20-F 1 tv487004_20f.htm FORM 20-F

 

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 2018

 

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

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2017
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, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x     Accelerated filer ¨    Non-accelerated filer ¨    Emerging growth company ¨

 

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards † provided pursuant to Section 13(a) of the Exchange Act.  ¨

 

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

 

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 

 

CERTAIN DEFINED TERMS 5
     
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS 8
     
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION 9
     
PART I 10
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 10
     
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 10
     
ITEM 3. KEY INFORMATION 10
A. SELECTED FINANCIAL DATA 10
B. CAPITALIZATION AND INDEBTEDNESS 14
C. REASONS FOR THE OFFER AND USE OF PROCEEDS 14
D. RISK FACTORS 14
     
ITEM 4. INFORMATION ON THE COMPANY 30
A. HISTORY AND DEVELOPMENT OF THE COMPANY 30
B. BUSINESS OVERVIEW 34

 

  B.1. GENERAL 34
  B.2. OPERATIONS 37
  B.3. SEASONALITY OF DEPOSITS 37
  B.4. RAW MATERIALS 37
  B.5. DISTRIBUTION NETWORK 37
  B.6. PATENTS, LICENSES AND CONTRACTS 39
  B.7. COMPETITION 40
  B.8. SUPERVISION AND REGULATION 49

 

C. ORGANIZATIONAL STRUCTURE 71
D. PREMISES AND EQUIPMENT 73
E. SELECTED STATISTICAL INFORMATION 74

 

  E.1. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL 74
  E.2. INVESTMENT PORTFOLIO 79
  E.3. LOAN PORTFOLIO 83
  E.4. SUMMARY OF LOAN LOSS EXPERIENCE 89
  E.5. DEPOSITS 96
  E.6. RETURN ON EQUITY AND ASSETS 97
  E.7. SHORT-TERM BORROWINGS 97

 

 

 

 

 

 

 

ITEM 4 A. UNRESOLVED STAFF COMMENTS 98
     
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 98
A. OPERATING RESULTS 98

 

  GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2017 VERSUS 2016 100
  GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2016 VERSUS 2015 105

 

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B. LIQUIDITY AND CAPITAL RESOURCES 126

 

  B.1. LIQUIDITY AND FUNDING 126
  B.2. FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES 132
  B.3. COMMITMENT FOR CAPITAL EXPENDITURES 133

 

C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. 133
D. TREND INFORMATION 133
E. OFF-BALANCE SHEET ARRANGEMENTS 135
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS 136
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 137
     
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 144
A. DIRECTORS AND SENIOR MANAGEMENT 144
B. COMPENSATION OF DIRECTORS AND OFFICERS 147
C. BOARD PRACTICES 148
D. EMPLOYEES 151
E. SHARE OWNERSHIP 153
     
ITEM 7. MAJOR STOCKHOLDERs AND RELATED PARTY TRANSACTIONS 153
A. MAJOR STOCKHOLDERS 153
B. RELATED PARTY TRANSACTIONS 155
C. INTEREST OF EXPERTS AND COUNSEL 155
     
ITEM 8. FINANCIAL INFORMATION 156
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 156

 

  A.1. CONSOLIDATED FINANCIAL STATEMENTS 156
  A.2. LEGAL PROCEEDINGS 156
  A.3. DIVIDEND POLICY 156

 

B. SIGNIFICANT CHANGES 157
     
ITEM 9. THE OFFER AND LISTING 157
A. OFFER AND LISTING DETAILS 157
B. PLAN OF DISTRIBUTION 160
C. MARKETS 160
D. SELLING STOCKHOLDERS 160
E. DILUTION 160
F. EXPENSES OF THE ISSUE 160
     
ITEM 10. ADDITIONAL INFORMATION 160
A. SHARE CAPITAL 160
B. MEMORANDUM AND ARTICLES OF ASSOCIATION 161
C. MATERIAL CONTRACTS 168
D. EXCHANGE CONTROLS 169
E. TAXATION 169
F. DIVIDENDS AND PAYING AGENTS 176
G. STATEMENT BY EXPERTS 176
H. DOCUMENTS ON DISPLAY 176
I. SUBSIDIARY INFORMATION 176
     
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 176
     
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 183

 

 3 

 

 

PART II 185
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 185
     
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 185
     
ITEM 15. CONTROLS AND PROCEDURES 185
     
ITEM 16. RESERVED 186
A. AUDIT COMMITTEE FINANCIAL EXPERT 186
B. CORPORATE GOVERNANCE AND CODE OF ETHICS 187
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 187
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 188
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 188
F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 188
G. CORPORATE GOVERNANCE 189
H. MINE SAFETY DISCLOSURES 190
     
PART III 191
     
ITEM 17. FINANCIAL STATEMENTS 191
     
ITEM 18. FINANCIAL STATEMENTS 191
     
ITEM 19. EXHIBITS 191

  

 4 

 

 

CERTAIN DEFINED TERMS

 

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 regulated by Law 1314 of 2009, Decree 1851 of 2013 and as supplemented by the applicable regulations of the SFC, which differs with IFRS in (i) the recognition of impairment for loans; (ii) the classification and subsequent measurement of debt and equity investments, and (iii) the impairment of foreclosed assets.

 

References to “Congress” refer to the national congress of Colombia.

 

 5 

 

 

References to "Consolidated Financial Statements" refer to the audited consolidated statements of financial position of the Bank as of December 31, 2017 and 2016 and the audited consolidated statements of income, of comprehensive income, changes in equity and cash flows for the years ended December 31, 2017, 2016 and 2015 and related notes included in this Annual Report.

 

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 BAM, and its consolidated subsidiaries, unless the context otherwise requires.

 

References to “IFRS” refer to the International Financial Reporting Standards as issued by the International Accounting Standards Board.

 

References to “IRS” refer to the 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 on September 30, 2016, merged into 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.

 

 6 

 

 

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.

 

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 2017, the SMMLV in Colombia was COP 737,717.

 

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 “Superintendency of Industry and Commerce” or “SIC” refer to the Colombian Superintendency of Industry and Commerce (Superintendencia de Industria y Comercio de Colombia), a technical entity under the Ministry of Commerce, Industry and Turism (Ministerio de Comercio, Industria y Turismo) with functions of supervision and regulation of the competition in several industries, including financial institutions.

 

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 millions (1,000,000,000).

 

 7 

 

 

The term “trillion” means one million millions (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.

 

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; and (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.

 

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.

 

 8 

 

 

PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION

 

Accounting Principles

 

The audited consolidated statements of financial position of the Bank as of December 31, 2017 and 2016 and the audited consolidated statements of income, of comprehensive income, changes in equity and cash flows for the years ended December 31, 2017, 2016 and 2015 and related notes (the “Consolidated Financial Statements”) included in this Annual Report were prepared in accordance with 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, 2017 and 2016 and for the three fiscal years ended December 31, 2017, 2016 and 2015 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 2,984.00 per USD 1.00, which corresponds to the Representative Market Rate calculated on December 31, 2017. 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 27, 2018, the Representative Market Rate was COP 2,812.83 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.

 

 9 

 

 

PART I

 

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, 2017 and 2016, and the selected consolidated statement of income data for each of the periods ended December 31, 2017, 2016 and 2015, 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, 2015 and 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 years ended December 31, 2016 and 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 and for the years ended December 31, 2017 and 2016 were audited by Deloitte and Touche Ltda, while the Consolidated Financial Statements of the Bank as of and for the years endedDecember 31, 2015 and 2014 were audited by PricewaterhouseCoopers Ltda.

 

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    As of and for the year ended December 31,
    2017 (1)   2017   2016   2015   2014
    In millions of COP and thousands of USD, except per share and per ADS amounts
CONSOLIDATED STATEMENT OF INCOME DATA:                    
Total interest and valuation USD 5,591,715 COP 16,685,677 COP 15,748,805 COP 11,269,644 COP 9,172,163
Interest expenses   (2,088,802)   (6,232,986)   (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   3,502,913   10,452,691   9,695,705   7,231,703   6,007,552
Credit impairment charges on loans and advances and financial leases, net   (1,162,433)   (3,468,699)   (2,643,710)   (1,667,680)   (843,597)
Credit impairment recoveries (charges) on off balance sheet credit instruments   2,297   6,854   (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   2,342,777   6,990,846   6,964,553   5,556,602   5,138,347
Total other operating income (2)   1,417,349   4,229,370   3,982,779   3,577,320   3,084,942
Total operating expenses   (2,422,066)   (7,227,445)   (6,979,050)   (5,898,287)   (5,118,695)
Profit before tax   1,338,060   3,992,771   3,968,282   3,235,635   3,104,594
Income tax   (415,080)   (1,238,598)   (1,176,832)   (649,250)   (737,676)
Profit for the year from continuing operations   922,980   2,754,173   2,791,450   2,586,385   2,366,918
Net income from discontinued operations   -   -   163,497   22,513   62,867
Net income   922,980   2,754,173   2,954,947   2,608,898   2,429,785
Net income attributable to equity holders of the parent company USD 876,340 COP 2,615,000 COP 2,865,328 COP 2,518,890 COP 2,387,086
Non-controlling interest   46,640   139,173   89,619   90,008   42,699
Weighted average of Preferred and Common Shares outstanding (3)       961,827,000   961,827,000   961,827,000   941,936,589
Basic and diluted earnings per share to common shareholders (3)   0.93   2,780   3,040   2,680   2,591
From continuing operations   0.93   2,780   2,870   2,656   2,524
From discontinued operations   -   -   170   24   67

Basic and diluted earnings per

ADS (3)

  3.73   11,120   12,160   10,720   10,364
From continuing operations   3.73   11,120   11,480   10,624   10,096
From discontinued operations   -   -   680   96   268
Cash dividends declared per share   -   1,020   950   888   830
Cash dividends declared per share (stated in USD)   -   0.34   0.32   0.28   0.26
Cash dividends declared per ADS   -   4,080   3,800   3,552   3,320
Cash dividends declared per ADS (stated in USD)   -   1.37   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 2,984.00 per U.S. 1.00 on December 31, 2017.

