The
Offering
The
following summary is not intended to be complete. For a more detailed description of the Notes, see “Description of the
Notes.” All capitalized terms used and not otherwise defined in this section shall have the meanings set forth in “Description
of the Notes.”
Issuer
|
Bancolombia
S.A.
|
Securities
Offered
|
US$ in
aggregate principal amount of % Senior Notes due 20 .
|
Issue
Price
|
%
of the principal amount of the Notes, plus accrued and unpaid interest, if any from ,
2020.
|
Maturity
|
The
Notes will mature on , 20 .
|
Interest
|
%
per year on the outstanding principal amount from and including the closing date of the Notes offering to, but excluding,
the maturity date.
Interest
will be payable semi-annually, in arrears, on and of
each year, beginning on , 2020.
In
the event that we default on the payment of principal, premium, if any, interest or such other amounts as may be payable
in respect of the Notes, we will pay interest on overdue principal and premium, if any, at the rate borne by the Notes
plus 1% per year and will pay interest on overdue installments of interest at the same rate to the extent lawful.
|
Form
and Denomination
|
The
Notes will be issued in registered form, without coupons, and in minimum denominations of US$200,000 and integral multiples
of US$1,000 in excess thereof.
|
Payment
Currency
|
All
amounts due in respect of principal, interest or the additional amounts, if any, will be paid in U.S. dollars.
|
Ranking
|
The
Notes will at all times constitute our general senior, unsecured and unsubordinated External Liabilities and will rank pari
passu, without any preferences among themselves, with all of our other present and future unsecured and unsubordinated
External Liabilities (other than obligations preferred by statute or by operation of law).
|
Optional
Redemption
|
At
any time on or prior to , 20 (
months prior to the final maturity date of the Notes), we may,
at our option, redeem the Notes, in whole or in part, at any time or from time to time, on at least 10 days’
but not more than 60 days’ written notice, at a redemption price equal to the greater of (1) 100% of the
principal amount of such Notes and (2) the sum of the present values of each remaining scheduled payment of principal
and interest thereon (exclusive of interest accrued to the date of redemption), in each case calculated as if the
maturity date of the Notes were , 20 ( months prior to
the scheduled maturity date of the Notes), discounted to the redemption date on a semi-annual basis (assuming a
360-day year consisting of twelve 30-day months) at the Treasury Rate plus
basis points (the “Make-Whole Amount”), plus in each case accrued and unpaid interest to the redemption date
on the Notes to be redeemed on such date.
At
any time on or after , 20
( months prior to the final maturity date of the Notes), we may, at our option,
redeem the Notes, in whole or in part, at any time or from time to time, on at least 10 days’ but not
more than 60 days’ written notice, at a redemption price equal to 100% of the principal amount of the
Notes being redeemed plus accrued and unpaid interest to the redemption date on the Notes to be redeemed on
such date.
|
Optional
Redemption upon a Tax Event
|
At
any time after the Issue Date (as defined in the “Description of the Notes”) and subject to certain conditions,
we may redeem the Notes in whole, but not in part, at a price equal to 100% of the outstanding principal amount thereof plus
accrued and unpaid interest and any Additional Amounts, to the relevant date of redemption, following the occurrence of a
Tax Event. See “Description of the Notes—Optional Redemption upon a Tax Event.”
|
Merger
and Sales of Assets
|
The
indenture governing the Notes will contain a covenant that limits our ability to merge or consolidate with another entity
or sell, lease or transfer substantially all of our properties or assets to another entity. See “Description of the
Notes—Certain Covenants—Mergers, Consolidations, Etc.”
|
Listing
|
We
will apply to list the Notes on the New York Stock Exchange. Currently, there is no public market for the Notes, and there
is no guarantee that a trading market for the Notes will develop.
|
Use
of Proceeds
|
We
estimate that the net cash proceeds from the offering will be approximately US$ million, after giving effect to the
Exchange and deducting the underwriting discount and estimated offering expenses. Pursuant to the Exchange, Citigroup
is expected to exchange the Early Tendered Notes purchased prior to the closing of this offering for a portion of the
Notes offered hereby, and the net proceeds of the offering otherwise payable to us in cash (which will reflect the underwriting
discount set forth on the cover page of this prospectus supplement) will be reduced by an amount equal to the aggregate
total consideration payable for the Early Tendered Notes plus an amount equal to accrued interest thereon through the
date of the Exchange.
We
intend to use the net proceeds from this offering, after effecting the Exchange, to purchase any Old Notes (other than
any Early Tendered Notes) accepted for purchase in the Offer and to redeem all or a portion of the Old Notes that remain
outstanding following completion of the Offer. See “Use of Proceeds.”
Certain
of the underwriters or their affiliates may hold positions in the Old Notes.
As
a result, certain of those underwriters or their affiliates may receive some of the
proceeds
from this offering. See “Underwriting.”
|
Issuance
of Additional Securities
|
Following
this offering, we may issue additional Notes having identical terms and conditions as the Notes offered hereby except with
respect to (1) issue date, (2) issue price, (3) first interest payment date and (4) any adjustments necessary in order to
conform to and ensure compliance with applicable securities laws, which are not adverse in any material respect to any Holder
of any outstanding Notes.
|
Trustee
|
The
Bank of New York Mellon.
|
Governing
Law
|
State
of New York; except for the authorization and execution of the offering documentation by the Bank, which will be governed
by the laws of Colombia.
|
Risk
Factors
See
“Risk Factors” beginning on page S-6 of this prospectus supplement for a discussion of certain factors you should
consider carefully before deciding to invest in the Notes.
Summary
Consolidated Financial Data
The
following tables present our summary consolidated financial information and other data as of and for each of the periods indicated.
The financial information and other data as of December 31, 2018 and 2017 and for the three years ended December 31, 2018 have
been derived from our audited consolidated financial statements as of December 31, 2018 and 2017 and for the three years ended
December 31, 2018 and the Notes related thereto included in the Annual Report. The financial information and other data
as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 have been derived from our unaudited condensed
consolidated financial statements as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 and the Notes
related thereto included elsewhere in this prospectus supplement. The unaudited summary consolidated financial information as
of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 includes all adjustments, consisting of only normal
recurring adjustments, which in the opinion of management are necessary for the fair statement of such information. Interim
results are not necessarily indicative of the results to be expected for the entire fiscal year.
|
|
For
the Year Ended
|
|
|
For
the Nine Months Ended
|
|
(Amounts
in millions of COP and
thousands of US$)(1)
|
|
December
31, 2016
|
|
|
December
31,
2017
|
|
|
December
31,
2018
|
|
|
December
31,
2018
|
|
|
September
30,
2018
|
|
|
September
30,
2019
|
|
|
September
30,
2019
|
|
CONSOLIDATED
STATEMENT OF INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance
sheet credit instruments
|
|
|
COP
9,695,705
|
|
|
|
COP10,463,407
|
|
|
|
COP10,446,284
|
|
|
|
USD3,214,489
|
|
|
|
COP7,627,024
|
|
|
|
COP8,358,560
|
|
|
|
USD2,403,646
|
|
Net
interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance
sheet credit instruments
|
|
|
6,964,553
|
|
|
|
7,001,790
|
|
|
|
6,603,212
|
|
|
|
2,031,914
|
|
|
|
4,771,247
|
|
|
|
6,077,118
|
|
|
|
1,747,579
|
|
Profit
before tax
|
|
|
3,968,282
|
|
|
|
3,992,771
|
|
|
|
3,615,870
|
|
|
|
1,112,661
|
|
|
|
2,472,626
|
|
|
|
3,752,403
|
|
|
|
1,079,068
|
|
Net
income
|
|
|
2,954,947
|
|
|
|
2,754,173
|
|
|
|
2,786,435
|
|
|
|
857,431
|
|
|
|
1,753,044
|
|
|
|
2,733,934
|
|
|
|
786,189
|
|
OTHER
DATA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability
ratios(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest and valuation margin from continuing operations
|
|
|
5.96
|
%
|
|
|
6.08
|
%
|
|
|
5.80
|
%
|
|
|
5.80
|
%
|
|
|
5.73
|
%
|
|
|
5.69
|
%
|
|
|
5.69
|
%
|
Return
on average total assets(3) from continuing operations
|
|
|
1.49
|
%
|
|
|
1.30
|
%
|
|
|
1.28
|
%
|
|
|
1.28
|
%
|
|
|
1.08
|
%
|
|
|
1.54
|
%
|
|
|
1.54
|
%
|
Return
on average stockholders‘ equity attributable to the owners of the parent company (4)
|
|
|
14.52
|
%
|
|
|
11.99
|
%
|
|
|
11.50
|
%
|
|
|
11.50
|
%
|
|
|
9.70
|
%
|
|
|
13.91
|
%
|
|
|
13.91
|
%
|
Efficiency
ratio(2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses to net operating income from continuing operations
|
|
|
51.02
|
%
|
|
|
49.22
|
%
|
|
|
50.08
|
%
|
|
|
50.08
|
%
|
|
|
50.97
|
%
|
|
|
49.84
|
%
|
|
|
49.84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
ratios (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
capital to risk weighted assets(%)
|
|
|
13.26
|
%
|
|
|
14.18
|
%
|
|
|
13.47
|
%
|
|
|
13.47
|
%
|
|
|
13.66
|
%
|
|
|
12.71
|
%
|
|
|
12.71
|
%
|
Asset
quality (at period end):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past
due loans to loans principal
|
|
|
3.31
|
%
|
|
|
4.49
|
%
|
|
|
4.33
|
%
|
|
|
4.33
|
%
|
|
|
5.09
|
%
|
|
|
4.24
|
%
|
|
|
4.24
|
%
|
“C,”
“D” and “E” loans as a percentage of loans principal(5)
|
|
|
5.07
|
%
|
|
|
6.34
|
%
|
|
|
9.06
|
%
|
|
|
9.06
|
%
|
|
|
9.84
|
%
|
|
|
8.72
|
%
|
|
|
8.72
|
%
|
Allowances
for loan and lease losses as a percentage of past due loans
|
|
|
125.90
|
%
|
|
|
107.52
|
%
|
|
|
128.21
|
%
|
|
|
128.21
|
%
|
|
|
112.23
|
%
|
|
|
129.65
|
%
|
|
|
129.65
|
%
|
Allowance
for loan and lease losses as a percentage of “C,” “D” and “E” loans(5)
|
|
|
82.08
|
%
|
|
|
76.12
|
%
|
|
|
61.26
|
%
|
|
|
61.26
|
%
|
|
|
57.98
|
%
|
|
|
62.98
|
%
|
|
|
62.98
|
%
|
Allowance
for loan and lease losses as a percentage of total loans principal (6)
|
|
|
4.17
|
%
|
|
|
4.83
|
%
|
|
|
5.55
|
%
|
|
|
5.55
|
%
|
|
|
5.71
|
%
|
|
|
5.49
|
%
|
|
|
5.49
|
%
|
Operating
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number
of branches (at period end)(7)
|
|
|
1,247
|
|
|
|
1,153
|
|
|
|
1,113
|
|
|
|
1,113
|
|
|
|
1,041
|
|
|
|
988
|
|
|
|
988
|
|
|
|
As of
|
|
|
As of
|
|
|
|
December 31, 2016(11)
|
|
|
December 31, 2017
|
|
|
December 31, 2018
|
|
|
December 31, 2018
|
|
|
September 30, 2018
|
|
|
September 30, 2019
|
|
|
September 30, 2019
|
|
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans and advances to customers and financial institutions (8)
|
|
|
COP151,747,486
|
|
|
|
COP160,468,094
|
|
|
|
COP173,819,116
|
|
|
|
USD53,486,919
|
|
|
|
COP164,716,053
|
|
|
|
COP184,030,281
|
|
|
|
USD52,921,043
|
|
Financial assets Investments
|
|
|
13,060,653
|
|
|
|
16,377,253
|
|
|
|
17,361,475
|
|
|
|
5,342,403
|
|
|
|
15,721,358
|
|
|
|
19,947,001
|
|
|
|
5,736,100
|
|
Other assets(9)
|
|
|
31,452,905
|
|
|
|
27,062,864
|
|
|
|
28,933,027
|
|
|
|
8,903,155
|
|
|
|
26,217,917
|
|
|
|
32,877,944
|
|
|
|
9,454,613
|
|
Total Assets
|
|
|
196,261,044
|
|
|
|
203,908,211
|
|
|
|
220,113,618
|
|
|
|
67,732,477
|
|
|
|
206,655,328
|
|
|
|
236,855,226
|
|
|
|
68,111,756
|
|
Liabilities and Stockholders’ Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits by customers
|
|
|
124,624,011
|
|
|
|
131,959,215
|
|
|
|
142,128,471
|
|
|
|
43,735,201
|
|
|
|
130,334,802
|
|
|
|
150,044,204
|
|
|
|
43,147,767
|
|
Borrowings from other financial institutions
|
|
|
18,905,843
|
|
|
|
13,822,152
|
|
|
|
16,337,964
|
|
|
|
5,027,453
|
|
|
|
15,033,285
|
|
|
|
15,653,594
|
|
|
|
4,501,458
|
|
Debt securities in issue
|
|
|
18,704,809
|
|
|
|
19,648,714
|
|
|
|
20,287,233
|
|
|
|
6,242,706
|
|
|
|
19,176,927
|
|
|
|
21,129,087
|
|
|
|
6,076,029
|
|
Other liabilities(10)
|
|
|
11,549,401
|
|
|
|
14,048,580
|
|
|
|
14,704,725
|
|
|
|
4,524,879
|
|
|
|
17,243,301
|
|
|
|
21,085,828
|
|
|
|
6,063,588
|
|
Total liabilities
|
|
|
173,784,064
|
|
|
|
179,478,661
|
|
|
|
193,458,393
|
|
|
|
59,530,239
|
|
|
|
181,788,315
|
|
|
|
207,912,713
|
|
|
|
59,788,842
|
|
Equity
|
|
|
22,476,980
|
|
|
|
24,429,550
|
|
|
|
26,655,225
|
|
|
|
8,202,238
|
|
|
|
24,867,013
|
|
|
|
28,942,513
|
|
|
|
8,322,915
|
|
Total liabilities and stockholders’ equity
|
|
|
196,261,044
|
|
|
|
203,908,211
|
|
|
|
220,113,618
|
|
|
|
67,732,477
|
|
|
|
206,655,328
|
|
|
|
236,855,226
|
|
|
|
68,111,757
|
|
|
(1)
|
Amounts
stated in U.S. dollars, for convenience only, have been converted at the rate of COP 3,477.45 per US$1.00, which is the representative
market rate calculated on September 30, 2019, as reported by the SFC. Such conversions should not be construed as representations
that the peso amounts represent, or have been or could be converted into, U.S. dollars at the representative market rate or any
other rate.
|
|
(2)
|
Ratios
were calculated on the basis of monthly averages.
|
|
(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
equity holders of the parent company.
|
|
(5)
|
See
Item 4. “Information on the Company—E. Selected Statistical Information—E.3. Loan Portfolio-Risk Categories”
in the Annual Report for a description of “C,” “D” and “E” Loans.
|
|
(6)
|
Allowances
are reserves for the principal of loans.
|
|
(7)
|
Number
of branches does not include branches of our subsidiaries.
|
|
(8)
|
Includes
financial leases.
|
|
(9)
|
The
principal items in the other assets are cash and balances at central bank, Derivative financial instruments, Goodwill and Intangible
assets, net, Premises and equipment, net.
|
|
(10)
|
The
principal items in the other liabilities are Interbank Deposits, Derivative financial instrument, Repurchase agreements and other
similar secured borrowing.
|
|
(11)
|
Derived
from the Bank’s consolidated statement of financial position as of December 31, 2016, which is included in the Bank’s
Annual Report on Form 20-F filed by the Bank on April 29, 2018 but is not included or incorporated by reference in the registration
statement to which this Prospectus Supplement relates.
|
Risk
Factors
Investing
in the Notes involves risks. Before you invest in the Notes, you should consider carefully the information set forth in this section
and all the other information provided to you or incorporated by reference in this prospectus supplement and the accompanying
prospectus, as the same may be updated from time to time by our future filings under the Exchange Act. In addition, new risks
may emerge at any time and we cannot predict such risks or estimate the extent to which they may affect our financial performance
or business operations.
RISKS
RELATING TO COLOMBIA AND OTHER COUNTRIES WHERE WE OPERATE
Changes
in economic and political conditions in Colombia, Panama, El Salvador and Guatemala or in other countries where we operate may
adversely affect our financial condition and results of operations.
Our
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 we operate. 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 our 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 us), market conditions and prices and rates of return on securities
of local issuers (including our 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 our business and financial condition and the market value of our securities.
Although
Colombia and Panama currently have investment grade credit ratings from international rating agencies, El Salvador and Guatemala
do not. As of the date of this prospectus supplement, El Salvador has a long-term debt rating of B- from Fitch, B3 from Moody’s,
and B- from S&P, respectively. Guatemala has ratings of BB from Fitch, Ba1 from Moody’s and BB- from S&P, respectively.
Downgrades in the ratings of either country, or the failure of Colombia or Panama to maintain investment grade credit ratings,
could increase our financing costs and adversely affect our results of operation and financial condition.
The
economies of the countries in which we operate 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, El Salvador and Guatemala) could have a material adverse impact on the balance
of trade and remittances inflows in those countries, resulting in lower economic growth.
Deterioration
in the economic and political situation in neighboring countries could adversely affect the economy and cause instability in Colombia,
Panama, El Salvador and Guatemala by disrupting their diplomatic or commercial relationships with neighboring countries. Any future
tensions may cause political and economic uncertainty, instability, market volatility, low confidence levels and higher risk aversion
by investors and market participants that may negatively affect economic activity in any of those jurisdictions.
Events
occurring in a market where we do not operate may cause international investors to have an increased risk perception of an entire
region or class of investment, which could in turn negatively affect market prices and liquidity of securities issued or owned
by us.
Recently,
a wave of protests has taken place in several countries of Latin America, including Colombia, demanding social reforms to pension
and retirement regimes, access to health care, access to education, environmental protection, and taking measures against inequality,
among others. Such events could have an adverse effect in the economies of the countries where they are taking place or in other
countries in which we operate. This could have a material adverse effect on our business, results of operations, financial condition
and ability to make payments on the Notes.
Any
additional taxes resulting from changes to tax regulations or the interpretation thereof in Colombia, Panama, El Salvador, Guatemala
or other countries where we operate, could adversely affect our consolidated results.
Uncertainty
relating to tax legislation poses a constant risk to us. 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 governments have significant fiscal deficits that may result in future tax increases.
Moreover, in Colombia, the tax reform of 2018 resulted in a tax that is higher on the banking industry than on other taxpayers
and, therefore, we can give no assurance that additional differential treatment will not be imposed in the future. On October
16, 2019, the Colombian Constitutional Court declared the tax reform of 2018 unconstitutional with effect as of January 1, 2020.
Consequently, on October 22, 2019, the Colombian government presented a new tax reform bill to Congress to replace the 2018 reform
which was signed into law on December 27, 2019. The new tax reform is similar to the 2018 tax reform (except for issues that were
challenged in 2019), but does increase the surcharge for financial entities to 4% in 2020. The surcharge for years 2021 and 2022
remains at 3% as initially intended in the 2018 tax reform. Moving forward, higher taxes could negatively affect our results of
operations and cash flow. In addition, national or local taxing authorities may not interpret tax regulations in the same way
that we do. Differing interpretations could result in future tax litigation and associated costs.
Exchange
rate fluctuations may adversely affect the Colombian economy and our results.
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 2019, 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 our assets and liabilities are denominated in, or indexed to, foreign currencies, especially the U.S. dollar,
sharp movements in exchange rates may negatively impact our results.
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. 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. In 2018, the Colombian government suspended
the peace negotiations with the National Liberation Army (Ejército de Liberación Nacional or ELN) and in
2019, a minority group of dissidents of the peace process with FARC announced their return to illegal activities. An escalation
of violence or drug-related crime may have a negative impact on the Colombian economy and on us.
Allegations
of corruption against the Colombian government, politicians and private industry could create economic and political
uncertainty
and could expose us to additional credit risk.
Allegations
of corruption against the Colombian government, politicians and private industry could create economic and political uncertainty
should the investigations triggered by these cases reach conclusions or result in further allegations or findings of illicit conduct
committed by the accused parties. Furthermore, proven or alleged wrongdoings could have adverse effects on the political stability
in Colombia and the Colombian economy. These adverse political and economic effects may negatively impact our business, including
by depressing business volumes, reducing our ability to recover amounts we have loaned to persons or projects involved in illicit
or allegedly illicit conduct and/or harming our reputation.
RISK
FACTORS RELATING TO OUR 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 statements that we expect as a result of those changes. Currently,
there are a number of issued but not yet effective IFRS changes, as well as potential IFRS changes, some of which could be expected
to impact our reported results, financial position and regulatory capital in the future. In particular, since January 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 our consolidated financial statements as of December 31, 2018 and
the “Significant Accounting Policies” in the Annual Report.
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 for the nine months ended September 30, 2019 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. As of September 30, 2019,
we had COP 7,648 billion of total goodwill and intangibles.
Changes
in banking laws and regulations in Colombia and in other jurisdictions in which we operate could adversely affect our consolidated
results.
Banking
laws and regulations, or their official interpretation, in Colombia and in other jurisdictions in which we operate, have a material
effect on our 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 our business.
Moreover,
regulators in the jurisdictions where we operate may alter the current regulatory capital requirements to which we are 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 our 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 us. Increased competition could lead to lower margins for affected products and services and could adversely affect
our results of operations.
We
are subject to regulatory inspections, examinations, inquiries or audits in Colombia and in other countries where it operates,
and any sanctions, fines and other penalties resulting from such inspections, examinations, inquiries or audits could materially
and adversely affect our business, financial condition, results of operations and reputation.
We
are subject to comprehensive regulation and supervision by the banking authorities of Colombia, Panama, El Salvador, Guatemala
and the other jurisdictions where we operate. These Banking authorities have broad powers to adopt regulations and impose other
requirements affecting or restricting virtually all aspects of our capitalization, organization and operations, including the
imposition of anti-money laundering measures and the authority to regulate the terms and conditions on which banks can extend
credit. In the event of non-compliance with applicable regulations, we could be subject to fines, sanctions or the revocation
of licenses or permits to operate our business. In Colombia, for instance, if we encounter significant financial problems or become
insolvent or in danger of becoming insolvent, banking authorities would have the power to take over our management and operations.
Any sanctions, fines and other penalties resulting from non-compliance with regulations in Colombia, Panama, El Salvador, Guatemala
and other jurisdictions where we operate could materially and adversely affect our 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 our 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 us, 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 us. These actions could
result in judgments against us and could materially and adversely affect our business, financial condition, results of operations
and reputation.
Future
restrictions on interest rates or banking fees could negatively affect our profitability.
In
prior years, the Colombian congress 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 we are prohibited
from continuing to charge our 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, our results of operations and financial condition could
be adversely affected.
Colombian
tax haven regulation could adversely affect our business and financial results.
Article
1.2.2.5.1 of Decree 1625 of 2016 designates 37 jurisdictions as non-cooperative or low-tax jurisdictions (also known as tax havens)
for Colombian tax purposes, although neither Panama nor other countries where we operate were included on this list. As a result
of the tax haven regulation, payments made to our clients who are residents in such jurisdictions do not benefit from the Colombian
Holding Corporation Regime and clients are 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 reporting
duties, (iii) enhanced ability on the part of Colombian authorities to qualify certain 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 our business
and financial results.
In
order to avoid Panama’s designation as a tax haven for Colombian tax purposes, Colombia and Panama signed a memorandum of
understanding that establishes that both countries will negotiate a double taxation treaty. 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 negatively impact our customer
base and, as a result, have a potential adverse impact on our 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 and the Multilateral
Competent Authority Agreement of the Organization for Economic Cooperation and Development (“OECD”). However, as of
the date of this prospectus supplement, the relationship to exchange financial information between Colombia and Panamá
has not been activated.
We
and most of our 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).
We
and most of our subsidiaries are considered foreign financial institutions (“FFIs”) under the Foreign Account Tax
Compliance Act of 2010 (“FATCA”). Additionally, we and some of our 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 our 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 we cannot satisfy the requirements thereunder, certain payments to us, or our 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 we operate remain under development,
and the reporting dates vary depending on the jurisdiction.
We
are exposed to increased costs and damages in the event of failure of our services providers to perform their obligations under
key services contracts.
We
enter into contracts with third parties who provide certain key services that are essential to our 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. We face the risk of operational disruption, failure or
capacity constraints due to our dependency on such third party vendors for certain components of our systems.
While
we conduct due diligence prior to engaging with third party service providers and perform ongoing monitoring of vendor controls,
we do 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),
our ability to conduct our businesses could be adversely affected and could also negatively impact our results of operations and
financial position. In addition, we 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.
Although
we have implemented contingency plans to anticipate, identify, and mitigate these potential risks, we may not be able to prevent
all significant negative consequences in case of a material failure of our key service providers.
We
are subject to credit risk and estimating exposure to credit risk involves subjective and complex judgments.
A
number of our products expose us to credit risk. These products include loans, financial leases, guarantees and lending commitments.
We
estimate and establish 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 our employees may not always be able to assign an accurate credit risk rating to a client, which
may result in our exposure to a higher credit risk than the one indicated by our risk rating system. We may not be able to timely
detect these risks before they occur, or due to limited resources or available infrastructure, our employees may not be able to
effectively implement our credit risk management system, which may increase our exposure to credit risk. Moreover, our failure
to continuously refine our credit risk management system may result in a higher risk exposure for us, which could materially and
adversely affect our results of operations and financial position.
Overall,
if we are unable to effectively control the level of non-performing or poor credit quality loans in the future, or if our loan
loss reserves are insufficient to cover future loan losses, our financial condition and results of operations may be materially
and adversely affected.
In
addition, the amount of our non-performing loans may increase in the future as a result of factors beyond our control, such as
changes in the income levels of our 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 where we operate or have 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 our loan portfolio, requiring us to increase provisions for loan losses and resulting in reduced profits or
in losses.
We
are subject to credit risk with respect to our 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 us, and executing securities, futures, currency or commodity trades from our
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 to
such transactions, could materially and adversely affect our results of operations and financial position.
We
are exposed to risks associated with the mortgage loan market.
We
are a relevant player in the mortgage loan markets where we operate. Colombia’s mortgage loan market is highly regulated
and has historically been affected by macroeconomic factors, as have the mortgage loan markets of Panama, El Salvador and Guatemala.
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.
We
are subject to concentration of default risks in our loan portfolio. Problems with one or more of our largest borrowers may adversely
affect our financial condition and results of operations.
As
of and for the nine months ended September 30, 2019, the aggregate outstanding principal amount of our 25 largest credit exposures,
on a consolidated basis, represented 6.94% of our loan portfolio. No single exposure represented more than 1.00% of the loan book
and all of those loans were corporate loans. Problems with one or more of our largest borrowers could materially and adversely
affect our results of operations and financial position.
The
value of the collateral or guarantees securing the outstanding principal and interest balance of our loans may not be sufficient
to cover such outstanding principal and interest. In addition, we may be unable to realize the full value of the collateral or
guarantees securing the outstanding principal and interest balance of our loans.
Our
loan collateral primarily includes real estate, assets pledged in financial leasing transactions and other assets that are located
primarily in Colombia, Panama, El Salvador and Guatemala, the value of which may significantly fluctuate or decline due to factors
beyond our control. Such factors include market factors, environmental risks (including natural disasters), macroeconomic factors
and political events affecting the local economy. In addition, we may face difficulties in enforcing our rights as a secured creditor.
Timing delays, procedural problems enforcing on collateral and laws, related judicial interpretations that are protective of debtors
and local protectionism may make foreclosures on collateral and enforcement of judgments difficult. Any decline in the value of
the collateral securing our loans, or inability to enforce on such collateral, may result in a reduction in the recovery from
collateral realization and may have an adverse impact on our results of operations and financial condition.
We
are subject to market risk.
We
are 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.
Our
results of operations are sensitive to fluctuations in interest rates.
We
hold 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 our 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 we usually maintain more assets than liabilities at variable rates. Decreasing interest rates
also may trigger loan prepayments, which could negatively affect our net interest income. Generally, in a declining interest rate
environment, prepayment activity increases, reducing the weighted average maturity of our interest earning assets and adversely
affecting our 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.
Our
income from our proprietary trading activities is highly volatile.
We
derive a portion of our profits from our proprietary trading activities. Income from this activity is highly volatile and depends
on numerous factors beyond our 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 our trading income, or the incurrence
of a trading loss, could adversely affect our results of operations and financial position.
We
have significant exposure to sovereign risk, and especially Colombian risk, and our results could be adversely affected by decreases
in the value of our sovereign debt instruments.
Our
debt instruments portfolio is primarily composed of sovereign debt instruments, including securities issued or guaranteed by the
Colombian Government, which exposes us to credit, market, and liquidity risk associated with sovereign debt. As of September 30,
2019, our total debt instruments represented 7.84% of our total assets, and 44.3% 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 our debt investment portfolio and consequently our results of operations and financial position.
We
are subject to market, operational and structural risks associated with our derivative transactions.
We
enter into derivative transactions for hedging purposes on our own account and on behalf of and for the benefit of our customers.
We are 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 where we operate 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 our ability to develop adequate control and administrative
systems, and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report these derivative
transactions depends, to a great extent, on our information technology systems. These factors may further increase the risks associated
with these transactions and could materially and adversely affect our results of operations and financial position.
We
are subject to operational risks and losses.
Our
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. We have adopted procedures to prevent and manage each of the operational
risks, but there can be no assurance that our procedures will be sufficient to prevent losses resulting from these risks.
In
addition, our businesses are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and
fraud, which could result in criminal and/or 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
we take to prevent and detect employee and third-party misconduct may not always be effective.
Our
businesses rely heavily on data collection, processing and storage systems, the failure of which could materially and adversely
affect the effectiveness of our risk management, reputation and internal control system as well as our financial condition and
results of operations.
All
of our principal businesses are highly dependent on the ability to timely collect and process a large amount of financial and
other information at our 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 our businesses and to our ability to compete effectively. A partial or complete failure of any of these
primary systems could materially and adversely affect our decision-making process, our risk management and internal control systems,
the quality of our service, and our ability to respond on a timely basis to changing market conditions. If we cannot maintain
an effective data collection and management system, our business operations, financial condition, reputation and results of operations
could be materially and adversely affected. We are also dependent on information systems to operate our website, process transactions,
respond to customer inquiries on a timely basis and maintain cost-efficient operations. We may experience operational problems
with our information systems as a result of system failures, viruses, computer hackers or other causes. Any material disruption
or slowdown of our systems could cause information, including data related to customer requests and other client information,
to be lost, compromised, or to be delivered to our clients with delays or errors, which could reduce demand for our services and
products, resulting in additional costs for us and potentially fines and penalties by regulators, which could materially and adversely
affect our results of operations and financial position.
We
are subject to cyber-security risk.
We
are subject to cyber-security risk, which includes the unauthorized access to privileged information, technological assaults on
our infrastructure with the aim of stealing information, committing fraud or interfering with regular service, and the interruption
of our services to some of our 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. Our business is highly dependent on the security and efficacy
of our infrastructure, computer and data management systems, as well as those of third-party service providers on whom we are
highly dependent, and others with whom we interact.
As
cyber-security threats continue to evolve, we may be required to expend significant additional resources to continue to modify
or enhance our protective measures or to investigate and remediate any information security vulnerabilities or incidents. Despite
efforts to ensure the integrity of our systems and implement controls, processes, policies and other protective measures, we may
not be able to anticipate all security breaches, nor may we be able to implement guaranteed preventive measures against such security
breaches. Cyber-security threats are rapidly evolving and we 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 our systems
to disclose sensitive information to gain access to our data or that of our 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 our data may not be disclosed to us in a timely manner.
Any
failure by us to detect or prevent cyber-security risk in a timely manner could result in a negative impact on our results of
operations and financial position, or in problems with information, including data related to customers being lost, compromised,
or delivered to our clients with delays or errors. The public perception that a cyber-attack on our systems has been successful,
whether or not this perception is correct, may damage our 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 to us serious negative consequences, including loss of customers and business
opportunities, significant business disruption to our operations and business, misappropriation or destruction of our confidential
information and/or that of our customers, or damage to us or our 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 our security measures, reputational damage, reimbursement or other compensatory costs.
Failures
related to our information technology infrastructure and management information systems could adversely affect our competitiveness,
reputation, financial condition and results of operations.
In
the past, we faced technological failures that negatively affected our products and services availability in general, and in particular,
our digital channel (including multiple offline periods). To mitigate potential failures and prevent future threats, we are 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 we have implemented have resulted in greater stability of our
products and services and, as a consequence, in better customer service.
We
recognize the importance of having a business continuity management system and accordingly give high priority to the design of
contingency plans to avoid service interruption risks. Any failure to effectively improve or upgrade our information technology
infrastructure and information management systems in a timely and cost-effective manner could materially and adversely affect
our competitiveness, reputation, financial condition and results of operations.
The
occurrence of natural disasters in the regions where we operate could impair our ability to conduct business effectively and could
impact our results of operations.
We
are 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 we have implemented disaster recovery systems, in the event of a natural
disaster, unanticipated problems with said systems could have a material adverse effect on our ability to conduct business in
the affected region, particularly if those problems affect our computer-based data processing, transmission, storage and retrieval
systems and destroy valuable data. In addition, if a significant number of our local employees and managers became unavailable
due to a natural disaster, our ability to effectively conduct business could be severely compromised. In addition, we may face
added credit risk if our clients located in the affected region are not able to make timely payment on outstanding loans or other
obligations to us. A natural disaster or multiple catastrophic events could have a material adverse effect on our business and
results of operations in the affected region.
Loss
of key talent or our inability to attract and retain additional talent could affect our 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 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 the development of new products.
Acquisitions
and strategic alliances may not perform in accordance with expectations or may disrupt our operations and adversely affect our
profitability.
An
element of our business strategy is to identify and pursue growth-enhancing strategic opportunities. We 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 our expectations which could adversely affect our operations and profitability. In particular, we hold 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, the company in which we indirectly hold 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 our results of operations
and financial condition and the return on our investment.
Our
concentration in and reliance on short-term deposits may increase our funding costs.
Our
principal source of funds is short-term deposits, which on a consolidated basis represented 72.17% of total liabilities as of
September 30, 2019 compared to 73.47% as of December 31, 2018. Because we rely primarily on short-term deposits for our funding,
in the event of a sudden or unexpected shortage of funds in the banking systems and money markets where we operate, we may not
be able to maintain our current level of funding without incurring higher costs or selling assets at prices below their prevailing
market value.
We
face risks relating to compliance with regulatory compliance rules in general, and in particular with respect to laws relating
to anti-competitive practices, consumer protection and protection of personal data.
We
are subject to laws and regulations related to anti-competitive practices, including the formation of cartels and the abuse of
our dominant position. Violation of these laws and regulations may result in significant administrative sanctions imposed by the
Superintendency of Industry and Commerce.
We
have 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, we are currently developing a comprehensive
data protection program.
We
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 us to detect and prevent the aforementioned practices in a timely manner could damage
our reputation and facing substantial fines and penalties which could adversely affect our results of operations and financial
position.
Our
policies and procedures may not be able to detect money laundering, corruption and other illegal or improper activities fully
or on a timely basis, which could damage our reputation and expose us to fines and other liabilities.
We
are required to comply with applicable anti-money laundering, anti-terrorism laws and other regulations. These laws and regulations
require us, 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 we have adopted policies and procedures aimed at detecting
and preventing the use of our 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 we may be used by other parties to engage in money laundering, corruption
and other illegal or improper activities.
We
are subject to laws and regulations relating to corrupt and illegal payments to public and private officials in the jurisdictions
in which we operate, including the U.S. Foreign Corrupt Practices Act and Colombian regulations on transnational bribery. We have
an anti-corruption program, which incorporates, among others, an anti-corruption policy, training, reporting channels, monitoring,
internal investigations and sanctions. Such system does not completely eliminate the risk that our employees, providers, clients
or agents may engage in corrupt practices.
If
we fail to fully comply with applicable laws and regulations, we may face fines, penalties or other liabilities, including restrictions
on our ability to conduct business. In addition, our business and reputation could suffer if we are not able to prevent and detect
money laundering, corruption or other illegal practices.
We
are subject to increasing competition, which may adversely affect our results of operations.
We
operate in a highly competitive environment and management expects competition to increase in the jurisdictions where we operate.
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 (other than individuals) to offer loans in COP,
may increase competition for us. Our ability to maintain our competitive position depends mainly on our ability to fulfill new
customers’ needs through the development of new products and services, our ability to offer adequate services and strengthen
our customer base through cross-selling and our ability to bring in and retain human talent. Our business will be adversely affected
if we are not able to maintain efficient service strategies. In addition, our efforts to offer new services and products may not
succeed if product or market opportunities develop more slowly than expected or if the profitability of opportunities is undermined
by competitive pressures.
Downgrades
in our credit ratings or those of our subsidiaries would increase our cost of borrowing funds and make our ability to raise new
funds, attract deposits or renew maturing debt more difficult.
Our
credit ratings and those of our subsidiaries’ are an important component of the liquidity profile of each entity, and our
ability to successfully compete depends on various factors, including our financial stability as reflected by our credit ratings.
A downgrade in any of these credit ratings would increase our cost of raising funds from other banks or in the capital markets.
Purchases by institutional investors of our debt securities and those of our subsidiaries could be reduced if we suffer a decline
in our credit ratings. Our ability to renew our maturing debt of that of our subsidiaries could become restricted and the terms
for such renewal more expensive if our credit ratings were to decline. We and our subsidiaries’ counterparties in derivative
transactions are sensitive to the risk of a credit rating downgrade, as well. A downgrade in our credit rating or those of our
subsidiaries may adversely affect perception of our 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 us, 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.
Discontinuation
of the London InterBank Offered Rate (“LIBOR”), and the regulation and implementation of a replacement benchmark rate
could adversely affect our business, financial condition and result of operations.
In
2017, the U.K. Financial Conduct Authority announced that it would no longer persuade or require banks to submit rates for the
calculation of the Libor benchmark after 2021. This announcement has resulted in uncertainty about the future of Libor which is
used as interest rate benchmark. These actions and uncertainties may trigger future changes in the rules or methodologies used
to calculate benchmarks or lead to the discontinuation or unavailability of benchmarks.
Bancolombia
holds exposures to assets and liabilities linked to Libor. As of September 30, 2019, Bancolombia’s Libor-linked liabilities
amounted to 4.75% of its total liabilities.
Any
failure by market participants, such as Bancolombia, and regulators to successfully introduce benchmark rates to replace Libor
and implement effective transitional arrangements to address the discontinuation of Libor could result in disruption in the financial
and capital markets. In addition, the transition process to an alternative reference rate could impact our business, financial
condition or result of operations, as a result of:
|
·
|
An adverse impact in pricing, liquidity, value, return and trading
for a broad array of financial products, loans and derivatives that are included in our financial assets and liabilities.
|
|
·
|
Extensive changes to documentation that contain references to
Libor or use formulas that depend on Libor.
|
|
·
|
Disputes, litigation or other actions with counterparties regarding
the interpretation and enforceability of provisions in Libor-based products such as fallback language or other related provisions.
|
|
·
|
The transition and development of appropriate systems and analytics
to effectively transition our risk management processes from Libor-based products to those based on one or more alternative
reference rates in a timely manner; and
|
|
·
|
An increase in prepayments of Libor-linked loans by our clients.
|
RISKS
RELATING TO THE NOTES
It
may be difficult to enforce your rights if we enter into a bankruptcy, liquidation or similar proceeding in Colombia.
The
insolvency laws of Colombia, particularly as they relate to the priority of creditors (secured or unsecured), the ability to obtain
post-petition interest and the duration of insolvency proceedings, may be less favorable to your interests than the bankruptcy
laws of the United States. As a result, your ability to recover payments due on the Notes may be more limited than would be the
case under U.S. bankruptcy law. The following is a brief description of certain aspects of insolvency laws in Colombia.
Your
ability to enforce your rights under the Notes may be limited if we become subject to the proceedings set forth in Decree 663
of 1993 and Decree 2555 of 2010, as amended from time to time, which establish the events under which the SFC may initiate a Taking
of Possession (toma de posesión) proceeding either to administer us or to liquidate us.
Under
Colombian banking laws, the SFC can take control of financial institutions under certain circumstances. The following grounds
for takeover are considered to be “automatic” in the sense that, if the SFC discovers their existence, the SFC is
obligated to step in and take over the respective financial institution: (i) if the financial institution’s Technical Capital
falls below 40% of the legal minimum or (ii) the expiration of the term of any then current recovery plans or the non-fulfillment
of the goals set forth in such plans. Additionally, the SFC also conducts periodic visits to financial institutions and, as a
consequence of these visits, the SFC can impose capital or solvency obligations on financial institutions without taking control
of the financial institution.
Additionally,
and subject to the approval of the Ministry of Finance, the SFC may, at its discretion, initiate intervention procedures 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) repeated failure to comply with orders and instructions from the
SFC; (v) repeated violations of applicable laws and regulations or of the bank’s by-laws; (vi) unauthorized or fraudulent
management of the bank’s business; (vii) reduction of the bank’s net worth below 50% of its subscribed capital; (viii)
failure to comply with minimum capital requirements set forth in the Colombian Financial Statute; (ix) failure to comply with
the recovery plans that were adopted by the bank; (x) failure to comply with the order of exclusion of certain assets and liabilities
to another institution designated by the SFC; and (xi) failure to comply with the order of progressive unwinding (desmonte
progresivo) of the operations of the bank.
A
takeover by the SFC may have one of two different purposes: (i) to manage the financial institution, in which case the financial
institution will be allowed to continue its activities subject to the administration of the authorities; or (ii) to liquidate
the financial institution. The SFC must decide if it will either manage or liquidate the financial institution within two months
following the takeover in the event of a bankruptcy, liquidation or similar proceeding.
In
view of the broad discretionary powers of the SFC it is impossible to predict how long payments under the Notes could be delayed
and whether or to what extent you would be compensated for any delay if any of the actions described above were to be taken with
respect to us.
The
obligations under the Notes will be subordinated to statutory preferences.
Under
Colombian law, the obligations under the Notes are subordinated, among others, to specified statutory priorities, including, for
example, client’s deposits, salaries, wages, social security, taxes, court fees and expenses and suppliers necessary for
the rendering of services. In the event of our liquidation, these obligations will have priority over any other claims, including
claims by any holder in respect of the Notes and, as a result, holders of Notes may be unable to fully recover amounts due under
the Notes.
Because
we are located in an emerging market country, any market for the Notes may be adversely affected by economic and market conditions
in other emerging market economies.
Colombia
is generally considered by investors to be an “emerging market country,” and securities of Colombian issuers have
been, to varying degrees, influenced by economic and market conditions in other emerging market countries. Although economic conditions
are different in each country, investors’ reactions to developments in one country may materially affect the prices of securities
of issuers in other countries, including Colombia. Events elsewhere that are unrelated to our financial performance, especially
in other emerging market countries, could adversely affect any market for the Notes that may develop.
An
active trading market may not develop for the Notes.
Prior
to this offering, there was no market for the Notes. Although we will apply to list the Notes on the NYSE, there is no guarantee
that we will be able to list the Notes. Even if the Notes are listed, there may be a limited secondary market or none at all for
the Notes. Even if a secondary market for the Notes develops, it may not provide significant liquidity, and we expect transaction
costs would be high.
The
underwriters have informed us that they intend to make a market in the Notes after this offering is completed. The underwriters,
however, may cease their market-making at any time without notice. The price at which the Notes may trade will depend on many
factors, including, but not limited to, prevailing interest rates, general economic conditions, our performance and financial
results and markets for similar securities. Historically, the markets for debt such as the Notes have been subject to disruptions
that have caused substantial volatility in their prices. The market, if any, for the Notes may be subject to similar disruptions,
which may have an adverse effect on the holders of the Notes.
There
are no restrictive covenants in the indenture for the Notes limiting our ability to incur future indebtedness or complete other
transactions that are adverse to the interests of holders of the Notes.
The
indenture governing the Notes does not contain any financial or operating covenants or restrictions on the payment of dividends,
the incurrence of indebtedness, change of control, transactions with affiliates, incurrence of liens or the issuance or repurchase
of securities by us or any of our subsidiaries. We therefore may incur additional indebtedness, including senior indebtedness,
and engage in other transactions that may not be in the interests of the noteholders.
The
ratings of the Notes may be lowered or withdrawn depending on various factors, including the rating agency’s assessments
of our financial strength and Colombian sovereign risk.
One
or more independent credit rating agencies may assign credit ratings to the Notes. The ratings address the timely payment of principal
and interest on each payment date. The ratings of the Notes are not a recommendation to purchase, hold or sell the Notes, and
the ratings do not comment on market price or suitability for a particular investor. The ratings of the Notes are subject to change
and may be lowered or withdrawn. A downgrade in or withdrawal of the ratings of the Notes will not be an Event of Default under
the indenture. The assigned ratings may be raised or lowered depending, among other things, on the rating agency’s assessment
of our financial strength, as well as its assessment of Colombian sovereign risk generally.
Use
of Proceeds
We
estimate that the net cash proceeds from the offering will be approximately US$ million, after giving effect to the Exchange and
deducting the underwriting discount and estimated offering expenses. Pursuant to the Exchange, Citigroup is expected to exchange
the Early Tendered Notes purchased prior to the closing of this offering for a portion of the Notes offered hereby and the net
proceeds of the offering otherwise payable to us in cash (which will reflect the underwriting discount set forth on the cover
page of this prospectus supplement) will be reduced by an amount equal to the aggregate total consideration payable for the Early
Tendered Notes plus an amount equal to accrued interest thereon through the date of the Exchange.
We
intend to use any remaining net proceeds from this offering, after effecting the Exchange, to purchase any Old Notes (other than
any Early Tendered Notes) that are accepted for purchase in the Offer and to redeem all or a portion of the Old Notes that remain
outstanding following completion of the Offer. See “Use of Proceeds.”
Certain
of the underwriters or their affiliates may hold positions in the Old Notes. As a result, certain of those underwriters or their
affiliates may receive some of the proceeds from this offering. See “Underwriting.”
Selected
Consolidated Financial Data
The
following tables present our unaudited selected consolidated financial information and other data as of and for the nine months
ended September 30, 2019 and 2018. This section should be read in conjunction with our audited consolidated financial statements
as of December 31, 2018 and 2017 and for the three years ended December 31, 2018 and the notes related thereto included in the
Annual Report and our unaudited condensed consolidated financial statements as of September 30, 2019 and for the nine months ended
September 30, 2019 and 2018 and the notes related thereto included elsewhere in this prospectus supplement. The unaudited selected
consolidated financial information as of September 30, 2019 and for the nine months ended September 30, 2019 and 2018 includes
all adjustments, consisting of only normal recurring adjustments, which in the opinion of management are necessary for the fair
presentation of such information. Interim results are not necessarily indicative of the results to be expected for the
entire fiscal year.
