, and share of profits of equity method investees | (40,115) | 69,127 | 1,716 | 13,573 | 40,018 | (1,473) | (141,261) | (159,583) | (217,998) | 429,572 | 211,574 |
| Total operating income, net | 6,012,552 | 977,672 | 647,569 | 223,492 | 73,958 | 122,388 | 28,667 | 631,930 | 8,718,228 | 415,694 | 9,133,922 |
| Operating expenses (2)(3) | (3,836,019) | (606,582) | (330,362) | (85,918) | (22,635) | (111,255) | (73,425) | (354,811) | (5,421,007) | 5 | (5,421,002) |
| Impairment, depreciation and amortization (3) | (247,446) | (49,590) | (27,761) | (466) | (93) | (1,274) | (17,254) | (133,401) | (477,285) | - | (477,285) |
| Total operating expenses | (4,083,465) | (656,172) | (358,123) | (86,384) | (22,728) | (112,529) | (90,679) | (488,212) | (5,898,292) | 5 | (5,898,287) |
| Profit before tax | 1,929,087 | 321,500 | 289,446 | 137,108 | 51,230 | 9,859 | (62,012) | 143,718 | 2,819,936 | 415,699 | 3,235,635 |
| (1) | Includes provisions, dividends, gains on sales and non-controlling interest and reclassification according to the analysis process used by the CODM. |
| (2) | Includes staff costs, administration and general expenses, contributions and other tax burdens and others. |
| (3) | The Bank inadvertently inverted the label of the amounts reported for Operating Expenses and Depreciation and Amortization in 2015. There was no impact in total operating expenses or profit before tax. |
| F-52 |
| For the year ended December 31, 2014 | |||||||||||
Banking Colombia |
Banking Panama | Banking El Salvador | Trust | Investment banking | Brokerage | Off shore | All other segments | Total before eliminations | Adjustments for consolidation(1) | Total after eliminations | |
| In millions of COP | |||||||||||
| Total interest and valuation | 7,510,647 | 807,547 | 506,575 | 12,852 | 249 | 19,833 | 188,934 | 154,107 | 9,200,744 | (28,581) | 9,172,163 |
| Interest expenses | (2,580,194) | (256,795) | (109,353) | (321) | (200) | (784) | (152,601) | (64,309) | (3,164,557) | (54) | (3,164,611) |
| Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments |
4,930,453 |
550,752 |
397,222 |
12,531 |
49 |
19,049 |
36,333 |
89,798 |
6,036,187 |
(28,635) |
6,007,552 |
| Total credit impairment charges, net | (869,260) | 69,703 | (44,808) | 319 | (157) | (1,829) | (21,160) | (2,012) | (869,204) | (1) | (869,205) |
| Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments |
4,061,193 |
620,455 |
352,414 |
12,850 |
(108) |
17,220 |
15,173 |
87,786 |
5,166,983 |
(28,636) |
5,138,347 |
| Revenues (Expenses) from transactions with other operating segments of the Bank | (20,928) | (1,831) | (3,529) | (34,036) | 961 | 46,068 | 53,519 | (40,224) | - | - | - |
| Total fees and commission income, net | 1,271,506 | 140,189 | 103,585 | 199,806 | 22,985 | 81,733 | 28,776 | (6,409) | 1,842,171 | (16,461) | 1,825,710 |
| Other operating income | 357,597 | 72,406 | 7,101 | (19,595) | 2,092 | 5,446 | 6,750 | 679,608 | 1,111,405 | 25,138 | 1,136,543 |
| Dividends received, and share of profits of equity method investees | (57,981) | 13,919 | (797) | 26,121 | (4,215) | (1,188) | (159,515) | (121,800) | (305,456) | 428,145 | 122,689 |
| Total operating income, net | 5,611,387 | 845,138 | 458,774 | 185,146 | 21,715 | 149,279 | (55,297) | 598,961 | 7,815,105 | 408,186 | 8,223,289 |
| Operating expenses (2) |
(3,320,789) | (470,862) | (220,715) | (84,102) | (22,946) | (105,880) | (38,652) | (398,293) | (4,662,239) | 3,247 | (4,658,992) |
| Impairment, depreciation and amortization | (274,120) | (57,902) | (18,334) | (387) | (92) | (899) | (636) | (107,333) | (459,703) | - | (459,703) |
| Total operating expenses | (3,594,909) | (528,764) | (239,049) | (84,489) | (23,038) | (106,779) | (39,288) | (505,626) | 5,121,942 | 3,247 | (5,118,695) |
| Profit before tax | 2,016,478 | 316,374 | 219,725 | 100,657 | (1,323) | 42,500 | (94,585) | 93,335 | 2,693,161 | 411,433 | 3,104,594 |
| (1) | Includes provisions, dividends, gains on sales and non-controlling interest and reclassification according to the analysis process used by the CODM. |
| (2) | Includes staff costs, administration and general expenses, contributions and other tax burdens and others. |
| F-53 |
The following table presents financial information of the investments in associates and joint ventures by operating segment:
| For the year ended December 31, 2016(1) | ||||||
| Banking Colombia | Banking El Salvador | Trust | Investment banking | All other segments | Total | |
| In millions of COP | ||||||
| Investments in associates and joint ventures | 284,516 | 9,888 | 208,963 | 361,079 | 433,800 | 1,298,246 |
| Equity method | (34,425) | (702) | (26,128) | 3,923 | (2,922) | (60,254) |
| (1) | As of December 31, 2016, Banking Panama, Banking Guatemala, Brokerage and Off shore did not have investments in associates and joint ventures. |
| For the year ended December 31, 2015(1) | |||||||
| Banking Colombia | Banking El Salvador | Trust | Investment banking | Off shore | All other segments | Total | |
| In millions of COP | |||||||
| Investments in associates and joint ventures | 286,009 | 9,936 | 201,909 | 2,489 | - | 46,206 | 546,549 |
| Equity method | 17,529 | 1,707 | 13,904 | (462) | 84,141 | 6,468 | 123,287 |
| (1) | As of December 31, 2015, Banking Panama and Brokerage did not have investments in associates and joint ventures. |
For additional information related to investment in associates and joint ventures, see Note 7 Investments in associates and joint ventures.
The following table presents material non-cash items other than depreciation and amortization by segment:
| For the year ended December 31, 2016 | ||||||||||
| Banking Colombia | Banking Panamá | Banking El Salvador | Banking Guatemala | Trust | Investment Banking | Brokerage | Off shore | All other segments | Total | |
| In millions of COP | ||||||||||
| Restructured loans that were transferred to foreclosed assets | 130,892 | 44,484 | 35,466 | 95,891 | - | - | - | - | 97,452 | 404,185 |
| Provisions | 2,130,261 | 381,531 | 104,864 | 127,370 | 164 | 423 | (34) | 48,977 | 5,565 | 2,799,121 |
| For the year ended December 31, 2015 | |||||||
| Banking Colombia | Banking Panama | Banking El Salvador | Trust | Off shore | All other segments | Total | |
| In millions of COP | |||||||
| Restructured loans that were transferred to foreclosed assets | 97,456 | 8,102 | 18,819 | - | - | 60,665 | 185,042 |
| Provisions | 1,921,873 | 114,425 | 65,037 | 3,241 | 67,347 | 8,536 | 2,180,459 |
| For the year ended December 31, 2014 | |||||||
| Banking Colombia | Banking Panama | Banking El Salvador | Trust | Off shore | All other segments | Total | |
| In millions of COP | |||||||
| Restructured loans that were transferred to foreclosed assets | 130,276 | 8,457 | 31,065 | - | - | - | 169,798 |
| Impairment goodwill | - | - | - | - | - | 3,179 | 3,179 |
| Provisions | 1,264,006 | (32,895) | 79,568 | (2,140) | 21,967 | (7,346) | 1,323,160 |
| Donations | 4,539 | - | - | - | - | - | 4,539 |
| F-54 |
Information about products and services
The Bank does not report revenues from external customers for each product and service or each group of similar products and services, because the information is not available and the cost to develop it is excessive.
Geographic information
The following summarizes the Bank’s total interest and valuation and long-lived assets attributable to Colombia and other foreign countries based on the country where the interest and valuation was originated:
| As of December 31, | |||||
| Geographic information | 2016 | 2015 | 2014 | ||
| Interest and valuation | Long-lived assets (1) | Interest and valuation | Long-lived assets (1) | Interest and valuation | |
| In millions of COP | |||||
| Colombia | 11,695,937 | 4,180,137 | 9,335,345 | 3,829,742 | 7,760,424 |
| Panama | 1,898,058 | 414,451 | 1,470,692 | 442,732 | 1,017,171 |
| Puerto Rico | 56,519 | 551 | 43,672 | 355 | 37,100 |
| Peru | 15,753 | 112,209 | 19,810 | 119,575 | 59,971 |
| El Salvador | 902,371 | 397,065 | 729,258 | 359,887 | 507,947 |
| Costa Rica | - | 99 | - | 124 | - |
| Guatemala | 870,283 | 259,072 | - | 205,315 | - |
| Total | 15,438,921 | 5,363,584 | 11,598,777 | 4,957,730 | 9,382,613 |
| Eliminations and translation adjustment | 309,884 | 6,075,268 | (329,133) | 6,394,792 | (210,450) |
| Total, net | 15,748,805 | 11,438,852 | 11,269,644 | 11,352,522 | 9,172,163 |
| (1) | Included foreclosed assets presented within other assets in the statement of financial position, premises and equipment, Investment property and goodwill. As of December 31, 2016, there is a difference of COP 563,002 with the aforementioned lines in the statement of financial position, due to the fact that long-term assets in the table do not take into account inventories and intangibles such as licenses and software applications. As of December 31, 2015 and 2014, the difference amounts to COP 2,247,853 and COP 183,118, respectively, and includes, in addition to the above items, the assets of Tuya S.A that were classified as assets held for sale in the presentation of the financial statement. |
NOTE 4. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement of cash flow and the consolidated statement of financial position, the following assets are considered as cash and cash equivalents:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Cash and balances at central bank | ||
| Cash | 5,501,532 | 5,806,157 |
| Due from the Colombian Central Bank (1) | 5,503,911 | 4,561,668 |
| Due from other private financial entities | 4,908,886 | 3,654,660 |
| Checks on hold | 102,525 | 79,959 |
| Remittances of domestic negotiated checks in transit | 200,053 | 192,719 |
| Total cash and due from banks | 16,216,907 | 14,295,163 |
| Money market transactions: | ||
| Interbank assets | 1,606,506 | 1,385,587 |
| Reverse repurchase agreements and other similar secured loans | 2,636,832 | 2,916,864 |
| Total money market transactions: | 4,243,338 | 4,302,451 |
| Total cash and cash equivalents | 20,460,245 | 18,597,614 |
| (1) | According to External Resolution Number 005 of 2008 issued by the Colombian Central Bank, the Parent Company must maintain the equivalent of 4,5% of its customer’s deposits with a maturity term less than 18 months as a legal banking reserve, represented in unrestricted deposits at the Central Bank or as cash in hand. |
| F-55 |
As of December 31, 2016 and 2015, there is restricted cash amounting to COP 171,561 and COP 325,458, respectively, included in other assets on the statement of financial position, which represents margin deposits pledged as collateral for derivative contracts traded through Colombian clearing houses.
As of December 31, 2015 Tuya S.A. (subsidiary whose control was lost in October 2016), had cash and cash equivalents amounting to COP 207,963. See Note 30 Discontinued operations.
NOTE 5. FINANCIAL ASSETS INVESTMENTS AND DERIVATIVES
| 5.1 | Financial assets investments |
The Bank’s securities portfolios at fair value and at amortized cost are listed below, as of December 31, 2016 and 2015:
The detail of the carrying value of the debt securities is as follows:
As of December 31, 2016
| Debt securities | Measurement methodology | Total
carrying value | |
| Fair
value through profit or loss |
Amortized cost | ||
| In millions of COP | |||
| Securities issued by the Colombian Government | 4,904,152 | - | 4,904,152 |
| Securities issued by Foreign Governments | 2,429,192 | 984,675 | 3,413,867 |
| Securities issued by other financial institutions | 1,080,368 | 201,523 | 1,281,891 |
| Securities issued by Government entities | 11,904 | 1,532,784 | 1,544,688 |
| Corporate Bonds | 111,946 | 415,937 | 527,883 |
| Total debt securities | 8,537,562 | 3,134,919 | 11,672,481 |
| Total equity securities | - | - | 1,388,172 |
| Total investment securities | - | - | 13,060,653 |
As of December 31, 2015
| Debt securities | Measurement methodology | Total
carrying value | |
| Fair
value through profit or loss |
Amortized cost | ||
| In millions of COP | |||
| Securities issued by the Colombian Government | 4,817,604 | 15,065 | 4,832,669 |
| Securities issued by Foreign Governments | 3,189,722 | 1,253,585 | 4,443,307 |
| Securities issued by other financial institutions | 1,358,117 | 385,823 | 1,743,940 |
| Securities issued by Government entities | 82,162 | 1,402,890 | 1,485,052 |
| Securities issued by the Salvador Central Bank | 43,913 | - | 43,913 |
| Corporate bonds | 159,750 | 404,512 | 564,262 |
| Total debt securities | 9,651,268 | 3,461,875 | 13,113,143 |
| Total equity securities | - | - | 1,164,681 |
| Total investment securities | - | - | 14,277,824 |
| F-56 |
The following tables set forth the debt securities portfolio by maturity:
As of December 31, 2016
| Less
than 1 year |
Between
1 and 3 years |
Between
3 and 5 years |
Greater than 5 years |
Total | |
| In millions of COP | |||||
| Securities at fair value through profit or loss | |||||
| Securities issued by the Colombian Government | 1,719,326 | 1,883,790 | 981,208 | 319,828 | 4,904,152 |
| Securities issued by Foreign Governments | 925,499 | 532,628 | 192,947 | 778,118 | 2,429,192 |
| Securities issued by other financial institutions | 172,571 | 135,157 | 87,153 | 685,487 | 1,080,368 |
| Securities issued by Government entities | 77 | 2,704 | 5,193 | 3,930 | 11,904 |
| Corporate bonds | 15,818 | 8,069 | 15,968 | 72,091 | 111,946 |
| Subtotal | 2,833,291 | 2,562,348 | 1,282,469 | 1,859,454 | 8,537,562 |
| Securities at amortized cost | |||||
| Securities issued by Foreign Governments | 103,889 | 105,032 | 507,817 | 267,937 | 984,675 |
| Securities issued by other financial institutions | 57,623 | 113,150 | - | 30,750 | 201,523 |
| Securities issued by Government entities | 1,523,571 | 9,213 | - | - | 1,532,784 |
| Corporate bonds | - | 70,464 | - | 345,473 | 415,937 |
| Subtotal | 1,685,083 | 297,859 | 507,817 | 644,160 | 3,134,919 |
| Total | 4,518,374 | 2,860,207 | 1,790,286 | 2,503,614 | 11,672,481 |
As of December 31, 2015
| Less
than 1 year |
Between
1 and 3 years |
Between
3 and 5 years |
Greater than 5 years |
Total | |
| In millions of COP | |||||
| Securities at fair value through profit or loss | |||||
| Securities issued by the Colombian Government | 1,416,860 | 635,998 | 420,155 | 2,344,591 | 4,817,604 |
| Securities issued by Foreign Governments | 1,044,499 | 894,027 | 118,778 | 1,132,418 | 3,189,722 |
| Securities issued by other financial institutions | 228,333 | 808,362 | 102,069 | 219,353 | 1,358,117 |
| Securities issued by Government entities | - | 77,417 | 4,196 | 549 | 82,162 |
| Securities issued by the Salvador Central Bank | 43,913 | - | - | - | 43,913 |
| Corporate bonds | 5,534 | 110,452 | 13,958 | 29,806 | 159,750 |
| Subtotal | 2,739,139 | 2,526,256 | 659,156 | 3,726,717 | 9,651,268 |
| Securities at amortized cost | |||||
| Securities issued by the Colombian Government | 15,065 | - | - | - | 15,065 |
| Securities issued by Foreign Governments | 267,781 | 647,982 | 229,390 | 108,432 | 1,253,585 |
| Securities issued by other financial institutions | 156,458 | 31,898 | 19,222 | 178,245 | 385,823 |
| Securities issued by Government entities | 1,392,894 | - | 9,996 | - | 1,402,890 |
| Corporate bonds | 12,819 | 316,519 | 2,968 | 72,206 | 404,512 |
| Subtotal | 1,845,017 | 996,399 | 261,576 | 358,883 | 3,461,875 |
| Total | 4,584,156 | 3,522,655 | 920,732 | 4,085,600 | 13,113,143 |
The investment securities held by Tuya S.A., classified as assets held for sale at December 31, 2015, amounting to COP 30,271, are carried at amortized cost, issued by other financial institutions and their maturity is less than one year. For further information, see Note 30 Discontinued Operations.
| F-57 |
For further information related to disclosures of the fair value of securities measured at amortized cost, please see Note 29 Fair value of assets and liabilities.
The following table shows the fair value of equity securities:
| Equity securities | Carrying amount | |
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Equity securities at fair value through profit or loss | 895,425 | 763,556 |
| Equity securities at fair value through OCI | 492,747 | 401,125 |
| Total equity securities | 1,388,172 | 1,164,681 |
The equity securities held by Tuya S.A., classified as assets held for sale as of December 31, 2015, amounted to COP 994, were classified as security measured at fair value through OCI. For further information, see Note 30 Discontinued Operations.
The Bank has recognized in the consolidated statement of comprehensive income COP 232,617 in 2016, COP 137,323 in 2015 and COP (123,737) in 2014 related to equity securities and trust funds at fair value through OCI. See consolidated statement of comprehensive income.
Equity securities that have been designated to be measured at fair value through OCI are considered strategic for the Bank and, thus, there is no intention to sell them in the foreseeable future and that is the main reason for using this presentation alternative.
The following table details the equity instruments designated at fair value through other comprehensive income analyzed by listing status:
| Equity securities | Carrying amount | |
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Securities at fair value through OCI: | ||
| Equity securities listed in Colombia | 17,479 | 12,146 |
| Equity securities listed elsewhere | 10,731 | 9,889 |
| Equity securities unlisted (1) | 464,536 | 379,090 |
| Total equity securities at fair value through OCI | 492,746 | 401,125 |
| (1) | Equity securities measured at fair value through OCI and unlisted in stock exchange, increased between December 31, 2016 and 2015 due to the valuation of the recent participation in Asociación Gremial de Instituciones Financieras - CREDIBANCO S.A., which amounts to COP 62,820. |
During 2016 and 2015 no impairment loss was recognized on equity securities. Dividends received from equity investments at fair value through OCI and through profit or loss held as of December 31, 2016 and 2015 amounted to COP 9,317 and COP 9,605, respectively.
| F-58 |
Equity investments do not have a specific maturity date; therefore, they are not included in the maturity detail.
The detail of the securities pledged as collateral as of December 31, 2016 and 2015 is as follows:
As of December 31, 2016
| Pledged financial assets | Term | Security pledged | Carrying amount |
| In millions of COP | |||
| Investments pledged as collateral in repo operations | |||
| Securities issued by the Colombian Government | Greater 12 months | TES-Fixed rate | 783,688 |
| Securities issued by the Colombian Government | Between 3 and 6 months | TES-Fixed rate | 63,102 |
| Securities issued by the Colombian Government | Between 6 and 12 months | TES-Fixed rate | 3,212 |
| Securities issued by the Colombian Government | Less than 3 months | TES-Fixed rate | 68,648 |
| Subtotal investments pledged as collateral in repo operations | 918,650 | ||
| Investments pledged as collateral in derivative operations | |||
| Securities issued by the Colombian Government | Greater 12 months | TES-Fixed rate | 147,221 |
| Securities issued by the Colombian Government | Between 3 and 6 months | TES- Fixed rate | 22,037 |
| Securities issued by the Colombian Government | Between 6 and 12 months | TES-Fixed rate | 2,263 |
| Securities issued by the Colombian Government | Less than 3 months | TES-Fixed rate | 47,285 |
| Subtotal investments pledged as collateral in derivative operations | 218,806 | ||
| Total securities pledged as collateral | 1,137,456 | ||
As of December 31, 2015
| Pledged financial assets | Term | Security pledged | Carrying amount |
| In millions of COP | |||
| Investments pledged as collateral in repo operations | |||
| Securities issued by the Colombian Government | Greater than 12 months | TES-Fixed rate | 268,921 |
| Securities issued by the Colombian Government | Between 3 and 6 months | TES-Fixed rate | 36,547 |
| Securities issued by Foreign Government | Greater than 12 months | BOND-Fixed rate | 231,970 |
| Securities issued by Foreign Government | Less than 3 months | BOND-Fixed rate | 20,881 |
| Securities issued by Foreign Government | Greater than 12 months | TREASURY-Fixed rate | 12,342 |
| Corporate bonds | Greater than 12 months | BOND-Fixed rate | 21,670 |
| Subtotal investments pledged as collateral in repo operations | 592,331 | ||
| Investments pledged as collateral in derivative operations | |||
| Securities issued by the Colombian Government | Between 6 and 12 months | TES-Fixed rate | 186,346 |
| Subtotal investments pledged as collateral in derivative operations | 186,346 | ||
| Total securities pledged as collateral | 778,677 | ||
| 5.2 | Derivative financial instruments |
The Bank derivative activities do not give rise to significant open positions in portfolios of derivatives. The Bank enters into derivative transactions to facilitate customer business, for hedging purposes and arbitrage activities, such asforwards, options or swaps where the underlying are exchange rates, interest rates and securities.
| F-59 |
A swap agreement is a contract between two parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Financial futures and forward settlement contracts are agreements to buy or sell a quantity of a financial instrument (including another derivative financial instrument), index, currency or commodity at a predetermined rate or price during a period or at a date in the future. Futures and option contracts are standardized agreements for future delivery, traded on exchanges that typically act as a platform.
For further information related to the objectives, policies and processes for managing the Bank’s risk, please see Note 31 Risk Management.
The following table sets forth for the Bank’s derivatives by type of risk as of December 31, 2016 and 2015:
| Derivatives | December 31, 2016 | December 31, 2015 |
| In Millions of COP | ||
| Forwards | ||
| Assets | ||
| Foreign exchange contracts | 313,566 | 692,324 |
| Equity contracts | 3,425 | 2,717 |
| Subtotal Assets | 316,991 | 695,041 |
| Liabilities | ||
| Foreign exchange contracts | (323,923) | (634,297) |
| Equity contracts | (3,110) | (5,395) |
| Subtotal Liabilities | (327,033) | (639,692) |
| Total Forwards | (10,042) | 55,349 |
| Swaps | ||
| Assets | ||
| Foreign exchange contracts | 1,127,474 | 1,293,947 |
| Interest rate contracts | 186,208 | 257,238 |
| Subtotal Assets | 1,313,682 | 1,551,185 |
| Liabilities | ||
| Foreign exchange contracts | (749,082) | (949,668) |
| Interest rate contracts | (192,344) | (267,113) |
| Subtotal Liabilities | (941,426) | (1,216,781) |
| Total Swaps | 372,256 | 334,404 |
| Options | ||
| Assets | ||
| Foreign exchange contracts | 47,297 | 135,942 |
| Subtotal Assets | 47,297 | 135,942 |
| Liabilities | ||
| Foreign exchange contracts | (42,961) | (74,136) |
| Subtotal Liabilities | (42,961) | (74,136) |
| Total Options | 4,336 | 61,806 |
| Futures | ||
| Liabilities | ||
| Equity contracts | (1,030) | - |
| Subtotal Liabilities | (1,030) | - |
| Total Futures | (1,030) | - |
| Derivative Assets | 1,677,970 | 2,382,168 |
| Derivative Liabilities | (1,312,450) | (1,930,609) |
| Total, net | 365,520 | 451,559 |
| F-60 |
The table below present the notional amounts of the derivatives contracts as of December 31, 2016 and 2015:
| Derivatives | December 31, 2016 | December 31, 2015 |
| In Millions of COP | ||
| Forwards | ||
| Assets | ||
| Foreign exchange contracts | 14,466,226 | 11,584,773 |
| Equity contracts | 696,348 | 529,000 |
| Subtotal Assets | 15,162,574 | 12,113,773 |
| Liabilities | ||
| Foreign exchange contracts | (13,637,335) | (11,405,286) |
| Equity contracts | (676,226) | (797,349) |
| Subtotal Liabilities | (14,313,561) | (12,202,635) |
| Total Forwards | 849,013 | (88,862) |
| Swaps | ||
| Assets | ||
| Foreign exchange contracts | 6,021,266 | 4,375,769 |
| Interest rate contracts | 15,109,435 | 13,461,806 |
| Subtotal Assets | 21,130,701 | 17,837,575 |
| Liabilities | ||
| Foreign exchange contracts | (3,614,135) | (2,202,391) |
| Interest rate contracts | (13,249,703) | (13,026,471) |
| Subtotal Liabilities | (16,863,838) | (15,228,862) |
| Total Swaps | 4,266,863 | 2,608,713 |
| Options | ||
| Assets | ||
| Foreign exchange contracts | 1,186,605 | 1,557,713 |
| Subtotal Assets | 1,186,605 | 1,557,713 |
| Liabilities | ||
| Foreign exchange contracts | (1,171,719) | (1,567,529) |
| Subtotal Liabilities | (1,171,719) | (1,567,529) |
| Total Options | 14,886 | (9,816) |
| Futures | ||
| Assets | ||
| Foreign exchange contracts | 19,556 | - |
| Equity contracts | 316,000 | - |
| Subtotal Assets | 335,556 | - |
| Liabilities | ||
| Equity contracts | (117,235) | - |
| Subtotal Liabilities | (117,235) | - |
| Total Futures | 218,321 | - |
| Derivative Assets | 37,815,436 | 31,509,061 |
| Derivative Liabilities | (32,466,353) | (28,999,026) |
| Total, net | 5,349,083 | 2,510,035 |
| F-61 |
The following table sets forth the remaining contractual life of the derivative portfolio:
As of December 31, 2016
| Forwards | Swaps | Options | Futures | Total | |
| In millions of COP | |||||
| Assets | 316,991 | 1,313,682 | 47,297 | - | 1,677,970 |
| Up to 1 year | 309,036 | 490,848 | 44,478 | - | 844,362 |
| From 1 to 3 years | 7,900 | 444,120 | 2,819 | - | 454,839 |
| Over 3 years | 55 | 378,714 | - | - | 378,769 |
| Liabilities | (327,033) | (941,426) | (42,961) | (1,030) | (1,312,450) |
| Up to 1 year | (311,382) | (167,025) | (40,686) | (1,030) | (520,123) |
| From 1 to 3 years | (15,623) | (431,814) | (2,275) | - | (449,712) |
| Over 3 years | (28) | (342,587) | - | - | (342,615) |
| Total | (10,042) | 372,256 | 4,336 | (1,030) | 365,520 |
As of December 31, 2015
| Forwards | Swaps | Options | Futures | Total | |
| In millions of COP | |||||
| Assets | 695,041 | 1,551,185 | 135,942 | - | 2,382,168 |
| Up to 1 year | 24,225 | 722,894 | 16,821 | - | 763,940 |
| From 1 to 3 years | 670,748 | 172,834 | 119,121 | - | 962,703 |
| Over 3 years | 68 | 655,457 | - | - | 655,525 |
| Liabilities | (639,692) | (1,216,781) | (74,136) | - | (1,930,609) |
| Up to 1 year | (67,821) | (376,173) | (14,429) | - | (458,423) |
| From 1 to 3 years | (571,871) | (256,064) | (59,707) | - | (887,642) |
| Over 3 years | - | (584,544) | - | - | (584,544) |
| Total | 55,349 | 334,404 | 61,806 | - | 451,559 |
Collateral for derivatives
The table below presents the cash collateral amounts posted under derivatives contracts as of December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Collateral | 343,334 | 476,709 |
Hedge accounting
The Bank, through Banistmo, has entered into derivatives to manage its interest risk. Those derivatives are designated as hedging instruments to protect the Bank against changes in the fair value of Banistmo´s position in debt securities issued by the Panamanian Government (fair value hedge). In order to protect against interest risk due to changes in cash flows related to Banitmo’s portfolio of floating-rate deposits (cash flow hedge), Banistmo entered into cash flow hedge contracts until March 2016, when the hedging relationship was discontinued. The hedge effectiveness assessment is performed on a monthly basis consistently throughout the hedging relationship. For fair value hedges, the changes in value of the hedging derivative, as well as the changes in value of the related hedged item concerning to the risk hedged, are reflected in the statement of income in the line “Interest and valuation on investments”.
| F-62 |
Fair value hedging
As of December 31, 2016 and 2015, Banistmo has designated 3 and 7 asset derivative contracts (Interest rate swaps), respectively, as fair value hedging instruments with maturity dates ranging from January 2015 to February 2023.
As of December 31, 2016 and 2015, Banistmo has designated 3 and 9 liability derivative contracts (Interest rate swaps), respectively, as fair value hedging instruments with maturity dates ranging from January 2018 to February 2022. The notional amount and the fair value of those instruments are as follows:
| In millions of COP | ||
| December 31, 2016 | December 31, 2015 | |
| Notional amount | 305,862 | 321,025 |
| Fair value | (5,170) | (6,284) |
| In thousands of USD | ||
| December 31, 2016 | December 31, 2015 | |
| Notional amount | 101,930 | 101,930 |
| Fair value | (1,723) | (1,995) |
All fair value hedging instruments are incluided in the line “Derivative financial instruments” in the statement of financial position.
The following table sets forth the notional amount and fair value of the hedged item recognized in the statement of financial position as ‘Financial assets investments’, as of December 31, 2016 and 2015:
| In millions of COP | ||
| December 31, 2016 | December 31, 2015 | |
| Notional amount | 305,862 | 321,025 |
| Fair value | 340,511 | 354,784 |
| In thousands of USD | ||
| December 31, 2016 | December 31, 2015 | |
| Notional amount | 101,930 | 101,930 |
| Fair value | 113,477 | 112,313 |
The amount of hedge ineffectiveness of fair value hedges amounted to COP (2,779), COP (3,110) and COP (1,982) for the periods ended December 31, 2016, 2015 and 2014, respectively.
| F-63 |
Cash flow hedging
The following table sets forth the derivative instruments designated by Banistmo as cash flow hedging instruments, as of December 31, 2016 and 2015:
| In millions of COP | ||
| December 31, 2016 | December 31, 2015 | |
| Notional amount | - | 629,894 |
| Fair value | - | (2,499) |
| In thousands of USD | ||
| December 31, 2016 | December 31, 2015 | |
| Notional amount | - | 200,000 |
| Fair value | - | (794) |
As of December 31, 2015, all cash flow hedges were recognized in the statement of financial position in the line "financial derivative instruments".
As of December 31, 2016 the Bank has reclassified from other comprehensive income to net income the net amount of COP 12,112 arising from the settlement of the derivative contract swap interest rate designated as cash flow hedge. As of December 31, 2015 and 2014, the Bank recognized unrealized gains in other comprehensive income amounting to COP 6,378 and COP 5,734, respectively, in connection with the effective portion of the cash flow hedges.
For the year ended December 31, 2014, the Bank has reclassified from OCI to the statement of income financial gains amounting to COP 2,361, related to the effectiveness of the cash flow hedge relationship.
The following tables set forth the expected cash flows related to the aforementioned hedging relationships, as well as the remaining periods:
As of December 31, 2015
| In millions of COP | ||||
| From 1 to 3 months | From 3 months to 1 year | From 1 year to 5 years | Total | |
| Cash inflows | 968 | - | - | 968 |
| Cash outflows | (3,467) | - | - | (3,467) |
| Total | (2,499) | - | - | (2,499) |
| In thousands of USD | ||||
| From 1 to 3 months | From 3 months to 1 year | From 1 year to 5 years | Total | |
| Cash inflows | 307 | - | - | 307 |
| Cash outflows | (1,101) | - | - | (1,101) |
| Total | (794) | - | - | (794) |
| F-64 |
The following table sets forth the carrying amount and fair value of the hedged item recognized in the statement of financial position as ‘Deposits from customers’, as of December 31, 2016 and 2015:
| In millions of COP | ||
| December 31, 2016 | December 31, 2015 | |
| Carrying amount (liability) | - | 629,894 |
| Fair value | - | 649,362 |
| In thousands of USD | ||
| December 31, 2016 | December 31, 2015 | |
| Carrying amount (liability) | - | 200,000 |
| Fair value | - | 206,181 |
As of December 31, 2015, all cash flow hedges were recognized in the statement of financial position in the line "financial derivative instruments".
As of December 31, 2015 and 2014, the Bank recognized unrealized gains in other comprehensive income amounting to COP 10,499 and COP 7,120, respectively, in connection with the effective portion of the cash flow hedges.
Net foreign investment
Exchange differences relating to the translation of the results and net assets of Banistmo operations from its functional currency (dollar) to the Bank's presentation currency (Colombian pesos) are recognized directly in other comprehensive income by the Parent Company. Gains and losses on debt securities in issue which were designated as hedging instruments for hedges of net investments in foreign operations are included in the foreign currency translation reserve. The adjustment recognized in other comprehensive income amounted to COP 327,272, COP (1,666,422) and COP (1,024,386), for the years ended at December 31, 2016, 2015 and 2014, respectively.
Offsetting of derivatives
The Bank enters into International Swaps and Derivatives Association (ISDA) master netting agreements or similar agreements with substantially all of the Bank’s derivative counterparties. Where legally enforceable, and depending on the Bank’s intention, these master netting agreements give the Bank, in the event of default by the counterparty, the right to liquidate securities and cash equivalents held as collateral and to offset receivables and payables with the same counterparty.
| F-65 |
The table below presents derivative instruments subject to enforceable master netting agreements and other similar agreements but not offset in the statement of financial position as of December 31, 2016 and 2015 by derivative and by risk:
As of December 31, 2016
| Derivatives Assets | Deririvatives Liabilities | |
| In millions of COP | ||
| Over-the-counter | ||
| Foreign exchange contracts | ||
| Swaps | 1,127,474 | (749,082) |
| Forwards | 313,566 | (323,923) |
| Options | 47,297 | (42,961) |
| Interest rate contracts | ||
| Swaps | 186,208 | (192,344) |
| Forwards | - | - |
| Equity contracts | ||
| Forwards | 3,425 | (3,110) |
| Futures | - | (1,030) |
| Gross derivative assets/liabilities | 1,677,970 | (1,312,450) |
| Offsetting of derivatives | - | - |
| Net derivatives in statement of financial position | 1,677,970 | (1,312,450) |
| Master netting agreements | (1,221,565) | - |
| Cash collateral received/paid | (343,334) | 1,312,450 |
| Total derivatives assetss/ liabilities | 113,071 | - |
As of December 31, 2015
| Derivatives Assets | Derivatives Liabilities | |
| In millions of COP | ||
| Over-the-counter | ||
| Foreign exchange contracts | ||
| Swaps | 1,293,947 | (949,668) |
| Forwards | 692,324 | (634,297) |
| Option | 135,942 | (74,136) |
| Interest rate contracts | ||
| Swaps | 257,238 | (267,113) |
| Forwards | - | - |
| Equity contracts | ||
| Forwards | 2,717 | (5,395) |
| Gross derivative assets/liabilities | 2,382,168 | (1,930,609) |
| Offsetting of derivatives | - | - |
| Net derivatives in statement of financial position | 2,382,168 | (1,930,609) |
| Master netting agreements | (1,681,887) | 1,930,609 |
| Cash collateral received/paid | (476,709) | - |
| Total derivatives assetss/ liabilities | 223,572 | - |
For further information about offsetting of other financial assets and liabilities see Note 15 Interbank deposits and repurchase agreements and other similar secured borrowing.
| F-66 |
NOTE 6. LOANS AND ADVANCES TO CUSTOMERS AND FINANCIAL INSTITUTIONS, NET
The following is the composition of the loans and financial leasing operations portfolio as of December 31, 2016 and 2015:
| Composition | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Commercial(1) | 86,259,708 | 85,892,752 |
| Consumer | 23,925,279 | 21,170,615 |
| Mortgage | 19,155,852 | 17,118,783 |
| Financial Leases | 21,343,923 | 20,551,576 |
| Small Business Loans | 1,062,724 | 886,913 |
| Total gross loans and advances to customers and financial institutions | 151,747,486 | 145,620,639 |
| Total allowance for loans and advances and lease losses | (6,621,911) | (5,248,755) |
| Total loans and advances to customers and financial institutions, net | 145,125,575 | 140,371,884(2) |
| (1) | Includes loans to financial institutions amounting to COP 6,217,825 and COP 7,230,919 as of December 31, 2016 and 2015, respectively. |
| (2) | The portfolio acquired in the business combination of Grupo Agromercantil Holding amounts to COP 8,162,177, see Note 8 Goodwill and Intangible assets, net. Additionally, Compañia de Financiamiento Tuya S.A. is considered a discontinued operation as of December 31, 2015. As a result Compañia de Financiamiento Tuya S.A. portfolio is classified within "assets held for sale and inventories"; the net balance amounted to COP 1,480,398. See Note 30 Discontinued Operations. |
For more details on the composition of the loans and financial leasing operations portfolio, see Note 31 Risk Management.