(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. As of December 31, 2017, the Bank recognized the amount of COP 173,339 due to impairment charges on joint venture, for further information see Note 7.

(3) The weighted average of preferred and common shares outstanding for the fiscal years ended December 31, 2017, 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.

 

 11 

 

  

    As of December 31,
    2017(1)   2017   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 6,087,682 COP 18,165,644 COP 20,460,245 COP 18,597,614 COP 13,466,783
Financial assets investments   5,488,356   16,377,253   13,060,653   14,277,824   12,784,223
Derivative financial instruments   380,151   1,134,372   1,677,970   2,382,168   1,448,845
Loans and advances to customers and financial Institutions   53,776,171   160,468,094   151,747,486   145,620,639   115,173,653
Allowance for loans and advances and lease losses   (2,755,732)   (8,223,103)   (6,621,911)   (5,248,755)   (4,789,257)
Assets held for sale and inventories   126,341   377,003   273,187   1,950,808   97,744
Investment in associates and joint ventures   524,484   1,565,059   1,298,246   546,549   1,349,697
Investment property   555,432   1,657,409   1,581,689   1,505,046   1,114,180
Premises and equipment, net (2)   1,048,058   3,127,405   3,115,697   3,052,266   2,646,321
Goodwill and intangible assets, net   2,222,327   6,631,424   6,694,037   7,092,255   4,585,849
Deferred tax, net   49,804   148,614   222,862   170,482   187,737
Other assets   830,776   2,479,037   2,750,883   3,025,971   1,564,106
Total assets USD 68,333,850 COP 203,908,211 COP 196,261,044 COP 192,972,867 COP 149,629,881
Liabilities and stockholders' equity: Liabilities and equity                    
Deposits by customers   44,222,257   131,959,215   124,624,011   121,802,028   94,769,319
Borrowings from other financial institutions   4,632,088   13,822,152   18,905,843   19,721,184   13,852,284
Debt securities in issue   6,584,689   19,648,714   18,704,809   19,435,865   14,527,403
Other liabilities (3)   4,707,969   14,048,580   11,549,401   11,605,871   9,114,395
Total equity   8,186,847   24,429,550   22,476,980   20,407,919   17,366,480
Total liabilities and equity USD

 

68,333,850

 

COP 203,908,211 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 2,984.00 per U.S. 1.00 on December 31, 2017.

(2) The Bank 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 premises and equipment. As of December 31, 2016, and 2015, such assets were reclassified to other assets as they are intended for immediate sale or disposition.

(3) Includes interbank deposits, repurchase agreements and other similar secured borrowing, liabilities relating to assets held for sale, 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.

 

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 duringthe fiscal years ended December 31, 2017, 2016, 2015 and 2014.

 

 12 

 

 

SELECTED RATIOS

 

  As of and for the year ended
December 31,
  2017 2016 2015 2014
  Percentages, except for operating data
SELECTED RATIOS: (1)        
Profitability ratios:        
Net interest and valuation margin from continuing operations (2) 6.07 5.96 5.25 5.30
Return on average total assets from continuing operations (3) 1.30 1.49 1.53 1.72
Return on average stockholders‘ equity attributable to the owners of the parent company (4) 11.99 14.52 13.62 14.81
Efficiency ratio:        
Operating expenses to net operating income from continuing operations 49.23 51.02 54.57 56.30
Operating expenses to average total assets from continuing operations 3.60 3.64 3.62 3.80
Operating expenses to productive assets from continuing operations 4.20 4.29 4.28 4.51
Capital ratios:        
Technical capital to risk weighted assets (5)(6) 14.18 13.26 12.46 N/A
Credit quality data:        
Past due loans to loans principal (9) 4.49 3.31 2.98 2.62
“C”, “D” and “E” loans as a percentage of loans principal 6.34 5.07 3.95 3.81
Allowances for loan and lease losses to past due loans principal 107.52 125.90 115.16 145.55
Allowance for loan and lease losses as a percentage of “C”, “D” and “E” loans principal 76.12 82.08 87.00 100.09
Allowance for loan and lease losses as a percentage of total loans principal 4.83 4.17 3.43 3.81
Operational data (in units):        
Number of branches (7) 1,153 1,247 1,274 1,067
Number of employees (8) 31,061 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, 2017, 2016 and 2015, for each month, the actual month-end balances were established. The average consolidated balance for such periods is the average of such month-end balances. These averages are calculated using 13 data points. The Bank has calculated the average balances using quarterly book 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.
2.Net interest and valuation income divided by average interest-earning assets.
3.Net income divided by average total assets.
4.Net income divided by average 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 “Operating and Financial Review and Prospects - B. Liquidity and Capital Resources – B.1. Liquidity and Funding - Capital Adequacy".
6.The Bank’s consolidated capital adequacy was computed considering balance accounts under IFRS as of December 31, 2017, 2016 and 2015. For 2014 the balance accounts were under Colombian Banking GAAP, as a result the figure is not comparative.
7.Number of branches includes branches of the Bank’s Subsidiaries. For some subsidiaries, the central office is considered a branch. Representative offices are included.
8.The number of employees includes employees of the Bank’s consolidated Subsidiaries. For the years 2015 and 2014 Tuya S.A had 3,020 and 2,639 employees, respectively. For the years 2016 and 2017, Tuya S.A. is classified as an investment in a joint venture in the Bank’s consolidated financial statements.
9.Loans that are past due more than 30 days to loans principal.

 

 13 

 

 

Exchange Rates

 

On March 31, 2018, the Representative Market Rate was COP 2,780.47 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 2018 2,780.47 2,879.15 2,780.47
February 2018 2,806.67 2,908.70 2,867.94
January 2018 2,783.13 2,940.94 2,835.05
December 2017 2,962.14 3,029.75 2,984.00
November 2017 2,976.39 3,055.57 3,006.04
October 2017 2,921.92 3,039.19 3,039.19

 

 

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  
2017 2,984.00 2,963.13
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

 

 

Source: SFC.

 

B.CAPITALIZATION AND INDEBTEDNESS

 

Not applicable.

 

C.REASONS FOR THE OFFER AND USE OF PROCEEDS

 

Not applicable.

 

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.

 

 14 

 

 

Risk Factors Relating to Colombia and Other Countries Where the Bank Operates.

 

Changes in economic and political conditions in Colombia, Panama, El Salvador and Guatemala or in 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, Panama, El Salvador, Guatemala and the other jurisdictions where 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, El Salvador and Guatemala 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, El Salvador and Guatemala, 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 CCC+ (stable) by S&P. Guatemala has ratings of BB (stable) and BB- (stable) from Fitchs 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 funding costs and adversely affect our results of operation and financial condition. 

 

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, Panama’s, El Salvador’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 Panama, Guatemala and El Salvador) could have a material adverse impact on Colombia’s, Panama’s, El Salvador’s and Guatemala’s balance of trade and remittances inflows, resulting in lower economic growth.

 

 15 

 

 

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, Panama, El Salvador, 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 2017, 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.

 

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.

 

 16 

 

 

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, since January 2018, IFRS 9 requires us to record credit losses on a loan at inception on an expected loss basis instead of recording credit losses on an incurred loss basis, which is likely to result in an increase in the Bank´s provisions for such losses. 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, 2017 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. 

 

Material weaknesses in our internal control over financial reporting could adversely affect our ability to report our financial condition accurately and on a timely basis.

 

In connection with our assessment as of December 31, 2017 of the effectiveness of our internal control over financial reporting, as defined in Rules 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, we identified a material weakness relating to the estimation of impairment for individually significant impaired commercial loans. Specifically, the review controls over the key judgments and information used in measuring impairment were not designed effectively and did not operate effectively.

 

We have initiated certain measures, including implementing controls to assure the completeness of the inputs and accuracy of the assumptions used to estimate loan losses from individually significant impaired commercial loans and completeness of the impaired commercial loans; defining procedures required to ensure sufficient detailed documentation to support the assumptions made for the estimation; providing additional training of Sarbanes-Oxley Act requirements to key personal in charge of loan losses estimation process; increasing the monitoring of activities during the year of the controls related to this process.

 

For a discussion of our internal control over financial reporting and a description of the material weakness identified in our internal controls and planned remediation measures, see Item 15. “Controls and Procedures”.

 

Although we have initiated the above mentioned remedial steps to address this material weakness in our internal controls, and based on the additional analysis and other procedures performed, we believe the consolidated financial statements included in this Annual Report on Form 20-F are fairly presented in all material respects, in conformity with IFRS, if we are unable to remediate the material weakness, our ability to report our financial condition accurately and on a timely basis could be adversely affected. This in turn could negatively affect shareholder and customer confidence towards our financial reporting and other aspects of our business.

 

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 be adopted, enforced or interpreted in a manner that may have an adverse effect on the Bank’s business.

 

 17 

 

 

Moreover, regulators in the jurisdictions in which Bancolombia operates may alter 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, Panama, El Salvador, Guatemala 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.

 

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.

 

 18 

 

 

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.

 

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 continuing 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.