Selected
Consolidated Financial Results
SELECTED
CONSOLIDATED STATEMENT OF FINANCIAL POSITION DATA
|
|
As
of
|
|
|
|
September
30,
2018
|
|
|
December
31, 2018
|
|
|
%
Change
September
2018 -
December
2018
|
|
|
|
|
|
%
Change
December 2018 -
September 2019
|
|
|
|
(in
millions of COP)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans
and advances to customers and financial institutions
|
|
|
164,716,053
|
|
|
|
173,819,116
|
|
|
|
5.53
|
%
|
|
|
184,030,281
|
|
|
|
5.87
|
%
|
Financial
assets Investments
|
|
|
15,721,358
|
|
|
|
17,361,475
|
|
|
|
10.43
|
%
|
|
|
19,947,001
|
|
|
|
14.89
|
%
|
Other
assets
|
|
|
26,217,917
|
|
|
|
28,933,027
|
|
|
|
10.36
|
%
|
|
|
32,877,944
|
|
|
|
13.63
|
%
|
Total
Assets
|
|
|
206,655,328
|
|
|
|
220,113,618
|
|
|
|
6.51
|
%
|
|
|
236,855,226
|
|
|
|
7.61
|
%
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits
by customers
|
|
|
130,334,802
|
|
|
|
142,128,471
|
|
|
|
9.05
|
%
|
|
|
150,044,204
|
|
|
|
5.57
|
%
|
Borrowings
from other financial institutions
|
|
|
15,033,285
|
|
|
|
16,337,964
|
|
|
|
8.68
|
%
|
|
|
15,653,594
|
|
|
|
-4.19
|
%
|
Debt
securities in issue
|
|
|
19,176,927
|
|
|
|
20,287,233
|
|
|
|
5.79
|
%
|
|
|
21,129,087
|
|
|
|
4.15
|
%
|
Other
liabilities
|
|
|
17,243,301
|
|
|
|
14,704,725
|
|
|
|
-14.72
|
%
|
|
|
21,085,828
|
|
|
|
43.39
|
%
|
Total
liabilities
|
|
|
181,788,315
|
|
|
|
193,458,393
|
|
|
|
6.42
|
%
|
|
|
207,912,713
|
|
|
|
7.47
|
%
|
Equity
|
|
|
24,867,013
|
|
|
|
26,655,225
|
|
|
|
7.19
|
%
|
|
|
28,942,513
|
|
|
|
8.58
|
%
|
Total
liabilities and stockholders’ equity
|
|
|
206,655,328
|
|
|
|
220,113,618
|
|
|
|
6.51
|
%
|
|
|
236,855,226
|
|
|
|
7.61
|
%
|
CONSOLIDATED
STATEMENT OF OPERATIONS DATA
|
|
For
the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
%
Change
|
|
|
|
(in
millions of COP)
|
|
Total interest
and valuation
|
|
|
11,858,035
|
|
|
|
12,966,093
|
|
|
|
9.34
|
%
|
Interest expenses
|
|
|
(4,231,011
|
)
|
|
|
(4,607,533
|
)
|
|
|
8.90
|
%
|
Net
interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance
sheet credit instruments
|
|
|
7,627,024
|
|
|
|
8,358,560
|
|
|
|
9.59
|
%
|
Total credit impairment
charges, net
|
|
|
(2,855,777
|
)
|
|
|
(2,281,442
|
)
|
|
|
-20.11
|
%
|
Total fees and commissions,
net
|
|
|
2,046,230
|
|
|
|
2,249,026
|
|
|
|
9.91
|
%
|
Other operating income
|
|
|
952,935
|
|
|
|
1,081,725
|
|
|
|
13.52
|
%
|
Dividends received,
and share of profits of equity method investees
|
|
|
241,218
|
|
|
|
339,700
|
|
|
|
40.83
|
%
|
Total operating expenses
|
|
|
(5,539,004
|
)
|
|
|
(5,995,166
|
)
|
|
|
8.24
|
%
|
Income tax
|
|
|
(719,582
|
)
|
|
|
(1,018,469
|
)
|
|
|
41.54
|
%
|
Net
income
|
|
|
1,753,044
|
|
|
|
2,733,934
|
|
|
|
55.95
|
%
|
PRINCIPAL
RATIOS
|
|
As
of and for the Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
Basis
Point
Change
|
|
PROFITABILITY
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
interest and valuation income after provisions for loans, financial leases and off-balance sheet credit instruments margin
from continuing operations (2)
|
|
|
5.73
|
%
|
|
|
5.69
|
%
|
|
|
(4
|
)
|
Return
on average total assets from continuing operations (3)
|
|
|
1.08
|
%
|
|
|
1.54
|
%
|
|
|
46
|
|
Return
on average stockholders’ equity attributable to the owners of the parent company (4)
|
|
|
9.70
|
%
|
|
|
13.91
|
%
|
|
|
421
|
|
EFFICIENCY
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses to net operating income from continuing operations
|
|
|
50.97
|
%
|
|
|
49.84
|
%
|
|
|
(113
|
)
|
Operating
expenses to average total assets from continuing operations
|
|
|
3.63
|
%
|
|
|
3.49
|
%
|
|
|
(14
|
)
|
Operating
expenses to interest-earning assets from continuing operations
|
|
|
4.16
|
%
|
|
|
4.08
|
%
|
|
|
(8
|
)
|
CAPITAL
ADEQUACY
|
|
|
|
|
|
|
|
|
|
|
|
|
Technical
capital to risk weighted assets (5)
|
|
|
13.66
|
%
|
|
|
12.71
|
%
|
|
|
(95
|
)
|
(1)
Ratios were calculated on the basis of monthly averages.
(2)
Net interest income divided by monthly average interest-earning assets.
(3)
Net income divided by monthly average assets.
(4)
Net income divided by monthly average stockholders’ equity.
(5)
For an explanation of risk-weighted assets and technical capital, see “Colombian Banking Regulations – Capital
Adequacy Requirements.”
Management’s
Discussion AND Analysis of Financial Condition and Results of Operations as of and for the nine Months Ended SEPTEMBER
30, 2019 and 2018
Summary
For
the nine months ended September 30, 2019, net income attributable to equity holders of the parent company totaled COP 2,648 billion,
which represents an increase of 59.84% from net income of COP 1,657 billion for the comparable period in 2018. Net interest margin
decreased to 5.54% for the nine months ended September 30, 2019 from 5.71% for the comparable period in 2018. Provision charges,
net of recoveries, totaled COP 2,281 billion for the nine months ended September 30, 2019, down 20.11% from COP 2,856 billion
for the comparable period in 2018. This decrease is mainly due to an improvement in the quality of our loan portfolio, which resulted
in lower provisions for the year.
Gross
loans and financial leases totaled COP 184,030 billion as of September 30, 2019, up 5.87% from COP 173,819 billion as of December
31, 2018. This performance was driven primarily by a 20.89% increase in consumer loans, mainly to high income individuals, while
corporate loans grew a more modest 1.72%. The increase in gross loans also reflects implementation of our strategy to increase
participation in the consumer segment. Mortgage loans increased by 6.03%.
Reserves
for loan losses represented 5.49% of total loans, and 129.65% of past-due loans as of September 30, 2019,
while capital adequacy was 12.71% as of September 30, 2019 (Basic Consolidated Solvency Ratio of 9.72%), lower than the
13.47% (Basic Consolidated Solvency Ratio of 10.05%) reported as of December 31, 2018. Capital adequacy, as well as our Basic
Consolidated Solvency Ratio was reduced due to the increase in our Risk Weighted Assets (RWA), as a result of the growth in the
loan book and the depreciation of the COP against the USD.
Deposits
for the nine months ended September 30, 2019 increased 5.57% from December 31, 2018, while the ratio of net loans to deposits
was 116% as of September 30, 2019, up from 115% as of December 31, 2018.
Revenue
Performance
Net
interest income
For
the nine months ended September 30, 2019, net interest income totaled COP 8,359 billion, up 9.60% as compared to COP 7,627 billion
for the comparable period in 2018. This performance is explained mainly by the growth in our overall loan portfolio, particularly
in the consumer segment.
The
decrease in the net interest margin, from 5.71% for the nine months ended September 30, 2018 to 5.54% for the nine months ended
September 30, 2019 resulted mainly from the compression in the lending rates, partially offset by a greater share of retail loans,
which earn a higher net interest margin.
In
the first nine months of 2019, average interest paid on interest bearing liabilities was 3.11%, down from 3.18% for the comparable
period in 2018, as the Central Bank has kept interest rates unchanged during the last twelve months. The strategy of the bank
has been focused on promoting low cost deposits and extending durations of liabilities.
Net
interest income represented 63.7% of revenues (the sum of net interest income, fees and other service income and total other operating
income) for the nine months ended September 30, 2019, compared to 65.2% for the comparable period in 2018.
Interest
income, which is the sum of interest on loans, financial leases, overnight funds and interest and valuation income from investment
securities, totaled COP 12,966 billion for the nine months ended September 30, 2019, up 9.34% from COP 11,858 billion for the
comparable period in 2018. This increase was primarily driven by the effect of overall growth in the loan portfolio.
Interest
on investment securities, which includes, among other items, the interest paid or accrued on debt securities and mark-to-market
valuation adjustments, totaled COP 553 billion for the nine months ended September 30, 2019, up 47.88% from COP 374 billion in
the comparable period in 2018. This increase was due to appreciation and reduction in yields of Colombian government securities.
Interest
expense totaled COP 4,608 billion for the nine months ended September 30, 2019, up 8.90% as compared to COP 4,231 billion for
the comparable period in 2018. In line with the interest income, the increase in interest expense is explained by the effect of
growth in the loan portfolio.
Overall,
the average interest rate paid on interest-bearing liabilities decreased to 3.11% for the nine months ended September 30, 2019
from 3.18% for the comparable period in 2018. This reduction was due to efforts made to decrease the cost on time deposits.
The
following table summarizes Bancolombia’s annualized net interest margin for the periods indicated:
|
|
For
the Nine Months Ended
September 30,
|
|
Annualized
Interest Margin
|
|
2018
|
|
|
2019
|
|
Loans’ interest margin
|
|
|
6.22
|
%
|
|
|
6.10
|
%
|
Debt investments' margin
|
|
|
0.45
|
%
|
|
|
2.29
|
%
|
Net interest margin
|
|
|
5.73
|
%
|
|
|
5.69
|
%
|
The
annualized weighted average cost of deposits reached 3.11% during the 2019 period, down from 3.18% during the 2018 period.
Weighted Average
|
|
For
the Nine Months Ended
September 30,
|
|
Funding
Cost
|
|
2018
|
|
|
2019
|
|
Checking accounts
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Saving accounts
|
|
|
1.87
|
%
|
|
|
1.75
|
%
|
Time deposits
|
|
|
5.14
|
%
|
|
|
4.89
|
%
|
Total deposits
|
|
|
2.95
|
%
|
|
|
2.82
|
%
|
Long term debt
|
|
|
5.98
|
%
|
|
|
5.80
|
%
|
Loans with banks
|
|
|
2.29
|
%
|
|
|
2.67
|
%
|
Total funding cost
|
|
|
3.18
|
%
|
|
|
3.11
|
%
|
Net
fees and income from financial services
For
the nine months ended September 30, 2019, net fees and income from financial services totaled COP 2,249 billion, up 9.91% from
COP 2,046 billion for the comparable period in 2018. This increase was driven primarily by performance of our credit and debit
card business, and higher commissions from banking services, trust products and bancassurance.
Fees
from credit and debit cards for the nine months ended September 30, 2019 increased 15.16% from the comparable period in 2018 due
to a higher transactional volume in distribution channels. Commissions from banking services for the nine months ended September
30, 2019 increased 17.88% versus the comparable period in 2018, trust products for the nine months ended September 30, 2019 increased
10.50% versus the comparable period in 2018, due to higher volumes of assets under management and bancassurance for the nine months
ended September 30, 2019 increased 23.64% from the comparable period in 2018.
The
following table lists the main revenue-producing fees for the nine months ended September 30, 2019 and 2018, together with the
percentage change between these periods:
Fees
and commissions income
|
|
|
|
|
For
the Nine Months Ended
September 30,
|
|
In
millions of COP
|
|
2018
|
|
|
2019
|
|
|
%
Change
|
|
Banking
services
|
|
|
419,595
|
|
|
|
494,630
|
|
|
|
17.88
|
%
|
Credit and debit
card fees and commercial establishments
|
|
|
1,164,887
|
|
|
|
1,341,493
|
|
|
|
15.16
|
%
|
Brokerage
|
|
|
21,270
|
|
|
|
19,417
|
|
|
|
-8.71
|
%
|
Acceptances and
Guarantees
|
|
|
42,450
|
|
|
|
41,848
|
|
|
|
-1.42
|
%
|
Trust and Securities
|
|
|
298,865
|
|
|
|
330,236
|
|
|
|
10.50
|
%
|
Investment banking
|
|
|
23,064
|
|
|
|
22,131
|
|
|
|
-4.04
|
%
|
Bancassurance
|
|
|
364,367
|
|
|
|
450,513
|
|
|
|
23.64
|
%
|
Payments and
Collections
|
|
|
417,322
|
|
|
|
454,448
|
|
|
|
8.90
|
%
|
Others
|
|
|
132,557
|
|
|
|
180,890
|
|
|
|
36.46
|
%
|
Fees
and commissions income
|
|
|
2,884,377
|
|
|
|
3,335,606
|
|
|
|
15.64
|
%
|
Other
Operating Income
For
the nine months ended September 30, 2019, total other operating income was COP 1,082 billion, 13.52% higher than the COP 953 billion
reported for the comparable period in 2018. This increase was primarily due to the growth of assets attributable to our operating
leasing business, mainly commercial real estate, vehicles and machinery.
Operating
Expenses
For
the nine months ended September 30, 2019, operating expenses totaled COP 5,995 billion, up 8.24% as compared to COP 5,539 billion
for the comparable period in 2018, due largely to increased expenses related to depreciation and amortization.
Personnel
expenses (the sum of salaries and employee benefits, bonus plan payments and indemnities) totaled COP 2,489 billion during the
nine months ended September 30, 2019, up 10.04% from COP 2,262 billion for the comparable period in 2018. This increase was due
to higher provisions in bonus plan payments as a result of a higher return on equity achieved during 2019.
Administrative
and other expenses totaled COP 2,204 billion for the nine months ended September 30, 2019, up 1.50% from COP 2,171 billion for
the comparable period in 2018.
Impairment,
depreciation and amortization expenses totaled COP 581 billion for the nine months ended September 30, 2019, increasing 60.00%
as compared to COP 363 billion for the comparable period in 2018, as a result of the implementation of IFRS 16 as well as higher
expenses related to foreclosed assets. Since January 1, 2019, IFRS 16 requires operating lease obligations to be brought on balance
sheet through the recognition of the present value of contractual payment as lease liabilities and recognition of the assets representing
the contractual rights of use. As a consequence, for Bancolombia as a lessee, operating leases enter the balance sheet, as if
they were financed purchases.
The
following table summarizes the principal components of our operating expenses for the nine months ended September 30, 2019 and
2018:
|
|
For
the nine months ended
September 30,
|
|
|
|
|
Operating expenses
|
|
2018
|
|
|
2019
|
|
|
%
Change
|
|
|
|
(in
millions of COP)
|
|
|
|
|
Salaries and employee benefits
|
|
|
1,946,538
|
|
|
|
2,094,063
|
|
|
|
7.58
|
%
|
Bonuses
|
|
|
315,893
|
|
|
|
394,535
|
|
|
|
24.90
|
%
|
Other administrative and general expenses
|
|
|
2,171,190
|
|
|
|
2,203,837
|
|
|
|
1.50
|
%
|
Tax contributions and other tax burden
|
|
|
549,817
|
|
|
|
552,376
|
|
|
|
0.47
|
%
|
Impairment, depreciation and amortization
|
|
|
363,211
|
|
|
|
581,136
|
|
|
|
60.00
|
%
|
Other expenses
|
|
|
192,355
|
|
|
|
169,218
|
|
|
|
-12.03
|
%
|
Equity Tax
|
|
|
–
|
|
|
|
–
|
|
|
|
0
|
%
|
Total operating expenses
|
|
|
5,539,004
|
|
|
|
5,995,165
|
|
|
|
8
|
%
|
Provision
charges and credit quality
For
the nine months ended September 30, 2019, provision charges (net of recoveries) totaled COP 2,281 billion (or 1.60% of average
loans), which represents a decrease of 20.11% as compared to COP 2,856 billion for the comparable period in 2018 (or 2.42% of
average loans). This variation is explained by favorable developments in the credit cycle characterized by a lower amount of new
past due loans and better vintages across all segments, which therefore required lower provisions.
Net
loan charge-offs totaled COP 2,352 billion for the nine months ended September 30, 2019, up 1.88% from COP 2,308 billion for the
comparable period in 2018. Past-due loans amounted to COP 7,563 billion as of September 30, 2019, up 3.54% as compared to COP
7,304 billion as of December 31, 2018. The delinquencies ratio (loans overdue more than 30 days divided by total loans) decreased
to 4.24% as of September 30, 2019, down from 4.33% as of December 31, 2018.
The
following tables present key metrics related to asset quality:
ASSET
QUALITY
|
|
As
of December 31,
|
|
|
As
of September 30,
|
|
|
|
2018
|
|
|
2019
|
|
|
|
(in
millions of COP, except percentages)
|
|
Total 30-day past due loans
|
|
|
7,304,798
|
|
|
|
7,563,180
|
|
Allowance for loan losses(1)
|
|
|
9,365,541
|
|
|
|
9,805,577
|
|
Past due loans to loans principal(2)
|
|
|
4.33
|
%
|
|
|
4.24
|
%
|
Allowances for loan and lease losses
to past due loans principal
|
|
|
128.21
|
%
|
|
|
129.65
|
%
|
Allowance for loan and lease losses
as a percentage of total loans principal
|
|
|
5.55
|
%
|
|
|
5.49
|
%
|
|
(1)
|
Allowances are reserves for the principal of loans.
|
|
(2)
|
Past due loans to total loans ratio is based on loans past due
more than 30 days.
|
Past
Due Loans (PDL)
Per Category (30 days)
|
|
As
of December 31,
2018
|
|
|
As
of September 30,
2019
|
|
|
%
of Total Loan Portfolio
As of September 30, 2019
|
|
Commercial loans
|
|
|
3.56
|
%
|
|
|
3.38
|
%
|
|
|
65.06
|
%
|
Consumer loans
|
|
|
4.93
|
%
|
|
|
4.74
|
%
|
|
|
21.08
|
%
|
Microcredit
|
|
|
12.01
|
%
|
|
|
11.45
|
%
|
|
|
0.69
|
%
|
Mortgage loans
|
|
|
6.95
|
%
|
|
|
7.18
|
%
|
|
|
13.18
|
%
|
PDL TOTAL
|
|
|
4.33
|
%
|
|
|
4.24
|
%
|
|
|
|
|
PDL
Per Category (90 days)
|
|
As
of December 31,
2018
|
|
|
As
of September 30,
2019
|
|
|
%
of Total Loan Portfolio
As of September 30, 2019
|
|
Commercial loans
|
|
|
3.00
|
%
|
|
|
2.80
|
%
|
|
|
65.06
|
%
|
Consumer loans
|
|
|
2.79
|
%
|
|
|
2.57
|
%
|
|
|
21.08
|
%
|
Microcredit
|
|
|
7.83
|
%
|
|
|
7.88
|
%
|
|
|
0.69
|
%
|
Mortgage loans*
|
|
|
3.65
|
%
|
|
|
3.43
|
%
|
|
|
13.18
|
%
|
PDL TOTAL
|
|
|
3.08
|
%
|
|
|
2.88
|
%
|
|
|
|
|
*
Overdue mortgage loans include those past due for 120 days, instead of 90 days.
Allowance
for Loan Losses
Allowances
for loan losses totaled COP 10,622 billion as of September 30, 2019, up 3.77% from COP 10,236 billion as of December 31, 2018.
Allowances for loan losses represented 5.49% of gross loans as of September 30, 2019, down from 5.55% as of December 31, 2018.
The coverage for loan losses, measured by the ratio of allowances for loan losses to past due loans (overdue 30 days), was 130%
as of September 30, 2019, up from 128% as of December 31, 2018.
The
coverage measured by the ratio of allowances for loan losses to loans classified as C, D and E, was 63.0% as of September 30,
2019, reflecting an increase compared to 61.3% as of December 31, 2018. Our management believes
that allowances for loan and financial leases losses adequately reflect the credit risk associated with our loan portfolio given
the current economic environment and the available information upon which the credit assessments are made. Nonetheless, the methodology
used in the allowance and provision charges determination is based on the existence and magnitude of determined factors that are
not necessarily an indication of future losses, and accordingly current allowances and provision charges may not exactly reflect
actual losses.
Goodwill
For
the period ended September 30, 2019, outstanding goodwill and intangible assets totaled COP 7,648 billion, mainly related to the
acquisition of Banistmo in 2013. This figure represents a 6.19% increase from COP 7,202 billion as of December 31, 2018. This
increase is explained by the 7.0% depreciation of the peso against the U.S. dollar, and the amortization of intangible assets
during the period. As of September 30, 2019, outstanding goodwill and intangible assets represented 3.22% of our total assets.
Income
Tax Expenses
Income
tax expense for the nine months ended September 30, 2019 totaled COP 1,018 billion, up 41.54% from COP 719.6 billion for the comparable
period in 2018. Our effective tax rate for the nine-month period in 2019 was 27.13%, down from 29.1% for the comparable period
in 2018. The decline in the effective tax rate during 2019 is attributable to the greater contribution to income from our Central
American and offshore subsidiaries which operate in jurisdictions with lower statutory tax rates. This greater contribution is
partially due to the depreciation of the COP versus the USD.
Loan
Portfolio
The
following table shows the composition of our loans by type as of September 30, 2019 and December 31, 2018, and the percentage
change compared to amounts as of December 31, 2018:
LOAN
PORTFOLIO
|
|
As
of December 31,
|
|
|
As
of September 30,
|
|
|
|
|
|
%
of total loans as of
|
|
(COP
million)
|
|
2018
|
|
|
2019
|
|
|
%
Change
|
|
|
September
30, 2019
|
|
Commercial Loans
|
|
|
94,600,648
|
|
|
|
95,549,668
|
|
|
|
1.00
|
%
|
|
|
55.10
|
%
|
Consumer Loans
|
|
|
31,993,381
|
|
|
|
38,728,899
|
|
|
|
21.05
|
%
|
|
|
22.33
|
%
|
Small Business Loan
|
|
|
1,156,198
|
|
|
|
1,274,638
|
|
|
|
10.24
|
%
|
|
|
0.74
|
%
|
Financial Lease
|
|
|
23,198,204
|
|
|
|
24,227,115
|
|
|
|
4.44
|
%
|
|
|
13.97
|
%
|
Mortgage
|
|
|
22,870,685
|
|
|
|
24,249,961
|
|
|
|
6.03
|
%
|
|
|
13.98
|
%
|
Total loan portfolio
|
|
|
173,819,116
|
|
|
|
184,030,281
|
|
|
|
5.87
|
%
|
|
|
|
|
Allowance for loan
losses
|
|
|
(10,235,831
|
)
|
|
|
(10,621,994
|
)
|
|
|
3.77
|
%
|
|
|
-6.13
|
%
|
Total loans, net
|
|
|
163,583,285
|
|
|
|
173,408,287
|
|
|
|
6.01
|
%
|
|
|
|
|
Investment
Portfolio
As
of September 30, 2019, our investment portfolio totaled COP 19,947 billion, reflecting an increase of 14.89% compared to December
31, 2018. The investment portfolio is mainly composed of debt securities. The debt securities portfolio had a duration of 20.4
months and a weighted average yield to maturity of 4.5%.
Funding
As
of September 30, 2019, our liabilities totaled COP 207.912 billion, increasing 7.47% compared to December 31, 2018. The ratio
of net loans to deposits was 116% as of September 30, 2019, increasing from 115% as of December 31, 2018. Deposits totaled COP
150,044 billion (or 72.2% of liabilities) as of September 30, 2019, increasing 5.57% over the last nine months. Certificates of
deposits represented 35% of total deposits as of September 30, 2019, up from 32% as of December 31, 2018. Such increase is consistent
with our funding strategy to promote deposits with longer durations while maintaining competitive funding cost.
The
following table summarizes our funding sources:
Funding mix
|
|
|
|
|
|
|
(in millions
of COP, except percentages)
|
|
As
of December 31,
2018
|
|
|
As
of September 30,
2019
|
|
Checking
accounts
|
|
|
24,098,073
|
|
|
|
13.48
|
%
|
|
|
22,656,648
|
|
|
|
12.13
|
%
|
Saving accounts
|
|
|
59,635,379
|
|
|
|
33.36
|
%
|
|
|
61,053,267
|
|
|
|
32.68
|
%
|
Time deposits
|
|
|
56,853,141
|
|
|
|
31.81
|
%
|
|
|
65,403,609
|
|
|
|
35.01
|
%
|
Other deposits
|
|
|
1,541,878
|
|
|
|
0.86
|
%
|
|
|
930,680
|
|
|
|
0.50
|
%
|
Long term debt
|
|
|
16,337,964
|
|
|
|
9.14
|
%
|
|
|
15,654,013
|
|
|
|
8.38
|
%
|
Loans with banks
|
|
|
20,287,233
|
|
|
|
11.35
|
%
|
|
|
21,129,087
|
|
|
|
11.31
|
%
|
Total
Funds
|
|
|
178,753,668
|
|
|
|
|
|
|
|
186,827,304
|
|
|
|
|
|
Regulatory
Capital
Our
consolidated Capital Adequacy Ratio as of September 30, 2019 was 12.71%, 76 bps below the 13.47% as of December 31, 2018. The
increase in the RWA is mainly explained by the growth in the loan book and the depreciation of the COP against the USD.
The
consolidated Capital Adequacy Ratio was 371 basis points above the 9% minimum required by the SFC, while the Basic Consolidated
Solvency Ratio was 9.72%, 522 basis points above the 4.5% minimum required by the SFC.
TECHNICAL
CAPITAL AND CAPITAL ADEQUACY RATIOS
|
Consolidated
(in millions of COP, except percentages)
|
|
As
of December 31, 2018
|
|
|
Percentage
of risk-weighted assets
|
|
|
As
of September 30, 2019
|
|
|
Percentage
of risk-weighted assets
|
|
Basic capital
(Tier I)
|
|
|
19,714,724
|
|
|
|
10.05
|
%
|
|
|
20,517,980
|
|
|
|
9.72
|
%
|
Additional capital
(Tier II)
|
|
|
6,704,143
|
|
|
|
3.42
|
%
|
|
|
6,321,398
|
|
|
|
2.99
|
%
|
Technical capital(1)
|
|
|
26,418,868
|
|
|
|
|
|
|
|
26,839,378
|
|
|
|
|
|
Risk weighted assets
including market risk
|
|
|
196,109,276
|
|
|
|
|
|
|
|
211,126,069
|
|
|
|
|
|
CAPITAL
ADEQUACY RATIO (2)
|
|
|
|
|
|
|
13.47
|
%
|
|
|
|
|
|
|
12.71
|
%
|
|
(1)
|
Technical
capital is the sum of basic and additional capital. For more information, see “Colombian
Banking Regulations – Capital Adequacy Requirements.”
|
|
(2)
|
Capital
adequacy is technical capital divided by risk weighted assets. For more information,
see “Colombian Banking Regulations – Capital Adequacy Requirements.”
|
Capitalization
The
following table sets forth our consolidated Technical Capital (as defined in “Colombian Banking Regulations —Capital
Adequacy Requirements”) and long-term senior indebtedness as of September 30, 2019, and as adjusted to give effect to the
issuance of US$550,000,000 4.625% subordinated notes due 2029, the use of a portion of the proceeds of such issuance to purchase
US$490,499,000 aggregate principal amount of outstanding subordinated notes due 2020 and 2022, the issuance of the US$
of Notes offered hereby, and the use of proceeds and such other resources as may be required to redeem or repurchase the US$995,643,000
million outstanding principal amount of our notes due 2021, in each case as if they had occurred on September 30, 2019.
|
|
As
of September 30, 2019
|
|
(In Millions of COP
and Thousands of US$) (1)
|
|
Actual
|
|
|
As
Adjusted for offering and use of proceeds
|
|
Long-term
senior indebtedness
|
|
|
COP
12,668,622
|
|
|
|
USD
3,643,078
|
|
|
|
COP
|
|
|
|
USD
|
|
Notes
offered hereby
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Subscribed
capital
|
|
|
480,914
|
|
|
|
138,295
|
|
|
|
480,914
|
|
|
|
138,295
|
|
Legal reserve
|
|
|
17,834,291
|
|
|
|
5,128,554
|
|
|
|
17,834,291
|
|
|
|
5,128,554
|
|
Non-controlling interest
|
|
|
1,826,881
|
|
|
|
525,351
|
|
|
|
1,826,881
|
|
|
|
525,351
|
|
Financial statements
translation adjustment
|
|
|
4,680,286
|
|
|
|
1,345,896
|
|
|
|
4,680,286
|
|
|
|
1,345,896
|
|
Less:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long - term investments
|
|
|
(185,579
|
)
|
|
|
(53,366
|
)
|
|
|
(185,579
|
)
|
|
|
(53,366
|
)
|
Intangibles
assets acquired after August 23, 2012
|
|
|
(4,118,812
|
)
|
|
|
(1,184,435
|
)
|
|
|
(4,118,812
|
)
|
|
|
(1,184,435
|
)
|
Primary
capital (Tier I)
|
|
|
20,517,981
|
|
|
|
5,900,295
|
|
|
|
20,517,981
|
|
|
|
5,900,295
|
|
Subordinated
bonds (2)
|
|
|
6,208,551
|
|
|
|
1,785,375
|
|
|
|
5,319,216
|
|
|
|
1,529,631
|
|
4.625%
Subordinated notes due 2029
|
|
|
|
|
|
|
|
|
|
|
1,912,598
|
|
|
|
550,000
|
|
Other comprehensive
income related to investments at fair value
|
|
|
(12,434
|
)
|
|
|
(3,576
|
)
|
|
|
(12,434
|
)
|
|
|
(3,576
|
)
|
Non-controlling
interest
|
|
|
125,281
|
|
|
|
36,027
|
|
|
|
125,281
|
|
|
|
36,027
|
|
Computed
secondary capital (Tier II)
|
|
|
6,321,398
|
|
|
|
1,817,826
|
|
|
|
7,344,661
|
|
|
|
2,112,082
|
|
Technical
capital
|
|
|
COP 26,839,379
|
|
|
|
USD
7,718,121
|
|
|
|
27,862,642
|
|
|
|
8,012,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary capital to
risk-weighted assets (Tier I)
|
|
|
9.72
|
%
|
|
|
9.72
|
%
|
|
|
9.72
|
%
|
|
|
9.72
|
%
|
Secondary capital to
risk-weighted assets (Tier II)
|
|
|
2.99
|
%
|
|
|
2.99
|
%
|
|
|
3,48
|
%
|
|
|
3,48
|
%
|
Risk weighted assets
including market risk
|
|
|
211,126,069
|
|
|
|
60,712,899
|
|
|
|
211,126,069
|
|
|
|
60,712,899
|
|
Technical
capital to risk - weighted assets (3)(4)
|
|
|
12.71
|
%
|
|
|
12.71
|
%
|
|
|
13,20
|
%
|
|
|
13,20
|
%
|
|
(1)
|
Amounts
stated in U.S. dollars, included solely for the convenience of the reader, have been
converted at the rate of COP 3,477.45 per US$1.00, which is the representative market
rate calculated on September 30, 2019, as reported by the SFC. Such conversions should
not be construed as representations that the peso amounts represent, or have been or
could be converted into, U.S. dollars at that or any other rate.
|
|
(2)
|
Actual
includes subordinated debt with maturity dates as follows:
|
|
|
|
Actual
|
|
|
As
Adjusted
|
|
Maturity
|
|
|
Amount
(millions of COP)
|
|
|
Amount
(thousands of USD)
|
|
|
Amount
(millions of COP)
|
|
|
Amount
(thousands of USD)
|
|
|
2020
|
|
|
|
151,115
|
|
|
|
43,456
|
|
|
|
103,631
|
|
|
|
29,801
|
|
|
2022
|
|
|
|
2,276,637
|
|
|
|
654,686
|
|
|
|
1,434,786
|
|
|
|
412,597
|
|
|
2024
|
|
|
|
558,211
|
|
|
|
160,523
|
|
|
|
558,211
|
|
|
|
160,523
|
|
|
2027
|
|
|
|
2,608,088
|
|
|
|
750,000
|
|
|
|
2,608,088
|
|
|
|
750,000
|
|
|
2029
|
|
|
|
360,000
|
|
|
|
103,524
|
|
|
|
360,000
|
|
|
|
103,524
|
|
|
2034
|
|
|
|
254,500
|
|
|
|
73,186
|
|
|
|
254,500
|
|
|
|
73,186
|
|
|
Total
|
|
|
|
6,208,551
|
|
|
|
1,785,375
|
|
|
|
5,319,216
|
|
|
|
1,529,631
|
|
Under
Colombian capital adequacy regulations, commencing on the fifth anniversary prior to the final maturity date or the call option
date of a subordinated instrument, the amount of subordinated debt that will be eligible to be included in Tier Two Capital will
be annually amortized using the straight-line method. See “Colombian Banking Regulations – Regulatory Framework for
Colombian Banking Institutions – Capital Adequacy Requirements.”
|
(3)
|
Capital
adequacy requirements for Colombian financial institutions (as set forth in Decree 2555
of 2010, as amended) are based on the standards of the Basel Committee and differ from
banking regulations in the United States. See “Risk Factors” and “Colombian
Banking Regulations – Capital adequacy requirements” for further information.
|
|
(4)
|
Referred
to elsewhere in this prospectus supplement as “Capital Adequacy Ratio.” Colombian
regulations require that a credit institution’s technical capital be at least 9%
of that institution’s total risk-weighted assets. See “Colombian Banking
Regulations – Capital adequacy requirements” for further information.
|
Colombian
Banking Regulations
COLOMBIAN
BANKING REGULATORS
Pursuant
to Colombia’s Constitution, Congress has the power to prescribe the general legal framework within which the Government
may regulate the financial system. The agencies vested with the authority to regulate the financial system are the board of directors
of the Central Bank, the Ministry of Finance and Public Credit (the “Ministry of Finance”), the SFC, the Superintendency
of Industry and Commerce (the “SIC”) and the Self-Regulatory Organization (Autorregulador del Mercado de Valores
or “AMV”).
Central
Bank
The
Central Bank exercises the customary functions of a central bank, including price stabilization, monetary policy, regulation of
currency circulation, regulation of credit, exchange rate monitoring and management of international reserves. Its board of directors
is the regulatory authority for monetary, currency exchange and credit policies, and is responsible for the direction of the Central
Bank’s duties. The Central Bank also acts as lender of last resort to financial institutions.
Ministry
of Finance
One
of the functions of the Ministry of Finance is to regulate all aspects of finance and insurance activities. As part of its duties,
the Ministry of Finance issues decrees relating to financial matters that may affect banking operations in Colombia. In particular,
the Ministry of Finance is responsible for regulations relating to capital adequacy, risk limitations, authorized operations,
disclosure of information and accounting of financial institutions on a high level, which matters are then regulated in detail
by the SFC.
Decree
4172 of 2011, established the Unit of Financial Regulation (“URF”), an affiliated unit of the Ministry of Finance.
The URF is responsible for preparing and drafting any new financial, credit, securities, foreign exchange and insurance regulation
to be issued by the Colombian Government.
Superintendency
of Finance
The
SFC is the authority responsible for supervising and regulating financial institutions, including commercial banks such as we,
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 us, 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 us, whenever
the financial entity behaves in a manner considered to be anti-competitive.
REGULATORY
FRAMEWORK FOR COLOMBIAN BANKING INSTITUTIONS
The
basic regulatory framework of the Colombian financial sector is set forth in Decree 663 of 1993, as modified by among others,
Law 510 of 1999, Law 546 of 1999, Law 795 of 2003 and Law 1328 of 2009, Decree 2555 of 2010, External Resolution 1 of 2018, (exchange
control regulation statute), and External Resolution 4 of 2006 issued by the board of directors of the Central Bank, as well as
by External Circulars 29 of 2014 (Circular Básica Jurídica) and 100 of 1995 (Circular Básica Contable
y Financiera) issued by the SFC, in each case as amended and supplemented.
Decree
663 of 1993 defined 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 (establecimientos de crédito)
(which are further categorized into banking institutions, such as we, finance corporations (corporaciones financieras),
financing companies (compañias de financiamiento) and finance cooperatives (cooperativas financieras)); (ii)
financial services entities (sociedades de servicios financieros); (iii) capitalization corporations (sociedades de
capitalización); (iv) insurance companies (entidades aseguradoras); and (v) insurance intermediaries (intermediarios
de seguros). Furthermore, Decree 663 of 1993 sets forth (i) the procedure applicable for mergers and acquisitions, spin-offs,
and other corporate reorganizations of the aforementioned entities, (ii) specific regulations that apply to the issuance and sale
of shares and other securities by such entities, and (iii) certain rules regarding the 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 (“Law 1870”) implemented the legal framework for the regulation and supervision on financial conglomerates
in areas such as regulatory capital, related party transactions, corporate governance principles, conflicts of interest and risk
management, among others. According to Law 1870, a financial holding company may acquire that status by either (i) having significant
influence over a financial institution or (ii) controlling a financial institution. A financial holding company has significant
influence over a financial institution when directly or indirectly, it has more than fifty percent (50%) of the voting capital
of the financial institution, excluding from the calculation voting capital held by entities that under their regulations are
not allowed to control a financial institution (i.e. pension funds), and controls a financial institution, when it has (i) more
than 50% of the voting capital, (ii) the majority of the votes in the Board of Directors, or the right to elect a majority of
its members or (iii) a dominant influence over the decisions made by the financial institution as a result of an agreement with
the financial institution itself or its shareholders as established in articles 260 and 261 of the Colombian Code of Commerce.
The Government and the SFC must take into consideration the structure, complexity, and individual features of each conglomerate
when regulating financial conglomerates. Additionally, regarding risk management and exposure limits, the new requirements applicable
to financial conglomerates must consider the requirements that currently apply to financial institutions. Furthermore, when financial
institutions fulfill capital adequacy requirements and solvency ratios on their own, authorities may not impose solvency ratios
on the financial conglomerate as a whole. The Government has issued several decrees pursuant to its authority under Law 1870,
including Decree 774 of 2018, which regulates capital adequacy requirements for financial conglomerates, and Decree 1486 of 2018,
which regulates the criteria to determine related parties, risk concentration limits and conflicts of interest.
Pursuant
to the provisions of Law 1870 and the Decrees mentioned above, Grupo de Inversiones Suramericana S.A. has significant influence
and, therefore, is the financial 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 its corporate governance system
as a financial conglomerate, (ii) review the risk management and capital adequacy models and (iii) strengthen the internal control
and information reporting systems of the companies that make up the conglomerate under this framework. 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 External Resolution 4 of 2006 issued by the board of directors of the Central Bank, defined
the different activities that banks, including us, 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 banking, insurance
and securities market activities, capital adequacy requirements, principles in the determination, diffusion and publicity of rates
and prices of products and financial services, and lending activities.
Violations
of any of the above statutes and their relevant regulations are subject to administrative sanctions and, in some cases, criminal
sanctions.
Key
interest rates
Colombian
commercial banks, finance corporations and consumer financing companies are required to provide the Central Bank, on a weekly
basis, with data regarding the total volume (in pesos) of certificates of deposit issued during the prior week and the average
interest rates paid for certificates of deposit with maturities of 90 days. Based on such reports, the Central Bank computes Depósitos
a Término Fijo (“DTF”) rate, which is published at the beginning of the following week, for use in calculating
interest rates payable by financial institutions. The DTF is the weighted average interest rate paid by finance corporations,
commercial banks and consumer financing companies for certificates of deposit with maturities of 90 days. For the week of November
25, 2019, the DTF was 4.49%.
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 September 30, 2019, the banking
interest rate for small business loans was 36.56% and for all other loans was 19.03%.
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. Decree 1477 of 2018 (as amended by Decree 1421 of 2019) introduced into the Colombian banking regulation
several Basel III reforms, mainly relating to the (i) implementation of capital buffers, (ii) the alignment with Basel III solvency
ratio definitions, (iii) quality of the regulatory capital base and (iv) update of the measurement of the Risk Weighted Assets
and the alignment of the standardized approach for credit risk. This regulation establishes a gradual implementation plan beginning
in 2021 and ending in 2024 for reforms regarding solvency ratios and capital buffers, as further established in Decree 1421 of
2019. Recently, the SFC issued External Circular 020 of 2019 which defines the applicability of conditions of Decree 1477 of 2018
in relation to capital adequacy requirements for credit institutions and information reporting to the SFC.
Some
of the highlights of this regulation are as follows:
|
·
|
The technical capital (“Technical Capital”) is calculated
as the sum of Common Equity Tier One Capital (the “patrimonio básico ordinario”), the Additional
Tier One Capital (“patrimonio básico adicional”) and the Tier Two Capital (“patrimonio
adicional”). Throughout this prospectus supplement, we also refer to the sum of Common Equity Tier One Capital and
Additional Tier One Capital as “Tier One Capital” or “Tier I” and to Tier Two Capital as “Tier
II.”
|
|
·
|
Criteria for debt and equity instruments to be considered Common
Equity Tier One Capital, Additional Tier One Capital and Tier Two Capital were established. Additionally, the SFC must review
whether a given instrument adequately complies with these criteria in order for an instrument to be considered Tier One Capital
or Tier Two Capital, upon request of the issuer. Debt and equity instruments that have not been classified by the SFC as Tier
One Capital or Tier Two Capital shall not be considered Tier One Capital or Tier Two 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 minimum additional basic solvency ratio of 4.875% beginning on January
1, 2021, increasing gradually up to 6% as of January 1, 2024, which is defined as the sum of Common Equity Tier One Capital
after deductions and Additional Tier One Capital, divided by the financial institution’s total risk-weighted assets
and off-balance sheet items; (iii) a capital conservation buffer of 0.375% beginning on January 1, 2021, increasing gradually
up to 1.5% as of January 1, 2024, which is defined as the Common Equity Tier One 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% 0.25% beginning on January 1, 2021, increasing gradually up to 1% as of January 1, 2024, which is defined as
the Common Equity Tier One after deductions divided by the financial institution’s total risk-weighted assets and off-balance
sheet items; and (v) a combined buffer equivalent to the sum of the aforementioned buffers as of January 1, 2024. These ratios
apply to credit institutions individually and on a consolidated basis. Credit institutions includes banks (including Bancolombia
S.A.), financial corporations, and financing companies.
|
|
·
|
Credit institutions must comply with a minimum leverage ratio
of 3%, which is defined as the sum of the Common Equity Tier One Capital after deductions and the Additional Tier One 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.
|
As
of the date of this prospectus supplement, banks are permitted to issue subordinated debt, and to include the outstanding aggregate
principal amount of such subordinated debt as a component of Tier Two Capital, provided that: (i) the instrument creating or evidencing
such subordinated debt or pursuant to which the same is outstanding expressly provides that, in the event of our liquidation,
such subordinated debt will rank junior in right of payment to the prior payment in full of all our existing and future External
Liabilities; (ii) the instrument is not secured or insured and does not contemplate any contractual provision providing for a
different degree of subordination or any other change in the nature of the instrument; (iii) such subordinated debt has an
original term to maturity equal to or greater than five (5) years; (iv) there are no optional prepayments, or optional redemption
rights (other than optional redemptions upon tax events or regulatory events), or any other rights conferred upon the holders
of such subordinated debt that reduce such term to less than five (5) years; and (v) after the fifth (5th) year following the
Issue Date, the instrument may only be redeemed, repurchased or prepaid if: (a) the issuer obtains prior approval of the SFC,
(b) the debt instrument is replaced with a debt instrument that qualifies as Tier One Capital or Tier Two Capital in a manner
that allows the issuer to have sustainable revenue generation capacity, except that such replacement is not required if the bank
demonstrates that its capital position is above the minimum capital requirements after the instrument is redeemed, repurchased
or prepaid, and (c) the issuer does not create expectations regarding the prepayment, redemption or early repurchase of the
instrument; and (vi) the subordinated debt has the ability to absorb losses.
Technical
Capital is comprised of Tier One Capital, which consists of different types of capital and instruments, such as capital stock
and capital reserves, Additional Tier One Capital, such as equity and debt instruments that comply with certain requirements set
forth in Decree 2555, and Tier Two Capital, which includes subordinated debt. Commencing on the fifth anniversary prior
to the final maturity date or the call option date of a subordinated instrument, the amount of subordinated debt that will be
eligible to be included in Tier Two Capital will be annually amortized using the straight-line method.
As
of September 30, 2019, our Capital Adequacy Ratio was 12.71%, exceeding the requirements of the Colombian government and the SFC
by 371 basis points. As of December, 2018, our Capital Adequacy Ratio was 13.47%.
For
more information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations as of
and for the Nine Months Ended September 30, 2019 and 2018 – Regulatory Capital.”
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 2019 is COP 96,813 million. Failure to meet such requirement can
result in the taking of possession (toma de posesión) of us by the SFC (see “Bankruptcy Considerations”).
Furthermore,
the Ministry of Finance, through URF, in consultation with the SFC, continues to perform an internal review of regulations applicable
to financial institutions.
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 us, to hold minimum mandatory investments in debt securities issued
by Fondo para el Financiamiento del Sector Agropecuario (“Finagro”), a Colombian public financial institution that
finances production and rural activities to support the agricultural sector. The amount of these mandatory investments is calculated
by applying a fixed percentage (ranging from 4.3% to 5.8%, depending on the type of liability) to the quarterly average of the
end of day balances of certain liabilities, primarily deposits and short-term debt. The investment balance is computed at the
end of each quarter. Any required adjustment (due to a change in the quarterly average between periods) results in the purchase
of additional securities or may result in redemption by Finagro at of securities in excess of the requirement. The purchase of
additional securities takes place during the month following the date as of which the computation was performed.
Foreign
Currency Position Requirements
According
to External Resolution 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 we, 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 us are permitted to hold
a three business days’ average negative foreign currency position not exceeding the equivalent in foreign currency of 5%
of its technical capital (with penalties being payable after the first business day).
Resolution
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 comply with a gross position of leverage (posición bruta de apalancamiento)
as it relates to its foreign currency position. Gross position of leverage is defined as (i) the value of term contracts denominated
in foreign currency, plus (ii) the value of transactions denominated in foreign currency to be settled within two days in cash,
plus (iii) the value of the exchange rate risk exposure associated with exchange rate options and derivatives.
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 External 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 us) or by placing debt securities abroad. Foreign currency loans must be either
disbursed through a foreign exchange intermediary or deposited in special purpose offshore accounts.
Colombian
residents who borrow funds in foreign currency may be required to post with the Central Bank non-interest bearing deposits for
a specified term, 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, provided that such foreign currency loans are hedged with a derivative
agreed in foreign currency that has a tenor equal to the term between the disbursement and the final maturity of the loan.
Finally,
pursuant to Law 9 of 1991, the board of directors of the Central Bank is entitled to impose conditions and limitations on the
incurrence of foreign currency indebtedness, as an exchange control policy, in order to avoid pressure in the currency exchange
market.
Non-Performing
Loan Allowance
The
SFC maintains rules on non-performing loan allowances for financial institutions. These rules apply to Bancolombia S.A.’s
financial statements on a stand-alone basis for Colombian regulatory purposes. Non-performing loan allowances in our consolidated
financial statements as of December 31, 2018 are calculated according to IFRS.
Lending
Activities
Decree
2555 of 2010, as amended, sets forth the maximum amounts that a financial institution may lend to a single borrower (including
for this purpose all related fees, expenses and charges). These maximum amounts may not exceed 10% of a bank’s technical
capital. However, there are several circumstances under which the limit may be raised. In general, the limit is raised to 25%
when amounts lent above 5% of technical capital are secured by guarantees that comply with the financial guidelines provided in
Decree 2555 of 2010, as amended, for being deemed as admissible guarantees. 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 our capital stock exceed 20% of our technical capital.
In addition, no loan to a single financial institution may exceed 30% of our 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 our 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
We
are organized as a stock company (sociedad anónima). Our corporate existence is subject to the rules applicable
to commercial companies, principally the Colombian Commercial Code which requires stock companies (such as us) to have a minimum
of five shareholders at all times and provides that no single shareholder may own 95% or more of our subscribed capital stock.
Article 262 of the Colombian Commerce Code prohibits our subsidiaries from acquiring our stock.
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 us, transactions resulting in holding ADRs representing
10% or more of our subscribed capital stock, is subject to the prior authorization of the SFC. For that purpose, the SFC must
evaluate the proposed transaction based on the criteria and guidelines specified in Decree 663 of 1993. Transactions entered into
without the prior approval of the SFC are null and void and cannot be recorded in the institution’s stock ledger. These
restrictions apply equally to Colombian and foreign investors.
Bankruptcy
Considerations
Colombian
banks and other financial institutions are not subject to the laws and regulations that generally govern the insolvency, restructuring
and liquidation of industrial and commercial companies, but rather are subject to special rules, the most important details of
which are summarized below.
Pursuant
to Colombian banking law, the SFC has the power to intervene in the operations of a bank in order to prevent it from, or to control
and reduce the effects of, a bank failure. The SFC also conducts periodic visits to financial institutions and may impose capital
or solvency obligations on financial institutions without taking control of such financial institutions.
The
SFC may intervene in a bank’s business: (i) as a preventive measure 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, as an intervention measure 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 an intervention measure 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 (extendible 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) for their opinion before the measures are adopted.
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 a taking of possession, the SFC must appoint as special agent the person or entity designated by Fogafin to administer
the affairs of the bank while such process lasts and until it is decided whether to liquidate the bank.
As
part of its duties following the taking of possession by the SFC, Fogafin must provide the SFC with the plan to be followed by
the special agent in order to meet the goals set for the fulfillment of the measures that may have been adopted. If the underlying
problems that gave rise to the taking of possession of the bank are not resolved within a term not to exceed two years, the SFC
must order the liquidation of the bank.
During
the intervention measure (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 0.3% of total funds received on
saving accounts, checking accounts, certificates of deposit and other deposits, which is paid in four quarterly installments.
If a bank is liquidated, the deposit insurance will cover the funds deposited by an individual or corporation with such bank up
to a maximum of COP 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; and (v) money laundering and terrorism.
Commercial
banks generally have several risk measurement methods, including the risk weighted assets measurement which is calculated according
to weight percentages assigned to different types of assets, which may be 0%, 20%, 50% and 100%. There are some exceptions in
which the weight percentage is higher and is calculated based on the associated risk perception of the evaluated asset. Provisions,
which are calculated on a monthly basis, are another risk measurement method. For commercial and consumer loans, the SFC issues
a provision reference model, according to which the probability of default depends on an assigned rating (AA, A, BB, B, CC and
default). For mortgage loans and small business loans, provisions are calculated based on ratings (A, B, C, D and E) assigned
depending on the time elapsed since the client’s default.
With
respect to market risks, commercial banks must follow the provisions of the Basic Accounting Circular, which defines criteria
and procedures for measuring a bank’s exposure to interest rate, foreign exchange, and market risks. Under such regulations,
banks must submit to the SFC information on the net present value, duration, and interest rate of its assets, liabilities, and
derivative positions. Colombian banks are required to calculate, for each position on the statement of financial position, a volatility
rate and a parametric value at risk (“VaR”), which is calculated based on net present value, modified duration and
a risk factor computed in terms of a basis points change. Each risk factor is calculated and provided by the SFC.
With
respect to liquidity risk, financial entities must meet a liquidity coverage test that ensures their ability to hold liquid assets
sufficient to cover potential net cash outflows for a period of 30 days. Net cash outflows for this purpose are contractual maturities
of assets (interbank borrowings, financial assets investments, loans and advances to customers, derivative financial instruments)
minus contractual maturities of liabilities (demand deposits, time deposits, interbank deposits borrowings from other financial
institutions, debt securities, derivative financial instruments) occurring within a period of 30 days. For purposes of this calculation,
liabilities does not include projections of future transactions. The maturity of the loan portfolio is affected by the historical
default indicator and the maturity of deposits is modeled according to the regulation.