Allowance for loans and advances and lease losses
The following table sets forth the changes in the allowance for loans and advances and lease losses as of December 31, 2016, 2015 and 2014:
As of December 31, 2016
Concept |
Commercial | Consumer | Mortgage | Financial Leases |
Small
business loans |
Total |
| In millions of COP | ||||||
| +Balance at beginning of period | 2,694,965 | 1,321,281 | 572,772 | 579,151 | 80,586 | 5,248,755 |
| +Allowance for loan of PA Leasing | - | - | - | 27,825 | - | 27,825 |
| + Provisions for loan losses (1) | 2,684,559 | 1,922,315 | 225,291 | 221,694 | 95,272 | 5,149,131 |
| - Charges-off | (489,573) | (902,400) | (24,619) | (74,900) | (41,710) | (1,533,202) |
| - Recoveries (1) | (1,379,288) | (525,510) | (109,912) | (180,537) | (23,645) | (2,218,892) |
| +/- Translation adjustment | (10,872) | (24,563) | (9,596) | (6,187) | (488) | (51,706) |
| = Balance at end of year | 3,499,791 | 1,791,123 | 653,936 | 567,046 | 110,015 | 6,621,911 |
| (1) | The provision for loan losses, net COP 2,930,239 differs from the COP 2,643,710 presents in the line “Credit impairment charges on loans and advances and financial leases, net” of the Consolidated Statement of Income, in the amount of COP 286,529 due to the recovery of charged-off loans. |
| F-67 |
The sale of Compañia de Financiamiento Tuya S.A took place on October 31, 2016. The amounts recognized until that date are presented in the line “Net income from discontinued operations” of the Statement of Income, the following table is the movement associated with this company:
| Concept | December 31, 2016 |
| +Balance at beginning of period | 351,375 |
| + Provisions for loan losses (*) | 465,947 |
| - Charges-off | (228,757) |
| - Recoveries (*) | (147,668) |
| = Balance at end of year | 440,897 |
| (*) | The provision for loan losses net of COP 318,279 differs from the COP 323,290 presented in "“Credit impairment charges on loans and advances and financial leases, net" in note 30. Discontinued operations, in the amount of COP 5,011 due to provision on off balance sheet credit exposures that is accounted for as a liability under IAS 37. |
As of December 31, 2015
| Concept | Commercial | Consumer | Mortgage | Small
business loans |
Financial Leases |
Total |
| In millions of COP | ||||||
| +Balance at beginning of period | 2,360,488 | 1,479,460 | 456,983 | 76,560 | 415,766 | 4,789,257 |
| - Discontinued operations (1) | - | (282,098) | - | - | - | (282,098) |
| + Provisions for loan losses (2) | 2,671,337 | 697,282 | 145,663 | 47,880 | 498,092 | 4,060,254 |
| - Charges-off | (711,257) | (629,628) | (12,765) | (36,682) | (31,723) | (1,422,055) |
| - Recoveries (2) | (1,709,293) | (64,340) | (63,632) | (9,947) | (328,183) | (2,175,395) |
| +/- Translation adjustment | 83,690 | 120,605 | 46,523 | 2,775 | 25,199 | 278,792 |
| = Balance at end of year | 2,694,965 | 1,321,281 | 572,772 | 80,586 | 579,151 | 5,248,755 |
| (1) | As of December 31, 2015, Compañía de Financiamiento Tuya S.A. was considered as a discontinued operation, see Note 30 Discontinued Operation. In October 2016, this sale was completed. The changes in the allowance for loan losses for this company is as follows: |
| Concept | December 31, 2015 |
| +Balance at beginning of period | 282,098 |
| + Provisions for loan losses (*) | 446,614 |
| - Charges-off | (236,196) |
| - Recoveries (*) | (141,141) |
| = Balance at end of year | 351,375 |
| (*) | The provision for loan losses net of COP 305,473 differs from the COP 324,309 presented in “Credit impairment charges on loans and advances and financial leases, net” in note 30 discontinued operations, in the amount of COP 18,836 due to the expense of the contingent component of credit cards. |
| (2) | The provision for loan losses, net COP 1,884,859 differs from the COP 1,667,680 presented in the line “Credit impairment charges on loans and advances and financial leases, net” of the Consolidated Statement of Income in the amount of COP 217,179 due to the recovery of charged-off loans. |
As of December 31, 2014
| Concept | Commercial | Consumer | Mortgage | Small business loans | Financial Leases | Total |
| In millions of COP | ||||||
| +Balance at beginning of period | 2,194,931 | 1,353,718 | 426,282 | 71,213 | 427,418 | 4,473,562 |
| + Provisions for loan losses (1) | 1,346,282 | 1,540,144 | 116,599 | 46,422 | 195,648 | 3,245,095 |
| - Charges-off | (355,881) | (743,453) | (8,674) | (30,468) | (40,272) | (1,178,748) |
| - Recoveries (1) | (888,108) | (753,897) | (106,608) | (12,757) | (174,900) | (1,936,270) |
| +/- Translation adjustment | 63,264 | 82,948 | 29,384 | 2,150 | 7,872 | 185,618 |
| = Balance at end of year | 2,360,488 | 1,479,460 | 456,983 | 76,560 | 415,766 | 4,789,257 |
| (1) | The provision for loan losses, net COP 1,308,825 differs from the COP 843,597 presented in the line “Credit impairment charges on loans and financial leases, net” of the Consolidated Statement of Income, in the amount of COP 465,228 due to the recovery of charged-off loans for COP 264,856 and the provision for loan losses, net for COP 200,372 of Compañía de Financiamiento Tuya S.A., which was classified in the "discontinued operation" at December 31, 2015. |
| F-68 |
Leasing operations:
Finance leases - lessor
The Bank has subscribed lease agreements as lessor. These lease arrangements involve machinery and equipment, computer equipment, automobile and furniture and fixtures and their terms range between one and ten years, as follows:
As of December 31, 2016
| Period | Gross
investment in finance lease receivable |
Present
value of minimum payments |
|
| In millions of COP | |||
| Within 1 year | 835,177 | 570,504 | |
| Over 1 year, but less than 5 years | 8,597,818 | 6,667,322 | |
| Over 5 years | 20,699,269 | 14,106,097 | |
| Total gross investment in finance lease receivable/ present value of minimum payments | 30,132,264 | 21,343,923 | |
| Less: Future financial income (1) | (8,788,341) | - | |
| Present value of payments receivable | 21,343,923 | 21,343,923 | |
| Minimum non-collectable payments impairment | (518,992) | (518,992) | |
| Total | 20,824,931 | 20,824,931 | |
| (1) | Future financial income: Total Gross Investment - Total Present Value of minimum payments |
As of December 31, 2015
Period |
Gross
investment in finance lease receivable |
Present
value of minimum payments |
|
| In millions of COP | |||
| Within 1 year | 3,198,897 | 2,717,904 | |
| Over 1 year, but less than 5 years | 7,572,931 | 6,227,836 | |
| Over 5 years | 18,872,781 | 11,605,836 | |
| Total gross investment in finance lease receivable/ present value of minimum payments | 29,644,609 | 20,551,576 | |
| Less: Future financial income (1) | (9,093,033) | - | |
| Present value of payments receivable | 20,551,576 | 20,551,576 | |
| Minimum non-collectable payments impairment | (553,071) | (553,071) | |
| Total | 19,998,505 | 19,998,505 | |
| (1) | Future financial income: Total Gross Investment - Total Present Value of minimum payments |
| F-69 |
Unsecured residual value (*)
The unsecured residual values by type of asset are as follows:
| Type of asset | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Machinery and equipment | 41,244 | 26,582 |
| Properties | 19,061 | 23,526 |
| Automobile | 4,264 | 33,611 |
| Furniture and fixtures | 45 | 8,445 |
| Other assets | - | 436 |
| Total | 64,614 | 92,600 |
Operating leases - lessor
Certain of the Bank’s subsidiaries lease assets to third parties under non-cancelable lease arrangements. Assets provided through operating leases are recorded as premises and equipment. The terms established for these agreements range from 1 to 10 years.
The following table presents information regarding the minimum payments under operating leases to be received as of December 31:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Within 1 year | 140,883 | 132,621 |
| Over 1 year, but less than 5 years | 823,035 | 664,673 |
| Over 5 years | 138,769 | 169,520 |
| Total | 1,102,687 | 966,814 |
NOTE 7. INVESTMENTS IN ASSOCIATES AND JOINT VENTURES
The following table presents information regarding the Bank’s investments in associates and joint ventures:
| Composition | December31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Associates | 940,364 | 540,955 |
| Joint ventures | 357,882 | 5,594 |
| Total | 1,298,246 | 546,549 |
* The unsecured residual value is the part of the residual value of the leased asset, whose realization is not secured or is secured by a third party related to the lessor.
| F-70 |
The following are the investments in associates that the Bank holds as of December 31, 2016 and 2015:
As of December 31, 2016
| Investments in Associates | ||||||||
| Company Name | Main activity | Country | % of | Equity method (1) | Total OCI (2) | OCI | OCI | Carrying amount |
| Ownership interest | (Equity method) (3) | (CTA) (4) | ||||||
| In millions of COP | ||||||||
| Protección S.A.* | Administration of pension funds and severances | Colombia | 20.58% | 54,304 | 11,229 | 725 | - | 434,318 |
| PA Viva Malls (5) | Development and operation of commercial spaces | Colombia | 30.68% | - | - | - | - | 388,595 |
| Titularizadora Colombiana S.A. Hitos* | Mortgage portfolio securities | Colombia | 26.98% | 2,619 | (621) | 11 | - | 35,930 |
| Redeban Multicolor S.A.* | Network data transmission services | Colombia | 20.36% | 319 | (651) | (49) | - | 17,006 |
| Avefarma S.A.S* | Manufacture and distribution of glass packing for pharmaceutical products | Colombia | 21.00% | (2,378) | (873) | (1,202) | - | 12,079 |
| Panamerican Pharmaceutical Holding Inc.* | Advisory services, consultation, representation, agent for individuals or company | Panama | 21.00% | (1,196) | (1,613) | (1,863) | 2,934 | 9,820 |
| Internacional Ejecutiva de Aviación S.A.S.* | Aircraft and aircraft travel | Colombia | 33.33% | 1,038 | 209 | 209 | - | 9,636 |
| Reintegra S.A.S.* | Collections and recovery of portfolio | Colombia | 46.00% | (1,309) | 3,496 | 805 | - | 8,604 |
| ACH Colombia S.A.* | Electronic transfer services | Colombia | 19.94% | 3,129 | (952) | (878) | - | 6,223 |
| Concesiones CCFC S.A.* | Construction of public works through an awarding system | Colombia | 25.50% | 6,606 | (753) | (4) | - | 5,742 |
| Servicio Salvadoreño de Protección, S. A. de C.V.* | Custodial services and transfer of monetary types | El Salvador | 24.40% | 436 | (965) | 957 | 13 | 5,448 |
| Servicios Financieros, S.A. de C.V.* | Processing of financial transactions and electronic payment methods | El Salvador | 46.72% | 56 | 9 | (93) | 62 | 3,550 |
| Glassfarma Tech S.A.S* | Manufacturing, elaboration and commercialization of packages and pharmaceutical products | Colombia | 21.00% | 425 | (12) | (348) | - | 2,522 |
| ACH de El Salvador, S. A. de C.V.* | Electronic transfer services | El Salvador | 24.40% | 210 | 6 | (58) | 20 | 891 |
| Multiactivos S.A. (6) | Securitization of non-mortgage assets | Colombia | - | 183 | - | 70 | - | - |
| Concesiones Urbanas S.A. (en liquidación) (7) | Construction of civil engineering projects | Colombia | - | (141) | - | - | - | - |
| Net investments in associates | 64,301 | 8,509 | (1,718)(8) | 3,029 | 940,364 | |||
| (1) | Corresponds to the income recognized as equity method in the statement of income for the year ended December 31, 2016. |
| (2) | Corresponds to the accumulated other comprehensive income as of December 31, 2016. |
| (3) | Corresponds to the other comprehensive income recognized as equity method for the year ended December 31, 2016. |
| (4) | Corresponds to the other comprehensive income recognized as Cumulative Translation Adjustment of Foreign Currency (CTA) for the year ended December 31, 2016. |
| (5) | PA Viva Malls, an investment in an associate of Fondo inmobiliario Colombia Inmobiliario which contributed COP 388,595 in December 2016 to participate in 49% of the company. In partnership with Grupo Éxito, which owns 51%, the company's corporate purpose will be the development and management of real estate. |
| (6) | On October 19, 2016 Multiactivos S.A was wound up. |
| (7) | On November 23, 2016 Concesiones Urbanas S.A was wound up. |
| (8) | See Consolidated Statement ofComprehensive income |
| F-71 |
For the purposes of applying the equity method of accounting, financial statements of associates marked above with (*) ended at November 30, 2016 have been used, due to the fact that no more recent financial information was available. However, the Bank does not consider that appropriate adjustments have to be made since no significant transactions took place between that date and December 31, 2016.
As of December 31, 2015
| Investments in Associates | |||||||||
| Company Name | Main activity | Country |
% of Ownership interest |
Equity method (1) |
Total OCI |
OCI (Equity method) |
OCI (CTA) |
Carrying amount | |
| In millions of COP | |||||||||
| Protección S.A.* | Administration of pension funds and severances | Colombia | 20.58% | 25,238 | 10,504 | (10,311) | - | 416,404 | |
| Titularizadora Colombiana S.A. Hitos* | Mortgage portfolio securities | Colombia | 26.98% | 2,163 | (632) | (464) | - | 37,174 | |
| Redeban Multicolor S.A.* | Network data transmission services | Colombia | 20.36% | 2,106 | (602) | (425) | - | 16,737 | |
| Avefarma S.A.S* | Manufacture and distribution of glass packing for pharmaceutical products | Colombia | 21.00% | (4,613) | 329 | (2,349) | - | 15,159 | |
| Reintegra S.A.S*. | Collections and recovery of portfolio | Colombia | 46.00% | 2,598 | 2,690 | (2,914) | - | 10,014 | |
| Panamerican Pharmaceutical Holding Inc.* | Advisory services, consultation, representation, agent for individuals or company | Panama | 21.00% | 1,227 | 250 | (782) | (949) | 9,928 | |
| Internacional Ejecutiva de Aviación S.A.S.* | Aircraft and aircraft travel | Colombia | 33.33% | (113) | - | - | - | 8,009 | |
| ACH Colombia S.A.* | Electronic transfer services | Colombia | 19.94% | 1,566 | (74) | 72 | - | 5,678 | |
| Servicio Salvadoreño de Protección, S. A. de C.V.* | Custodial services and transfer of monetary types | El Salvador | 24.40% | 1,303 | (1,922) | 956 | (686) | 5,550 | |
| Multiactivos S.A.* | Securitization of non-mortgage assets | Colombia | 21.25% | (336) | (70) | 51 | - | 3,917 | |
| Servicios Financieros, S.A. de C.V.* | Processing of financial transactions and electronic payment methods | El Salvador | 46.72% | 287 | 102 | (93) | 76 | 3,667 | |
| Concesiones CCFC S.A. | Construction of public works through an awarding system | Colombia | 25.50% | 3,213 | (749) | 720 | - | 3,174 | |
| Concesiones Urbanas S.A. (en liquidación)* | Construction of civil engineering projects | Colombia | 33.33% | 154 | - | - | - | 2,489 | |
| Glassfarma Tech S.A.S* | Manufacturing, elaboration and commercialization of packages and pharmaceutical products | Colombia | 21.00% | 91 | 336 | (199) | - | 2,337 | |
| ACH de El Salvador, S. A. de C.V.* | Electronic transfer services | El Salvador | 24.40% | 117 | 64 | (58) | 45 | 718 | |
| Grupo Agromercantil Holding S.A.(2) | Offering of financial products portfolio and the initiation of business | Guatemala | - | 84,141 | - | 41,304 | - | - | |
| Inversiones Inmobiliarias Arauco Alameda S.A.S.(3) | Real estate activities with separate properties or leasings | Colombia | - | (1,232) | - | (1,714) | - | - | |
| Net investments in associates | 117,910 | 10,226 | 23,794(4) | (1,514) | 540,955 | ||||
| (1) | Corresponds to the income recognized as equity method in the statement of income for the year ended December 31, 2015. |
| (2) | On December 30, 2015 the Bank acquired 60% of Grupo Agromercantil Holding S.A., however, the table presents the recognition of the Equity Method before the control acquisition when the Bank’s investment was 40%. |
| (3) | On November 20, 2015 Bancolombia Group sold its investment in Inversiones Inmobiliarias Arauco Alameda S.A.S. |
| (4) | The total amount in the line ‘Unrealized (loss) or gains on investments in associates and joint ventures using equity method‘detailed in the Consolidated Statemenr of Comprehensive Income for the year 2015 is comprised of COP 23,794 related to OCI in associates and COP (13) in joint ventures. |
| F-72 |
For the purposes of applying the equity method of accounting, financial statements of associates marked above with (*) ended at November 30, 2015 have been used, due to the fact that no more recent financial information was available. However, the Bank does not consider that appropriate adjustments have to be made since no significant transactions took place between that date and December 31, 2015.
The following is additional information regarding the Bank’s most significant associates as of December 31, 2016 and 2015:
As of December 31, 2016
| Company Name | Assets | Liabilities | Income
from ordinary activities |
Profits (loss) | Dividends |
| In millions of COP | |||||
| Protección S.A. | 1,901,016 | 618,573 | 1,115,206 | 226,554 | 34,163 |
| Titularizadora Colombiana S.A. Hitos | 500,950 | 371,827 | 34,185 | 8,019 | 3,873 |
| F-73 |
As of December 31, 2015
| Company Name | Assets | Liabilities | Income
from ordinary activities |
Profits (loss) | Dividends |
| In millions of COP | |||||
| Protección S.A. | 1,665,993 | 485,279 | 499,946 | 164,342 | 27,042 |
| Titularizadora Colombiana S.A. Hitos | 145,246 | 11,515 | 24,295 | 6,899 | 3,278 |
As of December 31, 2016 and 2015, there are no restrictions on the ability of the associates to transfer funds to the Bank in the form of cash dividends.
The following are the Joint ventures that the Bank holds as of December 31, 2016 and 2015:
| Company Name | Main activity | Country | %
of Ownership interest |
Equity method (1) |
Total OCI (2) |
OCI | Carrying amount |
| (Equity method)(3) | |||||||
| In millions of COP | |||||||
| Compañía de financiamiento Tuya S.A (4) | Financing company | Colombia | 50% | (7,801) | - | - | 348,480 |
| Fideicomiso Ruta del Sol - compartimento A | Investment in infrastructure projects | Colombia | 50% | 778 | 13 | - | 6,376 |
| Servicios de Aceptación S.A (5) | Network data transmission services | Colombia | 50% | 2,976 | - | - | 3,026 |
| Net investments in joint ventures | (4,047) | 13 | - | 357,882 | |||
| (1) | Corresponds to the income recognized as equity method in the statement of income for the year ended December 31, 2016. |
| (2) | Corresponds to the accumulated other comprehensive income as of December 31, 2016. |
| (3) | Corresponds to the other comprehensive income recognized as equity method for the year ended December 31, 2016. |
| (4) | On October 30, 2016 the Bank sold 50% of Compañía de Financiemiento TUYA S.A. The table above presents the recognition of the Equity Method after loss of control. |
| (5) | In June 2016. Joint venture with Fist Data was created with the purpose of generating an alliance that promotes the business of using credit and debit cards in commercial establishments. |
Investments in joint ventures
December 31, 2015
| Company Name | Main activity | Country | %
of Ownership interest |
Equity method (1) |
Total OCI (2) |
OCI | Carrying amount |
| (Equity method)(3) | |||||||
| In millions of COP | |||||||
| Fideicomiso Ruta del Sol - compartimento A | Investment in infrastructure projects | Colombia | 50.00% | 4,567 | 13 | (13)(4) | 5,594 |
| (1) | Corresponds to the income recognized as equity method in the statement of income for the year ended December 31, 2015. |
| (2) | Corresponds to the accumulated other comprehensive income as of December 31, 2015. |
| (3) | Corresponds to the other comprehensive income recognized as equity method for the year ended December 31, 2015. |
| (4) | The total amount in the line ‘Unrealized (loss) or gains on investments in associates and joint ventures using equity method‘detailed in the Consolidated Statemenr of Comprehensive Income for the year 2015 is comprised of COP 23,794 related to OCI in associates and COP (13) in joint ventures. |
| F-74 |
The following is complementary information regarding the Bank’s most significant joint venture as of December 31, 2016:
| Company Name | Assets | Liabilities | Income
from ordinary activities |
Profits (loss) |
Dividends |
| In millions of COP | |||||
| Compañía de financiamiento TUYA S.A | 2,474,730 | 2,429,631 | 1,153,155 | (13,257) | - |
As of December 31, 2016 and 2015, there are no contingent liabilities incurred by the Bank regarding its interests in the joint ventures and associates aforementioned.
As of December 31, 2014 the Bank has recognized COP 60,547 as equity method in the statement of income, COP 34,021 as other comprehensive income from equity method and COP 11,598 as other comprehensive income from currency translation adjustment. Additionally, during 2014, the Bank received dividends amounting to COP 4,734 from its significant associates.
NOTE 8. GOODWILL AND INTANGIBLE ASSETS, NET
Intangibles assets and goodwill are as follows:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Intangible assets | 563,942 | 607,586 |
| Goodwill | 6,130,095 | 6,484,669 |
| Total | 6,694,037 | 7,092,255 |
| 8.1. | Intangible assets |
The following table sets forth the Bank's intangible assets as of December 31, 2016 and 2015, including the reconciliation of initial and final balances of the cost and accrued amortization:
As of December 31, 2016
| Cost | Trademarks | Licenses, software and computer applications |
Client relationships |
Total |
| In millions of COP | ||||
| Balance at January 1, 2016 | 18,620 | 1,032,334 | 340,582 | 1,391,536 |
| Acquisitions | - | 122,729 | - | 122,729 |
| Terminated agreements/ Write off (1) | - | (636,826) | - | (636,826) |
| Foreign currency translation adjustment | (879) | (15,143) | (16,087) | (32,109) |
| Balance at December 31, 2016 | 17,741 | 503,094 | 324,495 | 845,330 |
| (1) | In 2016, the Parent Company noticed that some licenses, software and computer applications amounting to COP 549,191 were recognized on the balance sheet even though their useful life were completely amortized and the Bank did not use them for several years. This amount has been written off. |
| Amortization | Trademarks | Licenses, software and computer applications |
Client relationships |
Total |
| In millions of COP | ||||
| Balance at January 1, 2016 | - | (783,950) | - | (783,950) |
| Terminated agreements/ Write off | - | 641,989 | - | 641,989 |
| Amortization expense | (2,578) | (71,540) | (75,658) | (149,776) |
| Foreign currency translation adjustment | 45 | 9,205 | 1,099 | 10,349 |
| Balance at December 31, 2016 | (2,533) | (204,296) | (74,559) | (281,388) |
| Intangible assets at December 31, 2016, net | 15,208 | 298,798 | 249,936 | 563,942 |
| F-75 |
As of December 31, 2015
| Cost | Trademarks | Licenses, software and computer applications |
Client relationships |
Total |
| In millions of COP | ||||
| Balance at January 1, 2015 | - | 773,948 | - | 773,948 |
| Acquisitions | - | 132,201 | - | 132,201 |
| Terminated agreements/ Write off | - | (25,328) | - | (25,328) |
| Acquisition of Grupo Agromercantil Holding | 18,620 | 99,610 | 340,582 | 458,812 |
| Assets classified as held for sale (1) | - | (6,246) | - | (6,246) |
| Foreign currency translation adjustment | - | 58,149 | - | 58,149 |
| Balance at December 31, 2015 | 18,620 | 1,032,334 | 340,582 | 1,391,536 |
| (1) | See Note 30. Discontinued operations |
| Amortization | Trademarks | Licenses, software and computer applications | Client relationships | Total |
| In millions of COP | ||||
| Balance at January 1, 2015 | - | (602,828) | - | (602,828) |
| Terminated agreements/ Write off | 28,249 | - | 28,249 | |
| Amortization expense | - | (153,799) | - | (153,799) |
| Acquisition of Grupo Agromercantil Holding | - | (13,586) | - | (13,586) |
| Assets classified as held for sale | - | 3,980 | - | 3,980 |
| Foreign currency translation adjustment | - | (45,966) | - | (45,966) |
| Balance at December 31, 2015 | - | (783,950) | - | (783,950) |
| Intangible assets at December 31, 2015, net | 18,620 | 248,384 | 340,582 | 607,586 |
As of December 31, 2016 and 2015, the Bank does not have intangible assets with restricted ownership, intangible assets pledged as collateral or contractual agreements for the acquisition of this class of assets.
Research and development costs related to software development
During the period ending at December 31, 2016, 2015 and 2014, the Bank incurred in costs that are directly related to software development amounted to COP 25,059, COP 8,344 and COP 12,340. These costs were incurred during the design and implementation processes in connection with the updating and replacement of the mortgage core software and the update of other core software. The expenses were recorded mainly as fees paid in the line ‘Other administrative and general expenses’ of the consolidated statement of income.
Intangibles which did not meet the criteria to be recognized as assets
As of December 31, 2016, 2015 and 2014, the Bank has recognized in the statement of income the amount of COP 16,217, COP 3,583 and 1,496, related to expenditures which were not recognized as intangible assets. These expenses were not recorded as assets due to the lack of characterists to be reliably identifiable, and those assets do not support critical processes to be recognized as intangible assets.
| F-76 |
| 8.2 | Goodwill |
The following table sets forth an analysis of the activity in the goodwill account:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Balance at beginning of the year, net | 6,484,669 | 4,414,728 |
| Sale of Uff! Móvil (1) | - | (18,083) |
| Sale of Banistmo Seguros(2) | - | (77,082) |
| Goodwill resulting from the GAH acquisition (3) | - | 735,073 |
| Effect of change in foreign exchange rate | (354,574) | 1,430,033 |
| Balance at end of the year, net | 6,130,095 | 6,484,669 |
| (1) | On November 30, 2015, the Bank sold its 80.59% stake in Uff! Móvil, which was held through Inversiones CFNS S.A.S. and BIBA Inmobiliaria S.A.S. The transaction was carried out by means of the sale of all shares of Uff! Móvil to MVNO Holdings LLC, a company established under the laws of the State of Florida in the United States. |
| (2) | On August 31, 2015, Banistmo S.A. sold 100% of the shares of the insurer to Suramericana S.A for USD 94,4 millon. |
| (3) | On December 30, 2015, Bancolombia Panama S.A., a subsidiary of the Bank, acquired an additional 20% of the common stock of Grupo Agromercantil Holding S.A. (GAH), which represents a controlling stake of 60%. |
The Bank tests goodwill recognized as a result of business combinations for impairment at least annually using a process that begins with an estimation of the recoverable amount of a group of cash-generation units equal to the operating segment. Recoverable amount is determined by management by reference to market value, if available, by pricing models, or with the assistance of a valuation specialist. Determination of recoverable amount requires management to make assumptions and use estimates to forecast cash flow for periods that are beyond the normal requirements of management reporting; the assessment of the appropriate discount rate; estimation of the recoverable amount of cash-generation units; and the valuation of the separable assets of each business whose goodwill is being reviewed. The key assumptions used by management in determining the recoverable amount are:
| Operating segment | Goodwill 2016 | Valuation Methodology |
Key Assumptions |
Discount Rate (real) |
Growth rate (real) |
| Banking El Salvador | COP 846,842 | Discounted Cash flow | 5 years plan | 12.20% | 3.40% |
| Banking Panama | COP 4,582,901 | Discounted Cash flow | 5 years plan | 9.50% | 6.60% |
| Banking Guatemala | COP 700,352 | Discounted Cash flow | 5 years plan | 11.60% | 5.30% |
In 2016, the Bank has tested the aforementioned goodwill for impairment purposes at operating segment levels: Banking Panamá, Banking El Salvador and Banking Guatemala. Each operating segment represent a group of cash generating units. In 2015, the goodwill was allocated to individual cash generating units. The change has been introduced to be more aligned with the approach used by the CODM to monitor the Bank’s results and allocate the resources.
On December 18, 2012, Bancolombia Panama S.A. (a subsidiary of Bancolombia S.A.) and BAM Financial Corporation (BFC), entered into a stock purchase agreement, pursuant to which Bancolombia Panama agreed to purchase from BFC a 40% stake in the capital stock of the Panamanian company Grupo Agromercantil Holding (GAH). Based on the terms of the agreement, BFC agreed to sell 40,540,000 common shares of Grupo Agromercantil (equivalent to 20% of the subscribed and paid capital) to Bancolombia Panama.
| F-77 |
On December 30, 2015, the Bank acquired control of Grupo Agromercantil Holding (GAH) through the acquisition of an additional 20% of the subscribed and paid capital. The consideration paid amounting to COP 477,144 (USD 151,500), was based on the estimated consolidated net income of GAH as of December 31, 2015. As part of the modification of the agreement, the Bank entered into a put agreement to acquire the remaining 40% shares in Grupo Agromercantil Holding at a contractually determined future date and value. The puttable non-controlling interest liability was recognized in the statement of financial position. The non-controlling shareholders in Grupo Agromercantil Holding have the option to put their remaining 40% interest in Agromercantil to the Bank. The fair value of the net assets acquired was COP 1,344,305 including loans for COP 8,151,122 and deposits for COP 8,148,820.
The acquisition achieved in stages of GAH and its subsidiaries was accounted for under the acquisition method in accordance with IFRS 3. Accordingly, the Bank remeasured its previously held equity interest in GAH at its acquisition-date fair value and recognized the resulting loss considering any other comprehensive income previously recorded related to currency translation adjustment and equity method adjustment. No further adjustment to the goodwill measurement took place in 2016.