 

Financial Conglomerates

 

In accordance with Law 1870 of 2017, the Government is expected to set out provisions and regulatory standards applicable to financial conglomerates in the areas of corporate governance principles, risk management, capital adequacy requirements and related party transactions, among others. Pursuant to Law 1870 of 2017 Bancolombia will be subject to such provisions and standards because of the shareholding in Bancolombia by Grupo de Inversiones Suramericana S.A. These provisions and regulatory standards, the details of which have not yet been published, could materially and adversely affect the Bank´s business.

 

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. Although Panama adhered to the Covention on Mutual Administrative Assitance in Tax Matters of the Organization for Economic Cooperation and Development’s (“OECD”) in 2017, any failure to execute a treaty between Colombia and Panama, 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. However, as of the date of this Annual Report, the treaty has not been entered into.

 

 19 

 

 

The Bank and most of its Subsidiaries are subject to the U.S. Foreign Account Tax Compliance Act of 2010 and the OECD´s Automatic Exchange of Information - Common Reporting Standard (CRS).

 

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”). Additionally, Bancolombia and some of its subsidiaries are subject to the reporting obligations derived from the conventions that implement the Common Reporting Standard (“CRS”) approved by the OECD.

 

Given the size and the scope of the Bank’s international operations, we have taken measures and implemented procedures aimed at complying with FATCA and CRS, including transmitting to the relevant authorities the reports required under FATCA and CRS.

 

However, if the Bank cannot satisfy the requirements thereunder, certain payments to Bancolombia, or its Subsidiaries, may be subject to withholding under FATCA or other penalties imposed by each government. The possibility of such withholding or penalties 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 the intergovernmental agreements (“IGA”), particular agreements entered into with the IRS, the international conventions signed for the exchange of information under CRS, the laws or any other regulations enforced in the relevant jurisdictions may increase our compliance costs. Legislation and regulations implementing FATCA and CRS in some of 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 risk rating to a client, which may result in the Bank’s exposure to a higher credit risk than one 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 the Bank’s 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.

 

 20 

 

 

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.

 

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, 2017, the aggregate outstanding principal amount of the Bank’s 25 largest credit exposures, on a consolidated basis, represented 8.88% of the Bank’s loan portfolio. No single exposure represented more than 2% 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”.

 

 21 

 

 

The value of the collateral 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.

 

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 and changes in the implied volatility of interest rates and foreign currency 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.

 

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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.

 

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, 2017, the Bank’s total debt securities represented 7.29% of its total assets, and 47.22% 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.

 

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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.

 

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 its infrastructure, computer and data management systems, as well as those of service providers, and others with whom the Bank interacts.

 

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The Bank has implemented a cyber-security management and control system that is designed to anticipate, identify, and offset these threats. The system includes features, among others, such as: perimeter security devices; the constant monitoring and continuous assessment of technological infrastructure seeking to identify vulnerabilities; implementations of software and hardware upgrades; backup security systems; a 24/7 security operations center; and continuous security testing (including ethical hacking). Furthermore, the Bank has obtained an insurance policy aimed at covering certain damages that may be suffered by the Bank and third parties as a result of data losses derived from cyber-attacks.

 

In addition to the measures listed above, all relevant cyber-security issues are reported to the Bank´s Board of Directors and Audit Committee.

 

As of the date of this Annual Report, the Bank has not faced a cyber-attack with a material impact on its business or its clients. However, we can give no assurance that the previously described measures, initiatives and procedures will be effective to prevent or mitigate potential future attacks or threats to our technology infrastructure. Any failure by the Bank to detect or prevent 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 being lost, compromised, or delivered to the Bank’s clients with delays or errors.

 

Failures related to the Bank’s information technology infrastructure and management information systems could adversely affect the Bank’s competitiveness, reputation, financial condition and results of operations.

 

The Bank has recently faced technological failures which have negatively affected the Bank´s products and services in general, and in particular, its digital channel (including multiple offline periods). Such failures have impacted, principally, the capacity of our clients to access their products and services. In addition to the technological updates being implemented by the Bank, we have implemented controls and measures, such as enabling alternative channels to assure the client´s access to our services, in order to mitigate such failures and to prevent future threats. Any failure to effectively prevent and manage the Bank’s information technology infrastructure and information management systems in an adequate manner could materially and adversely affect the Bank’s competitiveness, reputation, financial condition and results of operations.

 

Furthermore, 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 regularly undertakes projects to update its information technology platform (“IT platform”) that may result in significant changes in the manner in which the Bank manages its business. 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, reputation, financial condition and results of operations.

 

 25 

 

 

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. 

 

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 73.52% of total liabilities at the end of 2017 compared to 71.71% at the end of 2016. 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 has adopted certain initiatives, policies and procedures to mitigate risks related to regulatory compliance.

 

The Bank is subject to laws and regulations related to anti-competitive practices, including the formation of cartels and the abuse of its dominant position. Violation of these laws and regulations may result in significant administrative sanctions imposed by the SIC.

 

The Bank is in the process of creating a special unit responsible for overseeing and ensuring regulatory compliance in general and, in particular, compliance with regulations related to anti-competitive practices, personal data protection and consumer protection. If this initiative is not successful our reputation, regulatory position and financial condition may be adversely affected and our ability to achieve our strategic objectives may be impaired.

 

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Moreover, to ensure compliance with regulations regarding the use and protection of personal data, the Bank is currently developing a Comprehensive Data Protection Program. The program may not be able to prevent all inappropriate use of personal data or breaches that may result in personal data being exposed.

 

The Bank may not be able to prevent all risks associated with regulatory compliance or detect all instances of non-compliance with regulations. Any failure by the Bank to detect and prevent the aforementioned practices in a timely manner could damage the Banks reputation and facing substantial fines and penalties which could adversely affect the Bank’s results of operations and financial position.

 

The Bank’s policies and procedures may not be able to detect money laundering, corruption and other illegal or improper activities fully or on a timely basis.

 

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, as the methods used by money launderers evolve and become increasingly sophisticated, such policies and procedures may not completely eliminate the risk that the Bank may be used by other parties to engage in money laundering, corruption and other illegal or improper activities.

 

The Bank is subject to laws and regulations relating to corrupt and illegal payments to public and private officials in the jurisdictions in where it operates, including the U.S. Foreign Corrupt Practices Act and Colombian regulations on transnational bribery. The Bank has an anti-corruption system, which incorporates, among others, an anti-corruption policy, training, reporting channels, monitoring, internal investigations and sanctions. Such system has only been recently implemented and does not completely eliminate the risk that the Bank´s employees, providers, clients or agents may engage in corrupt practices.

 

If the Bank fails to fully comply with applicable laws and regulations, it may face fines, penalties or other liabilities including restrictions on its ability to conduct business. In addition, the Bank’s business and reputation could suffer if it is not able to prevent and detect money laundering, corruption or other illegal practices.

 

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 has produced 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. Also, the emergence of new financial technologies, unregulated financial intermediaries (known as “shadow banking”) and the recent enactment of regulations aimed at enabling non-Colombian residents to offer loans in COP, may increase competition for the Bank operates. 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, the Bank’s ability to offer adequate services and strengthen its customer base through cross-selling and the Bank’s ability to bring in and retain human talent. 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.

 

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Downgrades in the credit ratings of the Bank and its subsidiaries would increase their cost of borrowing funds and make their ability to raise new funds, attract deposits or renew maturing debt more difficult.

 

The Bank’s and its subsidiaries’ credit ratings are an important component of the liquidity profile of each entity, and their ability to successfully compete depends on various factors, including their financial stability as reflected by their credit ratings. A downgrade in the credit ratings of the Bank or its subsidiaries would increase their cost of raising funds from other banks or in the capital markets. Purchases of the Bank’s or its subsidiaries’ securities by institutional investors could be reduced if they suffer a decline in their credit ratings. The ability of the Bank or its subsidiaries to renew maturing debt could become restricted and the terms for such renewal more expensive if their credit ratings were to decline. The Bank’s and its subsidiaries’ lenders and counterparties in derivative transactions are sensitive to the risk of a credit rating downgrade. A downgrade in the credit rating of the Bank or its subsidiaries may adversely affect perception of their financial stability and their ability to raise deposits, which could make each entity less successful when competing for deposits and loans in the market place. 

 

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.

 

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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 does 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.

 

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. 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 preferred shares, including holders of ADRs, are not entitled to vote for the election of directors or to influence the Bank’s management policies.

 

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.

 

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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 Securities 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 Securities Exchange. A liquid trading market for the Bank’s securities might not develop on the Colombian Securities 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 Securities 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”.

 

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 Banco Comercial y de Ahorros S.A. and Corporación Financiera Nacional y Suramericana S.A. 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 activities, consumer activities and brokerage. Through its first international acquisition, Bancolombia gained a leadership position in the Salvadorian market.

 

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 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 BAM, 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 Securities Exchange, where its preferred shares are traded under the symbol “PFBCOLOM”. Since 1981 Bancolombia’s common shares have been traded on the Colombian Securities 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, 2017, Bancolombia and its consolidated subsidiaries had:

 

COP 203,908 billion in total assets;

 

COP 152,245 billion in total net loans and advances to customers and financial institution, net;

 

COP 131,959 billion in total deposits from customers; and

 

COP 23,113 billion in stockholders’ equity attributable to the owners of the parent company.

 

Bancolombia’s consolidated net income attributable to equity holders of Bancolombia S.A. for the year ended December 31, 2017 was COP 2,615 billion, representing a return on average total equity of 11.99% and a return on average total assets of 1.3%.