With
respect to operational risk, commercial banks must assess, according to principles provided by the Basic Accounting Circular,
each of their business lines (such as corporate finance, purchases and sales of securities, commercial banking, asset management,
etc.) in order to record the risk events that may occur and result in fraud, technology problems, legal and reputational problems
and problems associated with labor relations at the bank.
In
order to implement Basel III liquidity standards and complement the measure and management of short-term liquidity risk, the SFC
issued the External Circular 019 of 2019 which introduced the Net Stable Funding Ratio (Coeficiente de Fondeo Estable Neto
or “CFEN”). The CFEN will require credit institutions, such as Bancolombia S.A., to maintain a stable funding
profile in relation to the composition of their assets. The CFEN is defined as the amount of Available Stable Funding (Fondeo
Estable Disponible or “FED”) relative to the amount of Required Stable Funding (Fondeo Estable Requerido).
The FED includes capital and liabilities that will remain with the credit institution for more than one year. This ratio should
be equal to at least 100% on an ongoing basis.
Anti-Money
Laundering Provisions
The
regulatory framework to prevent and control money laundering is contained in, among others, Decree 663 of 1993 and External Circular
029 of 2014 issued by the SFC, as well as Law 599 of 2000, and the Colombian Criminal Code, as amended.
Colombian
laws adopt the latest guidelines related to anti-money laundering and other terrorist activities established by the Financial
Action Task Force on Money Laundering (“FATF”). Colombia, as a member of the GAFI-SUD (a FATF-style regional body),
follows all of FATF’s 40 recommendations and eight special recommendations. External Circular 029 of 2014 requires the implementation
by financial institutions of a system of controls for money laundering and terrorism financing. These rules emphasize “know
your customer” policies and knowledge of customers and markets, and other customer identification and monitoring processes
that include screening against international lists.
Financial
institutions must cooperate with the appropriate authorities to prevent and control money laundering and terrorism financing.
Finally, the Colombian Criminal Code introduced criminal rules and regulations to prevent, control, detect, eliminate and adjudicate
all matters related to financing terrorism and money laundering, including the omission of reports on cash transactions, mobilization
or storage of cash, and the lack of controls.
Regulatory
Framework for Subsidiaries that are Non-Participants in the Financial Sector
All
of Bancolombia’s Colombian subsidiaries that are not part of the financial services are governed by the laws and regulations
embodied in the Colombian Civil Code and the Colombian Commercial Code as well as any regulations issued by the Colombian Superintendency
of Industry and Commerce and the Superintendency of Corporations or any other type of special regulations that may be applicable
to the commercial and industrial activities carried out by said subsidiaries.
International
regulations applicable to us and our subsidiaries
FATCA
We
and most of our subsidiaries are considered foreign financial institutions (“FFIs”) under the Foreign Account Tax
Compliance Act of 2010 (“FATCA”) and must therefore comply with U.S. information reporting requirements or certification
requirements in respect of their United States accountholders and, in certain cases, their direct or indirect shareholders to
avoid becoming subject to U.S. withholding tax on certain payments made to us and our subsidiaries. The United States has entered
into intergovernmental agreements (“Model 1 IGAs”) with a number of countries pursuant to which FFIs in such a country
will report information to that country’s government for transmittal to the IRS. FFIs in these countries are generally not
subject to U.S. withholding under FATCA. Among the countries where we operate, Colombia, the Cayman Islands, and Panama has each
signed a Model 1 IGA. Peru has reached an agreement in substance with the IRS, and consented to be treated as having a Model 1
IGA in effect. In addition, certain of our subsidiaries located in other countries have transmitted directly to the IRS the information
required pursuant to FATCA, since these other countries have not entered into a Model 1 IGA. Given the size and the scope of our
international operations, we have taken and intend to continue to take necessary steps to comply with FATCA, including transmitting
to the applicable authorities the reports required under FATCA.
However,
if certain affiliates of us cannot enter into agreements with the IRS or satisfy the requirements thereunder, certain payments
to us or our Subsidiaries may be subject to withholding under FATCA. The possibility of such withholding and the need for accountholders
and investors to provide certain information may discourage some customers or potential customers from banking with us, thereby
adversely affecting our results of operations and financial condition. In addition, compliance with the terms of agreements entered
into with the IRS and with FATCA and any other regulations may increase our compliance costs.
Description
of the Notes
As
used below in this “Description of the Notes” section, the “Bank” means Bancolombia S.A., a sociedad
anónima organized and existing under the laws of Colombia, and its successors, but not any of its subsidiaries. The
Bank will issue the Notes described in this prospectus supplement under an indenture (the “Indenture”) to be executed
between the Bank and The Bank of New York Mellon, as trustee (the “Trustee”). The terms of the Notes include those
set forth in the Indenture and those made part of the Indenture by reference to the Trust Indenture Act. You may obtain a copy
of the Indenture from the Bank at its address set forth elsewhere in this prospectus supplement.
The
following is a summary of the material terms and provisions of the Notes. The following summary does not purport to be a complete
description of the Notes and is subject to the detailed provisions of, and qualified in its entirety by reference to, the Indenture.
You can find definitions of certain terms used in this description under the heading “—Certain Definitions.”
The
Notes will be issued in fully registered form in denominations of US$200,000 and integral multiples of US$1,000 in excess thereof
and will be represented by one or more global securities registered in the name of The Depository Trust Company (“DTC”)
or its nominee. Beneficial interests in the Notes will be shown on, and transfers thereof will be effected only through, records
maintained by the DTC and its participants.
General
Indenture
The
Notes will be issued under an Indenture to be executed between the Bank and the Trustee. The Indenture is an agreement among us
and The Bank of New York Mellon, as trustee.
The
Trustee has the following two main roles, subject to the terms of the Indenture:
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First, the Trustee can enforce your rights against us if we default
in respect of the Notes. There are some limitations on the extent to which the Trustee acts on your behalf, which are described
under “—Events of Default”; and
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Second, the Trustee performs administrative duties for us, such
as making interest payments and sending notices to holders of Notes.
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Principal,
Maturity and Interest
The
Notes will mature on , 20 . The Notes will bear interest at % per
year on the outstanding principal amount thereof from and including the closing date of the Notes offering to, but excluding,
the date of maturity or earlier redemption date of the Notes.
Interest
on the Notes will be payable semi-annually, in arrears, on and
of each year (each, an “Interest Payment Date”), commencing on ,
2020, to Holders of record at the close of business on the Business Day immediately prior to each such Interest Payment Date,
as the case may be, immediately preceding the relevant interest payment date. Interest on the Notes will be computed on the basis
of a 360-day year of twelve 30-day months. If any interest payment date or final maturity date is a day that is not a Business
Day, the related payment of the principal and interest will be made on the next succeeding Business Day as if it were made on
the date the payment was due.
In
the event that the Bank defaults on the payment of principal, premium, if any, interest or such other amounts as may be payable
in respect of the Notes, the Bank will pay interest on overdue principal and premium, if any, at the rate borne by the Notes plus
1% per year and it will pay interest on overdue installments of interest at the same rate to the extent lawful.
The
Bank will pay the principal of and interest on the Notes and any Additional Amounts (as defined below) in U.S. Dollars.
Additional
Notes
After
the Issue Date, the Bank may issue additional Notes under the Indenture having identical terms and conditions to the Notes to
be issued on the early settlement date (the “Additional Fungible Notes”), except with respect to (1) issue date, (2)
issue price, (3) first interest payment date and (4) any adjustments necessary in order to conform to and ensure compliance with
the Securities Act (or other applicable securities laws), which are not adverse in any material respect to any Holder of any outstanding
Notes (other than such Additional Fungible Notes). Any Additional Fungible Notes are expected to be part of the same issue as
the Notes to be issued on the early settlement date and will be treated as a single series with the Notes to be issued on the
early settlement date, including for purposes of voting, redemptions and offers to purchase. Pursuant to the Indenture, no Additional
Fungible Notes may be issued unless such Additional Fungible Notes will be fungible with the Notes to be issued on the early settlement
date for U.S. federal income tax purposes.
Additional
Amounts
All
payments made by the Bank under or with respect to the Notes will be made free and clear of and without withholding or deduction
for or on account of any present or future Taxes imposed or levied by or on behalf of any Taxing Authority in any jurisdiction
in which the Bank is organized or is otherwise resident for tax purposes or any jurisdiction from or through which payment is
made (each a “Relevant Taxing Jurisdiction”), unless the Bank or the paying agent is required to withhold or deduct
Taxes by law or by the interpretation or administration thereof. If the Bank or the paying agent is required to withhold or deduct
any amount for or on account of Taxes imposed by a Relevant Taxing Jurisdiction, from any payment made under or with respect to
the Notes, the Bank will pay such additional amounts (“Additional Amounts”) as may be necessary so that the net amount
received by each Holder (including Additional Amounts) after such withholding or deduction will equal the amount the Holder would
have received if such Taxes had not been withheld or deducted; provided, however, that no Additional Amounts will be payable with
respect to any Tax that would not have been imposed, payable or due:
(1)
but for the existence of any present or former connection between the Holder (or the beneficial owner of, or Person ultimately
entitled to obtain an interest in, such Notes) and the Relevant Taxing Jurisdiction (including being a citizen or resident or
national of, or carrying on a business or maintaining a permanent establishment in, or being physically present in, the Relevant
Taxing Jurisdiction) other than the mere holding of the Notes or enforcement of rights thereunder or the receipt of payments in
respect thereof;
(2)
but for the failure to satisfy any certification, identification or other reporting requirements whether imposed by statute, treaty,
regulation or administrative practice, provided, however, that the Bank has delivered a request to the Holder to comply with such
requirements at least 30 days prior to the date by which such compliance is required; or
(3)
if the presentation of Notes (where presentation is required) for payment had occurred within 30 days after the date such payment
was due and payable or was duly provided for, whichever is later.
In
addition, Additional Amounts will not be payable if the beneficial owner of, or Person ultimately entitled to obtain an interest
in, such Notes had been the Holder and such beneficial owner would not be entitled to the payment of Additional Amounts by reason
of clause (1), (2), or (3) above. In addition, Additional Amounts will not be payable with respect to any Tax which is payable
otherwise than by withholding from payments of, or in respect of principal of, or any interest on, the Notes.
Whenever
in the Indenture or in this “Description of the Notes” there is mentioned, in any context, the payment of amounts
based upon the principal amount of the Notes or of principal, interest or of any other amount payable under or with respect to
any of the Notes, such mention shall be deemed to include mention of the payment of Additional Amounts to the extent that, in
such context, Additional Amounts are, were or would be payable in respect thereof.
Notwithstanding
the foregoing, all payments shall be made net of any deduction or withholding imposed or collected pursuant to Sections 1471 through
1474 of the U.S. Internal Revenue Code of 1986, as amended (the “Code”), any current or future regulations or official
interpretations thereof, any agreement entered into pursuant to Section 1471(b) of the Code, or any fiscal or regulatory legislation,
rules or practices adopted pursuant to any intergovernmental agreement entered into in connection with the implementation of such
Sections of the Code (or any law implementing such an intergovernmental agreement) (any such withholding is defined as a “FATCA
Withholding Tax”), and no additional amounts will be payable as a result of any such FATCA Withholding Tax.
Upon
request, the Bank will provide the Trustee with documentation satisfactory to the Trustee evidencing the payment of Additional
Amounts.
The
Bank will pay any present or future stamp, court or documentary taxes, or any other excise or property taxes, charges or similar
levies which arise in any jurisdiction from the execution, delivery or registration of the Notes or any other document or instrument
referred to therein, or the receipt of any payments with respect to the Notes, excluding any such taxes, charges or similar levies
imposed by any jurisdiction other than a jurisdiction in which the Bank is organized or is otherwise resident for tax purposes,
the United States of America or any jurisdiction in which a paying agent is located, but not excluding those resulting from, or
required to be paid in connection with, the enforcement of the Notes or any other such document or instrument following the occurrence
of any Event of Default with respect to the Notes.
Methods
of Receiving Payments on the Notes
The
Bank will make payments of principal of, and premium, if any, and interest on the Notes and any Additional Amounts represented
by global securities by wire transfer of U.S. dollars to DTC or to its nominee as the registered holder of the Notes, which will
receive the funds for distribution to the owners of beneficial interests in the Notes. The Bank has been informed by DTC that
the owners will be paid in accordance with the procedures of DTC and its participants. Neither the Bank, the Trustee nor the paying
agent shall have any responsibility or liability for any of the records of, or payments made by, DTC or its nominee.
Certificated
Notes
If
(i) the Bank notifies the Trustee in writing that DTC is no longer willing or able to act as a depositary or DTC ceases to be
registered as a clearing agency under the Exchange Act and a successor depositary is not appointed within 90 days of such
notice or cessation; (ii) the Bank, at its option, notifies the Trustee in writing that it elects to cause the issuance of
Notes in definitive form under the indenture; or (iii) upon the occurrence of certain other events as provided in the indenture,
then, upon surrender by DTC of the global Notes, certificated Notes will be issued to each person that DTC identifies as the beneficial
owner of the Notes represented by the global Notes. Upon any such issuance, the Trustee shall (upon written direction from the
Bank) register such certificated Notes in the name of such person or persons (or the nominee of any thereof) and cause the
same to be delivered thereto.
Neither
the Bank nor the Trustee shall be liable for any delay by DTC or any participant or indirect participant in identifying the beneficial
owners of the related Notes and the Bank and the Trustee may conclusively rely on, and shall be protected in relying on, instructions
from DTC for all purposes (including with respect to the registration and delivery, and the respective principal amounts, of the
Notes to be issued).
Notices
The
Bank will mail any notices to Holders at the addresses appearing in the security register maintained by the paying agent. The
Bank will consider a notice to be given at the time it is mailed. Neither the failure to give any notice to a particular Holder,
nor any defect in a notice given to a particular Holder, will affect the sufficiency of any notice given to another Holder.
Ranking
of Notes
The
Notes will at all times constitute our general senior, unsecured and unsubordinated External Liabilities and will rank pari
passu, without any preferences among themselves, with all of our other present and future unsecured and unsubordinated External
Liabilities (other than External Liabilities preferred by statute or by operation of law).
Redemption
The
Bank will not be permitted to redeem the Notes before their stated maturity, except as set forth below.
Optional
Redemption
At
any time on or prior to , 20 ( months prior to the final maturity date of the Notes), the Bank may, at its option, redeem the
Notes, in whole or in part, at any time or from time to time, on at least 10 days’ but not more than 60 days’ written
notice, at a redemption price equal to the greater of (1) 100% of the principal amount of such Notes and (2) the sum of the present
values of each remaining scheduled payment of principal and interest thereon (exclusive of interest accrued to the date of redemption),
in each case calculated as if the maturity date of the Notes were , 20 ( months prior to the scheduled maturity date of the Notes),
discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury
Rate plus basis points (the “Make-Whole Amount”), plus in each case accrued and unpaid interest and Additional Amounts
to the redemption date on the Notes to be redeemed on such date.
At
any time on or after , 20 ( months prior to the final maturity date of the Notes), the Bank may, at its option, redeem the Notes,
in whole or in part, at any time or from time to time, on at least 10 days’ but not more than 60 days’ written
notice, at a redemption price equal to 100% of the principal amount of the Notes being redeemed plus accrued and unpaid interest
and Additional Amounts to the redemption date on the Notes to be redeemed on such date.
“Treasury
Rate” means, with respect to any redemption date, the rate per annum equal to the semi-annual equivalent yield to maturity
or interpolated maturity (on a day count basis) of the Comparable Treasury Issue, assuming a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for such redemption date.
“Comparable
Treasury Issue” means the U.S. Treasury security or securities selected by an Independent Investment Banker as having an
actual or interpolated maturity comparable to the remaining term of the Notes to be redeemed that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing new issues of corporate debt securities of a comparable
maturity to the remaining term of such Notes.
“Independent
Investment Banker” means one of the Reference Treasury Dealers appointed by the Bank.
“Comparable
Treasury Price” means, with respect to any redemption date (1) the average of the Reference Treasury Dealer Quotations quoted
to an entity selected by us for such redemption date, after excluding the highest and lowest such Reference Treasury Dealer Quotation
or (2) if such entity is quoted fewer than four such Reference Treasury Dealer Quotations, the average of all such quotations.
“Reference
Treasury Dealer” means Citigroup Global Markets Inc. or its respective affiliates which are primary U.S. government securities
dealers, or J.P. Morgan Securities LLC or its affiliates which are primary U.S. government securities dealers, and two other leading
primary U.S. government securities dealers in New York City reasonably designated by the Bank; provided, however, that if any
of the foregoing shall cease to be a primary U.S. government securities dealer in New York City (a “Primary Treasury Dealer”),
the Bank will substitute therefor another Primary Treasury Dealer.
“Reference
Treasury Dealer Quotation” means, with respect to each Reference Treasury Dealer and any redemption date, the average, as
determined by an entity selected by the Bank, of the bid and asked prices for the Comparable Treasury Issue (expressed in each
case as a percentage of its principal amount) quoted in writing to an Independent Investment Banker selected by the Bank by such
Reference Treasury Dealer at 3:30 p.m. (New York City time) on the third business day in New York and Medellín, Colombia
preceding such redemption date.
Optional
Redemption upon a Tax Event
At
any time after the Issue Date, the Bank will have the right to redeem the Notes in whole, but not in part, at a price equal to
100% of the principal amount thereof plus accrued and unpaid interest and any Additional Amounts, to the date of redemption upon
the occurrence of a Tax Event. In the case of a redemption following the occurrence of a Tax Event, the Bank must provide the
Trustee an Officers’ Certificate and an opinion of an independent legal counsel of nationally recognized standing in such
tax matters, stating that the conditions set forth in the Indenture for such exercise have been met.
Redemption
Procedures
Notice
of redemption must be given to Holders not less than 10 nor more than 60 days prior to the redemption date. The redemption notice
shall include, among other things, the redemption date, the redemption price, the identity of Notes selected for redemption (in
the case of a redemption in part) or the method by which such Notes will be selected, any conditions to which the redemption of
the Notes may be subject (which may include the consummation of a refinancing or other transaction), and a statement that, on
the redemption date, the redemption price shall become due and payable upon each such Note or portion thereof to be redeemed,
and, if applicable, that interest thereon shall cease to accrue on and after that date. On and after the redemption date, interest
will cease to accrue on the Notes (unless the Bank defaults in the payment of the redemption price and accrued and unpaid interest).
On the Business Day immediately preceding the redemption date, the Bank will deposit with the Trustee money sufficient to pay
the redemption price of and (unless the redemption date shall be an interest payment date) accrued and unpaid interest payable
up to (but excluding) the redemption date on the Notes to be redeemed on such date.
If
less than all of the notes are to be redeemed, the Trustee shall select the Notes to be redeemed in compliance with the requirements
of the principal national securities exchange, if any, on which the Notes are listed as instructed by the Bank in writing or,
if the Notes are not then listed on a national securities exchange, on a pro rata basis, by lot or in another fair and reasonable
manner chosen at the discretion of the Trustee, subject to the procedures of DTC.
Certain
Covenants
The
Indenture will contain, among others, the following covenants:
Mergers,
Consolidations, Etc.
The
Bank will not consolidate with or merge into, or sell, lease, convey or transfer, in one transaction or a series of transactions,
all or substantially all of the Bank’s properties and assets to any Person, unless:
(1)
the surviving entity, if other than the Bank, is organized and existing under the laws of Colombia or the United States and assumes
via supplemental indenture all of the Obligations under the Notes and the Indenture;
(2)
the Bank, or the surviving entity, as the case may be, is not immediately after such transaction in Default under the Notes and
the Indenture; and
(3)
the Bank or the surviving entity will have delivered to the Trustee an Officers’ Certificate and an Opinion of Counsel,
each in form and substance satisfactory to the Trustee, stating that such consolidation, merger, sale, assignment, conveyance,
transfer, lease or other disposition, and if a supplemental indenture is required in connection with such transaction, such supplemental
indenture, complies with the requirements of the Indenture and that all conditions precedent in the Indenture relating to such
transaction have been satisfied and that the Indenture and the Notes constitute legal, valid and binding obligations of the surviving
entity, enforceable in accordance with their terms.
Maintenance
of Office or Agent for Service of Process
The
Bank shall maintain an office or agent for service of process in the Borough of Manhattan, The City of New York, where notices
to and demands upon the Bank in respect of the Notes and the Indenture may be served. Initially this agent will be CT Corporation
System, and the Bank will agree not to change the designation of such agent without prior notice to the Trustee and designation
of a replacement agent in the Borough of Manhattan, The City of New York.
Provision
of Financial Statements and Reports
At
all times when the Bank is required to file any financial statements or reports with the SEC, the Bank shall use its best efforts
to file all required statements or reports in a timely manner in accordance with the rules and regulations of the SEC. In addition,
at any time when the Bank is not subject to or is not current in its reporting obligations under Section 13 or Section 15(d)
of the Exchange Act and is not exempt from the registration requirements of Section 12(g) of the Exchange Act pursuant to Rule
12g3-2(b) thereunder and any Notes remain outstanding, the Bank will make available, upon request, to any Holder or any prospective
purchaser of the Notes, who so requests in writing, substantially the same financial and other information that we would be required
to include and file in an annual report on Form 20-F and reports on Form 6-K.
Delivery
of such reports, information and documents to the Trustee shall be for informational purposes only and the Trustee’s receipt
of such reports, information and documents shall not constitute constructive notice of any information contained therein or determinable
from information contained therein, including the Bank’s compliance with any of the covenants contained in the Indenture
(as to which the Trustee will be entitled to conclusively rely upon an Officers’ Certificate).
Further
Actions
The
Bank will, at its own cost and expense, satisfy any condition or take any action (including the obtaining or effecting of any
necessary consent, approval, authorization, exemption, filing, license, order, recording or registration) at any time required,
as may be necessary or as the Trustee may reasonably request, in accordance with applicable laws and/or regulations, to be taken,
fulfilled or done in order to (i) enable the Bank to lawfully enter into, exercise its rights and perform and comply with its
obligations under the Indenture and the Notes, as the case may be; (ii) ensure that its obligations under the Indenture and the
Notes are legally binding and enforceable; (iii) make the Indenture and the Notes admissible in evidence in the courts of the
State of New York and Colombia; (iv) preserve the enforceability of, and maintain the Trustee’s rights under, the Indenture;
and (v) respond to any reasonable requests received from the Trustee to enable the Trustee to facilitate the Trustee’s exercise
of its rights and performance of its obligations under the Indenture and the Notes, including exercising and enforcing its rights
under and carrying out the terms, provisions and purposes of the Indenture and the Notes.
Events
of Default
Each
of the following is an “Event of Default”:
(1)
failure by the Bank to pay interest on any of the Notes when it becomes due and payable and the continuance of any such failure
for thirty (30) days;
(2)
failure by the Bank to pay the principal on any of the Notes when it becomes due and payable, whether at stated maturity or otherwise;
(3)
the Bank pursuant to or within the meaning of any Bankruptcy Law:
(a)
commences a voluntary case;
(b)
consents to the entry of an order for relief against it in an involuntary case;
(c)
consents to the appointment of a Custodian of it or for all or substantially all of its assets;
(d)
makes a general assignment for the benefit of its creditors;
(e)
is subject to any other Intervention Measure or Preventive Measure; or
(4)
The SFC enters an order or decree under any Bankruptcy Law that:
(a)
is for relief against the Bank as debtor in an involuntary case;
(b)
appoints a Custodian of the Bank or a Custodian for all or substantially all of the assets of the Bank; or
(c)
orders the liquidation of the Bank, and the order or decree remains unstayed and in effect for sixty (60) days.
If
the Bank fails to make payment of principal, interest or Additional Amounts, if any, on the Notes (and, in the case of payment
of interest or Additional Amounts, such failure to pay continues for thirty (30) days), each Holder has the right to demand and
collect under the Indenture and the Bank will pay to the Holders the applicable amount of such due and payable principal, accrued
and unpaid interest and Additional Amounts, if any, on the Notes. To the extent that the SFC has adopted an Intervention Measure
(as defined below) in connection with the Bank under the Colombian Bankruptcy Law, however, the Holders of the Notes would not
be able to commence independent collection proceedings to recover amounts owed.
The
Trustee is not to be charged with knowledge of any Default or Event of Default or knowledge of any cure of any Default or Event
of Default unless either (i) an authorized officer of the Trustee with direct responsibility for the Indenture has actual knowledge
of such Default or Event of Default or (ii) written notice of such Default or Event of Default has been given to the Trustee by
the Bank or any Holder.
Consequences
of an Event of Default
The
Bank will deliver to the Trustee, within 10 business days after obtaining actual knowledge thereof, written notice of any Default
or Event of Default that has occurred and is still continuing, its status and what action the Bank is taking or proposing to take
in respect thereof. The Indenture provides that the Trustee may withhold notice to the Holders of any Default or Event of Default
(except in payment of principal of, or interest or premium (and Additional Amounts), if any, on the notes) if the Trustee in good
faith determines that it is in the interest of the Holders.
If
an Event of Default (other than an Event of Default described in clauses (3) and (4) above under ‘‘— Events
of Default”) shall have occurred and be continuing, either the Trustee or the Holders of at least 25% in aggregate principal
amount of the notes, by written notice to the Bank (and to the Trustee if notice is given by the Holders), may declare the principal
amount of (and interest on) all the notes to be due and payable immediately. If an Event of Default described in clauses (3) and
(4) above under “— Events of Default” shall have occurred, the principal of all outstanding notes, the accrued
interest and Additional Amounts, if any, shall become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The notes owned by the Bank or any of its affiliates shall be deemed not to be outstanding
for, among other purposes, determining the amount of notes that have provided written notice or declaring the acceleration of
the maturity of the notes.
If
the Bank cures all Defaults or such Defaults have been waived (except the nonpayment of principal of and accrued interest or premium
and Additional Amounts on the notes) and certain other conditions are met, such acceleration may be rescinded and annulled by
the Holders of not less than a majority in aggregate principal amount of the notes.
Subject
to the provisions of the Indenture relating to the duties of the Trustee, in case an Event of Default will occur or be continuing,
the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request or direction
of any of the Holders, unless such Holders shall have offered to the Trustee security or indemnity satisfactory to the Trustee.
Subject to such provision for indemnification, the Holders of a majority in principal amount of the notes will have the right
to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust
or power conferred on the Trustee with respect to the notes; provided that the Trustee shall have the right to decline to follow
any such direction if the Trustee shall determine that the action so directed conflicts with any law or the provisions of the
Indenture, if the Trustee shall determine that such action would be prejudicial to Holders not taking part in such direction,
or if such direction would involve the Trustee in personal liability.
No
Holder shall have any right to institute any proceeding, judicial or otherwise, with respect to the Indenture, or for the appointment
of a receiver or trustee, or for any other remedy thereunder, unless:
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such
Holder has previously given written notice to the Trustee of a continuing Event of Default
with respect to the notes;
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·
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the
Holders of not less than 25% in principal amount of the outstanding notes shall have
made written request to the Trustee to institute proceedings in respect of such Event
of Default in its own name as Trustee thereunder;
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such
Holder or Holders have offered to the Trustee indemnity satisfactory to the Trustee against
the costs, expenses and liabilities to be incurred in compliance with such request;
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the
Trustee for 60 days after its receipt of such notice, request and offer of indemnity
has failed to institute any such proceeding; and
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no
direction inconsistent with such written request has been given to the Trustee during
such 60-day period by the Holders of a majority in principal amount of the outstanding
notes, it being understood and intended that no one or more of such Holders shall have
any right in any manner whatsoever by virtue of, or by availing of, any provision of
the Indenture to affect, disturb or prejudice the rights of any other of such Holders,
or to obtain or to seek to obtain priority or preference over any other of such Holders
or to enforce any right under the Indenture, except in the manner therein provided and
for the equal and ratable benefit of all such Holders.
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Notwithstanding
any other provision of the Indenture, the Holder of any note shall have the right, which is absolute and unconditional, to receive
payment of the principal of (and premium, if any) and interest and Additional Amounts, if any, on such note and to institute suit
for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder.
Book-entry
and other indirect Holders should consult their bank or brokers for information on how to give notice or direction to or make
a request of the Trustee and how to declare or cancel an acceleration of the maturity.
Satisfaction
and Discharge
The
Indenture will be discharged and will cease to be of further effect (except as to rights of registration of transfer or exchange
of Notes, which shall survive until all Notes have been canceled) as to all outstanding Notes when either:
(1)
all the Notes that have been authenticated and delivered (except lost, stolen or destroyed Notes which have been replaced or paid
and Notes for whose payment money has been deposited in trust or segregated and held in trust by the Bank and thereafter repaid
to the Bank or discharged from this trust) have been delivered to the Trustee for cancellation, or
(2)
(a) all Notes not delivered to the Trustee for cancellation otherwise have become due and payable and the Bank has irrevocably
deposited or caused to be deposited with the Trustee trust funds in trust solely for the benefit of the Holders in an amount of
money sufficient to pay and discharge the entire Indebtedness (including all principal and accrued interest) on the Notes not
theretofore delivered to the Trustee for cancellation,
(b) the
Bank has paid all sums payable by it under the Indenture,
(c) the
Bank has delivered irrevocable instructions to the Trustee to apply the deposited money toward the payment of the Notes at maturity,
and
(d) the
Holders have a valid, perfected, exclusive security interest in this trust.
In
addition, the Bank must deliver an Officers’ Certificate and an Opinion of Counsel to the Trustee stating that all conditions
precedent to satisfaction and discharge have been satisfied.
Transfer
and Exchange
A
Holder will be able to register the transfer of or exchange Notes only in accordance with the provisions of the Indenture. The
registrar may require a Holder, among other things, to furnish appropriate endorsements and transfer documents and to pay any
taxes and fees required by law or permitted by the Indenture. Without the prior consent of the Bank, the registrar is not required
to register the transfer or exchange of a Note between a record date and the next succeeding interest payment date.
The
Notes will be issued in registered form and the registered Holder will be treated as the owner of such Note for all purposes.
Purchase
of Notes
The
Bank may purchase Notes at any price in the open market, in privately negotiated transactions or otherwise, subject to the applicable
laws and regulations then in effect. Notes so purchased by the Bank may be held, resold in accordance with the Securities Act
or any exemption therefrom, or surrendered to the Trustee for cancellation.
Amendment,
Supplement and Waiver
Subject
to certain exceptions, the Indenture or the Notes may be amended with the consent (which may include consents obtained in connection
with a tender offer or exchange offer for Notes) of the Holders of at least a majority in aggregate principal amount of the Notes
then outstanding, and any existing Default under, or compliance with any provision of, the Indenture may be waived (other than
any continuing Default in the payment of the principal or interest on the Notes) with the consent (which may include consents
obtained in connection with a tender offer or exchange offer for Notes) of the Holders of a majority in aggregate principal amount
of the Notes then outstanding; provided, that without the consent of each Holder affected, no amendment or waiver may:
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(1)
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reduce,
or change the maturity of, the principal of any Note;
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(2)
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reduce
the rate of or extend the time for payment of interest on any Note;
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(3)
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change
the currency or place of payment of principal of or interest on the Notes;
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(4)
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reduce
the redemption price of any Note;
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(5)
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reduce
the percentage of Holders necessary to consent to an amendment or waiver to the Indenture
or the Notes;
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(6)
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impair
the rights of Holders to receive payments of principal of or interest on the Notes; or
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(7)
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make
any change in these amendment and waiver provisions.
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Notwithstanding
the foregoing, the Bank and the Trustee may amend the Indenture or the Notes without the consent of any Holder to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Notes in addition to or in place of certificated Notes, to provide for
the assumption of the Bank’s obligations to the Holders in the case of a merger, consolidation or sale of all or substantially
all of the assets in accordance with “Description of the Notes—Certain Covenants—Mergers, Consolidations, Etc.,”
to add any applicable covenants, to surrender any right or power under the Indenture conferred to the Bank not for the benefit
of Holders, to conform the text of the Indenture or the Notes to any provision in this section “Description of the Notes,”,
to provide for the issuance of Additional Notes, to provide for the acceptance of a successor trustee or to make any change that
would provide any additional rights or benefits to the Holders or that does not adversely affect the rights of any Holder in any
material respect or, in the case of the Indenture, to maintain the qualification of the Indenture under the Trust Indenture Act.
No
Personal Liability of Directors, Officers, Employees and Stockholders
No
director, Officer, employee, incorporator or stockholder of the Bank will have any liability for any obligations of the Bank under
the Notes or the Indenture or for any claim based on, in respect of, or by reason of, such obligations or their creation. Each
Holder by accepting a Note waives and releases all such liability. The waiver and release are part of the consideration for issuance
of the Notes. The waiver may not be effective to waive liabilities under the federal securities laws. It is the view of the SEC
that this type of waiver is against public policy.
Concerning
the Trustee
The
Bank of New York Mellon is the Trustee under the Indenture and has been appointed by the Bank as registrar and paying agent with
regard to the Notes. The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of the
Bank, to obtain payment of claims in certain cases, or to realize on certain assets received in respect of any such claim as security
or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest
(as defined in the Indenture), it must eliminate such conflict or resign.
The
Holders of a majority in principal amount of the then outstanding Notes will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the Trustee, subject to certain exceptions. The Indenture
provides that, in case an Event of Default occurs and is not cured, the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent person in similar circumstances in the conduct of his own affairs. Subject to such provisions,
the Trustee will be under no obligation to exercise any of its rights or powers under the Indenture at the request of any Holder,
unless such Holder shall have offered to the Trustee security and indemnity satisfactory to the Trustee.
Unclaimed
Amounts
Any
money deposited with the Trustee or paying agent or held by the Bank, in trust, for the payment of principal, premium, interest
or any Additional Amounts, that remains unclaimed for two (2) years after such amount becomes due and payable shall be paid to
the Bank upon its request or, if held by the Bank, shall be discharged from such trust. The Holder will look only to the Bank
for payment thereof, and all liability of the Trustee or paying agent shall thereupon cease. However, the Trustee or paying agent
may at the expense of the Bank cause to be mailed to Holders at the last address of record, notice that the money remains unclaimed
and any unclaimed balance of such money remaining, after a specified date, will be repaid to the Bank.
No
Sinking Fund
The
Notes will not be entitled to the benefit of a sinking fund.
Listing
We
will apply to have the Notes listed on the New York Stock Exchange.
Governing
Law
The
Indenture and the Notes will be governed by, and construed in accordance with, the laws of the State of New York.
Notwithstanding
the foregoing, the authorization and execution of such documentation by the Bank will be governed by the laws of Colombia.
Currency
Rate Indemnity
The
Bank has agreed that, if a judgment or order made by any court for the payment of any amount in respect of any Notes is expressed
in a currency other than U.S. dollars, the Bank will indemnify the relevant Holder against any deficiency arising from any variation
in rates of exchange between the date as of which the denomination currency is notionally converted into the judgment currency
for the purposes of the judgment or order and the date of actual payment. This indemnity will constitute a separate and independent
obligation from the Bank’s other obligations under the Indenture, will give rise to a separate and independent cause of
action, will apply irrespective of any indulgence granted from time to time and will continue in full force and effect notwithstanding
any judgment or order for a liquidated sum or sums in respect of amounts due under the Indenture or the Notes.
Certain
Definitions
Set
forth below is a summary of certain of the defined terms used in the Indenture. Reference is made to the Indenture for the full
definition of all such terms.
“amend”
means to amend, supplement, restate, amend and restate or otherwise modify; and “amendment” shall have a correlative
meaning.
“asset”
means any asset or property.
“Bankruptcy
Law” means the provisions of the Financial Statute concerning bankruptcy of financial institutions, Decree 2555 and any
other Colombian law or regulation regulating the insolvency of financial entities from time to time.
“Board
of Directors” shall mean, with respect to any Person, (i) in the case of any corporation, the board of directors of such
Person, (ii) in the case of any limited liability company, the board of managers of such Person, (iii) in the case of any partnership,
the board of directors of the general partner of such Person and (iv) in any other case, the functional equivalent of the foregoing.
“Business
Day” means any day other than a Saturday, Sunday or other day on which banking institutions in New York or Colombia are
authorized or required by law to close.
“Colombian
Banking GAAP” means generally accepted accounting principles as prescribed by the SFC for banks licensed to operate in Colombia,
consistently applied, as in effect from time to time.
“Custodian”
means any receiver, trustee, assignee, liquidator or similar official under any Bankruptcy Law.
“Decree
2555” means Decree 2555 of 2010, as amended from time to time.
“Default”
means (1) any Event of Default or (2) any event, act or condition that, after notice or the passage of time or both, would be
an Event of Default.
“External
Liabilities” means any liabilities to third parties that constitute external debt of the Bank (pasivo externo) under
Colombian banking laws and accounting principles, whether outstanding on the Issue Date or thereafter created, incurred or assumed.
Under Colombian banking laws and accounting principles, “external debt” (pasivo externo) means, in the case
of the Bank, any and all liabilities to third parties, as reflected in the financial statements of the Bank from time to time
or any and all liabilities to third parties in the event of liquidation.
“Financial
Statute” means Decree 663 of 1993, as amended, of the Republic of Colombia.
“Holder”
means any registered holder, from time to time, of the Notes.
“Indebtedness”
means, with respect to any Person, any obligation for the payment or repayment of money borrowed or otherwise evidenced by debentures,
Notes, bonds, or similar instruments or any other obligation (including all trade payables and other accounts payable and including
payments relating to bank deposits) that would appear or be treated as indebtedness upon a balance sheet if such Person prepared
it in accordance with Colombian Banking GAAP.
“Interest”
means, with respect to the Notes, interest on the Notes.
“Intervention
Measures” means any of the measures described in article 114 of the Financial Statute, as amended from time to time, that
allow the SFC to take possession of a financial institution, Decree 2555 as amended, and any other Colombian law or regulation
regulating the administrative takeover of a financial institution.
“Issue
Date” means the date on which the Notes are originally issued.
“Obligation”
means any principal, interest, penalties, fees, indemnification, reimbursements, costs, expenses, damages and other liabilities
payable under any Indebtedness.
“Officer”
means any of the following of the Bank: the Chairman of the Board of Directors, the Chief Executive Officer, the Chief Financial
Officer, the President, any Vice President, the Treasurer or the Secretary.
“Officers’
Certificate” means a certificate signed by two Officers.
“Opinion
of Counsel” means an opinion from legal counsel who is reasonably acceptable to the Trustee. The counsel may be an employee
of or counsel to the Bank or any subsidiary of the Bank.
“Person”
means any individual, corporation, partnership, limited liability company, joint venture, incorporated or unincorporated association,
joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof or other
entity of any kind.
“Preventive
Measures” means the measures described in article 113 of the Financial Statute, as amended from time to time, that the SFC
can take with respect to a financial institution prior to and in order to avoid having to take an Intervention Measure, Decree
2555 as amended, and any other Colombian law or regulation regulating such type of measures.
“Principal”
means, with respect to the Notes, as of any date, the principal of, and premium, if any, on the Notes.
“SEC”
means the U.S. Securities and Exchange Commission.
“Securities
Act” means the U.S. Securities Act of 1933, as amended.
“SFC”
means the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia) or any other successor governmental
entity in charge of the surveillance of financial institutions in Colombia.
“Tax”
shall mean any tax, duty, levy, impost, assessment or other governmental charge (including penalties, interest and any other liabilities
related thereto).
A
“Tax Event” shall occur if, as a result of any change in or amendment to the laws (or any rules or regulations thereunder)
of a Relevant Taxing Jurisdiction (as defined above under “—Additional Amounts”), or any amendment to or change
in an official interpretation, administration or application of such laws, rules or regulations, or any treaties or related agreements
to which the Relevant Taxing Jurisdiction is a party (including a holding by a court of competent jurisdiction), which change
or amendment becomes effective or, in the case of a change in official position, is announced on or after the issue date of the
Notes or, if later, the date on which the applicable Relevant Taxing Jurisdiction became a Relevant Taxing Jurisdiction, the Bank
has or will become obligated to pay additional amounts as described above under “—Additional Amounts,” and such
obligation cannot be avoided by the Bank taking reasonable measures available to it.
“Taxing
Authority” shall mean any government or political subdivision or territory or possession of any government or any authority
or agency therein or thereof having power to tax.
“Trust
Indenture Act” means the Trust Indenture Act of 1939, as amended (15 U.S.C. §§77aaa-77bbbb).
Tax
Considerations
Colombian
Tax Considerations
The
following summary contains a description of the principal Colombian income tax considerations in connection with the purchase,
ownership and sale of the Notes, but does not purport to be a comprehensive description of all Colombian tax considerations that
may be relevant to a decision to purchase the Notes. This summary does not describe any tax consequences arising under the laws
of any state, locality or taxing jurisdiction other than those of Colombia.
This
summary is based on the tax laws of Colombia as in effect on the date of this prospectus supplement, as well as regulations, rulings
and decisions in Colombia available on or before such date and now in effect. All of the foregoing is subject to change, and change
could apply retroactively and could affect the continued validity of this summary.
Prospective
purchasers of the Notes should consult their own tax advisors as to Colombian tax consequences of the purchase, ownership and
sale of the Notes, including, in particular, the application of the tax considerations discussed below to their particular situations,
as well as the application of national, sub-national, local, foreign or other tax laws.
Article
25 of the Estatuto Tributario (“Colombian Tax Code”) provides that loans obtained outside of Colombia (i.e.
when the Holders of the notes are not resident or domiciled in Colombia for tax purposes) by Colombian finance corporations or
banks do not generate taxable income in Colombia, and account receivables will not be considered to be “owned” in
Colombia.
Consequently,
under current Colombian law, payments made by financial institutions or banks in Colombia of principal and interest on the Notes
to Holders of the Notes who are not resident or domiciled in Colombia are not subject to Colombian income tax, and no income tax
will be withheld from payments by us to Holders of the Notes not resident or domiciled in Colombia.
In
addition, and given that receivables on the Notes will be deemed to be a loan owned outside of Colombia, under article 266 (3
and 6) of the Colombian Tax Code, income or gains realized on the sale or other disposition of the Notes will not be sourced in
Colombia, but they will be considered as foreign income or gains not to be subject to Colombian income tax or withholdings provided
that the holder of the Notes is neither a Colombian resident for tax purposes nor is domiciled in Colombia.
United
States Federal Income Tax Considerations
This
section describes the material United States federal income tax consequences of owning the Notes we are offering. It applies to
you only if you acquire Notes in the offering and you hold your Notes as capital assets for tax purposes. This section addresses
only United States federal income taxation and does not discuss all of the tax consequences that may be relevant to you in light
of your individual circumstances, including foreign, state or local tax consequences, and tax consequences arising under the Medicare
contribution tax on net investment income or the alternative minimum tax. This section does not apply to you if you are a member
of a class of holders subject to special rules, such as:
|
·
|
a
dealer in securities,
|
|
·
|
a
trader in securities that elects to use a mark-to-market method of accounting for your
securities holdings,
|
|
·
|
a
life insurance company,
|
|
·
|
a
tax-exempt organization,
|
|
·
|
a
person that owns Notes that are a hedge or that are hedged against interest rate risks,
|
|
·
|
a
person that owns Notes as part of a straddle or conversion transaction for tax purposes,
|
|
·
|
a
person that purchases or sells Notes as part of a wash sale for tax purposes, or
|
|
·
|
a
United States holder (as defined below) whose functional currency for tax purposes is
not the U.S. dollar.
|
If
you purchase Notes at a price other than the offering price, the amortizable bond premium or market discount rules may also apply
to you. You should consult your tax advisor regarding this possibility.
This
section is based on the Internal Revenue Code of 1986, as amended, its legislative history, existing and proposed regulations
under the Internal Revenue Code, published rulings and court decisions, all as currently in effect. These laws are subject to
change, possibly on a retroactive basis. There is currently no comprehensive income tax treaty between the United States and Colombia.
If
an entity or arrangement that is treated as a partnership for United States federal income tax purposes holds the Notes, the United
States federal income tax treatment of a partner will generally depend on the status of the partner and the tax treatment of the
partnership. A partner in a partnership holding the Notes should consult its tax advisor with regard to the United States federal
income tax treatment of an investment in the Notes.
Please
consult your own tax advisor concerning the consequences of owning these Notes in your particular circumstances under the Internal
Revenue Code and the laws of any other taxing jurisdiction.
UNITED
STATES HOLDERS
This
subsection describes the tax consequences to a United States holder. You are a United States holder if you are a beneficial owner
of Notes and you are:
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·
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a
citizen or resident of the United States,
|
|
·
|
a
domestic corporation,
|
|
·
|
an
estate whose income is subject to United States federal income tax regardless of its
source, or
|
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·
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a
trust if a United States court can exercise primary supervision over the trust’s
administration and one or more United States persons are authorized to control all substantial
decisions of the trust.
|
If
you are not a United States holder, this subsection does not apply to you and you should refer to “—United States
Alien Holders” below.
Payments
of Interest
You
will be taxed on interest on your Note as ordinary income at the time you receive the interest or when it accrues, depending on
your method of accounting for tax purposes.
Interest
paid by the Bank on the Notes is income from sources outside the United States for the purposes of the rules regarding the foreign
tax credit allowable to a United States holder. Interest will, depending on your circumstances, generally be “passive”
income for purposes of the rules regarding the foreign tax credit allowable to a United States holder.
Purchase,
Sale and Retirement of the Notes
Your
tax basis in your Notes will generally be the U.S. dollar cost of your Notes.
You
will generally recognize gain or loss on the sale or retirement of your Note equal to the difference between the amount you realize
on the sale or retirement, excluding any amounts attributable to accrued but unpaid interest (which will be treated as interest
payments), and your tax basis in your Note.
You
will recognize capital gain or loss when you sell or retire your Note. Capital gain of a noncorporate United States holder is
generally taxed at preferential rates, where property is held for greater than one year. The deduction of capital losses is subject
to limitations.
Information
with Respect to Foreign Financial Assets
Owners
of “specified foreign financial assets” with an aggregate value in excess of US$50,000 (and in some circumstances,
a higher threshold) may be required to file an information report with respect to such assets with their tax returns. “Specified
foreign financial assets” may include financial accounts maintained by foreign financial institutions, as well as the following,
but only if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities
issued by non-United States persons, (ii) financial instruments and contracts held for investment that have non-United States
issuers or counterparties, and (iii) interests in foreign entities. Significant penalties may apply for failing to satisfy this
filing requirement. Holders are urged to consult their tax advisors regarding the application of this legislation to their ownership
of the Notes.
UNITED
STATES ALIEN HOLDERS
This
subsection describes the tax consequences to a United States alien holder. You are a United States alien holder if you are a beneficial
owner of a Note and you are, for United States federal income tax purposes:
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·
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a
nonresident alien individual,
|
|
·
|
a
foreign corporation or
|
|
·
|
an
estate or trust that in either case is not subject to United States federal income tax
on a net income basis on income or gain from a Note.
|
If
you are a United States holder, this subsection does not apply to you.
Payments
of Interest
Under
United States federal income and estate tax law, and subject to the discussion of backup withholding below, if you are a United
States alien holder of a Note interest on a Note paid to you is exempt from United States federal income tax, including withholding
tax, whether or not you are engaged in a trade or business in the United States, unless:
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·
|
you
are an insurance company carrying on a United States insurance business to which the
interest is attributable, within the meaning of the Internal Revenue Code, or
|
|
·
|
have
an office or other fixed place of business in the United States to which the interest
is attributable and
|
|
·
|
derive
the interest in the active conduct of a banking, financing or similar business within
the United States, or are a corporation with a principal business of trading in stocks
and securities for its own account.
|
Purchase,
Sale, Retirement and Other Disposition of the Notes
If
you are a United States alien holder of a Note, you generally would not be subject to United States federal income tax on gain
realized on the sale, exchange or retirement of a Note unless:
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·
|
the
gain is effectively connected with your conduct of a trade or business in the United
States or
|
|
·
|
you
are an individual, you are present in the United States for 183 or more days during the
taxable year in which the gain is realized and certain other conditions exist.
|
For
purposes of the United States federal estate tax, the Notes will be treated as situated outside the United States and will not
be includible in the gross estate of a holder who is neither a citizen nor a resident of the United States at the time of death.
FOREIGN
ACCOUNT TAX COMPLIANCE WITHHOLDING
Certain
non-U.S. financial institutions must comply with information reporting requirements or certification requirements in respect of
their direct and indirect United States shareholders and/or United States accountholders to avoid becoming subject to withholding
on certain payments. The issuer and other non-U.S. financial institutions may accordingly be required to report information to
the IRS regarding the holders of notes and to withhold on a portion of payments under the notes to certain holders that fail to
comply with the relevant information reporting requirements (or hold notes directly or indirectly through certain non-compliant
intermediaries). However, under proposed Treasury regulations, such withholding will not apply to payments made before the date
that is two years after the date on which final regulations defining the term “foreign passthru payment” are enacted.
Moreover, such withholding would only apply to notes issued at least six months after the date on which final regulations defining
the term “foreign passthru payment” are enacted. Accordingly, the Notes should in any case not be subject to such
withholding. Holders are urged to consult their own tax advisors and any banks or brokers through which they will hold notes as
to the consequences (if any) of these rules to them.
BACKUP
WITHHOLDING AND INFORMATION REPORTING
If
you are a noncorporate United States holder, information reporting requirements, on Internal Revenue Service Form 1099, generally
would apply to payments of principal and interest on a Note within the United States, and the payment of proceeds to you from
the sale of a Note effected at a United States office of a broker.
