20-F 1 tv517668_20f.htm FORM 20-F

 

 

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 24, 2019

 

 

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, 2018

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, e-mail: almejia@bancolombia.com

Carrera 48 # 26-85, Medellín, Colombia

(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act.

 

Title of each Class Name of each exchange on which registered
American Depositary Shares New York Stock Exchange
Preferred Shares New York Stock Exchange*

 

 
*Bancolombia’s preferred shares are not listed for trading directly, but only in connection with its American Depositary Shares, which are evidenced by American Depositary Receipts, each representing four preferred shares.

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

 

Not applicable

(Title of Class)

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

 

Not applicable

(Title of Class)

 

indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the

period covered by the annual report.

Common Shares 509,704,584
Preferred Shares 452,122,416

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes x No ¨

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 of 15(d) of the Securities Exchange Act of 1934.

Yes ¨ No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See the definitions of “accelerated filer and large, accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨

 

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 7
   
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION 8
   
PART I 9
     
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 9
     
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 9
     
ITEM 3. KEY INFORMATION 9
A. SELECTED FINANCIAL DATA 9
B. CAPITALIZATION AND INDEBTEDNESS 13
C. REASONS FOR THE OFFER AND USE OF PROCEEDS 13
D. RISK FACTORS 13
     
ITEM 4. INFORMATION ON THE COMPANY 28
A. HISTORY AND DEVELOPMENT OF THE COMPANY 28
B. BUSINESS OVERVIEW 32
  B.1. GENERAL 32
  B.2. OPERATIONS 35
  B.3. SEASONALITY OF DEPOSITS 35
  B.4. RAW MATERIALS 35
  B.5. DISTRIBUTION NETWORK 35
  B.6. PATENTS, LICENSES AND CONTRACTS 37
  B.7. COMPETITION 37
  B.8. SUPERVISION AND REGULATION 45
  B.9 CYBERSECURITY FRAMEWORK 64
C. ORGANIZATIONAL STRUCTURE 66
D. PREMISES AND EQUIPMENT 68
E. SELECTED STATISTICAL INFORMATION 69
     
  E.1. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS’ EQUITY; INTEREST RATES AND INTEREST DIFFERENTIAL 69
  E.2. INVESTMENT PORTFOLIO 75
  E.3. LOAN PORTFOLIO 79
  E.4. SUMMARY OF LOAN LOSS EXPERIENCE 86
  E.5. DEPOSITS 92
  E.6. RETURN ON EQUITY AND ASSETS 92
  E.7. SHORT-TERM BORROWINGS 93
     
ITEM 4 A. UNRESOLVED STAFF COMMENTS 93
     
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 93
A. OPERATING RESULTS 93
  GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2018 VERSUS 2017 95
  GENERAL DISCUSSION OF THE CHANGES IN RESULTS FOR 2017 VERSUS 2016 101

 

 

 

 

B. LIQUIDITY AND CAPITAL RESOURCES 121
  B.1. LIQUIDITY AND FUNDING 121
  B.2. FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES 126
  B.3. COMMITMENT FOR CAPITAL EXPENDITURES 127
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. 127
D. TREND INFORMATION 127
E. OFF-BALANCE SHEET ARRANGEMENTS 128
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS 129
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES 130
     
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 138
A. DIRECTORS AND SENIOR MANAGEMENT 138
B. COMPENSATION OF DIRECTORS AND OFFICERS 141
C. BOARD PRACTICES 141
D. EMPLOYEES 144
E. SHARE OWNERSHIP 145
     
ITEM 7. MAJOR STOCKHOLDERS AND RELATED PARTY TRANSACTIONS 146
A. MAJOR STOCKHOLDERS 146
B. RELATED PARTY TRANSACTIONS 147
C. INTEREST OF EXPERTS AND COUNSEL 147
     
ITEM 8. FINANCIAL INFORMATION 147
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION 147
  A.1. CONSOLIDATED FINANCIAL STATEMENTS 147
  A.2. LEGAL PROCEEDINGS 147
  A.3. DIVIDEND POLICY 148
B. SIGNIFICANT CHANGES 148
     
ITEM 9. THE OFFER AND LISTING 148
A. OFFER AND LISTING DETAILS 148
B. PLAN OF DISTRIBUTION 149
C. MARKETS 149
D. SELLING STOCKHOLDERS 149
E. DILUTION 149
F. EXPENSES OF THE ISSUE 149
     
ITEM 10. ADDITIONAL INFORMATION 150
A. SHARE CAPITAL 150
B. MEMORANDUM AND ARTICLES OF ASSOCIATION 150
C. MATERIAL CONTRACTS 155
D. EXCHANGE CONTROLS 156
E. TAXATION 156
F. DIVIDENDS AND PAYING AGENTS 161
G. STATEMENT BY EXPERTS 162
H. DOCUMENTS ON DISPLAY 162
I. SUBSIDIARY INFORMATION 162
     
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 162
     
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 167

 

 

 

 

PART II 168
     
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 168
     
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 168
     
ITEM 15. CONTROLS AND PROCEDURES 168
     
ITEM 16. RESERVED 170
A. AUDIT COMMITTEE FINANCIAL EXPERT 170
B. CORPORATE GOVERNANCE AND CODE OF ETHICS 170
C. PRINCIPAL ACCOUNTANT FEES AND SERVICES 170
D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES 171
E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS 171
F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT 171
G. CORPORATE GOVERNANCE 171
H. MINE SAFETY DISCLOSURES 172
   
PART III 172
     
ITEM 17. FINANCIAL STATEMENTS 172
     
ITEM 18. FINANCIAL STATEMENTS 173
     
ITEM 19. EXHIBITS 173

 

 

 

 

CERTAIN DEFINED TERMS

 

Unless otherwise specified or if the context so requires, in this annual report:

 

“ADSs” refers to our American Depositary Shares (one ADS represents four preferred shares).

 

“Annual Report” refer to this annual report on Form 20-F.

 

“ATM” refer to automated teller machine.

 

“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.

 

“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.

 

“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.

 

“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.

 

“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.

 

“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.

 

“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.

 

“Central Bank” refer to the Central Bank of Colombia (Banco de la República).

 

“Colombia” refer to the Republic of Colombia.

 

“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. The Consolidated Financial Statements included in this Annual Report are prepared under IFRS as issued by the International Accounting Standard Board.

 

"Consolidated Financial Statements" refer to the audited consolidated statements of financial position of the Bank as of December 31, 2018 and 2017 and the audited consolidated statements of income, comprehensive income, changes in equity and cash flows for the years ended December 31, 2018, 2017 and 2016 and related notes included in this Annual Report.

 

 5 

 

 

“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.

 

“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.

 

“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.

 

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

 

“IRS” refer to the U.S. Internal Revenue Service.

 

“NYSE” refer to the New York Stock Exchange.

 

“OCI” refers to Other Comprehensive Income.

 

“peso”, “pesos” or “COP” refer to the lawful currency of Colombia.

 

“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.

 

“Renting Colombia” refer to Renting Colombia S.A.S., a Subsidiary of Bancolombia S.A. organized under the laws of Colombia, which provides operating lease and fleet management services for individuals and companies.

 

“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.

 

“SEC” refer to the U.S. Securities and Exchange Commission.

 

“SMEs” refer to Small and Medium Enterprises.

 

“SMMLV” refer to Salario Mínimo Mensual Legal Vigente, the effective legal minimum monthly salary in Colombia. In 2018, the effective legal minimum monthly salary in Colombia was COP $781,242.

 

“Subsidiaries” refer to entities controlled by Bancolombia S.A. The Bank controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through the Bank’s power.

 

“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.

 

 6 

 

 

“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 Tourism (Ministerio de Comercio Industria y Turismo) with functions of supervision and regulation of the competition in several industries, including financial institutions.

 

“U.S.” or “United States” refer to the United States of America.

 

“U.S. dollar”, “USD”, and “US$” refer to the lawful currency of the United States.

 

“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.

 

“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.

 

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.

 

 7 

 

 

PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION

 

Accounting Principles

 

The audited consolidated statements of financial position of the Bank as of December 31, 2018 and 2017 and the audited consolidated statements of income, of comprehensive income, changes in equity and cash flows for the years ended December 31, 2018, 2017 and 2016 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 IFRS Interpretations Committee (“IFRS IC”). 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, 2018 and 2017 and for the three fiscal years ended December 31, 2018, 2017, and 2016 contained in this Annual Report are expressed in millions of pesos.

 

This Annual Report translates certain pesos amounts into U.S. dollars at specified rates solely for the convenience of the reader. Unless otherwise indicated, such peso amounts have been translated at the rate of COP 3,249.75 per USD 1.00, which corresponds to the Representative Market Rate calculated on December 31, 2018. 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 22, 2019, the Representative Market Rate was COP 3,160.48 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, Banistmo and Banco Agromercantil de Guatemala maintain internet sites at http://www.bancoagricola.com/, http://www.banistmo.com/, and https://www.bam.com.gt/ 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 incorporated into this Annual Report or the fili. 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.

 

 8 

 

 

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, 2018 and 2017, and the selected consolidated statement of income data for each of the periods ended December 31, 2018, 2017 and 2016, 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 under IFRS as issued by IASB 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, the audit reports of the Bank’s independent registered public accounting firms and the previously consolidated statement 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 Consolidated Financial Statements of the Bank as of and for the year ended December 31, 2018 were audited by PricewaterhouseCoopers Ltda., while the Consolidated Financial Statements of the Bank for the years ended December 31, 2017 and 2016 were audited by Deloitte and Touche Ltda. The Consolidated Financial Statements of the Bank as of and for the years ended December 31, 2015 and 2014 were audited by PricewaterhouseCoopers.