Sensitivity analysis:
In order to assess the impact of changes in certain significant inputs as the discount rate and the growth rate in the operating segments’ recoverable amount, the Bank made a sensitivity analysis of these inputs through the definition of alternative scenarios with their future evolution. The tables below present the estimated recoverable amount of each operating segment obtained as a result of sensitivity analysis:
As of December 31, 2016
Banking Panama
| Growth rate | Discount rate | ||
| 9.75% | 9.50% | 9.25% | |
| 6.60% | COP 8,690,384 | COP 9,444,020 | COP 10,339,834 |
| Discount rate | Growth rate | ||
| 6.35% | 6.60% | 6.85% | |
| 9.50% | COP 8,950,634 | COP 9,444,020 | COP 10,030,497 |
Banking El Salvador
| Growth rate | Discount rate | ||
| 12.45% | 12.20% | 11.95% | |
| 3.40% | COP 2,736,320 | COP 2,803,464 | COP 2,874,488 |
| Discount rate | Growth rate | ||
| 3.15% | 3.40% | 3.65% | |
| 12.20% | COP 2,774,994 | COP 2,803,464 | COP 2,833,601 |
| F-78 |
Banking Guatemala
| Growth rate | Discount rate | ||
| 11.85% | 11.60% | 11.35% | |
| 5.30% | COP 2,096,380 | COP 2,187,604 | COP 2,286,466 |
| Discount rate | Growth rate | ||
| 5.05% | 5.30% | 5.55% | |
| 11.60% | COP 2,150,867 | COP 2,187,604 | COP 2,227,376 |
As of December 31, 2015
Banking Panamá
Corporate banking
| Growth rate | Discount rate | ||
| 11.60% | 11.40% | 11.20% | |
| 5.20% | COP 4,378,598 | COP 4,530,538 | COP 4,692,729 |
| Discount rate | Growth rate | ||
| 4.90% | 5.20% | 5.40% | |
| 11.40% | COP 4,426,517 | COP 4,530,538 | COP 4,643,317 |
Small business banking
| Growth rate | Discount rate | ||
| 11.60% | 11.40% | 11.20% | |
| 5.20% | COP 3,231,340 | COP 3,341,235 | COP 3,458,518 |
| Discount rate | Growth rate | ||
| 4.90% | 5.20% | 5.40% | |
| 11.40% | COP 3,266,133 | COP 3,341,235 | COP 3,422,655 |
| F-79 |
Banking El Salvador
Corporate Banking
| Discount rate | Growth rate | ||
| (0.39%) | 0.00% | 0.59% | |
| 12.30% | COP 1,140,004 | COP 1,151,278 | COP 1,170,065 |
| 13.28% | COP 1,079,885 | COP 1,088,903 | COP 1,103,933 |
| 14.26% | COP 1,027,282 | COP 1,034,797 | COP 1,046,819 |
Consumer Banking
| Discount rate | Growth rate | ||
| 0.00% | 1.00% | 2.00% | |
| 12.30% | COP 2,946,107 | COP 2,975,238 | COP 3,023,789 |
| 13.28% | COP 2,790,743 | COP 2,814,045 | COP 2,852,888 |
| 14.26% | COP 2,654,797 | COP 2,674,218 | COP 2,705,291 |
Mortgage Banking
| Discount rate | Growth rate | ||
| (0.39%) | 0.00% | 0.59% | |
| 12.30% | COP 556,237 | COP 561,735 | COP 570,903 |
| 13.28% | COP 526,903 | COP 531,304 | COP 538,637 |
| 14.26% | COP 501,236 | COP 504,904 | COP 510,769 |
The Bank considers goodwill as an asset with indefinite useful life.
| F-80 |
NOTE 9. PREMISES AND EQUIPMENT, NET
As of December 31, 2016 and 2015 the premises and equipment consisted of the following:
As of December 31, 2016
| Premises and equipment | Balance
at January 1, 2016 |
Roll - forward | Balance
at December 31, 2016 | |||||
| Acquisitions | Transfers | Expenses
- depreciation |
Disposals | Assets sale |
Effect
of changes in foreign exchange rate | |||
| In millions of COP | ||||||||
| Land | ||||||||
| Cost | 355,907 | - | - | - | (8,692) | - | (12,716) | 334,499 |
| Construction in progress | ||||||||
| Cost | 61,322 | 34,428 | - | - | (59,873) | (766) | (2,228) | 32,883 |
| Buildings | ||||||||
| Cost | 1,185,109 | 88,506 | - | - | (43,997) | (24,293) | (20,029) | 1,185,296 |
| Accumulated depreciation | (269,316) | (54) | - | (31,007) | 16,942 | 13,569 | 10,466 | (259,400) |
| Furniture and fixtures | ||||||||
| Cost | 531,176 | 74,117 | 2,029 | - | (19,962) | - | (14,661) | 572,699 |
| Accumulated depreciation | (270,193) | (1,243) | (866) | (43,150) | 7,176 | - | 7,545 | (300,371) |
| Computer equipment | ||||||||
| Cost | 761,961 | 92,723 | 2,348 | - | (120,241) | (3,309) | (16,018) | 717,464 |
| Accumulated depreciation | (484,520) | (1,338) | (606) | (89,771) | 83,763 | 2,864 | 12,269 | (477,339) |
| Vehicles | ||||||||
| Cost | 1,240,211 | 682,070 | 146 | - | (278,175) | (185,937) | 3,313 | 1,461,628 |
| Accumulated depreciation | (342,606) | (134) | (20) | (141,290) | 9,889 | 89,872 | (3,202) | (387,491) |
| Airplane | ||||||||
| Cost | 63,619 | - | - | - | - | - | (3,005) | 60,614 |
| Accumulated depreciation | (4,126) | - | - | (2,336) | - | - | 235 | (6,227) |
| Ongoing Imports | ||||||||
| Cost | 21,192 | 59,777 | - | - | (54,598) | - | (24,442) | 1,929 |
| Leasehold improvements | ||||||||
| Cost | 283,666 | 23,055 | - | - | (43,640) | - | (14,723) | 248,358 |
| Accumulated depreciation | (81,136) | - | - | (21,704) | 31,598 | - | 2,757 | (68,485) |
| Total premises and equipment - cost | 4,504,163 | 1,054,676 | 4,523 | - | (629,178) | (214,305) | (104,509) | 4,615,370 |
| Total premises and equipment - accumulated depreciation | (1,451,897) | (2,769) | (1,492) | (329,258) | 149,368 | 106,305 | 30,070 | (1,499,673) |
| Total premises and equipment, net | 3,052,266 | 1,051,907 | 3,031 | (329,258) | (479,810) | (108,000) | (74,439) | 3,115,697 |
| F-81 |
As of December 31, 2015
| Premises and equipment | Balance
at January 1, 2015 |
Roll - forward | Balance
at December 31, 2015 | |||||
| Acquisitions | Expenses
- depreciation |
Disposals | Acquisitions through business combination (1) |
Assets classified as held for sale (2) |
Effect
of changes in foreign exchange rate | |||
| In millions of COP | ||||||||
| Land | ||||||||
| Cost | 253,467 | 29,330 | - | (9,526) | 48,852 | - | 33,784 | 355,907 |
| Construction in progress | ||||||||
| Cost | 2,285 | 52,559 | - | (1,372) | 144 | - | 7,706 | 61,322 |
| Buildings | ||||||||
| Cost | 1,023,019 | 11,336 | - | (21,870) | 75,695 | - | 96,929 | 1,185,109 |
| Accumulated depreciation | (194,275) | - | (34,299) | 5,795 | - | - | (46,537) | (269,316) |
| Furniture and fixtures | ||||||||
| Cost | 466,485 | 48,048 | - | (38,770) | 13,057 | (327) | 42,683 | 531,176 |
| Accumulated depreciation | (199,928) | (3,970) | (36,323) | 5,770 | (5,249) | 201 | (30,694) | (270,193) |
| Computer equipment | ||||||||
| Cost | 569,808 | 143,846 | - | (38,590) | 24,675 | (12,877) | 75,099 | 761,961 |
| Accumulated depreciation | (358,943) | (8,867) | (84,162) | 30,255 | (11,613) | 7,410 | (58,600) | (484,520) |
| Vehicles | ||||||||
| Cost | 1,065,853 | 373,524 | - | (94,574) | 1,546 | (133,143) | 27,005 | 1,240,211 |
| Accumulated depreciation | (312,702) | (382) | (130,753) | 44,231 | (696) | 65,290 | (7,594) | (342,606) |
| Airplane | ||||||||
| Cost | 48,328 | - | - | - | - | - | 15,291 | 63,619 |
| Accumulated depreciation | (1,296) | - | (2,111) | - | - | - | (719) | (4,126) |
| Ongoing Imports | ||||||||
| Cost | 49,678 | 1,406 | - | (29,892) | - | - | - | 21,192 |
| Leasehold improvements | ||||||||
| Cost | 122,154 | 117,645 | - | (2,798) | 11,711 | (105) | 35,059 | 283,666 |
| Accumulated depreciation | (61,444) | - | (19,041) | 775 | - | - | (1,426) | (81,136) |
| Total premises and equipment - cost | 3,601,077 | 777,694 | - | (237,392) | 175,680 | (146,452) | 333,556 | 4,504,163 |
| Total premises and equipment - accumulated depreciation | (1,128,588) | (13,219) | (306,689) | 86,826 | (17,558) | 72,901 | (144,851) | (1,451,897) |
| Total premises and equipment, net (3) | 2,472,489 | 764,475 | (306,689) | (150,566) | 158,122 | (73,551) | 188,705 | 3,052,266 |
| (1) | Premises and equipment classified in this category relate to the acquisition of Grupo Agromercantil Holding S.A. For further information see Note 8 Goodwill and Intangible assets, net. |
| (2) | Corresponds to Compañía de Financiamiento Tuya S.A. For further information see Note 30 Discontinued Operations. |
| (3) | The Group previously classified land and buildings that were acquired through foreclosure of loans with net carrying amount of 189,296 as of December 31, 2015 in property and equipment. At December 31, 2016 and 2015, such assets were reclassified to other assets as they are intended for immediately sale or disposition. |
As of December 31, 2016 and 2015, there were no contractual commitments for the purchase of premises and equipment, or premises and equipment pledged as collateral.
As of December 31, 2016 and 2015, the assessment made by the Bank indicates there is no evidence of impairment of its premises and equipment.
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NOTE 10. INVESTMENT PROPERTIES
The table below sets forth the reconciliation between the initial balance account and the balance at the end of the period, at fair value:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Balance at the beginning of the year | 1,505,046 | 1,114,180 |
| Acquisitions | 29,034 | 244,730 |
| Sales/Write-offs | (72,682) | (4,040) |
| Classified to Assets held for sale | (29,008) | - |
| Profits on valuation (1) | 149,299 | 150,176 |
| Balance at the end of the period(2) | 1,581,689 | 1,505,046 |
| (1) | See note 24.4. Other operating income. |
| (2) | Between December 31, 2015 and December 31, 2016 there were no transfers in and out of Level 3 fair value hierarchy related with investment properties. See Note 29 Fair value of assets and liabilities. |
During 2014, the Bank recognized COP 56,235 in the consolidated statement of income related with the profit or loss on valuation of investment properties.
The valuation adjustments recorded by the Bank's related to its investment properties are detailed below:
As of December 31, 2016
| Type of asset | Balance
at the beginning of the year |
Appraisals | Net
increase (decrease) in investment properties |
Classified
to assets held for sale |
Adjusted
fair value at the end of the year (1) |
| In millions of COP | |||||
| Buildings | 1,275,566 | 52,543 | 27,608 | - | 1,355,717 |
| Lands | 229,480 | 96,756 | (71,256) | (29,008) | 225,972 |
| Total | 1,505,046 | 149,299 | (43,648) | (29,008) | 1,581,689 |
As of December 31, 2015
| Type of asset | Balance
at the beginning of the year |
Appraisals | Net increase in investment properties |
Classified
to assets held for sale |
Adjusted
fair value at the end of the year (1) |
| In millions of COP | |||||
| Buildings | 949,413 | 94,810 | 231,343 | - | 1,275,566 |
| Lands | 164,767 | 55,366 | 9,347 | - | 229,480 |
| Total | 1,114,180 | 150,176 | 240,690 | - | 1,505,046 |
| (1) | Corresponds to the change in the commercial appraisal of real estate due to the change in the Colombian consumer price index (“IPC”). |
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Amounts recognized in the statement of income for the period
The table sets forth the main income recorded by the Bank related to its investment properties:
| December 31, 2016 | December 31, 2015 | December 31, 2014 | |
| In millions of COP | |||
| Income from rentals | 66,838 | 89,389 | 79,237 |
| Operating expenses due to: | |||
| Investment properties that generated income through rentals | 21,254 | 11,693 | 9,320 |
| Investment properties that did not generate income through rentals | 2,495 | 2,539 | 823 |
Currently, there are no restrictions on the use or income derived from the buildings or lands that the Bank has as investment property.
The fair value of the Bank’s investment properties for the year ending at December 31, 2016 and December 31, 2015, has been recorded according to the assessment made by independent external consulting companies that have the appropriate capacity and experience in performing those assessments. The appraisers are either approved by the Property Market Auctions of Colombia or foreign appraisers, who are required to provide a second signature by a Colombia appraiser accredited by the Property Market Auctions.
Fair value appraisals are carried out in accordance with IFRS 13. The reports made by the external consulting company contain the description of the valuation methodologies used, and key assumptions such as: discount rates, calculation of applied expenses and income approach, among others. The fair value of the investment properties is based on the comparative market approach, which reflects the prices of recent transactions with similar characteristics. Upon determining the fair value of these investment properties, the greater and best use of these investment properties is their present use. For further information about measurements techniques and inputs used by consulting companies, please see Note 29 Fair Value of assets and liabilities.
As of December 31, 2016 and 2015, the Bank does not have investment properties held under financial leases.
NOTE 11. INCOME TAX
The income tax is recognized in each country where the Bank has operations, in accordance with the tax regulations in force in each of the jurisdictions.
The deferred tax asset and liability is recognized based on the temporary differences arising from the future estimate of tax and accounting effects attributable to differences between assets and liabilities in the Financial Statements and its tax base.
In order to adequately comply with tax obligations on a timely basis, the Bank constantly analyzes and interprets current tax legislation that is applicable to its operations.
| F-84 |
| 11.1. | Components recognized in the Income Statement for the period: |
| 2016 | 2015 | 2014 | |
| In millions of COP | |||
| Current tax | |||
| Fiscal year | 813,355 | 346,556 | 457,338 |
| Previous fiscal years | 2,519 | 6,159 | 10,061 |
| Total current tax | 815,874 | 352,715 | 467,399 |
| Deferred tax | |||
| Fiscal year | 360,958 | 296,535 | 270,277 |
| Total deferred tax | 360,958 | 296,535 | 270,277 |
| Total tax | 1,176,832 | 649,250 | 737,676 |
| 11.2. | Components recognized in Other Comprehensive Income (OCI) |
| December 31, 2016 | |||
| In millions of COP | |||
| Amount before taxes |
Expenses or benefit per tax |
Net taxes | |
| Net profit (loss) by financial instruments measured at fair value | 208,276 | 24,341 | 232,617 |
| Remeasurement loss related to defined benefit liability | 626 | (10,966) | (10,340) |
| Net | 208,902 | 13,375 | 222,277 |
See Other Comprehensive Income
| December 31, 2015 | |||
| In millions of COP | |||
| Amount before taxes |
Expenses or benefit per tax |
Net taxes | |
| Net profit (loss) by financial instruments measured at fair value | 128,271 | 9,052 | 137,323 |
| Remeasurement loss related to defined benefit liability | (59,434) | 9,312 | (50,122) |
| Net | 68,837 | 18,364 | 87,201 |
See Other Comprehensive Income
| December 31, 2014 | |||
| In millions of COP | |||
| Amount before taxes | Expenses or benefit per tax | Net taxes | |
| Net profit (loss) by financial instruments measured at fair value | (120,627) | (3,110) | (123,737) |
| Remeasurement loss related to defined benefit liability | (27,297) | 6,407 | (20,890) |
| Net | (147,924) | 3,297 | (144,627) |
See Other Comprehensive Income
| 11.3. | Other disclosures |
| 11.3.1. | Explanation of applicable rates |
The following are nominal rates of the income tax in each of the countries where the Bank has operations that are subject to income tax:
Companies domiciled in Colombia
Income tax and Equity Tax (CREE) were applied at the following rates for 2016, 2015 and 2014 in accordance with Law 1739 of 2014:
| 2016 | 2015 | 2014 | |
| Income | 25% | 25% | 25% |
| CREE | 9% | 9% | 9% |
| Surcharge | 6% | 5% | - |
| Total | 40% | 39% | 34% |
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Companies domiciled in other countries
| 2014 | 2015 | 2016 | 2017 | 2018 | As from 2019 | ||
| Companies from Perú | Income | 30% | 28% | 28% | 29,5% | 29,5% | 29,5% |
| Companies from Panama | Income | 25% | 25% | 25% | 25% | 25% | 25% |
| Companies from Salvador | Income | 30% | 30% | 30% | 30% | 30% | 30% |
| Companies from Guatemala | Income | 25% | 25% | 25% | 25% | 25% | 25% |
| 11.3.2. | Amount of temporary differences in subsidiaries, branches, associates on which no charged deferred tax has been recognized |
| December 31, 2016 | December 31, 2015 | |
| Temporary differences | ||
| Local Subsidiaries | (234,975) | (375,957) |
| Foreign Subsidiaries | (4,547,623) | (1,925,942) |
In accordance with IAS 12, no deferred tax was recognized due to the fact that management are able to control the future time when those differences are reverted, and that this is not expected to take place in the foreseeable future.
| 11.3.3. | Temporary differences to December 31, 2016 |
| - | The net deferred tax assets and liabilities by company is as follows |
| Company | December 31, 2016 | December 31, 2016 | December 31, 2015 | December 31, 2015 |
| Deferred tax asset | Deferred tax liability | Deferred tax asset | Deferred tax liability | |
| Arrendadora Financiera S.A. | - | (87) | 128 | - |
| Arrendamiento Operativo CIB S.A.C. | 370 | - | 4,252 | - |
| Bagrícola Costa Rica S.A. | 68 | - | 48 | - |
| Grupo Agromercantil Holding | - | (38,622) | - | (83,292) |
| Banagricola S.A. | - | - | (5,326) | |
| Banca de Inversión Bancolombia S.A. | - | (99,504) | 1,356 | - |
| Banco Agrícola S.A. | 43,594 | - | 40,239 | - |
| Bancolombia S.A. | - | (1,152,726) | - | (705,176) |
| Banistmo S.A. y Filiales | 166,421 | - | 114,594 | |
| BIBA Inmobiliaria S.A.S. | - | (10) | - | - |
| Fideicomiso “Lote Abelardo Castro” | - | (171) | - | (372) |
| Fiduciaria Bancolombia S.A. | 6,483 | - | 4,883 | - |
| FiduPerú S.A Sociedad Fiduciaria | 165 | - | - | - |
| Inversiones CFNS S.A.S. | - | (1,042) | - | (717) |
| Inversiones Financieras Banco Agricola S.A. | - | - | (19,144) | |
| Lesasing Bancolombia S.A. | - | 4,040 | - | |
| Renting Colombia S.A.S. | - | (19,753) | - | (8,893) |
| Transportempo S.A.S | 285 | - | - | (4,456) |
| Valores Bancolombia S.A. | 5,476 | - | 942 | - |
| Valores Simesa S.A. | - | (13,439) | - | (7,016) |
| Net deferred tax | 222,862 | (1,325,354) | 170,482 | (834,392) |
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| Deferred tax summary in Balance accounts |
December 31, 2015 |
With effects on the statement of income |
With OCI effects |
Reclassifications | Eliminations | December 31, 2016 |
|
| Deferred tax asset | 791,079 | (108,135) | 10,966 | 69,642 | (5,678) | 757,874 | |
| Deferred tax liability | (1,454,989) | (346,794) | (24,341) | (35,674) | 832 | (1,860,366) | |
| Net deferred tax | (663,910) | (454,929) | (13,375) | 34,568 | (4,846) | (1,102,492) |
With effects on the statement of income
| December 31, 2015 | Realization | Increase | December 31, 2016 | |
| Deferred tax asset: | ||||
| Property and equipment | 35,615 | 16,603 | 709 | 19,721 |
| Employee benefits | 146,116 | 15,356 | 21,310 | 152,070 |
| Municipal tax liabilities | 9,528 | 386 | 7,243 | 16,385 |
| Impairment evaluation | 126,651 | 25,384 | 150,914 | 252,181 |
| Offset of tax credits | 120,060 | 89,037 | 371 | 31,394 |
| Financial obligations | 174,439 | 131,496 | 17,024 | 59,967 |
| Investment valuation | 75,544 | 68,714 | 16 | 6,846 |
| Goods received as payment | 50,097 | 1,499 | 70,297 | 118,894 |
| Other deductions | 35,371 | 4,590 | 41,010 | 71,792 |
| Total deferred tax asset | 773,421 | 353,065 | 308,894 | 729,250 |
| December 31, 2015 | Realization | Increase | December 31, 2016 | |
| Deferred tax liability: | ||||
| Property and equipment | (285,236) | 162,570 | 107,536 | (230,202) |
| Leasing re-expression | (245,440) | 108,423 | 142,716 | (279,733) |
| Impairment evaluation | (138,161) | 4,855 | 92,329 | (225,635) |
| Equity securities valuation | (46,631) | 9,301 | 116,556 | (153,886) |
| Derivatives valuation | (187,231) | 62,857 | 363 | (124,737) |
| Goodwill | (260,789) | 22,932 | 349,237 | (587,094) |
| Goods received as payment | (21,994) | 3,825 | 6,991 | (25,160) |
| Other deductions | (198,164) | 71,508 | 11,579 | (138,235) |
| Total deferred tax liability | (1,383,646) | 446,271 | 827,307 | (1,764,682) |
Impact on Other Comprehensive Income
| December 31, 2015 | Realization | Increase | December 31, 2016 | |
| Deferred tax asset | ||||
| Employee benefits | 17,658 | 123 | 11,089 | 28,624 |
| Total deferred tax asset | 17,658 | 123 | 11,089 | 28,624 |
| December 31, 2015 | Realization | Increase | December 31, 2016 | |
| Deferred tax liability | ||||
| Debt securities valuation | (1,468) | 1,429 | - | (39) |
| Investment valuation | (69,875) | - | 25,770 | (95,645) |
| Total deferred tax liability | (71,343) | 1,429 | 25,770 | (95,684) |
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| 11.3.4. | Future consequences of dividends from local subsidiaries |
According to the historical behavior of dividends and current tax regulations, they would not be taxed in the event that the Parent Company receives dividends from its local subsidiaries.
| 11.3.5 | Conciliation of the effective tax rate |
| Conciliation of the tax rate | 2016 | 2015 | 2014 |
| Accounting earnings | 3,968,282 | 3,235,635 | 3,104,594 |
| Tax applicable to the nominal rate | 1,587,313 | 1,261,898 | 1,055,562 |
| Non-deductible expenses for determining taxable profit (loss) | 255,435 | 290,291 | 146,282 |
| Accounting and not fiscal expenses (income) for determining taxable profit (loss) | (217,056) | (822,513) | (119,202) |
| Differences in tax bases | (348,985) | (149,502) | (235,530) |
| Tax and not accounting expenses (income) for determining taxable profit (loss) | 23,381 | 352,543 | 354,750 |
| Revenues from ordinary activities exempt from taxation | (121,917) | (172,466) | (168,047) |
| Income from ordinary activities not constituting income or occasional earnings from taxation | (111,027) | (66,459) | (103,938) |
| Other fiscal deductions | (127,406) | (171,053) | (216,569) |
| Foreign profits taxed at other rates | 72,144 | 99,398 | 71,614 |
| Other effects of the tax rate from reconciling accounting earnings and tax expenses (income) | 164,950 | 27,113 | (47,246) |
| Total Tax | 1,176,832 | 649,250 | 737,676 |
Discontinued operations
| 2016 | 2015 | 2014 | |
| Earnings before taxes | 266,072 | 21,446 | 99,852 |
| Total income and CREE taxes | (2,961) | 21,635 | 26,157 |
| Total deferred tax | (99,614) | (22,702) | 10,828 |
| Total tax | (102,575) | (1,067) | 36,985 |
| Net profit of discontinued operations | 163,497 | 22,513 | 62,867 |
| 11.4. | Potential consequences on the payment of dividends |
If the Parent Company, or any of its subsidiaries, distributes dividends, these would be subject to the tax regulations of each of the countries where they are enacted.
| 11.5. | Tax contingent liabilities and assets |
Having analyzed the tax positions taken in the returns subject to review by the tax authorities, the Bank has not identified income tax repercussions that must be revealed here with respect to the Financial Statements at December 31, 2016.
| F-88 |
| 11.6. | Fiscal credits |
The following is the detail of the Tax loss carryforward and excesses of presumptive income on net income in the group entities, which have not been used up to December 31, 2016.
| Base | Tax deferred asset recognized |
| In millions of COP | |
| 94,020 | 31,023 |
| 11.7. | Tax regulations applicable to current and deferred taxes for fiscal years 2015 and 2016. |
| 11.7.1. | Companies domiciled in Colombia |
Current tax
In general terms, the tax regulations applicable to current taxes relate to those in force and applicable prior to Law 1819 of 2016, which include the following, among others:
| a) | Current tax is calculated based on the accounting information prepared using the regulations set out in Decrees 2649 and 2650 of 1993, the technical rules established by the Financial Supervisors in Colombia that are in force and applicable at December 31, 2014. |
| b) | Income tax and Equity Tax (CREE) rates are established in Law 1607 of 2012 and Law 1739 of 2014 (see point 11.3.1.) |
| c) | Occasional earnings are handled separately from ordinary income and taxed at a rate of 10%. |
| d) | The base for determining the ordinary income tax cannot be under three percent (3%) of liquid assets on the last day of the previous fiscal year. |
| e) | Bancolombia is required to file a report on transfer prices and to prepare supporting documentation regarding the operations carried out with related or associated parties abroad and those in tax havens. |
Supported by economic studies and documentation supporting previous years, it is considered that it is not required the additional provision of income tax and Equity Tax (CREE). The study and the transfer prices declaration of taxable year 2016, there is the formal obligation to submit them in 2017.
| f) | Articles 147 and 189 of the Fiscal Statute stipulate that tax loss carryforwards and presumed net income surpluses may be offset in subsequent periods, although the latter must be offset within the five (5) following years. |
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Deferred Tax
Deferred tax at December 31, 2016 was calculated taking into account the tax rules established by Law 1819 of 2016 with respect to the tax bases and applicable rates in the future, when the temporary differences are expected to be reverted.
Main impacts of the tax reform - Law 1819 of December 29, 2016
The enactment of Law 1819 of 2016 modifies aspects such as the following: tax base, tax rates, adoption of some of the OECD “BEPS” actions, the transition to International Financial Reporting Standards (IFRS) is brought forward and dividends are taxed, among other provisions.
The main impacts are seen in:
| a) | The current tax base starting in the 2017 tax year will be established by the new accounting regulatory frameworks in force in Colombia, with certain reconciliations. |
| b) | The Equity Tax (CREE) is eliminated and only income and supplementary taxes remain. |
| c) | The income and supplementary tax rates are modified starting in the 2017 tax year, as follows: |
| Income tax and supplementary taxes | |||
| 2017 | 2018 | 2019 and subsequent years | |
| Income | 34% | 33% | 33% |
| Surcharge | 6% | 4% | 0% |
| Total rate | 40% | 37% | 33% |
| d) | The income from the new finance lease contracts (residencial leases) are taxed at the 9% rate. |
| e) | Goodwill originating as from 2017 will not be tax-deductible. |
| f) | Preferred shares will have the same treatment as financial liabilities for the issuer's tax purposes. The treatment will be the same as financial assets for the holder. This treatment will not be applicable to listed shares that do not comply with the rest of the requirements established by Article 33-3 of the Fiscal Statute. |
| g) | VAT on sales of capital goods may be deducted from income. |
| h) | Occasional earnings are handled separately from ordinary income and taxed at a rate of 10%. |
| i) | The base for determining the ordinary income tax cannot be under three and a half percent (3.5%) of liquid assets on the last day of the immediately preceding fiscal year. |
| j) | Tax loss carryforwards may be offset against net ordinary income obtained over the subsequent 12 tax periods. Presumed income surpluses over net income may continue to be offset over the subsequent five (5) years. |
| F-90 |
| k) | The tax treatment of finance leases means that the sum recorded as a liability by the lessee coincides with the amount recognized by the lesser as a lease asset. Finance leases or leases with purchase options and operating leases concluded before Law 1819 of 2016 enters into force will maintain the tax treatment in place at the time they are concluded. |
| l) | The information to be disclosed in the informational transfer pricing report and supplementary documentation regarding operations with foreign associated and related parties or those in tax havens is expanded and there is now an obligation to report: Master report, local report, country-by country report, rules for applying transfer price methods. |
| m) | A dividend tax was created, which will be collected by at-source withholdings at the time they are paid out. This new tax applies to dividends distributed based on earnings obtained starting in the 2017 tax year. |
The rates for non-residents of Colombia are:
| · | 5% if the distributed dividends relate to earnings taxed at the parent company (notwithstanding the application of any double taxation treaty signed by Colombia). |
| · | 35% if the distributed dividends relate to earnings not taxed at the Parent Company. A further 5% will be applied to the difference to be distributed (for a total of 38.25%). The above is notwithstanding the application of double taxation treaties signed by Colombia. |
The rates for residents of Colombia are:
| · | The at-source withholding rate for domestic companies continues to be 20% when the dividends are distributed against taxed earnings. |
| · | The tax will be as follows for natural persons: |
| − | Between 0%, 5% and 10% if the dividends are distributed against earnings taxed at the parent company. |
| − | 35% if the dividends are distributed against earnings not taxed at the parent company. A further 5% will be applied to the difference to be distributed (for a total of 38.25%). |
| 11.7.2. | Companies domiciled in other countries |
| a) | Subsidiaries established in the Republic of Panama pay an income tax on the earnings obtained in Panama at a rate of 25%. According to the tax regulations in force in the country, earnings on foreign transactions, interests earned on term deposits in local banks, Government of Panama debt securities and investments in securities listed on the Stock Exchange are exempt from the payment of income tax. |
| b) | Subsidiaries located in the Cayman Islands pay income tax when the earnings are from transactions considered to be from a domestic source. |
| F-91 |
| c) | For companies located in Guatemala; in accordance with Book I, Income Tax of Decree No. 10-2012 of the Congress of the Republic of Guatemala, published on March 5, 2012, from January 1, 2013, the Bank adopted the profit regime of lucrative activities that sets a tax rate of 25% for the year 2015 and following periods. Additionally, the income from capital and capital earnings are charged with a tax rate of 10%, and the distribution of dividends, earnings and profits is charged with a tax rate of 5%. |
Likewise, it is also possible for some companies to adopt the optional simplified regime of income from lucrative activities for the determination of the income tax, which sets a tax rate of 5% on the monthly taxable income up to GTQ $30,000 plus 7% upon the remainder of the monthly taxable income over this amount, considering as taxable income the total income affected.
| d) | In El Salvador, the income tax is determined applying the rate of 30% to the taxable income, with the exception of entities with taxable income equal or less that USD 150, which pay 25%, under the Income Tax Act of El Salvador, contained in Legislative Decree No. 134 of 1991, which is effective since January 1, 1992. |
All income received or accrued by the taxpayer from activities carried out within national territory and abroad is taken into account for the purposes of calculating taxable income, in accordance with the nature and scope of the law.
Dividends are excluded from the income tax calculation, but are subject to a 5% tax rate when paid or credited to its shareholders.
Net capital gains are subject to 10% tax, except earnings from the sale of an asset within twelve months after acquisition will be included in taxable income.
| e) | In accordance to the law governing the International Banking Center of Puerto Rico, they are exempt from taxes on income, property and municipal taxes, provided that the income derives from international banking activities. |
| f) | For companies based in Peru, the Peruvian tax system is governed by the principles of legal reservation and equality and respect of fundamental individual rights. The Constitution consecrates the principle of non-confiscatory taxation and also guarantees the right to tax reservation. The main taxes in Peru are levied on income, production and consumption, the circulation of money and wealth. Contributions must also be made to the Social Security Health System and the National Pension System. |
Direct taxes are represented by income tax, temporary tax on net assets and the tax on financial transactions. Income tax is levied on net income and is calculated on an annual basis without any exception whatsoever.
According to Legislative Decree 1261, published on December 10, 2016, starting in 2017 the income tax rate will change to 29.5%. This legislation repeals the preceding regulation that established a progressive decline in the rate from 30% to 26%, between 2015 and 2019 respectively.
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NOTE 12. ASSETS HELD FOR SALE AND INVENTORIES
The breakdown of inventories and assets held for sale of the Bank is as follows:
| Assets held for sale and inventories | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Inventories | 140,137 | 76,543 |
| Assets held for sale | 133,050 | 53,286 |
| Assets related to discontinued operations (1) | - | 1,820,979 |
| Total inventories and assets held for sale | 273,187 | 1,950,808 |
| (1) | This assets corresponded to Compañía de Financiación Tuya S.A, which was sold in October of 2016. See Note 30. Discontinued operations. |
| 12.1 | Inventories |
Due to the nature of the financial services provided by some subsidiaries of the Bank, when assets provided through operating or financial leases to third parties that do not exercise the purchase option or do not have a purchase option, once the agreement expires those assets are recorded as inventories, considering that in the course of the ordinary activities performed by such subsidiaries, those assets are routinely sold.
The Bank's inventories at December 31, 2016 and 2015, are summarized as follows:
| Inventories | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Lands and buildings | 90,166 | 63,631 |
| Vehicles | 50,843 | 15,223 |
| Machinery | 11,045 | 12,577 |
| Total inventory cost | 152,054 | 91,431 |
| Impairment | (11,917) | (14,888) |
| Total inventories | 140,137 | 76,543 |
Impairment is recognized based on market price fluctuation due to the fact that the fair value is determined by the offering price less cost to sell.
There are no inventories pledged as collateral for liabilities as of December 31, 2016 and 2015.
| 12.2 | Assets held for sale |
The assets recognized by the Bank as assets held for sale correspond to machinery, equipment, motor vehicles, technology, and investment property, among others that have been received as foreclosed assets.
The Bank's assets held for sale have a current plan to sale, which contains the details of the selling price allocation and the advertising and marketing plan of the assets. Furthermore, the plan specifies the conditions to proceed with the selling process, consisting of an offer made by the customer and then, the Management's approval to perform the sale.
| F-93 |
The total balance of assets held for sale, by operating segment, are detailed below:
As of December 31, 2016
| Assets held for sale | Banking Colombia |
Banking Panama |
Banking El Salvador |
Banking Guatemala |
Others Segment |
Total |
| In millions of COP | ||||||
| Machinery and equipment | 3,726 | 2,361 | - | 24 | 3,355 | 9,466 |
| Cost | 3,871 | 2,671 | - | 26 | 3,355 | 9,923 |
| Impairment | (145) | (310) | - | (2) | - | (457) |
| Real estate for residential purposes | 3,862 | 15,036 | 1,096 | 677 | - | 20,671 |
| Cost | 4,031 | 15,160 | 1,114 | 825 | - | 21,130 |
| Impairment | (169) | (124) | (18) | (148) | - | (459) |
| Real estate different from residential properties | 28,587 | 2,093 | - | 185 | 72,048 | 102,913 |
| Cost | 29,861 | 2,093 | - | 185 | 72,048 | 104,187 |
| Impairment | (1,274) | - | - | - | - | (1,274) |
| Total assets held for sale | 36,175 | 19,490 | 1,096 | 886 | 75,403 | 133,050 |
As of December 31, 2015
| Assets held for sale | Banking Colombia |
Banking Panama |
Banking El Salvador |
Banking Guatemala (1) |
Other Segments |
Total |
| In millions of COP | ||||||
| Machinery and equipment | 7,527 | 1,776 | - | - | 14,188 | 23,491 |
| Cost | 7,818 | 1,859 | - | - | 14,928 | 24,605 |
| Impairment | (291) | (83) | - | - | (741) | (1,115) |
| Real estate for residential purposes | 1,880 | 10,129 | 5,785 | 4,124 | - | 21,918 |
| Cost | 2,032 | 10,290 | 5,967 | 4,124 | - | 22,413 |
| Impairment | (152) | (161) | (182) | - | - | (495) |
| Real estate different from residential properties | 166 | 6,793 | - | 918 | - | 7,877 |
| Cost | 175 | 6,857 | - | 918 | - | 7,950 |
| Impairment | (9) | (64) | - | - | - | (73) |
| Total assets held for sale | 9,573 | 18,698 | 5,785 | 5,042 | 14,188 | 53,286 |
| (1) | Relates to the acquisition of Grupo Agromercantil Holding S.A For further information see Note 8 Goodwill and intangible assets, net. |
Assets held for sale had an impairment amounting COP 2.190 and COP 1.683 as of December 31, 2016 and December 31, 2015, respectively. The aforementioned impairment was mainly due to transactions with a sale price below the carrying value of assets less the estimated costs to sell.
| F-94 |
NOTE 13. OTHER ASSETS
As of December 31, 2016 and 2015 the Bank’s other assets consist of:
| Other Assets | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Tax advance | 581,152 | 899,485 |
| Other receivables(1) | 480,255 | 414,544 |
| Marketable and non-marketable for sale assets (3) | 337,243 | 189,296 |
| Prepaid expenses | 310,759 | 292,416 |
| Assets pledged as collateral | 171,561 | 325,458 |
| Interbank Borrowings not classified as cash equivalents | 159,398 | 386,367 |
| Receivable Sales of goods and service | 137,248 | 97,016 |
| Receivables related to abandoned private accounts (2) | 110,944 | - |
| Commission for letters of credit | 94,835 | 110,549 |
| Advances to asset purchases | 94,150 | - |
| Commission receivables | 72,002 | 73,528 |
| Balance in credit card clearning house | 63,018 | 61,251 |
| Operating leases | 39,150 | 42,200 |
| Debtors | 18,911 | 14,876 |
| Interest receivable | 8,794 | 10,818 |
| Taxes Receivable | 4,474 | 33,786 |
| Others | 100,838 | 87,363 |
| Allowance Others | (33,849) | (12,981) |
| Total (3) | 2,750,883 | 3,025,971 |
| (1) | Mainly comprised of insurance claims and cash short and over. |
| (2) | The item corresponds to receivables related to the application of the Colombian Law 1777 of February 1, 2016, which establishes that entities holding accounts deemed abandoned must transfer the related amounts to a fund constituted and regulated by the Icetex (Governmental entity responsible for promoting high quality education in Colombia). |
| (3) | As of December 31, 2015, the Group reclassified from property and equipment, with net carrying amount of 189,296, certain land and building acquired through foreclosure (see Note 9). |
As of December 31, 2015, Compañía de financiamiento Tuya S.A. had COP 47,521 in other assets that are classified as a discontinued operation.