        

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

 

Issuance of Subordinated Notes

 

On October 18, 2017 Bancolombia S.A. issued notes for an aggregate principal amount of USD 750,000,000. The notes, which were listed in the New York Stock Exchange, have a 10-year maturity, are redeemdable at the option of Bancolombia on the fifth anniversary of their issuance and bear interest at a rate of 4.875%, payable semi-annually on April 18 and October 18 of each year, commencing on April 18, 2018. The Bank used the proceeds of the Notes to acquire USD 360,912,000 of the outstanding Notes due 2020 and USD 321,152,000 of the outstanding Notes due 2022, issued on July 26, 2010 and September 4, 2012, respectively, through a private exchange following a dealer intermediated tender offer.

 

Issuance of Banistmo Senior Notes

 

On September 12, 2017, Banistmo issued international bonds for an aggregate principal amount of USD 500,000,000 due in 2022, under Regulation S and Rule 144A under the Securities Act of 1933. The bonds bear interest at a rate of 3.65%.

 

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Bancolombia enters into a Collective Bargaining Agreement

 

On October 24, 2017, Bancolombia entered into a new collective bargaining agreement with its labor unions. The new agreement provides for a salary increase as well as increases in education, housing and health insurance benefits. The agreement covers 13,000 Colombian employees of Bancolombia S.A. and its subsidiaries. The agreement came into force on November 1, 2017 and will expire on October 31, 2020.

 

PUBLIC TAKEOVER OFFERS

 

In 2017, 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 2017, total capital expenditures amounted to COP 349.97 billion. Such investments were mainly focused on IT related projects (COP 59.71 billion), the expansion of the Bank’s branch and ATM network (COP 23.64 billion), the purchase of fixed assets (COP 30.92 billion), and other miscellaneous projects, including new software modules, upgrade of web contents, automation of reports, and construction of data centers (COP 235.69 billion).

 

In 2017, Bancolombia funded its capital expenditures with its own resources and plans to continue to fund those currently in progress in the same manner.

 

During 2018, the Bank expects to invest approximately COP 295.98 billion as follows: COP 47.65 billion in connection with the expansion of the Bank’s branch and ATM network, COP 55.26 billion in connection with the purchase of hardware for the expansion, updating and replacement of the current IT equipment, COP 36.99 billion in connection with other fixed assets and COP 156.08 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, 2017, 2016 and 2015:

 

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Capital Acquisitions (1)   For the year ended December 31,  
Type of Investment 2017   2016   2015   Total
    In millions of COP  
PA Viva Malls Associate 262,918   388,595   -   651,513
PA Central Point Financial Instrument 36,242   -   -   36,242
Compañía de Financiamiento Tuya S.A. Joint venture 30,000   15,977   -   45,977
Puntos Colombia S.A.S. Joint venture 9,000   -   -   9,000
ECOPETROL S.A. Financial Instrument 6,347   -   1,785   8,132
500 Luchadores II, L.P. Financial Instrument 2,984   -   -   2,984
Davivienda S.A. Preferencial Financial Instrument 2,490   -   2,180   4,670
Canacol Energy Ltd. Financial Instrument 2,375   -   -   2,375
PA Estrategias Inmobiliarias Financial Instrument 1,797   -   -   1,797
Grupo AVAL Acciones y Valores S.A. Financial Instrument 1,735   -   -   1,735
CEMEX Latam Holdings S.A. Financial Instrument 1,650   -   -   1,650
Fondo Bursátil Ishares COLCAP Financial Instrument 1,567   -   -   1,567
Corporación Financiera Colombiana S.A. Financial Instrument 1,501   -   -   1,501
Fondos SURA SAF SAC Financial Instrument 1,345   3,307   -   4,652
Anheuser-Busch Companies, Inc Financial Instrument 1,328   -   -   1,328
Johnson & Johnson de Colombia S.A. Financial Instrument 1,258   -   -   1,258
SPDR Gold Shares Financial Instrument 916   -   -   916
Amgen, Inc Financial Instrument 784   -   -   784
Walgreens Boots Alliance, Inc Financial Instrument 762   -   -   762
Reintegra S.A.S. Associate 739   573   950   2,262
Grupo ARGOS S.A. Financial Instrument -   92,966   -   92,966
Asociación Gremail de Instituciones Financieras Credibanco S.A. Financial Instrument -   82,258   -   82,258
PA Clínica del Prado Financial Instrument -   41,069   -   41,069
Fideicomiso P.A Acqua Power Center Financial Instrument -   21,649   -   21,649
Fideicomiso Corpacero S.A.S. Financial Instrument -   11,111   -   11,111
PA Plesco Financial Instrument -   10,935   -   10,935
ETB S.A. E.S.P. Financial Instrument -   1,986   -   1,986
Equifax centroamerica S.A. De C.V. Financial Instrument -   1,615   1,695   3,310
Gestora de Fondos de Inversión Banagricola S.A. Subsidiary -   1,471 (2) -   1,471
Inversiones ARGOS S.A. Financial Instrument -   37   1,076   1,113
Grupo Agromercantil Holding S.A. DE C.V. Subsidiary -   -   477,145 (3) 477,145
Internacional Ejecutiva de Aviación S.A.S. Associate -   -   8,121   8,121
Compañía de Procesamiento de Medios de Pago Guatemala, S.A. Financial Instrument -   -   5,562   5,562
Grupo Nutresa Financial Instrument -   -   2,644   2,644
Grupo AVAL Financial Instrument -   -   2,618   2,618
Transacciones y Transferencias, S.A. Financial Instrument -   -   1,315   1,315
Interconexión Eléctrica S.A. Financial Instrument -   -   1,107   1,107
Cementos ARGOS S.A. Financial Instrument -   -   667   667
Garantias y Servicios S.G.R.S.A. De C.V. Financial Instrument -   -   531   531
Imágenes Computarizadas de Guatemala, S.A. Financial Instrument -   -   476   476
Citigruop, Inc. Financial Instrument -   -   461   461
Others   3,440   1,842   1,709   6,991
Total Acquisitions   371,178   675,391   510,042   1,556,611

 

 

(1)The amounts disclosed in this table correspond to the consideration paid as a result of the acquisition of each invesment.

(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 December 31, 2015, as reported by the SFC.

 

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Capital Divestitures (1)

  As of December 31,
Type of Investment 2017   2016   2015   Total
    In millions of COP
Grupo Argos Financial Instrument 92,966   -   -   92,966
Fideicomiso P.A Acqua Power Center Financial Instrument 17,640   -   -   17,640
Leasing Perú S.A. (In liquidation) Subsidiary 16,838   -   -   16,838
ECOPETROL S.A. Financial Instrument 15,469   -   -   15,469
PA Plesco Financial Instrument 10,935   -   -   10,935
ADARA VENTURES Financial Instrument 6,979   -   -   6,979
Fideicomiso Corpacero S.A.S. Financial Instrument 6,584   -   -   6,584
Fondo de Inversión en Arrendamiento Operativo CIB S.A. (In liquidation) Subsidiary 3,757   -   -   3,757
Construcciones El Cóndor S.A. Financial Instrument 2,819   -   -   2,819
Fondos SURA SAF SAC Financial Instrument 2,128   -   -   2,128
SURA Corto Plazo CASHDOL Financial Instrument 1,194   -   -   1,194
Fogansa S.A. Financial Instrument 883   -   -   883
Grupo Odinsa S.A. Financial Instrument -   101,371   1,442   102,813
Compañía de Financiamiento Tuya S.A. Joint venture -   79,017   -   79,017
CIFIN S.A. Financial Instrument -   46,432   -   46,432
ISAGEN S.A. E.S.P. Financial Instrument -   8,489   -   8,489
Multiactivos S.A. Associate -   4,101   -   4,101
Cementos ARGOS S.A. Financial Instrument -   2,601   -   2,601
Concesiones Urbanas S.A. Associate -   2,361   -   2,361
Davivienda S.A. Preferencial Financial Instrument -   2,180   -   2,180
Trust found Financial Instrument -   2,077   -   2,077
Equifax centroamerica S.A. De C.V. Financial Instrument -   1,695   -   1,695
Inversiones Inmobiliarias Arauco Alameda S.A.S. Associate -   -   216,598   216,598
Others   2,420   2,267   2,426   7,113
Total Divestitures   180,612   252,591   220,466   653,669

 

 

(1).The amount disclosed in this table correspond to the consideration received as result of the sale of each invesment.

 

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 12 million customers. Bancolombia delivers its products and services through its regional network comprising Colombia’s largest non-Government owned banking network, El Salvador’s leading financial conglomerate, Guatemala’s fourth-largest bank, Panama’s second-largest bank and off-shore banking subsidiaries in Panama, Cayman and Puerto Rico, all of them measure by gross loans.

 

Bancolombia and its subsidiaries offer the following products and services:

 

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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.

 

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 real estate developers 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 Securities 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.

 

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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.

 

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.

 

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, 2017, this app had over 704,467 downloads, 271,864 total users and 76,193 active users who have made at least one transaction over the last three months.

 

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 2017:

 

Nequi (Digital Bank): In January 2017, the Bank launched its signature pilot project Nequi in Banistmo our operation in Panamá, a 100% digital bank that operates independently from the Banistmo brand. This product is completely paperless; users interact with the platform exclusively by mobile phone, with no contact with Banistmo’s branch network. Nequi users can open a savings account, transfer cash, make payments in POS, withdraw cash from Banistmo ATMs, make payments of some bills by the marketplace of Nequi. As of December 31, 2017, this app had over 80,556 downloads, 20,464 total users and 3,361 active users who have made at least one transaction over the last three months.

 

Revolving Credit Facility for Individuals: it is a product designed for employees that require resources before the next payment day and have a stable salary and their payroll or pension deposited in the Bank. The facility has a flat commitment fee and can be withdrawn through any channel of the Bank. Also, along with the product, there is a life and unemployment insurance that covers the outstanding balance.