 

 9 

 

 

  As of and for the year ended December 31,
    2018(1)   2018   2017(2)   2016(2)   2015   2014
CONSOLIDATED STATEMENT OF INCOME DATA:                        
Total interest and valuation on financial instruments USD 4,959,305 COP 16,116,500 COP 16,696,393 COP 15,748,805 COP 11,269,644 COP 9,172,163
Interest expenses   (1,744,816)   (5,670,216)   (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   3,214,489   10,446,284   10,463,407   9,695,705   7,231,703   6,007,552
Credit impairment charges on loans and advances and financial leases, net   (1,185,207)   (3,851,625)   (3,468,699)   (2,643,710)   (1,667,680)   (843,597)
Credit impairment recoveries (charges) on off balance sheet credit instruments   1,744   5,668   7,082   (87,442)   (7,421)   (25,608)
Allowances for credit losses on debt investments(3)   888   2,885   -   -   -   -
Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments   2,031,914   6,603,212   7,001,790   6,964,553   5,556,602   5,138,347
Total other operating income (4)   1,383,354   4,495,556   4,217,039   3,974,310   3,577,320   3,084,942
Total operating expenses   (2,302,607)   (7,482,898)   (7,226,058)   (6,970,581)   (5,898,287)   (5,118,695)
Profit before tax   1,112,661   3,615,870   3,992,771   3,968,282   3,235,635   3,104,594
Income tax   (255,230)   (829,435)   (1,238,598)   (1,176,832)   (649,250)   (737,676)
Profit for the year from continued operations   857,431   2,786,435   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   857,431   2,786,435   2,754,173   2,954,947   2,608,898   2,429,785
Net income attributable to equity holders of the parent company USD 818,175 COP 2,658,864 COP 2,615,000 COP 2,865,328 COP 2,518,890 COP 2,387,086
Non-controlling interest   39,256   127,571   139,173   89,619   90,008   42,699
Weighted average of Preferred and Common Shares outstanding (5)       961,827,000   961,827,000   961,827,000   961,827,000   941,936,589
Basic and diluted earnings per share to common shareholders (5)   0.87   2,825   2,780   3,040   2,680   2,591
From continuing operations   0.87   2,825   2,780   2,870   2,656   2,524
From discontinued operations   -   -   -   170   24   67

Basic and diluted earnings per

ADS (5)

  3.48   11,300   11,120   12,160   10,720   10,364
From continuing operations   3.48   11,300   11,120   11,480   10,624   10,096
From discontinued operations   -   -   -   680   96   268
Cash dividends declared per share       1,092   1,020   950   888   830
Cash dividends declared per share (stated in USD)       0.34   0.34   0.32   0.28   0.26
Cash dividends declared per ADS       4,368   4,080   3,800   3,552   3,320
Cash dividends declared per ADS (stated in USD)       1.34   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 on December 31, 2018 of 3,249.75 per USD 1.00.
(2)Some items in the Consolidated Statement of Income for the years ended as of December 31, 2017 and 2016 disclosed in the Bank’s annual report in 2017 have been disaggregated in more detail as a result of the adoption of IFRS 15. See adoption of new accounting standards in Note 32 Impacts on application of new standards.
(3)IFRS 9 (2014) set significant changes in the assessment of the impairment of the value of financial instruments and therefore their associated risk, going from an incurred loss model to one of expected credit loss. As of December 31, 2018, the Bank recgnized credit impairment charges based on IFRS 9 model. The allowances for the years ended December 31, 2017, 2016, 2015 and 2014 were computed under IAS 39. Accordingly, those amounts are not comparable to the amount as of December 31, 2018. For further information see Note 32 to the Consolidated Financial Statements Impacts on application of new standards.
(4)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, and for the years ended as of December 31, 2015 and 2014, see annual reports previously filed with the SEC for the years ended December 31, 2016 and 2015.
(5)The weighted average of preferred and common shares outstanding for the fiscal years ended December 31, 2018, 2017, 2016 and 2015 are 452,122,416 preferred shares and 509,704,584 common shares.

 

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  For the year ended December 31,    
    2018(1)   2018   2017   2016   2015   2014
SELECTED CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA:                        
Assets:                        
Cash and cash equivalents USD 5,763,770 COP 18,730,810 COP 18,165,644 COP 20,460,245 COP 18,597,614 COP 13,466,783
Financial assets investments   5,342,403   17,361,475   16,377,253   13,060,653   14,277,824   12,784,223
Derivative financial instruments   567,338   1,843,708   1,134,372   1,677,970   2,382,168   1,448,845
Loans and advances to customers and financial Institutions   53,486,919   173,819,116   160,468,094   151,747,486   145,620,639   115,173,653
Allowance for loans and advances and lease losses (2)   (3,149,729)   (10,235,831)   (8,223,103)   (6,621,911)   (5,248,755)   (4,789,257)
Assets held for sale and inventories, net   195,716   636,028   377,003   273,187   1,950,808   97,744
Investment in associates and joint ventures   661,460   2,149,579   1,565,059   1,298,246   546,549   1,349,697
Investment property   533,233   1,732,873   1,657,409   1,581,689   1,505,046   1,114,180
Premises and equipment, net (3)   1,036,587   3,368,647   3,127,405   3,115,697   3,052,266   2,646,321
Goodwill and intangible assets, net   2,216,126   7,201,855   6,631,424   6,694,037   7,092,255   4,585,849
Deferred tax, net   83,445   271,177   148,614   222,862   170,482   187,737
Other assets, net   995,209   3,234,181   2,479,037   2,750,883   3,025,971   1,564,106
Total assets USD 67,732,477 COP 220,113,618 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   43,735,201   142,128,471   131,959,215   124,624,011   121,802,028   94,769,319
Borrowings from other financial institutions   5,027,452   16,337,964   13,822,152   18,905,843   19,721,184   13,852,284
Debt instruments in issue   6,242,706   20,287,233   19,648,714   18,704,809   19,435,865   14,527,403
Other liabilities (4)   4,524,879   14,704,725   14,048,580   11,549,401   11,605,871   9,114,395
Total equity   8,202,239   26,655,225   24,429,550   22,476,980   20,407,919   17,366,480
Total liabilities and equity USD 67,732,477 COP 220,113,618 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 on December 31, 2018 of 3,249.75 per USD 1.00.

(2) The allowance as of December 31, 2018 was estimated according to the expected credit losses methodology required by IFRS 9. The allowances for the years ended December 31, 2017, 2016, 2015 and 2014 were computed under IAS 39. Accordingly, those amounts are not comparable to the amount as of December 31, 2018. For further information see Note 32 to the Consolidated Financial Statements Impacts on application of new standards.

(3) 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.

(4) 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.

 

 11 

 

 

See ― “Item 8. Financial Information – A. Consolidated Financial Statements and Other Financial Information –A.3. Dividend Policy”, for information about the dividends declared per share in both pesos and U.S. dollars during the fiscal years ended December 31, 2018, 2017, 2016, 2015 and 2014.

 

SELECTED RATIOS

 

  As of and for the year ended December 31,
  2018 2017 2016 2015 2014
  Percentages, except for operating data
SELECTED RATIOS: (1)          
Profitability ratios:          
Net interest and valuation margin from continuing operations (2) 5.80 6.08 5.96 5.25 5.30
Net interest margin 5.87 6.26 6.36 5.50 5.70
Return on average total assets from continuing operations (3) 1.28 1.30 1.49 1.53 1.72
Return on average stockholders‘ equity attributable to the owners of the parent company (4) 11.50 11.99 14.52 13.62 14.81
Efficiency ratio:          
Operating expenses to net operating income from continuing operations 50.08 49.22 51.02 54.57 56.30
Operating expenses to average total assets from continuing operations 3.62 3.60 3.64 3.62 3.80
Operating expenses to productive assets from continuing operations 4.16 4.20 4.29 4.28 4.51
Capital ratios:          
Technical capital to risk weighted assets (5)(6) 13.47 14.18 13.26 12.46 N/A
Credit quality data:          
Past due loans to loans principal (7) 4.33 4.49 3.31 2.98 2.62
Allowances for loan and lease losses to past due loans principal 128.21 107.52 125.90 115.16 145.55
Allowance for loan and lease losses as a percentage of total loans principal 5.55 4.83 4.17 3.43 3.81
Operational data (in units):          
Number of branches (8) 1,113 1,153 1,247 1,274 1,067
Number of employees (9) 31,040 31,061 31,598 34,390 30,158

 

(1)Average balances used to calculate the ratios have been calculated as follows: for the years ended December 31, 2018, 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 month-end balances. 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 on financial instruments income divided by average interest-earning assets.
(3)Net income attributable to equity holders of the parent company divided by average total assets.
(4)Net income attributable to equity holders of the parent company 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, 2018, 2017, 2016 and 2015. For 2014 the balance accounts were under Colombian Banking GAAP, as a result the figure is not comparative.
(7)Loans that are past due more than 30 days to loans principal.
(8)Number of branches includes branches of the Bank’s Subsidiaries. For some subsidiaries, the central office is considered a branch. Representative offices are included.
(9)The number of employees includes employees of the Bank’s consolidated Subsidiaries. For the years 2015 and 2014 Compañía de Financiamiento Tuya S.A had 3,020 and 2,639 employees, respectively. For the years 2016, 2017 and 2018, Compañía de Financiamiento Tuya S.A. is classified as an investment in a joint venture in the Bank’s consolidated financial statements.

 

 12 

 

 

Exchange Rates

 

On March 31, 2019, the Representative Market Rate was COP 3,174.79 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 2019 3,082.45 3,190.94 3,174.79
February 2019 3,072.01 3,155.27 3,077.35
January 2019 3,115.70 3,250.01 3,115.70
December 2018 3,153.29 3,289.69 3,249.75
November 2018 3,140.25 3,274.47 3,235.27
October 2018 2,993.74 3,219.85 3,219.85

 

 

 

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  
2018 3,249.75 2,977.54
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

 

 

 

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.

 

 13 

 

 

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.

 

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 B- from Fitch, B3 from Moody’s, and B- by S&P. Guatemala has ratings of BB from Fitch, Ba1 from Moody’s and BB- S&P. 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, Panama, El Salvador 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, Panama, El Salvador and Guatemala’s balance of trade and remittances inflows, resulting in lower economic growth.

 

Deterioration in the economic and political situation in neighbouring 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.

 

 14 

 

 

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 Colombian and Salvadorian government has significant fiscal deficits that may result in future tax increases. Moreover, in Colombia, the tax reform of 2018 resulted in a tax burden for the banking industry that is higher on the banking industry than on other taxpayers, therefore, we can give no assurance that additional differential treatment will not be imposed in the future. 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 2018, 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 2018, the Colombian government suspended the peace negotiations with the National Liberation Army (Ejercito de Liberación Nacional or ELN). Therefore, despite the peace treaty between the Colombian government and the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia or FARC), a lasting decrease in violence or drug-related crime in Colombia or the successful integration of former guerilla members into Colombian society, may not be achieved. An escalation of violence or drug-related crime may have a negative impact on the Colombian economy and on the Bank.