NOTE 14. DEPOSITS FROM COSTUMERS
The detail of the deposits as of December 31, 2016 and 2015 is as follows:
| Deposits | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Saving accounts | 48,693,702 | 47,813,680 |
| Time deposits | 52,673,385 | 48,713,789 |
| Checking accounts | 21,443,002 | 23,646,578 |
| Other deposits | 1,813,922 | 1,627,981 |
| Total (1) | 124,624,011 | 121,802,028 |
| (1) | As of December 31, 2015, Tuya was considered as assets held for sale, and the related deposits amounted to COP 1,266,305. |
| F-95 |
The following table details the time deposits (‘CDT’) issued by the Bank:
| CDT | Effective interest rate | December 31, 2016 | ||
| Modality | Minimum | Maximum | Carrying value | Fair value |
| In millions of COP | ||||
| Less than 6 Months | 0.01% | 8.86% | 10,495,536 | 10,458,936 |
| Equal to 6 months and less than 12 months | 0.20% | 9.63% | 7,612,216 | 7,629,195 |
| Equal to 12 months and less than 18 months | 0.01% | 10.01% | 5,345,522 | 5,391,407 |
| Equal to or greater than 18 months | 0.01% | 18.29% | 29,220,111 | 29,666,246 |
| Total | 52,673,385 | 53,145,784 | ||
| CDT | Effective interest rate | December 31, 2015 | ||
| Modality | Minimum | Maximum | Carrying value | Fair value |
| In millions of COP | ||||
| Less than 6 Months | 0.05% | 7.09% | 10,383,845 | 10,324,971 |
| Equal to 6 months and less than 12 months | 0.10% | 8.91% | 8,196,680 | 8,160,973 |
| Equal to 12 months and less than 18 months | 0.10% | 9.34% | 6,037,867 | 6,031,437 |
| Equal to or greater than 18 months | 0.03% | 13.09% | 24,095,397 | 24,136,462 |
| Total | 48,713,789 | 48,653,843 | ||
The detail of CDT’s issued by the Bank by maturity is as follows:
| December 31, 2016 | ||
| Period | Carrying value | Fair value |
| In millions of COP | ||
| Less than one year | 34,442,445 | 34,626,003 |
| 1 to 3 years | 10,698,266 | 10,815,760 |
| 3 to 5 years | 5,401,074 | 5,505,403 |
| More than 5 years | 2,131,600 | 2,198,618 |
| Total | 52,673,385 | 53,145,784 |
| December 31, 2015 | ||
| Period | Carrying value | Fair value |
| In millions of COP | ||
| Less than one year | 34,353,150 | 34,256,206 |
| 1 to 3 years | 9,287,774 | 9,326,760 |
| 3 to 5 years | 2,918,071 | 2,937,748 |
| More than 5 years | 2,154,794 | 2,133,129 |
| Total | 48,713,789 | 48,653,843 |
| F-96 |
NOTE 15. INTERBANK DEPOSITS AND REPURCHASE AGREEMENTS AND OTHER SIMILAR SECURED BORROWING
The following table sets forth information regarding the money market operations recognized as liabilities in the statement of financial position:
| Interbank and repurchase agreements and other similar secured borrowing |
December 31, 2016 | December 31, 2015 | |
| In millions of COP | |||
| Interbank Deposits | |||
| Interbank liabilities | 341,856 | 400,062 | |
| Total interbank | 341,856 | 400,062 | |
| Repurchase agreements and other similar secured borrowing | |||
| Short selling operations | 880,705 | 699,367 | |
| Temporary transfer of securities | 918,470 | 266,798 | |
| Repurchase agreements | 124,835 | 266,291 | |
| Total Repurchase agreements and other similar secured borrowing (1) | 1,924,010 | 1,232,456 | |
| Total money market transactions | 2,265,866 | 1,632,518 | |
| (1) | Total repo liabilities have maturities of less than 30 days. |
Offsetting of Repurchase and Resale Agreements
For the Bank and its Colombian subsidiaries, substantially all of repurchase and resale activities are transacted under legally enforceable repurchase agreements that give the Bank, in the event of default by the counterparty, the right to liquidate securities held with the same counterparty. However, the local law for certain jurisdictions outside of Colombia is unclear to determine the enforceability of offsetting rights.
The Bank does not offset repurchase and resale transactions with the same counterparty on the consolidated statement of financial position.
| F-97 |
The table below presents repurchases and resale transactions included in the consolidated statement of financial position at December 31, 2016 and 2015:
As of December 31, 2016
| Assets / liabilities gross |
Amounts offset in the statement of financial position |
Net balance presented in the statement of financial position |
Financial instruments as collaterals |
Assets / liabilities net | |
| In millions of COP | |||||
| Securities purchased under resale agreements(1) | 2,643,707 | - | 2,643,707 | (2,643,707) | - |
| Securities sold under repurchase agreements | (1,924,010) | - | (1,924,010) | 1,924,010 | - |
| Total repurchase and resale agreements | 719,697 | - | 719,697 | (719,697) | - |
| (1) | The amount includes those presented as cash and cash equivalents and those presented as other assets. |
As of December 31, 2015
| Assets / liabilities gross |
Amounts offset in the statement of financial position |
Net balance presented in the statement of financial position |
Financial instruments as collaterals |
Assets / liabilities net | |
| In millions of COP | |||||
| Securities purchased under resale agreements | 3,303,231 | - | 3,303,231 | (2,931,266) | 371,965 |
| Securities sold under repurchase agreements (1) | (533,089) | - | (533,089) | 533,089 | - |
| Total repurchase and resale agreements | 2,770,142 | - | 2,770,142 | (2,398,177) | 371,965 |
| (1) | As of December 31, 2015, short-sell operations amounted to COP 699,367, these are not offset in the table above. |
For further information about offsetting of other financial assets and liabilities see Note 5 Financial assets investments and derivatives.
| F-98 |
NOTE 16. BORROWINGS FROM OTHER FINANCIAL INSTITUTIONS
As of December 31, 2016 and 2015, the composition of the borrowings from other financial institutions measured at amortized cost is the following:
| Borrowings from other financial institutions | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Obligations granted by domestic banks | 5,616,934 | 5,634,692 |
| Obligations granted by foreign banks (1) | 13,288,909 | 14,086,492 |
| Total | 18,905,843 | 19,721,184 |
| (1) | The Bank has recognized a financial liability with BAM Financial Corporation (BFC) amounting to USD 251.5 million as of December 31, 2016 and USD 271.5 million as of December 31, 2015, due to its obligation to pay cash in the future to purchase the non-controlling shares of Grupo Agromercantil Holding. For further information see Note 8 Goodwill and intangible assets, net. |
Obligations granted by domestic banks
As of December 31, 2016
| Financial entity | Rate Maximum | Rate Minimum | December 31, 2016 |
| In millions of COP | |||
| Financiera de Desarrollo Territorial (Findeter) | 12.77% | 1.29% | 2,404,521 |
| Banco De Comercio Exterior De Colombia (Bancoldex) | 12.48% | 0.06% | 1,591,035 |
| Fondo Para El Financiamiento Del Sector Agropecuario (Finagro) | 12.38% | 1.39% | 642,775 |
| Other private financial entities | 11.86% | 2.28% | 978,603 |
| Total | 5,616,934 | ||
As of December 31, 2015
| Financial entity | Rate Maximum | Rate Minimum | December 31, 2015 |
| In millions of COP | |||
| Financiera de Desarrollo Territorial (Findeter) | 11.70% | 0.16% | 1,953,996 |
| Banco de Comercio Exterior de Colombia (Bancoldex) | 10.47% | 1.01% | 1,248,294 |
| Fondo para el Financiamiento del Sector Agropecuario (Finagro) | 7.38% | 0.27% | 320,332 |
| Other private financial entities | 8.51% | 3.46% | 2,112,070 |
| Total | 5,634,692 | ||
The maturities of financial obligations with domestic banks as of December 31, 2016 and 2015, are the following:
| Domestic | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Amount expected to be settled: | ||
| No more than twelve months after the reporting period | 382,369 | 1,326,192 |
| More than twelve months after the reporting period | 5,234,565 | 4,308,500 |
| Total | 5,616,934 | 5,634,692 |
| F-99 |
Obligations granted by foreign banks
As of December 31, 2016
| Financial entity | Rate Maximum | Rate Minimum | December
31, 2016 |
| In millions of COP | |||
| Financing with correspondent banks | 9.71% | 0.88% | 12,129,817 |
| Corporación Andina de Fomento (CAF) | 4.04% | 2.67% | 745,086 |
| Banco Latinoamericano de Comercio Exterior (Bladex) | 3.83% | 1.24% | 278,392 |
| Banco Interamericano de Desarrollo (BID) | 3.96% | 1.54% | 135,614 |
| Total | 13,288,909 | ||
As of December 31, 2015
| Financial entity | Rate Maximum | Rate Minimum | December
31, 2015 |
| In millions of COP | |||
| Financing with correspondent banks | 8.45% | 0.13% | 12,392,735 |
| Corporación Andina de Fomento (CAF) | 3.38% | 1.89% | 1,019,782 |
| Banco Latinoamericano de Comercio Exterior (Bladex) | 3.28% | 0.60% | 426,707 |
| Banco Interamericano de Desarrollo (BID) | 3.96% | 3.30% | 247,268 |
| Total | 14,086,492 | ||
The maturities of the financial obligations with foreign entities as of December 31 of 2016 and 2015 are the following:
| Foreign | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Amount expected to be settled: | ||
| No more than twelve months after the reporting period | 9,559,568 | 9,803,308 |
| More than twelve months after the reporting period | 3,729,341 | 4,283,184 |
| Total | 13,288,909 | 14,086,492 |
NOTE 17. DEBT SECURITIES IN ISSUE
Duly authorized by the authority in each country bonds have been issued as follows:
As of December 31, 2016
| Issuer | Currency | Face value | Balance | Rate Range | |
| Bancolombia S.A.(1) | Local | COP | 5,458,619 | 5,562,900 | 5.49%-IPC(2) + 6.9% |
| Bancolombia S.A. | Foreign | USD | 3,246,970 | 9,814,915 | 5.54%-7.84% |
| Banco Agrícola S.A. | Foreign | USD | 530,000 | 1,581,348 | 4.25%-6.75% |
| Bancolombia Panamá S.A. | Foreign | USD | 272,282 | 826,069 | 1.30%-2.65% |
| Grupo Agromercantil Holding S.A. | Foreign | USD | 302,272 | 919,577 | 0.25%-7.25% |
| Total | 18,704,809 | ||||
| (1) | The increased in the coupon rate is due to the liabilities assumed by the Parent Company as a result of the merger between Bancolombia S.A. and Leasing Bancolombia S.A. that took place in September 2016, for further information see Note 1. Reporting entity |
| (2) | Consumer price index. |
| F-100 |
As of December 31, 2015
| Issuer | Currency | Face value | Balance | Rate Range | |
| Bancolombia S.A. | Local | COP | 4,134,297 | 2,813,865 | 5.19% - 6.99% |
| Bancolombia S.A. | Foreign | USD | 3,246,970 | 10,290,398 | 4.95% - 14.18% |
| Leasing Bancolombia S.A. | Local | COP | 2,455,982 | 2,474,308 | 5.5% - 10.90% |
| Banco Agrícola S.A. | Foreign | USD | 513,981 | 1,610,198 | 4.00% - 6.75% |
| Renting Colombia S.A.S. | Local | COP | 300,000 | 16,297 | IPC (1) + 5.90% |
| Bancolombia Panamá S.A. | Foreign | USD | 397,511 | 1,265,643 | 0.15% - 2.00% |
| Grupo Agromercantil Holding S.A. | Foreign | USD | 306,450 | 965,156 | 0.25% - 7.25% |
| Total | 19,435,865 | ||||
| (1) | Consumer price index |
As of December 31, 2015 discontinued operation Tuya S.A. had bonds amounting to COP 150,032, see Note 30 discontinued operations.
The breakdown of the Bank securities in issue by maturity is as follows:
As of December 31, 2016
| Issuer | Less than a year |
1 to 3 years | 3 to 5 years | more
than 5 years |
Total amortized cost |
| In millions of COP | |||||
| Local currency | |||||
| Subordinated bonds (1) | - | - | 495,614 | 1,875,068 | 2,370,682 |
| Ordinary bonds | - | 13 | 390,016 | 2,802,189 | 3,192,218 |
| Foreign currency | |||||
| Subordinated bonds (1) | 6,816 | - | 912,760 | 6,807,909 | 7,727,485 |
| Ordinary bonds | 826,069 | - | 970,751 | 3,617,604 | 5,414,424 |
| Total | 832,885 | 13 | 2,769,141 | 15,102,770 | 18,704,809 |
As of December 31, 2015
| Issuer | Less than a year |
1 to 3 years | 3 to 5 years | more
than 5 years |
Total amortized cost |
| In millions of COP | |||||
| Local currency | |||||
| Subordinated bonds (1) | - | - | - | 1,489,189 | 1,489,189 |
| Ordinary bonds | - | 313 | 938,808 | 2,876,160 | 3,815,281 |
| Foreign currency | |||||
| Subordinated bonds (1) | 1,172,037 | 101,159 | 957,602 | 7,135,678 | 9,366,476 |
| Ordinary bonds | - | 37,878 | 1,002,490 | 3,724,551 | 4,764,919 |
| Total | 1,172,037 | 139,350 | 2,898,900 | 15,225,578 | 19,435,865 |
| (1) | The subordinated bonds, in the event of default of the Bank, will be subordinated to the claims of depositors and all other creditors of the issuer, other than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities. |
| F-101 |
The following is a schedule of the debt securities in issue by maturity:
| Issuer | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Amount expected to be settled: | ||
| No more than twelve months after the reporting period | 2,018,995 | - |
| More than twelve months after the reporting period | 16,685,814 | 19,435,865 |
| Total | 18,704,809 | 19,435,865 |
As of December 31, 2016 and 2015, there were no covenants linked to the aforementioned securities in issue, nor were any of these instruments past due by the Bank in relation to its financial obligations.
On December 5, 2016, Bancolombia S.A. completed the offering of ordinary bonds in an aggregate principal amount of COP 350,000 with a term of 7 years and a rate of IBR + 2.20% monthly (30/360). The bonds are referred to as Green Bonds because the proceeds from the offering will be used to finance sustainability projects to combat the climate changes, associated with renewable energies and sustainable constructions.
For information related with the disclosures of fair value of the debt securities in issued, see Note 29 fair value of assets and liabilities.
NOTE 18. EMPLOYEE BENEFIT PLANS
The following table shows liabilities relating to post-employment benefit plans:
| Post-employment and long-term benefit plans | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Defined benefit pension plan | 129,931 | 127,231 |
| Severance obligation | 51,289 | 52,209 |
| Retirement Pension Premium Plan and Senior Management Pension Plan Premium | 105,158 | 95,331 |
| Other long term benefits | 364,424 | 271,651 |
| Post-employment and long-term benefit plans | 650,802 | 546,422 |
Short-term employment benefit plans recognized in the statement of financial position in the line “other liabilities” consist of the following:
| Other employment benefit plans | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Current severance obligation(1) | 104,352 | 69,689 |
| Other bonuses and short-term benefits | 336,018 | 209,866 |
| Other employment benefit plans | 440,370 | 279,555 |
| (1) | See severance obligation |
| F-102 |
These benefits include all types of payments that the Bank provides to its employees. The recognition of liabilities related to post-employment and long-term employee benefit plans is based on actuarial computations which involve judgments and assumptions made by the actuaries related to the future macroeconomic and employee demographic factors, among others, which will not necessarily coincide with the future outcome of such factors.
As of December 31, 2014, the amount recognized through Profit and Losses, due to benefit employee plans' current service cost and interest cost, was COP 55,354; on the other hand, COP 93,996 was recognized through other comprehensive income as a result of the net actuarial gain or loss due to change in assumptions, demographic experience and foreign currency translation effect.
Bonuses and short-term benefits
As of December 31, 2016 and 2015, the amounts of COP 336,018 and COP 209,866, respectively, were recognized by the Bank and its subsidiaries as bonuses related to private agreements in connection with the employees' variable compensation. The increase in other bonuses is mainly due to higher level of short term variable compensation recognized in 2016.
Post-employment benefits
Defined benefit pension plan
Colombia
Under Colombian law, employee pension obligations are managed as a defined contribution plan since 1990. The Bank’s legal retirement benefit obligation as of December 31, 2016 and 2015 relates to retired employees who rendered services to the Bank before the current regulations took effect. Under this unfunded plan, benefits are based on length of service and level of compensation. As of December 2016, 705 participants were covered by this plan, and as of December 2015, 731 participants.
For purposes of the projected assessment of the pension plan obligation, in the absence of a deep market of high quality corporate debt, the sovereign bond curve of the Colombian Government is used, with maturity similar to the residual life of the obligation of the projected benefit. The net cost of pensions is accounted for in the statement of income as “salaries and employee benefits”, and includes the interest costs and cost of current service.
| Unfunded defined benefit pension plan of the Parent Company | 2016 | 2015 |
| In millions of COP | ||
| Present value of the obligation as of January 1 | 120,543 | 126,379 |
| Interest cost | 8,998 | 5,886 |
| Benefits paid | (11,114) | (9,263) |
| Net actuarial (gain) / loss due to changes in demographic assumptions | 514 | (2,459) |
| Net actuarial (gain) / loss due to plan experience | 4,341 | - |
| Defined obligation, unfunded as of December 31 | 123,282 | 120,543 |
| F-103 |
Panama
The pension plan for Banistmo and its subsidiaries provides defined benefits based on average salary paid during the most recent 120 months before retirement and years of service of certain employees entitled to receive the benefits. The pension benefit vests after 10 years of service. As of December 31, 2016 and 2015, there were 64 participants covered by the Plan (2 active participants, 31 participants with deferred benefits and 31 participants receiving benefits), and 67 participants respectively:
| Unfunded defined benefit pension plan of Banistmo | 2016 | 2015 |
| In millions of COP | ||
| Present value of the obligation as of January 1 | 6,688 | 5,090 |
| Current service cost | - | 1 |
| Interest cost | 230 | 213 |
| Actuarial (gain)/loss - experience | 446 | 121 |
| Actuarial (gain)/loss - financial assumptions | 190 | - |
| Benefits paid from plan assets | (584) | (346) |
| Foreign currency translation effect | (321) | 1,609 |
| Defined obligation, unfunded as of December 31 | 6,649 | 6,688 |
Severance obligation
Colombia
Under Colombian labor regulations, employees hired before 1990 are entitled to receive one month’s salary for each year of service. This benefit accumulates and is paid to the employees upon their termination or retirement from the Bank, calculated based on the employees’ last salary base; however, employees may request advances against this benefit at any time. In 1990, the Colombian government revised its labor regulations for new employees to permit companies, subject to the approval of the employees, to transfer this severance obligation annually to private pension funds (this scheme of employee benefits is known as the current severance obligation).. The Bank’s severance obligations relate to employees hired before 1990.
As of December 2016 and 2015, 725 and 828 participants respectively, were covered by this plan.
The balances recognized in the statement of financial position are listed below:
| Defined benefit severance obligation plan | 2016 | 2015 |
| In millions of COP | ||
| Present value of the obligation as of January 1 | 52,209 | 4,998 |
| Current cost of service | 2,144 | 3,172 |
| Interest cost | 4,020 | 9,164 |
| Benefits paid | (10,233) | (10,512) |
| Net actuarial (gain) / loss due to assumption changes and plan experience (1) | 3,149 | 45,387 |
| Defined obligation, unfunded as of December 31 | 51,289 | 52,209 |
| Current severance regimen | 104,352 | 69,689 |
| Total | 155,641 | 121,898 |
| (1) | The amount recognized in 2015 in the line ‘net actuarial (gain) / loss due to assumption changes’ includes the accumulated adjustment related to actuarial modification in the methodology applied to advances in the severance plan, which was made by the Bank from December 31, 2015 onwards, and was considered by the management as a change in an accounting estimate. |
| F-104 |
Retirement Pension Premium Plan and Senior Management Pension Plan Premium
Colombia
Under Colombian labor regulations, employers and employees are entitled to negotiate compensation, other than the retirement benefit prescribed by law, by means of private agreements. The Bank’s employees participating in defined contribution plans are entitled to receive, on their retirement date, a one-time payment at the time based on the salary of the employee at their retirement date.
On the other hand, the Bank has established a retirement benefit plan for its senior management executives. Under this plan, the executives are entitled to receive a one-off payment on their retirement date based on the number of years of service to the organization.
El Salvador
By means of Decree 592 of 2013, under Salvadorian labor regulations, employees are entitled to receive 15 days of salary for each year of service. This benefit is payable upon retirement, resignation, unjustified dismissal, death and disability. As of December 31, 2016 and 2015, there were 2,899 and 2,872 participants respectively, covered by the plan.
Additionally, employees of Banco Agrícola and its subsidiaries that were 50 years of age (45 for females) as of March 31, 2005 are entitled through a private agreement to receive one month of salary per year of service, net of the benefit established under Legislative Decree 592 in case of termination due to voluntary retirement. As of December 31, 2016 and 2015, there were 1 and 46 participants respectively, covered by the plan.
Guatemala
Grupo Agromercantil Holding has established a retirement pension plan for its employees. Under this plan, the employees are entitled to receive a lifetime payment of 50% of their monthly nominal wage, if they are 70 years old and have 30 years of service, or if they are 65 years old and have 40 years of service. On the other hand, the employees are entitled to receive a lifetime payment of 70% of their monthly nominal wage, if they are 70 years old and have 40 years of service, or they are 65 years old and have 45 years of service.
The annual change of the present value of the obligations of defined benefit plans is as follows:
| Retirement Pension Premium Plan and Senior Management Pension Plan Premium | 2016 | 2015 |
| In millions of COP | ||
| Present value of the obligation as of January 1 | 95,331 | 77,790 |
| Current service cost | 10,597 | 11,763 |
| Interest cost | 7,211 | 4,854 |
| Benefits paid | (14,933) | (1,611) |
| Net actuarial (gain) / loss due to assumption changes and plan experience | 7,093 | 1,996 |
| Foreign currency translation effect | (141) | 539 |
| Defined obligation, unfunded at the end of the year | 105,158 | 95,331 |
| F-105 |
Other long term benefits
In addition to legal benefits and the aforementioned post-employment benfits, the Bank grants to its employees other benefits based on the employees’ seniority:
| Other long term benefits | 2016 | 2015 |
| In millions of COP | ||
| Present value of the obligation as of January 1 | 271,651 | 210,301 |
| Current service cost | 29,190 | 30,826 |
| Interest cost | 18,940 | 11,970 |
| Benefits paid | (39,092) | (23,732) |
| Unfunded benefit obligation assumed for Grupo Agromercantil at December 30, 2015 (1) | - | 9,250 |
| Net actuarial (gain) / loss due to assumption changes and plan experience(1) | 84,247 | 36,959 |
| Liabilities relating to assets held for sale (2) | - | (8,312) |
| Foreign currency translation effect | (512) | 4,389 |
| Defined obligation, unfunded at the end of the year | 364,424 | 271,651 |
| (1) | As a result of the acquisition of control of Grupo Agromercantil Holding in 2015, the Bank assumed the obligations related to the termination indemnity plan of Banco Agromercantil de Guatemala, Consejería, Mantenimiento y Mensajería, Seguros Agromercantil (subsidiaries of Grupo Agromercantil Holding). See Note 8 Goodwill and intangible assets, net. |
| (2) | See Note 30. Discontinued operations |
Plan Assets - Panama
The Bank, through its subsidiary Banistmo, has established a plan with assets to secure benefits promised by Banistmo to the employees entitled to receive the Pension Plan under the terms described above and to comply with Panama labor code, which specify the terms for securing the payments to be made in the event of an employee’s termination (voluntary or involuntary) or upon retirement (termination indemnity plan).
Banistmo’s pension and post-retirement plan assets consider investments in fixed-term deposits and cash and due from banks, in order to reduce the investment risk. The plan assets are managed by a trustee (third party). Likewise, the assets allocation is periodically reviewed by Banistmo and, when necessary, adjusted according to the investment strategy. The plan's investment assets are measured at fair value using significant, unobservable market data and, therefore, are classified as Level 3.
The expected return on assets assumption represents the long term rate of return based on analysis of historical returns, historical asset class volatilities and the fund’s past experience.
The components of the periodic net cost of the plans previously mentioned and the total of charges (credits) recognized in the consolidated statement of income are as follows:
| Banistmo asset plan | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Employee pension plan | 5,565 | 6,087 |
| Total | 5,565 | 6,087 |
| F-106 |
The following table details the change in plan assets:
| 2016 | 2015 | |
| In millions of COP | ||
| Fair value of assets as of January 1 | 6,087 | 4,030 |
| Interest income on plan assets | 209 | 224 |
| Return on plan assets greater/(less) than discount rate | 130 | (133) |
| Plan participants’ contributions | - | 999 |
| Benefits paid | (584) | (346) |
| Foreign currency translation effect | (277) | 1,313 |
| Fair value assets at the end of the year | 5,565 | 6,087 |
Defined contribution plans
The expense recognized in the line “Salaries and employee benefits” of the consolidated statement of income for defined contribution plans, for current severance regimen and pension benefits, is as follows:
| Defined contribution plans | 2016 | 2015 | |
| In millions of COP | |||
| Pension | 159,525 | 140,457 | |
| Current severance regimen | 74,816 | 73,560 | |
| Total | 234,341 | 214,017 | |
The economic assumptions used in the determination of the present value of the defined benefit plans, in nominal terms, are as follows:
Colombia
| Main projected assumptions | December 31, 2016 | December 31, 2015 |
| Discount rate | 6.90% | 7.90% |
| Rate of wage increase | 9.00% | 6.30% |
| Projected inflation | 6.50% | 4.30% |
Bancolombia Panama
| Main projected assumptions | December 31, 2016 | December 31, 2015 |
| Discount rate | 3.10% | 3.65% |
| Rate of wage increase | 3.00% | 3.00% |
| Projected inflation | 2.00% | 2.00% |
Banistmo
| Main projected assumptions | December 31, 2016 | December 31, 2015 |
| Discount rate | 3.10% | 3.65% |
| Expected long-term rate of return on plan assets | 6.00% | 0.70% |
| Rate of wage increase | 3.00% | 4.50% |
| F-107 |
El Salvador
| Main projected assumptions | December 31, 2016 | December 31, 2015 |
| Discount rate | 5.10% | 5.60% |
| Rate of wage increase | 3.00% | 3.50% |
| Projected inflation | 2.00% | 2.50% |
Guatemala
| Main projected assumptions | December 31, 2016 | December 31, 2015 |
| Discount rate | 8.20% | 8.47% |
| Rate of wage increase | 5.03% | 5.03% |
| Projected inflation | 4.00% | 4.00% |
In 2016, the assumption of mortality used in the preparation of the assessment of the estimated liabilities is based on tables RP-2000, CSO-80 and RV-08, which reflect average ages of mortality from 32-75 years. The rate used to discount the obligation of the defined benefit plan to reflect the duration of the labor liabilities as of December 2016 corresponds to the yield of sovereign bonds of each country where the plan is established, either Colombia, Panama, Guatemala and El Salvador, as applicable, since the market transactions of these countries involving corporate bonds of high quality have no high levels of activity. The assumption of the rate of inflation is based on the long term projection of the Central Bank of Colombia, Panama, Guatemala and El Salvador.
The nature of the risks related to the obligations aforementioned are summarized below:
| Investment risk | The present value of the obligation for the defined benefits plan is calculated using a discount rate determined with reference to high quality sovereign yields of each country. Currently, the plan includes investment in financial instruments that are not vulnerable to market risks |
| Interest rate risks | A reduction of the bond interest rates will increase the obligation of the plan |
| Longevity risk | The present value of the obligation of the defined benefit plan is calculated with reference to the highest estimate of the mortality of participants during their time of employment. An increase in the life expectancy of the participants will increase the plan obligation |
| Salary risk | The present value of the obligation of the benefit plan is calculated with reference to the future salaries of the participants. As such, an increase in the participants' wages will increase the obligation of the plan |
| F-108 |
Estimated payment of future benefits
The payments of benefits, which reflect future service rendered, are considered to be paid as follows:
| Years | Pension Benefits | Other benefits |
| In millions of COP | ||
| 2017 | 13,162 | 24,853 |
| 2018 | 12,460 | 45,286 |
| 2019 | 12,502 | 51,024 |
| 2020 | 12,507 | 51,223 |
| 2021 | 12,439 | 62,840 |
| 2022 to 2026 | 58,598 | 342,478 |
Sensitivity analysis
Defined Benefit Obligations (DBO) was calculated using the Projected Unit Credit method. Obligations and expenses will change in the future as a result of future changes in the methods of projection and assumption, participant information, plan provisions and regulations, or as resulting from future gains and losses.
Pension plan Bancolombia
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 7.40% | 0.50% increase | (4,457) |
| Discount rate | 6.40% | 0.50% decrease | 4,772 |
| Salary increases | 7.00% | 0.50% increase | 5,191 |
| Salary increases | 6.00% | 0.50% decrease | (4,881) |
| Mortality Table | RV-08 ("Rentistas Validos") | One year increase in life expectancy | 4,857 |
Retirement Pension Premium Plan
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 7.40% | 0.50% increase | (4,201) |
| Discount rate | 6.40% | 0.50% decrease | 4,403 |
| Salary increases | 9.50% | 0.50% increase | 3,393 |
| Salary increases | 8.50% | 0.50% decrease | (3,111) |
Severance obligation
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 7.40% | 0.50% increase | (1,371) |
| Discount rate | 6.40% | 0.50% decrease | 1,431 |
| Salary increases | 9.50% | 0.50% increase | 3,060 |
| Salary increases | 8.50% | 0.50% decrease | (2,960) |
| F-109 |
Senior Management Pension Plan Premium
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 7.40% | 0.50% increase | (841) |
| Discount rate | 6.40% | 0.50% decrease | 889 |
| Salary increases | 9.50% | 0.50% increase | 1,336 |
| Salary increases | 8.50% | 0.50% decrease | (1,269) |
Pension Plan Banistmo
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 3.60% | 0.50% increase | (331) |
| Discount rate | 2.60% | 0.50% decrease | 360 |
| Salary increases | 3.50% | 0.50% increase | 3 |
| Salary increases | 2.50% | 0.50% decrease | (3) |
| Mortality Table | RP-2000 | One year increase in life expectancy | 201 |
Other long term benefits
Colombia
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 7.40% | 0.50% increase | (9,996) |
| Discount rate | 6.40% | 0.50% decrease | 10,663 |
| Salary increases | 9.50% | 0.50% increase | 12,194 |
| Salary increases | 8.50% | 0.50% decrease | (11,514) |
El Salvador
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 4.60% | 0.50% increase | (556) |
| Discount rate | 5.60% | 0.50% decrease | 601 |
| Salary increases | 3.50% | 0.50% increase | 114 |
| Salary increases | 2.50% | 0.50% decrease | (150) |
| Mortality Table | RP-2000 (M&F) | One year increase in life expectancy | 4 |
Guatemala
| Assumption | Value | (Increase/Decrease) | Effect on DBO |
| In millions of COP | |||
| Discount rate | 8.70% | 0.50% increase | (1,586) |
| Discount rate | 7.70% | 0.50% decrease | 1,822 |
| Salary increases | 5.50% | 0.50% increase | 1,289 |
| Salary increases | 4.50% | 0.50% decrease | (1,166) |
| Mortality Table | RP-2000 (M&F) | One year increase in life expectancy | 520 |
| F-110 |
NOTE 19. OTHER LIABILITIES
Other liabilities consist of the following:
| Other liabilities | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Payables | 1,597,923 | 1,160,760 |
| Suppliers | 1,289,495 | 891,000 |
| Advances (1) | 576,170 | 617,989 |
| Security contributions | 329,098 | 324,869 |
| Salaries and other labor obligations | 322,010 | 357,023 |
| Employee benefits and bonuses(2) | 277,635 | 158,975 |
| Dividends | 228,004 | 213,546 |
| Deferred interests | 149,360 | 201,897 |
| Provisions (3) | 107,813 | 72,203 |
| Other | 410,647 | 283,627 |
| Total | 5,288,155 | 4,281,889 |
| (1) | For the year 2016 and 2015 advance includes the amount received by the Bank from its customers as advances in leasing operations and loans amounting to COP 274,394 and COP 235,181, respectively, gain on derivatives first day valuation amounting to COP 51,271 and COP 84,259, respectively, balances related to insurance operations amounting to COP 47,549 and COP 50,907, respectively, balances held by court order amounting to COP 52,205 and COP 104,037, respectively and excess cash amounting to COP 12,584 and COP 9,621, respectively. Additionally, in 2016 includes balances of credit cards charges pending to be applied amounting to COP 12,580. |
| (2) | For further information related to other employee benefit plans, see Note 18 "Employees benefit plans". |
| (3) | See Note 20 "Provisions and contingents liabilities". |
NOTE 20. PROVISIONS AND CONTINGENT LIABILITIES
| 20.1 | Provisions |
The following tables show the detail of the provisions:
As of December 31, 2016
| Judicial proceedings |
Administrative proceedings |
Financial guarantees |
Total | |
| In millions of COP | ||||
| Initial balance at January 1, 2016 | 19,147 | 336 | 52,720 | 72,203 |
| Additions recognized in the year | 17,000 | 1,032 | 71,564 | 89,596 |
| Provisions used during the period | (3,444) | (56) | - | (3,500) |
| Provisions reversed during the period | (3,512) | - | (46,918) | (50,430) |
| Foreign currency translation adjustment | (243) | - | - | (243) |
| Effect of discounted cash flows | 187 | - | - | 187 |
| Final balance at December 31, 2016 | 29,135 | 1,312 | 77,366 | 107,813 |
| F-111 |
As of December 31, 2015
| Judicial proceedings |
Administrative proceedings |
Financial guarantees |
Total | |
| In millions of COP | ||||
| Initial balance at January 1, 2015 | 21,998 | 63,480 | 5,029 | 90,507 |
| Additions recognized in the period | 10,948 | 26,376 | 113,843 | 151,167 |
| Provisions used during the period | (4,320) | (59,809) | - | (64,129) |
| Provisions reversed during the period | (10,524) | (29,721) | (66,152) | (106,397) |
| Liabilities relating to assets held for sale | (208) | - | - | (208) |
| Acquisition of Grupo Agromercantil Holding | - | 10 | - | 10 |
| Foreign currency translation adjustment | 963 | - | - | 963 |
| Effect of discounted cash flows | 290 | - | - | 290 |
| Final balance at December 31, 2015 | 19,147 | 336 | 52,720 | 72,203 |
Compañía de Financiamiento Tuya S.A. recorded as discontinued operations as of December 31, 2015, had a legal proceeding provision amounting to COP 112. For further information, see Note 30 Discontinued operations.
Judicial proceedings
The judicial provisions refer to pending legal proceedings on employment matters, ordinary lawsuits, class actions suits, civil actions within criminal prosecutions and executive proceedings against the Bank. In the opinion of management, after receiving pertinent legal advice, the payments that will be made by these processes will not generate significant losses in addition to the provisions recognized as of December 31, 2016 and 2015, the Bank does not expect to obtain any kind of reimbursement from judicial proceedings raised against it and, therefore, has not recognized any assets for that purpose.
Administrative proceedings
The constituted provisions correspond to proceedings related to equity tax for the year 2011.
Financial guarantees
In order to meet the needs of its customers, the Bank issues financial standby letters of credit and bank guarantees. These are commitments issued by the Bank to guarantee the performance of a customer to a third party and are mainly issued to guarantee agreements established between parties from the energy sector, private sector and public procurement contracts. The Bank expects most of those guarantees provided to expire before they are used.
The events or circumstances that would require the Bank to perform under a guarantee are determined by the type of guarantee:
Guarantees for the energy sector
The Bank shall be responsible before the guarantee’s beneficiary in the following situations:
• Breach of the contract signed by the guaranteed entity.
• Lack of energy supply due to a low availability from the generating company (the guaranteed entity).
| F-112 |
Guarantees for public procurement
The amount guaranteed should be reimbursed by the Bank to the beneficiary of the guarantee which is a Government entity, in case the contractor breaches the agreed terms or its legal obligations.