 

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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 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.

 

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 92.26% of all transactions in 2017, up from 91.02% of all transactions in 2016. In addition, as of December 31, 2017, Bancolombia had a sales force of approximately 13,479 employees. 

 

The following are the distribution channels offered by Bancolombia as of December 31, 2017:

 

Branch Network

 

As of December 31, 2017, Bancolombia’s consolidated branch network consisted of 1,153 offices, including 726 from Bancolombia S.A., 97 from Banco Agricola, 44 from Banistmo, 203 from BAM and 83 from other subsidiaries.

 

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Company* Number of
branches
2017
Number of
branches
2016
Number of
branches
2015
Number of
branches
2014
Bancolombia S.A.(unconsolidated) 726 817 827 826
Leasing Bancolombia (1) 19 20 21 21
SUFI (1) 5 3 3 3
Bancolombia Panama 1 1 1 1
Bancolombia S.A. Panama Branch 1 1 1 1
Renting Colombia 24 22 23 19
Valores Bancolombia 6 6 7 11
Valores Bancolombia Panamá S.A. 1 1 1 1
Banca de Inversión 2 2 2 2
Fiduciaria Bancolombia 7 6 5 7
Bancolombia Puerto Rico International Inc. 1 1 1 1
Arrendamiento Operativo CIB S.A.C. (2) 1 1 1 1
Fondo Inversión Arrend.Operativo Renting Perú I (in liquidation)(2) - 1 1 1
Inversiones CFNS S.A.S. 2 2 2 2
Banco Agrícola 97 97 97 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. (in liquidation) - 1 1 1
FiduPerú S.A. Sociedad Fiduciaria (previously Fiduciaria GBC S.A.) 1 1 1
Banistmo 44 45 47 50
Financomer 8 8 8 7
BAM (Guatemala) 203 208 220 -
Tuya S.A. Compañía de Financiamiento (3) - - - 4
Seguros Banitsmo (4) - - - 4
Uff Móvil S.A.S. (5) - - - 1
Total 1,153 1,248 1,274 1,067

 

 

* For some subsidiaries, their central office is considered a branch.

(1)On September 30, 2016, Leasing Bancolombia S.A. merged into 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.  Leasing Bancolombia operates 19 branches under that brand.  Sufi is a Bancolombia brand that operates 5 branches.
(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 S.A. sold 50% of its stake in Compañía de Financiamiento Tuya S.A. on October 31, 2016. Bancolombia S.A. no longer consolidates such company, although it stills own 50% of the company’s common equity.
(4)On February 23, 2015, Banistmo S.A. sold its insurance operation to Suramericana S.A.
(5)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, 2017, Bancolombia had a total of 10,349 banking correspondents, including 9,629 in Colombia, 142 in Panama and 578 in El Salvador.

 

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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, 2017, there were a total of 590 PAMs (567 in Colombia, 7 in Panama and 16 in El Salvador).

 

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, 2017, there were a total of 227 kiosks.

 

Automatic Teller Machines “ATMs”

 

Bancolombia has a total of 5,630 ATMs, including 4,549 in Colombia, 572 in El Salvador, 331 in Panama, and 178 in Guatemala.

 

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 5,414 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:

 

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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. 

 

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.

 

If we were required to replace any of Todo1 Services Inc., Allus Global BPO Center, IQ Outsourcing S.A. or First Data Corp., 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. In 2007, 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. In 2011, Canadian Scotiabank purchased a stake in Colpatria. 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 in 2012, 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, began operations in March, of that year; in June, Corpbanca completed the acquisition of Helm Bank, keeping Corpbanca’s brand, and 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 S.A. 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, 2017, 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 2017

 

During 2017, the Colombian economy continued its downward trend, with an annual GDP growth of 1.8%, lower than the 2.0% of 2016. The economic activities that contributed to GDP growth were financial services, construction and manufacturing. The economic activity that subtracted from GDP growth was mining and quarrying. Inflation in 2017 was 4.09%, 166 basis points less than 2016, and still above the target range of the Central Bank by 9 basis points. Food and housing groups were the main contributors to this gap. Due to the Central Bank's objective inflation policy and the expectations of rate hikes given by the Federal Reserve in the United States, among other reasons, the Central Bank began to lower the interest rate to 4.75% during the second half of 2017. In 2017, the Colombian peso was largely stable, appreciating only 0.56% against the U.S. dollar.

 

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 38 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, the following information includes figures under Colombian Banking GAAP regulation, as reported by Colombian credit institutions to the SFC. Loan growth at Colombian credit institutions was 6.21% in 2017, compared to 7.83% in 2016. Commercial loans grew by 3.32% in 2017, compared to 4.35% in the previous year. Consumer loans increased 9.39% in 2017, less than the 13.18% in 2016. Mortgage loans continued performing well, with increases of 11.38% compared with 13.50% in 2016, and small business loans grew 7.74% in 2017 as compared with 6.66% in 2016.

 

Credit institutions’ ratio of past-due loans as a percentage of the total loan portfolio increased from 3.19% in December 2016 to 4.33% in December 2017. In addition, the coverage, measured by the ratio of allowances for loan losses (principal) to past-due loans (overdue 30 days), ended 2017 at 133.84%, compared to 154.29% at the end of 2016.

 

At the end of 2017, the loan portfolio of Colombian credit institutions represented 64.24% of their assets, less than the previous year, when the precentage was 65.00%. Investments and derivatives transactions as a percentage of total assets increased from 20.77% at the end of 2016 to 21.81% at the end of 2017. The ratio of deposits to total loan balances decreased from 88.75% in 2016 to 85.83% in 2017. 

 

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As of December 31, 2017, credit institutions recorded COP 676.9 trillion in total assets, representing a 6.63% increase compared to previous year. Based on total assets held by Colombian credit institutions, banks had a market share of 95.55% followed by financial corporations with 1.98%, financing companies with 1.96%, and financial cooperatives with 0.52%.

 

The capital adequacy ratio (Tier 1 + Tier 2) for credit institutions was 16.58% in December 2017 (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 IFRS information as applicable under Colombian Banking GAAP and published by the SFC.

 

 

 

ROE(1) ROA(2) Past-due loans/
Total loans
Allowances/
Past-due loans
Capital Adequacy
  Dic-17 Dic-16 Dic-17 Dic-16 Dic-17 Dic-16 Dic-17 Dic-16 Dic-17 Dic-16
Bancolombia 10.42% 13.31% 1.52% 1.96% 4.48% 2.95% 151.50% 189.20% 16.56% 16.20%
Banco de Bogotá 11.97% 26.72% 2.41% 5.33% 3.71% 2.55% 121.34% 133.51% 21.25% 20.80%
Davivienda 11.61% 17.37% 1.41% 2.12% 3.78% 2.95% 127.82% 141.31% 15.58% 13.95%
BBVA 11.37% 12.79% 0.79% 0.99% 4.12% 2.66% 127.43% 148.47% 12.27% 12.87%
Banco de Occidente 7.80% 12.95% 0.92% 1.61% 4.13% 2.96% 118.30% 140.42% 14.03% 13.23%
Banco Corpbanca (3.50%) (4.22%) (0.41%) (0.49%) 3.81% 2.90% 165.97% 179.61% 12.73% 12.96%
Banco Colpatria 6.93% 15.87% 0.56% 1.38% 5.89% 4.46% 105.94% 134.50% 11.06% 11.36%

 

 

Source: SFC.

 

(1)ROE is return on average stockholders’ equity.

(2)ROA is return on average assets.

 

The following tables illustrate Bancolombia and its main competitor’s market share on an unconsolidated basis with respect to various key products, based on figures published by the SFC for the years ended December 31, 2017 and 2016:

 

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Total Net Loans
Market Share

 

Total Net Loans – Market Share (%) 2017 2016
Bancolombia 25.62% 25.05%
Banco de Bogotá 12.97% 13.25%
Davivienda 14.79% 14.46%
BBVA 10.48% 10.14%
Banco de Occidente 6.29% 6.71%
Banco Corpbanca 4.96% 5.41%
Banco Colpatria 5.11% 4.98%

 

 

Source: Ratios are calculated by Bancolombia based on figures published by the SFC.

 

Checking Accounts
Market Share

 

Checking Accounts – Market Share (%) 2017 2016
Bancolombia 21.82% 22.47%
Banco de Bogotá 23.35% 24.55%
Davivienda 10.72% 9.20%
BBVA 12.10% 10.86%
Banco de Occidente 10.43% 11.01%
Banco Corpbanca 2.97% 3.54%
Banco Colpatria 2.67% 3.21%

 

 

Source: Ratios are calculated by Bancolombia based on figures published by the SFC.

 

Time Deposits
Market Share

 

Time Deposits – Market Share (%) 2017 2016
Bancolombia 21.22% 21.68%
Banco de Bogotá 11.75% 12.16%
Davivienda 15.17% 13.34%
BBVA 13.91% 13.27%
Banco de Occidente 4.07% 4.76%
Banco Corpbanca 6.91% 8.16%
Banco Colpatria 6.72% 6.36%

 

 

Source: Ratios are calculated by Bancolombia based on figures published by the SFC.

 

Saving Accounts
Market Share

 

Saving Accounts – Market Share (%) 2017 2016
Bancolombia 25.60% 23.94%
Banco de Bogotá 13.49% 13.07%
Davivienda 12.09% 14.28%
BBVA 10.33% 10.63%
Banco de Occidente 6.73% 5.68%
Banco Corpbanca 3.44% 3.98%
Banco Colpatria 4.64% 4.41%

 

 

Source: Ratios are calculated by Bancolombia based on figures published by the SFC.