 

 15 

 

 

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 financial ratios. We monitor potential accounting changes and when possible, we determine their potential impact and disclose significant future changes in our financial statemdamagesents 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 1, 2019, IFRS 16 requires lease obligations to be brought on balance sheet through the recognition of the present value of contractual payment as lease liabilities and the assets representing the contractual rights of use. 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 financial position of our operating segments for impairment at least annually. Our impairment test in respect of the assets recognized as of December 31, 2018 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. 

 

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.

 

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.

 

 16 

 

 

The Bank is subject to regulatory inspections, examinations, inquiries or audits in Colombia and in other countries in where 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) or class actions (acciones de grupo) may affect the Bank’s businesses and results of operations.

 

Under the Colombian constitution, individuals may initiate constitutional public interest or class actions to protect their collective or class rights, respectively. Colombian financial institutions, including the Bank, have experienced a high number of these actions. The great majority of such actions have been related to fees, financial services and interest rates, and their outcome is uncertain. Pursuant to Law 1425 of 2010, monetary awards for plaintiffs in constitutional actions or class actions were eliminated as of January 1, 2011. Nevertheless, individuals continue to have the right to initiate these actions against the Bank.

 

Future restrictions on interest rates or banking fees could negatively affect the Bank’s profitability.

 

In the future, regulations in the jurisdictions where the Bank operates could impose limitations regarding interest rates or fees the Bank may charge. Any such limitations could materially and adversely affect the Bank’s results of operations and financial situation.

 

Additionally, in past years, the congress of Colombia has 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 its clients for certain products or services, including specified types of transactions, or from imposing charges for products or services that might be introduced in the future, the Bank’s results of operations and financial condition could be adversely affected.

 

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.

 

 17 

 

 

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. Any failure of Colombia and Panama to enter into such a Treaty, or the designation of Panama as a tax haven by Colombia, 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. In addition, Panama adhered to the Convention on Mutual Administrative Assistance in Tax Matters of the Organization for Economic Cooperation and Development (“OECD”) in 2017. However, as of the date of this Annual Report, the treaty has not been entered into.

 

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 exposed to increased costs and damages in the event of failure of its services providers to perform their obligations under key services contracts

 

The Bank enters into contracts with third parties who provide certain key services that are essential to its business. These services include: online banking platforms, data processing and payment services, clearing and settlement services, software for processing credit and debit card services, and technological infrastructure, among others. The Bank faces the risk of operational disruption, failure or capacity constraints due to its dependency on such third party vendors for certain components of its systems.

 

While the Bank conducts due diligence prior to engaging with third party service providers and performs ongoing monitoring of vendor controls, it does not control their operations. If any of our key service providers fails to fulfill any of their contractual obligations or cause disruptions in services (including as a result of a cyberattack, other information security event or a natural disaster, failure to handle current or higher volumes, poor performance of services and failure to comply with applicable laws and regulations), the Bank’s ability to conduct its businesses could be adversely affected and could also negatively impact its results of operations and financial position. In addition, the Bank might be required to incur significant additional costs to find replacement providers. Furthermore, the unavailability of the services provided by some technology vendors could result in the unavailability of certain channels through which our clients execute transactions with us until a replacement provider is engaged, which could result in lost revenue, additional costs and, potentially, adverse regulatory consequences and reputational harm.

 

 18 

 

 

The Bank has also implemented contingency plans to anticipate, identify, and mitigate these potential risks. However, the Bank may not be able to prevent all significant negative consequences in case of a material failure of its key service providers.

 

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.

 

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.

 

 19 

 

 

The Bank is exposed to risks associated with the mortgage loan market.

 

The Bank is a relevant player in the mortgage loan markets in which it operates. Colombia’s mortgage loan market is highly regulated and has historically been affected by macroeconomic factors, as have the mortgage loan markets of Panama, Guatemala and El Salvador. Although interest rates have been stable 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, 2018, the aggregate outstanding principal amount of the Bank’s 25 largest credit exposures, on a consolidated basis, represented 8.23% 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”.

 

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, macroeconomic factors and political events affecting the local economy. In addition, the Bank may face difficulties in enforcing its rights as a secured creditor. Timing delays, procedural problems enforcing 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 instruments 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 instruments. Increases in interest rates may reduce the market value of the Bank’s debt instruments, 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 instruments.

 

The Bank’s debt instruments portfolio is primarily composed of sovereign debt instruments, 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, 2018, the Bank’s total debt instruments represented 7.14% of its total assets, and 46.38% 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 instruments 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 on its own account and on behalf of its customers. The Bank is subject to market and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder). In addition, the market practice and documentation for derivative transactions is less developed in the jurisdictions in which the Bank operates as compared to other more economically developed countries, and the court systems in such jurisdictions have limited experience in dealing with issues related to derivative transactions. As a result, there are increased operating and structural risks associated with derivatives transactions in these jurisdictions.

 

In addition, the execution and performance of derivatives transactions depend on the Bank’s ability to develop adequate control and administrative systems, and to hire and retain qualified personnel. Moreover, the Bank’s ability to adequately monitor, analyze and report these derivative transactions depends, to a great extent, on its information technology systems. These factors may further increase the risks associated with these transactions and could materially and adversely affect the Bank’s results of operations and financial position.

 

The Bank is subject to operational risks and losses.

 

The Bank’s businesses are dependent on the ability to process a large number of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee errors, technological failures and failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure of external systems. The Bank has adopted procedures to prevent and manage each of the operational risks, but there can be no assurance that our procedures will be sufficient to prevent losses resulting from these risks.

 

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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 third-party service providers on which the Bank is highly dependent, and others with whom the Bank interacts.

 

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As cyber-security threats continue to evolve, the Bank may be required to expend significant additional resources to continue to modify or enhance its protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite efforts to ensure the integrity of the Bank’s systems and implement controls, processes, policies and other protective measures, the Bank may not be able to anticipate all security breaches, nor may it be able to implement guaranteed preventive measures against such security breaches. Cyber-security threats are rapidly evolving and the Bank may not be able to anticipate or prevent all such attacks and could be held liable for any security breach or loss. Even the most advanced internal control environment may be vulnerable to compromise. Targeted social engineering attacks and "spear phishing" attacks are becoming more sophisticated and are extremely difficult to prevent. In such an attack, an attacker will attempt to fraudulently induce colleagues, customers or other users of the Bank’s systems to disclose sensitive information to gain access to its data or that of its clients. Persistent attackers may succeed in penetrating defenses given enough resources, time, and motive. The techniques used by cyber criminals change frequently, may not be recognized until launched and may not be recognized until well after a breach has occurred. The risk of a security breach caused by a cyber-attack at a vendor or by unauthorized vendor access has also increased in recent years. Additionally, the existence of cyber-attacks or security breaches at third-party vendors with access to the Bank’s data may not be disclosed to it in a timely manner.

 

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. The public perception that a cyber-attack on its systems has been successful, whether or not this perception is correct, may damage the Bank’s reputation with customers and third parties with whom it does business. Hacking of personal information and identity theft risks, in particular, could cause serious reputational harm. A successful penetration or circumvention of system security could cause the Bank serious negative consequences, including loss of customers and business opportunities, significant business disruption to its operations and business, misappropriation or destruction of its confidential information and/or that of its customers, or damage to the Bank’s or its customers’ and/or third parties’ computers or systems, and could result in a violation of applicable privacy laws and other laws, litigation exposure, regulatory fines, penalties or intervention, loss of confidence in the Bank’s security measures, reputational damage, reimbursement or other compensatory costs.

 

For further information see Item 4 B. “Business Overview”, B.9.- “Cybersecurity Framework”.

 

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.

 

In the past, the Bank recently faced technological failures which negatively affected the Bank’s products and services in general, and in particular, its digital channel (including multiple offline periods). To mitigate potential failures and prevent future threats, the Bank is implementing technological updates, controls and measures, such as enabling alternative channels to guarantee the clients’ uninterrupted access to our services. The improvements and continuity strategies the Bank has implemented have resulted in greater stability of our products and services and, as a consequence, in better customer service.

 

The organization recognizes the importance of having a business continuity management system and accordingly gives high priority to the design of contingency plans to avoid service interruption risks. 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.

 

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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.

 

Loss of key talent or our inability to attract and retain additional talent could affect the Bank’s operations.

 

Our business involves operations spanning a variety of disciplines and demanding a board of directors, key management team and employee workforce that is knowledgeable and innovative in many areas necessary for our operations. Globalization and interconnection through disruptive technologies have resulted in changes in the labor market. Younger generations seek workplaces with creativity, flexibility and high remuneration, which could translate into in an increasing key talent migration rate.

 

While we have been successful in attracting experienced, skilled professionals, the loss of any key member of our management team or the failure to attract and retain additional such employees, could affect our operations and slow the execution of our business strategy, including our development of new products.

 

Acquisitions and strategic alliances 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 alliances 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. In particular, the Bank holds a minority financial investment in an infrastructure project located in Colombia through a private equity fund. In recent years, the main shareholder of the project and the concession company have faced negative press related to irregular practices. If any of these situations result in sanctions or convictions then the company in which the Bank indirectly holds a minority stake, which is the holder of a toll road concession, may suffer a reputational harm, which in turn may have an adverse impact on its results of operations and financial condition and the return on the Bank’s investment.

 

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The Bank’s concentration in and reliance on short-term deposits may increase its funding costs.

 

The Bank’s principal source of funds is short-term deposits, which on a consolidated basis represented 73.47% of total liabilities at the end of 2018 compared to 73.52% at the end of 2017. 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 faces risks relating to compliance with regulatory compliance in general, and in particular with respect to laws relating to anti-competitive practices, consumer protection and protection of personal data.

 

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 has created 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.

 

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 Bank may not be able to prevent all risks associated with regulatory compliance or detect all instances of non-compliance with the regulations described above. 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.

 

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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. 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.

 

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.

 

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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.

 

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 securities 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.

 

Changes in Colombia’s tax regime may affect ADRs tax treatment.

 

ADRs do not have the same tax benefits as other equity investments in Colombia. 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 regulations 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.

 

However, the tax regime applicable to ADRs may change from time to time, considering that in recent years the Colombian tax regime has had several reforms.

 

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 a Colombia’s relevant financial institution, with presence in other jurisdictions such as Panama, El Salvador, Puerto Rico, Guatemala and the Cayman Islands, 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.

 

In October 2013, Bancolombia acquired a 100% percent interest in the ordinary voting shares of Banistmo.

 

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 and other financial businesses. Bancolombia Panama acquired an additional 20% interest and control of Grupo Agromercantil on December 30, 2015.