Additionally,
backup withholding may apply to such payments if you fail to comply with applicable certification requirements or (in the case
of interest payments) are notified by the IRS that you have failed to report all interest and dividends required to be shown on
your federal income tax returns.
If
you are a United States alien holder, you are generally exempt from backup withholding and information reporting requirements
with respect to payments of principal and interest made to you outside the United States by us or another non-United States payor.
You are also generally exempt from backup withholding and information reporting requirements in respect of payments of principal
and interest made within the United States and the payment of the proceeds from the sale of a note effected at a United States
office of a broker, as long as either (i) the payor or broker does not have actual knowledge or reason to know that you are a
United States person and you have furnished a valid IRS Form W-8 or other documentation upon which the payor or broker may rely
to treat the payments as made to a non-United States person, or (ii) you otherwise establish an exemption.
Payment
of the proceeds from the sale of a Note effected at a foreign office of a broker generally will not be subject to information
reporting or backup withholding. However, a sale effected at a foreign office of a broker could be subject to information reporting
in the same manner as a sale within the United States (and in certain cases may be subject to backup withholding as well) if (i)
the broker has certain connections to the United States, (ii) the proceeds or confirmation are sent to the United States or (iii)
the sale has certain other specified connections with the United States.
You
generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed your U.S. income tax liability
(if any) by filing a refund claim with the IRS.
Underwriting
Subject
to the terms and conditions in the underwriting agreement between us and the underwriters, we have agreed to sell to each underwriter,
and each underwriter has severally and not jointly agreed to purchase from us, the principal amount of Notes that appears opposite
its name in the table below:
Underwriter
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Principal
Amount
of Notes
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Citigroup Global Markets Inc.
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US$
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J.P. Morgan Securities LLC
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|
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US$
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Total
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US$
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Valores
Banistmo, a subsidiary of Bancolombia, is acting as co-manager in connection with the offering. Valores Banistmo is not a U.S.-registered
broker-dealer and will not effect any offers or sales of Notes in the United States. Valores Banistmo may place Notes outside
the United States.
Under
the terms and conditions of the underwriting agreement, the underwriters must buy all of the Notes if the underwriters buy any
of them. The underwriters are offering the Notes, subject to prior sale, when, as and if issued to and accepted by them, subject
to approval of legal matters by their counsel, including the validity of the Notes, and other conditions contained in the underwriting
agreement, such as the receipt by the underwriters of officer’s certificates and legal opinions. The underwriters reserve
the right to withdraw, cancel or modify offers to the public and to reject orders in whole or in part.
The
Notes are a new issue of securities with no established trading market. We will apply for listing of the Notes on the NYSE. We
have been advised by the underwriters that the underwriters intend to make a market in the Notes, but they are not obligated to
do so and may stop their market-making at any time without providing any notice. We cannot assure the liquidity of the trading
market for the Notes or that an active public market for the Notes will develop. If an active public trading market for the Notes
does not develop, the market price and liquidity of the Notes may be adversely affected. If the Notes are traded, they may trade
at a discount from their initial offering price, depending on prevailing interest rates, the market for similar securities, our
operating performance and financial condition, general economic conditions and other factors.
The
Notes sold by the underwriters to the public will initially be offered at the public offering price set forth on the cover of
this prospectus supplement. If all of the Notes are not sold at the public offering price, the underwriters may change the offering
price and other selling terms. The underwriters may offer and sell the Notes through certain of their affiliates.
The
underwriters initially may offer part of the Notes directly to the public at the offering price described on the cover page of
this prospectus supplement and part to certain dealers at a price that represents a concession not in excess of %
of the principal amount of the Notes. Any underwriter may allow, and any such dealer may reallow, a concession not in excess of
% of the principal amount of the Notes. After the initial offering of the Notes, the underwriters may from time to time vary the
offering price and other selling terms.
In
order to facilitate the offering of the Notes, the underwriters may engage in transactions that stabilize, maintain or otherwise
affect the trading price of the Notes. In addition, to cover short positions or to stabilize the price of the Notes, the underwriters
may bid for, and purchase, the Notes in the open market. Finally, the underwriters may reclaim selling concessions allowed to
a particular dealer for distributing the Notes in the offering if the underwriters repurchase previously distributed Notes in
transactions to cover short positions, in stabilization transactions or otherwise. Any of these activities may stabilize or maintain
the market price of the Notes above independent market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time. These transactions may be effected in the over-the-counter market or otherwise.
Neither we nor any of the underwriters makes any representation or prediction as to the direction or magnitude of any effect that
the transactions described above may have on the price of the Notes. In addition, neither we nor any of the underwriters makes
any representation that the underwriters will engage in such transactions or that such transactions, once commenced, will not
be discontinued without notice.
In
the underwriting agreement, we have agreed (i) to indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the underwriters may be required to make in respect of those liabilities;
and (ii) that we will not offer or sell any of our debt securities with a tenor of longer than one year (other than the Notes)
outside Colombia or Panama for a period of 45 days after the date of this prospectus supplement without the prior consent of the
underwriters.
We
estimate that our expenses in connection with the sale of the Notes, other than the underwriting discount, will be approximately
US$ and are payable by us.
We
expect that the delivery of the Notes will be made against payment therefore on or about the closing date specified on the cover
page of this prospectus supplement, which is the fourth business day following the date of this prospectus supplement, or “T+4.”
Under Rule 15c6-1 of the Exchange Act, trades in the secondary market generally are required to settle in two business days, or
“T+2,” unless the parties to any such trade expressly agree otherwise. Accordingly, purchasers who wish to trade the
Notes prior to the settlement date may be required, by virtue of the fact that the Notes initially will settle in “T+4,”
to specify an alternative settlement cycle at the time of any such trade to prevent a failed settlement. Purchasers of the Notes
who wish to trade the Notes prior to the settlement date should consult their own advisor.
The
underwriters and their respective affiliates have engaged in, and may in the future engage in, investment banking, commercial
banking, financial advisory and other transactions and matters in the ordinary course of business with us and our affiliates.
They have received customary fees and commissions for these transactions. In particular, certain of the underwriters or their
affiliates may hold positions in the Old Notes for their own account and/or for the accounts of their customers. Citigroup Global
Markets Inc. and J.P. Morgan Securities LLC are acting as dealer managers in connection with the Offer. Further, Citigroup Global
Markets Inc. is acting as tender offer structuring advisor and offeror of the Old Notes in connection with the Offer, pursuant
to which all Old Notes validly tendered and not withdrawn prior to the Early Tender Date that are accepted for purchase will be
exchanged by Citigroup Global Markets Inc. for a portion of the Notes offered hereby, reducing the net proceeds of this offering
otherwise payable to us in cash by the underwriters, and we will not receive any cash proceeds of this offering to the extent
of such Exchange. Further, we will purchase from Citigroup Global Markets Inc. any Old Notes validly tendered after the Early
Tender Date that are accepted for purchase for cash in an amount equal to the purchase price paid by Citigroup Global Markets
Inc., including an amount equal to accrued and unpaid interest thereon through the date of purchase. See “Summary—Recent
Developments—Tender Offer for Outstanding Senior Notes.”
In
addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad
array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments
(including bank loans) for their own account and for the accounts of their customers. Such investments and securities activities
may involve securities and/or instruments of ours or our affiliates. If any of the underwriters or their affiliates has a lending
relationship with us, certain of those underwriters or their affiliates routinely hedge, and certain other of those underwriters
or their affiliates may hedge, their credit exposure to us consistent with their customary risk management policies. Typically,
these underwriters and their affiliates would hedge such exposure by entering into transactions which consist of either the purchase
of credit default swaps or the creation of short positions in our securities, including potentially the notes offered hereby.
Any such credit default swaps or short positions could adversely affect future trading prices of the Notes offered hereby. The
underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views
in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short
positions in such securities and instruments.
Selling
Restrictions
The
distribution of this prospectus supplement and the accompanying prospectus may be restricted by law in certain jurisdictions.
Persons into whose possession this prospectus supplement and the accompanying prospectus must inform themselves of and observe
any of these restrictions.
This
prospectus supplement and the accompanying prospectus do not constitute, and may not be used in connection with, an offer or solicitation
by anyone in any jurisdiction in which an offer or solicitation is not authorized or in which the person making an offer or solicitation
is not qualified to do so or to any person to whom it is unlawful to make an offer or solicitation.
Canada
The
Notes may be sold only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined
in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients,
as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations. Any resale
of the Notes must be made in accordance with an exemption from, or in a transaction not subject to, the prospectus requirements
of applicable securities laws.
Securities
legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this
prospectus supplement and the accompanying prospectus contain a misrepresentation, provided that the remedies for rescission
or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchaser’s
province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchaser’s
province or territory for particulars of these rights or consult with a legal advisor.
Pursuant
to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply
with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Prohibition
of Sales to EEA Retail Investors
Each
underwriter has represented, warranted and agreed that it has not offered, sold or otherwise made available and will not offer,
sell or otherwise make available any Notes which are the subject of the offering contemplated by this prospectus supplement to
any retail investor in the EEA. For the purposes of this provision:
|
(a)
|
the expression “retail investor” means a person who
is one (or more) of the following:
|
|
(i)
|
a retail client as defined in point (11) of Article 4(1) of MiFID
II; or
|
|
(ii)
|
a customer within the meaning of the Insurance Distribution Directive,
where that customer would not qualify as a professional client as defined in point (10) of Article 4(1) of MiFID II; and
|
|
(b)
|
the expression “offer” includes the communication
in any form and by and means of sufficient information on the terms of the offer and the Notes to be offered so as to enable
investors to decide to purchase or subscribe for the Notes.
|
Consequently
no key information document required by the PRIIPs Regulation for offering or selling the Notes or otherwise making them available
to retail investors in the EEA has been prepared and therefore offering or selling the Notes or otherwise making them available
to any retail investor in the EEA may be unlawful under the PRIIPs Regulation.
United
Kingdom
Each
underwriter has represented, warranted and agreed that:
|
(a)
|
it has only communicated or caused to be communicated and will
only communicate or cause to be communicated an invitation or inducement to engage in investment activity (within the meaning
of Section 21 of the Financial Services and Markets Act 2000, as amended (the “FSMA”)) received by it in connection
with this offering in circumstances in which Section 21(1) of the FSMA does not apply to the issuer; and
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|
(b)
|
it has complied and will comply with all applicable provisions
of the FSMA with respect to anything done by it in relation to the Notes in, from or otherwise involving the United Kingdom.
|
The
communication of this prospectus supplement, accompanying prospectus and any other documents or materials relating to the offering
have not been approved by an authorized person for the purposes of Section 21 of the FSMA. Accordingly, such documents and/or
materials are not being distributed to, and must not be passed on to, persons in the United Kingdom save in circumstances where
section 21(1) of the FSMA does not apply. This prospectus supplement and accompanying prospectus is for distribution only
to persons who (i) have professional experience in matters relating to investments falling within Article 19(5) of the
Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended, the “Financial Promotion Order”),
(ii) are persons falling within Article 49(2)(a) to (d) (“high net worth companies, unincorporated associations
etc.”) of the Financial Promotion Order or (iii) are outside the United Kingdom (all such persons together being referred
to as “relevant persons”). This document is directed only at relevant persons and must not be acted on or relied on
by persons who are not relevant persons. Any investment or investment activity to which this document relates is available only
to relevant persons and will be engaged in only with relevant persons.
Hong
Kong
The
Notes may not be offered or sold in Hong Kong by means of any document other than (i) to “professional investors”
within the meaning of the Securities and Futures Ordinance (Cap.571, The Laws of Hong Kong) and any rules made thereunder or (ii) in
other circumstances which do not result in the document being a “prospectus” within the meaning of the Companies Ordinance
(Cap.32, The Laws of Hong Kong), or which do not constitute an offer to the public within the meaning of the Companies Ordinance,
and no advertisement, invitation or document relating to the Notes may be issued or may be in the possession of any person for
the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely
to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of Hong Kong) other
than with respect to Notes which are or are intended to be disposed of only to persons outside Hong Kong or only to “professional
investors” within the meaning of the Securities and Futures Ordinance and any rules made thereunder.
Japan
The
Notes have not been and will not be registered under the Financial Instruments and Exchange Law of Japan (as amended, the “FIEL”)
and each underwriter has agreed that it has not offered or sold and will not offer or sell any Notes, directly or indirectly,
in Japan or to, or for the benefit of, any resident of Japan (as defined under Article 6, Paragraph 1, Item 5 of the Foreign Exchange
and Foreign Trade Act of Japan (Act No. 228 of 1949, as amended))), or to others for re-offering or resale, directly or indirectly,
in Japan or to, or for the benefit of, a resident of Japan, except pursuant to an exemption from the registration requirements
of, and otherwise in compliance with, the FIEL and any other applicable laws, regulations and ministerial guidelines of Japan.
Singapore
This
prospectus supplement and the accompanying prospectus have not been registered as a prospectus with the Monetary Authority of
Singapore. Accordingly, this prospectus supplement, accompanying prospectus and any other document or material in connection with
the offer or sale, or invitation or subscription or purchase, of the Notes may not be circulated or distributed, nor may the Notes
be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons
in Singapore other than (i) to an institutional investor under Section 274 of the Securities and Futures Act, Chapter 289 of Singapore
(the “SFA”); (ii) to a relevant person, or any person pursuant to Section 275(1A), and in accordance with the conditions,
specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable
provision of the SFA.
Where
the Notes are subscribed or purchased under Section 275 of the SFA by a relevant person which is: (a) a corporation (which is
not an accredited investor (as defined in the SFA)) the sole business of which is to hold investments and the entire share capital
of which is owned by one or more individuals, each of whom is an accredited investor; or (b) a trust (where the trustee is not
an accredited investor) whose sole purpose is to hold investments and each beneficiary of the trust is an individual who is an
accredited investor, securities or securities-based derivatives contracts (each as defined in Section 2(1) of the SFA) of that
corporation or the beneficiaries’ rights and interest (howsoever described) in that trust shall not be transferred within
six months after that corporation or that trust has acquired the notes pursuant to an offer made under Section 275 of the SFA,
except: (1) to an institutional investor or to a relevant person or to any person arising from an offer referred to in Section
275(1A) or Section 276(4)(i)(B) of the SFA; (2) where no consideration is or will be given for the transfer; (3) where the transfer
is by operation of law; (4) as specified in Section 276(7) of the SFA; or (5) as specified in Regulation 37A of the Securities
and Futures (Offers of Investments) (Securities and Securities based Derivatives Contracts) Regulations 2018.
Singapore
Securities and Futures Act Product Classification—Solely for the purposes of its obligations pursuant to sections 309B(1)(a)
and 309B(1)(c) of the SFA, the Bank has determined, and hereby notifies all relevant persons (as defined in Section 309A of the
SFA) that the Notes are “prescribed capital markets products” (as defined in the Securities and Futures (Capital Markets
Products) Regulations 2018) and Excluded Investment Products (as defined in MAS Notice SFA 04-N12: Notice on the Sale of Investment
Products and MAS Notice FAA-N16: Notice on Recommendations on Investment Products).
Switzerland
This
prospectus supplement and the accompanying prospectus do not, and are not intended to, constitute an offer or solicitation to
purchase or invest in the Notes described herein in Switzerland. The Notes may not be offered, sold or advertised, directly or
indirectly, to the public in, into or from Switzerland and will not be listed on the SIX Swiss Exchange or on any other exchange
or regulated trading facility in Switzerland. Neither this prospectus supplement, the accompanying prospectus nor any other offering
or marketing material relating to the Notes constitutes a prospectus pursuant to article 652a or article 1156 of the Swiss Code
of Obligations or a listing prospectus pursuant to the listing rules of the SIX Swiss Exchange or any other regulated trading
facility in Switzerland, and neither this prospectus supplement, the accompanying prospectus nor any other offering or marketing
material relating to the Notes may be distributed, or otherwise made available, to the public in Switzerland. Each underwriter
has, accordingly, represented and agreed that it has not offered, sold or advertised and will not offer, sell or advertise, directly
or indirectly, Notes to the public in, into or from Switzerland, and that it has not distributed, or otherwise made available,
and will not distribute or otherwise make available, this prospectus supplement, the accompanying prospectus or any other offering
or marketing material relating to the Notes to the public in Switzerland.
Chile
Pursuant
to Law No. 18,045 of Chile (the securities market law of Chile) and Rule (Norma de Carácter General) No. 336, dated
June 27, 2012, issued by the Superintendency of Securities and Insurance of Chile (Superintendencia de Valores y Seguros de
Chile or “SVS”), the Notes may be privately offered in Chile to certain “qualified investors” identified
as such by Rule 336 (which in turn are further described in Rule N°. 216, dated June 12, 2008, of the SVS).
Rule
336 requires the following information to be provided to prospective investors in Chile:
|
1.
|
the date of
commencement of the offer is January 23, 2020. The offer of the Notes is subject to Rule (Norma de Carácter
General) No. 336, dated June 27, 2012, issued by the SVS;
|
|
2.
|
the subject matter of this offer are securities not registered
with the Securities Registry (Registro de Valores) of the SVS, nor with the foreign securities registry (Registro
de Valores Extranjeros) of the SVS, hence the Notes are not subject to the oversight of the SVS;
|
|
3.
|
since the Notes are not registered in Chile there is no obligation
by the issuer to make publicly available information about the Notes in Chile; and
|
|
4.
|
the Notes shall not be subject to public offering in Chile unless
registered with the relevant Securities Registry of the SVS.
|
Información
a los Inversionistas Chilenos
De
conformidad con la ley N° 18.045, de mercado de valores y la Norma de Carácter General N° 336 (la “NCG 336”),
de 27 de junio de 2012, de la Superintendencia de Valores y Seguros de Chile (la “SVS”), los bonos pueden ser ofrecidos
privadamente a ciertos “inversionistas calificados,” a los que se refiere la NCG 336 y que se definen como tales en
la Norma de Carácter General N° 216, de 12 de junio de 2008, de la SVS.
La
siguiente información se proporciona a potenciales inversionistas de conformidad con la NCG 336:
1.
La oferta de los bonos comienza el 23 de enero de 2020, y se encuentra acogida a
la Norma de Carácter General N° 336, de fecha 27 de junio de 2012, de la SVS;
2.
La oferta versa sobre valores no inscritos en el Registro de Valores o en el Registro
de Valores Extranjeros que lleva la SVS, por lo que tales valores no están sujetos a la fiscalización de esa Superintendencia;
3.
Por tratarse de valores no inscritos en Chile no existe la obligación por parte
del emisor de entregar en Chile información pública sobre los mismos; y
4.
Estos valores no podrán ser objeto de oferta pública en Chile mientras
no sean inscritos en el Registro de Valores correspondiente.
Mexico
The
Notes have not been registered in Mexico with the Securities Section (Sección de Valores) of the National Securities
Registry (Registro Nacional de Valores) maintained by the CNBV, and that no action has been or will be taken that would
permit a public offer or sale of the Notes in Mexico. The Notes may not be offered or sold in Mexico, absent an available exception
under Article 8 of the Ley del Mercado de Valores (the Mexican Securities Market Law).
Peru
The
Notes and the information contained in this prospectus supplement and the accompanying prospectus are not being publicly marketed
or offered in Peru and will not be distributed or caused to be distributed to the general public in Peru. Peruvian securities
laws and regulations on public offerings will not be applicable to the offering of the Notes and therefore, the disclosure obligations
set forth therein will not be applicable to the issuer or the sellers of the Notes before or after their acquisition by prospective
investors. The Notes and the information contained in this prospectus supplement and the accompanying prospectus have not been
and will not be reviewed, confirmed, approved or in any way submitted to the Peruvian Superintendency of Capital Markets (Superintendencia
del Mercado de Valores), or the SMV, and the Notes have not been registered under the Securities Market Law (Ley del Mercado
de Valores) or any other Peruvian regulations. Accordingly, the Notes cannot be offered or sold within Peruvian territory
except to the extent any such offering or sale qualifies as a private offering under Peruvian regulations and complies with the
provisions on private offerings set forth therein. The Peruvian regulations establish that any offering may qualify as a private
offering if it is directed exclusively to institutional investors.
Colombia
The
Notes may not be offered or sold in Colombia, except under circumstances which do not constitute a public offering of securities
under applicable Colombian securities laws and regulations or unless the Notes are registered with the Colombian National Registry
of Securities and Issuers (Registro Nacional de Valores y Emisores).
EXPENSES
The
total costs and expenses, other than the underwriting discount and the special structuring fee, in connection with this offering
are US$ .
Validity
Of The Notes
The
validity of the Notes being offered hereby are being passed upon for us by Sullivan & Cromwell LLP, New York, New York and
Washington, D.C. and for the underwriters by Cleary Gottlieb Steen & Hamilton LLP, New York, New York.
Matters
of Colombian law are being passed upon for us by Brigard & Urrutia S.A.S., our special Colombian counsel, and for the underwriters
by Gómez Pinzón Abogados, S.A.S, Colombian counsel for the underwriters.
Experts
Our
consolidated financial statements as of December 31, 2018 and for the year ended December 31, 2018 and management’s assessment
of the effectiveness of internal control over financial reporting (which is included in Management’s Report on Internal
Control Over Financial Reporting) incorporated in this prospectus supplement and in the accompanying prospectus by reference to
our Annual Report on Form 20-F for the year ended December 31, 2018 have been so incorporated in reliance on the report of PricewaterhouseCoopers
Ltda., an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Our
consolidated financial statements as of December 31, 2017 and for each of the two years in the period ended December 31, 2017
incorporated in this prospectus supplement and in the accompanying prospectus by reference to our Annual Report on Form 20-F for
the year ended December 31, 2018 have been so incorporated in reliance on the report of Deloitte & Touche Ltda., an independent
registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
US$
Bancolombia
S.A.
%
Senior Notes due
PROSPECTUS
SUPPLEMENT
Joint
Book-Running Managers
Citigroup
|
|
J.P.
Morgan
|
|
|
|
|
Co-Manager
|
|
|
|
|
|
Valores Banistmo
|
|
The
date of this prospectus supplement is ,
2020.
|
|
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
For the nine months period ended September
30, 2018 and 2019
|
CONDENSED CONSOLIDATED INTERIM STATEMENT OF
FINANCIAL POSITION (Unaudited)
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
As of September 30, 2019 and December 31, 2018
(Stated in millions of Colombian pesos)
|
Note
|
September 30, 2019
|
December 31, 2018
|
ASSETS
|
|
|
|
Cash and cash equivalents
|
4
|
18,686,747
|
18,730,810
|
Financial assets investments
|
5.1
|
19,947,001
|
17,361,475
|
Derivative financial instruments
|
5.2
|
2,292,926
|
1,843,708
|
Financial assets investments and derivative financial instruments
|
|
22,239,927
|
19,205,183
|
Loans and advances to customers and financial institutions
|
6
|
184,030,281
|
173,819,116
|
Allowance for loans, advances and lease losses
|
6
|
(10,621,994)
|
(10,235,831)
|
Loans and advances to customers and financial institutions, net
|
|
173,408,287
|
163,583,285
|
Assets held for sale and inventories, net
|
|
522,145
|
636,028
|
Investment in associates and joint ventures
|
|
2,283,729
|
2,149,579
|
Investment properties
|
|
1,922,097
|
1,732,873
|
Premises and equipment, net
|
|
3,367,311
|
3,368,647
|
Right of use assets
|
7.1
|
1,752,734
|
-
|
Goodwill and intangible assets, net
|
8
|
7,647,515
|
7,201,855
|
Deferred tax, net
|
|
359,727
|
271,177
|
Other assets, net
|
|
4,665,007
|
3,234,181
|
TOTAL ASSETS
|
|
236,855,226
|
220,113,618
|
LIABILITIES AND EQUITY
|
|
|
|
LIABILITIES
|
|
|
|
Deposits by customers
|
10
|
150,044,204
|
142,128,471
|
Interbank deposits
|
|
1,920,483
|
1,374,222
|
Repurchase agreements and other similar secured borrowing
|
|
5,078,295
|
2,315,555
|
Liabilities relating to assets held for sale
|
|
-
|
163,596
|
Derivative financial instruments
|
5.2
|
1,752,774
|
1,295,070
|
Borrowings from other financial institutions
|
|
15,653,594
|
16,337,964
|
Debt instruments in issue
|
11
|
21,129,087
|
20,287,233
|
Lease liabilities
|
7.1
|
1,901,466
|
-
|
Preferred shares
|
|
569,477
|
583,997
|
Current tax
|
|
760,470
|
166,472
|
Deferred tax, net
|
|
1,247,699
|
1,318,295
|
Employees benefit plans
|
12
|
743,891
|
719,265
|
Other liabilities
|
|
7,111,273
|
6,768,253
|
TOTAL LIABILITIES
|
|
207,912,713
|
193,458,393
|
EQUITY
|
|
|
|
Share capital
|
|
480,914
|
480,914
|
Additional paid-in-capital
|
|
4,857,454
|
4,857,454
|
Appropriated reserves
|
13
|
10,412,822
|
9,741,774
|
Retained earnings
|
|
4,706,256
|
3,906,945
|
Net income attributable to equity holders of the Parent Company
|
|
2,648,098
|
2,658,864
|
Accumulated other comprehensive income, net of tax
|
|
3,884,807
|
3,202,969
|
STOCKHOLDERS’ EQUITY ATTRIBUTABLE TO THE OWNERS OF THE PARENT COMPANY
|
|
26,990,351
|
24,848,920
|
Non-controlling interest
|
|
1,952,162
|
1,806,305
|
TOTAL EQUITY
|
|
28,942,513
|
26,655,225
|
TOTAL LIABILITIES AND EQUITY
|
|
236,855,226
|
220,113,618
|
The accompanying notes form an integral part of these Condensed
Consolidated Interim Financial Statements.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF
INCOME (Unaudited)
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the nine months period ended at September
30
(Stated in millions of Colombian pesos,
except EPS stated in units of pesos)
|
Note
|
2019
|
2018
|
Interest on loans and financial leases
|
|
|
|
Commercial
|
|
5,500,476
|
5,385,931
|
Consumer
|
|
3,833,440
|
3,067,506
|
Small business loans
|
|
107,844
|
165,859
|
Mortgage
|
|
1,487,826
|
1,415,765
|
Financial leases
|
|
1,430,855
|
1,424,001
|
Interest income on loans and financial leases
|
|
12,360,441
|
11,459,062
|
Interest on debt instruments using the effective interest method
|
14.1
|
116,777
|
91,669
|
Total Interest of debt instruments using the effective interest method
|
|
12,477,218
|
11,550,731
|
Interest income on overnight and market funds
|
|
53,089
|
25,323
|
Interest and valuation on financial instruments
|
14.1
|
435,786
|
281,981
|
Total interest and valuation on financial instruments
|
|
12,966,093
|
11,858,035
|
Interest expenses
|
14.2
|
(4,607,533)
|
(4,231,011)
|
Net interest margin and valuation on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments
|
|
8,358,560
|
7,627,024
|
Credit impairment charges on loans, advances and financial leases, net
|
6
|
(2,274,298)
|
(2,892,336)
|
Credit recovery (impairment) for other financial instruments
|
|
(7,144)
|
36,559
|
Total credit impairment charges, net
|
|
(2,281,442)
|
(2,855,777)
|
Net interest margin and valuation on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments
|
|
6,077,118
|
4,771,247
|
Fees and commissions income
|
|
3,335,606
|
2,884,377
|
Fees and commissions expenses
|
|
(1,086,580)
|
(838,147)
|
Total fees and commissions, net
|
14.3
|
2,249,026
|
2,046,230
|
Other operating income
|
14.4
|
1,081,725
|
952,935
|
Dividends received, and share of profits of equity method investees
|
|
339,700
|
241,218
|
Total operating income, net
|
|
9,747,569
|
8,011,630
|
Operating expenses
|
|
|
|
Salaries and employee benefits
|
|
(2,488,598)
|
(2,262,431)
|
Other administrative and general expenses
|
15.1
|
(2,203,838)
|
(2,171,190)
|
Wealth tax, contributions and other tax burden
|
|
(552,376)
|
(549,817)
|
Impairment, depreciation and amortization
|
15.2
|
(581,136)
|
(363,211)
|
Other operating expenses
|
|
(169,218)
|
(192,355)
|
Total operating expenses
|
|
(5,995,166)
|
(5,539,004)
|
Profit before tax
|
|
3,752,403
|
2,472,626
|
Income tax
|
9.3.5
|
(1,018,469)
|
(719,582)
|
Profit for the year from continued operations
|
|
2,733,934
|
1,753,044
|
Net income
|
|
2,733,934
|
1,753,044
|
Net income attributable to equity holders of the Parent Company
|
|
2,648,098
|
1,656,695
|
Non-controlling interest
|
|
85,836
|
96,349
|
Basic and Diluted earnings per share to common shareholders, stated in units of pesos
|
16
|
2,930
|
1,768
|
From continuing operations
|
|
2,930
|
1,768
|
From discontinuing operations
|
|
-
|
-
|
The accompanying notes
form an integral part of these Condensed Consolidated Interim Financial Statements.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF
COMPREHENSIVE INCOME (Unaudited)
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the nine months period ended at September 30
(Stated in millions of Colombian pesos)
|
Note
|
2019
|
2018
|
Net income
|
|
2,733,934
|
1,753,044
|
Other comprehensive income ⁄ (loss) that will not be reclassified to net income
|
|
|
|
Remeasurement loss related to defined benefit liability
|
|
(830)
|
(3,689)
|
Income tax
|
9.2
|
(1,357)
|
-
|
Net of tax amount
|
|
(2,187)
|
(3,689)
|
Investments in equity instruments measured at fair value through other comprehensive income (FVTOCI):
|
|
|
|
Unrealized gain/(loss)
|
|
(126,788)
|
27,760
|
Income tax
|
9.2
|
10,002
|
17,030
|
Net of tax amount
|
|
(116,786)
|
44,790
|
Total other comprehensive income that will not be reclassified to net income, net of tax
|
|
(118,973)
|
41,101
|
Other comprehensive profit that may be reclassified to net income
|
|
|
|
Investments in debt instruments measured at fair value through other comprehensive income (FVTOCI)
|
|
|
|
Gain/(loss) on investments recycled to profit or loss upon disposal
|
|
(1,840)
|
2,349
|
Unrealized gain/(loss)
|
|
29,038
|
(17,881)
|
Changes in loss allowance for credit losses
|
|
(532)
|
2,395
|
Income tax
|
9.2
|
-
|
-
|
Net of tax amount
|
|
26,666
|
(13,137)
|
Foreign currency translation adjustments:
|
|
|
|
Exchange differences arising on translating the foreign operations
|
|
1,120,088
|
4,979
|
Gain/(loss) on net investment hedge in foreign operations
|
|
(500,940)
|
26,004
|
Income tax
|
9.2
|
159,391
|
-
|
Net of tax amount
|
|
778,539
|
30,983
|
Unrealized gain/(loss) on investments in associates and joint ventures using equity method
|
|
496
|
290
|
Income tax
|
9.2
|
(1,090)
|
(547)
|
Net of tax amount
|
|
(594)
|
(257)
|
Total other comprehensive income/(loss) that may be reclassified to net income, net of tax
|
|
804,611
|
17,589
|
Comprehensive income/(loss), net of tax
|
|
685,638
|
58,690
|
Total comprehensive income attributable to:
|
|
3,419,572
|
1,811,734
|
Equity holders of the Parent Company
|
|
3,333,736
|
1,715,385
|
Non-controlling interests
|
|
85,836
|
96,349
|
The accompanying notes form an integral
part of these Condensed Consolidated Interim Financial Statements.
CONDENSED
CONSOLIDATED INTERIM STATEMENT OF CHANGES IN EQUITY (Unaudited)
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the nine months period ended September 30, 2019
and 2018
(Stated in millions of Colombian pesos)
|
Attributable
to owners of Parent Company
|
|
|
|
|
|
|
|
Accumulated
other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
Equity
|
Debt
|
|
|
|
|
to
owners
|
Non-
|
|
|
Share
|
Additional
|
Appropriated
|
Translation
|
securities
|
Instruments
|
|
Employee
|
Retained
|
Net
|
of
Parent
|
Controlling
|
Total
|
|
Capital
|
Paid
in capital
|
Reserves
(Note 13)
|
adjustment
|
through
OCI
|
at
fair value
through
OCI
|
Associates
|
Benefits
|
Earnings
|
Income
|
Company
|
interest
|
Equity
|
Balance
as of January 1, 2019
|
480,914
|
4,857,454
|
9,741,774
|
2,882,202
|
392,707
|
(19,877)
|
(1,107)
|
(50,956)
|
3,906,945
|
2,658,864
|
24,848,920
|
1,806,305
|
26,655,225
|
Effect of adoption of new
accounting
standards (Note 20)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(182,872)
|
-
|
(182,872)
|
(3,148)
|
(186,020)
|
Shareholders'
equity as of January 1, 2019 (adjusted)
|
480,914
|
4,857,454
|
9,741,774
|
2,882,202
|
392,707
|
(19,877)
|
(1,107)
|
(50,956)
|
3,724,073
|
2,658,864
|
24,666,048
|
1,803,157
|
26,469,205
|
Transfer
to profit or loss from previous years
|
|
|
|
|
|
|
|
|
2,658,864
|
(2,658,864)
|
|
|
|
Dividend
payment corresponding to 509,704,584 common shares and 452,122,416 preferred shares without voting rights, subscribed and
paid as of December 31, 2018, at a rate of COP 1,020 per share.
|
|
|
|
|
|
|
|
|
(992,613)
|
|
(992,613)
|
|
(992,613)
|
Disposal
of debt/equity instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
investment
impairment
|
|
|
(6,561)
|
|
|
|
|
|
6,561
|
|
-
|
|
-
|
Realization
of retained earnings
|
|
|
|
|
(3,800)
|
|
|
|
3,800
|
|
|
|
|
Non-controlling
interest
|
|
|
|
|
|
|
|
|
|
|
-
|
27,807
|
27,807
|
Other
reserves(1)
|
|
|
692,680
|
|
|
|
|
|
(692,680)
|
|
-
|
|
-
|
Use
of reservations
|
|
|
(15,071)
|
|
|
|
|
|
|
|
(15,071)
|
|
(15,071)
|
Changes
in shareholdings subsidiaries
|
|
|
|
|
|
|
|
|
(1,749)
|
|
(1,749)
|
|
(1,749)
|
Net
income
|
|
|
|
|
|
|
|
|
|
2,648,098
|
2,648,098
|
85,836
|
2,733,934
|
Other
comprehensive income
|
|
|
|
778,539
|
(116,786)
|
26,666
|
(594)
|
(2,187)
|
|
|
685,638
|
35,362
|
721,000
|
Balance
as of September 30, 2019
|
480,914
|
4,857,454
|
10,412,822
|
3,660,741
|
272,121
|
6,789
|
(1,701)
|
(53,143)
|
4,706,256
|
2,648,098
|
26,990,351
|
1,952,162
|
28,942,513
|
|
(1)
|
This item corresponds to the dynamic reserves of Banistmo S.A., which correspond to an additional provision recognized on its low credit risk loan portfolio.
|
The accompanying notes form an integral
part of these Condensed Consolidated Interim Financial Statements.
|
Attributable to owners of Parent Company
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Attributable
|
|
|
|
|
|
|
|
Equity
|
Debt
|
|
|
|
|
to owners
|
Non-
|
|
|
Share
|
Additional
|
Appropriated
|
Translation
|
securities
|
Instruments
|
|
Employee
|
Retained
|
Net
|
of Parent
|
Controlling
|
Total
|
|
Capital
|
Paid in capital
|
Reserves (Note 13)
|
adjustment
|
through OCI
|
at fair value
through OCI
|
Associates
|
Benefits
|
Earnings
|
Income
|
Company
|
interest
|
Equity
|
Balance as of January 1, 2018
|
480,914
|
4,857,454
|
9,045,155
|
2,250,389
|
379,513
|
-
|
(3,025)
|
(80,618)
|
3,568,182
|
2,615,000
|
23,112,964
|
1,316,586
|
24,429,550
|
Effect
of adoption of new accounting standards (Note 20 impacts on application of new standards)
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
(753,874)
|
|
(753,874)
|
|
(753,874)
|
Shareholders' equity as of January 1, 2018 (adjusted)
|
480,914
|
4,857,454
|
9,045,155
|
2,250,389
|
379,513
|
-
|
(3,025)
|
(80,618)
|
2,814,308
|
2,615,000
|
22,359,090
|
1,316,586
|
23,675,676
|
Transfer to profit or loss from previous years
|
|
|
|
|
|
|
|
|
2,615,000
|
(2,615,000)
|
|
|
|
Dividend payment corresponding to 509,704,584 common shares and 452,122,416 preferred shares without voting rights, subscribed and paid as of December 31, 2017, at a rate of COP 1,020 per share.
|
|
|
|
|
|
|
|
|
(923,363)
|
|
(923,363)
|
|
(923,363)
|
Release of reserves by law
|
|
|
579,254
|
|
|
|
|
|
(579,254)
|
|
|
|
|
Disposal of debt/equity instruments
|
|
|
|
|
(20,754)
|
|
|
|
20,754
|
|
|
|
|
Non-controlling interest
|
|
|
|
|
|
|
|
|
|
|
|
302,966
|
302,966
|
Other
reserves(1)
|
|
|
315,763
|
|
|
|
|
|
(315,763)
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
1,656,695
|
1,656,695
|
96,349
|
1,753,044
|
Other comprehensive income
|
|
|
|
30,983
|
44,790
|
(13,137)
|
(257)
|
(3,689)
|
|
|
58,690
|
|
58,690
|
Balance as of September 30, 2018
|
480,914
|
4,857,454
|
9,940,172
|
2,281,372
|
403,549
|
(13,137)
|
(3,282)
|
(84,307)
|
3,631,682
|
1,656,695
|
23,151,112
|
1,715,901
|
24,867,013
|
|
(1)
|
This item corresponds to the dynamic reserves of Banistmo S.A., which correspond to an additional
provision recognized on its low credit risk loan portfolio.
|
The accompanying notes form an integral
part of these Condensed Consolidated Interim Financial Statements.
CONDENSED CONSOLIDATED INTERIM STATEMENT OF CASH FLOWS
BANCOLOMBIA S.A. AND ITS SUBSIDIARIES
For the nine months period ended at September 30
(Stated in millions of Colombian pesos)
|
2019
|
|
2018
|
|
Net income
|
2,733,934
|
|
1,753,044
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Depreciation and amortization
|
482,867
|
|
374,926
|
|
Other assets impairment (Reversal)
|
98,269
|
|
(11,714)
|
|
Equity method
|
(186,113)
|
|
(171,541)
|
|
Credit impairment charges on loans and advances and financial leases
|
2,697,044
|
|
3,536,621
|
|
Credit impairment (recovery) charges on off balance sheet credit and other financial instruments
|
7,144
|
|
(36,560)
|
|
Gain on sales on assets held for sale and inventories
|
(59,321)
|
|
(38,154)
|
|
Gains on sale of financial leases
|
-
|
|
(4,656)
|
|
Valuation gain on investment securities
|
(923,838)
|
|
(380,264)
|
|
(Gain) loss upon disposal of investment in subsidiary and associates
|
(72,489)
|
|
510
|
|
Valuation (losses) on derivative financial instruments
|
(85,561)
|
|
(28,638)
|
|
Income tax
|
1,018,469
|
|
719,582
|
|
Other non-cash items
|
(12,070)
|
|
(7,108)
|
|
Net interest
|
(7,962,998)
|
|
(7,748,590)
|
|
Change in operating assets and liabilities:
|
|
|
|
|
(increase) Decrease in derivative financial instruments
|
73,632
|
|
30,165
|
|
(increase) Decrease in accounts receivable
|
(820,548)
|
|
(640,797)
|
|
Increase in loans and advances to customers
|
(9,244,979)
|
|
(7,417,740)
|
|
Increase in other assets
|
(454,065)
|
|
(16,056)
|
|
(Decrease) increase in accounts payable
|
(561,357)
|
|
(121,930)
|
|
Increase in other liabilities
|
221,121
|
|
12,895
|
|
Increase in deposits by customers
|
4,544,808
|
|
(548,631)
|
|
Decrease in estimated liabilities and provisions
|
13,085
|
|
33,369
|
|
Net changes in investment securities recognized at fair value through profit or loss
|
(825,874)
|
|
1,471,555
|
|
Proceeds from sale of financial leases
|
-
|
|
205,550
|
|
Proceeds from sales of assets held for sale
|
200,694
|
|
213,778
|
|
Income tax paid
|
(187,636)
|
|
(153,558)
|
|
Dividend received
|
96,222
|
|
85,467
|
|
Interest received
|
12,558,333
|
|
11,366,647
|
|
Interest paid
|
(4,012,628)
|
|
(3,815,929)
|
|
Net cash (used in) operating activities
|
(663,855)
|
|
(1,337,757)
|
|
Cash flows from investment activities:
|
|
|
|
|
Purchases of debt instruments at amortized cost
|
(2,058,348)
|
|
(1,745,896)
|
|
Proceeds from maturities of debt instruments at amortized cost
|
1,936,495
|
|
1,364,708
|
|
Purchases of debt instruments at fair value through OCI
|
(3,962,947)
|
|
(1,398,484)
|
|
Proceeds from debt instruments at fair value through OCI
|
3,776,689
|
|
1,185,612
|
|
Purchases of equity instruments and interests in associates and joint ventures
|
(17,521)
|
|
(127,786)
|
|
Proceeds from equity instruments and interests in associates and joint ventures
|
112,641
|
|
22,379
|
|
Purchases of premises and equipment and investment properties
|
(772,120)
|
|
(571,492)
|
|
Proceeds from sales of premises and equipment and investment properties
|
89,487
|
|
144,319
|
|
Net cash outflow from sales of investments in subsidiaries (1)
|
73,319
|
|
26
|
|
Purchase of other long-term assets
|
(64,267)
|
|
(82,737)
|
|
Net cash (used in) provided by investing activities
|
(886,572)
|
|
(1,209,351)
|
|
Cash flows from financing activities:
|
|
|
|
|
(Decrease) Increase in repurchase agreements and other similar secured borrowing
|
2,759,660
|
|
1,109,129
|
|
Proceeds from borrowings from other financial institutions
|
8,969,838
|
|
12,351,962
|
|
Repayment of borrowings from other financial institutions
|
(10,703,167)
|
|
(11,111,557)
|
|
Payments of lease liabilities(2)
|
(93,242)
|
|
-
|
|
Placement of debt instruments in issue
|
1,798,677
|
|
562,525
|
|
Payment of debt instruments in issue
|
(1,998,248)
|
|
(1,159,806)
|
|
Dividends paid
|
(770,846)
|
|
(490,583)
|
|
Transactions with non-controlling interests
|
(24,574)
|
|
-
|
|
Net cash provided by financing activities
|
(61,902)
|
|
1,261,670
|
|
Effect of exchange rate changes on cash and cash equivalents
|
1,568,266
|
|
471,640
|
|
(Decrease) increase in cash and cash equivalents
|
(1,612,329)
|
|
(1,285,438)
|
|
Cash and cash equivalents at beginning of period
|
18,730,810
|
|
18,165,644
|
|
Cash and cash equivalents at end of period
|
18,686,747
|
|
17,351,846
|
|
(1) In March 2019, the Bank’s
subsidiaries Renting Colombia S.A.S and Inversiones CFNS S.A.S closed the sale to Arval Relsa of 100% of the shares of Arrendamiento
Operativo CIB S.A.C – Renting Peru, an operational leasing company incorporated and with operations in Peru. Arval Relsa
is the joint venture between Arval (subsidiary of BNP Paribas, with more than one million vehicles in operational leasing) and
Relsa (company with 15 years of experience in the Peruvian market) that seeks to strengthen the car leasing and vehicle fleet management
businesses in Peru and Chile. The sale price amounted to USD 21.8 million.
(2) See adoption of new accounting
standards in Note 19.
The accompanying notes form an integral
part of these Consolidated Financial Statements.
NOTE
1. REPORTING ENTITY
Bancolombia S.A., hereinafter the Parent
Company is a credit establishment, listed in the Colombia Stock Exchange “BVC,” as well as on the New York Stock Exchange
“NYSE”, since 1981 and 1995, respectively. The Parent Company's main location is in Medellin (Colombia), and its principal
address is Carrera 48 # 26-85, Avenida Los Industriales. The Parent Company was originally constituted under the name of Colombian
Industrial Bank (BIC) according to public deed number 388, dated January 24 1945, from the First Notary's Office of Medellin,
authorized by the Superintendence of Finance of Colombia (“SFC”). On April 3, 1998, by means of public deed No. 633,
BIC merged with Bank of Colombia S.A., and the resulting organization of that merger was named Bancolombia S.A.
Bancolombia S.A.’s business purpose
is to carry out all operations, transactions, acts and services inherent to the Banking business through banking establishments
that carry its name in accordance to all applicable legislation. The Parent Company may own interests in other corporations, wherever
authorized by law, according to all terms and requirements, limits or conditions established therein.
The significant changes in the Bank’s
about the composition of the entity, in March 2019 the subsidiaries Renting Colombia S.A.S and Inversiones CFNS S.A.S, closed the
sale to Arval Relsa of 100% of the shares of Arrendamiento Operativo CIB S.A.C – Renting Perú, an operational leasing
company incorporated and with operations in Peru, and then, in July 2019 the Bank’s subsidiaries Fiduciaria Bancolombia and
Banca de Inversion Bancolombia, closed the sale to TMF Group Americas B.V of 100% of the shares of FiduPeru S.A, a trust services
company incorporated and with operations in Peru.
NOTE
2. SIGNIFICANT ACCOUNTING POLICIES
A.
Basis for preparation
The condensed consolidated interim financial
statements as of and for the nine months period ended at September 30, 2019 have been prepared in accordance with International
Accounting Standard (‘IAS’) 34 ‘Interim Financial Reporting’, as issued by the International Accounting
Standards Board (‘IASB’). These condensed consolidated interim financial statements do not include all the information
and disclosures normally required for full annual financial statements and should be read in conjunction with the consolidated
financial statements of Bancolombia S.A. and its subsidiaries, hereinafter the ‘Bank’, as of and for the year ended
as of December 31, 2018, which were prepared in accordance with International Financial Reporting Standards as issued by the IASB
including interpretations issued by the IFRS Interpretations Committee (‘IFRIC’) of the IASB (together ‘IFRS’).
Management have assessed the ability of
the Bank to continue as a going concern and confirm they are satisfied that the Bank has adequate resources to continue in business
for the foreseeable future, which is at least, but is not limited to, twelve months from the end of the reporting period. For this
reason, they continue to adopt the ‘going concern’ basis of accounting for preparing the condensed consolidated interim
financial statements.
In the opinion of management, these unaudited
condensed consolidated interim financial statements reflect all normal recurring adjustments, which are necessary for a fair statement
of financial results for the interim periods presented.
The results of operations for the nine-month
periods ended at September 30, 2019 and 2018 are not necessarily indicative of the results for the full year. The Company believes
that the disclosures are adequate to make the information presented not misleading.
Assets and liabilities are measured at
cost or amortized cost, except for some financial assets and liabilities and investment properties that are measured at fair value.
Financial assets and liabilities measured at fair value are comprised by those classified as assets and liabilities at fair value
through profit or loss, equity investments measured at fair value through other comprehensive income (“OCI”) and derivative
instruments. Likewise, the carrying value of assets and liabilities recognized as a fair value hedge are adjusted for changes in
fair value attributable to the hedged risk.
The condensed consolidated interim financial
statements are stated in Colombian pesos and its figures are stated in millions, except earnings per share, diluted earnings per
share and the market exchange rate, which are stated in Colombian pesos, while other currencies (dollars, euro, pounds, etc.) are
stated in thousands.
Selected explanatory notes are included
to explain events and transactions that are significant to an understanding of the changes in the Bank’s financial position
and performance since the last annual financial statements.
B.
Use of judgments and estimates
The preparation of these condensed consolidated
interim financial statements requires that management make judgments, estimates and assumptions that affect the application of
accounting policies and the reported amounts of assets and liabilities, income and expense. Actual results may differ from these
estimates. Therefore, the estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates
are recognized in the period in which the estimate is revised if the revision affects only that period, or in the period of the
revision and future periods if the revision affects both current and future periods.
Except for the new IFRS 16 estimates such
as: the weighted average lessee’s incremental borrowing rate and expectations about the term of the lease, there have not
been changes in the basis upon which estimates have been determined and the significant judgments made by management in applying
the Bank’s accounting policies compared to that applied in the consolidated financial statements of the Bank for the year
ended as of December 31, 2018.
IFRS 16 Leases:
They measurement of the right of use asset and of the lease liabilities requires a series of judgments, among which is the determination
of the term of the lease and the rate used in discounting the cash flows. The term of the lease was defined according to the historical
information of the contracts and the period over which an asset is expected to be economically usable. For the Bank’s case,
it was not possible to determine or obtain interest rate implicit in the lease; therefore, the weighted average lessee’s
incremental borrowing rate is used to discount the cash flows associated with the leases.
C.
Significant accounting policies
The same accounting policies and methods
of computation applied in the Bank's 2018 consolidated Financial Statements are followed in these condensed consolidated interim
financial statements, except for the adoption of new standards, amendments and interpretations effective since January 01, 2019
and the adoption of IFRS 9 regarding to hedge accounting. IFRS 16 Leases were applied during the period ended as of September 30,
2019, for more details on the impact of the adoption of the leasing standard see Note 20 Impacts on application of new standards.