Commitment issued by the Bank to guarantee the performance of a customer from the private sector
The amount guaranteed should be reimbursed to the beneficiary of the guarantee in case of breach of agreed covenants by the customer guaranteed or upon its financial insolvency.
As of December 31, 2016
| Maturity | Financial Guarantees |
| In millions of COP | |
| Guarantees under 1 month | 635,033 |
| Guarantees greater than 1 month and up to 3 months | 959,385 |
| Guarantees greater than 3 months and up to 1 year | 3,007,832 |
| Guarantees greater than 1 year and up to 3 years | 1,228,289 |
| Guarantees greater than 3 year and up to 5 years | 367,298 |
| Guarantees greater than 5 years | 146,167 |
| Total | 6,344,004 |
As of December 31, 2015
| Maturity | Financial Guarantees |
| In millions of COP | |
| Guarantees under 1 month | 572,363 |
| Guarantees greater than 1 month and up to 3 months | 833,635 |
| Guarantees greater than 3 months and up to 1 year | 3,398,029 |
| Guarantees greater than 1 year and up to 3 years | 1,430,371 |
| Guarantees greater than 3 year and up to 5 years | 548,991 |
| Guarantees greater than 5 years | 340,132 |
| Total | 7,123,521 |
The total amount outstanding is the maximum potential payments which represent a “worse-case scenario”, and do not reflect expected results.
| 20.2 | Contingent liabilities |
The contingencies higher than USD 5,000 against the Bank, with significant importance to be disclose in notes to the financial statements as of December 31, 2016 are presented below:
| F-113 |
Bancolombia
Constitutional public interest action claim by Carlos Julio Aguilar and others
This constitutional public interest action was filed by the plaintiff arguing that the restructuring of financial obligations by Departamento del Valle and the performance plan executed, allegedly violates the collective rights to public administration’s morality and the protection of the public funds of Departamento del Valle.
This process merged to the constitutional public interest action filed by Carlos Aponte and, as of December 31, 2016, is in its taking of evidence stage.
Banitsmo
Ordinary claim filed by Deniss Rafael Perez Perozo and others.
Promotora Terramar received USD 299 by means of Visa Gift Cards issued by a U.S Bank, as partial payment for two apartments in Panama City.
The Credit Card Security and Fraud Prevention department of HSBC bank detected an irregular activity performed by Promotora Terramar. Thus, as permitted by the Business Establishments Affiliate Agreement, HSBC decided to hold back USD 286 from Promotora Terramar´s accounts; nevertheless, before any further investigations took place the money was refunded.
The plaintiff claims a compensation payment of USD 5,000,000. As of December 31, 2016, the process is pending as the judge reviewing the case was recused.
Ordinary claim filed by Menelao Mora and Said Díaz against Banistmo
The plaintiff claims the payment of costs and damages resulting from a criminal proceeding filed by Banistmo against Menelao Mora for alleged criminal acts (issuance of credit lines to enterprises where they figured as legal representative). The claim seeks USD 20,000. As of December 31, 2016 the claim is pending of admission and taking of evidence stage.
Banco Agromercantil
Superintendency of Tax Administration
The Superintendency of Tax Administration of Guatemala filed a claim against the Bank in order to obtain an adjustment with respect to the withholding tax for the year 2014. The claim seeks USD 13,000. The bank was notified of the confirmation of the adjustments requested by the Superintendency. The bank filed an appeal action against the Superintendency´s decision.
| F-114 |
Arrendadora Financiera S.A. Arfinsa filial de Banco Agrícola
Corporación de Alimentos S.A. de CV
The plaintiffs claim damages derived from funds wrongfully delivered to third parties that were not entitled to receiving said funds. The claim seeks USD 6,000. As of December 31, 2016 the process is in its taking of evidence stage.
NOTE 21. CAPITAL
The subscribed and paid-in capital is the following:
| December 31, 2016 | December 31, 2015 | |
| Authorized shares | 1,400,000,000 | 1,400,000,000 |
| Subscribed and paid-in shares: | ||
| Common shares with a nominal value of COP 500 pesos | 509,704,584 | 509,704,584 |
| Preferred shares with dividend without voting rights with nominal value of COP 500 pesos | 452,122,416 | 452,122,416 |
| Total shares | 961,827,000 | 961,827,000 |
| Subscribed and paid capital (nominal value) | 480,914 | 480,914 |
Dividends declared
The declaration, amount and payment of dividends are based on Bancolombia S.A’s unconsolidated net income. Dividends must be approved at the ordinary annual shareholders’ meeting upon the recommendation of the Board of Directors. Under the Colombian Commercial Code, after payment of income taxes and appropriation of legal and other reserves, and after setting off losses from prior fiscal years, Bancolombia must distribute to its stockholders at least 50% of its annual net income or 70% of its annual net income if the total amount of reserves exceeds its outstanding capital, unless such minimum percentages are waived by an affirmative vote of the holders of 78% of the shares present and entitled to vote at the stockholders’ meeting. Such dividend distribution must be made to all stockholders, in cash or in issued stock of Bancolombia, as may be determined by the stockholders, and within a year from the date of the ordinary annual stockholders’ meeting in which the dividend was declared.
The payment of dividends must be made in cash during the next year since the date when the Annual Meeting takes place and for all the stockholder’s. If the payment is made in the Bank’s own equity securities instead of cash, that situation has to be approved by the 80% of the subscribed common shareholders and the 80% of the subscribed preferred shares.
The annual net income of Bancolombia must be applied as follows: (i) first, an amount equal to 10% of Bancolombia’s net income to a legal reserve until such reserve is equal to at least 50% of the Bank’s paid-in capital; (ii) second, to the payment of the minimum dividend on the preferred shares; and (iii) third, as may be determined in the ordinary annual stockholders’ meeting by the vote of the holders of a majority of the shares entitled to vote.
| F-115 |
| Dividends declared with respect to net income earned in: | Cash dividends per share (Stated in COP) |
| 2016 | 950 |
| 2015 | 888 |
| 2014 | 830 |
| 2013 | 776 |
| 2012 | 754 |
| 2011 | 708 |
Preferred shares
Holders of preferred shares are entitled to receive dividends based on the net income of the preceding fiscal year, after deducting losses affecting the capital and once the amount that shall be legally set apart for the legal reserve has been deducted, but before creating or accruing for any other reserve, of a minimum preferred dividend equal to one per cent (1%) yearly of the subscription price of the preferred share, provided this dividend is higher than the dividend assigned to common shares. If this is not the case, the dividend shall be increased to an amount that is equal to the per share dividend on the common shares. The dividend received by holders of common shares may not be higher than the dividend paid to preferred shares.
Payment of the preferred dividend shall be made at the time and in the manner established in the general shareholders’ meeting and with the priority indicated by Colombian law.
Any stock dividend payable in common shares requires the approval of 80% or more of the shares present at a shareholders’ meeting, which will include 80% or more of the outstanding preferred shares. In the event that none of the holders of preferred shares is present at such meeting, a stock dividend may only be paid to the holders of common shares that approve such a payment.
NOTE 22. APPROPIATED RESERVES
As of December 31, 2016 and 2015 the appropriated retained earnings consist of the following:
| Concept | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Appropriation of net income(1) | 6,871,092 | 5,331,624 |
| For Fiscal provisions (2) | 551,341 | 427,265 |
| Others | 49,976 | 118,490 |
| Total Appropiated reserves | 7,472,409 | 5,877,379 |
| (1) | The legal reserve fulfills two objetives: to increase and maintain the company's capital and to absorb economic losses. Based on the aforementioned, this amount shall not be distributed in dividends to the stockholders. |
| (2) | Pusuant to Decree 2336 of 1995, a reserve must be established for profits related to the valuation of investments held for trading purposes by the Bank. |
| F-116 |
NOTE 23. UNCONSOLIDATED STRUCTURED ENTITIES
Nature and risks associated with the Bank’s interests in unconsolidated structured entities
The term "unconsolidated structured entities" refers to all structured entities that are not controlled by the Bank. The Bank manages transactions with unconsolidated structured entities in the normal course of business to facilitate customer transactions and for specific investment opportunities.
The table below shows the total assets of unconsolidated structured entities in which the Bank had an interest at the reporting date and its maximum exposure to loss in relation to those interests.
As of December 31, 2016
| Securitizations | The Bank’s managed funds | Total | |
| In millions of COP | |||
| Total assets of the entities | 1,621,035 | 111,580,219 | 113,201,254 |
| The Bank’s interest-assets | |||
| Investments at fair value through profit or loss | 295,536 | - | 295,536 |
|
Investments at fair value through other comprehensive income Loans and advances to customers |
196,131 - |
- 3,125,459 |
196,131 3,125,459 |
| Total assets in relation to The Bank’s interests in the unconsolidated structured entities | 491,667 | 3,125,459 | 3,617,126 |
| The Bank’s maximum exposure | 491,667 | 3,125,459 | 3,617,126 |
As of December 31, 2015
| Securitizations | The Bank’s managed funds | Total | |
| In millions of COP | |||
| Total assets of the entities | 1,879,500 | 97,929,459 | 99,808,959 |
| The Bank’s interest-assets | |||
| Investments at fair value through profit or loss | 475,723 | - | 475,723 |
| Investments at fair value through other comprehensive income | 170,861 | - | 170,861 |
| Loans and advances to customers | - | 2,130,965 | 2,130,965 |
| Total assets in relation to the Bank’s interests in the unconsolidated structured entities | 646,584 | 2,130,965 | 2,777,549 |
| The Bank’s maximum exposure | 646,584 | 2,130,965 | 2,777,549 |
The Bank invests in asset-backed securities issued by securitization entities for which underlying assets are mortgages originated by financial institutions. The Bank does not have a significant exposure to sub-prime securities. The asset-backed securities are denominated in local market TIPS and accounted for as investment at fair value through profit or loss. These asset-backed securities have different maturities and are generally classified by credit ratings. The Bank does not expect significant changes in those ratings. Also, the Bank retain beneficial interests in the form of servicing fees on the securitized mortgages.
| F-117 |
Revenues generated by the Bank´s asset management business, are derived from the following type of business lines: related trusts, mutual funds sold to individuals, corporate trusts, escrow accounts, private equity funds, and delegated tailor-made mandates from third parties. Generally, the revenues correspond to the fees received from the management of resources that are invested in several instruments, management of properties and premises related to real estate projects in progress.
Likewise, fees from management of resources pledged by clients in order to guarantee commitments and obligations with third parties. Finally, fees from management of resources of government agencies and entities.
On the other hand, there is no an additional exposure to loss, such as funding commitments with regards to the Bank’s involvement with those entities.
NOTE 24. OPERATING INCOME AND OPERATING EXPENSES
24.1 Interest and valuation on investment
The following table sets forth the detail of interest and valuation on financial asset instruments for the years ended December 31, 2016, 2015 and 2014:
| Interest and valuation on investment | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Debt investments, net | 163,311 | 71,091 | 28,470 |
| Net gains from investment activities at fair value through income statement | |||
| Debt investments | 579,403 | 294,979 | 434,586 |
| Derivatives | (4,750) | 31,835 | (91,963) |
| Spot transactions | (22,831) | (48,961) | 35,990 |
| Repos | (7,638) | (50,081) | 164,198 |
| Others | - | 2,977 | - |
| Total net gains from investment activities at fair value through profit and loss | 544,184 | 230,749 | 542,811 |
| Interest and valuation on investment | 707,495 | 301,840 | 571,281 |
| F-118 |
24.2. Interest expenses
The following table sets forth the detail of interest on financial liability instruments for the years ended December 31, 2016, 2015 and 2014:
| Interest expenses | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Deposits | (3,878,528) | (2,415,187) | (1,881,821) |
| Debt securities in issue | (1,335,192) | (1,057,748) | (780,429) |
| Financial borrowings | (723,385) | (454,326) | (384,313) |
| Preferred shares | (58,714) | (58,714) | (53,155) |
| Borrowings from other financial institutions | (6,345) | (6,836) | (3,719) |
| Other interest | (50,936) | (45,130) | (61,174) |
| Interest expenses | (6,053,100) | (4,037,941) | (3,164,611) |
Net interest income includes interest earned on loans, ‘repos’ and investments less interest beared on deposits by customers, debt securities in issued, borrowing from other financial institutions and ‘repos’. At December 31, 2016, 2015 and 2014, net interest income amounted to COP 10,202,433, COP 7,723,704 and COP 6,461,751, respectively.
24.3 Fees and commissions
The following table sets forth the detail of fees and commissions, for the years ended December 31, 2016, 2015 and 2014:
Fees and commissions:
| Fees and commissions income | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Credit and debit card fees | 1,092,919 | 1,015,253 | 801,403 |
| Banking services | 816,839 | 630,616 | 653,513 |
| Bancassurance | 336,692 | 260,224 | 212,223 |
| Trust | 294,499 | 265,215 | 203,608 |
| Payments and Collections | 229,940 | 203,772 | 182,669 |
| Acceptances, Guarantees and Standby letters of credits | 55,724 | 44,539 | 51,923 |
| Checks | 51,974 | 55,861 | 60,998 |
| Brokerage | 23,431 | 23,453 | 23,784 |
| Others | 383,217 | 291,624 | 305,296 |
| Fees and commissions income | 3,285,235 | 2,790,557 | 2,495,417 |
For the years ended December 31, 2015 and 2014, Compañía de Financiamiento Tuya, as a discontinued operation, had fees and commissions income amounting to COP 388,306 and 341,601, respectively. For further information see Note 30. Discontinued operations.
| F-119 |
Fees and commissions expenses:
| Fees and commissions expenses | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Banking services | (354,640) | (298,415) | (245,581) |
| Call Center and Website | (345,336) | (254,769) | (230,501) |
| Credit and debit card fees | (54,126) | (85,798) | (95,172) |
| Others | (212,169) | (158,531) | (98,453) |
| Fees and commissions expenses | (966,271) | (797,513) | (669,707) |
| Total fees and commissions income, net | 2,318,964 | 1,993,044 | 1,825,710 |
As of December 31, 2015 and 2014, Compañía de Financiamiento Tuya, as a discontinued operation, had a balance of fees and commissions expenses amounting to COP 152,500 and COP 69,397, respectively. For further information see Note 30. Discontinued operations.
24.4 Other operating income
The following table sets forth the detail of other operating income net for the years ended December 31, 2016, 2015 and 2014:
| Other operating income | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Operating leases | 493,486 | 448,754 | 355,542 |
| Services | 167,914 | 165,737 | 91,869 |
| Derivatives foreign exchange contracts | 164,172 | 527,137 | (150,451) |
| Investment property valuation | 149,299 | 150,176 | 56,235 |
| Net foreign exchange | 132,292 | (157,933) | 331,786 |
| Gains on sale of assets | 60,282 | 8,408 | 31,913 |
| Insurance (1) | 49,679 | - | - |
| Penalties for failure to contract | 14,634 | 14,963 | 9,164 |
| Other reversals | 6,242 | 8,110 | 10,765 |
| Hedging | (5,985) | (20,509) | (22,923) |
| Others | 255,108 | 227,859 | 422,643 |
| Total Other operating income | 1,487,123 | 1,372,702 | 1,136,543 |
| (1) | The increase in the line corresponds to Seguros Agromercantil’s operating income. This company was acquired by the Bank on December 31, 2015. For further information about the Grupo Agromercantil Holding acquisition see Note 8. Goodwill and Intangible assets, net. |
| F-120 |
NOTE 25. OPERATING EXPENSES
The detail for administrative and general expenses for the years ended December 31, 2016, 2015 and 2014 is as follows:
25.1. Other administrative and general expenses
| Other administrative and general expenses | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Maintenance and repairs | 448,017 | 356,655 | 258,317 |
| Others Fees | 411,521 | 256,852 | 202,262 |
| Insurance | 286,384 | 244,274 | 228,670 |
| Leasing | 246,445 | 218,394 | 175,912 |
| Transport | 154,220 | 138,084 | 130,602 |
| Advertising | 120,046 | 113,821 | 94,433 |
| Public services | 114,840 | 94,295 | 85,900 |
| Data processing | 101,347 | 46,536 | 21,939 |
| Cleaning and security services | 93,336 | 65,867 | 57,716 |
| Frauds and claims | 72,860 | 81,836 | 105,159 |
| communications | 61,943 | 55,003 | 66,051 |
| Useful and stationery | 61,699 | 42,232 | 57,144 |
| Contributions and affiliations | 59,406 | 50,709 | 48,705 |
| Properties improvements and installation | 55,307 | 58,141 | 50,434 |
| Disputes, fines and sanctions | 52,441 | 58,821 | 27,881 |
| Travel expenses | 37,112 | 34,998 | 31,384 |
| Production and supply cards | 29,532 | 15,509 | 20,948 |
| Legal and financial consultants | 29,435 | 18,785 | 17,469 |
| Board of directors and audit fee | 20,926 | 19,223 | 30,338 |
| Real estate management. | 19,262 | 18,428 | 17,477 |
| Donations | 18,338 | 13,031 | 14,708 |
| Storage services | 14,157 | 14,918 | 14,290 |
| Trust | 13,176 | 10,637 | 14,502 |
| Activities Joint Operations | 8,805 | 3,988 | 13,729 |
| Legal expenses | 7,232 | 22,923 | 12,074 |
| Temporary services | 5,897 | 4,078 | 3,326 |
| Public relations | 5,101 | 3,270 | 4,630 |
| Others | 102,549 | 176,290 | 141,375 |
| Total other administrative and general expenses | 2,651,334 | 2,237,598 | 1,947,375 |
| Wealth tax, contributions and other tax burden (1) | 741,184 | 675,387 | 438,711 |
| (1) | See note 11 taxes. |
25.2. Impairment, depreciation and amortization
| Impairment, depreciation and amortization | December 31, 2016 | December 31, 2015 | December 31, 2014 |
| In millions of COP | |||
| Impairment of other assets (1) | 38,775 | 16,797 | 27,739 |
| Depreciation of premises and equipment | 329,258 | 306,689 | 253,703 |
| Amortization of intangible assets | 149,776 | 153,799 | 178,261 |
| Total impairment, depreciation and amortization | 517,809 | 477,285 | 459,703 |
| F-121 |
(1)The detail of the impairment of other assets net by operating segments is presented in the table below:
| December 31, 2016 | December 31, 2015 | December 31, 2014 | |
| In millions of COP | |||
| Banking El Salvador | 19,705 | (3,253) | 24,560 |
| Banking Colombia | 15,078 | 22,255 | - |
| Banking Guatemala | 2,118 | - | - |
| Banking Panamá | 1,934 | (2,303) | - |
| Off Shore | (60) | - | - |
| All other segments | - | 98 | 3,179 |
| Total | 38,775 | 16,797 | 27,739 |
NOTE 26. EARNING PER SHARE (‘EPS’)
Basic EPS is calculated by reducing the income from continuing operations by the amount of dividends declared in the current period for each class of stock and by the contractual amount of dividends that must be paid for the current period, considering the allocation of remaining earnings to common stock and participating securities to the extent that each security may share in earnings as if all of the earnings for the period had been distributed. EPS is determined by dividing the total earnings allocated to each security by the weighted average number of common shares outstanding.
Diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. The Bank has no dilutive potential common shares as of December 31, 2016, 2015 and 2014.
The following table summarizes information related to the computation of basic EPS for the years ended December 31, 2016, 2015 and 2014 (in millions of pesos, except per share data):
|
December 31, 2016 |
December 31, 2015 |
December 31, 2014 | ||
| Income from continuing operations before attribution of non-controlling interests | 2,791,450 | 2,586,385 | 2,366,918 | |
| Less: Non-controlling interests from continuing operations | 89,619 | 90,008 | 42,699 | |
| Net income from continuing operations | 2,701,831 | 2,496,377 | 2,324,219 | |
| Income from operations and disposals of discontinued operations, net of taxes | 163,497 | 22,513 | 62,867 | |
| Less: Non-controlling interests from discontinuing operations | - | - | - | |
| Net income attributable to the controlling interest | 2,865,328 | 2,518,890 | 2,387,086 | |
| Less: Preferred dividends declared | 342,825 | 316,548 | 282,365 | |
| Less: Allocation of undistributed earnings to preferred stockholders | 972,955 | 836,383 | 784,306 | |
| Continuing operations | 896,100 | 825,800 | 755,458 | |
| Discontinued operations | 123,680 | 10,583 | 28,848 | |
| Net income allocated to common shareholders for basic and diluted EPS | 1,549,548 | 1,365,959 | 1,320,415 | |
| Weighted average number of common shares outstanding used in basic EPS calculation (in millions) | 510 | 510 | 510 | |
| Basic and Diluted earnings per share to common shareholders | 3,040 | 2,680 | 2,591 | |
| From continuing operations | 2,870 | 2,656 | 2,524 | |
| From discontinuing operations | 170 | 24 | 67 | |
| F-122 |
NOTE 27. RELATED PARTY TRANSACTIONS
Framework under IFRS
IAS 24 Related Party Disclosures requires that an entity discloses:
| (a) | Transactions with its related parties; and |
| (b) | Relationships between a parent and its subsidiaries irrespective of whether there have been transactions between them. |
Under IAS 24, an entity must disclose transactions with its related parties, outstanding balances, including commitments, recognized in the consolidated and separate financial statements of a parent or investors with joint control of, or significant influence over, an investee presented in accordance with IFRS 10.
Under this standard parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions, or one other party controls both. This definition applies to the Bank in the cases below:
| · | Stockholders with ownership interest higher than 20% of the Bank’s capital: |
| − | Grupo de Inversiones Suramericana S.A. |
| − | Fondo Bancolombia ADR Program. |
| · | Members of Board of Directors and Senior Management, understood as the president and corporate Vice-presidents, as well as their close relatives and the companies in which they have a participation of 50% or more. |
| · | Associates and joint ventures for which the Bank provides commercial banking services and deposits. For these purposes all companies that have been included companies in which the Bank has significant influence (in all cases, the Bank has between 20% and 50% share of capital). |
In addition, and in accordance with External Circular 067 of 2001 issued by the Financial Superintendence of Colombia, the Bank should disclose as transactions with related parties, the transactions with shareholders that have interest equal or higher than 10% of the Bank’s capital.
Between the Parent Company and its related parties, during the periods ending at December 31, 2016 and December 31, 2015, there were no:
| − | Loans that for its contractual terms do not reprent a lending transaction. |
| − | Loans with interest rates different to those that are ordinarily paid or charged to third parties in similar conditions of term, risk, etc. |
| F-123 |
As of December 31, 2016
| Stockholders with an interest equal or higher than 10% of the Bank’s capital |
Directors
and senior management |
Associates
and joint venture (1) | |
| In millions of COP | |||
| Assets | |||
| Investments | - | - | 1,688,543 |
| Loans and advances to customers and financial entities, net | 246,245 | 15,709 | 36,262 |
| Other assets | - | 389 | 64,078 |
| Total assets | 246,245 | 16,098 | 1,788,883 |
| Liabilities | |||
| Deposits | 145,266 | 3,750 | 230,176 |
| Debt securities in issue | - | - | - |
| Other liabilities | - | - | 31,941 |
| Total Liabilities | 145,266 | 3,750 | 262,117 |
| Income | |||
| Interest and Other operating income | 8,951 | 931 | 6,089 |
| Dividends | - | - | 49,627 |
| Others | - | - | 51,586 |
| Net income | 8,951 | 931 | 107,302 |
| Expenses | |||
| Interests and other operating expenses | 430 | 767 | 13,912 |
| Fees | - | 1,001 | 5 |
| Others | - | - | 37,370 |
| Total expenses | 430 | 1,768 | 51,287 |
| (1) | This ítem includes operations held between Bancolombia S.A. and Compañía de Financiamiento Tuya S.A. since November 1, 2016 when the Bank lost control of Tuya S.A. Furthermore, the item includes operations held between Bancolombia S.A. and Sociedad Servicios de Aceptación S.A.S. since June, 2016, when that company was set up. |
As of December 31, 2015
| Stockholders with an interest equal or higher than 10% of the Bank’s capital |
Directors
and senior management |
Associates
and joint venture | |
| In millions of COP | |||
| Assets | |||
| Investments | - | - | 974,366 |
| Loans and advances to customers and financial entities, net | 57 | 20,194 | 16,603 |
| Other assets | - | - | 5,063 |
| Total Assets | 57 | 20,194 | 996,032 |
| Liabilities | |||
| Deposits | 1,093 | 1,496 | 148,823 |
| Debt securities in issue | - | - | 2,031 |
| Other liabilities | - | 16 | - |
| Total Liabilities | 1,093 | 1,512 | 150,854 |
| Income | |||
| Interest and Other operating income | - | 1,389 | 22,588 |
| Dividends | - | - | 45,736 |
| Others | - | - | 14 |
| Net income | - | 1,389 | 68,338 |
| Expenses | |||
| Interests and other operating expenses | 16 | 23 | 4,879 |
| Fees | - | 792 | - |
| Others | - | - | 1,006 |
| Total expenses | 16 | 815 | 5,885 |
As of December 31, 2014
Stockholders with an interest equal or higher than 10% of the Bank’s capital |
Directors and senior management |
Associates and joint venture | |
| In millions of COP | |||
| Income | |||
| Interest and Other operating income | 178 | 913 | 21,713 |
| Dividends | - | - | 16,043 |
| Others | - | - | 141 |
| Net income | 178 | 913 | 37,897 |
| Expenses | |||
| Interests and other operating expenses | 723 | 15 | 5,077 |
| Fees | - | 776 | - |
| Others | - | 94 | 13,336 |
| Total expenses | 723 | 885 | 18,413 |
During the years ending December 31, 2016, 2015 and 2014, the Bank paid fees to the directors amounting to COP 1,001, COP 792 and COP 776 as compensation for attending meetings of Board and Support Committee. The Payments to senior management in the same periods were COP 12,956, COP 55,175 and COP 47,633, respectively, for short-term benefits, COP 589, COP 191 and COP 3,824 for long-term benefits and in 2016 and 2014, other payments for post-employment benefits were COP 13,994 and COP 63, respectively. In 2015 the Bank did not pay post-employment benefits.
| F-124 |
The Parent company, which is also the ultimate parent company, is Bancolombia S.A. Transactions between companies included in consolidation Note 2.C and the Parent company meet the definition of related party transactions, and were eliminated from the consolidated financial statements.
In 2016, through public deed number 1,124, a merger between the Parent Company (absorbing entity) and Leasing Bancolombia S.A. (absorbed entity) was completed, with the objective of taking advantage of synergies and complementarities between the two entities, seeking greater efficiencies and delivering a better value proposition to clients. As a result of the merger, Bancolombia became the holder of all the rights and obligations of Leasing Bancolombia and continues to offer its clients the portfolio of leasing products and services.
As a result of the merger, on September 30, 2016, the Parent company recognized in its statement of financial position the assets and liabilities at their carrying value in Leasing Bancolombia’s financial statements, including the portfolio loans and financial leasing contracts amounting to COP 15,186,102, cash and cash equivalents amounting to COP295,852 and other assets amounting to COP 1,097,058. On the other hand, the Parent company assumed liabilities in deposits from customers amounting to COP 8,944,845, debt securities in issued amounting to COP 2,387,940 and other liabilities amounting to COP 3,117,115
The Parent Company provides banking and financial services to its related parties in order to satisfy their liquidity needs, and except for the intercompany merger agreement described above, these transactions are conducted on similar terms to third-party transactions and are not individually material.
No guarantees, pledges or commitments have been given or received in respect of the aforementioned transactions in 2016 or 2015.
| F-125 |
NOTE 28. SUBSEQUENT EVENTS
The consolidated financial statements were approved by the Board of Directors on April 24, 2017.
On March 16, 2017 the General stockholders meeting approved the Board of Directors’ profit distribution proposal and declared a dividend equal to COP 950.4 per share to be paid in quarterly instalment payments.
Entering into an alliance “Alianza Lealtad” related to the loyalty program of the Bank
On April 19, 2017, the Bank entered into an agreement with Almacenes Exito S.A. for the creation of a new loyalty program for its clients called “Puntos Colombia” (Puntos Colombia).
Once implemented, Puntos Colombia will be the loyalty program through which the clients of both companies, and of other allies related to the program, will accumulate and redeem points on the loyalty ecosystem. Puntos Colombia will replace the existing loyalty programs of the Bank and Grupo Exito.
The program Puntos Colombia will begin during the first half of 2018 and will be managed by an independent company located in Colombia, which will be 50% owned by Banca de Inversión Bancolombia S.A Corporación Financiera, a subsidiary of the Bank. The capital investment to be made by the subsidiary in the new Company is equivalent to COP 9,000 million, which will be paid within the next 12 months following incorporation.
NOTE 29. FAIR VALUE OF ASSETS AND LIABILITIES
The following table presents the carrying amount and the fair value of the assets and liabilities as of December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |||
| Carrying amount |
Fair Value | Carrying amount |
Fair Value | |
| In millions of COP | ||||
| Assets | ||||
| Debt securities at fair value | 8,537,562 | 8,537,562 | 9,651,268 | 9,651,268 |
| Debt securities at amortized cost | 3,134,919 | 3,115,477 | 3,492,146 | 3,434,606 |
| Equity securities at fair value | 1,388,172 | 1,388,172 | 1,164,681 | 1,164,681 |
| Derivative financial instruments | 1,677,970 | 1,677,970 | 2,382,168 | 2,382,168 |
| Loans and advances to customers and financial institutions, net | 145,125,575 | 140,398,685 | 140,371,884 | 136,729,366 |
| Investment property | 1,581,689 | 1,581,689 | 1,505,046 | 1,505,046 |
| Invesments in associates and joint ventures | 388,595 | 388,595 | - | - |
| Total | 161,834,482 | 157,088,150 | 158,567,193 | 154,867,135 |
| Liabilities | ||||
| Deposits by customers | 124,624,011 | 125,096,410 | 121,802,028 | 116,487,773 |
| Interbank deposits | 341,856 | 341,856 | 400,062 | 400,062 |
| Repurchase agreements and other similar secured borrowing | 1,924,010 | 1,924,010 | 1,232,456 | 1,232,456 |
| Derivativefinancial instruments | 1,312,450 | 1,312,450 | 1,930,609 | 1,930,609 |
| Borrowings from other financial institutions (1) | 18,905,843 | 18,905,843 | 19,721,184 | 19,721,184 |
| Preferred shares (2) | 581,972 | 565,676 | 580,959 | 428,281 |
| Debt securities in issue | 18,704,809 | 19,071,085 | 19,435,865 | 19,734,430 |
| Total (2) | 166,394,951 | 167,217,330 | 165,103,163 | 159,934,795 |
| (1) | The Bank added to the disclosure of fair value, borrowings from other financial institutions COP 854,707 in 2015 corresponding to the obligations of Grupo Agromercantil Holding (GAH), a company acquired on December 31, 2015. In 2016, the disclosure of fair value of borrowings from other financial institutions as of December 31, 2015, amounted to COP 19,721,184. |
| (2) | The Group added to the disclosure of fair value of assets and liabilities, the preferred shares with carrying amount of COP 580,959 and fair value of COP 428,281, as of December 31, 2015. Such preferred shares have not been previously disclosed. |
| · | Fair value hierarchy |
IFRS 13 establishes a fair value hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable, that reflects the significance of inputs adopted in the measurement process. In accordance with IFRS the financial instruments are classified as follows:
| F-126 |
Level 1: Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market is a market in which transactions for the asset or liability being measured take place with sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly. Level 2 generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset or liability.
Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category generally includes certain retained residual interests in securitizations, asset-backed securities (ABS) and highly structured or long-term derivative contracts where independent pricing information was not able to be obtained for a significant portion of the underlying assets.
• Valuation process for fair value measurements
The valuation to fair value prices is performed using prices, methodologies and inputs provided by the official pricing services provider (Infovalmer) to the Bank. All methodologies and procedures developed by the pricing services provider are supervised by the Financial Superintendence of Colombia, which has not objected to them.
On a daily basis, the Financial Operations Officer verifies the valuation of investments, and, the Proprietary Trading Desk’s Risk Management area reports the results of the portfolio’s valuation.
Fair value measurement
Assets
a. Debt securities
The Bank assigns price to those debt investments, using the prices provided by the official pricing services provider (Infovalmer) and assigns the appropriate level according to the procedure described above. (Hierarchy of fair value section).
b. Equity securities
The Bank performs the market price valuation of their investments in variable income using the prices provided by the official pricing services provider (Infovalmer) and classifies those investments according to the procedure described above. (Hierarchy of fair value section). Likewise, the fair value of unlisted equity securities is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, and if necessary considered, are subject to appropriate discounts for lack of liquidity or marketability.
| F-127 |
c. Derivative Financial Instruments
The Bank holds positions in standardized derivatives, such as futures over local stocks, over specific TES references and over the TRM. These instruments are valuated according to the information provided by Infovalmer, which perfectly matches the information provided by the Clearing and Settlement House.
Additionally, the Bank holds positions in OTC derivatives, which in the absence of prices, are valued using the inputs and methodologies provided by the pricing services provider.
The key inputs depend upon the type of derivative and the nature of the underlying instrument and include interest rate yield curves, foreign exchange rates, the spot price of the underlying volatility, credit curves and correlation of such inputs.
d. Credit valuation adjustment
The Bank measures the effects of the credit risk of its counterparties and its own creditworthiness in determining fair value of the swap, option and forward derivatives.
Counterparty credit-risk adjustments are applied to derivatives when the Bank’s position is a derivative asset and the Bank’s credit risk is incorporated when the position is a derivative liability. The Bank attempts to mitigate credit risk to third parties which are international banks by entering into master netting agreements.
When assessing the impact of credit exposure, only the net counterparty exposure is considered at risk, due to the offsetting of certain same-counterparty positions and the application of cash and other collateral.
The Bank generally calculates the asset’s credit risk adjustment for derivatives transacted with international financial institutions by incorporating indicative credit related pricing that is generally observable in the market (“CDS”). The credit-risk adjustment for derivatives transacted with non-public counterparties is calculated by incorporating unobservable credit data derived from internal credit qualifications to the financial institutions and corporate companies located in Colombia. The Bank also considers its own creditworthiness when determining the fair value of an instrument, including OTC derivative instruments if the Bank believes market participants would take that into account when transacting the respective instrument. The approach to measuring the impact of the Bank’s credit risk on an instrument transacted with international financial institutions is done using the asset swap curve calculated for subordinated bonds issued by the Bank in foreign currency. For derivatives transacted with local financial institutions, the Bank calculates the credit risk adjustment by incorporating credit risk data provided by rating agencies and released in the Colombian financial market.
| F-128 |
e. Impaired loans measured at fair value
The Bank measured certain impaired loans based on the fair value of the associated collateral less costs to sell. The fair values were determined as follows using external and internal valuation techniques or third party experts, depending on the type of underlying asset:
For vehicles under leasing arrangements, the Bank uses an internal valuation model based on price curves for each type of vehicle. Such curves show the expected price of the vehicle at different points in time based on the initial price and projection of economic variables such as inflation, devaluation and customs. The prices modelled in the curves are compared every six months with market information for the same or similar vehicles and in the case of significant deviation; the curve is adjusted to reflect the market conditions.
Other vehicles are measured using matrix pricing from a third party. This matrix is used by most of the market participants and is updated monthly. The matrix is developed from values provided by several price providers for identical or similar vehicles and considers brand, characteristics of the vehicles, and manufacturing date among other variables to determine the prices.