 

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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, 2018, Bancolombia and its consolidated subsidiaries had:

 

COP 220,114 billion in total assets;

 

COP 163,583 billion in total net loans and advances to customers and financial institution;

 

COP 142,128 billion in total deposits by customers; and

 

COP 24,849 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, 2018 was COP 2,659 billion, representing a return on average total equity of 11,50% and a return on average total assets of 1,28%.

 

The address and telephone numbers of the Bank’s headquarters are as follows: Carrera 48 # 26-85, Medellín, Colombia; telephone + (574) 404-1837. The Bank’s website is: https://www.grupobancolombia.com. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

 

RECENT DEVELOPMENTS

 

Investment classified as assets held for sale - Peruvian subsidiaries

 

On November 26, 2018, the Bank’s subsidiary Fiduciaria Bancolombia and Banca de Inversión entered into an agreement with TMF Group Americas B.V. (“TMF”), whereby Fiduciaria Bancolombia and Banca de Inversión agreed to sell, and TMF agreed to buy, a 100% stake in FiduPerú S.A. Sociedad Fiduciaria. Closing of the transaction is subject to authorization of the Peruvian authorities.

 

Also, on January 16, 2019, the Bank’s subsidiary Renting Colombia and Inversiones CFNS S.A.S. entered into an agreement with Arval Relsa, whereby Renting Colombia and Inversiones CFNS S.A.S. agreed to sell, and Arval Relsa agreed to buy, a 100% of the stake in Arrendamiento Operativo CIB S.A.C. The purchase price was USD 21.893 millions (gross basis without taking into consideration any tax withholding) and the transaction was closed on March 29, 2019.

 

Sale of minority interest in Sura Asset Management S.A. by Banagrícola S.A.

 

On April 15, 2019, Banagrícola sold to Caisse de Dépôt et Placement du Québec (“CDPQ”), Banagrícola’s 3.65% minority stake in Sura Asset Management S.A., a company specialized in pension, savings and investment funds in Latin America, for a purchase price of USD135 million.

 

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Changes to governance structure

 

On March 22, 2019, the Board of Directors adopted a resolution to modify the governance structure of the Bank, creating a new business vice presidency. The new vice presidency, which will report directly to the CEO of the Bank, will be responsible for leading the individual banking, small and medium enterprises and corporate business segments, as well as consolidate other support areas such as marketing, products and customer service, among others. Maria Cristina Arrastía, was appointed as head of the new Business Vice presidency.

 

The Vicepresidency of Digital Innovation and Transformation was eliminated, and its staff will report directly to the CEO.

 

PUBLIC TAKEOVER OFFERS

 

In 2018, 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 2018, total capital expenditures amounted to COP 272.1 billion. Such investments were mainly focused on IT related projects (COP 71 billion), the expansion of the Bank’s branch and ATM network (COP 53.4 billion), the purchase of fixed assets (COP 32.9 billion), and other miscellaneous projects, including new software modules, upgrade of web contents, automation of reports, and construction of data centers (COP 114.7 billion).

 

In 2018, Bancolombia funded its capital expenditures with its own resources and plans to continue to fund those currently in progress in the same manner.

 

In 2019, the Bank expects to invest approximately COP 266.9 billion as follows: COP 72.5 billion in connection with the expansion of the Bank’s branch and ATM network, COP 68.4 billion in connection with the purchase of hardware for the expansion, updating and replacement of the current IT equipment, COP 34.3 billion in connection with other fixed assets and COP 91.8 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.

 

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The following table summarizes the Bank’s capital acquisitions and divestitures in interests in other companies, for the years ending December 31, 2018, 2017 and 2016:

 

Capital Acquisitions (1)   For the year ended December 31,  
Type of Investment 2018   2017   2016   Total
    In millions of COP  
PA Viva Malls Associate 274,951   262,918   388,595   926,464
Fondo Inmobiliario Colombia Subsidiary 208,995   -   -   208,995
PA Cartera Factoring Valores Simesa Financial Instrument 25,074   -   -   25,074
Fondo Renta Fija Valor Financial Instrument 16,256   -   -   16,256
CIFI (Corporación para el financiamiento y la infraestructura) Financial Instrument 6,599 (2) -   -   6,599
Compañía de Financiamiento Tuya S.A. Joint venture 5,000   30,000   15,977   50,977
Reintegra S.A.S. Associate 1,152   739   573   2,464
Ely Lilly Company Financial Instrument 1,047   -   -   1,047
Walgreens Boots Alliance, Inc Financial Instrument 434   762   -   1,196
PA Central Point Financial Instrument -   36,242   -   36,242
Puntos Colombia S.A.S Joint venture -   9,000   -   9,000
ECOPETROL S.A. Financial Instrument -   6,347   -   6,347
500 Luchadores II, L.P. Financial Instrument -   2,984   -   2,984
Davivienda S.A. Preferencial Financial Instrument -   2,490   -   2,490
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 Financial Instrument -   1,258   -   1,258
SPDR Gold Shares Financial Instrument -   916   -   916
Amgen, Inc Financial Instrument -   784   -   784
Grupo ARGOS S.A. Financial Instrument -   -   92,966   92,966
Asociación Gremiall 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 Centroamérica S.A. De C.V. Financial Instrument -   -   1,615   1,615
Gestora de Fondos de Inversión Banagrícola S.A. Subsidiary -   -   1,471 (3) 1,471
Inversiones ARGOS S.A. Financial Instrument -   -   37   37
Others   3,457   3,440   1,842   8,739
Total Acquisitions   542,965   371,178   675,391   1,589,534

 

 

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

(2)The amount of USD 1,122 thousand has been converted at the rate of COP 2,930.8 per USD 1.00, which is the Representative Market Rate calculated on June 30, 2018, as reported by the SFC.

(3)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, as reported by the SFC.

 

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Capital Divestitures (1)   As of December 31,
Type of Investment 2018   2017   2016   Total
    In millions of COP
DECEVAL Financial Instrument  22,024    -       -       22,024
Renta Liquidez Cartera Colectiva Financial Instrument  21,606    -       -       21,606
Bolsa de Valores de Colombia Financial Instrument  6,752    -       -       6,752
ETB S.A. E.S.P Financial Instrument  2,940    -       -       2,940
Davivienda S.A. Preferencial Financial Instrument  2,490    -       2,180    4,670
Canacol Energy Ltd. Financial Instrument  2,375    -       -       2,375
Interconexión Eléctrica S.A. Financial Instrument  1,976    -       -       1,976
Preferencial Grupo Sura Financial Instrument  1,924    -       -       1,924
PA Estrategias Inmobiliarias Financial Instrument  1,797    -       -       1,797
Clean Harbors Inc Financial Instrument  1,650    -       -       1,650
Anheuser-Busch InBev Financial Instrument  1,328    -       -       1,328
Johnson & Johnson Financial Instrument  1,258    -       -       1,258
Capital Investment SAFI (2) Subsidiary  1,148    -       -       1,148
Grupo Odinsa S.A. Financial Instrument  95    -       101,371    101,466
Grupo Argos Financial Instrument  -       92,966    -       92,966
Fideicomiso P.A Acqua Power Center Financial Instrument  -       17,640    -       17,640
Leasing Perú S.A (2) 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.C (2) 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
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
Trust found Financial Instrument  -       -       2,077    2,077
Equifax Centroamérica S.A. De C.V Financial Instrument  -       -       1,695    1,695
Others    5,267    2,420    2,267    9,954
Total Divestitures   74,630   180,612   252,591   507,833

 

 

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

(2) Investment wound-up in during the year 2018.

 

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, in each case measured by amount of 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.

 

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.

 

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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): Nequi is a digital platform that is seeking to disrupt the financial market in Latin America starting in Colombia and Panama. Nequi is a 100% digital bank that operates independently from the Bancolombia brand and aims to articulate real financial needs of nowadays' clients with the wide range of possibilities enabled by technology. Nequi is completely paperless; users interact with the platform exclusively by mobile phone, with no contact with Bancolombia’s branch network. Nequi offers saving accounts, a digital card, PayPal integration, nano-loans and third-party non-financial services, like utilities, entertainment and transportation among others, to over a million users in Colombia and over a 40 thousand in Panama.

 

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.

 

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 2018:

 

Debit from multiple accounts: In June 2018, the multi-account debit service was launched. This service allows clients to enroll up to 3 accounts such as be Saving, Current or AFC Accounts for the payment of the mortgage loans, in order to assign a percentage to each one of the accounts where the sum is 100% of the value of the installments to be paid. This service improves the client’s experience by offering more payment options of their mortgage loan, and the bank to have more options of collecting the installment and eventually improve the portfolio performance.

 

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”.

 

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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 three 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 months 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 92.78% of all transactions in 2018, up from 92.26% of all transactions in 2017. In addition, as of December 31, 2018, Bancolombia had a sales force of approximately 13,328 employees.

 

The following are the distribution channels offered by Bancolombia as of December 31, 2018:

 

Branch Network

 

As of December 31, 2018, Bancolombia’s consolidated branch network consisted of 1,113 offices, including 704 from Bancolombia S.A., 97 from Banco Agrícola, 44 from Banistmo, 177 from BAM and 91 from other subsidiaries.

 

Company* Number
of
branches
2018
Number
of
branches
2017
Number
of
branches
2016
Number
of
branches
2015
Bancolombia S.A.(unconsolidated) 704 726 817 827
Leasing Bancolombia (1) 18 19 20 21
SUFI (1) 5 5 3 3
Bancolombia Panama 1 1 1 1
Bancolombia S.A. Panama Branch 1 1 1 1
Renting Colombia 33 24 22 23
Valores Bancolombia 6 6 6 7
Valores Bancolombia Panama S.A. 1 1 1 1
Banca de Inversión 2 2 2 2
Fiduciaria Bancolombia 7 7 6 5
Bancolombia Puerto Rico International Inc. 1 1 1 1
Arrendamiento Operativo CIB S.A.C. (2) 1 1 1 1

 

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Company* Number
of
branches
2018
Number
of
branches
2017
Number
of
branches
2016
Number
of
branches
2015
Fondo Inversión Arrend.Operativo Renting Perú I (in liquidation)(2) - - 1 1
Inversiones CFNS S.A.S. 2 2 2 2
Banco Agrícola 97 97 97 97
Arrendadora Financiera S.A. 1 1 1 1
Valores Banagrícola, 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
FiduPerú S.A. Sociedad Fiduciaria (previously Fiduciaria GBC S.A.) 1 1 1
Banistmo 44 44 45 47
Financomer 8 8 8 8
BAM (Guatemala) 177 203 208 220
Total 1,113 1,153 1,248 1,274

 

 

*For some subsidiaries, their central office is considered a branch.
(1)On September 30, 2016, Leasing Bancolombia S.A., a former Subsidiary of Bancolombia S.A. organized under the laws of Colombia, 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 18 branches under that brand.  Sufi is a Bancolombia brand that operates 5 branches.
(2)Fondo Inversión Arrend.Operativo Renting Perú 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.