On the March 2019 agenda, the IFRS Interpretations
Committee clarified the question asked to the committee in November 2018. The request asked whether, following the curing of a
credit-impaired financial asset, an entity can present the difference between the interest that would be calculated by multiplying
the effective interest rate by the gross carrying amount of the credit-impaired asset and the interest revenue recognized for that
asset as interest revenue or, instead, is required to present it as a reversal of impairment losses.
The Committee concluded that, in the statement
of income, an entity is required to present the difference described in the request as a reversal of impairment losses following
the curing of a credit-impaired financial asset.
Hedge accounting
Accounting policy applied
from January 01, 2019:
Fair value hedges are used by the Bank,
through its Panamanian subsidiary, Banistmo, to protect against changes in the fair value of investment securities that are attributable
to interest rate variability. Cash flow hedges are used mainly to reduce the variability in cash flows of deposits issued by the
Parent Company and the changes in fair value of the Parent’s investment portfolio caused by interest rate changes. The Bank
applied the hedge accounting provisions required by IFRS 9 prospectively and assessed that all qualifying criteria under IFRS 9
were met at the date when it ceased to apply hedge requirements of IAS 39. When the hedging relationship is considered to be highly
effective, the changes in value of the hedging derivative are accounted for according to their classification as fair value hedges,
cash flow hedges and hedges of net investment in foreign operations, as set in the paragraph below.
The Bank assesses at the inception of the
hedge and on a monthly basis during the life of the instrument, whether the hedge used in the transaction is expected to be aligned
with the hedge effectiveness requirement (prospective effectiveness):
|
o
|
Economic relationship exists
|
|
o
|
Credit risk does not dominate value changes
|
|
o
|
Designated hedge ratio is consistent with risk management strategy.
|
The Bank discontinues the hedge accounting
when the hedging relationship no longer meets the criteria provided for the hedge effectiveness requirements or when the hedging
instrument expires or is sold, terminated or exercised. When hedge accounting for a fair value hedge is terminated the previous
adjustments related to the changes in fair value of the hedged item are subsequently recorded in the consolidated statement of
income in the same manner as other components of the carrying amount of that asset. When hedge accounting for a cash flow hedge
is terminated the accumulated gains and losses recorded in equity should be reclassified to the Statement of Operations in the
same period or periods during which the hedged expected future cash flows affect the Consolidated Statement of Operations.
Before the establishment of the hedge accounting,
the Bank documents the relationship between hedged items and hedging instruments, as well as its risk management objectives and
hedging strategies, which are approved by the Risk Management Committee as the body designated by the Board of Directors.
Hedge relationships are classified and
accounted for in the following way:
Fair value
hedges are designated to protect against the exposure to changes in the fair value of recognized assets or liabilities or
unrecognized firm commitments.
Changes in the fair value of derivatives
that are designated and qualify as hedging instruments in fair value hedges are recorded in the statement of income as interest
and valuation on investments. The change in fair value of the hedged item attributable to the hedged risk is included as part of
the carrying value of the hedged item, and it is also recognized in the aforementioned item of statement of income.
For fair value hedges that are related
to items accounted for at amortized cost, the adjustments to the carrying value are amortized through the statement of income during
the remaining term until their expiry.
The amortization of the effective interest
rate shall begin as long as there is an adjustment to the carrying value of the hedged item and shall begin no later than when
the hedged item ceases to be adjusted for changes in its fair value attributable to the risk being hedged. The adjustment is based
on a recalculated effective interest rate at the date amortization begins. If the hedged item is derecognized, the non-amortized
fair value is recognized immediately in the statement of income. If the hedge instrument expires or it is sold, terminated or exercised,
or when the hedge no longer meets the criteria for hedge accounting, the Bank discontinues prospectively the hedge accounting.
For the items hedged at amortized cost, the difference between the carrying value of the item hedged at the termination of the
hedge and the nominal value are amortized using the effective rate method during the time beyond the original terms of the hedge.
If the hedged item is derecognized, the remaining value to amortize is recognized immediately in the statement of income.
When an unrecognized firm commitment is
designated as a hedged item, the subsequent cumulative change in the fair value of the firm commitment attributable to the hedged
risk is recognized as an asset or liability with corresponding gain or loss recognized in net income.
Cash
flow hedges are used mainly to manage the exposure to variability related to the cash flow attributable to a specific risk
associated with an asset or liability recognized on statement of financial position or to a highly probable forecast transaction.
The portion of the gain or loss on the
hedging instrument that is determined to be an effective hedge is recognized in other comprehensive income. The ineffective portion
of the gain or loss on the hedging instrument is recognized in the statement of income.
If the hedging instrument expires or is
sold, terminated or exercised, without replacement or rollover into another hedging instrument, or if the hedging designation no
longer meets the criteria provided for the hedge effectiveness requirements after any subsequent rebalancing adjustment, any accumulated
gain or loss previously recognized in OCI remains in OCI, until the planned operation or the firm commitment affects the result.
The Bank ceases hedge accounting when the
hedging relationship ceases to meet the objective of managing the hedged risk when the hedging instrument expires or is sold, terminated,
or exercised, or when no longer qualifies for hedge accounting. Any gain or loss recognized in other comprehensive income and accumulated
in equity at that time remains in equity and is recognized in other comprehensive income when the forecast transaction is ultimately
recognized in net income. When a forecasted transaction is no longer expected to occur, the gain or loss accumulated in equity
is recognized immediately in net income.
–
Hedges of a net investment in a foreign operation: In accordance with IFRS 9 ‘Financial
instruments’ and IFRIC 16 ‘Hedges of a net investment in a foreign operation’, the Bank has decided to apply
the hedge accounting of the foreign currency risk arising from its net investment in Banistmo, designating as a hedging instrument
of certain debt securities issued by the Parent Company. Considering the hedge accounting relationship, in the case of the net
investment, the gain or loss derived from the foreign exchange differences related to the debt securities that is determined to
be an effective hedge is recognized in other comprehensive income, as is the currency translation adjustment of the Banistmo operation
into the presentation currency as required by IAS 21 as detailed in F.2. ‘Functional and presentation currency’.
There were no adjustments to the carrying
amounts of financial assets and liabilities at the date of transition to be recognized in retained earnings. All hedge relationships
designated under IAS 39 as of December 31, 2018, qualify for hedge accounting considering specified qualifying criteria under requirements
provided by IFRS 9 on January 1, 2019.
IFRS 16 Leases-
Lessee: At the start date of a lease, the Bank recognizes right of use asset and a liability. Both the right-of-use asset
and the lease liability are measured at the present value of the lease payments that are not paid that date. Lease payments are
discounted using the lessee’s incremental borrowing rate. Additionally, the right-of-use asset includes: 1) lease payments
made at or before the commencement date, less any lease incentives received 2) costs to be incurred in dismantling and removing
the underlying asset, restoring the site on which it is located or restoring the underlying asset to the condition required.
Subsequently, the Bank shall measure the
right of use asset at cost less any accumulated depreciation and any accumulated impairment losses; and adjusted for any remeasurement
of the lease liability. The Bank shall measure the lease liability by increasing the carrying amount to reflect interest on the
lease liability; reducing the carrying amount to reflect the lease payments made; and remeasuring the carrying amount to reflect
any reassessment or lease modifications, or to reflect revised in-substance fixed lease payments.
Interest on the lease liability in each
period during the lease term shall be the amount that produces a constant periodic rate of interest on the remaining balance of
the lease liability.
The Bank will not recognize right of use
assets and lease liabilities for 1) leases for a period of less than 12 months and without purchase option; and 2) leases in which
the underlying asset is of low value. These exemptions are recognized in the results of the period on a straight-line basis during
the lease term.
The Bank shall recognize in profit or loss,
unless the costs are included in the carrying amount of another asset applying other applicable Standards, both interest on the
lease liability; and variable lease payments not included in the measurement of the lease liability in the period in which the
event or condition that triggers those payments occurs and depreciation and any impairment losses if applicable.
The Bank has adopted new standards, amendments
and interpretations to existing standards effective from January 01, 2019, which were disclosed in the Note 2 Significant Accounting
Policies to the 2018 consolidated financial statements. Except for IFRS 16, these new standards, amendments and interpretations
to IFRS effective January 01, 2019 did not have a material impact on the Bank's condensed consolidated interim financial statements
or an accounting policies, as explained below:
Amendments
to IFRS 3 Business combination: The amendments to IFRS 3 clarify that when an entity obtains control of a business that
is a joint operation, it remeasures previously held interests in that business.
Amendments
to IFRS 11 Joint Arrangements: The amendments to IFRS 11 clarify that when an entity obtains joint control of a business
that is a joint operation, the entity does not remeasure previously held interests in that business.
Amendments
to IAS 12 Income taxes: The amendments to IAS 12 clarify the recognition of the tax effects for dividends as defined in
IFRS 9, when a liability is recognized for payment of the dividend. The tax effects of dividends are linked more directly to past
transactions or events that generate distributable profits than to distributions to owners. Therefore, an entity shall recognize
the income tax consequences of dividends in profit or loss, other comprehensive income or equity according to where the entity
originally recognized those past transactions or events.
Amendments
to IAS 23 Borrowing Costs: The amendments clarify that if any specific borrowing remains outstanding after the related asset
is ready for its intended use or sale, that borrowing becomes part of the funds that an entity borrows generally when calculating
the capitalization rate on general borrowings.
IFRIC 23 uncertainty
over income tax treatments: This interpretation has the object of reducing the diversity there is in the recognition and
calculation of a tax liability or an asset when there is uncertainty about tax treatment.
This interpretation applies to all accounting
aspects of the income tax when there is uncertainty regarding the treatment of an element, including the tax gain or loss, the
assets and liabilities tax bases, tax loss and credit and tax rates.
The Bank reflects the effect of an uncertain
tax position on the income tax, when it is concluded that the tax authority is not likely to accept an uncertain tax treatment
and therefore, it is likely to pay amounts related to such treatment. In the determination of the current and deferred tax of reviews
by the tax authority, the pertinent norms have been applied and interpretations have been made to take positions, on which eventually
different interpretations to those made by the entity could arise; due to the complexity of the tax system, the continuous modifications
to the fiscal rules, the accounting changes with implications in the tax bases and in general the legal instability of the country
in some subjects such as deductible expenses such as provisions, depreciation, amortization and expenses in general or non-taxed
income that at any time the tax authority could have different criteria from the Bank; However, the Administration and its advisors
consider that their actions against the estimates and judgments made in each fiscal period correspond to those indicated by the
current tax regulations and therefore have not considered it necessary to recognize any additional provision to those indicated
in Note 21 Provisions and liabilities related to the financial statements..
Improvements
to IAS 28 Long-term interests in associates and joint ventures: The board clarifies that long-term interests in an associate
or joint venture which, in essence, are part of a net investment in the associate or joint venture, are within IFRS 9, and thus,
the value impairment requirements of IFRS 9 apply to these interests.
Amendments
to IAS 19: The amendments clarify that an entity first determines any past service cost, or a gain or loss on settlement,
without considering the effect of the asset ceiling. This clarification provides that entities might have to recognize a past service
cost, or a gain or loss on settlement, that reduces a surplus that was not recognized before. Changes in the effect of the asset
ceiling are not netted with such amounts. This amount is recognized in profit or loss. An entity then determines the effect of
the asset ceiling after the plan amendment, curtailment or settlement. Any change in that effect, excluding amounts included in
the net interest, is recognized in other comprehensive income.
The amendments to this accounting standard
that began as of January 01, 2019 involved an adjustment to the deferred tax calculated, as the accounting basis of the liability
(asset) is modified using updated actuarial assumptions to determine the cost of services for the current period and the net interest,
for the rest of the annual period.
Standards issued but not
yet effective
Conceptual
Framework: The IASB issued the Conceptual Framework in March 2018, it is effective for annual periods beginning on or after
January 01, 2020. It sets out a comprehensive set of concepts for financial reporting, standard setting, guidance for preparers
in developing consistent accounting policies and assistance to others in their efforts to understand and interpret the standards.
The Conceptual Framework includes some
new concepts, provides updated definitions and recognition criteria for assets and liabilities and clarifies some important concepts.
Management is currently evaluating the
impact of the changes that the amendment of Conceptual Framework would have on the Bank and its financial statements and disclosures.
NOTE
3. OPERATING SEGMENTS
Operating segments are defined as components
of an entity about which separate financial information is available and that is evaluated regularly by the chief operating decision
maker (CODM) in deciding how to allocate resources and assessing performance; the CODM is constituted by the Bank’s President
(CEO) and Financial Vicepresident (CFO). The segment information has been prepared following the Bank’s accounting policies
as described in the summary of significant accounting policies in Note 2 Significant accounting policies and has been presented
consistently with the internal reports provided to the CODM.
The CODM uses a variety of information
and key financial data on a segment basis to assess the performance and make decision regarding the investment and allocation of
resources, such as:
|
·
|
Net interest margin (Net margin on financial instruments divided by average interest-earning assets).
|
|
·
|
Return on average total assets (Net income divided by average total assets).
|
|
·
|
Return on average stockholders’ equity.
|
|
·
|
Efficiency ratio (Operating expenses as a percentage of interest, fees, services and other operating income).
|
|
·
|
Asset Quality and loans coverage ratios.
|
The Bank includes the following segments:
Banking Colombia, Banking Panama, Banking El Salvador, Banking Guatemala, Trust, Investment Banking, Brokerage, Off Shore and All
other segments. The factors used to identify the Bank’s reportable segments are the nature of the products and services provided
by the subsidiaries and the geographical locations where the subsidiaries are domiciled, in line with the CODM’s operating
decisions related to the results of each segment.
The Bank’s operating segments are
comprised as follows:
This segment provides retail and corporate
banking products and services to individuals, companies and national and local governments in Colombia. The Bank’s strategy
in Colombia is to grow with these clients based on value added and long-term relationships.
This segment is also responsible for the
management of the Bank’s proprietary trading activities, liquidity and distribution of treasury products and services to
its client base in Colombia.
This segment provides retail and commercial
banking products and services to individuals and companies in Panama through the Banistmo operation. This segment includes all
the operations of Banistmo and its subsidiaries, which are managed and monitored by the CODM on a consolidated basis.
This segment is also responsible for the
management of the Banistmo’s proprietary trading activities, liquidity and distribution of treasury products and services
to its client base in Panama.
This segment provides retail and commercial
banking products and services to individuals, companies and national and local governments in El Salvador through Banco Agrícola
S.A. Banking El Salvador also includes operations of the following subsidiaries: Arrendadora Financiera S.A., Credibac S.A. de
CV, Valores Banagricola S.A. de C.V.
This segment is also responsible for the
management of Banco Agrícola’s proprietary trading activities, liquidity and distribution of treasury products and
services to its client base in El Salvador.
This segment provides retail and commercial
banking and insurance products and services to individuals, companies and national and local governments in Guatemala through Banco
Agromercantil de Guatemala S.A. Banking Guatemala also includes operations of the following subsidiaries: Mercom Bank Ltd., Seguros
Agromercantil S.A., Financiera Agromercantil S.A., Agrovalores S.A., Arrendadora Agromercantil S.A., Agencia de Seguros y Fianzas
Agromercantil S.A., Asistencia y Ajustes S.A., Serproba S.A., Servicios de Formalización S.A., Conserjería, Mantenimiento
y Mensajería S.A. and New Alma Enterprises LTD.
This segment is also responsible for the
management of Banco Agromercantil’s proprietary trading activities, liquidity and distribution of treasury products and services
to its client base in Guatemala.
This segment provides trust and asset management
services to clients in Colombia through Fiduciaria Bancolombia S.A. Sociedad Fiduciaria. As of September 30, 2018, this segment
includes FiduPerú S.A. Sociedad Fiduciaria’s results, this entity was sold in July 2019. For further information,
see Note 1. Reporting Entity.
The main products offered by this segment
include money market accounts, mutual and pension funds, private equity funds, payment trust, custody services, and corporate trust.
This segment provides corporate and project
finance advisory, underwriting, capital markets services and private equity management through Banca de Inversión Bancolombia
S.A. Corporación Financiera. Its customers include private and publicly-held corporations as well as government institutions.
This segment provides brokerage, investment
advisory and private banking services to individuals and institutions through Valores Bancolombia S.A. Comisionista de Bolsa. It
sells and distributes equities, futures, foreign currencies, fixed income securities, mutual funds and structured products.
This segment provides a complete line of
offshore banking services to Colombian and foreign customers through Bancolombia Panamá S.A., Bancolombia Caymán
S.A., and Bancolombia Puerto Rico International, Inc. It offers loans to private sector companies, trade financing, leases financing
and financing for industrial projects, as well as a complete portfolio of cash management products, such as checking accounts,
international collections and payments. Through these subsidiaries, the Bank also offers investment opportunities in U.S. dollars,
savings and checking accounts, time deposits, and investment funds to its high net worth clients and private banking customers.
This segment provides financial and operational
leases activities, including cross-border and international leasing services to clients in Colombia, Central America and Mexico.
Bancolombia offers these services mainly through the following Subsidiaries: Renting Colombia S.A.S., and Transportempo S.A.S.
This segment also includes results from low operation of particular investment vehicles of Bancolombia: Valores Simesa S.A., Pasarella
colombia., Inversiones CFNS S.A.S., Sistema de Inversiones y Negocios S.A. Sinesa, Banagrícola S.A., Inversiones Financieras
Banco Agrícola and others. As of September 30, 2018, this segment includes Arrendamiento Operativo CIB S.A.C – Renting
Perú’s results, this entity was sold in March 2019. For further information, see Note 1. Reporting Entity.
According to the quantitative threshold
test required by IFRS 8 Operating Segments, the revenue reported by “all other segments” is less than 10 per cent
of the combined revenue of all operating segments and its assets represent less than 10 percent of all operating segments combined
assets of the Bank.
Financial performance by
operating segment:
The CODM reviews the performance of the
Bank using the following financial information by operating segment:
|
For the nine months period ended at september 30, 2019
|
|
Banking
Colombia
|
Banking
Panama
|
Banking
El
Salvador
|
Banking
Guatemala
|
Trust
|
Investment
banking
|
Brokerage
|
Off shore
|
All other
segments
|
Total before
eliminations
|
Adjustments
for
consolidation(1)
|
Total after
eliminations
|
|
In millions of COP
|
Total interest and valuation
|
9,719,766
|
1,389,523
|
796,506
|
707,243
|
145
|
8
|
4,315
|
342,451
|
5,967
|
12,965,924
|
169
|
12,966,093
|
Interest income on loans and financial leases
|
9,457,670
|
1,223,824
|
716,072
|
650,887
|
-
|
-
|
-
|
309,009
|
2,810
|
12,360,272
|
169
|
12,360,441
|
Total Debt investments
|
679,793
|
129,899
|
31,233
|
53,815
|
20
|
8
|
11,245
|
17,700
|
6
|
923,719
|
-
|
923,719
|
Derivatives
|
(201,962)
|
131
|
-
|
-
|
-
|
-
|
(7,508)
|
-
|
-
|
(209,339)
|
-
|
(209,339)
|
Total liquidity operations
|
(215,735)
|
35,669
|
49,201
|
2,541
|
125
|
-
|
578
|
15,742
|
3,151
|
(108,728)
|
-
|
(108,728)
|
Interest expenses
|
(3,303,602)
|
(524,198)
|
(216,428)
|
(288,080)
|
(102)
|
(3)
|
(24)
|
(228,776)
|
(46,320)
|
(4,607,533)
|
-
|
(4,607,533)
|
Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments
|
6,416,164
|
865,325
|
580,078
|
419,163
|
43
|
5
|
4,291
|
113,675
|
(40,353)
|
8,358,391
|
169
|
8,358,560
|
Total credit impairment charges, net
|
(1,845,967)
|
(193,518)
|
(75,015)
|
(181,733)
|
(919)
|
109
|
(4,255)
|
27,279
|
(7,423)
|
(2,281,442)
|
-
|
(2,281,442)
|
Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments
|
4,570,197
|
671,807
|
505,063
|
237,430
|
(876)
|
114
|
36
|
140,954
|
(47,776)
|
6,076,949
|
169
|
6,077,118
|
Revenues (Expenses) from transactions with other operating segments of the Bank
|
(24,859)
|
(28,229)
|
(1,601)
|
(26,246)
|
(19,470)
|
23,535
|
46,346
|
120,915
|
(90,391)
|
-
|
-
|
-
|
Fees and commission income (2)
|
2,386,409
|
252,283
|
195,167
|
123,991
|
259,632
|
15,011
|
84,131
|
18,648
|
334
|
3,335,606
|
-
|
3,335,606
|
Fees and commission expenses
|
(905,069)
|
(101,725)
|
(41,876)
|
(26,802)
|
(2,142)
|
(33)
|
(2,483)
|
(2,874)
|
(3,576)
|
(1,086,580)
|
-
|
(1,086,580)
|
Total fees and commission income, net
|
1,481,340
|
150,558
|
153,291
|
97,189
|
257,490
|
14,978
|
81,648
|
15,774
|
(3,242)
|
2,249,026
|
-
|
2,249,026
|
Other operating income
|
268,897
|
18,798
|
5,305
|
44,889
|
9,693
|
14,641
|
(7,724)
|
4,579
|
735,522
|
1,094,600
|
(12,875)
|
1,081,725
|
Dividends received, and share of profits of equity method investees
|
(235,941)
|
2,041
|
107
|
655
|
11,275
|
(72,477)
|
12,219
|
(617,433)
|
18,350
|
(881,204)
|
1,220,904
|
339,700
|
Total operating income, net
|
6,059,634
|
814,975
|
662,165
|
353,917
|
258,112
|
(19,209)
|
132,525
|
(335,211)
|
612,463
|
8,539,371
|
1,208,198
|
9,747,569
|
Operating expenses (3)
|
(3,794,383)
|
(423,769)
|
(316,793)
|
(263,244)
|
(88,641)
|
(26,517)
|
(81,659)
|
(42,972)
|
(376,052)
|
(5,414,030)
|
-
|
(5,414,030)
|
Impairment, depreciation and amortization
|
(266,374)
|
(77,687)
|
(32,534)
|
(94,422)
|
(709)
|
(136)
|
(1,314)
|
(2,218)
|
(104,942)
|
(580,336)
|
(800)
|
(581,136)
|
Total operating expenses
|
(4,060,757)
|
(501,456)
|
(349,327)
|
(357,666)
|
(89,350)
|
(26,653)
|
(82,973)
|
(45,190)
|
(480,994)
|
(5,994,366)
|
(800)
|
(5,995,166)
|
Profit before tax
|
1,998,877
|
313,519
|
312,838
|
(3,749)
|
168,762
|
(45,862)
|
49,552
|
(380,401)
|
131,469
|
2,545,005
|
1,207,398
|
3,752,403
|
(1) Includes provisions, dividends,
gains on sales and non-controlling interest and reclassification according to the analysis process used by the CODM.
(2) For Further information about
income from contracts with customers, see note 13.3 Fees and commissions
(3) Includes staff costs, other administration and
general expenses, contributions and other tax burdens and others.
|
For the nine months period ended at September 30, 2018
|
|
Banking
Colombia
|
Banking
Panama
|
Banking
El
Salvador
|
Banking
Guatemala
|
Trust
|
Investment
banking
|
Brokerage
|
Off shore
|
All other
segments
|
Total before
eliminations
|
Adjustments
for
consolidation(1)
|
Total after
eliminations
|
|
In millions of COP
|
Total interest and valuation
|
9,039,942
|
1,140,409
|
667,776
|
656,748
|
328
|
18
|
11,790
|
329,193
|
11,771
|
11,857,975
|
60
|
11,858,035
|
Interest income on loans and financial leases
|
8,868,528
|
1,051,390
|
616,740
|
605,069
|
-
|
-
|
-
|
310,352
|
6,951
|
11,459,030
|
32
|
11,459,062
|
Total Debt investments
|
244,470
|
69,508
|
19,618
|
51,342
|
84
|
18
|
10,808
|
15,448
|
1
|
411,297
|
26
|
411,323
|
Derivatives
|
20,142
|
(8,317)
|
-
|
-
|
-
|
-
|
(432)
|
-
|
-
|
11,393
|
3
|
11,396
|
Total liquidity operations
|
(93,198)
|
27,828
|
31,418
|
337
|
244
|
-
|
1,414
|
3,393
|
4,819
|
(23,745)
|
(1)
|
(23,746)
|
Interest expenses
|
(3,162,328)
|
(401,827)
|
(183,816)
|
(261,459)
|
(37)
|
-
|
(14)
|
(176,685)
|
(44,845)
|
(4,231,011)
|
-
|
(4,231,011)
|
Net interest margin and valuation income on financial instruments before impairment on loans and financial leases and off balance sheet credit instruments
|
5,877,614
|
738,582
|
483,960
|
395,289
|
291
|
18
|
11,776
|
152,508
|
(33,074)
|
7,626,964
|
60
|
7,627,024
|
Total credit impairment charges, net
|
(2,517,247)
|
(169,607)
|
(72,449)
|
(125,749)
|
(797)
|
(74)
|
213
|
31,245
|
(1,312)
|
(2,855,777)
|
-
|
(2,855,777)
|
Net interest margin and valuation income on financial instruments after impairment on loans and financial leases and off balance sheet credit instruments
|
3,360,367
|
568,975
|
411,511
|
269,540
|
(506)
|
(56)
|
11,989
|
183,753
|
(34,386)
|
4,771,187
|
60
|
4,771,247
|
Revenues (Expenses) from transactions with other operating segments of the Bank
|
(24,550)
|
(21,381)
|
(1,596)
|
(5,109)
|
(24,369)
|
14,496
|
41,096
|
75,632
|
(54,219)
|
-
|
-
|
-
|
Fees and commission income (2)
|
2,048,887
|
223,314
|
163,367
|
103,128
|
232,613
|
12,221
|
84,659
|
13,886
|
2,452
|
2,884,527
|
(150)
|
2,884,377
|
Fees and commission expenses
|
(695,346)
|
(84,803)
|
(30,311)
|
(20,658)
|
(1,669)
|
(31)
|
(1,814)
|
(2,227)
|
(1,287)
|
(838,146)
|
(1)
|
(838,147)
|
Total fees and commission income, net
|
1,353,541
|
138,511
|
133,056
|
82,470
|
230,944
|
12,190
|
82,845
|
11,659
|
1,165
|
2,046,381
|
(151)
|
2,046,230
|
Other operating income
|
225,404
|
25,389
|
3,015
|
34,365
|
16,097
|
811
|
(7,248)
|
12,182
|
660,780
|
970,795
|
(17,860)
|
952,935
|
Dividends received, and share of profits of equity method investees
|
(68,872)
|
2,849
|
122
|
709
|
18,572
|
(56,700)
|
(3,224)
|
(208,206)
|
(49,829)
|
(364,579)
|
605,797
|
241,218
|
Total operating income, net
|
4,845,890
|
714,343
|
546,108
|
381,975
|
240,738
|
(29,259)
|
125,458
|
75,020
|
523,511
|
7,423,784
|
587,846
|
8,011,630
|
Operating expenses (3)
|
(3,641,815)
|
(403,897)
|
(294,330)
|
(270,609)
|
(82,242)
|
(17,839)
|
(78,140)
|
(36,742)
|
(350,149)
|
(5,175,763)
|
(30)
|
(5,175,793)
|
Impairment, depreciation and amortization
|
(128,728)
|
(40,341)
|
(20,450)
|
(63,582)
|
(433)
|
(99)
|
(1,043)
|
(819)
|
(107,012)
|
(362,507)
|
(704)
|
(363,211)
|
Total operating expenses
|
(3,770,543)
|
(444,238)
|
(314,780)
|
(334,191)
|
(82,675)
|
(17,938)
|
(79,183)
|
(37,561)
|
(457,161)
|
(5,538,270)
|
(734)
|
(5,539,004)
|
Profit before tax
|
1,075,347
|
270,105
|
231,328
|
47,784
|
158,063
|
(47,197)
|
46,275
|
37,459
|
66,350
|
1,885,514
|
587,112
|
2,472,626
|
(1) Includes provisions, dividends,
gains on sales and non-controlling interest and reclassification according to the analysis process used by the CODM.
(2) For Further information about
income from contracts with customers, see note 13.3 Fees and commissions
(3) Includes staff costs, other
administration and general expenses, contributions and other tax burdens and others
NOTE
4. CASH AND CASH EQUIVALENTS
For purposes of the consolidated statement
of cash flow and the consolidated statement of financial position, the following assets are considered as cash and cash equivalents:
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Cash and balances at central bank
|
|
|
Cash
|
6,468,111
|
5,192,182
|
Due from the Colombian Central Bank (1)
|
5,667,833
|
6,603,500
|
Due from other private financial entities
|
4,137,164
|
3,713,481
|
Checks on hold
|
162,807
|
216,323
|
Remittances of domestic negotiated checks in transit
|
102,528
|
107,531
|
Total cash and cash due from banks
|
16,538,443
|
15,833,017
|
Money market transactions
|
|
|
Interbank assets
|
1,747,137
|
1,965,973
|
Reverse repurchase agreements and other similar secured loans
|
401,167
|
931,820
|
Total money market transactions
|
2,148,304
|
2,897,793
|
Total cash and cash equivalents
|
18,686,747
|
18,730,810
|
(1) According to External
Resolution Number 005 of 2008 issued by the Colombian Central Bank, the Parent Company must maintain the equivalent of 4.50% of
its customer’s deposits with a maturity term less than 18 months as a legal banking reserve, represented in deposits at the
Central Bank or as cash in hand. In addition, according to Resolution Number 177 of 2002 issued by the Guatemalan Monetary Board,
Grupo Agromercantil Holding through its Subsidiary Banco Agromercantil de Guatemala must maintain the equivalent of 14.60% of
its customer’s deposits daily balances as a legal banking reserve, represented in unrestricted deposits at the Bank of Guatemala.
For its part, according to the norm of the banks Number 3-06 of 2000 issued by the Financial System Superintendency of El Salvador,
Banco Agricola must mantain an equivalent amount between 1.00% and 25.00% of its deposits and debt securities in issue average
daily balances as a liquidity reserve, represented in unrestricted deposits or debt securities issued by El Salvador Central Bank.
Finally, in accordance with the Agreement 004 of 2008 issued by the Superintendency of Banks of Panama, all Panamanian banks must
be maintain a minimum legal liquidity rate established at 30.00%.
As of September 30, 2019 and December 31, 2018,
there is restricted cash amounting to COP 284,116 and COP 253,546, respectively, included in other assets on the condensed consolidated
interim statement of financial position, which represents margin deposits pledged as collateral for derivative contracts traded
through Colombian clearing houses.
As of December 31, 2018, cash and cash equivalents
held by FiduPerú S.A. Sociedad Fiduciaria COP 5,830 and Arrendamiento Operativo CIB S.A.C COP 6,646, were classified as
assets held for sale.
NOTE
5. FINANCIAL ASSETS INVESTMENTS AND DERIVATIVES
5.1
Financial assets investments
The Bank’s securities portfolios at fair
value through profit or loss, other comprehensive income and at amortized cost are listed below, as of September 30, 2019 and December
31, 2018:
As of September 30, 2019
The detail of the carrying value of the financial
assets investments is as follows as of September 30, 2019:
Financial assets investments
|
Measurement methodology
|
Total carrying
value
|
Fair value through
profit or loss
|
Fair value through
other comprehensive
income
|
Amortized cost
|
In millions of COP
|
Securities issued by the Colombian Government
|
8,168,889
|
-
|
57,022
|
8,225,911
|
Securities issued by foreign governments
|
1,783,500
|
3,568,167
|
290,176
|
5,641,843
|
Securities issued by government entities
|
65,565
|
-
|
1,805,531
|
1,871,096
|
Securities issued by other financial institutions(1)
|
817,485
|
187,177
|
189,656
|
1,194,318
|
Corporate bonds
|
126,532
|
37,380
|
1,489,651
|
1,653,563
|
Total debt instruments
|
10,961,971
|
3,792,724
|
3,832,036
|
18,586,731
|
Total equity securities
|
847,282
|
512,988
|
|
1,360,270
|
Total financial assets Investments
|
|
|
|
19,947,001
|
(1) Includes mortgage-backed
securities (TIPS) measured at fair value through profit or loss amounting to COP 201,353. For further information on TIPS’
fair value measurement see Note 18 fair value of assets and liabilities.
As of December 31, 2018
The detail of the carrying value of the financial
assets investments is as follows as of December 31, 2018:
Financial assets investments
|
|
Measurement methodology
|
Total carrying
value
|
Fair value through
profit or loss
|
Fair value through other
comprehensive income
|
Amortized cost
|
In millions of COP
|
Securities issued by the Colombian Government
|
7,242,168
|
-
|
50,243
|
7,292,411
|
Securities issued by foreign governments
|
817,639
|
3,143,488
|
272,073
|
4,233,200
|
Securities issued by government entities
|
43,846
|
-
|
1,875,260
|
1,919,106
|
Securities issued by other financial institutions (1)
|
661,176
|
186,250
|
143,750
|
991,176
|
Corporate bonds
|
145,032
|
-
|
1,140,602
|
1,285,634
|
Total debt instruments
|
8,909,861
|
3,329,738
|
3,481,928
|
15,721,527
|
Total equity securities
|
1,101,461
|
538,487
|
|
1,639,948
|
Total financial assets Investments
|
|
|
|
17,361,475
|
(1) Includes mortgage-backed securities
(TIPS) measured at fair value through profit or loss amounting to COP 196,920 and amortized cost amounting to COP 7. For further
information on TIPS’ fair value measurement see Note 17 fair value of assets and liabilities.
The following table shows the breakdown of the
changes in the gross carrying amount of the debt securities at Fair value through other comprehensive income and Amortized cost,
in order to explain their significance to the changes in the loss allowance for the same portfolio as discussed above:
As of September 30, 2019
Debt instruments portfolio measure at fair value through OCI and amortized cost
|
Stage 1
|
Stage 2
|
Total
|
In millions of COP
|
Gross
carrying amount as of 1 January 2019
|
6,785,507
|
26,159
|
6,811,666
|
Transfers:
|
|
|
|
|
|
|
|
Transfer from Stage 1 to Stage 2
|
(14,024)
|
14,024
|
-
|
Change in measurement
|
13,637
|
-
|
13,637
|
Financial assets derecognized during the period other than write-offs
|
(3,178,330)
|
(393)
|
(3,178,723)
|
New financial assets purchased
|
3,810,570
|
-
|
3,810,570
|
Valuation on investments and Write-offs
|
(62,955)
|
(144)
|
(63,099)
|
Foreign exchange
|
228,906
|
1,803
|
230,709
|
Gross carrying amount as of 30 September 2019
|
7,583,311
|
41,449
|
7,624,760
|
The following shows provisions detail using
the expected credit losses model:
As of September 30, 2019
Concept
|
Stage 1
|
Stage 2
|
Total
|
In millions of COP
|
Securities at amortized cost
|
3,790,587
|
41,449
|
3,832,036
|
Carrying amount
|
3,798,601
|
41,969
|
3,840,570
|
Loss allowance
|
(8,014)
|
(520)
|
(8,534)
|
Securities at fair value through other comprehensive income
|
3,792,724
|
-
|
3,792,724
|
Carrying amount
|
3,794,847
|
-
|
3,794,847
|
Loss allowance
|
(2,123)
|
|
(2,123)
|
As of December 31, 2018
Concept
|
Stage 1
|
Stage 2
|
Total
|
In millions of COP
|
Securities at amortized cost
|
3,456,164
|
25,764
|
3,481,928
|
Carrying amount
|
3,467,285
|
26,373
|
3,493,658
|
Loss allowance
|
(11,121)
|
(609)
|
(11,730)
|
Securities at fair value through other comprehensive income
|
3,329,345
|
393
|
3,329,738
|
Carrying amount
|
3,332,398
|
393
|
3,332,791
|
Loss allowance
|
(3,053)
|
-
|
(3,053)
|
The following table sets forth the changes
in the allowance for debt instruments measured at amortized cost and fair value through other comprehensive income:
As of September 30, 2019
Concept
|
Stage 1
|
Stage 2
|
Total
|
In millions of COP
|
Balance of January 1, 2019
|
14,174
|
609
|
14,783
|
Net effect in loss allowance changes
|
(3,399)
|
-
|
(3,399)
|
Transfer to Stage 1
|
(2,869)
|
|
(2,869)
|
Transfer to Stage 2
|
(530)
|
|
(530)
|
New debt instruments purchased
|
4,136
|
|
4,136
|
Debt instruments that have been derecognized
|
(5,340)
|
|
(5,340)
|
Translation adjustment
|
566
|
(89)
|
477
|
Balance of September 30, 2019
|
10,137
|
520
|
10,657
|
The following table shows the fair value of
equity securities:
Equity securities
|
Carrying amount
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Equity
securities at fair value through profit or loss (1)
|
847,282
|
1,101,461
|
Equity securities at fair value through OCI
|
512,988
|
538,487
|
Total equity securities
|
1,360,270
|
1,639,948
|
(1)
The decrease is mainly due to the sale of the Sura Assets Management by COP 69,162 in April 15,
2019. In accordance with the price conditions agreed with Caisse de Dépôt et Placement du Québec (CDPQ) for
the sale of this investment, the total Bank’s shareholding was sold for (USD 135,173) COP 423,996.
Equity securities that have been designated
to be measured at fair value through OCI are considered strategic for the Bank and, thus, there is no intention to sell them in
the foreseeable future and that is the main reason for using this presentation alternative.
The following
table details the equity instruments designated at fair value through other comprehensive income analyzed by listing status:
Equity securities
|
Carrying amount
|
September 30, 2019
|
December 31, 2018
|
In millions of COP
|
Securities at fair value through OCI:
|
|
|
Equity securities listed in Colombia
|
68,810
|
71,626
|
Equity securities listed elsewhere
|
6,303
|
5,319
|
Equity securities unlisted:
|
|
|
TELERED
|
115,180
|
100,126
|
Asociación Gremial de Instituciones Financieras Credibanco S.A.
|
89,006
|
84,807
|
CIFI
(1)
|
-
|
23,663
|
Compañía De Procesamiento de Medios de Pago Guatemala (Bahamas), S. A.
|
18,959
|
17,408
|
Transacciones y Transferencias, S. A.
|
5,178
|
6,424
|
CADENALCO
|
3,066
|
2,964
|
Others
|
206,486
|
226,150
|
Total equity securities at fair value through OCI
|
512,988
|
538,487
|
(1) During 2019 CIFI was totally
sold for USD 6,122,697. This transaction transferred from OCI to retained earnings the amount of COP 3,579.
5.2
Derivative financial instruments
The Bank derivative activities do not give
rise to significant open positions in portfolios of derivatives. The Bank enters into derivative transactions to facilitate customer
business, for hedging purposes and arbitrage activities, such as forwards, options or swaps where the underlying are exchange rates,
interest rates and securities.
A swap agreement is a contract between two
parties to exchange cash flows based on specified underlying notional amounts, assets and/or indices. Financial futures and forward
settlement contracts are agreements to buy or sell a quantity of a financial instrument (including another derivative financial
instrument), index, currency or commodity at a predetermined rate or price during a period or at a date in the future. Futures
and option contracts are standardized agreements for future delivery, traded on exchanges that typically act as a platform.
For further information related to the objectives,
policies and processes for managing the Bank’s risk, please see Note 19 Risk Management.
The following table sets forth for the Bank’s
derivatives by type of risk:
Derivatives
|
September 30, 2019
|
December 31, 2018
|
In Millions of COP
|
Forwards
|
Assets
|
|
|
Foreign exchange contracts
|
294,120
|
294,345
|
Equity contracts
|
3,284
|
981
|
Subtotal Assets
|
297,404
|
295,326
|
Liabilities
|
|
|
Foreign exchange contracts
|
(392,116)
|
(299,015)
|
Equity contracts
|
(8,483)
|
(7,585)
|
Subtotal Liabilities
|
(400,599)
|
(306,600)
|
Total Forwards
|
(103,195)
|
(11,274)
|
Swaps
|
|
|
Assets
|
|
|
Foreign exchange contracts
|
1,409,205
|
1,199,236
|
Interest rate contracts
|
474,435
|
252,928
|
Subtotal Assets
|
1,883,640
|
1,452,164
|
Liabilities
|
|
|
Foreign exchange contracts
|
(831,195)
|
(700,903)
|
Interest rate contracts
|
(478,096)
|
(257,978)
|
Subtotal Liabilities
|
(1,309,291)
|
(958,881)
|
Total Swaps
|
574,349
|
493,283
|
Options
|
|
|
Assets
|
|
|
Foreign exchange contracts
|
111,882
|
96,218
|
Subtotal Assets
|
111,882
|
96,218
|
Liabilities
|
|
|
Foreign exchange contracts
|
(42,884)
|
(29,589)
|
Subtotal Liabilities
|
(42,884)
|
(29,589)
|
Total Options
|
68,998
|
66,629
|
Derivative Assets
|
2,292,926
|
1,843,708
|
Derivative Liabilities
|
(1,752,774)
|
(1,295,070)
|
Total, net
|
540,152
|
548,638
|
Derivative assets and liabilities are reported
on a gross basis on the condensed consolidated interim statement financial position unless there is a legally enforceable right
to set off the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities
simultaneously.
NOTE
6. LOANS AND ADVANCES TO CUSTOMERS AND FINANCIAL INSTITUTIONS, NET
Loans and financial leasing
operating portfolio
The following is the composition of the loans
and financial leasing operations portfolio, net as of September 30, 2019 and December 31, 2018:
Composition
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Commercial
(1)
|
95,549,668
|
94,600,648
|
Consumer
|
38,728,899
|
31,993,381
|
Mortgage
|
24,249,961
|
22,870,685
|
Financial Leases
|
24,227,115
|
23,198,204
|
Small Business Loans
|
1,274,638
|
1,156,198
|
Total gross loans and Financial Leases
|
184,030,281
|
173,819,116
|
Total allowance
|
(10,621,994)
|
(10,235,831)
|
Total Net Loans and financial leases
|
173,408,287
|
163,583,285
|
(1) Includes loans to financial
institutions amounting to COP 9,548,305 and COP 8,154,507 as of September 30, 2019 and December 31, 2018, respectively.
The following table shows the breakdown of
loans to financial institutions by stage:
As of September 30, 2019
Concept
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
Total loans to Financial institutions
|
9,547,515
|
67
|
723
|
9,548,305
|
Allowance
|
(20,912)
|
(1)
|
(370)
|
(21,283)
|
Total Net Loans with financial institutions
|
9,526,603
|
66
|
353
|
9,527,022
|
As of December 31, 2018
Concept
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
Total loans to Financial institutions
|
8,140,354
|
13,812
|
341
|
8,154,507
|
Allowance
|
(15,048)
|
(1,123)
|
(267)
|
(16,438)
|
Total Net Loans with financial institutions
|
8,125,306
|
12,689
|
74
|
8,138,069
|
For more details on the composition of the
loans and financial leasing operations portfolio, see Note 18 Risk Management.
Allowance for loans losses
The following table sets forth the changes
in the allowance for loans and advances and lease losses as of September 30, 2019 and 2018:
As of September 30, 2019
Concept
|
Commercial
|
Consumer
|
Mortgage
|
Financial
Leases
|
Small
Business
Loans
|
Total
|
|
In millions of COP
|
+Balance at beginning of period January 1, 2019
|
5,360,833
|
2,892,891
|
853,764
|
990,970
|
137,373
|
10,235,831
|
+
Provisions for loan losses (1)
|
2,895,645
|
2,438,042
|
196,702
|
46,040
|
89,326
|
5,665,755
|
- Charges-off
|
(1,263,580)
|
(1,382,511)
|
(80,079)
|
(71,728)
|
(53,210)
|
(2,851,108)
|
- Recoveries
|
(1,931,255)
|
(785,738)
|
(139,922)
|
(80,874)
|
(30,921)
|
(2,968,710)
|
Adjusted stage 3
|
175,271
|
107,076
|
32,239
|
38,609
|
6,952
|
360,147
|
+/-
Translation adjustment
|
71,239
|
88,038
|
13,178
|
4,693
|
2,931
|
180,079
|
Balance of September 30, 2019
|
5,308,153
|
3,357,798
|
875,882
|
927,710
|
152,451
|
10,621,994
|
(1) The provision for loan losses,
net COP 2,697,045 differs from the COP 2,274,298 presented in the line “Credit impairment charges on loans and advances and
financial leases, net” of the Condensed Consolidated Interim Statement of Income, in the amount of COP 422,747 due to the
recovery of charged-off loans.
As of September 30, 2018
Concept
|
Commercial
|
Consumer
|
Mortgage
|
Financial
Leases
|
Small business
loans
|
Total
|
|
In millions of COP
|
Balance of period January 1, 2018
|
4,514,180
|
2,291,829
|
645,101
|
631,402
|
140,591
|
8,223,103
|
+ Effect
of adoption of IFRS 9
|
516,164
|
228,240
|
104,076
|
176,224
|
1,815
|
1,026,519
|
+Balance at beginning of period January 1, 2018(Adjusted)
|
5,030,344
|
2,520,069
|
749,177
|
807,626
|
142,406
|
9,249,622
|
+/-
Loan purchases / Loan sales (1)
|
(882)
|
-
|
-
|
11
|
-
|
(871)
|
+
Provisions for loan losses (2)
|
3,252,518
|
2,378,279
|
169,524
|
243,331
|
86,980
|
6,130,632
|
- Charges-off
|
(1,109,267)
|
(1,496,771)
|
(54,729)
|
(69,237)
|
(68,612)
|
(2,798,616)
|
- Recoveries (2)
|
(1,966,564)
|
(745,688)
|
(114,785)
|
(46,927)
|
(35,074)
|
(2,909,038)
|
Adjusted stage 3 (3)
|
169,404
|
83,452
|
24,398
|
31,068
|
6,706
|
315,028
|
+/-
Translation adjustment
|
(3,493)
|
5,867
|
(285)
|
(1,414)
|
194
|
869
|
Balance at September 30, 2018
|
5,372,060
|
2,745,208
|
773,300
|
964,458
|
132,600
|
9,987,626
|
(1) This item includes portfolio
purchase/sales operation held between Bancolombia S.A. and Titularizadora Colombiana.
(2) The provision for loan losses,
net COP 3,221,594 differs from the COP 2,892,336 presented in the line “Credit impairment charges on loans and advances and
financial leases, net” of the Consolidated Statement of Income, in the amount of COP 329,258 due to the recovery of charged-off
loans.
(3) Provisions reflect the expected
credit losses (ECL) measured using the three-step approach under IFRS 9, as described in Note 2 significant accounting policies.
The following explains the significant changes
in the loans and provision during the period ended at September 30, 2019 with the expected credit loss model according to IFRS
9:
As of September 30, 2019
Loans
|
Stage
1
|
Stage
2
|
Stage
3
|
Simplified
methodology
|
Total
|
In
millions of COP
|
Balance
at January 1, 2019
|
153,894,099
|
7,606,260
|
12,212,964
|
105,793
|
173,819,116
|
Transfer
to Stage 1
|
789,557
|
(1,611,337)
|
(154,559)
|
-
|
(976,339)
|
Transfer
to Stage 2
|
(3,492,543)
|
3,585,954
|
(408,262)
|
-
|
(314,851)
|
Transfer
to Stage 3
|
(1,939,181)
|
(1,021,942)
|
3,056,185
|
-
|
95,062
|
Payments
|
(10,755,758)
|
(243,190)
|
(412,594)
|
|
(11,411,542)
|
Net
remeasurement of loss allowance
|
(15,397,925)
|
709,485
|
2,080,770
|
-
|
(12,607,670)
|
New
financial assets purchased/originated
|
60,295,398
|
1,449,434
|
1,705,029
|
134,442
|
63,584,303
|
Financial
assets that have been derecognized
|
(39,177,114)
|
(1,117,604)
|
(1,728,752)
|
(5,001)
|
(42,028,471)
|
Charges-off
|
(241,374)
|
(236,892)
|
(2,372,842)
|
-
|
(2,851,108)
|
Foreign
Exchange and other movements
|
3,733,863
|
215,190
|
155,544
|
9,514
|
4,114,111
|
Balance
at September 30, 2019
|
163,106,947
|
8,625,873
|
12,052,713
|
244,748
|
184,030,281
|
As of September 30,
2019
Provision
|
Stage
1
|
Stage
2
|
Stage
3
|
Simplified
methodology
|
Total
|
In
millions of COP
|
Balance
at January 1, 2019
|
1,759,774
|
1,215,323
|
7,244,502
|
16,232
|
10,235,831
|
Transfer
to Stage 1
|
62,303
|
(237,532)
|
(83,762)
|
5,220
|
(253,771)
|
Transfer
to Stage 2
|
(92,000)
|
549,751
|
(188,893)
|
(272)
|
268,586
|
Transfer
to Stage 3
|
(97,639)
|
(240,116)
|
2,605,826
|
846
|
2,268,917
|
Provisions
for loan losses
|
(188,969)
|
(73,605)
|
340,190
|
-
|
77,616
|
Net
remeasurement of loss allowance
|
(316,305)
|
(1,502)
|
2,673,361
|
5,794
|
2,361,348
|
New
financial assets purchased/originated
|
764,729
|
297,270
|
1,139,254
|
5,138
|
2,206,391
|
Financial
assets that have been derecognized
|
(334,662)
|
(155,343)
|
(1,019,725)
|
(817)
|
(1,510,547)
|
Charges-off
|
(24,580)
|
(85,981)
|
(2,740,332)
|
(215)
|
(2,851,108)
|
Foreign
Exchange and other movements
|
41,229
|
27,412
|
111,214
|
224
|
180,079
|
Balance
at September 30, 2019
|
1,890,185
|
1,297,179
|
7,408,274
|
26,356
|
10,621,994
|
Impact of movements
in loans and provision for Stage
Stage 1 (12 months expected credit
losses): the exposure in stage 1 presented a positive variation of COP 9,212,848 and the allowance increased COP 130,411. The growth
of the portfolio at this stage is mainly due to the new disbursement of 2019, mostly in consumer and mortgage portfolio. There
is also a credit portfolio growth of the dollar loans due to increase in the exchange rate. The variation in the allowance
is consistent with the growth on the portfolio.