For real estate properties, a third-party qualified appraiser is used. The methodologies vary depending on the date of the last appraisal available for the property (The appraisal is estimated based on either of three approaches: cost, sale comparison and income approach).
f. Assets held for sale measured at fair value less cost of sale
The Bank measured certain impaired foreclosed assets and premises and equipment held for sale based on fair value less costs to sell. The fair values were determined using external and internal valuation techniques, depending on the type of underlying asset. Those assets are comprised mainly by real estate properties for which the appraisal is conducted by experts considering factors such as the location, type and characteristics of the property, size, physical conditions and expected selling costs, among others. Likewise, in some cases the fair value is estimated considering comparable prices or promises of sale and offering prices from auctions process.
g. Mortgage-backed securities (“TIPS”) and Asset-Backed securities
The Bank invests in asset-backed securities for which underlying assets are mortgages and earnings under contracts issued by financial institutions and corporations, respectively. The Bank does not have a significant exposure to sub-prime securities. The asset-backed securities are denominated in local market TIPS and are classified as fair value through profit or loss. These asset-backed securities have different maturities and are generally classified by credit ratings.
| F-129 |
Fair values were estimated using discounted cash flows models where the main key economic assumptions used are estimates of prepayment rates and resultant weighted average lives of the securitized mortgage portfolio, probability of default and interest rate curves. These items are classified as Level 2 and Level 3.
h. Investments in associates and joint ventures measured at fair value
The Bank recognizes its investment in PA Viva Malls as an associated at fair value. The estimated amount is provided by fund manager as the variation of the units according to the units owned by the Fondo Colombia Inmobiliario. The associate’s assets are comprised of investment properties which are measured using the following techniques; comparable prices, discounted cash flows, replacement cost and direct capitalization. For further information about techniques methodologies and inputs used by the external party see ‘Quantitative Information about Level 3 Fair Value Measurements’.
i. Investment property
The Bank’s investment property are valued by external experts, who use valuation techniques based on comparable prices, direct capitalization, discounted cash flows and replacement costs.
| F-130 |
Assets and liabilities measured at fair value on a recurring basis
The following table presents for each of the fair-value hierarchy levels the Bank’s assets and liabilities that are measured at fair value on a recurring basis at December 31, 2016 and 2015:
| Assets | ||||||||
| Type of instrument | December 31, 2016 | December 31, 2015 | ||||||
| Fair value hierarchy | Total
fair value |
Fair value hierarchy | Total
fair value | |||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||
| In millions of COP | ||||||||
| Investment securities | ||||||||
| Debt securities | ||||||||
| Securities issued by the Colombian Government | 4,400,952 | 503,200 | - | 4,904,152 | 4,299,235 | 518,369 | - | 4,817,604 |
| Securities issued by the El Salvador Central Bank | - | - | - | - | - | 43,913 | - | 43,913 |
| Securities issued or secured by Government entities | 3,163 | 8,741 | - | 11,904 | - | 82,162 | - | 82,162 |
| Securities issued by other financial institutions | 146,025 | 529,244 | 405,099 | 1,080,368 | 122,872 | 605,251 | 629,994 | 1,358,117 |
| Securities issued by Foreign Governments | 1,044,629 | 1,384,563 | - | 2,429,192 | 1,478,568 | 1,711,154 | - | 3,189,722 |
| Corporate bonds | 19,614 | 77,403 | 14,929 | 111,946 | 57,495 | 92,190 | 10,065 | 159,750 |
| Total Debt securities | 5,614,383 | 2,503,151 | 420,028 | 8,537,562 | 5,958,170 | 3,053,039 | 640,059 | 9,651,268 |
| Equity securities | ||||||||
| Equity securities at fair value | 189,363 | 20,131 | 1,178,678 | 1,388,172 | 66,589 | 119,341 | 978,751 | 1,164,681 |
| Total equity securities | 189,363 | 20,131 | 1,178,678 | 1,388,172 | 66,589 | 119,341 | 978,751 | 1,164,681 |
| Derivative financial instruments | ||||||||
| Forwards | ||||||||
| Foreign exchange contracts | - | 187,682 | 125,884 | 313,566 | - | 193,290 | 499,034 | 692,324 |
| Equity contracts | - | 2,816 | 609 | 3,425 | - | 2,717 | - | 2,717 |
| Total forwards | - | 190,498 | 126,493 | 316,991 | - | 196,007 | 499,034 | 695,041 |
| Swaps | ||||||||
| Foreign exchange contracts | - | 856,742 | 270,732 | 1,127,474 | - | 1,057,462 | 236,485 | 1,293,947 |
| Interest rate contracts | 4,497 | 158,342 | 23,369 | 186,208 | 2,407 | 239,766 | 15,065 | 257,238 |
| Total swaps | 4,497 | 1,015,084 | 294,101 | 1,313,682 | 2,407 | 1,297,228 | 251,550 | 1,551,185 |
| Options | ||||||||
| Foreign exchange contracts | - | 5,633 | 41,664 | 47,297 | - | 3,813 | 132,129 | 135,942 |
| Total options | - | 5,633 | 41,664 | 47,297 | - | 3,813 | 132,129 | 135,942 |
| Total derivative financial instruments | 4,497 | 1,211,215 | 462,258 | 1,677,970 | 2,407 | 1,497,048 | 882,713 | 2,382,168 |
| Investment properties | ||||||||
| Buildings | - | - | 1,355,717 | 1,355,717 | - | - | 1,275,567 | 1,275,567 |
| Lands | - | - | 225,972 | 225,972 | - | - | 229,479 | 229,479 |
| Total investment properties | - | - | 1,581,689 | 1,581,689 | - | - | 1,505,046 | (1) 1,505,046 |
| Investment in associates and joint ventures | ||||||||
| PA Viva Malls | - | - | 388,595 | 388,595 | - | - | - | - |
| Total investment in associates and joint ventures | - | - | 388,595 | 388,595 | - | - | - | - |
| Total | 5,808,243 | 3,734,497 | 4,031,248 | 13,573,988 | 6,027,166 | 4,669,428 | 4,006,569 | 14,703,163 |
| (1) | The Group reclassified the presentation in 2015 of the fair value of land and buildings from levels 1 and 2 to level 3 as the fair value measurement used unobservable inputs that are significant to the overall fair value measurement. |
| F-131 |
| Financial liabilities | ||||||||
| Type of instrument | December 31, 2016 | December 31, 2015 | ||||||
| Fair value hierarchy | Total fair value |
Fair value hierarchy | Total
fair value | |||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||
| In millions of COP | ||||||||
| Forwards | ||||||||
| Foreign exchange contracts | - | (304,757) | (19,167) | (323,924) | - | (532,884) | (101,413) | (634,297) |
| Equity contracts | - | (2,837) | (272) | (3,109) | - | (5,395) | - | (5,395) |
| Total forwards | - | (307,594) | (19,439) | (327,033) | - | (538,279) | (101,413) | (639,692) |
| Swaps | ||||||||
| Foreign exchange contracts | - | (708,354) | (40,728) | (749,082) | - | (910,042) | (39,626) | (949,668) |
| Interest rate contracts | (7,828) | (178,743) | (5,773) | (192,344) | (2,001) | (259,366) | (5,746) | (267,113) |
| Total swaps | (7,828) | (887,097) | (46,501) | (941,426) | (2,001) | (1,169,408) | (45,372) | (1,216,781) |
| Options | ||||||||
| Foreign exchange contracts | - | (42,961) | - | (42,961) | - | (74,136) | - | (74,136) |
| Total options | - | (42,961) | - | (42,961) | - | (74,136) | - | (74,136) |
| Futures | ||||||||
| Equity contracts | (1,030) | - | - | (1,030) | - | - | - | - |
| Total futures | (1,030) | - | - | (1,030) | - | - | - | - |
| Total derivative financial instruments | (8,858) | (1,237,652) | (65,940) | (1,312,450) | (2,001) | (1,781,823) | (146,785) | (1,930,609) |
| Total | (8,858) | (1,237,652) | (65,940) | (1,312,450) | (2,001) | (1,781,823) | (146,785) | (1,930,609) |
| F-132 |
Fair value of assets and liabilities that are not measured at fair value in the Statement of Financial Position
The following table presents for each of the fair-value hierarchy levels the Bank’s assets and liabilities that are not measured at fair value in the statement of financial position but for which the fair value is disclosed at December 31, 2016 and 2015:
| Assets | ||||||||
| Type of instrument | December 31, 2016 | December 31, 2015 | ||||||
| Fair value hierarchy | Total
fair value |
Fair value hierarchy | Total
fair value | |||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||
| In millions of COP | ||||||||
| Debt securities | ||||||||
| Securities issued by the Colombian Government | - | - | - | - | - | - | 15,050 | 15,050 |
| Securities issued or secured by Government entities | 9,336 | 344,200 | 1,154,372 | 1,507,908 | 9,834 | 967,908 | 405,799 | 1,383,541 |
| Securities issued by other financial institutions | 172,125 | 15,421 | 18,033 | 205,579 | 247,355 | 32,069 | 105,299 | 384,723 |
| Securities issued by Foreign Governments | 822,598 | 162,626 | - | 985,224 | 924,095 | 327,924 | - | 1,252,019 |
| Corporate bonds | 199,331 | - | 217,435 | 416,766 | 219,203 | - | 180,070 | 399,273 |
| Total – Debt securities | 1,203,390 | 522,247 | 1,389,840 | 3,115,477 | 1,400,487 | 1,327,901 | 706,218 | 3,434,606 |
| Loans and advances to customers and financial institutions | - | - | 140,398,685 | 140,398,685 | - | - | 136,729,366 | 136,729,366 |
| Total | 1,203,390 | 522,247 | 141,788,525 | 143,514,162 | 1,400,487 | 1,327,901 | 137,435,584 | 140,163,972 |
| Liabilities | ||||||||
| Type of instruments | December 31, 2016 | December 31, 2015 | ||||||
| Fair value hierarchy | Total
fair value |
Fair value hierarchy | Total
fair value | |||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||
| In millions of COP | ||||||||
| Deposits by customers | - | (20,534,986) | (104,561,424) | (125,096,410) | - | (14,727,160) | (101,760,613) | (116,487,773) |
| Interbank deposits | - | - | (341,856) | (341,856) | - | - | (400,062) | (400,062) |
| Repurchase agreements | - | - | (1,924,010) | (1,924,010) | - | - | (1,232,456) | (1,232,456) |
| Borrowings from other financial institutions | - | - | (18,905,843) | (18,905,843) | - | - | (19,721,184) | (19,721,184) |
| Preferred shares | - | - | (565,676) | (565,676) | - | - | (428,281) | (428,281) |
| Debt securities in issue | (7,068,228) | (10,228,190) | (1,774,667) | (19,071,085) | (7,070,156) | (10,438,041) | (2,226,233) | (19,734,430) |
| Total | (7,068,228) | (30,763,176) | (128,073,476) | (165,904,880) | (7,070,156) | (25,165,201) | (125,768,829) | (158,004,186) |
| F-133 |
IFRS requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position, for which it is practicable to estimate fair value. Certain categories of assets and liabilities, however, are not eligible for fair value accounting. The financial instruments below are not recorded at fair value on a recurring and nonrecurring basis:
Short-term financial instruments
Short-term financial instruments are valued at their carrying amounts included in the consolidated statement of financial position, which are reasonable estimates of fair value due to the relatively short period to maturity of the instruments. This approach was used for cash and cash equivalents, accrued interest receivable, customers’ acceptances, accounts receivable, accounts payable, accrued interest payable and bank acceptances outstanding.
Deposits from customers
The fair value of time deposits was estimated based on the discounted value of cash flows using the appropriate discount rate for the applicable maturity. Fair value of deposits with no contractual maturities represents the amount payable on demand as of the statement of financial position date.
Interbank deposits and repurchase agreements and other similar secured borrowings
Short-term interbank borrowings and repurchase agreements have been valued at their carrying amounts because of their relatively short-term nature.
Borrowings from other financial institutions
The fair value of borrowings from other financial institutions were determined using discounted cash flow models. The cash flows projection of capital and interest was made according to the contractual terms, considering capital amortization and interest bearing. Subsequently, the cash flows was discounted using reference curves formed by the weighted average of the Bank’s deposit rates.
Debt securities in issue
The fair value of debt securities in issue, comprised of bonds issued by Bancolombia S.A. and its subsidiaries, was estimated substantially based on quoted market prices. The fair value of certain bonds which do not have a public trading market, were determined based on the discounted value of cash flows using the rates currently offered for bonds of similar remaining maturities and the Bank’s creditworthiness.
Preferred shares
In the valuation of the liability component of preferred shares related to the minimum dividend of 1% of the subscription price, the Bank uses the Gordon model to price the obligation, taking into account its own credit risk, which is measured using the market spread based on observable inputs such as quoted prices of sovereign debt. The Gordon Model is commonly used to determine the intrinsic value of a stock based on a future series of dividends that are estimated by the Bank and grow at a constant rate considering the Bank’s own perspectives of the payout ratio.
| F-134 |
Loans and advances to customers and financial institutions
Estimating the fair value of loans and advances to customers is considered an area of considerable uncertainty as there is no observable market. The loan portfolio is stratified into tranches and loans segments suchs as commercial, small business loans, mortgage and consumer. The fair value of loans and advances to customers and financial institutions is determined using a discounted cash flow methodology, considering each credit’s principal and interest projected cash flows to the maturity date. Subsequently, the projected cash flows are discounted using reference curves according to the type of loan and its maturity date.
Items Measured at fair value on a non-recurring basis
The Bank measured certain foreclosed assets held for sale based on fair value less costs to sell. The fair values were determined using external and internal valuation techniques or third party experts, depending on the type of underlying asset. The following breakdown sets forth the fair value hierarchy of those assets classified by type:
| December 31, 2016 | December 31, 2015 | |||||||
| Fair-value hierarchy | Total fair Value | Fair-value hierarchy | Total fair Value | |||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||
| In millions of COP | ||||||||
| Machinery and equipment | - | - | 9,466 | 9,466 | - | - | 23,491 | 23,491 |
| Real estate for residential purposes | - | - | 20,671 | 20,671 | - | - | 21,918 | 21,918 |
| Real estate different from residential properties | - | - | 102,913 | 102,913 | - | - | 7,876 | 7,876 |
| Collateralized loans | - | - | 1,543,513 | 1,543,513 | - | - | 1,080,052 | 1,080,052 |
| Total | - | - | 1,676,563 | 1,676,563 | - | - | 1,133,437 | 1,133,437 |
| F-135 |
Changes in Level 3 Fair-Value Category
The table below presents reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during 2016 and 2015:
As of December 31, 2016
| Balance, December 31, 2015 |
Included
in earnings |
OCI | Purchases | Settlement | Prepaids | Transfers
in to Level 3 |
Transfers
out of Level 3 |
Balance, December 31, 2016 | |
| In millions of COP | |||||||||
| Debt securities at fair value | |||||||||
| Securities issued or secured by Colombian Government | - | - | - | - | - | - | - | - | - |
| Securities issued or secured by Government entities | - | - | - | - | - | - | - | - | - |
| Securities issued or secured by other financial entities | 629,994 | (64,739) | - | 77,263 | (239,769) | - | 2,350 | - | 405,099 |
| Other investments | 10,065 | 9,160 | - | 62 | (6,954) | - | 2,596 | - | 14,929 |
| Total | 640,059 | (55,579) | 77,325 | (246,723) | - | 4,946 | - | 420,028 | |
| Derivatives | |||||||||
| Foreign exchange contracts | 726,609 | (22,727) | - | 125,632 | (495,525) | - | 21,267 | 23,129 | 378,385 |
| Interest rate contracts | 9,319 | (3,170) | - | 5,014 | (1,858) | - | 6,004 | 2,287 | 17,596 |
| Equity contracts | - | - | - | 337 | - | - | - | - | 337 |
| Total | 735,928 | (25,897) | 130,983 | (497,383) | - | 27,271 | 25,416 | 396,318 | |
| Equity securities | |||||||||
| Equity securities | 978,751 | (75,573) | 46,035 | 282,604 | (53,139) | - | - | - | 1,178,678 |
| Total | 978,751 | (75,573) | 46,035 | 282,604 | (53,139) | - | - | - | 1,178,678 |
| Investment in associates | |||||||||
| PA Viva Malls | - | - | - | 388,595 | - | - | - | - | 388,595 |
| Total | - | - | - | 388,595 | - | - | - | - | 388,595 |
| F-136 |
As of December 31, 2015
| Balance, December 31, 2014 |
Included in earnings |
OCI | Purchases | Settlement | Prepaids | Transfers in to Level 3 |
Transfers out of Level 3 |
Balance, December 31, 2015 | |
| In millions of COP | |||||||||
| Debts securities at fair value | |||||||||
| Securities issued or secured by Colombian Government | 16,956 | - | - | - | (16,956) | - | - | - | - |
| Securities issued or secured by Government entities | - | - | - | - | - | - | - | - | - |
| Securities issued or secured by other financial entities | 517,413 | (18,964) | - | 104,828 | (35,041) | - | 61,758 | - | 629,994 |
| Other investments | 19,149 | (1,972) | - | 9,513 | (19,149) | - | 2,524 | - | 10,065 |
| Total | 553,518 | (20,936) | 114,341 | (71,146) | - | 64,282 | - | 640,059 | |
| Derivatives | |||||||||
| Foreign exchange contracts | 674,032 | 45,005 | - | 482,802 | (476,123) | - | - | 893 | 726,609 |
| Interest rate contracts | 3,758 | 647 | - | 8,675 | (3,761) | - | - | - | 9,319 |
| Equity contracts | (255,503) | - | - | - | 255,503 | - | - | - | - |
| Total | 422,287 | 45,652 | - | 491,477 | (224,381) | - | - | 893 | 735,928 |
| Equity securities | |||||||||
| Equity securities | 998,007 | 119,837 | (7,974) | 10,236 | (141,355) | - | - | - | 978,751 |
| F-137 |
Level 3 Fair Value Rollforward
The following were the significant Level 3 transfers for the period December 31, 2015 to 2016:
The transfer of COP 23,129 in 2016 from Level 3 to Level 2 foreing exchange contracts, primarily linked to an increase in their market liquidity and the observability of prices.
All transfers are assumed to occur at the end of the reporting period.
Transfers between Level 1 and Level 2 of the Fair Value Hierarchy
During the years ended December 31, 2016 and 2015, the Bank transferred securities amounting to COP 5,647 securities issued by other financial institutions and COP 9,510 related to corporative bonds, respectively, from Level 2 to Level 1 primarily, because such securities increased their liquidity and were traded more frequently to comprise an active market.
During the years ended December 31, 2016 and 2015, the Bank has not transferred securities from Level 1 to Level 2
All transfers are assumed to occur at the end of the reporting period.
Quantitative Information about Level 3 Fair Value Measurements
The following table sets forth information about significant unobservable inputs related to the Bank’s material categories of Level 3 financial assets and liabilities:
As of December 31,2016
| Financial instrument |
Fair Value |
Valuation technique |
Significant unobservable input |
Range
of inputs |
Weighted average |
Sensitivity basis point increase |
Sensitivity basis point decrease |
| Amounts in millions of COP | |||||||
| Mortgage-backed securities (“TIPS”) | |||||||
| TIPS | 22,651 | Discounted cash flow | Yield | (0.2277%)/ 0.7551% | 0.32% | 22,484 | 22,807 |
Liquidity risk Premium |
0% / 10.35% | 9.58% | 22,377 | 22,687 | |||
Prepayment Speed |
n/a | n/a | 22,557 | 22,509 | |||
| Other | |||||||
| Corporate bonds | 90,791 | Discounted cash flow | Yield | 0.7511%/ 1.1953% | 2.14% | 72,069 | 75,306 |
| Debt securities | 2,350 | Discounted cash flow | Yield | (0.12%) | (0.12%) | 2,297 | 2,388 |
| Asset-backed Securities | 16,895 | Discounted cash flow | Yield | (0.12%) | 1.65% | 16,766 | 17,056 |
| Equity securities | |||||||
| Equity securities | 1,178,678 | Price-based | Price | n/a | n/a | n/a | n/a |
| Derivatives | |||||||
| Options | 41,496 | Black-Scholes | Recovery rate | 25% | 25.00% | 41,668 | 41,661 |
| Forward | 106,921 | Discounted cash flow | Credit spread | 0% to 20.0479% | 5.01% | 106,759 | 107,346 |
| Swaps | 201,185 | Discounted cash flow | Credit spread | 0% to 23.4435% | 5.86% | 200,098 | 202,279 |
| F-138 |
As of December 31,2015
| Financial instrument | Fair value |
Valuation Technique |
Significant unobservable input |
Ranges
of inputs |
Weighted average |
Sensitivity basis point increase |
Sensitivity basis point decrease |
| Amounts in millions of COP | |||||||
| Mortgage-backed securities (“TIPS”) | |||||||
TIPS
|
430,148 | Discounted cash flow | Yield | (0.2277%) / 0.7551% | 0.15% | 423,092 | 437,470 |
| Liquidity risk Premium | 0% / 10.35% | 5.27% | 423,523 | 437,025 | |||
| Prepayment speed | n/a | n/a | 430,872 | 429,966 | |||
| Other | |||||||
| Corporate bonds | 19,314 | Discounted cash flow | Yield | 0.0537% / 1.4554% | 0.35% | 18,780 | 19,791 |
| Time Deposits | 155,480 | Discounted cash flow | Yield | 1.61% | 1.61% | 155,472 | 155,487 |
| Securitizations | 35,117 | Discounted cash flow | Yield | 1.65% | 1.65% | 32,378 | 35,455 |
| Equity securities | |||||||
| Equity securities | 978,751 | Price-based | Price | n/a | n/a | n/a | n/a |
| Derivatives | |||||||
| Options | 132,129 | Black-Scholes | Recovery rate(1) | 25% | 25.00% | 132,141 | 132,117 |
| setoff COP (USD)(1) | 0.0813% a 16.8753% | 0.88% | 132,129 | 132,129 | |||
| Forward | 397,622 | Discounted cash flow | SPBAAA y ASW COP (USD)(2) | - | - | 397,622 | 397,622 |
| Setoff COP (USD)(1) | 0% a 28.7559% | 5.08% | 396,366 | 398,877 | |||
| Swaps | 206,178 | Discounted cash flow | SPBAAA y ASW COP (USD)(2) | - | - | 204,582 | 204,582 |
| Setoff COP (USD) (1) | 0% a 39.7004% | 3.77% | 212,782 | 193,908 | |||
| Discount Rate | 7.00% | 1,596 | 1,596 | ||||
| (1) | Recovery rate and Setoff COP (USD) relate to the counterparties’ recovery rates and probabilities of default, which are used for assesing the CVA/DVA adjustments in the measurement of the fair value of OTC derivative instruments. |
| (2) | SPBAAA y ASW COP (USD) are curves used mainly in the valuation of forwards and swaps, and relate to the Bank’s own credit spread, estimated as the spread of IPC (COP) bonds issued in the local market and USD bonds issued in foreign markets. |
| F-139 |
The following table sets forth information about valuation techniques used in the measurement of the fair value investment properties of the Bank, the significant unobservable inputs and the respective sensivity:
| Methodology | Valuation technique |
Significant
unobservable input |
Description of sensitivity |
Sales Comparison Approach - SCA
The fair value assessment is based on the examination of prices at which similar properties in the same area recently sold. Since no two properties are identical the measurement valuation must take into account adjustments for the differences between the sold properties and those held by the Bank to earn rentals or for capital appreciation. |
Comparable Prices | The weighted average rates used in the capitalization methodology for revenues for 2016 are: • Direct capitalization: initial rate 8.30% • Discounted cash flow: discount rate: 11.46%, terminal rate: 8.76%. The same weighted rates for 2015 were: • Direct capitalization: initial rate 8.13% • Discounted cash flow: discount rate: 10.96%, terminal rate: 8.54%.
The ratio between monthly gross income and real estate value (rental rate) considering the differences in placements and individual factors between properties and in a weighted way is 0.77% for 2016 and 0.74% for 2015. |
An increase (Light, normal, considerable, significant) in the capitalization rate used would generate a decrease (significant, light, normal, considerable) in the fair value of the asset, and vice versa.
An increase (Light, normal, considerable, significant) in the leases used in the valuation would generate a (significant, light, considerable) increase in the fair value of the asset, and vice versa. |
Income Approach
Used to estimate the fair value of the property by taking future net cash flows and discounting them at the capitalization rate. |
Direct Capitalization | ||
Cost approach
Used to estimate the fair value of the property considering the cost to replace or build a property at the same or equal conditions of the asset to be measured, deducting the accumulated depreciation charge and adding-up the amount of the land. |
Replacement cost |
| F-140 |
NOTE 30. DISCONTINUED OPERATIONS
Compañía de financiamiento Tuya S.A is a private entity oriented to offer lines of credit directed to individuals, corporate credit cards, vehicle loan and payroll loans among others, as a result of which Tuya has achieved a significant market share position in the consumer loan market in Colombia.
On October 31, 2016 Bancolombia S.A, announced that, after obtaining all the required regulatory approvals, the sale agreement announced in a press release on July 1st, 2015, pursuant to which Bancolombia S.A (“Bancolombia”), the Fondo de Empleados of Grupo Bancolombia - FEBANC and Fundacion Bancolombia, (together, the “Sellers”), transferred to Almacenes Éxito S.A (“Almacenes Exito”) and Almacenes Éxito Inversiones S.A.S (together, the “Buyers”) 50% of the shares of Compañia de Financiamiento Tuya S.A (“Tuya”), entered into effect. The total purchase price of the transaction was COP 79,037.
As a result of this transaction:
| 1. | Tuya was under the exclusive control of Bancolombia, and as from October 30, 2016 is jointly controlled by the strategic partners. |
| 2. | Tuya’s shares formerly owned by the Bank will now be owned by Bancolombia S.A. and its subsidiaries Banca de Inversión Bancolombia S.A. Corporación Financiera and BIBA Inmobiliaria SAS. |
| 3. | Tuya’s assets and liabilities were derecognized at their carrying amounts at October 31, 2016, which is considered the date when the Bank’s control was lost. Likewise the Bank recognized the fair value of the non-controlling interest in Tuya amounting to COP 343,108 as a joint venture. The fair value of the consideration received amounted to COP 79,017 and as a result of this transaction the Bank recognized an income by COP 263,770 (associated with the remeasurement of the fair value) in the statement of income in the line “Income from discontinued operations”, and the related occasional earning tax amounted to COP 659 and the deferred income tax amounted to COP 99,614. |
| F-141 |
Analysis of the results of discontinued operations:
Results of operations as of October 31, 2016 and December 31, 2015 and 2014, recognized in the Consolidated Statement of Income as Net income from discontinued operations, are the following:
| Ten months ended October 31, 2016 | Year ended December 31, 2015 |
Year ended December 31, 2014 | |
| In millions of COP | |||
| Interest income on loans | 408,233 | 403,382 | 378,612 |
| Overnight and market funds | 320 | 53 | - |
| Interest and valuation on investment | 1,246 | 698 | - |
| Total interest and valuation | 409,799 | 404,133 | 378,612 |
| Interest expense | (106,110) | (74,919) | (69,484) |
| Net margin on financial instruments | 303,689 | 329,214 | 309,128 |
| Credit impairment charges on loans, net | (323,290) | (324,309) | (208,959) |
| Net interest and valuation income after provision for loans and financial leases | (19,601) | 4,905 | 100,169 |
| Fees and other service income, net | 244,193 | 235,806 | 272,204 |
| Other operating income | 1,365 | 267 | 2,893 |
| Total income, net | 225,957 | 240,978 | 375,266 |
| Total operating expenses | (221,310) | (219,532) | (275,419) |
| Profit before tax | 4,647 | 21,446 | 99,847 |
| Income tax | (2,961) | 1,067 | (36,980) |
| Net income from discontinued operations | 1,686 | 22,513 | 62,867 |
Assets classified as held for sale
At December 31, 2015 Compañía de financiamiento Tuya was composed of assets and liabilities as presented below:
| December 31, 2015 | |
| In millions of COP | |
| Assets | |
| Cash and balances at central bank | 207,963 |
| Financial assets investments | 31,265 |
| Loans and advances to customers | 1,831,773 |
| Allowance for loan and lease losses | (351,375) |
| Intangible assets | 2,267 |
| Premises and equipment | 5,746 |
| Prepayments | 724 |
| Tax receivables | 11,152 |
| Deferred tax | 32,726 |
| Other assets | 48,738 |
| Total Assets | 1,820,979 |
| Liabilities | |
| Deposit from customers | 1,266,305 |
| Borrowings from other financial institutions | 378 |
| Debt securities in issue | 150,032 |
| Currrent Tax | 1,535 |
| Deferred tax liabilities | 28,503 |
| Other liabilities | 158,380 |
| Total liabilities | 1,605,133 |
| Net assets classified as held for sale | 215,846 |
Cash flow from discontinued operations
For the years ended December 31, 2015 and 2014, Compañía de Financiamiento Tuya S.A. had the following cash flows:
| 2015 | 2014 | |
| In millions of COP | ||
| Cash flows provided by operating activities: | ||
| Net Income | 22,508 | 62,861 |
| Total net income adjustments | 308,945 | 267,223 |
| Net changes of assets and liabilities | (243,153) | (279,429) |
| Net cash provided by operating activities | 88,300 | 50,655 |
| Cash flows provided by (used in) investing activities: | ||
| Net cash provided by (used in) investing activities | 12,259 | (3,235) |
| Cash flows used in financing activities: | ||
| Net cash used in financing activities | (42,823) | (34,655) |
| Net increased in cash | 57,736 | 12,765 |
| Cash at the beginning of the year | 150,225 | 137,460 |
| Cash at the end of the year | 207,961 | 150,225 |
| F-142 |
NOTE 31. RISK MANAGEMENT
In the light of ERM (Enterprise Risk Management), during 2016 progress was made in consolidating risk management in the Bank, with the integration of corporate tools such as the risk framework that contains methodological guidelines and corporate policies that allow us to advance in the integral management of risk in the Bank, aligned with the expectations of management and stakeholders.
The Bank’s comprehensive risk management is developed in compliance with current regulations and internal standards as defined by the Board of Directors, in relation to market, credit/ counterparty, liquidity and operational risk.
The Board of Directors reviews and approves the resources, structure and processes of the Bank associated with risk management, and the development of its supervisory functions has the support of the Risk Committee in charge of the approval, monitoring and control of policies, methodologies, tools, guidelines and strategies for the identification, measurement, control and mitigation of risks.
The Risk Corporate Vicepresidency professionals manage the different risk inherent to the activities undertaken in the fulfillment of their responsibilities.
| 1. | CREDIT RISK |
Credit risk is the risk of an economic loss to the Bank due to a non-fulfillment of financial obligations by a customer or counterparty, and arises principally from the decline on borrower´s creditworthiness or changes in the business climate.
| F-143 |
The information below contains the maximum exposure to credit risk as of December 31, 2016 and December 31 2015:
December 31, 2016
| Maximum exposure | Collateral | Net exposure | |
| In millions of COP | |||
| Loans and Financial Leases | 151,747,486 | (68,627,160) | 83,120,326 |
| Commercial | 86,259,708 | (28,801,285) | 57,458,423 |
| Consumer | 23,925,279 | (5,917,791) | 18,007,488 |
| Mortgage | 19,155,852 | (18,193,999) | 961,853 |
| Small Business Loans | 1,062,724 | (296,816) | 765,908 |
| Financial Leases | 21,343,923 | (15,417,269) | 5,926,654 |
| Off-Balance Sheet Exposures | 15,499,545 | - | 15,499,545 |
| Financial Guarantees | 6,344,004 | - | 6,344,004 |
| Loan Commitments | 9,155,541 | - | 9,155,541 |
| Other Financial Instruments (1) | 13,900,216 | (1,384,764) | 12,515,452 |
| Debt Securities | 11,705,563 | (1,137,457) | 10,568,106 |
| Derivatives | 779,829 | (247,307) | 532,522 |
| Equity Securities | 1,414,824 | - | 1,414,824 |
| Total | 181,147,247 | (70,011,924) | 111,135,323 |
December 31, 2015
| Maximum exposure | Collateral | Net exposure | |
| In millions of COP | |||
| Loans and Financial Leases | 145.620.639 | (63.835.897) | 81.784.742 |
| Commercial | 85,892,752 | (26,496,740) | 59,396,012 |
| Consumer | 21,170,615 | (5,954,699) | 15,215,916 |
| Mortgage | 17,118,783 | (16,070,752) | 1,048,031 |
| Small Business Loans | 886,913 | ( 482,194) | 404,719 |
| Financial Leases | 20,551,576 | (14,831,512) | 5,720,064 |
| Off-Balance Sheet Exposures | 16,396,103 | - | 16,396,103 |
| Financial Guarantees | 7,123,521 | - | 7,123,521 |
| Loan Commitments | 9,272,582 | - | 9,272,582 |
| Other Financial Instruments (1) | 15,468,928 | (905,388) | 14,563,540 |
| Debt Securities | 13,171,189 | (552,744) | 12,618,445 |
| Derivatives | 1,135,149 | (352,644) | 782,505 |
| Equity Securities | 1,162,590 | - | 1,162,590 |
| Total | 177.485.670 | (64,741,285) | 112.744.385 |
| (1) | Collateral Held (-) and Collateral Pledged (+). |
Maximum exposure to credit risk of the loans and financial leases refers to the carrying amount at the end of the period. It does not take into account any collateral received or any other credit risk mitigates.
Maximum exposure to credit risk of financial guarantees corresponds to the total amount granted at the end of the period. This amount represents the worst case scenario and does not reflect the expected results.
| F-144 |
Maximum exposure to derivatives refers to the fair value at the end of the period, without considering any guarantee received or any other credit risk mitigates.
Maximum exposure to credit risk of debt securities and equity securities refers to the carrying amount at the end of the period without considering any guarantee received.
| a. | Credit Risk Management - Loans and Financial Leases |
Risk management during the credit life cycle is developed through the fulfillment of the policies, procedures and methodologies stipulated in the Credit Risk Administration System, in accordance with the strategy approved by the Board of Directors for monitoring and controlling credit risk.
The Credit Risk Administration System also contains the general criteria to evaluate, classify, measure and mitigate credit risk. In addition, the credit risk department has developed methodologies and manuals that specify the policies and procedures for different products and segments managed by the organization.
To maintain credit quality and manage the risk arising from its lending activities, the Bank has established general loan policies, including the following:
| · | Credit exposure limits: It contains guidelines with regards to the establishment of credit exposure limits to customers, geographies and industries. The Bank applies the lending limits to borrowers established under Colombian law, which require among other things that uncollateralized loans to a single customer or economic group may not exceed 10% of the Parent Company’s Technical Capital.* |
| · | Origination policies: These policies aim to acquire ample and sufficient knowledge of the characteristics of potential borrowers and to select them properly. The riskiness of the borrowers is determined using credit rating models. These models use information as the character, reputation and credit history of the borrower, the type of business the borrower engages in, the borrower’s ability to repay the loan, and information received from the credit risk bureaus. The credit risk rating system is also used in determining the allowance for loans and advances and lease losses. |
Loan applications, depending on their amount, are presented for approval at the level of management authority required.
| · | Collaterals policies: For the purpose of mitigating risk associated with non-fulfillment of obligations agreed upon by the borrower, The Bank has established policies for the valuation of collateral received as well as for the determination of the maximum loan amount that can be granted against the value of the collateral. |
| · | Allowance policies: The definition of this type of policies underlies the fulfillment of legal guidelines, in what is stipulated by the organization and for the analysis of borrowers in terms of the actions that must be undertaken in order to cover loss risk through The Bank’s credit exposure. |
| · | Monitoring policies: Contains various monitoring procedures, portfolio reports and policies for the purpose of overseeing, in an adequate and timely manner, the evolution of credit risk. These procedures include a continuous process of classification and reassessment of credit operations and they maintain consistency with the policies implemented for granting loans. |
| · | Portfolio recovery policies: Through the definition of these policies, the organization aims to establish those mechanisms that allow it to anticipate the action to be taken in the event of possible delays and minimize the impact resulting from non-fulfillment of payment or delays by the borrower. Additionally, the aspects established in this policy delimit what the organization has defined as collection management and that make it possible to obtain information to improve the origination policies and the allowances for loans and advances and lease losses models. |
| * | Technical Capital refers to the amount of capital requited by local regulation. See Capital Management for further information. |
| F-145 |
Management of credit risk is carried out in all of the credit life cycle. These processes are defined in the following way:
| · | Origination: Knowing the borrower, payment capacity analysis, payment behavior and credit approval and structure. |
| · | Monitoring: Knowing the borrower’s situation during the life of the credit. |
| · | Recovery: Collection management during the different stages of the same credit. |
In order to withstand the credit origination processes, the Bank develops scoring and rating models based on statistical information or criteria from experts, which differentiate the risk levels of potential borrowers in order to support the decision making process.