 

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Banco Agrícola and its Competitors

 

In 2017, 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, 2017:

 

  Assets Stockholders` Equity Loans Deposits Profits
Banco Agrícola 26.2% 26.0% 26.2% 27.0% 44.7%
Cuscatlán 8.9% 11.1% 8.6% 9.0% 4.7%
Davivienda 15.0% 13.2% 15.3% 13.7% 14.3%
Scotiabank 12.1% 15.4% 13.1% 11.8% 13.4%
BAC 13.6% 11.9% 13.8% 14.1% 13.4%
Promerica 6.8% 5.3% 6.8% 7.2% 5.9%
Others 17.4% 17.1% 16.2% 17.2% 3.6%

 

Sources: ABANSA (Asociación Bancaria Salvadoreña)

 

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, 2017 and 2016:

 

Total Loans
Market Share

 

Total Loans - Market Share (%) 2017 2016
Banco Agrícola 26.2% 27.2%
Cuscatlán 8.6% 8.5%
Davivienda 15.3% 14.9%
Scotiabank 13.1% 14.1%
BAC 13.8% 13.0%
Promerica 6.8% 6.8%
Others 16.2% 15.5%

 

Checking Accounts
Market Share

 

Checking Accounts - Market Share (%) 2017 2016
Banco Agrícola 21.9% 22.3%
Cuscatlán 11.7% 13.3%
Davivienda 11.0% 10.4%
Scotiabank 9.4% 9.4%
BAC 20.8% 20.2%
Promerica 7.0% 7.1%
Others 18.2% 17.3%

 

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Time Deposits
Market Share

 

Time Deposits - Market Share (%) 2017 2016
Banco Agrícola 21.1% 21.3%
Cuscatlán 6.2% 5.6%
Davivienda 15.8% 15.2%
Scotiabank 13.4% 15.1%
BAC 11.9% 10.7%
Promerica 9.4% 9.7%
Others 22.2% 22.4%

 

Saving Accounts
Market Share

 

Saving Account - Market Share (%) 2017 2016
Banco Agrícola 40.1% 39.0%
Cuscatlán 9.8% 9.9%
Davivienda 13.5% 13.3%
Scotiabank 12.2% 12.9%
BAC 9.9% 8.7%
Promerica 4.4% 4.1%
Others 10.1% 12.1%

 

Banistmo and its Competitors

 

Banistmo, a leading company in Panama, is the second largest bank in the country with an 11.0% market share by loans. The information presented in the following tables relates was prepared based on Panama accounting standards. The following table illustrates the market share for the main institutions of the Panamanian financial system for the year ended in December 31, 2017.

 

MARKET SHARE

  Assets Equity Loans Deposits Profits
Banistmo 9.4% 9.2% 11.0% 12.0% 5.0%
Banco General 15.9% 10.5% 16.1% 20.8% 21.2%
Global Bank 6.6% 5.1% 7.6% 5.8% 6.8%
Banesco 4.1% 3.3% 4.3% 6.4% 2.7%
BAC 8.0% 22.6% 5.7% 7.0% 25.0%
Others 56.0% 49.3% 55.3% 48.0% 39.3%

 

 

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, for the years ended in December 31, 2017 and 2016:

 

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Total Loans

Market Share

 

Total Loans - Market Share (%) 2017 2016
Banistmo 11.0% 10.8%
Banco General 16.1% 15.1%
Global Bank 7.6% 8.4%
Banesco 4.3% 4.1%
BAC 5.7% 5.4%
Others 55.3% 56.2%

 

 

Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)

 

Saving Accounts

Market Share

  

Saving Account - Market Share (%) 2017 2016
Banistmo 12.2% 13.0%
Banco General 25.8% 25.8%
Global Bank 5.2% 5.4%
Banesco 12.5% 13.1%
BAC 3.1% 3.1%
Others 41.2% 39.6%

 

 

Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)

 

Checking Accounts

Market Share

 

Checking Accounts - Market Share (%) 2017 2016
Banistmo 12.0% 12.2%
Banco General 23.5% 24.6%
Global Bank 3.8% 3.8%
Banesco 4.1% 4.7%
BAC 10.4% 9.0%
Others 46.2% 45.7%

 

 

Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)

 

Time Deposits

Market Share

 

Time Deposits - Market Share (%) 2017 2016
Banistmo 11.9% 11.6%
Banco General 17.8% 16.8%
Global Bank 6.7% 6.6%
Banesco 4.5% 4.4%
BAC 7.4% 6.0%
Others 51.7% 54.6%

 

 

Source: Banistmo based on data by SBP (Superintendency of Banks of Panama)

 

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Banco Agromercantil de Guatemala, S.A. and its Competitors

 

Banco Agromercantil continues as the fourth largest bank in the banking system in Guatemala by total assets, net loans and stockholders’ equity.

 

As of December 31, 2017, the Superintendencia de Bancos de Guatemala (SIB) has under its supervision and inspection, 18 banking entities. 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, 2017:

 

MARKET SHARE
  Assets Stockholders’ Equity Loans Deposits Profits
Banco Industrial 28.3% 24.8% 27.9% 24.8% 30.5%
Banrural 20.4% 23.4% 17.9% 22.9% 20.7%
Banco G&T Continental 17.1% 13.8% 15.5% 17.3% 13.2%
Banco Agromercantil 8.0% 8.3% 10.6% 7.4% 6.5%
BAC-Reformador 7.6% 8.1% 9.9% 8.0% 6.3%
Bantrab 7.0% 7.4% 7.0% 7.7% 11.6%
Banco Promerica 2.1% 2.9% 2.6% 2.2% 2.6%
Others* 9.5% 11.3% 8.6% 9.7% 8.6%

*Others. Includes the followings banks: Internacional, Crédito Hipotecario Nacional, Ficohsa Azteca, Inmobiliario, De Antigua, Vivibanco, Citibank, N.A. de Guatemala, De Crédito, Inv.

 

Source: Superintendencia de Bancos de Guatemala (SIB).

 

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, 2017 and 2016: 

 

Net Loans

Market Share

 

Total Loans - Market Share (%) 2017 2016
Banco Industrial 27.9% 27.6%
Banrural 17.9% 20.0%
Banco G&T Continental 15.5% 15.8%
Banco Agromercantil 10.6% 10.7%
BAC-Reformador 9.9% 8.4%
Bantrab 7.0% 6.5%
Banco Promerica (Citibank 2016)* 2.6% 2.6%
Others** 8.6% 8.4%

 

* Banco Promerica (Citibank 2016). Grupo Promerica completed the acquisition of Banco Citibank de Guatemala, S.A on October 31, 2016. This transaction is only for consumer and commercial banking, excluding corporate banking which will continue to operate under Citibank N.A. Guatemala Branch. As of February 2017, Banco Citibank de Guatemala, S.A. changed its corporate name to Banco Promerica de Guatemala.

 

**Others. Includes the following banks: Internacional, Crédito Hipotecario Nacional, Ficohsa, Azteca, Inmobiliario, De Antigua, Vivibanco, Citibank, N.A. de Guatemala, De Crédito, Inv.

 

Source: Superintendencia de Bancos de Guatemala (SIB).

 

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Checking Accounts
Market Share

 

Checking Accounts - Market Share (%) 2017 2016
Banco Industrial 30.0% 31.3%
Banrural 22.1% 22.0%
Banco G&T Continental 17.1% 17.3%
BAC-Reformador 11.9% 9.9%
Banco Agromercantil 7.2% 7.8%
Bantrab 1.2% 1.2%
Banco Promerica (Citibank 2016)* 2.0% 1.9%
Others** 8.5% 8.6%

 

* Banco Promerica (Citibank 2016). Grupo Promerica completed the acquisition of Banco Citibank de Guatemala, S.A on October 31, 2016. This transaction is only for consumer and commercial banking, excluding corporate banking which will continue to operate under Citibank N.A. Guatemala Branch. As of February 2017, Banco Citibank de Guatemala, S.A. changed its corporate name to Banco Promerica de Guatemala.

 

**Others. Includes the following banks: Internacional, Crédito Hipotecario Nacional, Ficohsa, Azteca, Inmobiliario, De Antigua, Vivibanco, Citibank, N.A. de Guatemala, De Crédito, Inv.

 

Source: Superintendencia de Bancos de Guatemala (SIB).

 

Time Deposits
Market Share

 

Time Deposits - Market Share (%) 2017 2016
Banco Industrial 20.9% 18.4%
Banrural 19.5% 21.6%
Bantrab 15.5% 13.5%
Banco G&T Continental 15.0% 17.1%
Banco Agromercantil 7.5% 7.2%
BAC-Reformador 5.9% 5.6%
Banco Promerica (Citibank 2016)* 2.9% 3.4%
Others** 12.8% 13.2%

 

* Banco Promerica (Citibank 2016). Grupo Promerica completed the acquisition of Banco Citibank de Guatemala, S.A on October 31, 2016. This transaction is only for consumer and commercial banking, excluding corporate banking which will continue to operate under Citibank N.A. Guatemala Branch. As of February 2017, Banco Citibank de Guatemala, S.A. changed its corporate name to Banco Promerica de Guatemala.

 

**Others. Includes the following banks: Internacional, Crédito Hipotecario Nacional, Ficohsa, Azteca, Inmobiliario, De Antigua, Vivibanco, Citibank, N.A. de Guatemala, De Crédito, Inv.

 

Source: Superintendencia de Bancos de Guatemala (SIB).