 

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, 2018, Bancolombia had a total of 12,395 banking correspondents, including 11,609 in Colombia, 149 in Panama and 637 in El Salvador.

 

Puntos de Atención Móviles “PAM”

 

PAMs consist of commercial advisors who visit small towns in Colombia periodically to offer Bancolombia’s products and services. As of December 31, 2018, there were a total of 585 PAMs (565 in Colombia, 7 in Panama and 13 in El Salvador).

 

Kiosks

 

Kiosks 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, 2018, there were a total of 222 kiosks in El Salvador and 10 in Colombia (located only in branches).

 

Automated Teller Machines “ATMs”

 

Bancolombia has a total of 5,939 ATMs, including 4,859 in Colombia, 574 in El Salvador, 330 in Panama, and 176 in Guatemala.

 

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Online/Computer Banking

 

We offer multiple online and computer-based banking alternatives designed to fit the specific needs of our different client segments. Through a variety of platforms (computer and Internet-based solutions) our clients can review their account balances and monitor transactions in their deposit accounts, loans, and credit cards, make virtual term investments, access funds from pre-approved loans, make payroll and supplier payments, make purchases and bill payments, negotiate stocks, learn about products and services and complete other transactions in real time.

 

Telephone Banking

 

We provide customized and convenient advisory services to customers of all segments through automatic interactive voice response (IVR) operations and a 24/7 contact center.

 

Electronic Funds Transfer at Point of Sale or Punto de Atención Cercano “PAC”

 

Through our own network of 4,829 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 Bank has entered into contracts with third parties who provide certain key services that are important to the Bank’s business. These services include: online banking platforms, data processing and payment services, clearing and settlement services, software for processing credit and debit card services, and technological infrastructure, among others.

 

If any of those service providers were not to fulfill their respective contractual obligations, our business could suffer, some of our channels of attention to our clients may be unavailable until a replacement provider is engaged and we might be required to incur additional costs to find such replacement providers.

 

B.7.COMPETITION

 

Description of the Colombian Financial System

 

Overview

 

Since 2007, the Colombian banking system has been undergoing a period of expansion, accompanied by a series of mergers and acquisitions that have taken place within the sector. Several transactions occurred in 2007, mainly due to the global financial crisis. Colombian banks made several investments allowing some entities to become big players in the Latin American market; Bancolombia, completed the acquisition of Banagrícola in El Salvador and Davivienda merged with Granbanco S.A. Bancafé, which allowed Davivienda to have operations in Panama. In 2010, Banco de Bogotá acquired BAC-Credomatic, which operates in several countries in Central America; and, in October 2011, Canadian Scotiabank purchased a stake in Colpatria. In 2012, the most relevant event regarding the presence of foreign banks in Colombia was the acquisition of Banco Santander Colombia S.A. in July 2012 by Corpbanca (Chile). Also, Davivienda acquired the subsidiaries of HSBC in Costa Rica, Honduras and El Salvador.

 

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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 reportedly valued at USD 411 million) and acquired BBVA Panama for a reported 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, which specializes in mortgage loans; Corpbanca completed the acquisition of Helm Bank, keeping Corpbanca’s brand; and GNB Sudameris acquired 99.9% of the capital of HSBC Colombia and started to operate under the brand GNB Colombia, while an agreement was signed to operate in Paraguay, Peru and Uruguay. In 2015, the Chilean group CorpBanca merged with the Itaú of Brazil and Bancolombia sold 50% of its shares in Tuya SA to Grupo Exito. In December 2015, Bancolombia also acquired an additional 20% interest in Grupo Agromercantil, bringing its interest to 60% in total.

 

As of December 31, 2018, 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 15 financing companies (3 leasing companies and 12 traditional financing companies). In addition, trust companies, cooperatives, insurance companies, insurance brokerage and securities intermediaries, special state-owned institutions, and severance pay and pension funds also participate in the Colombian financial system.

 

Market and Credit Institutions’ Evolution in 2018

 

In 2015, Colombian financial institutions began reporting their consolidated financial results under IFRS framework. 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 basis, 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 for Colombian credit institutions was 6.11% in 2018, compared to 6.21% in 2017. Commercial loans grew by 3.22% in 2018, compared to 3.32% in the previous year. Consumer loans increased 9.21% in 2018, less than the 9.69% showed in 2017. Mortgage loans continued performing well, increasing 12.17% compared with 11.38% in 2017, and small business loans grew 3.53 % in 2018 compared with growth of 7.74% in 2017.

 

The credit institutions’ level of past-due loans as a percentage of the total loan portfolio, increased from 4.33% in December 2017 to 4.56% in December 2018. In addition, the coverage, measured by the ratio of allowances for loans losses (principal) to PDLs (overdue 30 days), ended 2018 at 137.31%, compared to 134.29% at the end of 2017.

 

At the end of 2018 the credit institutions’ loan portfolio represented 65.18% of total assets, less than the 66.89% at December 31, 2017. Investments and derivatives transactions as a percentage of total assets increased from 18.67% at the end of 2017 to 19.72% at the end of 2018. Deposits as a percentage of total assets increased from 63.17% in 2017 to 66.91% in 2018.

 

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As of December 31, 2018, credit institutions recorded COP 659.3 trillion in total assets, representing a 8.39% increase compared to previous year. Based on total assets held by Colombian credit institutions, banks had a market share of 95.14% followed by financial corporations with 2.01%, financing companies with 2.34%, and financial cooperatives with 0.51%.

 

The capital adequacy ratio (Tier 1 + Tier 2) for credit institutions non consolidated was 16.34% in December 2018 (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 and 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-18 Dic-17 Dic-18 Dic-17 Dic-18 Dic-17 Dic-18 Dic-17 Dic-18 Dic-17
Bancolombia 11.5% 10.4% 1.7% 1.5% 4.5% 4.5% 157.2% 151.5% 16.0% 16.6%
Banco de Bogotá 15.5% 12.0% 3.1% 2.4% 4.2% 3.7% 136.6% 121.3% 20.7% 21.3%
Davivienda 11.6% 11.6% 1.4% 1.4% 4.9% 3.8% 110.6% 127.8% 15.1% 15.6%
BBVA 12.6% 11.4% 0.9% 0.8% 4.6% 4.1% 139.6% 127.4% 12.4% 12.3%
Banco de Occidente 9.2% 7.8% 1.1% 0.9% 4.2% 4.1% 127.4% 118.3% 13.0% 14.0%
Banco Corpbanca 0.3% (3.5%) 0.0% (0.4%) 4.0% 3.8% 152.5% 166.0% 14.6% 12.7%
Banco Colpatria 5.0% 6.9% 0.5% 0. 6% 5.8% 5.9% 115.1% 105.9% 10.7% 11.1%

 

 

Source: SFC.

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

 

The following tables include market share information for various key products for Bancolombia and its main competitors on an unconsolidated basis, based on figures published by the SFC as of and for the years ended December 31, 2018 and 2017:

 

Total Net Loans
Market Share

 

Total Net Loans – Market Share (%) 2018 2017
Bancolombia 26.1% 25.6%
Banco de Bogotá 12.2% 13.0%
Davivienda 15.5% 14.8%
BBVA 10.2% 10.5%
Banco de Occidente 6.1% 6.3%
Banco Corpbanca 4.7% 5.0%
Banco Colpatria 6.2% 5.1%
Others 19.0% 19.7%

 

 

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

 

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Checking Accounts
Market Share

 

Checking Accounts – Market Share (%) 2018 2017
Bancolombia 23.4% 21.8%
Banco de Bogotá 22.8% 23.4%
Davivienda 10.1% 10.7%
BBVA 12.9% 12.1%
Banco de Occidente 10.1% 10.4%
Banco Corpbanca 2.8% 3.0%
Banco Colpatria 3.6% 2.7%
Others 14.3% 15.9%

 

 

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

 

Time Deposits
Market Share

 

Time Deposits – Market Share (%) 2018 2017
Bancolombia 21.0% 21.2%
Banco de Bogotá 13.3% 11.8%
Davivienda 15.2% 15.2%
BBVA 13.0% 13.9%
Banco de Occidente 3.7% 4.1%
Banco Corpbanca 5.8% 6.9%
Banco Colpatria 7.7% 6.7%
Others 20.3% 20.2%

 

 

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

 

Saving Accounts
Market Share

 

Saving Accounts – Market Share (%) 2018 2017
Bancolombia 26.4% 25.6%
Banco de Bogotá 12.1% 13.5%
Davivienda 12.7% 12.1%
BBVA 10.6% 10.3%
Banco de Occidente 6.1% 6.7%
Banco Corpbanca 3.1% 3.4%
Banco Colpatria 6.1% 4.6%
Others 22.9% 23.8%

 

 

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

 

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Banco Agrícola and its Competitors

 

In 2018, Banco Agrícola 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 as of and for the year ended on December 31, 2018:

 

  Assets Stockholders` Equity Loans Deposits Profits
Banco Agrícola 27.4% 25.6% 28.2% 28.1% 41.9%
Cuscatlán 9.4% 11.7% 8.9% 9.7% 6.8%
Davivienda 15.8% 14.2% 16.1% 14.2% 15.1%
Scotiabank 11.8% 16.9% 12.9% 11.9% 14.0%
BAC 15.4% 13.1% 15.2% 16.2% 15.8%
Promerica 7.3% 5.7% 7.5% 7.8% 4.4%
Others 12.9% 12.8% 11.2% 12.1% 2.0%

 

Sources: ABANSA (Asociación Bancaria Salvadoreña)

 

The following tables illustrate the market share of Banco Agrícola and its main competitors, based on figures published by the Salvadorian Banking Association (ABANSA), as of December 31, 2018 and 2017:

 

Total Loans
Market Share

 

Total Loans - Market Share (%) 2018 2017
Banco Agrícola 28.2% 26.2%
Cuscatlán 8.9% 8.6%
Davivienda 16.1% 15.3%
Scotiabank 12.9% 13.1%
BAC 15.2% 13.8%
Promerica 7.5% 6.8%
Others 11.2% 16.2%

 

Checking Accounts
Market Share

 

Checking Accounts - Market Share (%) 2018 2017
Banco Agrícola 21.5% 21.9%
Cuscatlán 13.3% 11.7%
Davivienda 11.5% 11.0%
Scotiabank 8.1% 9.4%
BAC 24.0% 20.8%
Promerica 7.2% 7.0%
Others 14.4% 18.2%

 

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Time Deposits
Market Share

 

Time Deposits - Market Share (%) 2018 2017
Banco Agrícola 21.8% 21.1%
Cuscatlán 6.4% 6.2%
Davivienda 16.5% 15.8%
Scotiabank 14.8% 13.4%
BAC 14.2% 11.9%
Promerica 10.5% 9.4%
Others 15.8% 22.2%

 

Saving Accounts
Market Share

 

Saving Account - Market Share (%) 2018 2017
Banco Agrícola 43.1% 40.1%
Cuscatlán 10.2% 9.8%
Davivienda 13.9% 13.5%
Scotiabank 12.2% 12.2%
BAC 10.7% 9.9%
Promerica 4.8% 4.4%
Others 5.1% 10.1%

 

Banistmo and its Competitors

 

Banistmo is the second largest bank in Panama with an 10.4% 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 as of and for the year ended in December 31, 2018.