The Risk Corporate Vicepresidency is in charge of defining and documenting the specific characteristics of the models being utilized, as well as the parameters, variables to use in each case and the cut-off points that are applied per situation in the process of issuing credit. On a biannual basis at minimum, the Risk Corporate Vicepresidency must perform backtesting1 of the scoring and rating models used in the granting process in order to validate their effectiveness. Additionally, on a monthly basis, the entire credit portfolio will be rated taking into account the established internal models for the purpose of evaluating the credit risk of each borrower and constitute the required allowance for loans and advances and lease losses.
In addition to the evaluation and qualification of the portfolio, the monthly allowance for loans and advances and lease losses serves to measure the present condition of the portfolio, the methodologies used for its calculation serve as a tool to evaluate risk, be it in a collective or individual manner. Collective evaluation of the portfolio applies the following parameters for measuring risk: probability of default (PD), loss given default (LGD) and exposure at default (EAD).
For the evaluation of individual risk, parameters such as recovery rates estimated by score sheets that include financial, behavioral information, collaterals and qualitative variables, serve as elements for measuring risk and defining an allowance for loans and advances and lease losses for that borrower.
Annual backtesting must be performed on the allowances for loans and advances and lease losses models for the purpose of maintaining suitable hedge levels in accordance with the Bank’s risk appetite.
The Bank is continuously monitoring the concentration of the risk groups, as well as carrying out a daily control of the exposure to different economic groups, evaluating the legal limits of indebtedness in order to fulfill the norms established about the concentration limits.
The Bank performs international references determined by the rankings of external risks that allow the analysis of concentration levels in different geographic areas. On the other hand, at the legal level, the Bank is governed by the concepts and methodologies established by the external norms regarding the construction, administration and control of the concentration of economic groups.
| 1 | Statistical procedures used to validate the quality and accuracy of a model, through the comparison of actual results and risk measures generated by the models. |
| F-146 |
The following classifications are established for the analysis of concentration:
| · | By country: the risk country of the borrower will be the one where the operation that generates the resources to pay the credit obligation has ocurred. |
| · | By sector: done according to the sectorial sub-segmentation defined by the Bank based mainly on the code CIIU2. |
| · | By categories: refers to the portfolio categories of each agreement (commercial and financial leases, consumer loans, small business loans and mortgages). |
| · | By economic group: according to the characteristics of economic groups as established by regulations. |
| b. | Credit Quality Analysis - Loans and Financial Leases |
Rating System for Credit Risk Management
Its principal aim is to determine the risk profile of the borrower, which is obtained through a rating.
The rating for corporate loans is assigned based on the analysis of the interrelation of both qualitative and quantitative elements that can affect the fulfillment of the financial commitments acquired by a borrower. They take information on the financial statements, profit and loss statement, historical payment behavior both with the Bank and with other entities, and qualitative information on variables that are not explicit in the financial statements. The rating model is applied at the origination of the loan and is updated by a central qualification office to undertake a biannual evaluation of the loan portfolio, during the months of May and November each year.
In the case of a retail customer, granting and behavior scoring models are used in order to identify the level of risk associated with the borrower. These models include information as personal details, financial information, historical behavior, the total number of credit products and external information from credit bureaus.
As the subsidiaries have their own internal rating models, for purposes of assessing the consolidated credit risk in a homogeneous bases, the Bank has established the following categories of risk in order to classify borrowers according to their payment behavior:
| Category | Description |
| A- Normal Risk | Loans and financial leases in this category are appropriately serviced. The borrower’s financial statements or its projected cash flows, as well as all other credit information available to the Bank, reflect adequate paying capacity. |
| B- Acceptable Risk | Loans and financial leases in this category are acceptably serviced and guaranty protected, but there are weaknesses in the payment capacity of the borrower which may potentially affect, on a temporary or permanent basis, the borrower’s ability to pay or its projected cash flows, to the extent that, if not timely corrected, would affect the normal servicing of the loans and financial leases. |
| C- Appreciable Risk | Loans and financial leases in this category represent insufficiencies in the borrower’s paying capacity or in the projected cash flow, which may compromise the normal servicing of the loans and financial leases. |
| D- Significant Risk | Loans and financial leases in this category have the same deficiencies as loans in category C, but to a larger extent; consequently, the probability of collection is highly doubtful. |
| E- Unrecoverable | Loans and financial leases in this category are deemed uncollectible. |
| 2 | CIIU: International Standard Industrial Classification of All Economic Activities. |
| F-147 |
Description of Loans and Financial Leases
In order to evaluate and manage credit risk, the credits and financial leasing operations have been classified as:
| · | Commercial and Financial Leases: |
Loans granted to individuals or companies in order to carry out organized economic activities and are not classified as small business loans.
The borrower of this portfolio is mainly made up of companies, segmented in homogenous groups that are constituted according to size, measured by annual sales. The following variables are part of this classification:
| Segment | Incomes/Sales |
| Business | Companies with annual sales > = COP 20,000 M and < COP 45,000 M except for Banco Agrícola, which places borrowers with annual sales >= USD 1M and < USD 25 M and their main activity is in El Salvador. |
| Business Construction | Constructors who dedicate themselves professionally to the construction of buildings to be sold as their main activity, with annual sales >= COP 10,000 M and <= COP 20,000 M or with more than three projects. |
| Corporate Construction | Constructors who dedicate themselves to the construction of buildings to be sold as their main activity, with annual sales > COP 20,000 M or more than five projects |
| Corporate | Companies with annual sales >= COP 45,000 M., Banistmo places borrowers with annual sales superior to USD 10 Million in this classification and Banco Agrícola places borrowers with annual sales >= USD 25 M and their main activity is in El Salvador. |
| Institutional Financing | Financial sector institutions. |
| Government | Municipalities, districts, departments with their respective decentralized organizations and entities at the national level with annual sales > COP 20,000 M. |
| SME | Annual sales >= COP 280 M and < COP 20,000 M, with a classification between small, medium and large, except for Banistmo which place companies that do not surpass USD 10 M in annual sales in this classification. |
| · | Consumer: |
Loans and financial leases, regardless of amount, granted to individuals for the purchase of consumer goods or to pay for non-commercial or business services.
| F-148 |
These loans are classified as follows:
| Classification | |
| Vehicles | Credits granted for the acquisition of vehicles. The vehicle financed is used as collateral for the loan. |
| Credit Cards | Rolling credit limits for the acquisition of consumer goods, utilized by means of a plastic card. |
| Payroll loans | It is a credit line attached to an authorized individual payroll amount. |
| Others loans | Loans granted for the acquisition of consumer goods other than vehicles and Payroll loans. Credit cards are not included in this segment. |
The counterparty of this portfolio is mainly made up of individuals, segmented in homogenous groups, which are formed according to their size, which is calculated by their monthly income.
| · | Mortgage: |
These are loans, regardless of amount, granted to individuals for the purchase of a new or used house or to build a home, all in accordance with Colombian Law 546 of 1999. These loans include loans denominated in Real Value Unit (UVR), which is an inflation index certified by the Colombian Central Bank, or local currency that are guaranteed by a senior mortgage on the property and that are financed with a total repayment term of 5 to 30 years.
The counterparty of the mortgage loan is mainly made up of individuals segmented in homogenous groups, which are formed according to their size, which is calculated by their monthly income. Additionally, this credit portfolio modality is classified in VIS3 and no VIS.
| · | Small Business Loans: |
These are issued for the purpose of encouraging the activities of small business and are subject to the following requirements: (i) the maximum amount to be lent is equal to 25SMMLV and at any time the balance of any single borrower may not exceed such amount (as stipulated in article 39 of Colombian Law 590 of 2000) and (ii) the main source of payment for the corresponding obligation shall be the revenues obtained from activities of the borrower’s micro business. The balance of indebtedness on the part of the borrower may not exceed 120 SMMLV, as applicable, at the moment the credit is approved.
The borrower of this portfolio is mainly made up of individuals, segmented in homogenous groups, which are formed according to their commercial size, which is calculated by their monthly income.
Loans and Financial Leases Collateral
The Bank obtains collateral for loans and leases in order to mitigate credit risk by foreclosing the collateral when the borrower cannot fully repaid the loan or lease. Collateral is considered in the determination of the allowance for loans and advances and lease losses when it complies with the following conditions:
| · | Their fair value is enough to cover the exposure of the obligation and was established according to technical and objective criteria. |
| · | The entity is granted a preference or an improved right to obtain the payment of the obligation, becoming an effective collateral. |
| · | Its performance is reasonably possible. |
| · | They are a payment source that sufficiently attends to the credit as per the requirement of the Bank. |
| · | When the borrower is a government entity, the collateral has to have a pledge certificate issued by the appropriate authority. |
| 3 | VIS: Social Interest Homes, corresponds to mortgage loans granted by the financial institutions of amounts less than 135 SMMLV. |
| F-149 |
The Bank has defined the criteria for the collateral enforceability, which are established according to the classification of loan portfolio. Besides, the Bank has set guidelines to value collaterals and the frequency of such valuations, as well as those guidelines related to the legalization, registry and maintenance of the collateral. Likewise, the Bank has defined the criteria for insurability, custody and the necessary procedures for their cancellation.
The update of the fair value of mortgages and vehicles collaterals for the loan portfolio is made between one and three years of agreement with the policy. The methodology used to estimate the fair value of the properties is applied by external and independent entities. Updating the fair value of the vehicles is done through guides and valid values commonly used as reference to set the value of a vehicle. The fair value of real state and vehicles are classified in levels 2 and 3 depending on the observability and significance of the inputs used in the valuation techniques according to the hierarchy established by IFRS 13.
The following table shows loans and financial leases, classified in commercial, consumer, mortgage, financial leases and small business loans, and disaggregated by type of collateral:
| December 31, 2016 | ||||||
| Amount Covered by Collateral | ||||||
| In Millions of COP | ||||||
| Nature of the Collateral | Commercial | Consumer | Mortgage | Financial Leasing | Small Business | Total |
| Real Estate and Residential | 18,359,267 | 1,493,231 | 17,862,248 | - | 215,889 | 37,930,635 |
| Goods Given in Real Estate Leasing | - | - | - | 9,231,286 | - | 9,231,286 |
| Goods Given in Leasing Other Than Real Estate | - | - | - | 6,185,983 | - | 6,185,983 |
| Stand by Letters of Credit | 206,453 | - | - | - | - | 206,453 |
| Security Deposits | 1,015,605 | 280,543 | - | - | 59,029 | 1,355,177 |
| Guarantee Fund | 2,542,666 | 53 | 308,532 | - | 348 | 2,851,599 |
| Sovereign of the Nation | 25,421 | - | - | - | - | 25,421 |
| Collection Rights | 2,896,981 | 35,816 | - | - | 1,230 | 2,934,027 |
| Other Collateral (Pledges) | 3,754,892 | 4,108,148 | 23,219 | - | 20,320 | 7,906,579 |
| Without Guarantee (Uncovered Balance) | 57,458,423 | 18,007,488 | 961,853 | 5,926,654 | 765,908 | 83,120,326 |
| Total loans and financial leases | 86,259,708 | 23,925,279 | 19,155,852 | 21,343,923 | 1,062,724 | 151,747,486 |
| F-150 |
| December 31, 2015 | ||||||
| Amount Covered by Collateral | ||||||
| In Millions of COP | ||||||
| Nature of the Collateral | Commercial | Consumer | Mortgage | Financial Leasing | Small Business | Total |
| Real Estate and Residential | 15,705,003 | 1,510,482 | 16,051,801 | 28,322 | 170,445 | 33,466,053 |
| Goods Given in Real Estate Leasing | - | - | - | 8,416,574 | - | 8,416,574 |
| Goods Given in Leasing Other Than Real Estate | - | - | - | 6,366,113 | - | 6,366,113 |
| Stand by Letters of Credit | 223,183 | - | - | - | 72 | 223,255 |
| Security Deposits | 957,826 | 257,268 | - | - | 26,665 | 1,241,759 |
| Guarantee Fund | 2,208,015 | 2,556 | - | 15,230 | 268,013 | 2,493,814 |
| Sovereign of the Nation | 38,132 | - | - | - | - | 38,132 |
| Collection Rights | 3,584,217 | 34,449 | - | 4,409 | 1,242 | 3,624,317 |
| Other Collateral (Pledges) | 3,780,364 | 4,149,944 | 18,951 | 864 | 15,757 | 7,965,880 |
| Without Guarantee (Uncovered Balance) | 59,396,012 | 15,215,916 | 1,048,031 | 5,720,064 | 404,719 | 81,784,742 |
| Total loans and financial leases | 85,892,752 | 21,170,615 | 17,118,783 | 20,551,576 | 886,913 | 145,620,639 |
Foreclosed assets and other credit mitigants
Assets received in lieu of payment (foreclosed assets) are recognized on the statement of financial position when current possession of the asset takes place.
Foreclosed assets represented by immovable or movable property are received based on a commercial valuation. Foreclosed assets such as equity securities and other financial assets, are received based on market value.
During 2016 and 2015, foreclosed assets received amounted to COP 487,122 and COP 107,663, respectively.
The Bank classifies foreclosed assets after acknowledgment of the exchange operation according to the intention of use, as follows:
| · | Non-current assets held for sale. |
| · | Other marketable assets. |
| · | Other non-marketable assets. |
| · | Financial instruments (investments). |
| · | Inventories. |
| · | Premises and equipment. |
| F-151 |
| c. | Risk Concentration – Loans and Financial Leases |
The analysis of credit risk concentration is done by monitoring the portfolio by groups such as: maturity loan, past due loan, loan categories and loan by sector and risk country, as shown here:
| · | Loans concentration by category |
The composition of the credit portfolio in commercial, consumer, mortgage, financial leases and small business loans categories for the years ended December 31, 2016 and December 31, 2015 are as follows:
| Composition | December 31, 2016 | December 31, 2015 |
| In millions of COP | ||
| Commercial | 86,259,708 | 85,892,752 |
| Corporate | 55,862,353 | 53,729,531 |
| SME | 16,521,808 | 15,386,399 |
| Others | 13,875,547 | 16,776,822 |
| Consumer | 23,925,279 | 21,170,615 |
| Credit card | 7,784,658 | 7,160,302 |
| Vehicle | 3,058,653 | 3,089,976 |
| Payroll loans | 5,080,660 | 4,950,780 |
| Others | 8,001,308 | 5,969,557 |
| Mortgage | 19,155,852 | 17,118,783 |
| VIS | 5,017,520 | 4,252,173 |
| Non- VIS | 14,138,332 | 12,866,610 |
| Financial Leases | 21,343,923 | 20,551,576 |
| Small Business Loan | 1,062,724 | 886,913 |
| Loans and advances to customers and financial institutions | 151,747,486 | 145,620,639 |
| Allowance for loans and advances and lease losses | (6,621,911) | (5,248,755) |
| Total net loan and financial leases | 145,125,575 | 140,371,884 |
| · | Concentration of loan by maturity |
The following table shows the ranges of maturity, understood as the remaining term for the completion of the contract of loans and financial leases at December 31, 2016 and 2015:
| December 31, 2016 | |||||
| Maturity | Less Than 1 Year | Between 1 and 3 Years | Between 3 and 5 Years | Greater Than 5 Years | Total |
| In millions of COP | |||||
| Commercial | 18,011,992 | 22,458,578 | 13,494,101 | 32,295,037 | 86,259,708 |
| Corporate | 9,679,076 | 14,032,332 | 8,385,002 | 23,765,943 | 55,862,353 |
| SME | 4,549,984 | 5,711,371 | 3,145,824 | 3,114,629 | 16,521,808 |
| Others | 3,782,932 | 2,714,875 | 1,963,275 | 5,414,465 | 13,875,547 |
| Consumer | 692,986 | 4,873,973 | 9,713,953 | 8,644,367 | 23,925,279 |
| Credit card | 189,648 | 1,465,599 | 2,363,351 | 3,766,060 | 7,784,658 |
| Vehicle | 68,174 | 644,217 | 1,516,701 | 829,561 | 3,058,653 |
| Payroll loans | 46,849 | 589,925 | 1,314,077 | 3,129,809 | 5,080,660 |
| Others | 388,315 | 2,174,232 | 4,519,824 | 918,937 | 8,001,308 |
| Mortgage | 37,068 | 130,429 | 309,167 | 18,679,188 | 19,155,852 |
| VIS | 11,151 | 45,615 | 81,807 | 4,878,947 | 5,017,520 |
| Non-VIS | 25,917 | 84,814 | 227,360 | 13,800,241 | 14,138,332 |
| Financial Leases | 3,389,108 | 2,719,026 | 3,168,629 | 12,067,160 | 21,343,923 |
| Small business loans | 128,025 | 604,831 | 161,559 | 168,309 | 1,062,724 |
| Total gross loans and financial leases | 22,259,179 | 30,786,837 | 26,847,409 | 71,854,061 | 151,747,486 |
| F-152 |
| December 31, 2015 | |||||
| Maturity | Less Than 1 Year | Between 1 and 3 Years | Between 3 and 5 Years | Greater Than 5 Years | Total |
| In millions of COP | |||||
| Commercial | 28,961,893 | 15,299,262 | 11,833,781 | 29,797,816 | 85,892,752 |
| Corporate | 18,280,963 | 8,585,749 | 7,422,020 | 19,440,799 | 53,729,531 |
| SME | 4,837,267 | 4,845,179 | 2,831,739 | 2,872,214 | 15,386,399 |
| Others | 5,843,663 | 1,868,334 | 1,580,022 | 7,484,803 | 16,776,822 |
| Consumer | 4,067,215 | 4,749,430 | 8,163,021 | 4,190,949 | 21,170,615 |
| Credit card | 2,636,138 | 1,395,015 | 2,160,657 | 968,492 | 7,160,302 |
| Vehicle | 73,875 | 656,111 | 1,401,635 | 958,355 | 3,089,976 |
| Payroll loans | 157,659 | 837,630 | 2,104,080 | 1,851,411 | 4,950,780 |
| Others | 1,199,543 | 1,860,674 | 2,496,649 | 412,691 | 5,969,557 |
| Mortgage | 44,099 | 154,032 | 297,668 | 16,622,984 | 17,118,783 |
| VIS | 8,951 | 46,270 | 83,377 | 4,113,575 | 4,252,173 |
| Non-VIS | 35,148 | 107,762 | 214,291 | 12,509,409 | 12,866,610 |
| Financial Leases | 2,325,571 | 3,825,292 | 2,186,262 | 12,214,451 | 20,551,576 |
| Small business loans | 189,206 | 455,594 | 116,515 | 125,598 | 886,913 |
| Total gross loans and financial leases | 35,587,984 | 24,483,610 | 22,597,247 | 62,951,798 | 145,620,639 |
| · | Concentration by past due days |
The following shows the loans according to past due days. A loan is considered past due if it is more than one month overdue (i.e. 31 days):
| December 31, 2016 | ||||||
| Past-due | ||||||
| Period | 0 - 30 Days | 31 - 90 Days | 91 - 120 Days | 121 - 360 Days | More Than 360 Days | Total |
| In millions of COP | ||||||
| Commercial | 84,353,343 | 361,110 | 116,876 | 857,622 | 570,757 | 86,259,708 |
| Consumer | 22,624,937 | 609,278 | 168,018 | 443,530 | 79,516 | 23,925,279 |
| Mortgage | 17,746,163 | 639,346 | 132,330 | 284,214 | 353,799 | 19,155,852 |
| Financial Leases | 20,695,617 | 149,214 | 25,238 | 160,557 | 313,297 | 21,343,923 |
| Small Business Loan | 943,393 | 42,941 | 11,639 | 46,382 | 18,369 | 1,062,724 |
| Total | 146,363,453 | 1,801,889 | 454,101 | 1,792,305 | 1,335,738 | 151,747,486 |
| December 31, 2015 | ||||||
| Past-due | ||||||
| Period | 0 - 30 Days | 31 - 90 Days | 91 - 120 Days | 121 - 360 Days | More Than 360 Days | Total |
| In millions of COP | ||||||
| Commercial | 84,050,557 | 663,131 | 89,588 | 665,556 | 423,920 | 85,892,752 |
| Consumer | 20,143,667 | 507,297 | 129,684 | 324,305 | 65,662 | 21,170,615 |
| Mortgage | 15,943,609 | 549,298 | 112,261 | 247,540 | 266,075 | 17,118,783 |
| Financial Leases | 19,979,338 | 130,336 | 26,120 | 212,315 | 203,467 | 20,551,576 |
| Small Business Loan | 814,163 | 22,830 | 7,214 | 31,544 | 11,162 | 886,913 |
| Total | 140,931,334 | 1,872,892 | 364,867 | 1,481,260 | 970,286 | 145,620,639 |
| F-153 |
| · | Concentration of loans by economic sector |
The following is the detail of the credit portfolio by main economic activity of the borrower for the years ended December 31, 2016 and 2015:
| December 31, 2016 | |||
| Economic sector | Loans and financial leases | ||
| Local | Foreign | Total | |
| In millions of COP | |||
| Agriculture | 3,360,479 | 2,210,219 | 5,570,698 |
| Petroleum and Mining Products | 1,670,126 | 96,463 | 1,766,589 |
| Food, Beverages and Tobacco | 4,992,305 | 556,798 | 5,549,103 |
| Chemical Production | 3,184,196 | 218,010 | 3,402,206 |
| Government | 3,426,089 | 204,429 | 3,630,518 |
| Construction | 14,122,163 | 4,496,434 | 18,618,597 |
| Commerce and Tourism | 15,953,310 | 6,056,928 | 22,010,238 |
| Transport and Communications | 7,484,105 | 740,379 | 8,224,484 |
| Public Services | 5,013,469 | 4,626,201 | 9,639,670 |
| Consumer Services | 28,673,632 | 13,116,938 | 41,790,570 |
| Commercial Services | 15,186,857 | 5,753,166 | 20,940,023 |
| Other Industries and Manufactured Products | 6,141,378 | 4,463,412 | 10,604,790 |
| Total | 109,208,109 | 42,539,377 | 151,747,486 |
| December 31, 2015 | |||
| Economic sector | Loans and financial leases | ||
| Local | Foreign | Total | |
| In millions of COP | |||
| Agriculture | 4,330,757 | 1,942,147 | 6,272,904 |
| Petroleum and Mining Products | 1,791,910 | 355,825 | 2,147,735 |
| Food, Beverages and Tobacco | 5,141,738 | 330,038 | 5,471,776 |
| Chemical Production | 2,871,547 | 331,651 | 3,203,198 |
| Government | 3,131,339 | 668,463 | 3,799,802 |
| Construction | 14,577,061 | 5,424,291 | 20,001,352 |
| Commerce and Tourism | 14,934,712 | 5,833,248 | 20,767,960 |
| Transport and Communications | 8,189,789 | 1,588,048 | 9,777,837 |
| Public Services | 4,881,297 | 4,807,362 | 9,688,659 |
| Consumer Services | 22,439,817 | 12,634,026 | 35,073,843 |
| Commercial Services | 15,956,430 | 3,049,918 | 19,006,348 |
| Other Industries and Manufactured Products | 5,657,242 | 4,751,983 | 10,409,225 |
| Total | 103,903,639 | 41,717,000 | 145,620,639 |
| F-154 |
| · | Credit concentration by country |
The table below shows the concentration of the loans and financial leases by country. Loans are presented based on the country that they were originated:
| December 31, 2016 | ||||
| Country | Loans and financial leases | % Participation | Allowance for loans and advances and lease losses | % Participation |
| Colombia | 102,011,845 | 67.22% | 5,369,122 | 81.08% |
| Panamá | 31,216,172 | 20.57% | 783,883 | 11.84% |
| El Salvador | 8,879,815 | 5.85% | 345,364 | 5.22% |
| Puerto Rico | 1,220,689 | 0.80% | 10,218 | 0.15% |
| Perú | 140,114 | 0.09% | 9,958 | 0.15% |
| Guatemala | 8,265,518 | 5.45% | 102,772 | 1.55% |
| Other Countries | 13,333 | 0.02% | 594 | 0.01% |
| Total | 151,747,486 | 100.00% | 6,621,911 | 100.00% |
| December 31, 2015 | ||||
| Country | Loans and financial leases | % Participation | Allowance for loans and advances and lease losses | % Participation |
| Colombia | 95,970,455 | 65.90% | 4,257,441 | 81.11% |
| Panamá | 31,001,163 | 21.28% | 558,856 | 10.65% |
| El Salvador | 8,998,603 | 6.18% | 404,384 | 7.70% |
| Puerto Rico | 1,217,737 | 0.84% | 13,545 | 0.26% |
| Perú | 256,511 | 0.18% | 13,953 | 0.27% |
| Guatemala | 8,162,177 | 5.61% | - | 0.00% |
| Other Countries | 13,993 | 0.01% | 576 | 0.01% |
| Total | 145,620,639 | 100.00% | 5,248,755 | 100.00% |
| · | Credit concentration by economic group |
As of December 31, 2016 and 2015, concentration of the 20 largest economic groups amounted to COP 17.3 billion and 17.4 billion, respectively. This exposure corresponds to all credit active operations of these groups and the exposure of each one does not exceed 10% of the Parent Company’s Technical Capital in accordance with Colombian law respect to credit exposure limits.
| d. | Credit quality – loans and financial leases |
The following table shows information about current, past due and impaired loans as of December 31, 2016 and December 31, 2015:
| December 31, 2016 | |||||
| Risk Category | Current loans without impairment | Past due loan without impairment | Current loans that are impaired | Past due and impaired loans | Total |
| In millions of COP | |||||
| A- Normal Risk | 134,686,374 | 183,232 | 1,590,500 | 11,110 | 136,471,216 |
| B- Acceptable Risk | 4,810,882 | 861,347 | 1,574,761 | 72,370 | 7,319,360 |
| C- Appreciable Risk | - | - | 2,603,480 | 979,191 | 3,582,671 |
| D- Significant Risk | 1,247 | - | 696,641 | 1,801,383 | 2,499,271 |
| E- Unrecoverable Risk | - | - | 532,715 | 1,342,253 | 1,874,968 |
| Total | 139,498,503 | 1,044,579 | 6,998,097 | 4,206,307 | 151,747,486 |
| F-155 |
| December 31, 2015 | |||||
| Risk Category | Current loans without impairment | Past due loan without impairment | Current loans that are impaired | Past due and impaired loans | Total |
| In millions of COP | |||||
| A- Normal Risk | 130,982,505 | 247,660 | 755,456 | 13,522 | 131,999,143 |
| B- Acceptable Risk | 6,101,551 | 740,335 | 778,519 | 62,211 | 7,682,616 |
| C- Appreciable Risk | 1,937 | - | 1,398,056 | 1,038,548 | 2,438,541 |
| D- Significant Risk | - | - | 576,447 | 1,245,135 | 1,821,582 |
| E- Unrecoverable Risk | - | 6,796 | 389,377 | 1,282,584 | 1,678,757 |
| Total | 137,085,993 | 994,791 | 3,897,855 | 3,642,000 | 145,620,639 |
In order to determine the loans and financial leases impairment the Bank considers the economic conditions and performance of the borrower’s industry, the analysis of payments behavior, events that could negatively affect the borrower’s ability to pay, among others.
Impairment is determined either by a collective or individual evaluation according to the amount and characteristics of the loan.
If the evaluation is collective, the impairment is determined in accordance with the variables PD, LGD and EAD. During 2016, enhancements to the estimation process were done, including the fact that information reflecting recoveries of defaulted loans for an entire economic cycle became available. The Bank, therefore, used the latest internal information to calculate the LGD parameter, that provides a better estimate of its borrower's credit risk. In prior periods, internal and external information (including finance sector data) was used. This change in accounting estimate resulted in a decrease of the allowance for loans and advances and lease losses amounting to COP 183,125 million at December 31, 2016.
All loans with a carrying amount equal or larger than COP 2,000 million are individually assessed (USD 1 million for foreign subsidiaries). The allowance for loans and advances and lease losses for significant impaired loans are assessed based on the present value of estimated future cash flows discounted at the original effective interest rate or on the fair value of collateral in the case where the loan is considered collateral-dependent. An allowance for loans and advances and lease losses is provided when discounted future cash flows or the fair value of collateral is lower than the book value.
| F-156 |
The table below shows impaired loans and financial leases as of December 31, 2016 and December 31 and 2015 according to their type of evaluation:
| December 31, 2016 | ||||
| Impairment | Individual Evaluation | Collective Evaluation | ||
| Carrying Amount | Impairment | Carrying Amount | Impairment | |
| In millions of COP | ||||
| Commercial | 4,547,366 | 1,767,139 | 2,245,077 | 1,121,557 |
| Consumer | 4,586 | 1,153 | 1,820,092 | 1,025,668 |
| Mortgage | - | - | 1,215,061 | 474,479 |
| Financial Leases | 454,477 | 265,920 | 815,043 | 144,318 |
| Small Business Loan | - | - | 102,702 | 73,594 |
| Total | 5,006,429 | 2,034,212 | 6,197,975 | 2,839,616 |
| December 31, 2015 | ||||
| Impairment | Individual Evaluation | Collective Evaluation | ||
| Carrying Amount | Impairment | Carrying Amount | Impairment | |
| In millions of COP | ||||
| Commercial | 2,061,218 | 1,087,354 | 1,839,366 | 982,636 |
| Consumer | 349 | 349 | 1,422,849 | 989,868 |
| Mortgage | - | - | 1,091,645 | 385,137 |
| Financial Leases | 325,950 | 157,898 | 724,043 | 266,934 |
| Small Business Loan | - | - | 74,435 | 54,249 |
| Total | 2,387,517 | 1,245,601 | 5,152,338 | 2,678,824 |
A one-percent increase or decrease in PD or LGD and in the cash flows for impaired loans represents an increase of approximately COP 81,446 million in the allowance for loans and advances and lease losses or in a recovery of COP 118,556 million respectively. These sensitivity analyses do not represent management’s expectations of a decline in risk ratings or an increase in loss rates, however is provided as a hypothetical scenario to assess the sensitivity of the allowance for loans and advances and lease losses to changes in key inputs. The Bank believes the risk ratings and loss severities currently in use are appropriate and represent management’s expectations about the credit risk inherent in its loan portfolio.
The following table shows the past due loans and financial leases without impairment:
| December 31, 2016 | ||||||
| Current Loan | Past Due Loan | |||||
| Period | 0 - 30 Days | 31 - 90 Days | 91 - 120 Days | 121 - 360 Days | More Than 360 Days | Total |
| In millions of COP | ||||||
| Commercial | 79,287,627 | 178,350 | - | 1,287 | 1 | 79,467,265 |
| Consumer | 21,809,911 | 290,549 | 5 | 133 | 3 | 22,100,601 |
| Mortgage | 17,485,525 | 368,574 | 50,410 | 36,282 | - | 17,940,791 |
| Financial Leases | 19,880,982 | 89,573 | 395 | 2,557 | 100,896 | 20,074,403 |
| Small Business Loan | 930,432 | 29,590 | - | - | - | 960,022 |
| Total | 139,394,477 | 956,636 | 50,810 | 40,259 | 100,900 | 140,543,082 |
| F-157 |
| December 31, 2015 | ||||||
| Current Loan | Past Due Loan | |||||
| Period | 0 - 30 Days | 31 - 90 Days | 91 - 120 Days | 121 - 360 Days | More Than 360 Days | Total |
| In millions of COP | ||||||
| Commercial | 81,751,070 | 234,143 | 139 | 6,816 | - | 81,992,168 |
| Consumer | 19,474,745 | 272,251 | 118 | 303 | - | 19,747,417 |
| Mortgage | 15,673,893 | 289,159 | 38,718 | 25,368 | - | 16,027,138 |
| Financial Leases | 19,325,515 | 71,704 | 371 | 1,522 | 102,471 | 19,501,583 |
| Small Business Loan | 797,959 | 14,519 | - | - | - | 812,478 |
| Total | 137,023,182 | 881,776 | 39,346 | 34,009 | 102,471 | 138,080,784 |
| e. | Credit Risk Management – Other Financial Instruments: |
Each one of the positions that make up the portfolio complies with the policies and limits that seek to diminish credit risk exposure. Those policies are, among others:
| · | Term Limits: Each borrower is evaluated by the Risk Committee, in which the result of the authorized model for this type of borrower is reviewed (quantitative and qualitative variables), which allows the Risk Committee to establish the maximum term for which the Bank wishes to have exposure. |
| · | Credit Limits: Limits approved under the model and with authorization from the Risk Committee, as well as the exposure, are monitored in line or batch, in such a way that the presentation of excesses is mitigated. |
| · | Counterparty Limits: These limits, derived from the credit limits or from allocation models and are verified by the Front Office prior to the close of operations. |
| · | Master Agreement: These bilateral agreements describe the handling of operations between the counterparties in accordance with good international practices and that limit the legal and financial risk under the occurrence of events of default (failure to pay or delivery). Mitigation mechanisms, procedures to be carried out in the case of this events of default, special conditions by type of operation and that are applied to OTC derivatives, Repos and other securities financing transactions, are all agreed upon. |
| · | Margin Agreements: For OTC derivatives operations and other securities financing transactions, agreements that regulate the administration of guarantees, haircuts, adjustment periods, minimum transfer amounts, etc., and that limit risk for a period of time (one day, one week, etc.), are established for counterparties involved in the operation. |
| · | Counterparty Alerts: There are financial, qualitative and market indicators that allow the Bank to establish damages to the credit quality of an issuer or counterparty. |
| F-158 |
| f. | Credit Quality Analysis - Other Financial Instruments: |
In order to evaluate the credit quality of a counterparty or issuer (to determine a risk level or profile), the Bank relies on two rating systems: an external one and an internal one, both of which allow to identify a degree of risk differentiated by segment and country and to apply the policies that have been established for issuers or counterparties with different levels of risk, in order to limit the impact on liquidity and/or the income statement of the Bank.
External credit rating system is divided by the type of rating applied to each instrument or counterparty; in this way the geographic location, the term and the type of instrument allow the assignment of a rating according to the methodology that each examining agency uses.
Internal credit rating system: The “ratings or risk profiles” scale is created with a range of levels that go from low exposure to high exposure (this can be reported in numerical or alphanumerical scales), where the rating model is sustained by the implementation and analysis of qualitative and quantitative variables at sector level, which according to the relative analysis of each variable, determine credit quality; in this way the internal credit rating system aims to establish adequate margin in decision-making regarding the management of financial instruments.