 

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Saving Accounts
Market Share

 

Saving Accounts - Market Share (%) 2017 2016
Banco Industrial 23.5% 24.1%
Banrural 31.1% 30.0%
Banco G&T Continental 22.1% 21.4%
Banco Agromercantil 7.5% 8.3%
BAC-Reformador 5.2% 5.2%
Bantrab 3.5% 3.6%
Banco Promerica (Citibank 2016)* 1.3% 1.5%
Others** 5.8% 5.9%

 

* Banco Promerica (Citibank 2016). Grupo Promerica completed the acquisition of Banco Citibank de Guatemala, S.A on October 31, 2016. This transaction is only for consumer and commercial banking, excluding corporate banking which will continue to operate under Citibank N.A. Guatemala Branch. As of February 2017, Banco Citibank de Guatemala, S.A. changed its corporate name to Banco Promerica de Guatemala.

 

**Others. Includes the following banks: Internacional, Crédito Hipotecario Nacional, Ficohsa, Azteca, Inmobiliario, De Antigua, Vivibanco, Citibank, N.A. de Guatemala, De Crédito, Inv.

 

Source: Superintendencia de Bancos de Guatemala (SIB).

 

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.

 

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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. 

 

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 Securities 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, Law 1328 of 2009 and Law 1870 of 2017.

 

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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. 

 

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.

 

Law 1870 of 2017 implemented the legal framework for the regulation and supervision on financial conglomerates. The law sets forth a definition for financial conglomerate. This regulation establishes two ways in which a company is considered a financial holding company and therefore subject to the new legal framework: (i) it has significant influence over a financial institution, or (ii) it controls a financial institution. This law prescribes the framework within which the Government and the SFC may regulate matters related to financial conglomerates, such as regulatory capital, definition of related parties, corporate governance principles and risk management, among others. In regulating financial conglomerates, the Government and the SFC musttake into consideration the structure, complexity, and individual features of each conglomerate. Additionally, regarding risk management and exposure limits, the new requirements applicable to financial conglomerates must consider the requirements to which the financial institutions are already subject. Along the same lines, when financial institutions fulfill capital adequacy requirements and solvency ratios, authorities may not impose solvency ratios on the conglomerate.

 

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The law also reinforced the mechanism for the resolution of credit establishments - deposit-taking institutions under Colombian Law - by establishing the concept of the bridge bank, an entity used to facilitate the purchase of assets and transfer of liabilities from failing institutions.

 

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. 

 

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 27, 2018, the DTF was 4.88%.

 

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, 2017, the banking interest rate for small business loans was 36.78% and for all other loans was 20.69%. 

 

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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 capital adequacy 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. These ratios apply to credit establishments individually and on a consolidated basis. Credit establishments include Banks, Financial Corporations, and Financing Companies.

 

·Recently the Ministry of Finance issued Decree 415 of 2018, which establishes that as of the year 2019, non-depository financial institutions, such as asset managers and fiduciary entities under Colombian law, shall comply with a 9% minimum solvency ratio on an individual basis.

 

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). 

 

As of December 31, 2017, the Bank’s capital adequacy ratio was 14.18%, exceeding the requirements of the Colombian government and the SFC by 518 basis points. As of December 31, 2016, the Bank’s capital adequacy ratio was 13.26%.

 

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 2017 is COP 90,142 million. Failure to meet such requirement can result in the taking of possession (toma de posesión) of the Bank by the SFC (see Item 4. “Information on the Company – B. Business Overview – B.8 –Supervision and Regulation – Bankruptcy Considerations”).

 

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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. 

 

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).

 

In addition, in the case of a bank that consolidated financial statements with its subsidiaries and has controlled foreign investments, the average of the bank’s foreign currency position for three business days cannot exceed the equivalent in foreign currency of 30% of the bank’s technical capital.

 

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.

 

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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 in a term equal or greater than one day 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 55% 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. 

 

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.

 

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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. 

 

 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.

 

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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. 

 

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.

 

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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. 

 

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.

 

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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 0.30% 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 50 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; (v) money laundering and terrorism; and (vi) counterparty.

 

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. 

 

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.

 

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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 that include screening against international lists.

 

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, a U.S. federal tax law 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.

 

CRS

 

The CRS, approved by the OECD Council on 2014, is applicable to signatory countries of the Multilateral Competent Authority Agreement (“MCAA”) which, therefore, have the obligation to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. The CRS defines (i) which financial institutions are required to report; (ii) the types of accounts covered; and (iii) the due diligence procedures that financial institutions must follow to identify the reporting information.

 

Among the countries where Bancolombia operates, Colombia, Panamá and Cayman Island, have signed to the MCAA and, thus, has the obligation to report in accordance to the CRS.

 

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.

 

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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. 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, which set forth aspects such as minimum requirements of trust agreements, characteristics of trusts, rights and responsibilities of grantors, trustees and beneficiaries.

 

In 2017, the Panamanian Congress issued Law No.21 of 2017, which strengthens the oversight and regulation capabilities of the Superintendency of Banks, regarding the trust business. The Law imposes higher standards and provides for more detailed supervision, with respect to matters such as licensing, prudential regulation, corporate governance, reporting and customer protection, amongst others.

 

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;

 

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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.

 

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.

 

Panama has also moved forward with the adoption of international standards on transparency and cooperation on tax matters, through the approval of the Inter-Governmental Agreement for the implementation of FATCA on 2016, the commitment regarding the automatic exchange of information on a bilateral basis and under the Common Reporting Standard, beginning on September, 2018, and the ratification of the Multilateral Convention on Mutual Administrative Assistance on Tax Matters on 2017. All of the above will enable the exchange of information for tax matters between the Panamanian tax authorities, and a broader set of countries to implement these commitments, regulations were adopted during the course of 2016 and 2017 setting forth the obligations and responsibilities of banking institutions, regarding due diligence procedures in order to identify reportable accounts under FATCA and CRS, as well as responsibilities regarding control measures and reporting requirements necessary to comply with such international standards and agreements. The laws, rules and regulations issued for these purposes include: Law No.47 of 2016, Law No.51 of 2016, Law No.5 of 2017, Executive Decree No.124 of 2017, Executive Decree No.461 of 2017 and the Resolution No.201-3931 of 2017 amended by Resolution No.201-4488 of 2017.

 

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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.

 

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.

 

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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, 2017 are:

 

  Ordinary Reserve Requirements %
Checking accounts 25%
Saving accounts 20%
Time deposits 20%
Borrowings from foreign banks 5%
Long-term debt (1) 15% - 20%
Checking accounts 25%

 

(1) 15% for long-term debt with maturity above one year and 20% for long-term debt with maturity less than one year.

Investment Certificates with maturity equal or more than 5 years with mortgage guarantee, are not obliged to have reserves.

 

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.  

 

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.

 

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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. 

 

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.

 

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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.
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.
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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.

 

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.

 

The Law for Banks and Financial Groups provides within a regularization plan, and if deemed convenient, at the discretion of the Monetary Board, limiting profit sharing for the shareholders of a bank as well as the possibility of incorporating a member to the Board of Directors.

 

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.

 

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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. 

 

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: 

 

 

 

 

 

(*) Investment in legal liquidation process. 

 

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The following is a list of subsidiaries of Bancolombia as of December 31, 2017:

 

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 100.00%
Valores Bancolombia S.A. Comisionista de Bolsa Colombia Securities brokerage 100.00%
Renting Colombia S.A.S. (Before Renting Colombia S.A.) Colombia Operating leasing 100.00%
Transportempo S.A.S. Colombia Transportation 100.00%
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 100.00%
FCP Fondo Colombia Inmobiliario. Colombia Real estate broker 63.47%
Fideicomiso "Lote Abelardo Castro". Colombia Mercantil trust 68.23%
Bancolombia Panamá S.A. Panama Banking 100.00%
Sistemas de Inversiones y Negocios S.A. Sinesa Panama Investments 100.00%
Banagrícola S.A. Panama Holding 99.16%
Banistmo S.A. Panama Banking 100.00%
Banistmo Investment Corporation S.A. Panama Trust 100.00%
Financomer S.A. Panama Financial services 100.00%
Leasing Banistmo S.A. Panama Leasing 100.00%
Valores Banistmo S.A. Panama Purchase and sale of securities 100.00%
Suvalor Panamá Fondos de Inversión S.A. Panama Holding 100.00%
Suvalor Renta Fija Internacional Largo Plazo S.A. Panama Collective investment fund 100.00%
Suvalor Renta Fija Internacional Corto Plazo S.A. Panama Collective investment fund 100.00%
Banistmo Capital Markets Group Inc. (non-operational stage) Panama Purchase and sale of securities 100.00%
Van Dyke Overseas Corp. (non-operational stage) Panama Real estate broker 100.00%
Inmobiliaria Bickford S.A. (non-operational stage) Panama Real estate broker 100.00%
Williamsburg International Corp. (non-operational stage) Panama Real estate broker 100.00%
Anavi Investment Corporation S.A. (non-operational stage) Panama Real estate broker 100.00%
Desarrollo de Oriente S.A. (non-operational stage) Panama Real estate broker 100.00%
Steens Enterpresies S.A. (non-operational stage) Panama Portfolio holder 100.00%
Ordway Holdings S.A. (non-operational stage) Panama Real estate broker 100.00%
Grupo Agromercantil Holding S.A. Panama Holding 60.00%
Banco Agrícola S.A. El Salvador Banking 97.36%
Arrendadora Financiera S.A. Arfinsa El Salvador Leasing 97.37%
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. (classified as assets held for sale) Peru Operating leasing 100.00%
Fondo de Inversión en Arrendamiento Operativo - Renting Perú (In liquidation) Peru Operating leasing 100.00%
Capital Investments SAFI S.A. (classified as assets held for sale) Peru Trust 100.00%
FiduPerú S.A. Sociedad Fiduciaria (classified as assets held for sale) Peru Trust 98.81%
       