 

 MARKET SHARE

  Assets Equity Loans Deposits Profits
Banistmo 9.2% 8.7% 10.4% 11.5% 5.7%
Banco General 16.3% 10.7% 16.1% 21.4% 22.1%
Global Bank 6.7% 6.7% 7.4% 5.8% 6.1%
Banesco 4.0% 3.4% 4.1% 6.4% 2.0%
BAC 8.1% 22.7% 5.7% 7.6% 26.7%
Others 55.7% 47.8% 56.3% 47.3% 37.4%

 

 

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, 2018 and 2017:

 

Total Loans

Market Share

 

Total Loans - Market Share (%) 2018 2017
Banistmo 10.4% 11.0%
Banco General 16.1% 16.1%
Global Bank 7.4% 7.6%
Banesco 4.1% 4.3%
BAC 5.7% 5.7%
Others 56.3% 55.3%

 

 

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

 

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Saving Accounts

Market Share

 

Saving Account - Market Share (%) 2018 2017
Banistmo 12.4% 12.2%
Banco General 25.9% 25.8%
Global Bank 5.3% 5.2%
Banesco 11.4% 12.5%
BAC 3.5% 3.1%
Others 41.5% 41.2%

 

 

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

 

Checking Accounts

Market Share

 

Checking Accounts - Market Share (%) 2018 2017
Banistmo 12.6% 12.0%
Banco General 26.0% 23.5%
Global Bank 3.9% 3.8%
Banesco 4.4% 4.1%
BAC 9.2% 10.4%
Others 43.9% 46.2%

 

 

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

 

Time Deposits

Market Share

 

Time Deposits - Market Share (%) 2018 2017
Banistmo 10.7% 11.9%
Banco General 17.9% 17.8%
Global Bank 6.8% 6.7%
Banesco 5.0% 4.5%
BAC 8.7% 7.4%
Others 50.9% 51.7%

 

 

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

 

BAM and its Competitors

 

BAM continues as the fourth largest bank in the banking system in Guatemala by total assets, the fifth in terms of net loans and the sixth in terms of deposits and stockholders’ equity.

 

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As of December 31, 2018, the Superintendencia de Bancos de Guatemala (SIB) has under its supervision and inspection, 17 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, 2018:

 

MARKET SHARE
  Assets Stockholders’ Equity Net Loans Deposits Profits
Banco Industrial 28.6% 25.5% 28.6% 25.4% 31.5%
Banrural 20.5% 22.8% 16.9% 22.8% 22.0%
Banco G&T Continental 16.1% 13.5% 13.5% 16.0% 8.2%
Banco Agromercantil 8.1% 7.5% 10.9% 7.6% 3.5%
BAC-Reformador 8.1% 8.3% 11.2% 8.4% 12.9%
Bantrab 7.5% 8.7% 7.3% 8.1% 11.9%
Banco Promerica 3.9% 4.5% 5.0% 4.2% 2.6%
Others* 7.2% 9.2% 6.6% 7.5% 7.4%

*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 BAM and its main competitors, based on figures published by the SIB as of December 31, 2018 and 2017: 

 

Net Loans

Market Share

 

Net Loans - Market Share (%) 2018 2017
Banco Industrial 28.6% 27.9%
Banrural 16.9% 17.9%
Banco G&T Continental 13.5% 15.5%
BAC-Reformador 11.2% 9.9%
Banco Agromercantil 10.9% 10.6%
Bantrab 7.3% 7.0%
Banco Promerica 5.0% 2.6%
Others* 6.6% 8.6%

*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).

 

Checking Accounts
Market Share

 

Checking Accounts - Market Share (%) 2018 2017
Banco Industrial 30.7% 31.3%
Banrural 23.5% 22.0%
Banco G&T Continental 16.9% 17.3%
BAC-Reformador 10.8% 9.9%
Banco Agromercantil 7.0% 7.8%
Banco Promerica 2.3% 1.9%
Bantrab 1.3% 1.2%
Others* 7.5% 8.6%

*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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Time Deposits
Market Share

 

Time Deposits - Market Share (%) 2018 2017
Banco Industrial 20.9% 20.9%
Banrural 18.1% 19.5%
Bantrab 16.4% 15.5%
Banco G&T Continental 12.6% 15.0%
Banco Agromercantil 8.2% 7.5%
BAC-Reformador 8.0% 5.9%
Banco Promerica 6.9% 2.9%
Others* 8.9% 12.8%

 

*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).

 

Saving Accounts
Market Share

 

Saving Accounts - Market Share (%) 2018 2017
Banrural 30.9% 31.1%
Banco Industrial 25.1% 23.5%
Banco G&T Continental 21.0% 22.1%
Banco Agromercantil 7.2% 7.5%
BAC-Reformador 5.3% 5.2%
Bantrab 3.6% 3.5%
Banco Promerica 2.0% 1.3%
Others* 4.9% 5.8%

 

*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, the congress of Colombia 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.

 

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Ministry of Finance

 

One of the functions of the Ministry of Finance is to regulate all aspects of financial 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, legal lending limits, authorized operations, disclosure of information and accounting of financial institutions on a high level, which matters are then regulated in detail by the SFC.

 

Superintendency of Finance

 

The SFC is the authority responsible for supervising and regulating financial institutions, including commercial banks such as the Bank, finance corporations, financing companies, financial services companies and insurance companies, all of which require prior authorization of the SFC before commencing operations. Regulations issued by the SFC must comply with decrees issued by the Ministry of Finance. The SFC has broad discretionary powers to supervise financial institutions, including the authority to impose fines on financial institutions and their directors and officers for violations of applicable regulations. The SFC can also conduct on-site inspections of Colombian financial institutions.

 

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 defines the structure of the Colombian financial system, establishes a set of permitted activities within the system and defines several forms of business entities, including: (i) credit institutions (which are further categorized into banking institutions, such as the Bank, finance corporations, financing companies and finance cooperatives; (ii) financial services entities; (iii) capitalization corporations; (iv) insurance companies; and (v) insurance intermediaries. 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 activities 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 provides 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 must take 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.

 

The law also reinforced the mechanism for the resolution of credit institutions - 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 Government has issued several Decrees within Law 1870 of 2017 regulation framework mentioned above. Decree 774 of 2018 regulates capital adequacy requirements for financial conglomerates and Decree 1486 of 2018 regulates the criteria to determine related parties, risk concentration limits and conflicts of interest.

 

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Pursuant to the provisions of Law 1870 of 2017 and the Decrees mentioned above, Grupo de Inversiones Suramericana S.A. has significant influence and, therefore, is the holding company of Bancolombia only for the purposes of the financial conglomerates framework. These new regulations require Grupo de Inversiones Suramericana S.A. to: (i) continue strengthening our Corporate Governance System as a Financial Conglomerate; (ii) review the risk management and capital adequacy models; and (iv) strengthen the internal control and information reporting systems of the companies that make up the conglomerate under this framework.

 

This new regulatory framework will not represent a negative impact on Bancolombia’s business and its affiliates. Grupo de Inversiones Suramericana S.A. will establish policies and procedures on the matter as the Decree 1486 establishes.

 

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 1 of 2018 (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 foreign exchange market 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 the DTF, which is published at the beginning of the following week, for use in calculating interest rates payable by financial institutions. The week of April 26, 2019, the DTF was 4.55%.

 

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, 2018, the banking interest rate for small business loans was 36.72% and for all other loans was 19.40%. 

 

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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. Recently, Decree 1477 of 2018 introduced into the Colombian banking regulation several Basel III reforms, mainly relating to: (i) implementation of capital buffers; (ii) alignment with Basel III solvency ratio definitions, and (iii) update of the measurement of the Risk Weighted Assets (RWA).

 

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 1), Additional Basic Capital (additional Tier 1), and Additional Capital (Tier 2 capital).

 

·Revised criteria for debt and equity instruments to be considered ordinary basic capital, additional basic capital, and additional capital was established. Additionally, the SFC must review whether a given instrument adequately complies with these criteria in order for an instrument to be considered Tier 1 or Tier 2 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 1 or Tier 2 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: (i) 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 and off-balance sheet items; (ii) a basic minimum solvency ratio of 6%, which is defined as the sum of the ordinary basic capital after deductions and the additional basic capital, divided by the financial institution’s total risk-weighted assets and off-balance sheet items; (iii) a capital conservation buffer of 1.5%, which is defined as the ordinary basic capital after deductions divided by the financial institution’s total risk-weighted assets and off-balance sheet items; (iv) a systemically important financial institutions buffer of 1%, which is defined as the ordinary basic capital after deductions divided by the financial institution’s total risk-weighted assets and off-balance sheet items; and (iv) a combined buffer equivalent to the sum of the aforementioned buffers. These ratios apply to credit establishments individually and on a consolidated basis. Credit establishments include Banks, Financial Corporations, and Financing Companies.

 

·Credit establishments must comply with a minimum leverage ratio of 3%, which is defined as the sum of the ordinary basic capital after deductions and the additional basic capital, divided by the leverage value. The leverage value is the sum of all net assets, the net exposures in all repo, simultaneous transactions and temporary transfer of securities, the credit exposures in all derivative instruments, and the exposure value of all contingencies.