Credit Quality Analysis of the Group
| Debt Securities | Equity | Derivatives4 | ||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| Maximum Exposure to Credit Risk | ||||||
| Low Risk | 9,134,939 | 9,967,029 | 792,323 | 918,910 | 765,355 | 1,111,724 |
| Medium Risk | 1,695,848 | 1,987,026 | 11,111 | - | 94 | 101 |
| High Risk | 647,709 | 846,379 | 602 | 558 | 1,640 | 3,374 |
| Without Rating | 227,067 | 370,755 | 610,788 | 243,122 | 12,741 | 19,949 |
| Total | 11,705,563 | 13,171,189 | 1,414,824 | 1,162,590 | 779,829 | 1,135,149 |
In accordance with the criteria and considerations specified in the internal rating allocation and external credit rating systems methodologies, the following schemes of relation can be established, according to credit quality given to each one of the qualification scales:
Low Risk: All investment grade positions (from AAA to BBB-), as well as those issuers that according to the information available (financial statements, relevant information, external ratings, CDS, among others.) reflect adequate credit quality.
Medium Risk: All speculative grade positions (from BB+ to BB-), as well as those issuers that according to the available information (Financial statements, relevant information, external qualifications, CDS, among others) reflect weaknesses that could affect their financial situation in the medium term.
High Risk: All positions of speculative grade (from B+ to D), as well as those issuers that according to the information available (fFinancial statements, relevant information, external qualifications, CDS, among others) reflect a high probability of default of financial obligations or that already have failed to fulfill them.
| 4 | For derivatives transactions counterparty risk is disclosed as long as the valuation is positive. Therefore, the value described here differs from the book value. |
| F-159 |
| · | Financial credit quality of other financial instruments that are not in default nor impaired in value |
Debt Securities: 100% of the debt securities are not in default.
Equity Securities: The positions do not represent significant risks.
Derivatives: 99.85% of the credit exposure does not present incidences of material default. The remaining percentage corresponds to default events at the end of the period.
| · | Maximum exposure level to the credit risk given for: |
| Maximum Exposure | Collateral5 | Net Exposure | ||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| Maximum Exposure to Credit Risk | ||||||
| Debt Securities | 11,705,563 | 13,171,189 | (1,137,457) | (552,744) | 10,568,106 | 12,618,446 |
| Derivatives | 779,829 | 1,135,149 | (247,307) | (352,644) | 532,522 | 782,505 |
| Equity | 1,414,824 | 1,162,590 | - | - | 1,414,824 | 1,162,590 |
| Total | 13,900,216 | 15,468,928 | (1,384,764) | (905,388) | 12,515,452 | 14,563,541 |
See Notes on this table
| (1) | * Exposure in Derivatives with base in MTM (only positive values), netting by counterparty is applied |
| * Debt Securities Book value 100% |
| * Equity Instruments: |
- Shares:100%
- Investment funds: Book value 100%
| · | Analysis of the maturity of other financial instruments that past due but not impaired |
| − | Debt Securities: Portfolio does not present past due nor impaired assets. |
| − | Equity securities: Portfolio does not present impaired assets |
| − | Derivatives: The past due assets are not material. |
| · | The information corresponding to the individual evaluation of impairment at the end of the period for other financial instruments, is detailed as follows: |
Debt Securities
| Exposure | Impairment | Final Exposure | ||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| Maximum Exposure to Credit Risk | ||||||
| Fair Value | 8,538,974 | 9,709,314 | - | - | 8,538,974 | 9,709,314 |
| Amortized Cost | 3,166,589 | 3,461,875 | - | - | 3,166,589 | 3,461,875 |
| Total | 11,705,563 | 13,171,189 | - | - | 11,705,563 | 13,171,189 |
| 5 | Collateral Held (-) and Collateral Pledged (+) |
| F-160 |
Equity
| Exposure | Impairment | Final Exposure | ||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| Maximum Exposure to Credit Risk | ||||||
| Fair Value through profit or loss | 895,425 | 761,907 | - | - | 895,425 | 761,907 |
| Fair Value through OCI | 519,399 | 400,683 | - | - | 519,399 | 400,683 |
| Total | 1,414,824 | 1,162,590 | - | - | 1,414,824 | 1,162,590 |
Collateral- other financial instruments:
Level of collateral: Respect to the type of asset or operation, a collateral level is determined according to the policies defined for each product and the market where the operation is carried out.
Assets held as collateral in organized markets: The only assets that can be received as collateral are those defined by the central counterparties, the stock market where the operation is negotiated, those assets that are settled separately in different contracts or documents, which can be managed by each organization and must comply with the investment policies defined by the Bank, taking into account the credit limit for each type of asset or operation received or delivered, which collateral received are the best credit quality and liquidity.
Assets received as bilateral collateral between counterparties: The collateral accepted in international OTC derivative operations is agreed on bilaterally in the Credit Support Annex (CSA)6 and with fulfillment in cash in dollars and managed by ClearStream. This company acts on behalf of Bancolombia for making international margin calls and providing a better management of the collateral.
Collateral adjustments for margin agreements: The adjustments will be determined by the criteria applied by both the external and internal regulations in effect, and at the same time, mitigation standards are maintained so that the operation fulfills the liquidity and solidity criteria for settlement. Among the main characteristics by product or market, we have:
| − | With respect to the derivative operations, these are carried out daily, with threshold levels of zero for the majority of counterparties, which reduces the exposure to a term that does not exceed 10 days, according to Basel. |
| − | For buy-sell backs, repos and other securities financing transactions, daily monitoring is done in order to establish the need to adjust the collateral in such a way that these are applied in as little time as possible, according to the contracts or market conditions. |
| − | For all international counterparties, margin agreements that limit exposure to the maximum and with a daily adjustment period are celebrated. These margin agreements are celebrated under ISDA (International Swaps and Derivatives Association)7 and GMRA (Global Master Repurchase Agreement)8 both for OTC derivatives and securities financing transactions. |
| − | For every local counterparty, the local framework agreement is signed (agreement developed by the industry) and the mitigating actions to apply in each operation are agreed upon, whether for margin agreements, re-couponing, early termination, among others. |
| − | For repos, buy-sell backs and other securities financing transactions, these are agreed upon by organized markets that in general implicate complying with haircut or additional collateral rules. |
| − | The central counterparty carries out daily control and monitoring processes in order to comply with the rules imposed by these organizations in such a way that we are always making daily adjustments at the demanded collateral level. |
| 6 | A Credit Support Annex (CSA) provides credit protection by setting forth the rules governing the mutual posting of collateral. CSAs are used in documenting collateral arrangements between two parties that trade privately negotiated (over-the-counter) derivative securities. The trade is documented under a standard contract called a master agreement, developed by the International Swaps and Derivatives Association (ISDA). |
| 7 | ISDA: is a trade organization of participants in the market for over-the-counter derivatives, which has created a standardized contract (the ISDA Master Agreement) to enter into derivatives transactions. |
| 8 | GMRA: It is a model legal agreement designed for parties transacting repos and is published by the International Capital Market Association (ICMA), which is the body representing the bond and repo markets in Europe. |
| F-161 |
| g. | Concentration of the credit risk - other financial instruments: |
According to the regulations, the Bank must control on a daily basis the risk of positions of the Bank’s companies with the same issuer or counterparty stands, below the legal limits.
By the same way, the positions of the Bank are verified respect of the authorized risk levels in each country in order to guarantee the alerts and positions limits, that are considered outside of the Bank risk appetite.
| h. | Risk exposure by economic sector and risk country: |
| Debt Securities | Equity | Derivatives9 | ||||
| 2016 | 2015 | 2016 | 2015 | 2016 | 2015 | |
| Maximum Exposure to Credit Risk | ||||||
| Sector Concentration | ||||||
| Corporate | 2,148,173 | 800,366 | 1,193,132 | 986,281 | 187,171 | 289,326 |
| Financial | 979,201 | 1,211,737 | 186,123 | 132,442 | 545,990 | 596,102 |
| Government | 8,578,189 | 11,051,168 | - | - | - | - |
| Funds and ETF | - | 107,918 | 35,569 | 43,867 | 46,668 | 249,721 |
| Total | 11,705,563 | 13,171,189 | 1,414,824 | 1,162,590 | 779,829 | 1,135,148 |
| Concentration by Location | ||||||
| North America | 344,173 | 539,462 | - | 7,814 | 294,317 | 296,186 |
| Latam | 11,352,383 | 12,607,259 | 1,407,845 | 1,154,776 | 369,401 | 716,004 |
| Europe | 9,007 | - | 6,979 | - | 55,572 | 116,473 |
| Others (Includes Funds and ETF) | - | 24,467 | - | - | 60,539 | 6,485 |
| Total | 11,705,563 | 13,171,189 | 1,414,824 | 1,162,590 | 779,829 | 1,135,148 |
At the moment, the Bank’s positions are not in excess of the concentration limit, according to the applicable laws.
9 For derivatives transactions counterparty risk is revealed as long as the valuation is positive. Therefore, the value described here differs from the book value.
| F-162 |
| 2. | MARKET RISK |
Market risk refers to the risk of losses in the Bank’s treasury book due to changes in equity prices, interest rates, foreign-exchange rates and other indicators whose values are set in a public market. It also refers to the probability of unexpected changes in net interest income and equity economic value as a result of a change in market interest rates.
Market risk stems from the following activities at the Bank:
| a) | Trading: includes purchase - sale and positioning mainly in fixed income securities, equities, currencies and derivatives, as well as the financial services provided to customers, such as brokerage. Trading instruments are recorded in the treasury book and are managed by the Treasury Division which is also responsible for the aggregated management of exchange rate exposures arising from the banking book and treasury book. |
| b) | Balance sheet management: refers to the assets and liabilities management, due to mismatches in maturities and repricing of them. The Assets Liability Management Division is responsible for the balance sheet management, preserving the stability of the financial margin and the equity economic value, maintaining adequate levels of liquidity and solvency. Non-trading instruments are recorded in the Bank’s banking book (the “Banking Book”), which includes primarily loans, time deposits, checking accounts and savings accounts. |
In the Bank, the market risks are identified, measured, monitored, controlled and reported in order to support the decision-taking process for their mitigation, and to create greater shareholder value added.
The guidelines, policies and methodologies for market risks management are approved by the Board of Directors, thus guaranteeing the congruence and consistency in the risk appetite among subsidiaries. Each country has a local Market and Liquidity Risk Management Office that applies at an individual level the principles of the Bank´s Market Risks Management Strategy. The Board of Directors and senior management have formalized the policies, procedures, strategies and rules of action for market risk administration in its “Market Risk Manual”. This manual defines the roles and responsibilities within each subdivision of the Bank and their interaction to ensure adequate market risk administration.
The Bank´s Market and Liquidity Risks Management Office, responsible for monitoring and permanently controlling compliance with the limits established, is set up with clear independence from the trading and businesses units, ensuring enforcement authority. This independent control function is complemented by regular reviews conducted by the Internal Audit.
The Bank’s Market and Liquidity Risks Management Office is responsible for: (a) identifying, measuring, monitoring, analyzing and controlling the market risk inherent in the Bank’s businesses: (b) analyzing the Bank’s exposure under stress scenarios and confirming compliance with the Bank’s risk management policies: (c) designing the methodologies for valuation of the market value of certain securities and financial instruments: (d) reporting to senior management and the Board of Directors any violation of the Bank’s risk management policies: (e) reporting to the senior management on a daily basis the levels of market risk associated with the trading instruments recorded in its treasury book, and (f) proposing policies to the Board of Directors and to senior management that ensure the maintenance of predetermined risk levels. The Bank has also implemented an approval process for new products across each of its subdivisions. This process is designed to ensure that each subdivision is prepared to incorporate the new product into its procedures, that every risk is considered before the product is incorporated and that approval is obtained from the Board of Directors before the new product can be sold.
| F-163 |
Market risks arising from trading instruments are measured at the Bank using two different Value at Risk (VaR) methodologies: the standard methodology required by the Superintendence of Finance (SFC), and the internal methodology of historical simulation. The standard methodology is established by “Chapter XXI of the Basic Accounting Circular”, based on the model recommended by the Amendment to the Capital Accord to Incorporate Market Risks of Basel Committee of 2005. The internal methodology of historical simulation uses a confidence level of 99%, a holding period of 10 days, and a time frame of one year or at least 250 days from the reference date of the VaR calculation is used, obtained from the reference date of calculating the VaR. The standard methodology is used to report the market risk exposure to the Financial Superintendency and is also used to measure the capital requirements for the Bank, therefore the analysis below is based on information obtain from this model.
The Bank’s VaR limits structure for trading activities, is sufficiently granular to conduct an effective control of the various types of market risk factors on which an exposure is held. It ensures that the market risk is not concentrated in certain asset classes and maximizes the portfolio diversification effect. These limits are defined by companies, products or by risk takers. The majority of the limits are based on the maximum VaR values to which a certain portfolio can be exposed, nevertheless, loss triggers, stop loss and sensitivity warning levels are also set, especially in the derivatives portfolios. The limits are approved by the Board of Directors, and set based on factors such as tolerance for losses, capital resources and market´s complexity and volatility. They are monitored daily, and their excesses or violations are reported to the Board of Directors and the Risk Committee.
Additional measurements like stress tests are done, to identify extreme unusual situations that could cause severe losses. Stress simulations include historical events and hypothetical scenarios. Back testing or model validation technics through comparison of predicted and actual loss level are applied on a regular basis to analyze and contrast the accuracy of the VaR calculation methodology in order to confirm its reliability, and make adjustments to the models if necessary.
Within the control and monitoring processes of market risks, reports are elaborated on a daily, weekly and monthly basis. They include an analysis of the most relevant risk measures and allow for monitoring the exposure levels to market risks and to the legal and internal limits established for each one of the levels of the Bank. These reports are taken as an input for the decision-taking process in the different Committees and management of the Bank.
Market Risk Management
The Bank uses a value at risk (“VaR”) calculation to limit its exposure to the market risk of its Treasury Book. The board of directors is responsible for establishing the maximum VaR based on its assessment of the appropriate level of risk for Bancolombia. The Risks Committee is responsible for establishing the maximum VaR by type of investment (e.g., fixed income in public debt) and by type of risk (e.g., currency risk). These limits are supervised on a daily basis by the Market Risk Management Office.
For managing the interest rate risk from banking activities, the Bank analyses the interest rate mismatches between its interest earning assets and its interest bearing liabilities. In addition, the foreign currency exchange rate exposures arising from the banking book are provided to the Treasury Division where these positions are aggregated and managed.
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| a. | Measurement of market risk of trading instruments |
The Bank currently measures the treasury book exposure to market risk (including over-the-counter derivatives positions) as well as the currency risk exposure of the banking book, which is provided to the Treasury Division, using a VaR methodology established in accordance with “Chapter XXI of the Basic Accounting Circular”, issued by the SFC.
The VaR methodology established by “Chapter XXI of the Basic Accounting Circular” is based on the model recommended by the Amendment to the Capital Accord to Incorporate Market Risks of Basel Committee of 2005, which focuses on the treasury book and excludes investments classified as amortized cost which are not being given as collateral and any other investment that comprises the banking book, such as non-trading positions. In addition, the methodology aggregate all risks by the use of correlations, through an allocation system based on defined zones and bands, affected by given sensitivity factors.
The total market risk for the Bank is calculated by the arithmetical aggregation of the VaR calculated for each subsidiary. The aggregated VaR is reflected in the Bank’s Capital Adequacy (Solvency) ratio, in accordance with Decree 1771 of 2012.
For purposes of VaR calculations, a risk exposure category is any market variable that is able to influence potential changes in the portfolio value. Taking into account a given risk exposure, the VaR model assesses the maximum loss not exceeded at a specified confidence level over a given period of time. The fluctuations in the portfolio’s VaR depend on volatility, modified duration and positions changes relating to the different instruments that are subject to market risk.
The relevant risk exposure categories for which VaR is computed by the Bank according to “Chapter XXI, Appendix 1 of the Basic Accounting Circular” are: (i) interest rate risks relating to local currency, foreign currency and UVR; (ii) currency risk; (iii) stock price risk; and (iv) fund risk.
| · | Interest Rate Risk (Treasury Book) |
The interest rate risk is the probability of decrease in the market value of the position due to fluctuations in market interest rates. The Bank calculates the interest rate risk for positions in local currency, foreign currency and UVR separately; in accordance with Chapter XXI of the Basic Accounting Circular issued by the SFC.
In the first instance, the interest rate risk exposure is determined by the sensitivity calculation for the net position of each instrument. This sensitivity is calculated as the net value market product, its corresponding modified duration and the estimated variation of interest rates. The possible variations in the interest rates are established by the SFC according to the historical behaviour of these variables in the markets, and they are a function of the duration and currency, as seen in the following table.
| F-165 |
| Zone | Band | Modified Duration | Changes in Interest Rates (pbs) | |||
| Lower Limit | Upper Limit | Legal Currency | UVR | Foreign Currency | ||
| Zone 1 | 1 | 0 | 0.08 | 274 | 274 | 100 |
| 2 | 0.08 | 0.25 | 268 | 274 | 100 | |
| 3 | 0.25 | 0.5 | 259 | 274 | 100 | |
| 4 | 0.5 | 1 | 233 | 274 | 100 | |
| Zone 2 | 5 | 1 | 1.9 | 222 | 250 | 90 |
| 6 | 1.9 | 2.8 | 222 | 250 | 80 | |
| 7 | 2.8 | 3.6 | 211 | 220 | 75 | |
| Zone 3 | 8 | 3.6 | 4.3 | 211 | 220 | 75 |
| 9 | 4.3 | 5.7 | 172 | 200 | 70 | |
| 10 | 5.7 | 7.3 | 162 | 170 | 65 | |
| 11 | 7.3 | 9.3 | 162 | 170 | 60 | |
| 12 | 9.3 | 10.6 | 162 | 170 | 60 | |
| 13 | 10.6 | 12 | 162 | 170 | 60 | |
| 14 | 12 | 20 | 162 | 170 | 60 | |
| 15 | 20 | 162 | 170 | 60 | ||
Once the sensitivity factor is calculated for each position, the modified duration is then used to classify each position within its corresponding band. A net sensitivity is then calculated for each band, by determining the difference between the sum of all long-positions and the sum of all short-positions. Then a net position is calculated for each zone (which consists of a series of bands) determined by the SFC. The final step is to make adjustments within each band, across bands and within each zone, which results in a final number that is the interest rate risk VaR by currency. Each adjustment is performed following the guidelines established by the SFC.
The Bank’s exposure to interest risk primarily arises from investments in Colombian government’s treasury bonds (TES).
| · | Currency (Treasury and Banking Book), Equity (Treasury Book) and Fund (Treasury Book) Risk |
The VaR model uses a sensitivity factor to calculate the probability of loss due to fluctuations in the price of stocks, funds and currencies in which the Bank maintains a position. As previously indicated, the methodology used in these financial statements to measure such risk consists of computing VaR, which is derived by multiplying the position by the maximum probable variation in the price of such positions (“∆p”). The (“∆p”) is determined by the SFC, as shown in the following table:
| Currency | Sensitivity Factor |
| United States Dollar | 5.5% |
| Euro | 6% |
| Other currencies and gold | 8% |
| Equity and Fund Risk | 14.7% |
The interest rate’s fluctuations and the sensitivity factors for currency, equity and fund risk used in the model are established by the SFC according to historical market performance, and have not changed since March 2011.
| · | Total Market Risk VaR |
The total market risk VaR is calculated as the algebraic sum of the interest rate risk, the currency risk, the stock price risk and the fund risk, which are calculated as the algebraic sum of the Parent Company and each of its subsidiaries’ exposure to these risks.
The following table presents the total change on market risk and every risk factor.
| December 2016 | ||||
| In millions of COP | ||||
| Factor | End of Year | Average | Maximum | Minimum |
| Interest Rate | 251,904 | 266,447 | 308,534 | 238,625 |
| Exchange Rate | 247,047 | 331,528 | 393,365 | 247,047 |
| Share Price | 61,120 | 61,811 | 76,438 | 55,264 |
| Collective Portfolios | 36,915 | 44,790 | 112,614 | 36,808 |
| Total Value at Risk | 596,986 | 704,576 | 827,564 | 596,987 |
| December 2015 | ||||
| In millions of COP | ||||
| Factor | End of Year | Average | Maximum | Minimum |
| Interest Rate | 276,405 | 212,472 | 276,405 | 134,113 |
| Exchange Rate | 348,815 | 144,018 | 348,815 | 58,516 |
| Share Price | 54,947 | 56,931 | 80,676 | 49,377 |
| Collective Portfolios | 40,675 | 41,108 | 46,994 | 35,616 |
| Total Value at Risk | 720,842 | 454,529 | 720,842 | 301,236 |
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| · | Assumptions and Limitations of VaR Models |
Although VaR models represent a recognized tool for risk management, they have inherent limitations, including reliance on historical data that may not be indicative of future market conditions or trading patterns. Accordingly, VaR models should not be viewed as predictive of future results. The Bank may incur losses that could be materially in excess of the amounts indicated by the models on a particular trading day or over a period of time, and there have been instances when results have fallen outside the values generated by the Bank’s VaR models. A VaR model does not calculate the greatest possible loss. The results of these models and analysis thereof are subject to the reasonable judgment of the Bank’s risk management personnel.
| b. | Non-trading instruments market risk measurement |
The banking book’s relevant risk exposure is interest rate risk, which is the probability of unexpected changes in net interest income as a result of a change in market interest rates. Changes in interest rates affect the Bank’s earnings because of timing differences on the reprising of the assets and liabilities. The Bank manages the interest rate risk arising from banking activities in non-trading instruments by analyzing the interest rate mismatches between its interest earning assets and its interest bearing liabilities. The foreign currency exchange rate exposures arising from the banking book are provided to the Treasury Division where these positions are aggregated and managed.
| · | Interest Risk Exposure (Banking Book) |
The Bank has performed a sensitivity analysis of market risk sensitive instruments estimating the impact on the net interest income of each position in the Banking Book, using a repricing model and assuming positive parallel shifts of 100 basis points (bps).
The table 1 provides information about Bancolombia’s interest rate sensitivity for the statement of financial position items comprising the Banking Book.
Table 1. Sensitivity to Interest Rate Risk of the Banking Book
The chart below provides information about Bancolombia’s interest rate risk sensitivity in local currency (COP) at December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |
| In millions of COP | ||
| Assets sensitivity 100 bps | 614,268 | 579,393 |
| Liabilities sensitivity 100 bps | 366,262 | 332,079 |
| Net interest income sensitivity 100 bps | 248,006 | 247,314 |
The chart below provides information about Bancolombia’s interest rate risk sensitivity in foreing currency (US dollars) at December 31, 2016 and 2015:
| December 31, 2016 | December 31, 2015 | |
| In millions of USD | ||
| Assets sensitivity 100 bps | 78,173 | 74,228 |
| Liabilities sensitivity 100 bps | 71,401 | 69,869 |
| Net interest income sensitivity 100 bps | 6,772 | 4,359 |
A positive net sensitivity denotes a higher sensitivity of assets than of liabilities and implies that a rise in interest rates will positively affect the Bank´s net interest income. A negative sensitivity denotes a higher sensitivity of liabilities than of assets and implies that a rise in interest rates will negatively affect the Bank´s net interest income. In the event of a decrease in interest rates, the impacts on net interest income would be opposite to those described above.
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Total Exposure:
As of December 31, 2016, the net interest income sensitivity in local currency for the banking book instruments, entered into for other than trading purposes with positive parallel shifts of 100 basis points was COP 248 million, which is not a significant difference between 2015 and 2016.
On the other hand, the net interest income sensitivity in foreign currency, assuming the same parallel shift of 100 basis points, was USD 6.8 million at December 31, 2016, compared with USD 4.4 million at December 31, 2015. The increased net interest income sensitivity due to interest rate risk between 2015 and 2016 occurred due to the increase in the sensitivity of the loan portfolio, because of the decrease in their repricing frecuency.
Assumptions and limitations:
Net interest income sensitivity analysis is based on the repricing model and consider the following key assumptions: (a) does not consider prepayments, new operations, defaults, etc., (b); the fixed rate instruments sensitivity, includes the amounts with maturity lower than one year and assumes these will be disbursed at market interest rates and (c) changes in interest rate occur immediately and parallel in the yield curves from assets and liabilities for different maturities.
| · | Structural equity risk exposure (Banking Book) |
Bancolombia’s investment banking affiliate, in its role of financial corporation, has, directly and through its affiliated companies, structural equity investments. These positions are maintained mostly in energy and construction sectors. Smaller positions are held on the financial sector. The market value of those investments decreased by 56% during the year, to COP 114 billion as of December 31, 2016 from COP 262 billion as of December 31, 2015, as a result of the sale of a portion of the investments in the construction sector.
The structural equity positions are exposed to equity price risk. Sensitivity calculations are made for those positions:
Table 2. Share Price Sensitivity
| December 2016 | December 2015 | |||
| Fair Value | 113,835 | 261,648 | ||
| Delta | 14.7% | 14.7% | ||
| Sensitivity | 16,734 | 38,462 |
A negative impact of 14.7%, applied to the market value, produces a decrease of COP 16 billion on the structural equity investments market value, which would decrease from COP 114 billion to COP 97 billion.
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| 3. | LIQUIDITY RISK |
Liquidity risk is defined as the inability of a financial firm to meet its debt obligations without incurring unacceptably large losses. Thus, funding liquidity risk is the risk that a firm will not be able to meet its current and future cash flow and collateral needs, both expected and unexpected, without materially affecting its daily operations or overall financial condition. The Bank is sensitive to funding liquidity risk since debt maturity transformation is one of its key business areas.
At the Bank, liquidity prevails over any objective of growth or revenue. Managing liquidity has always been a fundamental pillar of its business strategy, together with capital, in supporting its balance sheet strength.
The Bank’s liquidity management model promotes the autonomy of subsidiaries, which must be self-sufficient in their structural funding. Each subsidiary is responsible for meeting the liquidity needs of its current and future activity, within a framework of management coordination at the Bank level. The metrics used to control liquidity risk are developed based on common and homogeneous concepts, but analysis and adaptation are made by each subsidiary.
In line with best governance practices, the Bank has established a clear division of function between executing liquidity management, responsibility of the Asset and Liability Division, and their monitoring and control, responsibility of the Market and Liquidity Risks Management Office.
The different authorities of senior management define the policies and guidelines for managing liquidity risk. These authorities are the Board of Directors, the Risk Committee, and senior management of the Parent Company, which set the risk appetite and define the financial strategy. The ALCO committees (Asset and liability committee) define the objective positioning of liquidity and the strategies that ensure the funding needs derived from businesses. The ALM division (Asset and liability management) and the Market and Liquidity Risks Management Office support the mentioned committees, which elaborate analysis and management proposals, and control compliance with the limits established.
Liquidity Risks Management Office is responsible for proposing the minimum amount of the liquidity reserve, the policies of the liquidity portfolio, defining premises and metrics in order to model the behaviour of the cash flows, proposing and monitoring liquidity limits in line with the Bank's risk appetite, simulating stress scenarios, evaluating and reporting the risks inherent to new products and operations; and submitting the reports required by the internal authorities for decision-making, as well as by regulators. All of the above activities are verified and evaluated by the Internal Audit.
The measures to control liquidity risk include maintaining a portfolio of high liquid assets, and the definition of triggers and liquidity limits, which enable evaluating the level of exposure of each one of the entities in a proactive way.
The methodologies used to control liquidity risk include the liquidity gaps and stress scenarios. The liquidity gaps measure the mismatches of assets, liabilities and off-balance sheet position´s cash flows, separately for local currency and foreign currency. Regulatory metrics are also applied, in which the contractual maturities are used; and internal models in which the cash flows are adjusted by different ratios, to reflect a more accurate behavior of them.
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Each subsidiary has its own liquidity contingency plan, which is tested annually. These contingency plans procure the optimization of different funding sources, including obtaining additional funding from the Parent Company.
Liquidity risk management
The Bank’s Board of Directors sets the strategy for managing liquidity risk and delegates responsibility for oversight of the implementation of this policy to ALCO committee that approves the Bank’s liquidity policies and procedures. The Treasury Division manages the Bank’s liquidity position on a day-to-day basis and reviews daily reports covering the liquidity position. A summary report, including any exceptions and remedial action taken, is submitted regularly to Risk Committee and ALCO committees.
| a. | Liquidity risk exposure: |
In order to estimate liquidity risk, the Bank measure a liquidity coverage ratio to ensure holding liquid assets sufficient to cover potential net cash outflows over 30 day. This indicator allows the Bank to meet liquidity coverage for the next month. The liquidity coverage ratio is presented as follows:
| Liquidity Coverage Ratio | December 31, 2016 | December 31, 2015 |
| Net cash outflows into 30 days* | 6,726,831 | 4,940,749 |
| Liquid Assets | 26,224,218 | 25,295,734 |
| Liquidity coverage ratio | 389.85% | 511.98% |
The liquidity ratio stood at 389.85% at December 31, 2016, for this year it change the way in which the 30-day liquidity requirements were measured. In 2015, using the new methodology the net cash outflows into 30 days would have been COP 7,492,314 and the liquidity coverage ratio would have been 337.6%
*Net cash outflows into 30 days: (Interbank borrowings, Financial assets investments, Loans and advances to customers, Derivative financial instruments), minus 30 days contractual maturities of liabilities Demand deposit Time deposits, Interbank deposits Borrowings from other financial institutions Debt securities, Derivative financial instruments.
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| c. | Contractual maturities of financial assets |
The tables below set out the remaining contractual maturities of principal and interest balances of the Group’s financial assets:
Contractual maturities of financial assets 2016
| Financial Assets | 0 - 1 Year | 1- 3 Years | 3- 5 Years | More than 5 years |
| Cash and balances with central bank | 16,216,907 | - | - | - |
| Interbank borrowings - Repurchase agreements | 4,475,341 | - | - | - |
| Financial assets investments | 5,438,351 | 3,805,890 | 2,025,553 | 2,016,014 |
| Loans and advances to customers | 55,098,988 | 48,180,287 | 27,881,140 | 49,141,494 |
| Derivative financial instruments | 1,437,057 | 274,065 | 202,543 | 533,265 |
| Total financial assets | 82,666,644 | 52,260,242 | 30,109,236 | 51,690,773 |
Contractual maturities of financial assets 2015
| Financial Assets | 0 - 1 Year | 1- 3 Years | 3- 5 Years | More than 5 years |
| Cash and balances with central bank | 14,295,163 | - | - | - |
| Interbank borrowings - Repurchase agreements | 4,727,842 | - | - | - |
| Financial assets investments | 6,172,115 | 5,246,429 | 1,490,030 | 3,884,006 |
| Loans and advances to customers | 55,371,495 | 45,822,004 | 30,971,805 | 48,150,359 |
| Derivative financial instruments | 2,083,030 | 570,041 | 201,374 | 616,116 |
| Total financial assets | 82,649,645 | 51,638,474 | 32,663,209 | 52,650,481 |
| d. | Contractual maturities of financial liabilities |
The tables below set out the remaining contractual maturities of principal and interest balances of the Bank’s financial liabilities:
Contractual maturities of financial liabilities 2016
| Financial Liabilities | 0 - 1 Year | 1- 3 Years | 3- 5 Years | More than 5 years |
| Demand deposit from customers | 70,136,704 | - | - | - |
| Time deposits from customers | 36,297,356 | 12,465,672 | 6,362,963 | 2,778,373 |
| Interbank deposits - Repurchase agreements | 2,295,020 | - | - | - |
| Borrowings from other financial institutions | 11,436,389 | 3,990,970 | 5,813,910 | 1,829,142 |
| Debt securities in issue | 2,965,927 | 4,626,491 | 8,380,097 | 9,083,988 |
| Derivative financial instruments | 1,072,980 | 194,556 | 165,462 | 528,894 |
| Total financial liabilities | 124,204,376 | 21,277,689 | 20,722,432 | 14,220,397 |
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Contractual maturities of financial liabilities 2015
| Financial Liabilities | 0 - 1 Year | 1- 3 Years | 3- 5 Years | More than 5 years |
| Demand deposit from customers | 73,088,239 | - | - | - |
| Time deposits from customers | 36,834,046 | 10,102,847 | 3,800,463 | 3,009,904 |
| Interbank deposits - Repurchase agreements | 1,660,910 | - | - | - |
| Borrowings from other financial institutions | 14,087,425 | 4,587,870 | 1,680,978 | 1,646,747 |
| Debt securities in issue | 2,907,077 | 3,687,330 | 7,456,174 | 13,118,661 |
| Derivative financial instruments | 2,072,756 | 318,171 | 110,677 | 538,325 |
| Total financial liabilities | 130,650,453 | 18,696,218 | 13,048,292 | 18,313,637 |
The expected cash flows for some financial assets and liabilities may vary significantly from their contractual maturity. The main differences are the following:
| · | The demand deposits historically have maintained a tendency to remain stable. |
| · | The mortgages loans, in spite of having contractual maturity between 15 and 20 years, its average life is less than these terms. |
| e. | Financial guarantees |
The tables below set out the remaining contractual maturities of the Bank’s financial guarantees
| December 31, 2016 | 0 - 1 Year | 1- 3 Years | 3- 5 Years | More than 5 years |
| Financial guarantees | 4,602,250 | 1,228,289 | 367,298 | 146,167 |
| December 31, 2015 | 0 - 1 Year | 1- 3 Years | 3- 5 Years | More than 5 years |
| Financial guarantees | 4,804,027 | 1,430,371 | 548,991 | 340,132 |
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| · | Liquid assets: The following are considered as liquid assets: cash, units in collective investment funds, shares listed on a stock exchange in Colombia that are eligible to be traded or repo traded and investments tradable and available for trading. |
| · | High-quality liquid assets: cash and shares that are eligible to be reportable or repo operations, in addition to those liquid assets that the Central Bank receives for its monetary expansion and contraction operations described in paragraph 3.1.1 of the Foreign Regulatory Circular DODM-142 of the Bank of the Republic. |
| · | Other Securities: Securities issued by financial and corporate entities. |
| 4. | CAPITAL MANAGEMENT |
In order to cover future unexpected losses and be prepared against economic crisis, the Bank is engaged with an active capital management role. To this end, one of the main Director of Financial Control’s responsibility, is to monitor constantly the capital adequacy allocation and suggest the appropriate measures before crisis take place.
Exercises such as stress testing assessment and Internal Capital Adequacy Assessment Process (ICAAP), are run for internal and external purposes and reported to the Board of Directors and senior levels to ensure all risks are managed according to our risk appetite, policies and regulation.
Simultaneously, senior management is engaged in maintaining a balance between an adequate capital allocation and our shareholders value proposal compliance. In doing so, upcoming investment plans will be funded by capital markets and operational flows without causing negative results among our shareholders´ interests.
In accordance with the Capital Adequacy Requirements explained above (see Supervision and Regulation ITEM4 B8), financial institutions in Colombia are required to achieve a minimum solvency ratio (Basic Solvency Risk Index, Tier 1) above 4,5%, and a total solvency risk index (Tier 2) greater than or equal to 9,0%.
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In spite of the above, the management has directed its efforts towards the equity strengthening as shown in table below.
| As of December 31 | |
| 2016 | |
| (in millions of COP) | |
| Regulatory Capital and Capital Adequacy Ratios | |
| Basic Ordinary Equity | 19,235,519 |
| Deductions Basic Ordinary Equity | (4,193,122) |
| Total Basic Ordinary Equity | 15,042,397 |
| Additional Equity | 7,069,448 |
| Total Regulatory Capital | 22,111,845 |
| F-174 |