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Entity Jurisdiction of
Incorporation
Business Shareholding
Directly and
Indirectly
Leasing Perú S.A. (In liquidation) Peru Leasing 100.00%
Banagrícola Guatemala S.A. Guatemala Outsourcing 99.16%
Banco Agromercantil de Guatemala S.A. 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%
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%
Conserjeria, Mantenimiento y Mensajería S.A. Guatemala Maintenance services 60.00%
Media Plus S.A. Guatemala Advertising and marketing 60.00%
Mercom Bank Ltd. Barbados Banking 60.00%
New Alma Enterprises Ltd. Bahamas investments 60.00%
Bancolombia Puerto Rico Internacional Inc. Puerto Rico Banking 100.00%
Bancolombia Caymán S.A. Cayman Islands Banking 100.00%
Bagrícola Costa Rica S.A. Costa Rica Outsourcing 99.16%

 

D.PREMISES AND EQUIPMENT

 

As of December 31, 2017, the Bank owned COP 3,127 billion in premises and equipment (including assets that are part of our operating leasing business) COP 1,641 billion correspond to land and buildings, of which approximately 95.88% are used for administrative offices and branches in 55 municipalities in Colombia, 25 municipalities in El Salvador, 9 municipalities in Guatemala and 4 municipalities in Panama. Likewise, COP 783 billion correspond to computer equipment, of which 12.06% relate to the central computer and servers of the Bank and the rest relate to personal computers, ATMs, telecommunications equipment and other equipment. Additionally, COP 5 billion correspond to constructions in progress.

 

In addition to its own branches, the Bank occupies 957 rented offices.

 

The following table illustrates the carrying amounts of premises and equipment for each country as of December 31, 2017:

 

Country (1) Amount
In millions of COP
Colombia 2,445,791
Costa Rica 80
El Salvador 277,976
Guatemala 165,804
Panamá 237,366
Puerto Rico 388
Total 3,127,405

 

 
(1)As of December 31, 2017, the Bank has premises and equipment classified as held for sale amounting to 109,469, related with its Peruvian operations.

 

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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 December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016, 2015 and 2014, as applicable, corresponds to the Bank, including all Subsidiaries as to which Bancolombia acquired control as a result of the 2015 acquisition of additional shares of Grupo Agromercantil. Prior to January 1, 2014, our consolidated financial statements were prepared in accordance with Colombian Banking GAAP. 

 

E.1.DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL

 

Average balances for each of the years ended December 31, 2017, 2016 and 2015 have been calculated as the arithmetic average of the last 13 monthly IFRS balances.

 

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, 2017, 2016 and 2015, 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)
  2017 2016 2015
  Average
Balance
Interest
income

earned
Average
Yield / Rate
Average
Balance
Interest
income

earned
Average
Yield /

Rate

Average

Balance

Interest
income

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 1,164,612  57,071 4.9% 1,434,974 119,889 8.4% 1,180,507 74,237 6.3%
Foreign activities 2,196,602  504 0.0% 1,905,163 41,113 2.2% 1,594,096 20,752 1.3%
Total 3,361,214  57,575 1.7% 3,340,137 161,002 4.8% 2,774,603 94,989 3.4%
Debt investments (2)                  
Domestic activities 9,057,238 612,076 6.8% 7,114,398 481,316 6.8% 7,929,171 253,161 3.2%
Foreign activities 5,390,576 247,655 4.6% 5,364,736 262,644 4.9% 3,684,896 113,608 3.1%
Total 14,447,814 859,731 6.0% 12,479,134 743,960 6.0% 11,614,067 366,769 3.2%
Interest income on loans and financial leases (3)                  
Domestic activities 94,870,082 12,122,572 12.8% 87,289,606 11,494,684 13.2% 79,835,468 8,739,998 10.9%
Foreign activities 55,631,821  3,851,013 6.9% 57,291,045 3,815,489 6.7% 45,190,581 2,521,782 5.6%
Total 150,501,903 15,973,585 10.6% 144,580,651 15,310,173 10.6% 125,026,049 11,261,780 9.0%
Total interest-earning assets                  
Domestic activities 105,091,932 12,791,719 12.2% 95,838,978 12,095,889 12.6% 88,945,146 9,067,396 10.2%
Foreign activities 63,218,999  4,099,172 6.5% 64,560,944 4,119,246 6.4% 50,469,573 2,656,142 5.3%
Total 168,310,931 16,890,891 10.0% 160,399,922 16,215,135 10.1% 139,414,719 11,723,538 8.4%
Total non-interest-earning assets                  
Domestic activities 16,254,108 - - 15,656,149 - - 10,050,646 - -
Foreign activities (4) 16,347,218 - - 17,411,162 - - 15,383,212 - -
Total 32,601,326 - - 33,067,311 - - 25,433,858 - -
Total interest and non-interest earnings assets                  
Domestic activities 121,346,040 12,791,719 10.5% 111,495,127 12,095,889 10.8% 98,995,792 9,067,396 9.2%
Foreign activities (4) 79,566,217  4,099,172 5.2% 81,972,106 4,119,246 5.0% 65,852,785 2,656,142 4.0%
Total (5) 200,912,257 16,890,891 8.4% 193,467,233 16,215,135 8.4% 164,848,577 11,723,538 7.1%
                       

 

(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 39.6%, 42.4% and 39.9% respectively, for the fiscal years ended December 31, 2017, 2016 and 2015.
(5)As of December 31, 2016, and 2015 the Bank´s total average assets includes the assets of the discontinued operations of Tuya S.A., as it was not practicable to exclude such assets when calculating monthly balances and the resulting annual averages. The difference between the line “total” in the table above and the line “Total interest and valuation” is due to the fact that the Bank’s Consolidated Statement of Income includes interest and valuation related to debt securities investments and derivatives.

 

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  Average statement of financial position and Interest Paid on Interest-Bearing Liabilities for the Fiscal Year Ended December 31, (1)
  2017 2016 2015
  Average
Balance
Interest paid Average Yield /
Rate (2)
Average
 Balance
Interest paid Average
Yield /
Rate (2)
Average
Balance
Interest paid Average
Yield / Rate
  In millions of COP, except percentages
LIABILITIES AND STOCKHOLDERS’ EQUITY                  
Interest-bearing liabilities:                  
Checking deposits                  
Domestic activities 10,319,409 14,234 0.1% 10,960,605 15,175 0.1% 11,034,571 17,778 0.2%
Foreign activities 10,173,663 36,579 0.4% 10,511,089 42,473 0.4% 7,538,081 16,060 0.2%
Total 20,493,072 50,813 0.2% 21,471,694 57,648 0.3% 18,572,652 33,838 0.2%
Savings deposits                  
Domestic activities 38,111,789 1,064,435 2.8% 33,763,375 866,387 2.6% 30,937,835 528,806 1.7%
Foreign activities 12,277,933 200,781 1.6% 12,653,306 192,413 1.5% 9,837,665 142,111 1.4%
Total 50,389,722 1,265,216 2.5% 46,416,681 1,058,800 2.3% 40,775,500 670,917 1.6%
Time deposits                  
Domestic activities 30,666,059 2,182,011 7.1% 27,813,915 2,128,861 7.7% 23,284,367 1,322,738 5.7%
Foreign activities 24,242,926 781,276 3.2% 23,375,945 720,532 3.1% 18,944,955 443,488 2.3%
Total 54,908,985 2,963,287 5.4% 51,189,860 2,849,393 5.6% 42,229,322 1,766,226 4.2%
Funds purchased and securities sold under agreements to repurchase                  
Domestic activities 4,109,470  175,911 4.3% 2,514,533 130,912 5.2% 2,795,234 128,858 4.6%
Foreign activities 845,370  5,056 0.6% 529,575 6,492 1.2% 450,720 3,327 0.7%
Total 4,954,840  180,967 3.7% 3,044,108 137,404 4.5% 3,245,954 132,185 4.1%
Borrowings from development and other domestic banks (2)                  
Domestic activities 5,066,726  391,449 7.7% 5,228,949 232,899 4.5% 4,603,982 130,156 2.8%
Foreign activities 683,451  34,300 5.0% 598,092 17,232 2.9% 270,205 7,475 2.8%
Total 5,750,177  425,749 7.4% 5,827,041 250,131 4.3% 4,874,187 137,631 2.8%
Interbank borrowings(2)(3)                  
Domestic activities - - 0.0% - - 0.0% - - 0.0%
Foreign activities 10,779,261 278,107 2.6% 14,004,249 307,178 2.2% 10,502,220 183,555 1.7%
Total 10,779,261 278,107 2.6% 14,004,249 307,178 2.2% 10,502,220 183,555 1.7%
Long-term debt                  
Domestic activities 5,803,401 476,080 8.2% 5,885,689 613,321 10.4% 5,907,501 495,168 8.4%
Foreign activities 13,435,824 714,920 5.3% 13,556,293 738,827 5.5% 10,735,079 580,314 5.4%
Total 19,239,225 1,191,000 6.2% 19,441,982 1,352,148 7.0% 16,642,580 1,075,482 6.5%
Total interest-bearing liabilities                  
Domestic activities 94,076,854  4,304,120 4.6% 86,167,066 3,987,555 4.6% 78,563,490 2,623,504 3.3%
Foreign activities 72,438,428  2,051,019 2.8% 75,228,549 2,025,147 2.7% 58,278,925 1,376,330 2.4%
Total 166,515,282  6,355,139 3.8% 161,395,615 6,012,702 3.7% 136,842,415 3,999,834 2.9%
Total non-interest bearing liabilities