 

·Recently the Ministry of Finance issued Decree 415 of 2018, which requires as of the year 2019, non-depository financial institutions, such as asset managers and fiduciary entities under Colombian law, 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 1). 

 

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As of December 31, 2018, the Bank’s capital adequacy ratio was 13.47%, exceeding the requirements of the Colombian government and the SFC by 447 basis points. As of December 31, 2017, the Bank’s capital adequacy ratio was 14.18%.

 

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 2018 is COP 96,813 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”).

 

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 instruments 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 1 of 2018 issued by the board of directors of the Central Bank as amended or supplemented (“Resolution 1 of 2018”), 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.  

 

Additionally, in the case of foreign exchange market intermediaries that consolidate financial statements and have controlled foreign investments, such as the Bank, the foreign exchange market intermediary shall exclude from its foreign currency position: (i) the value of controlled foreign investments, and (ii) the value of derivatives and other liabilities designated by the intermediary as hedging instruments for the controlled foreign investments.

 

Resolution 1 of 2018 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. Foreign exchange market 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).

 

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Resolution 1 of 2018 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.

 

Finally, Resolution 1 of 2018 requires banks to calculate 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.

 

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 1 of 2018, residents of Colombia may obtain foreign currency loans from foreign residents, and from Colombian foreign exchange market intermediaries (such as the Bank) or by placing debt instruments 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 may 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 1 of 2018 sets forth a number of restrictions and limitations as to the use of proceeds in the case of foreign currency loans obtained by Colombian foreign exchange market 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 legal lending limits, which provide for 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.

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

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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 instruments, derivative financial instruments) occurring within a period of 30 days. For purposes of this calculation, liabilities does not include projections of future transactions. The maturity of the loan portfolio is affected by the historical default indicator and the maturity of deposits is modeled according to the regulation.

 

With respect to operational risk, commercial banks must assess, according to principles provided by the Basic Accounting Circular, each of their business lines (such as corporate finance, purchases and sales of securities, commercial banking, asset management, etc.) in order to record the risk events that may occur and result in fraud, technology problems, legal and reputational problems and problems associated with labor relations at the bank.

 

Anti-Money Laundering Provisions

 

The regulatory framework to prevent and control money laundering is contained in, among others, Decree 663 of 1993 and External Circular 029 of 2014 issued by the SFC, as well as Law 599 of 2000, and the Colombian Criminal Code, as amended.

 

Colombian laws adopt the latest guidelines related to anti-money laundering and other terrorist activities established by the Financial Action Task Force on Money Laundering (“FATF”). Colombia, as a member of the GAFI-SUD (a FATF-style regional body), follows all of FATF’s 40 recommendations and eight special recommendations. External Circular 029 of 2014 requires the implementation by financial institutions of a system of controls for money laundering and terrorism financing. These rules emphasize “know your customer” policies and knowledge of customers and markets, and other customer identification and monitoring processes 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.

 

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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.

 

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.

 

Among the countries where Bancolombia operates, Colombia, the Cayman Islands, and Panama have signed an IGA Model 1. 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. However, in 2018, the Superintendency of Banks of the Republic of Panama, moving forward with the implementation of Basel III liquidity standards, issued an agreement on Liquidity Coverage Ratio (LCR), also requiring General License Banks to maintain high quality liquid assets in relation to its short-term net cash outflows. Daily compliance with the LCR (High Quality Liquid Assets as a percentage of net cash outflows) shall be implemented progressively, beginning on December 2018 with a compliance percentage of 25%, until achieving a 100% compliance percentage on 2022.

 

The Superintendency has also issued regulation, consistent with Basel III standards, regarding capital requirements for market risk on the trading book; and regulation to improve country risk and operational risk management.

 

Panamanian 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;

 

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.

 

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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.

 

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.

 

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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.

 

Banking Law of El Salvador

 

In 1999, Salvadorian congress 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, 2018 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.

 

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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.  

 

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.

 

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.

 

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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.
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.

 

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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.

 

Other Regulations in Guatemala

 

Decree 94 of 2000 permits and regulates the use, transfer and payment in foreign currencies, as well as the use of foreign currency accounts and deposits within the Guatemalan financial system. Corporations and other entities that wish to offer securities denominated in foreign currencies must obtain prior authorization from the Monetary Board.

 

The Anti-Money Laundering Law (Ley Contra el Lavado de Dinero u Otros Activos) was enacted to prevent and control money laundering in connection with criminal activities. Regulations issued by the Superintendency of Banks in accordance with this law went into effect on April 26, 2002. Among other things, the law and regulations created the Financial Intelligence Unit within the Superintendence of Banks under the name of Special Verification Intendence (Intendencia de Verificación Especial – IVE). The Special Verification Intendence has been developing a national network for the prevention, control and surveillance of money-laundering activities. Penalties for non-compliance with anti-money laundering laws and regulations, which are set forth in the Superintendence of Banks Resolution 43-2002, include fines or jail time for bank directors or employees and the suspension or cancellation of a financial institution’s license. 

 

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In August 2005, Guatemala’s congress approved Decree No. 58-2005 which contains the Law to Prevent and Repress Terrorism Financing. This law is based on the requirements and recommendations of the United Nation’s International Convention for the suppression of Terrorism Financing, the UN’s 1373 Resolution from the Security Council and the FATF 9 Special Recommendations. Approval of the Law to Prevent and Repress Terrorism Financing places Guatemala as the first country in Central America and second in Latin America to have specific legislation concerning terrorist financing. The law provides penalties such as seizure of assets, imprisonment or imposition of fines to any director, officer, stockholder or owner of financial entities found guilty of violating it.

 

B.9. CYBERSECURITY FRAMEWORK

 

The Bank’s internal policies define cyber-security risk as the possibility of an economic or non-economic loss derived from an assault to the confidentiality, integrity and availability of the information that the Bank processes (this excludes an assault suffered by our clients´ informational systems), whenever at least one of the following events occurs: (i) intentional interruption of the Bank´s informational and technological infrastructure, excluding technological or operative failures; (ii) successful unauthorized access to information or to a system; and (iii) unauthorized change in the Bank´s hardware, firmware or software. Realization of cyber-security risk may result in 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 vulnerabilities.

 

The Bank has implemented over the recent years a cyber-security management and control system that is designed to identify and protect critical assets, anticipate, identify, and offset threats, and respond and recover capabilities or services that were impaired due to a cybersecurity event. The system includes features such as: perimeter security devices; endpoint and malicious software security mechanisms, including firewalls, intrusion prevention systems, endpoint protection platform, navigation control such as proxy and cloud access security broker, network access control, virtual private networks, encryption techniques, Anti-DDoS (distributed denial of service), multi-factor authentication, backup security systems and techniques; the constant monitoring and continuous assessment of technological infrastructure though software and hardware updates, penetration tests and ethical hacking seeking to identify and mitigate vulnerabilities; implementations of software and hardware upgrades; backup security systems; a 24/7 security operations center to detect, analyze, respond to, report on, and prevent cybersecurity incidents as well as computer forensics, intelligence and threat hunting services, among others. 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, although the coverage under the policy is subject to a retention (deductible) and the coverage limit may not be adequate to compensate the Bank for all losses resulting from a cybersecurity event.

 

The framework used to manage cyber-security risks is designed under practices of international frameworks and standards issued by the National Institute of Standards and Technology (NIST) in NIST 800-30 and NIST Cybersecurity Framework, by the International Organization for Standardization (ISO) in ISO-27032, as well as the definitions established by the Bank.

 

The cybersecurity and information security division of the Bank is responsible for cybersecurity risk management, a function performed together with the business processes, technology, risk and internal audit, considering the nature of the Bank, its risk appetite, customer needs, business strategy and the environment of the financial industry.

 

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The framework seeks to ensure that the risks are identified, measured, controlled and monitored, and considers the international and regional best practices and regulations. The cyber-security risks management system is designed as a three lines defense model: a risk identification stage, executed by the technological component and security managers; an oversight stage, which includes monitoring, assessment and analysis of the risk´s potential impact, executed by the technological component and security managers along with the risk areas; and, a review of the control’s effectiveness stage developed by the internal audit.

 

The Bank’s senior management is committed to cybersecurity risk management, through a clear strategy, the allocation of human, technical and financial resources and a clear definition and disclosure of responsibilities with regard to security. Senior management has formed a cybersecurity and information security committee, responsible for: approving and promoting the most important policies, strategies and projects, being informed and making decisions about associated controls, periodically evaluating the strategic and tactical plans of compliance, the review, approval and prioritization of initiatives or decisions as well as the prioritization of the use of the allocated budget. This Committee is formed by seven vice presidents of the following vice presidencies: Bancolombia’s Corporate Services Vice-presidency, Banistmo’s Corporate Services Vice-presidency, BAM’s Corporate Services Vice-presidency, Banco Agrícola’s Corporate Services Vice-presidency, Administrative and Security Services Vice-presidency, Human Resources Vice-presidency (corporate) and the Risk Corporate Vice Presidency (corporate).

 

Bancolombia’s Board of Directors and senior management are involved in cyber-security risk management. The risk committee of the Board of Directors is in charge of proposing the methodology, procedures and tools for cyber-security related risks management and the management policies manual which is then approved by the Board of Directors; ensuring that an appropriate cyber-security risk management process is maintained and keeping the Board of Directors informed of its effectiveness according to the approved guidelines and methodologies; and analyzing periodically the reports that are submitted by the senior management on cyber-security risk exposure, exposures substantial changes, tolerance level compliance and mitigation and management measures adopted by the Bank. The full Board of Directors receives periodic reports on the level of compliance with the approved policies and procedures for cyber-security risk management, as well as relating to the causes of any breaches and the measures adopted to address the gaps identified by the Cyber-security and Information Security Committee, to consider any corrective actions required.

 

In 2018, Bancolombia incurred in USD 20.7 million, in costs related to preventive, detective and corrective efforts for cybersecurity management, including: insurance policies, human resources costs, security solutions licensing and the administration and maintenance of cybersecurity controls for the Bank. In 2018, Bancolombia had no cybersecurity and information security incidents that could have materially affected the Bank with an economic or non-economic impact, in accordance with the definition and criteria defined by the Bank for that purpose. Therefore, no costs are associated with its remediation or consequences.

 

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. The public perception that a cyber-attack on its systems has been successful, whether or not this perception is correct, may damage the Bank’s reputation with customers and third parties with whom it does business.