Stage 2: (Lifetime expected credit
losses): the exposure in stage 2 increased COP 1,019,613, and allowance has an increase of COP 81,856. The increase in the exposure
is mainly explained for the migration of clients of the commercial portfolio from stage 1 to stage 2. Regarding the allowance,
the increase is concentrated in Bancolombia, specifically in restructures clients of the commercial portfolio and consumer portfolio
with more of 30 past due days.
Stage 3 (Lifetime expected credit
losses): the exposure in stage 3 decreased COP 160,261, while allowance increased COP 163,772, the exposure decrease is
associated mainly to the commercial portfolio, due to write offs in the energetic sector. Regarding the allowance, the increase
is due mainly to clients in the infrastructure and agriculture sector that remain in stage 3 and increased the risk level.
Charges-off
As
of September 30, 2019, and December 31, 2018 the write off loans amounted to COP 2,851,108
and COP 3,815,912.
NOTE
7. LEASES
7.1.
Lessee
The Bank has subscribed lease agreements as
a lessee. These leases arrangements involve offices, branches and administrative offices as well as some technological equipment.
As of September 30, 2019, the right of use assets amounted to COP 1,752,734 and consisted of the following:
Right of use assets
|
Balance at
January
01, 2019
|
|
Roll - forward
|
Balance at
September
30, 2019
|
Acquisitions
|
Additions
|
Expenses
depreciation
|
Disposals
|
Revaluation
|
Effect
of changes
in foreign
exchange rate
|
In millions of COP
|
Buildings
|
|
|
|
|
|
|
|
|
Cost
|
1,487,175
|
109,110
|
164,755
|
-
|
(30,082)
|
(810)
|
53,984
|
1,784,132
|
Accumulated depreciation
|
-
|
-
|
-
|
(112,508)
|
15,388
|
-
|
(2,783)
|
(99,903)
|
Furniture and fixtures
|
|
|
|
|
|
|
|
|
Cost
|
579
|
3,754
|
-
|
-
|
(151)
|
(360)
|
126
|
3,948
|
Accumulated depreciation
|
-
|
-
|
-
|
(717)
|
77
|
-
|
(25)
|
(665)
|
Technological equipment
|
|
|
|
|
|
|
|
|
Cost
|
49,736
|
3,625
|
-
|
-
|
(284)
|
(2,873)
|
1,346
|
51,550
|
Accumulated depreciation
|
-
|
-
|
-
|
(12,782)
|
18
|
-
|
(135)
|
(12,899)
|
Vehicles
|
|
|
|
|
|
|
|
|
Cost
|
34,956
|
2,770
|
-
|
-
|
(8,488)
|
(1,310)
|
-
|
27,928
|
Accumulated depreciation
|
|
-
|
-
|
(2,720)
|
1,363
|
-
|
-
|
(1,357)
|
Total right of use assets – cost
|
1,572,446
|
119,259
|
164,755
|
-
|
(39,005)
|
(5,353)
|
55,456
|
1,867,558
|
Total right of use assets - accumulated depreciation
|
-
|
-
|
-
|
(128,727)
|
16,846
|
-
|
(2,943)
|
(114,824)
|
Total right of use assets, net
|
1,572,446
|
119,259
|
164,755
|
(128,727)
|
(22,159)
|
(5,353)
|
52,513
|
1,752,734
|
The following table sets forth the changes
in lease liabilities as of September 30, 2019 according to IFRS 16:
Concept
|
|
Total
|
In millions of COP
|
Balance at January 01, 2019
|
|
1,848,833
|
(+)
New contracts
|
|
113,834
|
(+/-)
Reassessment of the lease liability
|
|
(20,304)
|
(-) Payments
|
|
(191,596)
|
(+)
Interest caused
|
|
96,280
|
(+/-)
Effect of changes in foreign exchange rate
|
|
54,419
|
Balance at September 30, 2019
|
|
1,901,466
|
The following table shows maturity analysis
of lease liabilities as of September 30, 2019:
Assets
|
Maturity less
than 1
year
|
Maturity
between 1 and
3 years
|
Maturity
between
3 and
5 years
|
Maturity more
than
5 years
|
Total lease
liabilities
|
Buildings
|
8,948
|
18,134
|
78,012
|
1,750,696
|
1,855,790
|
Vehicles
|
-
|
1,017
|
-
|
2,170
|
3,187
|
Technological equipment
|
9,687
|
10,408
|
3,483
|
15,904
|
39,482
|
Furniture and fixtures
|
-
|
1,510
|
1,497
|
-
|
3,007
|
Total lease liabilities
|
18,635
|
31,069
|
82,992
|
1,768,770
|
1,901,466
|
The weighted average rates and average useful
life of right of use assets are as follows:
As of September 30, 2019
Right of use assets
|
Weighted average life
|
Weighted average
remaining lease terms
|
Weighted average discount
rates
|
Buildings
|
282
|
158
|
5%
|
Vehicles
|
37
|
32
|
6%
|
Technological equipment
|
91
|
60
|
4%
|
Furniture and fixtures
|
46
|
39
|
7%
|
As of September 30, 2019, the lease payments
associated with those assets amounted to COP 191.596.
In the Consolidated Statement of Income, the
detail of leases are as follows:
As of September 30, 2019
Right of use assets
|
Financial
interest
|
Expenses
depreciation
|
Payments
of
penalties
|
Effect of
changes in
foreign
exchange
rate
|
Short-term
leases
|
Leases for
which the
underlying
asset is of low
value
|
Buildings
|
94,363
|
112,508
|
83
|
36
|
252
|
284
|
Vehicles
|
97
|
2,720
|
-
|
-
|
10
|
-
|
Machinery
|
1
|
197
|
-
|
-
|
-
|
-
|
Technological equipment
|
1,700
|
12,782
|
72
|
-
|
-
|
2,430
|
Furniture and fixtures
|
119
|
520
|
-
|
-
|
-
|
-
|
Total
|
96,280
|
128,727
|
155
|
36
|
262
|
2,714
|
7.2.
Lessor
Finance leases
The Bank has subscribed lease agreements as
the lessor. These leases arrangements involve machinery and equipment, computer equipment, automobile and furniture and fixtures
and their terms range between one and ten years, as follows:
As of September 30, 2019
Period
|
Gross investment in finance lease
receivable
|
Present value of minimum
payments
|
|
|
|
In millions of COP
|
|
Within 1 year
|
1,220,547
|
550,027
|
|
Over 1 year, but less than 5 years
|
6,781,596
|
7,008,711
|
|
Over 5 years
|
23,118,773
|
16,668,377
|
|
Total gross investment in finance lease receivable/ present value of minimum payments
|
31,120,916
|
24,227,115
|
|
Less: Future financial income (1)
|
(6,893,801)
|
-
|
|
Present value of payments receivable
|
24,227,115
|
24,227,115
|
|
Minimum non-collectable payments impairment
|
(927,710)
|
(927,710)
|
|
Total
|
23,299,405
|
23,299,405
|
|
(1) Future financial income: Total
Gross Investment - Total Present Value of minimum payments.
As of December 31, 2018
Period
|
Gross investment in finance lease
receivable
|
Present value of minimum
payments
|
|
|
|
In millions of COP
|
|
Within 1 year
|
735,187
|
526,581
|
|
Over 1 year, but less than 5 years
|
8,194,658
|
6,677,063
|
|
Over 5 years
|
22,738,577
|
15,994,560
|
|
Total gross investment in finance lease receivable/ present value of minimum payments
|
31,668,422
|
23,198,204
|
|
Less: Future financial income (1)
|
(8,470,218)
|
-
|
|
Present value of payments receivable
|
23,198,204
|
23,198,204
|
|
Minimum non-collectable payments impairment
|
(985,844)
|
(985,844)
|
|
Total
|
22,212,360
|
22,212,360
|
|
(1) Future financial income: Total
Gross Investment - Total Present Value of minimum payments.
Unsecured residual value
The following table sets the unsecured residual
values by type of asset as of September 30, 2019:
As of September 30, 2019
Type of asset
|
Residual value
|
In millions of COP
|
Technology
|
25,371
|
Automobile
|
23,759
|
Machinery and equipment
|
11,655
|
Furniture and fixtures
|
222
|
Total
|
61,007
|
(*) The unsecured residual value is the part
of the residual value of the leased asset, whose realization is not secured or is secured by a third party related to the lessor.
Operating leases –
lessor
Certain of the Bank’s subsidiaries leases
assets to third parties under non-cancelable leases arrangements. Assets provided through operating leases are recorded as premises
and equipment. The terms established for these agreements range from one to ten years.
The following table presents the information
of minimum payments by lease to be received:
September 30, 2019
|
In millions of COP
|
Within 1 year
|
353,131
|
Over 1 year, but less than 5 years
|
883,482
|
Over
5 years
|
381,534
|
TOTAL
|
1,618,147
|
NOTE
8. GOODWILL AND INTANGIBLE ASSETS, NET
Intangibles assets and goodwill are as follows:
|
September 30, 2019
|
December 31, 2018
|
In millions of COP
|
Intangible assets
|
543,979
|
563,452
|
Goodwill
|
7,103,536
|
6,638,403
|
Total
|
7,647,515
|
7,201,855
|
Full details of the Bank’s intangibles
assets for the year ended at December 31, 2018 are included in the 2018 Annual Report, and there is no relevant information about
the composition of the Bank’s intangible assets to be disclosed as of September 30, 2019.
NOTE
9. INCOME TAX
The income tax is recognized in each country
where the Bank has operations, in accordance with the tax regulations in force in each of the countries.
The deferred tax asset and liability is recognized
based on the temporary differences arising from the future estimate of tax and accounting effects attributable to differences between
assets and liabilities in the financial statements and its tax base.
The methodology applied to calculate the income
tax for Bancolombia subsidiaries at the end of September 2019 was the indicated in IAS 12, with the exception of Bancolombia (Colombia),
which calculated the income tax for the nine-month period completed on September 30, 2019 through a reasonable estimate in accordance
with paragraph 30 (c) of IAS 34 Interim Financial Information.
In order to adequately comply with tax regulations
on a timely basis, the Bank constantly analyzes and interprets current tax legislation that is applicable to its operations.
9.1
Components recognized in the Condensed Consolidated Interim Income Statement for the nine month period ended
|
September 30, 2019
|
September 30, 2018
|
|
In millions of COP
|
Current tax
|
|
Fiscal period
|
857,963
|
667,676
|
Prior fiscal terms
|
7,909
|
(48,471)
|
Total current tax
|
865,872
|
619,205
|
Deferred tax
|
|
|
Fiscal period
|
152,597
|
100,377
|
Total deferred tax
|
152,597
|
100,377
|
Total tax
|
1,018,469
|
719,582
|
9.2
Components recognized in Other Comprehensive Income (OCI), for the nine month period ended
September 30, 2019
|
In millions of COP
|
|
Amounts before taxes
|
Deferred tax
|
Net taxes
|
Revaluation losses related to the defined benefit liability
|
(830)
|
(1,357)
|
(2,187)
|
Net income (loss) from financial instruments measured at fair value
|
(126,788)
|
10,002
|
(116,786)
|
Unrealized gains/(loss) on investments in associates and joint ventures using equity method.
|
496
|
(1,090)
|
(594)
|
Net profit (loss) net investment coverage in operations abroad
|
619,148
|
159,391
|
778,539
|
Net
|
492,026
|
166,946
|
658,972
|
See Condensed Consolidated Interim Statement
Of Comprehensive Income
September 30, 2018
|
In millions of COP
|
|
Amounts before taxes
|
Deferred tax
|
Net taxes
|
Revaluation losses related to the defined benefit liability
|
(3,689)
|
-
|
(3,689)
|
Net income (loss) from financial instruments measured at fair value
|
27,759
|
17,030
|
44,789
|
Unrealized gains/(loss) on investments in associates and joint ventures using equity method.
|
290
|
(547)
|
(257)
|
Net profit (loss) net investment coverage in operations abroad
|
30,983
|
-
|
30,983
|
Net
|
55,343
|
16,483
|
71,826
|
See Condensed Consolidated Interim Statement
Of Comprehensive Income
9.3 Other disclosures
9.3.1
Explanation of applicable rates
Companies
domiciled in Colombia
|
September 30, 2019
|
December 31, 2018
|
Income
|
33.00%
|
33.00%
|
Surcharge
|
4.00%
|
4.00%
|
Total
|
37.00%
|
37.00%
|
Domiciled companies in other
countries
The current and deferred income tax rate for
the taxable periods 2018 and for the nine month period ended was:
|
|
September 30, 2019
|
December 31, 2018
|
Companies from Peru
|
Income
|
-
|
29.5%
|
Companies from Panama
|
Income
|
25%
|
25%
|
Companies from Salvador
|
Income
|
30%
|
30%
|
Companies from Guatemala
|
Income
|
25%
|
25%
|
9.3.2
Amount of temporary differences in subsidiaries, branches, associates on which no deferred tax expense has been recognized
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Temporary differences
|
|
|
Local subsidiaries
|
(1,133,979)
|
(442,739)
|
Foreign subsidiaries
|
(4,547,635)
|
(4,547,635)
|
In accordance with IAS 12, no deferred tax
expense was recognized due to the fact that management are able to control the future time when those differences will reserve,
and that this is not expected to take place in the foreseeable future.
9.3.3
Temporary differences to September 30, 2019
The net deferred tax assets and liabilities
by company is as follows:
|
September 30,
2019
|
September 30,
2019
|
December 31,
2018
|
December 31,
2018
|
Company
|
Deferred tax
assets
|
Deferred tax
liability
|
Deferred tax
assets
|
Deferred tax
liability
|
|
In millions of COP
|
Arrendadora Financiera S.A.
|
74
|
|
94
|
|
Bagrícola Costa Rica S.A.
|
100
|
|
74
|
|
Grupo Agromercantil Holding
|
16,000
|
|
|
(13,566)
|
Banca de Inversión Bancolombia S.A.
|
|
(20,196)
|
|
(20,300)
|
Banco Agrícola S.A.
|
82,300
|
|
67,527
|
|
Bancolombia S.A.
|
|
(1,191,259)
|
|
(1,245,807)
|
Banistmo S.A. y Filiales
|
253,974
|
|
198,958
|
|
Pasarela Colombia (antes BIBA Inmobiliaria S.A.S.)
|
154
|
|
|
(19)
|
Fideicomiso “Lote Abelardo Castro”
|
|
(123)
|
|
(123)
|
Fiduciaria Bancolombia S.A.
|
|
(1,560)
|
|
(4,265)
|
Inversiones CFNS S.A.S.
|
|
(321)
|
|
(1,011)
|
Renting Colombia S.A.
|
|
(23,475)
|
|
(22,450)
|
Transportempo S.A.S
|
1,112
|
|
163
|
|
Valores Banagrícola S.A
|
7
|
|
19
|
|
Valores Bancolombia S.A.
|
5,988
|
|
4,342
|
|
Valores Simesa S.A.
Gestora de Fondos de Inversión
|
18
|
(10,765)
|
|
(10,754)
|
Net Deferred Tax by Company
|
359,727
|
(1,247,699)
|
271,177
|
(1,318,295)
|
Net Deferred Tax
|
|
(887,972)
|
|
(1,047,118)
|
This section shows the net deferred tax resulting
from each company and differs from the information in section 9.3.4, because there the deferred tax is disclosed according to its
nature.
9.3.4.
Asset and liability deferred tax detail without netting by company
This section shows the deferred tax according
to its nature and differs from the information in section 9.3.3, because there the deferred tax is shown net by company.
Deferred tax assets with effect on Income Statement,
OCI and Equity
Deferred tax summary in balance
sheet accounts
|
December
31,
2018
|
With effects on
Results
|
With effects on OCI
and Retained Profits
|
Eliminations
|
Reclassifications
|
September 30,
2019
|
In millions of COP
|
Deferred tax assets Results
|
704,801
|
163,917
|
-
|
(35,768)
|
172,868
|
1,005,818
|
Deferred tax assets OCI and Equity
|
477,876
|
-
|
304,344
|
-
|
(164,519)
|
617,701
|
Net Deferred Tax
|
1,182,677
|
163,917
|
304,344
|
(35,768)
|
8,349
|
1,623,519
|
|
December 31, 2018
|
Implementation
|
Increase
|
September 30, 2019
|
In millions of COP
|
Deferred Tax Assets:
|
|
|
|
|
Property and equipment
|
18,117
|
11,062
|
1,876
|
8,931
|
Employee Benefits
|
172,327
|
1,048
|
29,765
|
201,044
|
Deterioration assessment
|
56,920
|
57,477
|
216,540
|
215,983
|
Tax credits settlement
|
74,189
|
2,882
|
-
|
71,307
|
Financial Obligations
|
291,865
|
16,459
|
60,721
|
336,127
|
Investments evaluation
|
73,863
|
1,847
|
65,655
|
137,671
|
Other deductions
|
17,520
|
1,579
|
18,814
|
34,755
|
Total Deferred Tax Assets
|
704,801
|
92,354
|
393,371
|
1,005,818
|
|
December 31, 2018
|
Implementation
|
Increase
|
September 30, 2019
|
In millions of COP
|
Deferred Tax Assets:
|
|
|
|
|
Net investment coverage in operations abroad
|
179,765
|
-
|
159,391
|
339,156
|
Employee Benefits
|
28,603
|
1,581
|
498
|
27,520
|
IFRS
9 implementation adjustment(1)
|
269,508
|
234,966
|
216,483
|
251,025
|
Total Deferred Tax Assets
|
477,876
|
236,547
|
376,372
|
617,701
|
(1)
value recorded against retained earnings, not other comprehensive
income (OCI)
Deferred tax liability with effect on Income
Statement, OCI and Equity
Deferred tax summary in
balance sheet accounts
|
December 31,
2018
|
With
effects
on Results
|
With effects on OCI
and Retained
Profits
|
Eliminations
|
Reclassifications
|
September 30,
2019
|
In millions of COP
|
Deferred tax liability Results
|
(2,122,001)
|
(283,134)
|
-
|
31,909
|
(38,524)
|
(2,411,750)
|
Deferred tax liability OCI and Equity
|
(107,794)
|
-
|
1,483
|
-
|
6,570
|
(99,741)
|
Net Deferred Tax
|
(2,229,795)
|
(283,134)
|
1,483
|
31,909
|
(31,954)
|
(2,511,491)
|
|
December 31, 2018
|
Implementation
|
Increase
|
September 30, 2019
|
In millions of COP
|
Deferred Tax liability:
|
|
|
|
|
Property and equipment
|
(243,330)
|
39,858
|
7,497
|
(210,969)
|
Lease restatement
|
(213,359)
|
-
|
37,796
|
(251,155)
|
Deterioration assessment
|
(375,178)
|
-
|
60,105
|
(435,283)
|
Participatory titles evaluation
|
(139,963)
|
60,357
|
39,764
|
(119,370)
|
Derivatives' evaluation
|
(178,470)
|
17,515
|
-
|
(160,955)
|
Goodwill
|
(858,849)
|
12,934
|
135,991
|
(981,906)
|
Properties received in payment
|
(77,043)
|
-
|
15,773
|
(92,816)
|
Other deductions
|
(35,809)
|
8,399
|
131,886
|
(159,296)
|
Total Deferred Tax liability:
|
(2,122,001)
|
139,063
|
428,812
|
(2,411,750)
|
|
December 31, 2018
|
Implementation
|
Increase
|
September 30, 2019
|
In millions of COP
|
Deferred Tax liability
|
|
|
|
|
Employee Benefits
|
(3,917)
|
-
|
274
|
(4,191)
|
Investments evaluation
|
(95,283)
|
10,646
|
645
|
(85,282)
|
Investments in associates. Adjustment for equity method
|
(663)
|
663
|
1,754
|
(1,754)
|
IFRS
9 implementation adjustment(1)(2)
|
(7,931)
|
77,964
|
78,547
|
(8,514)
|
Total Deferred Tax liability:
|
(107,794)
|
89,273
|
81,220
|
(99,741)
|
(1)
value recorded against retained earnings, not other comprehensive
income (OCI)
(2)
Effect on Grupo Agromercantil Holding, due to an increase
in the investments evaluation
Total deferred tax
Deferred tax summary in
balance sheet accounts
|
December 31,
2018
|
With effects
on Results
|
With effects on OCI
and Retained
Profits
|
Eliminations
|
Reclassifications
|
September 30,
2019
|
In millions of COP
|
Deferred Tax assets
|
1,182,677
|
163,917
|
304,344
|
(35,768)
|
8,349
|
1,623,519
|
Deferred Tax liability
|
(2,229,795)
|
(283,134)
|
1,483
|
31,909
|
(31,954)
|
(2,511,491)
|
Net Deferred Tax
|
(1,047,118)
|
(119,217)
|
305,827
|
(3,859)
|
(23,605)
|
(887,972)
|
9.3.5
Reconciliation of the nominal tax rate and effective tax rate
Reconciliation of the tax rate
|
September 30,
2019
|
September 30,
2018
|
In millions of COP
|
Accounting profit
|
3,752,403
|
2,472,626
|
Applicable tax with nominal rate
|
1,388,389
|
914,872
|
Non-deductible expenses to determine taxable profit (loss)
|
248,217
|
209,841
|
Accounting and non-tax expense (income) to determine of taxable profit (loss)
|
(187,410)
|
(59,908)
|
Base Differences
|
223,809
|
334,648
|
Fiscal
and non-accounting expense (income) to determine of taxable profit (loss)
|
(206,986)
|
(205,202)
|
Ordinary activities income exempt from taxation
|
(150,468)
|
(130,665)
|
Ordinary activities income not constituting income or occasional tax gain
|
(133,221)
|
(83,503)
|
Tax deductions
|
(96,730)
|
(52,405)
|
Goodwill Depreciation
|
(163,708)
|
(157,762)
|
Tax depreciation surplus
|
(86,746)
|
(60,738)
|
Tax rate effect in other countries
|
(16,987)
|
(46,481)
|
Prior fiscal terms
|
7,909
|
(48,471)
|
Other effects of the tax rate by reconciliation between accounting profit and tax expense (income)
|
192,401
|
105,356
|
Total tax
|
1,018,469
|
719,582
|
9.4
Tax contingent liabilities and assets
For the Financial Statements as of December
31, 2018 and September 30, 2019, the Bancolombia Group, once the tax positions adopted in the statements subject to review by the
tax authority were analyzed, considered it necessary to reverse and update the uncertain positions in accordance with the administrative
acts received during the year:
Balance
December 2018
|
Update
|
Payments
|
Reversal
|
Balance
September 2019
|
114,968
|
9,997
|
6,086
|
19,031
|
99,848
|
9.5 Tax credits
The following is the detail of the fiscal losses
and presumptive income excesses over net income in the Group's entities, which have not been used, as of September 30, 2019.
Base
|
Deferred tax recognized
asset
|
In millions of COP
|
226,371
|
71,307
|
In the implementation of the provisions of
IAS 12 "Income Tax", a deferred tax asset is recognized, provided that the company will have future taxable profits with
which to charge this temporary difference.
NOTE
10. DEPOSITS BY CUSTOMERS
The detail of the deposits as of September
30, 2019 and December 31, 2018 is as follows
Deposits
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Saving accounts
|
61,053,267
|
59,635,379
|
Time deposits
|
65,403,609
|
56,853,141
|
Checking accounts
|
22,656,648
|
24,098,073
|
Other deposits
|
930,680
|
1,541,878
|
Total
|
150,044,204
|
142,128,471
|
NOTE
11. DEBT INSTRUMENTS IN ISSUE
The breakdown of the Bank securities in issue
by maturity is as follows:
As of September 30, 2019
Issuer
|
Less than
a year
|
1 to 3 years
|
3 to 5 years
|
more than 5 years
|
Total amortized cost
|
In millions of COP
|
Local currency
|
|
|
|
|
|
Subordinated bonds (1)
|
-
|
-
|
-
|
1,210,894
|
1,210,894
|
Ordinary bonds
|
-
|
-
|
154,955
|
3,369,729
|
3,524,684
|
Foreign currency
|
|
|
|
|
|
Subordinated bonds (1)
|
-
|
-
|
-
|
7,252,717
|
7,252,717
|
Ordinary bonds
|
364,064
|
1,026,718
|
291,604
|
7,458,406
|
9,140,792
|
Total
|
364,064
|
1,026,718
|
446,559
|
19,291,746
|
21,129,087
|
|
(1)
|
The subordinated bonds,
in the event of default of the Bank, will be subordinated to the claims of depositors and all other creditors of the issuer, other
than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities.
|
As of December 31, 2018
Issuer
|
Less than
a year
|
1 to 3 years
|
3 to 5 years
|
more than 5 years
|
Total amortized cost
|
In millions of COP
|
Local currency
|
|
|
|
|
|
Subordinated bonds (1)
|
-
|
-
|
-
|
1,425,034
|
1,425,034
|
Ordinary bonds
|
-
|
-
|
154,813
|
3,027,306
|
3,182,119
|
Foreign currency
|
|
|
|
|
|
Subordinated bonds (1)
|
-
|
-
|
-
|
6,790,506
|
6,790,506
|
Ordinary bonds
|
652,579
|
339,419
|
159,721
|
7,737,855
|
8,889,574
|
Total
|
652,579
|
339,419
|
314,534
|
18,980,701
|
20,287,233
|
|
(1)
|
The subordinated bonds,
in the event of default of the Bank, will be subordinated to the claims of depositors and all other creditors of the issuer, other
than creditors whose claims rank equally with, or are junior to, the claims of the holders of the subordinated liabilities.
|
As of September 30, 2019 and December 31, 2018,
there were no covenants linked to the aforementioned securities in issue, nor were any of these instruments past due by the Bank
in relation to its financial obligations.
Sustainable Bonds Offering
On June 25, 2019 Bancolombia S.A. completed
the offering of ordinary bonds in an aggregate principal amount of COP 657,000. The bonds will mature 5 years from the date of
issue. This issuance was allocated through a public offering in Colombia aimed at institutional investors authorized to operate
in the Secondary Market exchange, including multilateral organizations.
Green Bonds Offering
On July 18, 2018 Bancolombia S.A. completed
the offering of ordinary bonds in an aggregate principal amount of COP 300,000 million with a term of 3 and 5 years and a rate
of IPC + 2.60% and ICP +2.95%, respectively. The bonds are referred to as Green Bonds because the proceeds from the offering will
be used to finance sustainability projects to combat climate changes, associated with renewable energies and sustainable constructions.
NOTE
12. EMPLOYEE BENEFIT PLANS
The following table shows liabilities relating
to post-employment and long-term benefit plans:
Post-employment and long-term benefit plans
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Defined benefit pension plan
|
124,224
|
128,246
|
Severance obligation
|
27,590
|
30,732
|
Retirement Pension Premium Plan and Senior Management Pension Plan Premium
|
130,678
|
120,966
|
Other long term benefits
|
461,399
|
439,321
|
Post-employment and long-term benefit plans
|
743,891
|
719,265
|
Short-term employment benefit plans recognized
in the condensed consolidated interim statement of financial position in the line “other liabilities” consist of the
following:
Other employment benefit plans
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Current severance obligation
|
97,668
|
113,654
|
Other bonuses and short-term benefits (1)
|
289,845
|
351,697
|
Other employment benefit plans
|
387,513
|
465,351
|
(1) The decrease between amount as of September
30, 2019, and December 31, 2018 corresponds to the difference of three months of provision recognized by the Bank as bonuses related
to private agreements in connection with the employees' variable compensation.
Plan
Assets
As of September 30, 2019, and December 31,
2018 the plan assets consist of the following
Plan assets
|
As of September 30, 2019
|
As of December 31, 2018
|
|
In millions of COP
|
Colombia
|
29,836
|
32,252
|
Panamá
|
4,956
|
4,884
|
Defined
contribution plans
The expense recognized in the line “Salaries
and employee benefits” of the condensed consolidated interim statement of income for defined contribution plans, for current
severance regimen and pension benefits for the nine months period ended at September 30, is:
Defined contribution plans
|
2019
|
2018
|
|
In millions of COP
|
Pension
|
|
149,802
|
138,131
|
Current severance regimen
|
|
69,726
|
66,108
|
Total
|
|
219,528
|
204,239
|
NOTE
13. APPROPIATED RESERVES
As of September 30, 2019, and December 31,
2018 the appropriated retained earnings consist of the following:
Concept
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Appropriation of net income (1)
|
9,406,792
|
9,312,009
|
For fiscal provisions (2)
|
262,671
|
276,640
|
Others (3)
|
743,359
|
153,125
|
Total appropriated reserves
|
10,412,822
|
9,741,774
|
(1) The legal reserve fulfills two objectives: to increase and maintain the company's capital and to absorb economic losses. Based on the aforementioned, this amount shall not be distributed in dividends to the stockholders.
(2) Pursuant
to Article 130 of Tax Statute, a non-distributable reserve to the shareholders must be established for the 70% of the difference
between the accounting and the tax depreciation, when the tax depreciation is greater than the accounting depreciation.
(3) The increase of other reserves
corresponds to occasional reserves for business growth and leverage.
NOTE
14. NET OPERATING INCOME
14.1
Interest and valuation on investment
The following table sets forth the detail of
interest and valuation on financial asset instruments for the years ended September 30, 2019 and 2018:
|
2019
|
2018
|
|
In millions of COP
|
Debt investments, net
|
116,777
|
91,669
|
Net gains from investment activities at fair value through income statement
|
|
|
Debt investments
|
806,942
|
319,654
|
Derivatives
|
(209,339)
|
11,396
|
Repos
|
(155,786)
|
(40,583)
|
Spot transactions
|
(6,031)
|
(8,486)
|
Total net gains from investment activities at fair value through profit and loss
|
435,786
|
281,981
|
Interest and valuation on investments
|
552,563
|
373,650
|
14.2.
Interest expenses
The following table sets forth the detail of
interest on financial liability instruments for the years ended September 30, 2019 and 2018:
Interest expenses
|
2019
|
2018
|
|
In millions of COP
|
Deposits
|
(3,086,891)
|
(2,896,754)
|
Debt securities in issue
|
(864,093)
|
(844,390)
|
Financial borrowings
|
(484,415)
|
(420,795)
|
Interest right of use assets
|
(96,280)
|
-
|
Preferred shares
|
(43,181)
|
(43,734)
|
Borrowings from other financial institution
|
(16,855)
|
(12,117)
|
Other interest
|
(15,818)
|
(13,221)
|
Interest expenses
|
(4,607,533)
|
(4,231,011)
|
Net interest
income includes interest earned on loans, ‘repos’ and investments less interest bearing on deposits by customers, debt
securities in issued, borrowing from other financial institutions. At September 30, 2019 and 2018, net interest income amounted
to COP 8,692,975 and 7,667,863, respectively.
14.3 Commissions
Commission income:
The Bank has elected to present the income
from contracts with costumes as an element in a line named “Fees and commissions income” in the consolidated statement
of income separated from the other income sources.
The information contained in this section about
the fees and commission’s income presents information on the nature, amount, timing and uncertainty of the income from ordinary
activities which arise from a contract with a customer under the regulatory framework of IFRS 15 Revenue from Ordinary activities
from Contracts with Customers.
In the following table, the description of
the principle activities through which the Bank generates revenue from contracts with customers is presented:
Fees and
Commissions
|
Description
|
Banking services
|
Banking Services are related to commissions from the use of digital or physical channels or once the customer makes a transaction. The performance obligation is fulfilled once the payment is delivered to its beneficiary and the proof of receipt of the payment is sent, in that moment, the collection of the commission charged to the customer is generated, which is a fixed amount. The commitment is satisfied during the entire validity of the contract with the customer. The Bank acts as principal.
|
Credit and debit card fees
|
In debit card product contracts, the price
assigned to the services promised by the Bank to the customers is fixed. Given that no financing component exists, it is established
on the basis of the national and international interbank rate. Additionally, the product charges to the customers commissions for
handling fees, at a determined time and with a fixed rate.
The commissions for Credit Cards are handling
fees and depend on the card franchise. The commitment is satisfied as long as the customer has capacity available on the card.
Other revenue received by the (issuer) credit
card product, are advanced commission; this revenue is the charge generated each time the customer makes a national or international
advance, at owned or non-owned ATMs, or through a physical branch. The banking exchange rate is revenue for the Issuing Bank of
the credit card for the services provided to the business for the transaction at the point of sale. The commission is accrued and
collected immediately at the establishment and has a fixed amount.
In the credit cards product there is a customer
loyalty program, in which points are awarded for each transaction made by the customer in a retail establishment. The program is
administrated by a third party who assumes the inventory and claims risks, for which it acts as agent. The Bank recognized it as
a lower value of the revenue from the banking exchange rate.
The rights and obligations of each party in respect of the goods
and services for transfer are clearly identified, the payment terms are explicit, and it is probable, that it takes into consideration
the capacity of the customer and the intention of having to pay the consideration at termination to those entitled to change the
transferred goods or services. The revenue is recognized at a point in time: The Bank satisfies the performance obligation when
the “control” of the goods or services was transferred to the customers.
|
Deposits
|
Deposits are related to the services generated from the offices network of the Bank once a customer makes a transaction. The Bank generally commits to maintain active channels for the products that the customer has with the Bank, with the purpose of making payments and transfers, sending statements and making transactions in general. The commissions are deducted from the deposit account, and they are incurred at a point in time. The Bank acts as principal.
|
Electronic services and ATMs
|
Revenue received from electronic services and ATMs arises through the provision of services so that the customers may make required transactions, and which are enabled by the Bank. These include online and real-time payments by the customers of the Bank holding a checking or savings accounts, with a debit or credit card for the products and services that the customer offers. Each transaction has a single price, for a single service. The provision of collection services or other different services provided by the Bank, through electronic equipment, generate consideration chargeable to the customer established contractually by the bank as a fee. The Bank acts as principal and the revenues recognized at a point in time.
|
Brokerage
|
Brokerage is a group of services for the negotiation and administration of operations for purchasing fixed revenue securities, equities and operations with derivatives in its own name, but on the account of others. The performance obligations are fulfilled at a point in time when the commission agent in making its best effort can execute the business entrusted by the customer in the best conditions. The performance obligations are considered satisfied once the service stipulated in the contract is fulfilled, as consideration fixed, or variable payments are agreed, depending on the service. It acts generally as principle and in some special cases as agent
|
Remittance
|
Revenue for remittance is received as consideration
for the commitment established by the Bank to pay remittances sent by the remitting companies to the beneficiaries of the same.
The commitment is satisfied at a point in time to the extent that the remittance is paid to the beneficiary.
The price is fixed, but may vary in accordance
to the transferred amount, due to the operation being dependent on the volume of operations generated and the transaction type.
There is no component of financing, nor the right to receive consideration dependent on the occurrence or not of a future event.
|
Acceptances, Guarantees and Standby Letters of Credit
|
Banking Service from acceptances, guarantees and standby letters of credit which are not part of the portfolio of the Bank. Different performance obligations exist and are satisfied when the service is given to the customer. The consideration in these type of contracts may include fixed amounts, variable amounts or both. The bank acts as principal in these agreements and the revenue is recognized at a point in time.
|
Trust
|
Revenue related to Trust are received from the administration of the customer resources in the business of investment trusts, property trusts, management trusts, guarantee trusts, for the resources of the general social security system, Collective portfolios and Private Equity Funds (PEF). The commitments are established in contracts independently and in an explicit manner, and the services provided by the Bank are not inter-related between the contracts. The performance obligation corresponds to performing the best management in terms of the services to be provided in relation to trust characteristics, thus fixed and variable prices are established depending on the complexity of the business, similarly, revenues are recognized throughout or at a determined time, in all the established businesses it acts as principal.
|
Securities brokerage
|
Valores Bancolombia makes available its commercial strength for the deposit, reinvestment of resources through financial instruments to the issuing company. It receives a payment for deposits made. The commitment of the contract is satisfied to the extent that the resources requested by the issuer are obtained through the distribution desks of Valores Bancolombia. The collection is made monthly. It is established that Valores Bancolombia may undertake collection of these commissions at the end of the month through a collection account charged to the issuer, acting as principal.
|
Bancassurance
|
The Bank receives a commission for collecting insurance premiums at a determined time and for permitting the use of its network to sell the insurances of different insurance companies over a period of time. The Bank in these bancassurance contracts acts as agent (intermediary between the customer and the insurance company), since it is the insurance company which assumes the risks, and which handles the complaints and claims of the customers inherent in each insurance. Therefore, the insurance company acts as principal before the customer. The prices agreed in bancassurance are defined as a percentage on the value of the policy premiums, the payment shall be tied to the premiums collected, sold or taken for the case of employees’ insurance. The aforementioned then means that the price is variable, since, the revenue will depend on the quantity of policies or calculations made by the insurance companies.
|
Collections
|
The Bank acting as principal, commits to collect outstanding invoices receivable by the collecting customers through the different channels offered by the bank, send the information of the collections made and credit the money to the savings or checking account defined by the collecting customer. The commitment is satisfied at a point in time to the extent that the money is collected by the different channels, the information of the said collections is delivered appropriately, and the resources are credited in real-time to the account agreed with the customer. For the service, the Bank receives a fixed payment, which is received for each transaction once the contract is in effect.
|
Services
|
These are the maintenance services performed
on the fleet owned by the customers, these services are performed on demand, and the value of the service cost is invoiced plus
an intermediation margin. The collection is made by the amount of expense invoiced by the provider plus an intermediation percentage,
which ranges between 4% and 12% depending on the customer.
The contract is written and based on a framework
contract, which is held between the customers that contains the general terms of negotiation, the payment terms are generally 30
days after generating the invoice. The revenue is recognized at the time in which the service is provided. There is no financing
nor sanctions for early cancellations.
In logistic operation services the contract
is written, with a defined duration, and details the rights and obligations of the parties. In general terms, the Bank commits
to provide to customers merchandise transport services, which includes the driver, fuel, maintenance, tolls and other elements
required to carry out the routes requested by the customer. Once the trip is finished, the price is variable and is determined
by the average cost per route, which is updated at the start of the year. At the end of the month an adjustment is made to this
price, with the actual costs incurred in the operation, such as the fuel, tolls, handling, maintenance, administrative expenses,
among others.
To view the details of the balance, refer to
line ‘Services’ in note 13.4 Other operational Income
|
Gains on sale of assets
|
The revenue that derives from the sale of assets
is calculated on the difference between the sale value, when it is higher, and the book value. The recognition of the revenue is
at a point in time once the sale is realized. The Bank acts as principal in this type of transactions and the price is determined
by the market value of the asset being sold.
To view the details of the balance, refer to
line ‘Gain on sale of assets’ in note 13.4 Other operational Income
|
Investment Banking
|
Investment Banking offers to customer’s
financial advisory services in the structuring of businesses in accordance to the needs of each one of them. The advisory services
consist in realizing a financial structuring of a credit or bond in which the Investment Bank offers the elements so that the company
decides the best option for structuring the instrument. In the financial advisory contract, a best efforts clause is included.
The promises given to the customers are established
in the contracts independently and explicitly. The services provided by the Investment Bank are not interrelated between the contracts,
correspond to the independent advice agreed and do not include additional services in the commission agreed with the customer.
The advisory services offered in each one of the contracts are identifiable separately from the other performance commitments that
the Investment Bank may have with the customers. The Investment Bank does not have a standard contract for the provision of advisory
services, given than each contract is tailored to the customer’s needs.
The transaction price is defined at the start
of the contract and is assigned to each service provided independently. The price contains a fixed and a variable portion, which
is provided in the contracts. The variation depends on the placement amount for the case of a financial structuring contract and
coordination of the issuance and conditions of the same. In these operations Banca de Inversion Bancolombia provides advice to
the customers and the price shall depend at times on the success and amount of the operation. In the contracts subject to evaluation
there are no incremental costs associated with the satisfaction of the commitments of the Bank with the customers provided for.
In the contracts signed with the customers,
a penalty clause is established in case of a customer withdrawing from continuing with the provision of the services established
in the commercial offer. The penalty shall be recognized in the financial statements once the Investment Bank is notified on the
withdrawal under the concept of charges for early termination of the contract.
|
In accordance with IFRS 15, the tables below
disaggregate in more detail than disclosed in the Bank’s annual report in 2018, revenue from contracts with customers, considering
the nature of the services offered by the Bank and the information regularly reviewed by the chief operating decision maker.
The Bank presents the information on revenue
from contracts with customers in accordance with its operating segments defined earlier in Note 3 Operating Segments for each of
the principal services offered.
The following table shows the balances categorized
by nature and by segment of revenue from ordinary activities from contracts with customers as at September 30, 2019 and 2018:
As of September 30, 2019
|
Banking
Colombia
|
Banking
Panama
|
Banking El
Salvador
|
Banking
Guatemala
|
Trust
|
Investment
Banking
|
Brokerage
|
Off Shore
|
All Other
Segments
|
Total before
eliminations
|
Adjustments for
consolidation
purposes(1)
|
Total after
eliminations
|
Revenue from contracts with customers
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and Commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking services
|
314,203
|
56,651
|
73,567
|
39,065
|
-
|
-
|
-
|
11,144
|
-
|
494,630
|
-
|
494,630
|
Credit and debit card fees and commercial estabilshments
|
1,054,909
|
143,593
|
|
55,952
|
-
|
-
|
-
|
3,142
|
-
|
1,341,493
|
-
|
1,341,493
|
Brokerage
|
-
|
5,798
|
-
|
19
|
-
|
-
|
13,600
|
-
|
-
|
19,417
|
-
|
19,417
|
Acceptances, Guarantees and Standby Letters of Credit
|
24,500
|
10,557
|
4,143
|
1,997
|
-
|
-
|
-
|
651
|
-
|
41,848
|
-
|
41,848
|
Trust
|
-
|
9,116
|
1,226
|
400
|
259,624
|
-
|
59,561
|
30
|
279
|
330,236
|
-
|
330,236
|
Securities brokerage
|
-
|
313
|
1,185
|
-
|
-
|
14,936
|
5,697
|
-
|
-
|
22,131
|
-
|
22,131
|
Bancassurance
|
424,887
|
25,495
|
115
|
-
|
7
|
-
|
9
|
-
|
-
|
450,513
|
-
|
450,513
|
Payment and collections
|
454,448
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
454,448
|
-
|
454,448
|
Others
|
113,462
|
760
|
31,034
|
26,558
|
1
|
75
|
5,264
|
3,681
|
55
|
180,890
|
-
|
180,890
|
Total revenue from contracts with customers(1)
|
2,386,409
|
252,283
|
195,167
|
123,991
|
259,632
|
15,011
|
84,131
|
18,648
|
334
|
3,335,606
|
-
|
3,335,606
|
(1)For further information about
composition of Bank’ segments see Note 3
As of September 30, 2018
|
Banking
Colombia
|
Banking
Panama
|
Banking
El
Salvador
|
Banking
Guatemala
|
Trust
|
Investment
Banking
|
Brokerage
|
Off Shore
|
All Other
Segments
|
Total before
eliminations
|
Adjustments for
consolidation
purposes
|
Total after
eliminations
|
Revenue from contracts with customers(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Fees and Commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
Banking services
|
269,292
|
48,282
|
62,129
|
28,518
|
-
|
-
|
-
|
11,374
|
-
|
419,595
|
-
|
419,595
|
Credit and debit card fees and commercial
|
915,797
|
129,490
|
69,015
|
48,763
|
-
|
-
|
-
|
1,822
|
-
|
1,164,887
|
-
|
1,164,887
|
Brokerage
|
-
|
5,296
|
-
|
20
|
-
|
-
|
15,954
|
-
|
-
|
21,270
|
-
|
21,270
|
Acceptances, Guarantees and Standby Letters of Credit
|
24,406
|
11,565
|
3,566
|
2,418
|
-
|
-
|
-
|
495
|
-
|
42,450
|
-
|
42,450
|
Trust
|
-
|
6,024
|
1,026
|
520
|
232,613
|
-
|
58,587
|
26
|
69
|
298,865
|
-
|
298,865
|
Securities brokerage
|
-
|
1,069
|
838
|
-
|
-
|
12,221
|
8,936
|
-
|
-
|
23,064
|
-
|
23,064
|
Bancassurance
|
343,006
|
21,281
|
80
|
-
|
-
|
-
|
-
|
-
|
-
|
364,367
|
-
|
364,367
|
Payments
and collections
|
414,310
|
-
|
-
|
3,012
|
-
|
-
|
-
|
-
|
-
|
417,322
|
-
|
417,322
|
Others
|
82,076
|
307
|
26,713
|
19,877
|
-
|
-
|
1,182
|
169
|
2,383
|
132,707
|
(150)
|
132,557
|
Total revenue from contracts with customers1
|
2,048,887
|
223,314
|
163,367
|
103,128
|
232,613
|
12,221
|
84,659
|
13,886
|
2,452
|
2,884,527
|
(150)
|
2,884,377
|
(1)For further information about composition of Bank’ segments see Note 3.
For the determination of the transaction price,
the Bank assigns to each one of the services the amount which represents the value expected to be received as consideration for
each independent commitment, which is based on the relative price of independent sale. The price that the Bank determines for each
performance obligation is done by defining the cost of each service, related tax and associated risks to the operation and inherent
to the transaction plus the margin expected to be received in each one of the services, taking as references the market prices
and conditions, as well as the segmentation of the customer.
In the transactions evaluated in the contracts,
changes in the price in the transaction are not identified.
Contract Assets
The Bank receives payments from customers based
on the provision of the service, in accordance to that established in the contracts. When the Bank incurs costs for providing the
service prior to the invoicing, and if these are directly related with a contract, they improve the resources of the entity, and
are expected to recuperate corresponding to a contract asset. Currently, the Group does not have assets related to contracts with
customers.
As a practical expedient, The Bank recognize
the incremental costs of obtaining a contract as an expense when the amortization period of the asset is one year or less.
Contract Liabilities
The contract liabilities constitute the obligation
of the Bank to transfer the services to a customer, for which the Group has received a payment on the part of the final customer
or if the amount is due before the execution of the contract. They also include deferred income related to services that shall
be delivered or provided in the future, which will be invoiced to the customer in advance, but which are still not due.
Fees and Commissions Expenses
Fees and Commissions Expenses
|
2019
|
2018
|
|
in millions of COP
|
Banking services
|
(467,822)
|
(396,435)
|
Call center and web page
|
(173,705)
|
(156,546)
|
Others
|
(445,053)
|
(285,166)
|
Expenses for commissions
|
(1,086,580)
|
(838,147)
|
|
|
|
|
14.4
Other operating income
The following table sets forth the detail of
other operating income net for the years ended September 30, 2019 and 2018:
Other operating income
|
2019
|
2018
|
|
In millions of COP
|
Operating leases
|
487,406
|
459,912
|
Derivatives Foreign exchange contracts
|
294,900
|
17,242
|
Service (1))
|
128,004
|
128,084
|
Investment property valuation
|
67,281
|
56,327
|
Gains on sale of assets
|
59,321
|
38,154
|
Other reversals
|
56,537
|
46,608
|
Insurance (2)
|
41,166
|
37,724
|
Penalties for failure to contracts
|
25,316
|
12,065
|
Hedging
|
767
|
10,244
|
Net foreign exchange
|
(161,697)
|
72,242
|
Others
|
82,724
|
74,333
|
Total Other operating income
|
1,081,725
|
952,935
|
(1) Corresponds to income
from contracts with customers. To see more information see note 14.3 Commissions.
(2) Corresponds to income
from Seguros Agromercantil insurance operations. See note 8
NOTE
15. OPERATING EXPENSES
The detail for administrative and general expenses
for the nine months period ended September 30, 2019 and 2018 is as follows:
15.1.
Other administrative and general expenses
Other administrative and general expenses
|
2019
|
2018
|
|
In millions of COP
|
Maintenance and repairs
|
450,978
|
425,122
|
Others Fees
|
334,801
|
298,331
|
Insurance
|
311,428
|
244,207
|
Transport
|
158,315
|
135,081
|
Data processing
|
147,650
|
97,710
|
Advertising
|
100,113
|
99,363
|
Public services
|
86,995
|
78,976
|
Cleaning and security services
|
73,898
|
71,245
|
Useful and stationery
|
64,547
|
44,811
|
Communications
|
58,023
|
53,365
|
Contributions and affiliations
|
53,687
|
49,848
|
Frauds and claims
|
47,013
|
77,465
|
Leasing
|
45,950
|
187,552
|
Properties improvements and installation
|
34,843
|
35,805
|
Travel expenses
|
31,240
|
26,716
|
Trust
|
30,084
|
31,281
|
Legal and financial consultant
|
25,335
|
20,859
|
Real estate management.
|
18,497
|
17,821
|
Board of directors and audit fee
|
16,173
|
15,538
|
Storage services
|
12,697
|
12,247
|
Disputes, fines and sanctions
|
12,301
|
18,014
|
Activities Joint Operations
|
6,202
|
6,232
|
Legal expenses
|
5,130
|
2,373
|
Donations
|
3,711
|
13,150
|
Temporary services
|
2,553
|
2,279
|
Public relations
|
1,512
|
1,881
|
Others
|
70,162
|
103,918
|
Total other administrative and general expenses
|
2,203,838
|
2,171,190
|
Wealth tax, contributions and other tax burden (1)
|
552,376
|
549,817
|
(1) See note 9 "Income
tax"
15.2.