 

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C.ORGANIZATIONAL STRUCTURE

 

The following are the subsidiaries of Bancolombia:

 

 

*Investment classified as assets held for sale and sold on March 29, 2019. For further information see Note 33. Subsequent Events.

FiduPerú was classified as assets held for sale in 2018.

 

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The following is a list of subsidiaries of Bancolombia as of December 31, 2018:

 

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. Colombia Operating leasing 100.00%
Transportempo S.A.S. Colombia Transportation 100.00%
Valores Simesa S.A. Colombia Investments 67.73%
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 51.29%
Fideicomiso "Lote Abelardo Castro". Colombia Mercantil trust 67.39%
Bancolombia Panamá S.A. Panama Banking 100.00%
Sistemas de Inversiones y Negocios S.A. Sinesa Panama Investments 100.00%
Banagrícola S.A. Panama Investments 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%
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 Banagrícola S.A. El Salvador Administers investment funds 98.89%
Arrendamiento Operativo CIB S.A.C. Peru Operating leasing 100.00%
FiduPerú S.A. Sociedad Fiduciaria Peru Trust 98.81%
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%

 

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Entity Jurisdiction of
Incorporation
Business Shareholding
Directly and
Indirectly 
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%
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, 2018, the Bank owned COP 3,369 billion in premises and equipment (including assets that are part of our operating leasing business), COP 1,706 billion correspond to land and buildings, of which approximately 95.74% are used for administrative offices and branches in 49 municipalities in Colombia, 25 municipalities in El Salvador, 8 municipalities in Guatemala and 4 municipalities in Panama. Likewise, COP 897 billion correspond to computer equipment, of which 14.53% relate to the central computer and servers of the Bank and the rest relate to personal computers, ATMs, telecommunications equipment and other equipment. Also, the Bank is currently constructing facilities for an amount of COP 2 billion.

 

In addition to its own branches, the Bank occupies 773 rented offices.

 

The following table illustrates the amount of premises and equipment for each country as of December 31, 2018:

 

Country (1) Amount
In millions of COP
Colombia 2,668,487
El Salvador 294,277
Panama 236,840
Guatemala 168,591
Puerto Rico 321
Costa Rica 131
Total PPE 3,368,647

 

(1) As of December 31, 2018, the Bank has property, plant and equipment classified as held for sale amounting to 164,356, related with its Peruvian operations.

 

The Bank does not have any liens on its property.

 

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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 corresponds to the Bank, including all Subsidiaries as to which Bancolombia has control.

 

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

 

Average balances for each of the years ended December 31, 2018, 2017 and 2016 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.

 

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Average statement of financial position

 

The following tables show for the years ended December 31, 2018, 2017 and 2016, 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:

 

  Average statement of financial position and Income from Interest-Earning Assets for the Fiscal Year Ended December 31,(1)
  2018 2017 2016
  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  1,775,740  106,706 6.0% 1,164,612  57,071 4.9% 1,434,974 119,889 8.4%
Foreign activities  1,587,751 38,001 2.4% 2,196,602  504 0.0% 1,905,163 41,113 2.2%
Total 3,363,491 144,707 4.3% 3,361,214  57,575 1.7% 3,340,137 161,002 4.8%
Debt investments (2)                  
Domestic activities  9,022,396  419,066 4.6% 9,057,238 612,076 6.8% 7,114,398 481,316 6.8%
Foreign activities  5,834,760  245,058 4.2% 5,390,576 247,655 4.6% 5,364,736 262,644 4.9%
Total 14,857,156 664,124 4.5% 14,447,814 859,731 6.0% 12,479,134 743,960 6.0%
Interest income on loans and financial leases (3)(4)                  
Domestic activities 106,400,898  11,519,444 10.8% 94,870,082 12,122,572 12.8% 87,289,606 11,494,684 13.2%
Foreign activities  55,139,161  4,046,980 7.3% 55,631,821  3,851,013 6.9% 57,291,045 3,815,489 6.7%
Total 161,540,059 15,566,424 9.6% 150,501,903 15,973,585 10.6% 144,580,651 15,310,173 10.6%
Total interest-earning assets (4)                  
Domestic activities  117,199,034  12,045,216 10.3% 105,091,932 12,791,719 12.2% 95,838,978 12,095,889 12.6%
Foreign activities  62,561,672  4,330,039 6.9% 63,218,999  4,099,172 6.5% 64,560,944 4,119,246 6.4%
Total  179,760,706  16,375,255 9.1% 168,310,931 16,890,891 10.0% 160,399,922 16,215,135 10.1%
Total non-interest-earning assets                  
Domestic activities  12,833,019 - - 16,254,108 - - 15,656,149 - -
Foreign activities (5)  14,625,382 - - 16,347,218 - - 17,411,162 - -

 

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  Average statement of financial position and Income from Interest-Earning Assets for the Fiscal Year Ended December 31,(1)
  2018 2017 2016
  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
 Total   27,458,401 - - 32,601,326 - - 33,067,311 - -
Total interest and non-interest earnings assets                  
Domestic activities 130,032,053  12,045,216 9.3% 121,346,040 12,791,719 10.5% 111,495,127 12,095,889 10.8%
Foreign activities (5)  77,187,054  4,330,039 5.6% 79,566,217  4,099,172 5.2% 81,972,106 4,119,246 5.0%
Total (6)(4) 207,219,107 16,375,255 7.9% 200,912,257 16,890,891 8.4% 193,467,233 16,215,135 8.4%

 

(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)As of December 31, 2018 the interest earned decreases is due to adoption of IFRS 9 by stage measurement, due to the fact that loans classified as stage 3 under IFRS 9 model are subject to reduction of their gross carrying amount in order to account for interest on loans and financial leases in the Consolidated Statement of Income.
(5)The percentage of total average assets attributable to foreign activities was 37.2%, 39.6% and 42.4%respectively, for the fiscal years ended December 31, 2018, 2017 and 2016.
(6)As of December 31, 2016 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 table above and the line “Total interest and valuation” in the Consolidated Financial Statements is due to the fact that the Bank’s consolidated statement of income includes interest and valuation related to debt instruments investments and derivative.

 

  Average statement of financial position and Interest Paid on Interest-Bearing Liabilities for the Fiscal Year Ended December 31, (1)
  2018 2017 2016
  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  10,857,580  14,347 0.1% 10,319,409 14,234 0.1% 10,960,605 15,175 0.1%
Foreign activities  10,375,370  39,321 0.4% 10,173,663 36,579 0.4% 10,511,089 42,473 0.4%
Total 21,232,950 53,668 0.3% 20,493,072 50,813 0.2% 21,471,694 57,648 0.3%
Savings deposits                  
Domestic activities  42,738,807  916,912 2.1% 38,111,789 1,064,435 2.8% 33,763,375 866,387 2.6%
Foreign activities  12,634,703  196,117 1.6% 12,277,933 200,781 1.6% 12,653,306 192,413 1.5%
Total 55,373,510 1,113,029 2.0% 50,389,722 1,265,216 2.5% 46,416,681 1,058,800 2.3%
Time deposits                  
Domestic activities  30,842,476  1,856,806 6.0% 30,666,059 2,182,011 7.1% 27,813,915 2,128,861 7.7%
Foreign activities  24,216,326  828,557 3.4% 24,242,926 781,276 3.2% 23,375,945 720,532 3.1%
Total 55,058,802 2,685,363 4.9% 54,908,985 2,963,287 5.4% 51,189,860 2,849,393 5.6%

 

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  Average statement of financial position and Interest Paid on Interest-Bearing Liabilities for the Fiscal Year Ended December 31, (1)
  2018 2017 2016
  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
Funds purchased and securities sold under agreements to repurchase                  
Domestic activities  4,275,044  215,679 5.0% 4,109,470  175,911 4.3% 2,514,533 130,912 5.2%
Foreign activities  1,457,406  3,832 0.3% 845,370  5,056 0.6% 529,575 6,492 1.2%
Total 5,732,450 219,511 3.8% 4,954,840  180,967 3.7% 3,044,108 137,404 4.5%
Borrowings from development and other domestic banks (2)                  
Domestic activities  4,829,403  297,843 6.2% 5,066,726  391,449 7.7% 5,228,949 232,899 4.5%
Foreign activities  492,483  47,254 9.6% 683,451  34,300 5.0% 598,092 17,232 2.9%
Total 5,321,886 345,097 6.5% 5,750,177  425,749 7.4% 5,827,041 250,131 4.3%
Interbank borrowings(2)(3)                  
Domestic activities  -     -    - - - - - - 0.0%
Foreign activities  8,814,236  274,851 3.1% 10,779,261 278,107 2.6% 14,004,249 307,178 2.2%
Total 8,814,236 274,851 3.1% 10,779,261 278,107 2.6% 14,004,249 307,178 2.2%
Long-term debt                  
Domestic activities  5,311,475  575,500 10.8% 5,803,401 476,080 8.2% 5,885,689 613,321 10.4%
Foreign activities  14,499,546  563,957 3.9% 13,435,824 714,920 5.3% 13,556,293 738,827 5.5%
Total 19,811,021 1,139,457 5.8% 19,239,225 1,191,000 6.2% 19,441,982 1,352,148 7.0%
Total interest-bearing liabilities                  
Domestic activities  98,854,785  3,877,087 3.9% 94,076,854  4,304,120 4.6% 86,167,066 3,987,555 4.6%
Foreign activities  72,490,070  1,953,889 2.7% 72,438,428  2,051,019 2.8% 75,228,549 2,025,147 2.7%
Total 171,344,855 5,830,976 3.4% 166,515,282  6,355,139 3.8% 161,395,615 6,012,702 3.7%
Total non-interest bearing liabilities                  
Domestic activities  8,971,908  -  - 8,965,995 - - 8,541,148 - -
Foreign activities (4) 2,331,603  -  - 2,387,904 - - 2,657,346 - -
Total 11,303,511 - - 11,353,899 - - 11,198,494 - -
Stockholders' equity                  
Domestic activities  19,827,602  -  - 18,743,416 - - 15,715,483 - -
Foreign activities  4,743,138  -  - 4,299,659 - - 5,157,640 - -
Total 24,570,740 - - 23,043,075 - - 20,873,123 - -
Total interest and non-interest bearing liabilities and stockholders’ equity (4)                  
Domestic activities  127,654,295  3,877,087 3.0% 121,786,265  4,304,120 3.5% 110,423,697 3,987,555 3.6%
Foreign activities (4)  79,564,811