Impairment, depreciation and amortization
Impairment, depreciation and amortization
|
2019
|
2018
|
|
In millions of COP
|
Depreciation of premises and equipment
|
254,138
|
249,115
|
Amortization of intangible assets
|
100,002
|
90,167
|
Impairment of other assets
|
98,269
|
23,929
|
Depreciation of right-of-use assets (1)
|
128,727
|
-
|
Total impairment, depreciation and amortization
|
581,136
|
363,211
|
|
(1)
|
See note 7. Leases and Note 20. Impacts
on applications of new standards
|
NOTE
16. EARNING PER SHARE (‘EPS’)
Basic EPS is calculated by reducing the income
from continuing operations by the amount of dividends declared in the current period for each class of stock and by the contractual
amount of dividends that must be paid for the current period, considering the allocation of remaining earnings to common stock
and participating securities to the extent that each security may share in earnings as if all of the earnings for the period had
been distributed. EPS is determined by dividing the total earnings allocated to each security by the weighted average number of
common shares outstanding.
Diluted EPS assumes the issuance of common
shares for all dilutive potential common shares outstanding during the reporting period. The Bank has no dilutive potential common
shares as of September 30, 2019 and 2018.
The following table summarizes information
related to the computation of basic EPS for the periods ended September 30, 2019 and 2018 (in millions of pesos, except per share
data):
|
September 30,
2019
|
September 30,
2018
|
Income from continuing operations before attribution of non-controlling interests
|
2,733,934
|
1,753,044
|
Less: Non-controlling interests from continuing operations
|
85,836
|
96,349
|
Net income from continuing operations
|
2,648,098
|
1,656,695
|
Income from operations and disposals of discontinued operations, net of taxes
|
-
|
-
|
Net income attributable to the controlling interest
|
2,648,098
|
1,656,695
|
Less: Preferred dividends declared
|
327,107
|
302,140
|
Less: Allocation of undistributed earnings to preferred stockholders
|
894,791
|
453,441
|
Continuing operations
|
894,791
|
453,441
|
Discontinued operations
|
-
|
-
|
Net income allocated to common shareholders for basic and diluted EPS
|
1,426,200
|
901,115
|
Weighted average number of common shares outstanding used in basic EPS calculation (in millions)
|
510
|
510
|
Basic and Diluted earnings per share to common shareholders
|
2,798
|
1,768
|
From continuing operations
|
2,798
|
1,768
|
From discontinuing operations
|
-
|
-
|
NOTE
17. RELATED PARTY TRANSACTIONS
The Parent Company is Bancolombia S.A. Transactions
between companies included in consolidation process and the Parent Company meet the definition of related party transactions and
were eliminated from the condensed consolidated interim financial statements. During the first nine months of 2019, there were
no significant changes to the outstanding balances and exposures with related parties. As a result, the performance of Bancolombia
has not been impacted by these variations.
NOTE
18. FAIR VALUE OF ASSETS AND LIABILITIES
The following table presents the carrying amount
and the fair value of the assets and liabilities as of September 30, 2019 and December 31, 2018:
|
September
30, 2019
|
December 31, 2018
|
Carrying
amount
|
Fair
Value
|
Carrying
amount
|
Fair
Value
|
In millions of COP
|
Assets
|
|
|
|
|
Debt instruments at fair value through profit or loss
|
10,961,971
|
10,961,971
|
8,909,861
|
8,909,861
|
Debt instruments at fair value through OCI
|
3,792,724
|
3,792,724
|
3,329,738
|
3,329,738
|
Debt instruments at amortized cost
|
3,832,036
|
3,817,282
|
3,481,928
|
3,461,616
|
Derivative financial instruments
|
2,292,926
|
2,292,926
|
1,843,708
|
1,843,708
|
Equity securities at fair value
|
1,360,270
|
1,360,270
|
1,639,948
|
1,639,948
|
Loans and advances to customers and financial institutions, net
|
173,408,287
|
176,247,669
|
163,583,285
|
167,551,429
|
Investment property
|
1,922,097
|
1,922,097
|
1,732,873
|
1,732,873
|
Investments in associates (1)
|
1,198,806
|
1,198,806
|
1,119,973
|
1,119,973
|
Total
|
198,769,117
|
201,593,745
|
185,641,314
|
189,589,146
|
Liabilities
|
|
|
|
|
Deposits by customers
|
150,044,204
|
150,809,042
|
142,128,471
|
142,860,996
|
Interbank deposits
|
1,920,483
|
1,920,483
|
1,374,222
|
1,374,222
|
Repurchase agreements and other similar secured borrowing
|
5,078,295
|
5,078,295
|
2,315,555
|
2,315,555
|
Derivative financial instruments
|
1,752,774
|
1,752,774
|
1,295,070
|
1,295,070
|
Borrowings from other financial institutions
|
15,653,594
|
15,653,594
|
16,337,964
|
16,337,964
|
Preferred shares
|
569,477
|
684,756
|
583,997
|
602,597
|
Debt instruments in issue
|
21,129,087
|
22,217,451
|
20,287,233
|
20,759,456
|
Total
|
196,147,914
|
198,116,395
|
184,322,512
|
185,545,860
|
·
|
IFRS 13 establishes a fair value
hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable, that
reflects the significance of inputs adopted in the measurement process. In accordance with IFRS the financial instruments are classified
as follows:
|
Level 1:
Observable inputs that reflect quoted prices (unadjusted) in active markets for identical assets or liabilities. An active market
is a market in which transactions for the asset or liability being measured take place with sufficient frequency and volume to
provide pricing information on an ongoing basis.
Level 2:
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability either directly or indirectly.
Level 2 generally includes: (i) quoted prices for similar assets or liabilities in active markets; (ii) quoted prices for identical
or similar assets or liabilities in markets that are not active, that is, markets in which there are few transactions for the asset
or liability.
Level 3:
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets
or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted
cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant
management judgment or estimation. This category generally includes certain retained residual interests in securitizations, asset-backed
securities (ABS) and highly structured or long-term derivative contracts where independent pricing information was not able to
be obtained for a significant portion of the underlying assets.
• Valuation process
for fair value measurements
The valuation for fair value prices is performed
using prices, methodologies and inputs provided by the official pricing services provider (Precia) to the Bank. All methodologies
and procedures developed by the pricing services provider are supervised by the Financial Superintendence of Colombia, which has
not objected to them.
On a daily basis, the back-office Service Valuation
Officer (SVO) verifies the valuation of investments, and the Credit and Financial Risk Manager area reports the results of the
portfolio’s valuation.
Fair value measurement
Assets and liabilities
a. Debt instruments
The Bank assigns prices to those debt investments,
using the prices provided by the official pricing services provider (Precia) and assigns the appropriate level according to the
procedure described above. For securities not traded or over-the-counter such as certain bonds issued by other financial institutions,
the Bank generally determines fair value utilizing internal valuation and standard techniques. These techniques include determination
of expected future cash flows which are discounted using curves of the applicable currencies and the Colombian consumer price index (interest
rate in this case), modified by the credit risk and liquidity risk. The interest rate is generally computed using observable market
data and reference yield curves derived from quoted interest in appropriate time bands, which match the timings of the cash flows
and maturities of the instruments.
b. Equity securities
The Bank performs the market price valuation
of their investments in variable income using the prices provided by the official pricing services provider (Precia) and classifies
those investments according to the procedure described above (Hierarchy of fair value section). Likewise, the fair value of unlisted
equity securities is based on an assessment of each individual investment using methodologies that include publicly-traded comparables
derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio
company by the relevant valuation multiple observed for comparable companies, acquisition comparables, and if necessary considered,
are subject to appropriate discounts for lack of liquidity or marketability. Interests in investment funds, trusts and collective
portfolios are valued using the investment unit value determined by the fund management company. For investment funds where the
underlying assets are investment properties, the investment unit value depends on the investment properties value, determined as
described below in “i. Investment property”.
c. Derivative financial
instruments
The Bank holds positions in standardized derivatives,
such as futures over local stocks, and over the representative exchange rate (TRM). These instruments are valuated according to
the information provided by Precia, which perfectly matches the information provided by the Central Counterparty Clearing House
– CCP.
Additionally, the Bank holds positions in OTC
derivatives, which in the absence of prices, are valued using the inputs and methodologies provided by the pricing services provider.
The key inputs depend upon the type of derivative
and the nature of the underlying instrument and include interest rate yield curves, foreign exchange rates, the spot price of the
underlying volatility, credit curves and correlation of such inputs.
d. Credit valuation adjustment
The Bank measures the effects of the credit
risk of its counterparties and its own creditworthiness in determining fair value of the swap, option and forward derivatives.
Counterparty credit-risk adjustments are applied
to derivatives when the Bank’s position is a derivative asset and the Bank’s credit risk is incorporated when the position
is a derivative liability. The Bank attempts to mitigate credit risk to third parties which are international banks by entering
into master netting agreements.
When assessing the impact of credit exposure,
only the net counterparty exposure is considered at risk, due to the offsetting of certain same-counterparty positions and the
application of cash and other collateral.
The Bank generally calculates the asset’s
credit risk adjustment for derivatives transacted with international financial institutions by incorporating indicative credit
related pricing that is generally observable in the market (“CDS”). The credit-risk adjustment for derivatives transacted
with non-public counterparties is calculated by incorporating unobservable credit data derived from internal credit qualifications
to the financial institutions and corporate companies located in Colombia. The Bank also considers its own creditworthiness when
determining the fair value of an instrument, including OTC derivative instruments if the Bank believes market participants would
take that into account when transacting the respective instrument. The approach to measuring the impact of the Bank’s credit
risk on an instrument transacted with international financial institutions is done using the asset swap curve calculated for subordinated
bonds issued by the Bank in foreign currency. For derivatives transacted with local financial institutions, the Bank calculates
the credit risk adjustment by incorporating credit risk data provided by rating agencies and released in the Colombian financial
market.
e. Impaired loans measured
at fair value
The Bank measured certain impaired loans based
on the fair value of the associated collateral less costs to sell. The fair values were determined as follows using external and
internal valuation techniques or third party experts, depending on the type of underlying asset.
For vehicles under leasing arrangements, the
Bank uses an internal valuation model based on price curves for each type of vehicle. Such curves show the expected price of the
vehicle at different points in time based on the initial price and projection of economic variables such as inflation, devaluation
and customs. The prices modelled in the curves are compared every nine months with market information for the same or similar vehicles
and in the case of significant deviation; the curve is adjusted to reflect the market conditions.
Other vehicles are measured using matrix pricing
from a third party. This matrix is used by most of the market participants and is updated monthly. The matrix is developed from
values provided by several price providers for identical or similar vehicles and considers brand, characteristics of the vehicles,
and manufacturing date among other variables to determine the prices.
For real estate assets, a third-party qualified
appraiser is used. The methodologies vary depending on the date of the last appraisal available for the property (the appraisal
is estimated based on either of three approaches: cost, sales comparison and income approach, and is required every three years).
When the property has been valued in the last 12 months and the market conditions have not shown significant changes, the most
recent valuation is considered the fair value of the property.
For all other cases (for example, appraisals
older than 12 months) the value of the property is updated by adjusting the value in the last appraisal for weighted factors such
as location, type and characteristics of the property, size, structural conditions and the expected sales prices, among others.
The factors are determined based on current market information gathered from several external real estate specialist.
f. Assets held for sale
measured at fair value less cost of sale
The Bank measures assets held for sale based
on fair value less costs to sell. This category includes certain foreclosed assets and investments in associates held for sale.
The fair values were determined using external and internal valuation techniques or third party experts, depending on the type
of underlying asset. Those assets are comprised mainly of real estate properties for which the appraisal is conducted by experts
considering factors such as the location, type and characteristics of the property, size, physical conditions and expected selling
costs, among others. Likewise, in some cases the fair value is estimated considering comparable prices or promises of sale and
offering prices from auctions process.
g. Mortgage-backed securities
(“TIPS”) and Asset-Backed securities
The Bank invests in asset-backed securities
for which underlying assets are mortgages and earnings under contracts issued by financial institutions and corporations, respectively.
The Bank does not have a significant exposure to sub-prime securities. The asset-backed securities are denominated in local market
TIPS and are classified as fair value through profit or loss. These asset-backed securities have different maturities and are generally
classified by credit ratings.
Fair values were estimated using discounted
cash flows models where the main key economic assumptions used are estimates of prepayment rates and resultant weighted average
lives of the securitized mortgage portfolio, probability of default and interest rate curves. These items are classified as level
2 and level 3.
h. Investments in associates
measured at fair value
The Bank recognizes its investment in PA Viva
Malls as an associated at fair value. The estimated amount is provided by fund manager as the variation of the units according
to the units owned by the Fondo Colombia Inmobiliario. The associate’s assets are comprised of investment properties
which are measured using the following techniques: comparable prices, discounted cash flows, replacement cost and direct capitalization.
For further information about techniques methodologies and inputs used by the external party see “Quantitative Information
about Level 3 Fair Value Measurements”.
I. Investment property
The Bank’s investment property are valued
by external experts, who use valuation techniques based on comparable prices, direct capitalization, discounted cash flows and
replacement costs.
Assets and liabilities measured
at fair value on a recurring basis
The following table presents for each of the
fair-value hierarchy levels the Bank’s assets and liabilities that are measured at fair value on a recurring basis at September
30, 2019 and December 31, 2018:
Financial Assets
|
Type of instrument
|
September 30, 2019
|
December 31, 2018
|
Fair value hierarchy
|
Total fair value
|
Fair value hierarchy
|
Total fair value
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
In millions of COP
|
Investment securities
|
Debt instruments at fair value through profit or loss
|
Securities issued by the Colombian Government
|
7,349,938
|
818,951
|
-
|
8,168,889
|
7,170,085
|
72,083
|
-
|
7,242,168
|
Securities issued or secured by government entities
|
60,820
|
3,715
|
1,030
|
65,565
|
24,588
|
12,851
|
6,407
|
43,846
|
Securities issued by other financial institutions
|
116,634
|
564,578
|
136,273
|
817,485
|
115,234
|
338,992
|
206,950
|
661,176
|
Securities issued by foreign governments
|
1,284,151
|
499,349
|
-
|
1,783,500
|
397,115
|
420,524
|
-
|
817,639
|
Corporate bonds
|
23,660
|
87,437
|
15,435
|
126,532
|
61,556
|
83,317
|
159
|
145,032
|
Total debt instruments at fair value through profit or loss
|
8,835,203
|
1,974,030
|
152,738
|
10,961,971
|
7,768,578
|
927,767
|
213,516
|
8,909,861
|
Debt instruments at fair value through OCI
|
|
|
|
|
|
|
|
|
Securities issued by other financial institutions
|
22,325
|
164,852
|
-
|
187,177
|
-
|
186,250
|
-
|
186,250
|
Securities issued by foreign governments
|
2,470,934
|
1,097,233
|
-
|
3,568,167
|
1,630,379
|
1,513,109
|
-
|
3,143,488
|
Corporate bonds
|
30,382
|
6,998
|
-
|
37,380
|
-
|
-
|
-
|
-
|
Total debt instruments at fair value through OCI
|
2,523,641
|
1,269,083
|
-
|
3,792,724
|
1,630,379
|
1,699,359
|
-
|
3,329,738
|
Total debt instruments
|
11,358,844
|
3,243,113
|
152,738
|
14,754,695
|
9,398,957
|
2,627,126
|
213,516
|
12,239,599
|
Equity securities
|
|
|
|
|
|
|
|
|
Equity securities
|
115,668
|
22,928
|
1,221,674
|
1,360,270
|
100,233
|
115
|
1,539,600
|
1,639,948
|
Total equity securities
|
115,668
|
22,928
|
1,221,674
|
1,360,270
|
100,233
|
115
|
1,539,600
|
1,639,948
|
Derivative financial instruments
|
Forwards
|
Foreign exchange contracts
|
-
|
102,295
|
191,825
|
294,120
|
-
|
96,426
|
197,919
|
294,345
|
Equity contracts
|
-
|
2,749
|
535
|
3,284
|
-
|
968
|
13
|
981
|
Total forwards
|
-
|
105,044
|
192,360
|
297,404
|
-
|
97,394
|
197,932
|
295,326
|
Swaps
|
Foreign exchange contracts
|
-
|
1,160,371
|
248,834
|
1,409,205
|
-
|
1,053,684
|
145,552
|
1,199,236
|
Interest rate contracts
|
5,023
|
377,185
|
92,227
|
474,435
|
2,935
|
198,697
|
51,296
|
252,928
|
Total swaps
|
5,023
|
1,537,556
|
341,061
|
1,883,640
|
2,935
|
1,252,381
|
196,848
|
1,452,164
|
Options
|
Foreign exchange contracts
|
679
|
8,605
|
102,598
|
111,882
|
-
|
6,707
|
89,511
|
96,218
|
Total options
|
679
|
8,605
|
102,598
|
111,882
|
-
|
6,707
|
89,511
|
96,218
|
Total derivative financial instruments
|
5,702
|
1,651,205
|
636,019
|
2,292,926
|
2,935
|
1,356,482
|
484,291
|
1,843,708
|
Investment properties
|
Buildings
|
-
|
-
|
249,278
|
249,278
|
-
|
-
|
1,483,594
|
1,483,594
|
Lands
|
-
|
-
|
1,672,819
|
1,672,819
|
-
|
-
|
249,279
|
249,279
|
Total investment properties
|
-
|
-
|
1,922,097
|
1,922,097
|
-
|
-
|
1,732,873
|
1,732,873
|
Investment in associates
|
PA Viva Malls
|
-
|
-
|
1,198,806
|
1,198,806
|
-
|
-
|
1,119,973
|
1,119,973
|
Total investment in associates and joint ventures
|
-
|
-
|
1,198,806
|
1,198,806
|
-
|
-
|
1,119,973
|
1,119,973
|
Total
|
11,480,214
|
4,917,246
|
5,131,334
|
21,528,794
|
9,502,125
|
3,983,723
|
5,090,253
|
18,576,101
|
Financial liabilities
|
Type of instrument
|
September 30, 2019
|
December 31, 2018
|
Fair value hierarchy
|
Total fair
value
|
Fair value hierarchy
|
Total fair value
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
In millions of COP
|
Derivative financial instruments
|
|
Forwards
|
|
Foreign exchange contracts
|
-
|
(324,423)
|
(67,693)
|
(392,116)
|
-
|
(242,844)
|
(56,171)
|
(299,015)
|
Equity contracts
|
-
|
(8,247)
|
(236)
|
(8,483)
|
-
|
(7,325)
|
(260)
|
(7,585)
|
Total forwards
|
-
|
(332,670)
|
(67,929)
|
(400,599)
|
-
|
(250,169)
|
(56,431)
|
(306,600)
|
Swaps
|
|
Foreign exchange contracts
|
-
|
(758,662)
|
(72,533)
|
(831,195)
|
-
|
(654,093)
|
(46,810)
|
(700,903)
|
Interest rate contracts
|
(7,069)
|
(458,044)
|
(12,983)
|
(478,096)
|
(3,887)
|
(248,436)
|
(5,655)
|
(257,978)
|
Total swaps
|
(7,069)
|
(1,216,706)
|
(85,516)
|
(1,309,291)
|
(3,887)
|
(902,529)
|
(52,465)
|
(958,881)
|
Options
|
|
Foreign exchange contracts
|
-
|
(42,884)
|
-
|
(42,884)
|
-
|
(29,589)
|
-
|
(29,589)
|
Total options
|
-
|
(42,884)
|
-
|
(42,884)
|
-
|
(29,589)
|
-
|
(29,589)
|
Total derivative financial instruments
|
(7,069)
|
(1,592,260)
|
(153,445)
|
(1,752,774)
|
(3,887)
|
(1,182,287)
|
(108,896)
|
(1,295,070)
|
Total
|
(7,069)
|
(1,592,260)
|
(153,445)
|
(1,752,774)
|
(3,887)
|
(1,182,287)
|
(108,896)
|
(1,295,070)
|
Fair value of assets and liabilities
that are not measured at fair value in the Statement of Financial Position
The following table presents for each of the
fair-value hierarchy levels the Bank’s assets and liabilities that are not measured at fair value in the statement of financial
position but for which the fair value is disclosed at September 30, 2019 and December 31, 2018:
Assets
|
Type of instrument
|
September 30, 2019
|
December 31, 2018
|
Fair value hierarchy
|
Total fair
value
|
Fair value hierarchy
|
Total fair
value
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
In millions of COP
|
Debt instruments
|
|
Securities issued by the Colombian Government
|
58,693
|
-
|
-
|
58,693
|
36,847
|
13,424
|
-
|
50,271
|
Securities issued or secured by government entities
|
-
|
177,493
|
1,594,244
|
1,771,737
|
17,744
|
386,396
|
1,449,333
|
1,853,473
|
Securities issued by other financial institutions
|
156,552
|
24,915
|
13,271
|
194,738
|
107,959
|
23,375
|
12,326
|
143,660
|
Securities issued by foreign governments
|
140,468
|
150,116
|
-
|
290,584
|
130,913
|
141,652
|
-
|
272,565
|
Corporate bonds
|
369,324
|
52,660
|
1,079,546
|
1,501,530
|
259,904
|
53,395
|
828,348
|
1,141,647
|
Total – Debt instruments
|
725,037
|
405,184
|
2,687,061
|
3,817,282
|
553,367
|
618,242
|
2,290,007
|
3,461,616
|
Loans and advances to customers and financial institutions, net
|
-
|
-
|
176,247,669
|
176,247,669
|
-
|
-
|
167,551,429
|
167,551,429
|
Total
|
725,037
|
405,184
|
178,934,730
|
180,064,951
|
553,367
|
618,242
|
169,841,436
|
171,013,045
|
Liabilities
|
Type of instruments
|
September 30, 2019
|
December 31, 2018
|
Fair value hierarchy
|
Total fair
value
|
Fair value hierarchy
|
Total fair
value
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
In millions of COP
|
Deposits by customers
|
-
|
(34,569,458)
|
(116,239,584)
|
(150,809,042)
|
-
|
(30,490,414)
|
(112,370,582)
|
(142,860,996)
|
Interbank deposits
|
-
|
-
|
(1,920,483)
|
(1,920,483)
|
-
|
-
|
(1,374,222)
|
(1,374,222)
|
Repurchase agreements and other similar secured borrowing
|
-
|
-
|
(5,078,295)
|
(5,078,295)
|
-
|
-
|
(2,315,555)
|
(2,315,555)
|
Borrowings from other financial institutions
|
-
|
-
|
(15,653,594)
|
(15,653,594)
|
-
|
-
|
(16,337,964)
|
(16,337,964)
|
Preferred shares
|
-
|
-
|
(684,756)
|
(684,756)
|
-
|
-
|
(602,597)
|
(602,597)
|
Debt instruments in issue
|
(10,581,052)
|
(9,040,473)
|
(2,595,926)
|
(22,217,451)
|
(9,503,793)
|
(8,486,088)
|
(2,769,575)
|
(20,759,456)
|
Total
|
(10,581,052)
|
(43,609,931)
|
(142,172,638)
|
(196,363,621)
|
(9,503,793)
|
(38,976,502)
|
(135,770,495)
|
(184,250,790)
|
IFRS requires entities to disclose the fair
value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial position,
for which it is practicable to estimate fair value. Certain categories of assets and liabilities, however, are not eligible for
fair value accounting. The financial instruments below are not recorded at fair value on a recurring and nonrecurring basis:
Short-term financial instruments
Short-term financial instruments are valued
at their carrying amounts included in the consolidated statement of financial position, which are reasonable estimates of fair
value due to the relatively short period to maturity of the instruments. This approach was used for cash and cash equivalents,
accrued interest receivable, customers’ acceptances, accounts receivable, accounts payable, accrued interest payable and
bank acceptances outstanding.
Deposits from customers
The fair value of time deposits was estimated
based on the discounted value of cash flows using the appropriate discount rate for the applicable maturity. Fair value of deposits
with no contractual maturities represents the amount payable on demand as of the statement of financial position date.
Interbank deposits and repurchase
agreements and other similar secured borrowings
Short-term interbank borrowings and repurchase
agreements have been valued at their carrying amounts because of their relatively short-term nature. Long-term and domestic development
bank borrowings have also been valued at their carrying amount because they bear interest at variable rates.
Borrowings from other financial
institutions
The fair value of borrowings from other financial
institutions were determined using discounted cash flow models. The cash flows projection of capital and interest was made according
to the contractual terms, considering capital amortization and interest bearing. Subsequently, the cash flows was discounted using
reference curves formed by the weighted average of the Bank’s deposit rates.
Debt instruments in issue
The fair value of debt instruments in issue,
comprised of bonds issued by Bancolombia S.A. and its subsidiaries, was estimated substantially based on quoted market prices.
The fair value of certain bonds which do not have a public trading market, were determined based on the discounted value of cash
flows using the rates currently offered for bonds of similar remaining maturities and the Bank’s creditworthiness.
Preferred shares
In the valuation of the liability component
of preferred shares related to the minimum dividend of 1% of the subscription price, the Bank uses the Gordon model to price the
obligation, taking into account its own credit risk, which is measured using the market spread based on observable inputs such
as quoted prices of sovereign debt. The Gordon Model is commonly used to determine the intrinsic value of a stock based on a future
series of dividends that are estimated by the Bank and growth at a constant rate considering the Bank’s own perspectives
of the payout ratio.
Loans and advances to customers
and financial institutions
Estimating the fair value of loans and advances
to customers is considered an area of considerable uncertainty as there is no observable market. The loan portfolio is stratified
into tranches and loans segments suchs as commercial, small business loans, mortgage and consumer. The fair value of loans and
advances to customers and financial institutions is determined using a discounted cash flow methodology, considering each credit’s
principal and interest projected cash flows to the prepayment date. Subsequently, the projected cash flows are discounted using
reference curves according to the type of loan and its maturity date.
Items Measured at fair value
on a non-recurring basis
The Bank measures certain foreclosed assets
held for sale based on fair value less costs to sell. The fair values were determined using external and internal valuation techniques
or third party experts, depending on the type of underlying asset. The following breakdown sets forth the fair value hierarchy
of those assets classified by type:
|
September 30, 2019
|
December 31, 2018
|
Fair-value hierarchy
|
Total fair
Value
|
Fair-value hierarchy
|
Total fair
Value
|
Level 1
|
Level 2
|
Level 3
|
Level 1
|
Level 2
|
Level 3
|
In millions of COP
|
Machinery and equipment
|
-
|
-
|
4,665
|
4,665
|
-
|
-
|
5,556
|
5,556
|
Real estate for residential purposes
|
-
|
-
|
108,390
|
108,390
|
-
|
-
|
92,052
|
92,052
|
Real estate different from
residential properties
|
-
|
-
|
19,220
|
19,220
|
-
|
-
|
24,076
|
24,076
|
Investments in associates (1)
|
-
|
-
|
19,741
|
19,741
|
-
|
-
|
-
|
-
|
Total
|
-
|
-
|
152,016
|
152,016
|
-
|
-
|
121,684
|
121,684
|
|
(1)
|
Corresponds to the investments in Avefarma S.A.S., Glassfarma Tech S.A.S. y Panamerican Pharmaceutical Holding Inc.
|
Changes in Level 3 Fair-Value
Category
The table below presents reconciliation for
all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the
nine months periods ended at September 30, 2019 and 2018:
As of September 30, 2019
|
|
Balance,
January
1, 2019
|
Included in
earnings
|
OCI
|
Purchases /
reclassifications
|
Settlement
|
Prepaids
|
Transfers
in to
Level 3
|
Transfers
out of
Level 3
|
Balance,
September
30, 2019
|
Debt instruments at fair value though profit or loss
|
|
|
|
|
|
|
|
|
|
Securities issued or secured by Government entities
|
6,407
|
19
|
-
|
-
|
(6,426)
|
-
|
1,030
|
-
|
1,030
|
Securities issued or secured by other financial entities
|
206,950
|
(19,448)
|
-
|
209
|
(16,186)
|
-
|
5,877
|
(41,129)
|
136,273
|
Corporate bonds
|
159
|
433
|
-
|
15,003
|
(160)
|
-
|
-
|
-
|
15,435
|
Total
|
213,516
|
(18,996)
|
-
|
15,212
|
(22,772)
|
-
|
6,907
|
(41,129)
|
152,738
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
330,001
|
109,895
|
-
|
137,127
|
(208,040)
|
|
(3,851)
|
37,899
|
403,031
|
Interest rate contracts
|
45,641
|
27,128
|
-
|
16,426
|
(3,642)
|
|
15,907
|
(22,216)
|
79,244
|
Equity contracts
|
(247)
|
-
|
-
|
299
|
247
|
|
-
|
-
|
299
|
Total
|
375,395
|
137,023
|
-
|
153,852
|
(211,435)
|
-
|
12,056
|
15,683
|
482,574
|
Equity securities
|
|
|
|
|
|
|
|
|
|
Equity securities
|
1,539,600
|
165,324
|
144
|
2,413
|
(485,807)
|
-
|
-
|
-
|
1,221,674
|
Total
|
1,539,600
|
165,324
|
144
|
2,413
|
(485,807)
|
-
|
-
|
-
|
1,221,674
|
Investment in associates
|
|
|
|
|
|
|
|
|
|
PA Viva Malls
|
1,119,973
|
78,833
|
-
|
-
|
-
|
-
|
-
|
-
|
1,198,806
|
Total
|
1,119,973
|
78,833
|
-
|
-
|
-
|
-
|
-
|
-
|
1,198,806
|
Equity securities - Assets held for sale
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
Total
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
-
|
As of September 30, 2018
|
|
Balance,
January
1, 2018
|
Included
in earnings
|
OCI
|
Purchases /
reclassifications
|
Settlement
|
Prepaids
|
Transfers
in to
Level 3
|
Transfers
out of
Level 3
|
Balance,
September
30, 2018
|
Debt instruments at fair value though profit or loss
|
|
|
|
|
|
|
|
|
|
Securities issued or secured by Government entities
|
-
|
36
|
-
|
1,383
|
-
|
-
|
4,914
|
-
|
6,333
|
Securities issued or secured by other financial entities
|
297,049
|
(48,042)
|
-
|
28,716
|
(37,825)
|
(8,512)
|
6,024
|
-
|
237,410
|
Corporate bonds
|
3,118
|
(5,218)
|
-
|
7,883
|
(2,516)
|
(106)
|
-
|
-
|
3,161
|
Total
|
300,167
|
(53,224)
|
-
|
37,982
|
(40,341)
|
(8,618)
|
10,938
|
-
|
246,904
|
Derivative financial instruments
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
232,012
|
(6,911)
|
-
|
84,128
|
(98,796)
|
-
|
(590)
|
(15,567)
|
194,276
|
Interest rate contracts
|
32,305
|
(10,031)
|
-
|
4,953
|
(5,732)
|
-
|
-
|
(1,855)
|
19,640
|
Equity contracts
|
(500)
|
-
|
-
|
789
|
500
|
-
|
-
|
-
|
789
|
Total
|
263,817
|
(16,942)
|
-
|
89,870
|
(104,028)
|
-
|
(590)
|
(17,422)
|
214,705
|
Equity securities
|
|
|
|
|
|
|
|
|
|
Equity securities
|
1,343,604
|
20,126
|
6,729
|
543
|
(14,737)
|
-
|
-
|
-
|
1,356,265
|
Total
|
1,343,604
|
20,126
|
6,729
|
543
|
(14,737)
|
-
|
-
|
-
|
1,356,265
|
Investment in associates
|
|
|
|
|
|
|
|
|
|
PA Viva Malls
|
757,886
|
95,190
|
-
|
121,618
|
-
|
-
|
-
|
-
|
974,694
|
Total
|
757,886
|
95,190
|
-
|
121,618
|
-
|
-
|
-
|
-
|
974,694
|
Equity securities - Assets held for sale
|
|
|
|
|
|
|
|
|
|
Assets held for sale
|
2,486
|
-
|
-
|
-
|
(2,486)
|
-
|
-
|
-
|
-
|
Total
|
2,486
|
-
|
-
|
-
|
(2,486)
|
-
|
-
|
-
|
-
|
Level 3 fair value rollforward
The following were the significant Level 3
transfers for the period of September 30, 2019 and 2018:
Transfer of COP 12,056 in 2019 from Level 2
to Level 3 of the derivative foreign exchange contracts and Interest rate contracts, was presented due to the transfer of the credit
risk from the Bank to the credit risk of the counterparty
For the nine months period ended at September
30, 2019 and 2018, unrealized gains and losses on debt instruments were COP (17,923) and COP (53,433), respectively. While equity
securities had unrealized gains and loss for COP 167,695 and COP 19,853 respectively
Transfers between Level
1 and Level 2 of the Fair Value Hierarchy
The table below presents the transfers for
all assets and liabilities measured at fair value on a recurring basis between Level 1 and Level 2 for the nine months periods
ended at September 30, 2019 and 2018:
|
September 30, 2019
|
September 30, 2018
|
Transfers Level 1
to Level 2
|
Transfers Level 2
to Level 1
|
Transfers Level 1
to Level 2
|
Transfers Level 2
to Level 1
|
Debt instruments at fair value though profit or loss
|
|
|
|
|
Securities issued or secured by Colombian Government
|
-
|
5,802
|
-
|
-
|
Securities issued or secured by Government entities
|
-
|
1,626
|
-
|
-
|
Securities issued or secured by Foreign Government
|
-
|
7,229
|
181,049
|
-
|
Corporate bonds
|
20,257
|
-
|
-
|
-
|
Total
|
20,257
|
14,657
|
181,049
|
-
|
Debt instruments at fair value through OCI
|
|
|
|
|
Securities issued or secured by Foreign Government
|
-
|
349,842
|
572,708
|
-
|
Total
|
-
|
349,842
|
572,708
|
-
|
Equity securities
|
22,818
|
3,081
|
1,197
|
-
|
Total
|
22.818
|
3.081
|
1,197
|
-
|
For the nine months period ended at September
30, 2019 and 2018 the Bank the transferred securities from Level 1 to Level 2 primarily, because such securities decreased their
liquidity and were traded less frequently to comprise an active market.
All transfers are assumed to occur at the end
of the reporting period.
Quantitative Information
about Level 3 Fair Value Measurements
The fair value of financial instruments are,
in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from
observable market transactions in the same instrument and are not based on observable market data. Changing one or more of the
inputs to the valuation models to reasonably possible alternative assumptions would change the fair values and therefore a valuation
adjustment would be recognized in profit or loss. Favorable and unfavorable changes are determined on the basis of changes in the
value of the instrument as a result of varying the levels of the unobservable input as described in the table below.
The following table sets forth information
about significant unobservable inputs related to the Bank’s material categories of Level 3 financial assets and liabilities
and the sensitivity of these fair values to reasonably possible alternative assumptions.
As of September 30, 2019
Financial instrument
|
Fair
Value
|
Valuation technique
|
Significant
unobservable input
|
Range of inputs
|
Weighted average
|
Sensitivity
100
basis
point
increase
|
Sensitivity
100
basis
point
decrease
|
Amounts in millions of COP
|
Debt instruments
|
Securities issued by other financial institutions
|
TIPS
|
100,357
|
Discounted cash flow
|
Yield
|
0.48% to 6.41%
|
3.23%
|
98,793
|
101,931
|
Liquidity risk
|
n/a
|
n/a
|
n/a
|
n/a
|
Prepayment Speed
|
n/a
|
n/a
|
103,055
|
100,164
|
Other bonds
|
35,916
|
Discounted cash flow
|
Yield
|
0.87% to 1.2%
|
1.06%
|
34,203
|
36,425
|
Liquidity risk
|
2.81% to 6.75%
|
5.63%
|
33,822
|
36,126
|
Securitizations
|
-
|
Discounted cash flow
|
Yield
|
0% to 0%
|
0.00%
|
-
|
-
|
Multilateral bonds
|
-
|
Discounted cash flow
|
Yield
|
0% to 0%
|
0.00%
|
-
|
-
|
Securities issued by other financial institutions
|
136,273
|
|
|
|
|
|
|
Securities issued by Colombian Government
|
|
|
|
|
|
Governments bonds
|
1,030
|
Discounted cash flow
|
Yield
|
-0.06% to -0.06%
|
-0.06%
|
1,029
|
1,029
|
Securities issued by Colombian Government
|
1,030
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
Corporate bonds
|
15,435
|
Discounted cash flow
|
Yield
|
0.52% to 0.52%
|
0.52%
|
15,355
|
15,500
|
Corporate bonds
|
15,435
|
|
|
|
|
|
|
Total debt instruments
|
152,738
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
Equity securities
|
1,221,674
|
Price-based
|
Price
|
n/a
|
n/a
|
n/a
|
n/a
|
Derivative financial instruments
|
|
|
|
|
|
|
|
Forward
|
124,431
|
Discounted cash flow
|
Credit spread
|
0% to 21.1%
|
3.95%
|
123,781
|
125,098
|
Swaps
|
255,545
|
Discounted cash flow
|
Credit spread
|
0% to 30.07%
|
6.00%
|
246,421
|
248,698
|
Options
|
102,598
|
Black-Scholes
|
Credit spread
|
0% to 16.97%
|
0.68%
|
101,824
|
103,000
|
Total derivate financial instruments
|
482,574
|
|
|
|
|
|
|
Investment in associates
|
|
|
|
|
|
|
|
P.A Viva Malls
|
1,198,806
|
Price-based
|
Price
|
n/a
|
n/a
|
n/a
|
n/a
|
As of December 31, 2018
Financial instrument
|
Fair Value
|
Valuation technique
|
Significant
unobservable
input
|
Range of inputs
|
Weighted
average
|
Sensitivity 100
basis point
increase
|
Sensitivity
100
basis
point
decrease
|
Amounts in millions of COP
|
Debt instruments
|
Securities issued by other financial institutions
|
TIPS
|
164,401
|
Discounted cash flow
|
Yield
|
0.16% to 0.90%
|
0.69%
|
160,056
|
168,000
|
Liquidity risk
|
0.00% to 9.38%
|
3.58%
|
160,162
|
167,881
|
Prepayment Speed
|
n/a
|
n/a
|
164,102
|
163,602
|
Other bonds
|
34,961
|
Discounted cash flow
|
Yield
|
0.14% to 0.89%
|
0.60%
|
33,700
|
36,299
|
Liquidity risk
|
2.80% to 3.48%
|
3.04%
|
33,142
|
35,678
|
Securitizations
|
5,394
|
Discounted cash flow
|
Yield
|
2.04%
|
2.04%
|
5,376
|
5,421
|
Multilateral bonds
|
2,194
|
Discounted cash flow
|
Yield
|
(0.05%)
|
(0.05%)
|
2,187
|
2,197
|
Securities issued by other financial institutions
|
206,950
|
|
|
|
|
|
|
Securities issued by Colombian Government
|
|
|
|
|
|
Governments bonds
|
6,407
|
Discounted cash flow
|
Yield
|
0.32%
|
0.32%
|
6,406
|
6,413
|
Securities issued by Colombian Government
|
6,407
|
|
|
|
|
|
|
Corporate bonds
|
|
|
|
|
|
|
|
Corporate bonds
|
159
|
Discounted cash flow
|
Yield
|
0.27%
|
0.27%
|
159
|
160
|
Corporate bonds
|
159
|
|
|
|
|
|
|
Total debt instruments
|
213,516
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
Equity securities
|
1,539,600
|
Price-based
|
Price
|
n/a
|
n/a
|
n/a
|
n/a
|
Derivative financial instruments
|
|
|
|
|
|
|
|
Forward
|
144,383
|
Discounted cash flow
|
Credit spread
|
0.00% to 54.30%
|
2.58%
|
139,506
|
136,941
|
Swaps
|
89,511
|
Black-Scholes
|
Credit spread
|
0.00% to 18.81%
|
0.77%
|
88,834
|
89,876
|
Options
|
141,501
|
Discounted cash flow
|
Credit spread
|
0.00% to 21.55%
|
2.96%
|
140,844
|
155,113
|
Derivative financial instruments
|
375,395
|
|
|
|
|
|
|
Investment in associates
|
|
|
|
|
|
|
|
P.A Viva Malls
|
1,119,973
|
Price-based
|
Price
|
n/a
|
n/a
|
n/a
|
n/a
|
The following table sets forth information
about valuation techniques used in the measurement of the fair value investment properties of the Bank, the significant unobservable
inputs and the respective sensivity:
Methodology
|
Valuation
technique
|
Significant unobservable input
|
Description of sensitivity
|
Sales Comparison Approach - SCA
The fair value assessment is based on the examination
of prices at which similar properties in the same area recently sold. Since no two properties are identical the measurement
valuation must take into account adjustments for the differences between the sold properties and those held by the Bank to earn
rentals or for capital appreciation.
|
Comparable Prices
|
The weighted average rates used in the capitalization
methodology for revenues for 2018 are:
• Direct capitalization: initial rate 8.05%
• Discounted cash flow: discount rate: 11.19%,
terminal rate: 8.33%.
The same weighted rates for the nine months period
ended at September 30, 2019 were:
• Direct capitalization: initial rate 7.97%
• Discounted cash flow: discount rate: 11.16%,
terminal rate: 8.28%.
The ratio between monthly gross income and real
estate value (rental rate) considering the differences in placements and individual factors between properties and in a weighted
way is 0.76% for 2018 and 0.69% for the nine months period ended at September 30, 2019.
|
An increase (Light, normal, considerable, significant)
in the capitalization rate used would generate a decrease (significant, light, normal, considerable) in the fair value of the asset,
and vice versa.
An increase (Light, normal, considerable, significant)
in the leases used in the valuation would generate a (significant, light, considerable) increase in the fair value of the asset,
and vice versa.
|
Income Approach
Used to estimate the fair value of the property
by taking future net cash flows and discounting them at the capitalization rate.
|
Direct Capitalization
Discounted Cash Flows
|
Cost approach
Used to estimate the fair value of the property
considering the cost to replace or build a property at the same or equal conditions of the asset to be measured, deducting the
accumulated depreciation charge and adding-up the amount of the land.
|
Replacement cost
|
There
has been no change to the valuation technique during the year for each asset.
NOTE
19. RISK MANAGEMENT
The Bank’s comprehensive risk management
is developed in compliance with current regulations and internal standards as defined by the Board of Directors, in relation to
market, credit/ counterparty, liquidity and operational risk. This management is strengthened with the three lines of defense model,
with a cohesive and coordinated approach, in which its independence is guaranteed. Within the Corporate Governance Framework, the
roles of the responsible areas in each line are defined, according to the level of responsibility in Grupo Bancolombia, in order
to guarantee effective and efficient coordination among them for risk management (in its different stages) and internal control.
First
line of defense: is the owner of risks and its management, focused
on self-control. Performs the commercial and operational management and the administration of controls; including the implementation
of actions that ensure processes compliance for risk management.
Second
line of defense: supports the construction and monitoring of the controls
from the first line of defense; performs a transversal management of risks, assisting the areas of Grupo Bancolombia in the definition
of mitigation actions and in the monitoring of the exposure; In addition, it is responsible for consolidating the risk information
in order to perform the accountability to the governance structures and senior management as appropriate.
Specifically, the Board of Directors reviews
and approves the resources, structure and processes of the Bank associated with risk management; in addition, it evaluates, through
periodic reports from the administration, the levels of exposure to the different risks, their impact and the mitigation strategies,
in accordance with the functions established in the current regulation and the Corporate Governance Code regarding the risk management.
For the development of its supervisory functions has the support of the Risk Committee in charge of the approval, monitoring and
control of policies, methodologies, tools, guidelines and strategies for the identification, measurement, control and mitigation
of risks. According to the corporate guidelines, the Risk Committee has the participation of members from the Board of Directors.
The main function of the Corporate Risk Vicepresidency
is to design and propose risk management strategies to the Board of Directors and Senior Management, lead its execution and define
the risk appetite, in such a way as to ensure alignment with the corporate strategy of the Group. In addition, it defines the
risk guidelines in policies, methodologies and tools for the Group.
The Risk Corporate Vicepresidency professionals
manage the different risks inherent to the activities undertaken in the fulfillment of their responsibilities.
Third
line of defense: Review the first two lines of defense, through a risk-based
approach, guaranteeing governance effectiveness, risk management and internal control. It provides the Governance structures and
Senior management with an adequate, independent and objective assurance of compliance within the organization.
Specifically, the Internal Audit periodically
evaluates the execution of the processes and the application of the methodologies for measurement and control of risks that support
the operations carried out by the entity, in accordance with current regulations and internal regulations defined by the Board
of Directors and Senior Management.
19.1
Credit risk
Credit risk is the risk of an economic loss
to the Bank due to a non-fulfillment of financial obligations by a customer or counterparty and arises principally from the decline
on borrower´s creditworthiness or changes in the business climate. Credit risk is the single largest risk for the Bank's
business; the Bank manages its exposure to credit risk.
The information below contains the maximum
exposure to credit risk:
September 30, 2019
Maximum exposure to credit risk - Financial instruments subject to impairment
|
In millions of COP
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
Loans and Advances
|
163,106,947
|
8,870,621
|
12,052,713
|
184,030,281
|
Commercial
|
84,218,612
|
3,974,551
|
7,356,505
|
95,549,668
|
Consumer
|
35,011,389
|
1,981,405
|
1,736,105
|
38,728,899
|
Mortgage
|
21,690,912
|
1,492,553
|
1,066,496
|
24,249,961
|
Small Business Loans
|
1,078,863
|
67,544
|
128,231
|
1,274,638
|
Financial Leases
|
21,107,171
|
1,354,568
|
1,765,376
|
24,227,115
|
Off-Balance Sheet Exposures
|
43,533,875
|
426,353
|
352,988
|
44,313,216
|
Financial Guarantees
|
6,756,803
|
7,337
|
234
|
6,764,374
|
Loan Commitments
|
36,777,072
|
419,016
|
352,754
|
37,548,842
|
Loss Allowance
|
(2,001,650)
|
(1,348,608)
|
(7,408,277)
|
(10,758,535)
|
Total
|
204,639,172
|
7,948,366
|
4,997,424
|
217,584,962
|
December 31, 2018
Maximum exposure to credit risk - Financial instruments subject to impairment
|
In millions of COP
|
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
Loans and Advances
|
153,894,099
|
7,712,055
|
12,212,962
|
173,819,116
|
Commercial
|
83,632,770
|
3,214,860
|
7,753,018
|
94,600,648
|
Consumer
|
28,666,461
|
1,758,162
|
1,568,758
|
31,993,381
|
Mortgage
|
20,280,416
|
1,513,063
|
1,077,206
|
22,870,685
|
Small Business Loans
|
958,491
|
80,805
|
116,902
|
1,156,198
|
Financial Leases
|
20,355,961
|
1,145,165
|
1,697,078
|
23,198,204
|
Off-Balance Sheet Exposures
|
38,831,993
|
349,228
|
354,525
|
39,535,746
|
Financial Guarantees
|
5,641,482
|
18,340
|
1,839
|
5,661,661
|
Loan Commitments
|
33,190,511
|
330,888
|
352,686
|
33,874,085
|
Loss Allowance
|
(1,872,529)
|
(1,246,444)
|
(7,244,517)
|
(10,363,490)
|
Total
|
190,853,563
|
6,814,839
|
5,322,970
|
202,991,372
|
Maximum Exposure to Credit Risk - Other Financial Instruments
|
|
Maximum Exposure
|
Collateral *
|
Net Exposure
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
Maximum Exposure to Credit Risk
|
Debt instruments
|
18,600,160
|
15,745,530
|
(5,048,582)
|
(2,352,276)
|
13,551,577
|
13,393,254
|
Derivatives **
|
901,129
|
894,001
|
114
|
(97)
|
901,242
|
893,905
|
Equity
|
1,360,270
|
1,639,949
|
-
|
-
|
1,360,270
|
1,639,949
|
Total
|
20,861,559
|
18,279,480
|
(5,048,468)
|
(2,352,373)
|
15,813,089
|
15,927,108
|
See Notes on this table:
* Collateral
Held (-) and Collateral Pledged (+)
** Exposure
in Derivatives with base in MTM (only positive values), netting by counterparty is applied
* Debt instruments
Book value 100%
* Equity Instruments:
|
-
|
Investment funds: Book value 100%
|
Maximum exposure to credit risk of the loans
and advances refers to the carrying amount at the end of the period. It does not take into account any collateral received or any
other credit risk mitigates.
Maximum exposure to credit risk of financial
guarantees corresponds to the total amount guaranteed at the end of the period. It does not take into account any collateral received
or any other credit risk mitigates.
Maximum exposure to derivatives refers to the
fair value at the end of the period, without considering any guarantee received or any other credit risk mitigates.
Maximum exposure to credit risk of debt instruments
and equity securities refers to the carrying amount at the end of the period without considering any guarantee received.
a.
|
Credit Risk Management
- Loans and Advances
|
Risk management during the credit life cycle
is developed through the fulfillment of the policies, procedures and methodologies stipulated in the Credit Risk Administration
System, in accordance with the strategy approved by the Board of Directors for monitoring and controlling credit risk.
The Credit Risk Administration System also
contains the general criteria to evaluate, classify, measure and mitigate credit risk. In addition, the credit risk department
has developed methodologies and manuals that specify the policies and procedures for different products and segments managed by
the Bank.
To maintain credit quality and manage the risk
arising from its lending activities, the Bank has established general loan policies, including the following:
·
|
Credit
exposure limits: It contains guidelines with regards
to the establishment of credit exposure limits. It is set in fulfillment of legal requirements and according to the Bank’s
internal guidelines.
|
·
|
Origination
policies: These policies aim to acquire ample and
sufficient knowledge of the characteristics of potential borrowers and to select them properly. The riskiness of the borrowers
is determined using credit rating models. These models use information such as the credit history of the borrower, the type of
business the borrower engages in, the borrower’s ability to repay the loan, and information received from the credit risk
bureaus. Loan applications, depending on their amount and risk level, are presented for approval at the level of management authority
required.
|
·
|
Collaterals
policies: For the purpose of mitigating risk
associated with non-fulfillment of obligations agreed upon by the borrower, the Bank has established policies for the valuation
of collateral received as well as for the determination of the maximum loan amount that can be granted against the value of the
collateral.
|
·
|
Allowance
policies: the objective of this policy is to fulfil
legal requirements and the Bank’s business policies. In addition, this policy is meant to provide the guidelines to perform
client’s status analysis and take the necessary actions in order to mitigate credit risk the Bank is exposed to. For further
information please see Note 2.
|
·
|
Monitoring
policies: Contains various monitoring procedures,
portfolio reports and policies for the purpose of overseeing, in an adequate and timely manner, the evolution of credit risk. These
procedures include a continuous process of classification and reassessment of credit operations and they maintain consistency with
the policies implemented for granting loans.
|
·
|
Portfolio
recovery policies: Through the definition of these
policies, the Bank aims to establish those mechanisms that allow it to anticipate the action to be taken in the event of possible
delays and minimize the impact resulting from non-fulfillment of payment or delays by the borrower. Additionally, the aspects established
in this policy delimit what the Bank has defined as collection management and that make it possible to obtain information to improve
the origination policies and the allowances for loans and advances and lease losses models.
|
Management of credit risk is carried out in
all of the credit life cycle. These processes are defined in the following way:
·
|
Origination:
Knowing the borrower, payment capacity analysis, payment
behavior and credit approval and structure.
|
·
|
Monitoring:
Knowing the borrower’s situation during the life of
the credit.
|
·
|
Recovery:
Collection management during the different stages of the
same credit.
|
In order to support the credit origination
processes, the Bank develops scoring and rating models based on statistical information or criteria from experts, which differentiate
the risk levels of potential borrowers in order to support the decision-making process.
The Risk Corporate Vice Presidency is in charge
of defining and documenting the specific characteristics of the models being utilized, as well as the parameters, variables to
use in each case and the cut-off points that are applied per situation in the process of issuing credit. On an annual basis at
the minimum, the Risk Corporate Vice Presidency must perform backtesting1 of the scoring and rating models used in
the granting process in order to evaluate their effectiveness. Additionally, on a periodically basis, the entire credit portfolio
will be rated taking into account the established internal models for the purpose of evaluating the credit risk of each borrower
and constitute the required allowance for loans and advances and lease losses.
1 CIIU:
International Standard Industrial Classification of All Economic Activities.
In addition to the evaluation and qualification
of the portfolio, the monthly allowance for loans and advances and lease losses serves to measure the present condition of the
portfolio and the methodologies used for its calculation serve as a tool to evaluate risk, be it in a collective or individual
manner. Collective evaluation of the portfolio applies the following parameters for measuring risk: probability of default (PD),
loss given default (LGD) and exposure at default (EAD). For further details please see Note 2 Significant Accounting Policies,
section 7.4.5 Impairment of financial assets at amortized cost.
For the evaluation of individual risk, parameters
such as recovery rates estimated by score sheets that include financial, behavioral information, collaterals and qualitative variables,
serve as elements for measuring risk and defining an allowance for loans and advances and lease losses for that borrower.
Annual backtesting is performed on the allowances
for loans and Financial Lease losses models for the purpose of maintaining suitable hedge levels in accordance with the Bank’s
risk appetite.
The Bank is continuously monitoring the concentration
of the risk groups, as well as carrying out a daily control of the exposure to different economic groups, evaluating the legal
limits of indebtedness in order to fulfill the norms established about the concentration limits.
The Bank performs international references
determined by the rankings of external risks that allow the analysis of concentration levels in different geographic areas. On
the other hand, at the legal level, the Bank is governed by the concepts and methodologies established by the external norms regarding
the construction, administration and control of the concentration of economic groups.
The following classifications are established
for the analysis of concentration:
·
|
By country:
based on the country that the loans were originated.
|
·
|
By sector:
according to the sectorial sub-segmentation defined by the
Bank based mainly on the code CIIU1.
|
·
|
By categories:
according to the portfolio categories of each agreement (commercial,
financial leases, consumer loans, small business loans and mortgages).
|
·
|
By economic
group: according to the characteristics of economic
groups as established by regulations.
|
·
|
By maturity:
according with the remaining term to loan maturity.
|
·
|
By past
due days: this concentration evaluates loans that
are more than one month overdue.
|
b.
|
Credit Quality Analysis
- Loans and Financial Leases
|
Rating System for Credit
Risk Management
Its principal aim is to determine the risk
profile of the borrower, which is obtained through a rating.
The rating for corporate loans is assigned
principally based on the analysis of the interrelation of both qualitative and quantitative elements that can affect the fulfillment
of the financial commitments acquired by a borrower. They take information on the financial statements, profit and loss statement,
historical payment behavior both with the Bank and with other entities, and qualitative information on variables that are not explicit
in the financial statements. The rating model is applied at the origination of the loan and is updated by a central qualification
office to undertake a periodical evaluation of the loan portfolio, during the months of May and November each year.
In the case of a retail customer, granting
and behavior scoring models are used in order to identify the level of risk associated with the borrower. These models include
information such as personal details, financial information, historical behavior, the total number of credit products and external
information from credit bureaus.
As the subsidiaries have their own internal
rating models, for purposes of assessing the consolidated credit risk on a homogeneous basis, the Bank has established the following
categories of risk in order to classify borrowers according to their payment behavior:
Category
|
Range % PD
|
Description
|
Commercial
|
Consumer and
Small Business Loans
|
Mortgage
|
Normal Risk
|
0
- 3.11
|
0 – 5
|
0 - 2
|
Loans and advances in this category are appropriately serviced. The borrower’s financial statements or its projected cash flows, as well as all other credit information available to the Bank, reflect adequate paying capacity.
|
Acceptable Risk
|
>
3.11 - 11.15
|
> 5 - 28
|
2 - 17
|
Loans and advances in this category are acceptably serviced and guaranty protected, but there are weaknesses in the payment capacity of the borrower which may potentially affect, on a temporary or permanent basis, the borrower’s ability to pay or its projected cash flows, to the extent that, if not timely corrected, would affect the normal servicing of the loans and advances.
|
Appreciable Risk
|
>
11.15 - 72.75
|
> 28 - 70
|
17 - 78
|
Loans and advances in this category represent insufficiencies in the borrower’s paying capacity or in the projected cash flow, which may compromise the normal servicing of the loans and advances.
|
Significant Risk
|
>
72.75 - 89.89
|
> 70 - 82
|
78 - 91
|
Loans and advances in this category have the same deficiencies as loans in category C, but to a larger extent; consequently, the probability of collection is highly doubtful.
|
Unrecoverable
|
>89.89
- 100
|
> 82 - 100
|
91 - 100
|
Loans and advances in this category are deemed uncollectible.
|
Description of Loans and
Financial Leases
In order to evaluate and manage credit risk,
the credits and financial leasing operations have been classified as:
·
|
Commercial and Financial
Leases:
|
Loans granted to individuals or companies in
order to carry out organized economic activities and are not classified as small business loans.
The borrowers in this portfolio are mainly
made up of companies, segmented in homogenous groups that are constituted according to size, annual sales or main activity. The
following variables are part of this classification:
Segment
|
Incomes/Sales
|
Corporate
|
Companies with annual sales >= COP 80,000 M. Banistmo places borrowers with annual sales >= USD 10 M. Banco Agrícola and BAM place borrowers with annual sales >= USD 25 M.
|
Business
|
Companies with annual sales > = COP 20,000 M and < COP 80,000 M except for Banco Agrícola and BAM, which place borrowers with annual sales >= USD 5 M and < USD 25 M.
|
Business Construction
|
Constructors who dedicate themselves professionally to the construction of buildings to be sold or rented as their main activity, with annual sales >= COP 20,000 M and <= COP 45,000 M. They must have more than 3 projects executed as previous experience.
|
Corporate Construction
|
Constructors who dedicate themselves to the construction of buildings to be sold or rented as their main activity, with annual sales > COP 45,000 M. They must have more than 3 projects executed as previous experience.
|
SME Construction
|
Constructors who dedicate themselves professionally to the construction of buildings to be sold or rented as their main activity with annual sales >= COP 380 M and <= COP 20,000 M. They must have more than 3 projects executed as previous experience.
|
Institutional Financing
|
Financial sector institutions.
|
Government
|
Municipalities, districts, departments with their respective decentralized organizations and entities at the national level with incomes >= COP 20,000 M.
|
SME
|
Annual sales < COP 20,000 M, with a classification between small, medium, large and plus except for Banistmo which places borrowers < USD 10 M in annual sales. For Banco Agrícola and BAM < USD 5 M.
|
Loans and advances, regardless of amount, granted
to individuals for the purchase of consumer goods or to pay for non-commercial or business services.
These loans are classified as follows:
Classification
|
Vehicles
|
Credits granted for the acquisition of vehicles. The vehicle financed is used as collateral for the loan.
|
Credit cards
|
Revolving credit limits for the acquisition of consumer goods, utilized by means of a plastic card.
|
Payroll loans
|
It is a credit line attached to an authorized individual payroll amount.
|
Other loans
|
Loans granted for the acquisition of consumer goods other than vehicles and Payroll loans Credit cards are not included in this segment.
|
The counterparties in this portfolio are mainly
individuals, segmented in homogenous groups, which are formed according to their size, which is calculated by their monthly income.
These are loans, regardless of amount, granted
to individuals for the purchase of a new or used house, commercial real estate or to build a home. These loans include loans
denominated in local units or local currency that are guaranteed by a senior mortgage on the property and that are financed
with a total repayment term of 5 to 30 years.
The counterparties in the mortgage portfolio
are mainly made up of individuals segmented in homogenous groups, which are formed according to their size, which is calculated
by their monthly income.
These are issued for the purpose of encouraging
the activities of small business and are subject to the following requirements: their indebtedness with all entities cannot exceed
120 minimum wages (excluding mortgage obligations for housing financing); (ii) the staff must not exceed 10 employees; (iii) the
client's total assets, excluding mortgage assets, are less than 500 minimum wages. For the classification of those small business
that present combinations of number of employees parameters and total assets different from those indicated, the determining factor
will be that of total assets.
The borrowers in this portfolio are mainly
individuals, segmented in homogenous groups, which are formed according to their commercial size, which is calculated by their
monthly income.
Analysis of the behavior
and impairment of the loan portfolio and financial lease operations
As of September 30, 2019, Bank’s total
loan portfolio valued in Colombian pesos registered an increase of 5.87% compared to December 2018, driven by a growth mainly in
Colombia, El Salvador and Guatemala (The last ones influenced by the devaluation of the Colombian peso against the U.S. dollar).
The 30-day past due loan ratio (consolidated) stood at 4.54% in September 2019 compared to 4.68% in December 2018, driven by a
decrease in the past-due portfolio of Personal and SME Banking consequently to the improvement in the strategies of origination
and recovery.
·
|
Commercial loans and finance
lease amounted to COP 119,776 billion, which represented an increase of 1.68% with respect to 2018. Its 30-day past due loan ratio
was 3.60%.
|
·
|
Consumer loans stood at COP
38,728 billion, which represented an increase of 21.05% with respect to 2018. Its 30-day past due loan ratio was 5.07%.
|
·
|
Mortgage loans came to COP
24,249 billion, which represented an increase of 6.03% with respect to 2018. Its 30-day past due loan ratio was 7.88%.
|
·
|
Small Business loans ended
at COP 1,274 billion, which represented an increase of 10.24% with respect to 2018. Its 30-day past due loan ratio was 12.33%.
|
In order to monitor credit risk associated
with clients, the Bank has established regular meetings conducted by a committee to identify events that can lead to a reduction
in borrowers’ ability to pay. Generally, clients with good credit behavior could be included in the watch list in case of
detecting any event that can lead to future financial difficulties to repay their loans; for instance, internal factors such as
the economic activity, financial weakness, impacts of macroeconomic conditions, changes in corporate governance and other situations
that could affect clients’ business. The amount and allowance of clients included in the described watch list, as of December
31, 2018 and September 2019 is shown below.
Watch List September 30, 2019
|
In
millions of COP
|
Risk Level
|
Amount
|
%
|
Allowance
|
Level 1 – Low Risk
|
9,630,123
|
1.07%
|
103,460
|
Level 2 – Medium Risk
|
3,135,997
|
6.52%
|
204,409
|
Level 3 and Level 4 – High Risk
|
6,294,315
|
52.59%
|
3,310,376
|
Total
|
19,060,435
|
18.98%
|
3,618,244
|
Watch List December 31, 2018
|
Million COP
|
Risk Level
|
Amount
|
%
|
Allowance
|
Level 1 – Low Risk
|
9,179,165
|
1.04%
|
95,896
|
Level 2 – Medium Risk
|
2,549,977
|
8.96%
|
228,461
|
Level
3 and Level 4 - High
Risk
|
5,723,041
|
57.36%
|
3,282,938
|
Total
|
17,452,183
|
20.67%
|
3,607,295
|
Loans and Financial Leases
Collateral
The Bank obtains collateral for loans and leases
in order to mitigate credit risk by foreclosing the collateral when the borrower cannot fully repaid the loan or lease. Collateral
is considered in the determination of the allowance for loans and advances and lease losses when it complies with the following
conditions:
|
·
|
Its fair value was established
according to technical and objective criteria.
|
|
·
|
The Bank is granted a preference
or an improved right to obtain the payment of the obligation, becoming an effective collateral.
|
|
·
|
Its performance is reasonably
possible.
|
|
·
|
It is a payment source that
sufficiently attends to the credit as per the requirement of the Bank.
|
|
·
|
When the borrower is a government
entity, the collateral has a pledge certificate issued by the appropriate authority.
|
The Bank has defined the criteria for the collateral
enforceability, which are established according to the classification of loan portfolio. In addition, the Bank has set guidelines
to value collaterals and the frequency of such valuations, as well as those guidelines related to the legalization, registry and
maintenance of the collateral. Likewise, the Bank has defined the criteria for insurability, custody and the necessary procedures
for their cancellation.
The update of the fair value of mortgages and
vehicles collaterals for the loan portfolio is made between one and three years of agreement with the policy. The methodology used
to estimate the fair value of the properties is applied by external and independent entities. Updating the fair value of the vehicles
is done through guides and valid values commonly used as reference to set the value of a vehicle. The fair value of real state
and vehicles are classified in levels 2 and 3 depending on the observability and significance of the inputs used in the valuation
techniques according to the hierarchy established by IFRS 13.
During the reporting period, the Group’s
collateral policies have not changed significantly in relation to the way collateral is held and its overall quality.
The following table shows loans and financial
leases, classified in commercial, consumer, mortgage, financial leases and small business loans, and disaggregated by type of collateral:
September 30, 2019
|
Amount Covered by Collateral
|
In Millions of COP
|
Nature of the Collateral
|
Commercial
|
Consumer
|
Mortgage
|
Financial
Leasing
|
Small Business
|
Total
|
Real Estate and Residential
|
20,894,435
|
1,836,209
|
22,760,452
|
43
|
270,746
|
45,761,885
|
Goods Given in Real Estate Leasing
|
-
|
-
|
223
|
13,399,102
|
-
|
13,399,325
|
Goods Given in Leasing Other Than Real Estate
|
-
|
-
|
-
|
6,312,557
|
-
|
6,312,557
|
Stand by Letters of Credit
|
834,823
|
210
|
-
|
-
|
-
|
835,033
|
Security Deposits
|
362,142
|
351,003
|
-
|
-
|
60,068
|
773,213
|
Guarantee Fund
|
2,882,358
|
164
|
-
|
109,317
|
324,990
|
3,316,829
|
Collection Rights
|
5,024,938
|
48,122
|
-
|
-
|
873
|
5,073,933
|
Other Collateral (Pledges)
|
3,895,951
|
5,031,890
|
43,842
|
2
|
10,032
|
8,981,717
|
Without Guarantee (Uncovered Balance)
|
61,655,021
|
31,461,301
|
1,445,444
|
4,406,094
|
607,929
|
99,575,789
|
Total loans and financial leases
|
95,549,668
|
38,728,899
|
24,249,961
|
24,227,115
|
1,274,638
|
184,030,281
|
December 31, 2018
|
Amount Covered by Collateral
|
In Millions of COP
|
Nature of the Collateral
|
Commercial
|
Consumer
|
Mortgage
|
Financial
Leasing
|
Small Business
|
Total
|
Real Estate and Residential
|
21,209,517
|
1,744,581
|
20,720,459
|
84
|
282,822
|
43,957,463
|
Goods Given in Real Estate Leasing
|
-
|
-
|
243
|
12,752,932
|
-
|
12,753,175
|
Goods Given in Leasing Other Than Real Estate
|
-
|
-
|
-
|
5,900,913
|
-
|
5,900,913
|
Stand by Letters of Credit
|
667,976
|
229
|
-
|
-
|
-
|
668,205
|
Security Deposits
|
470,400
|
369,689
|
-
|
-
|
76,136
|
916,225
|
Guarantee Fund
|
2,595,913
|
138
|
-
|
118,747
|
288,890
|
3,003,688
|
Collection Rights
|
3,992,592
|
49,910
|
-
|
-
|
1,452
|
4,043,954
|
Other Collateral (Pledges)
|
4,118,947
|
4,713,359
|
48,098
|
20
|
14,158
|
8,894,582
|
Without Guarantee (Uncovered Balance)
|
61,545,303
|
25,115,475
|
2,101,885
|
4,425,508
|
492,740
|
93,680,911
|
Total loans and financial leases
|
94,600,648
|
31,993,381
|
22,870,685
|
23,198,204
|
1,156,198
|
173,819,116
|
The Bank closely monitors collateral held for
financial assets that are considered in Stage 3, as it becomes more likely that the Bank will take possession of collateral to
mitigate potential credit losses.
Financial assets that are considered Stage
3 and related collateral held in order to mitigate potential losses are shown below:
September 30, 2019
|
In Millions of COP
|
Classification
|
Amount
|
Allowance
|
Total
|
Fair Value of
Collateral
|
Commercial
|
779,589
|
247,371
|
532,218
|
2,011,521
|
Mortgage
|
131,138
|
15,332
|
115,806
|
170,562
|
Financial Leases
|
753,038
|
218,712
|
534,326
|
1,158,984
|
Total credit assets
|
1,663,765
|
481,415
|
1,182,350
|
3,341,067
|
December 31, 2018
|
In Millions of COP
|
Classification
|
Amount
|
Allowance
|
Total
|
Fair Value of
Collateral
|
Commercial
|
775,689
|
239,720
|
535,969
|
2,528,495
|
Mortgage
|
139,084
|
21,883
|
117,201
|
173,482
|
Financial Leases
|
666,495
|
201,981
|
464,514
|
974,274
|
Total credit assets
|
1,581,268
|
463,584
|
1,117,684
|
3,676,251
|
A portion of the Bank’s financial assets
originated by the mortgage and commercial business has sufficiently low ‘loan to value’ (LTV) ratios, which results
in no loss allowance being recognized in accordance with The Bank’s expected credit loss model. The carrying amount of such
financial assets is COP 346,071 as at 30 September 2019.
Foreclosed assets and other
credit mitigants
Assets received in lieu of payment (foreclosed
assets) are recognized on the statement of financial position when current possession of the asset takes place.
Foreclosed assets represented by immovable
or movable property are received based on a commercial valuation. Foreclosed assets such as equity securities and other financial
assets, are received based on market value.
The Bank classifies foreclosed assets after
acknowledgment of the exchange operation according to the intention of use, as follows:
·
|
Non-current assets held for
sale.
|
·
|
Other marketable assets.
|
·
|
Other non-marketable assets.
|
·
|
Financial instruments (investments).
|
·
|
Premises and equipment.
|
Collaterals classified as non-current assets
held for sale are those expected to be sold in the following 12 months. When there are market restrictions that do not allow their
realization in less than 12 months and this period is extended, retroactive depreciation must be charged to results and the asset
value will be reduced by the depreciation value.
c.
|
Risk Concentration –
Loans and Advances
|
The analysis of credit risk concentration is
done by monitoring the portfolio by groups such as: loan categories, maturity, past due days, economic sector, country and economic
group, as shown here:
·
|
Loans concentration by
category
|
The composition of the credit portfolio in
commercial, consumer, mortgage, financial leases and small business loans categories are as follows:
Composition
|
September 30, 2019
|
December 31, 2018
|
In millions of COP
|
Commercial
|
95,549,668
|
94,600,648
|
Corporate
|
56,611,099
|
55,562,618
|
SME
|
17,925,526
|
16,524,571
|
Others
|
21,013,043
|
22,513,459
|
Consumer
|
38,728,899
|
31,993,381
|
Credit card
|
7,908,779
|
7,026,689
|
Vehicle
|
3,467,818
|
3,253,060
|
Payroll loans
|
8,148,251
|
7,451,381
|
Others
|
19,204,051
|
14,262,251
|
Mortgage
|
24,249,961
|
22,870,685
|
VIS2
|
6,221,210
|
5,778,067
|
Non- VIS
|
18,028,751
|
17,092,618
|
Financial Leases
|
24,227,115
|
23,198,204
|
Small Business Loan
|
1,274,638
|
1,156,198
|
Loans and advances to customers and financial institutions
|
184,030,281
|
173,819,116
|
Allowance for loans and advances and lease losses
|
(10,621,994)
|
(10,235,831)
|
Total net loan and financial leases
|
173,408,287
|
163,583,285
|
2 VIS: Social Interest Homes,
corresponds to mortgage loans granted by the financial institutions of amounts less than 135 minimum wages.
·
|
Concentration of loan
by maturity
|
The following table shows the ranges of maturity
for the credit loans and financial leases, according for the remaining term for the completion of the contract of loans and financial
leases:
September 30, 2019
|
Maturity
|
Less Than 1 Year
|
Between 1 and 3
Years
|
Between 3 and 5
Years
|
Greater Than 5
Years
|
Total
|
In millions of COP
|
Commercial
|
29,706,930
|
20,335,874
|
17,209,897
|
28,296,967
|
95,549,668
|
Corporate
|
15,468,368
|
10,293,643
|
11,864,816
|
18,984,272
|
56,611,099
|
SME
|
6,230,867
|
6,034,053
|
2,635,991
|
3,024,615
|
17,925,526
|
Others
|
8,007,695
|
4,008,178
|
2,709,090
|
6,288,080
|
21,013,043
|
Consumer
|
885,017
|
5,287,564
|
15,476,664
|
17,079,654
|
38,728,899
|
Credit card
|
143,945
|
343,376
|
1,488,856
|
5,932,602
|
7,908,779
|
Vehicle
|
65,412
|
587,729
|
1,449,413
|
1,365,264
|
3,467,818
|
Payroll loans
|
56,297
|
564,237
|
1,342,673
|
6,185,044
|
8,148,251
|
Others
|
619,363
|
3,792,222
|
11,195,722
|
3,596,744
|
19,204,051
|
Mortgage
|
48,561
|
192,920
|
511,863
|
23,496,617
|
24,249,961
|
VIS
|
9,942
|
54,013
|
132,785
|
6,024,470
|
6,221,210
|
Non-VIS
|
38,619
|
138,907
|
379,078
|
17,472,147
|
18,028,751
|
Financial Leases
|
2,912,863
|
2,705,212
|
4,350,317
|
14,258,723
|
24,227,115
|
Small business loans
|
251,358
|
570,509
|
244,209
|
208,562
|
1,274,638
|
Total gross loans and financial leases
|
33,804,729
|
29,092,079
|
37,792,950
|
83,340,523
|
184,030,281
|
December 31, 2018
|
Maturity
|
Less Than 1 Year
|
Between 1 and 3
Years
|
Between 3 and 5
Years
|
Greater Than 5
Years
|
Total
|
In millions of COP
|
Commercial
|
31,052,548
|
18,846,830
|
16,216,100
|
28,485,170
|
94,600,648
|
Corporate
|
16,569,691
|
8,491,758
|
11,335,723
|
19,165,446
|
55,562,618
|
SME
|
5,253,678
|
5,482,139
|
2,774,471
|
3,014,283
|
16,524,571
|
Others
|
9,229,179
|
4,872,933
|
2,105,906
|
6,305,441
|
22,513,459
|
Consumer
|
749,322
|
4,562,956
|
12,069,707
|
14,611,396
|
31,993,381
|
Credit card
|
100,367
|
244,218
|
1,073,539
|
5,608,565
|
7,026,689
|
Vehicle
|
60,754
|
610,398
|
1,538,979
|
1,042,929
|
3,253,060
|
Payroll loans
|
62,657
|
624,660
|
1,397,974
|
5,366,090
|
7,451,381
|
Others
|
525,544
|
3,083,680
|
8,059,215
|
2,593,812
|
14,262,251
|
Mortgage
|
58,613
|
175,572
|
479,086
|
22,157,414
|
22,870,685
|
VIS
|
11,056
|
51,768
|
117,404
|
5,597,839
|
5,778,067
|
Non-VIS
|
47,557
|
123,804
|
361,682
|
16,559,575
|
17,092,618
|
Financial Leases
|
2,393,428
|
2,560,578
|
4,260,513
|
13,983,685
|
23,198,204
|
Small business loans
|
256,093
|
477,456
|
220,105
|
202,544
|
1,156,198
|
Total gross loans and financial leases
|
34,510,004
|
26,623,392
|
33,245,511
|
79,440,209
|
173,819,116
|
·
|
Concentration by past
due days
|
The following table shows the loans and financial
leases according to past due days. Loans or financial leases are considered past due if it is more than one month overdue (i.e.
31 days):
September 30, 2019
|
Past-due
|
Period
|
0 - 30 Days
|
31 - 90 Days
|
91 - 120 Days
|
121 - 360 Days
|
More Than 360
Days
|
Total
|
|
In millions of COP
|
Commercial
|
92,118,035
|
469,070
|
170,449
|
1,001,232
|
1,790,882
|
95,549,668
|
Consumer
|
36,763,610
|
864,563
|
273,868
|
691,258
|
135,600
|
38,728,899
|
Mortgage
|
22,339,317
|
784,889
|
131,093
|
339,888
|
654,774
|
24,249,961
|
Financial Leases
|
23,343,158
|
224,917
|
62,392
|
302,907
|
293,741
|
24,227,115
|
Small Business Loan
|
1,117,440
|
46,255
|
14,943
|
67,140
|
28,860
|
1,274,638
|
Total
|
175,681,560
|
2,389,694
|
652,745
|
2,402,425
|
2,903,857
|
184,030,281
|
December 31, 2018
|
Past-due
|
Period
|
0 - 30 Days
|
31 - 90 Days
|
91 - 120 Days
|
121 - 360 Days
|
More Than 360
Days
|
Total
|
|
In millions of COP
|
Commercial
|
90,804,138
|
452,890
|
152,877
|
1,387,364
|
1,803,379
|
94,600,648
|
Consumer
|
30,311,854
|
701,314
|
238,540
|
638,868
|
102,805
|
31,993,381
|
Mortgage
|
21,121,205
|
612,480
|
148,786
|
388,653
|
599,561
|
22,870,685
|
Financial Leases
|
22,433,190
|
209,840
|
54,029
|
245,974
|
255,171
|
23,198,204
|
Small Business Loan
|
1,008,378
|
48,849
|
16,202
|
60,103
|
22,666
|
1,156,198
|
Total
|
165,678,765
|
2,025,373
|
610,434
|
2,720,962
|
2,783,582
|
173,819,116
|
·
|
Concentration of loans
by economic sector
|
The following table contains the detail of
the portfolio of loans and financial leases by main economic activity of the borrower:
September 30, 2019
|
Economic sector
|
Loans and advances
|
Local
|
Foreign
|
Total
|
|
In millions of COP
|
Agriculture
|
3,742,145
|
2,040,961
|
5,783,106
|
Petroleum and Mining Products
|
907,302
|
152,555
|
1,059,857
|
Food, Beverages and Tobacco
|
6,262,010
|
693,555
|
6,955,565
|
Chemical Production
|
3,524,743
|
64,970
|
3,589,713
|
Government
|
4,943,644
|
1,821
|
4,945,465
|
Construction
|
14,687,238
|
6,575,671
|
21,262,909
|
Commerce and Tourism
|
17,426,655
|
9,524,976
|
26,951,631
|
Transport and Communications
|
8,377,368
|
746,038
|
9,123,406
|
Public Services
|
5,248,826
|
1,462,666
|
6,711,492
|
Consumer Services
|
41,531,683
|
23,789,383
|
65,321,066
|
Commercial Services
|
15,970,345
|
4,364,411
|
20,334,756
|
Other Industries and Manufactured Products
|
6,870,921
|
5,120,394
|
11,991,315
|
Total
|
129,492,880
|
54,537,401
|
184,030,281
|
December 31, 2018
|
Economic sector
|
Loans and advances
|
Local
|
Foreign
|
Total
|
|
In millions of COP
|
Agriculture
|
3,804,075
|
2,548,078
|
6,352,153
|
Petroleum and Mining Products
|
1,082,816
|
181,789
|
1,264,605
|
Food, Beverages and Tobacco
|
5,865,111
|
320,596
|
6,185,707
|
Chemical Production
|
3,566,746
|
12,561
|
3,579,307
|
Government
|
4,457,944
|
79,133
|
4,537,077
|
Construction
|
14,508,354
|
5,513,212
|
20,021,566
|
Commerce and Tourism
|
16,928,137
|
7,641,117
|
24,569,254
|
Transport and Communications
|
8,331,727
|
865,257
|
9,196,984
|
Public Services
|
6,007,483
|
966,764
|
6,974,247
|
Consumer Services
|
35,886,645
|
20,813,390
|
56,700,035
|
Commercial Services
|
17,041,170
|
5,540,572
|
22,581,742
|
Other Industries and Manufactured Products
|
5,978,092
|
5,878,347
|
11,856,439
|
Total
|
123,458,300
|
50,360,816
|
173,819,116
|
|
·
|
Credit concentration by
country
|
The following table shows the concentration
of the loans and financial leases by country. Loans are presented based on the country in which they were originated:
September 30, 2019
|
Country
|
Loans and advances
|
% Participation
|
Allowance for loans and
advances and lease losses
|
% Participation
|
Colombia
|
126,432,236
|
68.70%
|
8,466,021
|
79.71%
|
Panama
|
33,128,468
|
18.00%
|
1,013,436
|
9.54%
|
El Salvador
|
11,983,951
|
6.51%
|
502,522
|
4.73%
|
Puerto Rico
|
831,715
|
0.45%
|
33,431
|
0.31%
|
Guatemala
|
11,641,601
|
6.33%
|
605,911
|
5.70%
|
Other countries
|
12,310
|
0.01%
|
673
|
0.01%
|
Total
|
184,030,281
|
100.00%
|
10,621,994
|
100.00%
|
December 31, 2018
|
Country
|
Loans and advances
|
% Participation
|
Allowance for loans and
advances and lease losses
|
% Participation
|
Colombia
|
119,674,770
|
68.85%
|
8,402,751
|
82.09%
|
Panama
|
32,299,274
|
18.58%
|
910,268
|
8.89%
|
El Salvador
|
10,590,571
|
6.09%
|
465,122
|
4.54%
|
Puerto Rico
|
889,528
|
0.51%
|
29,041
|
0.29%
|
Guatemala
|
10,352,272
|
5.96%
|
427,747
|
4.18%
|
Other countries
|
12,701
|
0.01%
|
902
|
0.01%
|
Total
|
173,819,116
|
100.0%
|
10,235,831
|
100.0%
|
·
|
Credit concentration by
economic group
|
As of September 30, 2019 and December 31, 2018,
concentration of the 20 largest economic groups amounted to COP 19,893 billion and COP 20,372 billion, respectively. This exposure
corresponds to all credit active operations of these groups.
d.
|
Credit quality –
Loans and Advances
|
The following table shows information about
credit quality of the borrower:
September 30, 2019
|
Classification
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
In millions of COP
|
Commercial
|
84,218,612
|
3,974,551
|
7,356,505
|
95,549,668
|
Consumer
|
35,011,389
|
1,981,405
|
1,736,105
|
38,728,899
|
Mortgage
|
21,690,912
|
1,492,553
|
1,066,496
|
24,249,961
|
Small Business Loans
|
1,078,863
|
67,544
|
128,231
|
1,274,638
|
Financial Leases
|
21,107,171
|
1,354,568
|
1,765,376
|
24,227,115
|
Loans and Advances
|
163,106,947
|
8,870,621
|
12,052,713
|
184,030,281
|
December 31, 2018
|
Classification
|
Stage 1
|
Stage 2
|
Stage 3
|
Total
|
|
In millions of COP
|
Commercial
|
83,632,770
|
3,214,860
|
7,753,018
|
94,600,648
|
Consumer
|
28,666,461
|
1,758,162
|
1,568,758
|
31,993,381
|
Mortgage
|
20,280,416
|
1,513,063
|
1,077,206
|
22,870,685
|
Small Business Loans
|
958,491
|
80,805
|
116,902
|
1,156,198
|
Financial Leases
|
20,355,961
|
1,145,165
|
1,697,078
|
23,198,204
|
Total
|
153,894,099
|
7,712,055
|
12,212,962
|
173,819,116
|
In order to determine the expected credit loss,
the Bank considers the economic conditions and performance of the borrower’s industry, the analysis of payments behavior,
events that could negatively affect the borrower’s ability to pay, among others factors.
The expected credit loss is determined either
by a collective or individual evaluation according to the amount and characteristics of the loan. For further details please see
Note 2 Significant Accounting Policies, section 7.4.5 Impairment of financial assets at amortized cost or at fair value through
other comprehensive income “FVOCI”.
Impairment loan portfolio analyzed by individual
evaluation at COP 5.1 billion, which represented 2.8% of the total portfolio of the Bank.
The table below shows Stage 3 loans and advances
according to their type of evaluation:
September 30, 2019
|
Impairment
|
Individual Evaluation
|
Collective Evaluation
|
|
Carrying Amount
|
ECL
|
Carrying Amount
|
ECL
|
In millions of COP
|
Commercial
|
4,337,233
|
2,286,829
|
3,019,272
|
2,176,411
|
Consumer
|
-
|
-
|
1,736,105
|
1,538,568
|
Mortgage
|
-
|
-
|
1,066,496
|
604,105
|
Financial Leases
|
791,691
|
335,706
|
973,685
|
378,817
|
Small Business Loan
|
-
|
-
|
128,231
|
87,838
|
Total
|
5,128,924
|
2,622,535
|
6,923,789
|
4,785,739
|
December 31, 2018
|
Impairment
|
Individual Evaluation
|
Collective Evaluation
|
|
Carrying Amount
|
ECL
|
Carrying Amount
|
ECL
|
In millions of COP
|
Commercial
|
4,970,415
|
2,583,874
|
2,782,603
|
1,904,866
|
Consumer
|
-
|
-
|
1,568,758
|
1,383,265
|
Mortgage
|
-
|
-
|
1,077,206
|
586,026
|
Financial Leases
|
795,862
|
339,418
|
901,216
|
367,072
|
Small Business Loan
|
-
|
-
|
116,902
|
79,981
|
Total
|
5,766,277
|
2,923,292
|
6,446,685
|
4,321,210
|
e.
|
Credit Risk Management
– Other Financial Instruments:
|
Each one of the positions that make up the
portfolio complies with the policies and limits that seek to diminish credit risk exposure. Those policies are, among others:
|
·
|
Term
Limits: Each borrower is evaluated by the Credit Committee, in which
the result of the authorized model for this type of borrower is reviewed (quantitative and qualitative variables), which allows
the Credit Committee to establish the maximum term for which the Bank wishes to have exposure.
|
|
·
|
Credit Limits:
Limits approved under the model and with authorization from the Risk Committee,
as well as the exposure, are monitored in line or batch, in such a way that the presentation of excesses is mitigated.
|
|
|
|
|
·
|
Counterparty
Limits: Are derived
from the credit limits or from allocation models and are verified by the Front Office prior to the close of operations.
|
|
|
|
|
·
|
Master
Agreement: These bilateral agreements describe management of operations
between the counterparties in accordance with good international practices and that limit the legal and financial risk under the
occurrence of events of default (failure to pay or delivery). These agreements include mitigation mechanisms, procedures to be
carried out in the case of this events of default, special conditions by type of operation and are applied to OTC derivatives,
Repos and other securities financing transactions.
|
|
|
|
|
·
|
Margin Agreements:
For OTC derivatives operations and other securities financing transactions,
agreements that regulate the administration of guarantees, haircuts, adjustment periods, minimum transfer amounts, etc., and that
limit risk for a period of time (one day, one week, etc.), are established for counterparties involved in the operation.
|
|
|
|
|
·
|
Counterparty
Alerts: Financial, qualitative and market indicators that allow the
Bank to establish damages to the credit quality of an issuer or counterparty.
|
f.
|
Credit Quality Analysis
- Other Financial Instruments:
|
In order to evaluate the credit quality of
a counterparty or issuer (to determine a risk level or profile), the Bank relies on two rating systems: an external one and an
internal one, both of which allow the Bank to identify a degree of risk differentiated by segment and country and to apply the
policies that have been established for issuers or counterparties with different levels of risk, in order to limit the impact on
liquidity and/or the income statement of the Bank.
External
credit rating system is divided by the type of rating applied to each
instrument or counterparty; in this way the geographic location, the term and the type of instrument allow the assignment of a
rating according to the methodology that each examining agency uses.
Internal
credit rating system: The “ratings or risk profiles” scale
is created with a range of levels that go from low exposure to high exposure (this can be reported in numerical or alphanumerical
scales), where the rating model is sustained by the implementation and analysis of qualitative and quantitative variables at
sector level, which according to the relative analysis of each variable, determine credit quality; in this way the internal credit
rating system aims to establish adequate margin in decision-making regarding the management of financial instruments.
Credit Quality Analysis
of the Group
|
Debt instruments
|
Equity
|
Derivatives(1)
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
Maximum Exposure to Credit Risk
|
Low Risk
|
16,682,876
|
12,994,432
|
434,728
|
349,425
|
892,713
|
867,639
|
Medium Risk
|
1,442,335
|
1,639,484
|
-
|
1,749
|
937
|
135
|
High Risk
|
474,949
|
412,834
|
5,256
|
6,496
|
1,996
|
429
|
Without Rating
|
-
|
698,781
|
920,286
|
1,282,278
|
5,483
|
25,798
|
Total
|
18,600,160
|
15,745,531
|
1,360,270
|
1,639,948
|
901,129
|
894,001
|
|
(1)
|
For derivatives transactions counterparty
risk is disclosed as long as the valuation is positive. Therefore, the value described here differs from the book value.
|
In accordance with the criteria and considerations
specified in the internal rating allocation and external credit rating systems methodologies, the following schemes of relation
can be established, according to credit quality given to each one of the qualification scales:
Low Risk:
All investment grade positions (from AAA to BBB-), as well as those issuers that according to the information available (financial
statements, relevant information, external ratings, CDS, among others.) reflect adequate credit quality.
Medium Risk:
All speculative grade positions (from BB+ to BB-), as well as those issuers that according to the available information (Financial
statements, relevant information, external qualifications, CDS, among others) reflect weaknesses that could affect their financial
situation in the medium term.
High Risk:
All positions of speculative grade (from B+ to D), as well as those issuers that according to the information available (Financial
statements, relevant information, external qualifications, CDS, among others) reflect a high probability of default of financial
obligations or that already have failed to fulfill them.
·
|
Financial credit quality
of other financial instruments that are not past due or impaired in value
|
Debt instruments:
100% of the debt instruments are not in default.
Equity: The
positions do not represent significant risks.
Derivatives:
99.26% of the credit exposure does not present incidences of material default. The remaining percentage corresponds
to default events at the end of the period.
|
·
|
Maximum exposure level
to the credit risk given for:
|
|
Maximum Exposure
|
Collateral *
|
Net Exposure
|
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
Maximum Exposure to Credit Risk
|
Debt instruments
|
18,600,160
|
15,745,530
|
(5,048,582)
|
(2,352,276)
|
13,551,577
|
13,393,254
|
Derivatives **
|
901,129
|
894,001
|
114
|
(97)
|
901,242
|
893,905
|
Equity
|
1,360,270
|
1,639,949
|
-
|
-
|
1,360,270
|
1,639,949
|
Total
|
20,861,559
|
18,279,480
|
(5,048,468)
|
(2,352,373)
|
15,813,089
|
15,927,108
|
See Notes on this table:
* Collateral Held
(-) and Collateral Pledged (+)
** Exposure
in Derivatives with base in MTM (only positive values), netting by counterparty is applied
* Debt instruments
Book value 100%
* Equity Instruments:
- Shares:100%
- Investment funds: Book value 100%
·
|
Analysis of the maturity
of other financial instruments past due but not impaired
|
|
−
|
Debt instruments:
Portfolio does not present past due nor impaired assets.
|
|
−
|
Equity:
Portfolio does not present impaired assets
|
|
−
|
Derivatives:
The past due assets are not material.
|
·
|
The information corresponding
to the individual evaluation of impairment at the end of the period for other financial instruments, is detailed as follows:
|
Debt instruments
|
Exposure
|
Impairment
|
Final Exposure
|
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
Maximum Exposure to Credit Risk
|
Fair Value
|
14,759,591
|
12,251,872
|
1,427
|
3,053
|
14,758,164
|
12,248,819
|
Amortized Cost
|
3,840,569
|
3,493,657
|
7,868
|
11,730
|
3,832,700
|
3,481,928
|
Total
|
18,600,160
|
15,745,529
|
9,295
|
14,783
|
18,590,864
|
15,730,747
|
Equity
|
Exposure
|
Impairment
|
Final Exposure
|
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
September 30,
2019
|
December 31,
2018
|
Maximum Exposure to Credit Risk
|
Fair Value through profit or loss
|
847,282
|
1,101,461
|
-
|
-
|
847,282
|
1,101,461
|
Fair Value through OCI
|
512,988
|
538,487
|
-
|
-
|
512,988
|
538,487
|
Total
|
1,360,270
|
1,639,948
|
-
|
-
|
1,360,270
|
1,639,948
|
Collateral- other financial
instruments:
Level
of collateral: Respect to the type of asset or operation, a collateral
level is determined according to the policies defined for each product and the market where the operation is carried out.
Assets
held as collateral in organized markets: The only assets that can be
received as collateral are those defined by the central counterparties, the stock market where the operation is negotiated, those
assets that are settled separately in different contracts or documents, which can be managed by each organization and must comply
with the investment policies defined by the Bank, taking into account the credit limit for each type of asset or operation received
or delivered, which collateral received are the best credit quality and liquidity.
Assets
received as bilateral collateral between counterparties: The collateral
accepted in international OTC derivative operations is agreed on bilaterally in the Credit Support Annex (CSA)3 and
with fulfillment in cash in dollars and managed by ClearStream. This company acts on behalf of Bancolombia for making international
margin calls and providing a better management of the collateral.
Collateral
adjustments for margin agreements: The adjustments will be determined
by the criteria applied by both the external and internal regulations in effect, and at the same time, mitigation standards are
maintained so that the operation fulfills the liquidity and solidity criteria for settlement. Among the main characteristics by
product or market, we have:
−
|
With respect to the derivative
operations, these are carried out daily, with threshold levels of zero for the majority of counterparties, which reduces the exposure
to a term that does not exceed 10 days, according to Basel.
|
−
|
For repos, reverse repos
and other securities financing transactions, daily monitoring is done in order to establish the need to adjust the collateral in
such a way that these are applied in as little time as possible, according to the contracts or market conditions.
|
−
|
For all international counterparties,
margin agreements that limit exposure to the maximum and with a daily adjustment period are entered into. These margin agreements
are entered into under ISDA and GMRA (Global Master Repurchase Agreement)4 both master agreements for OTC derivatives
and securities financing transactions.
|
−
|
For every local counterparty,
the local framework agreement is signed (agreement developed by the industry) and the mitigating actions to apply in each operation
are agreed upon, whether for margin agreements, re-couponing, early termination, among others.
|
−
|
For repos, reverse repos
and other securities financing transactions, these are agreed upon by organized markets that in general implicate complying with
haircut or additional collateral rules.
|
−
|
The central counterparty
carries out daily control and monitoring processes in order to comply with the rules imposed by these organizations in such a way
that we are always making daily adjustments at the demanded collateral level.
|
3 A Credit Support
Annex (CSA) provides credit protection by setting forth the rules governing the mutual posting of collateral. CSAs are used in
documenting collateral arrangements between two parties that trade privately negotiated (over-the-counter) derivative securities.
The trade is documented under a standard contract called a master agreement, developed by the International Swaps and Derivatives
Association (ISDA).
4 GMRA: It is a model legal agreement
designed for parties transacting repos and is published by the International Capital Market Association (ICMA), which is
the body representing the bond and repo markets in Europe.
Level of collateral held:
|
Collateral*
|
Main type of collateral
|
|
2019
|
2018
|
2019
|
2018
|
Maximum Exposure to Credit Risk
|
Debt instruments
|
(5,048,582)
|
(2,352,276)
|
Government bonds (TES)
|
Government bonds (TES) and term deposits
|
Derivatives
|
114
|
(97)
|
Cash
|
Cash
|
Equity
|
-
|
-
|
|
|
Total
|
(5,048,468)
|
(2,352,373)
|
|
|
See Notes on this
table:
* Collateral Held
(-) and Collateral Pledged (+)
g.
|
Credit risk concentration
- other financial instruments:
|
According to the regulations, the Bank must
control on a daily basis the risk of positions of the Bank’s companies with the same issuer or counterparty stands, below
the legal limits.
By the same way, the positions of the Bank
are verified for compliance with the authorized risk levels in each country in order to guarantee the alerts and positions limits,
that are considered outside of the Bank risk appetite.
Risk exposure by economic
sector and risk region
|
Debt instruments
|
Equity
|
Derivatives5
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
Maximum Exposure to Credit Risk
|
|
|
|
|
|
Sector Concentration
|
|
|
|
|
|
|
Corporate
|
3,503,087
|
3,179,751
|
1,181,057
|
1,064,268
|
368,440
|
276,721
|
Financial
|
1,377,256
|
805,863
|
102,008
|
543,256
|
445,988
|
520,026
|
Government
|
13,719,817
|
11,757,757
|
-
|
-
|
-
|
-
|
Funds and ETFs
|
-
|
2159
|
77,205
|
32,425
|
86,701
|
97,254
|
Total
|
18,600,160
|
15,745,530
|
1,360,270
|
1,639,949
|
901,129
|
894,001
|
Concentration by Region
|
North America
|
2,662,574
|
1,569,943
|
6,699
|
1,472
|
116,426
|
279,132
|
Latam
|
14,575,816
|
14,175,587
|
1,320,996
|
1,613,783
|
501,439
|
475,243
|
Europe
|
-
|
-
|
-
|
-
|
247,442
|
119,126
|
Others (Includes Funds and ETF)
|
1,361,770
|
-
|
32,575
|
24,694
|
35,822
|
20,501
|
Total
|
18,600,160
|
15,745,530
|
1,360,270
|
1,639,949
|
901,129
|
894,002
|
5 For derivatives
transactions counterparty risk is disclosed as long as the valuation is positive. Therefore, the value described here differs from
the book value.
Risk exposure by credit
rating
|
Other financial instruments
|
|
2019
|
2018
|
Maximum Exposure to Credit Risk
|
Sovereign Risk
|
7,984,525
|
6,879,344
|
AAA
|
5,889,617
|
4,304,103
|
AA+
|
521,832
|
398,479
|
AA
|
238,840
|
22,615
|
AA-
|
69,476
|
180,757
|
A+
|
329,992
|
23,800
|
A
|
190,314
|
328,597
|
A-
|
211,690
|
163,235
|
BBB+
|
1,690,762
|
73,101
|
BBB
|
89,697
|
1,133,247
|
BBB-
|
793,573
|
704,216
|
Otros
|
1,925,474
|
2,061,126
|
Not rated
|
925,767
|
2,006,860
|
Total
|
20,861,559
|
18,279,480
|
At the end of the year, the Bank’s positions
are not in excess of the concentration limit, according to the applicable laws.
19.2 Market risk
Market risk refers to the risk of losses in
the Bank’s treasury book due to changes in equity prices, interest rates, foreign-exchange rates and other indicators whose
values are set in a public market. It also refers to the probability of unexpected changes in net interest income and equity economic
value as a result of a change in market interest rates.
Market risk stems from the following activities
at the Bank:
|
a)
|
Trading:
includes purchase - sale and positioning mainly in fixed
income securities, equities, currencies and derivatives, as well as the financial services provided to customers, such as brokerage.
Trading instruments are recorded in the treasury book and are managed by the Treasury Division which is also responsible for the
aggregated management of exchange rate exposures arising from the banking book and treasury book.
|
|
b)
|
Balance
sheet management: refers to the assets and liabilities
management, due to mismatches in maturities and repricing of them. The Assets Liability Management Division is responsible for
the balance sheet management, preserving the stability of the financial margin and the equity economic value, maintaining adequate
levels of liquidity and solvency. Non-trading instruments are recorded in the Bank’s banking book (the “Banking Book”),
which includes primarily loans, time deposits, checking accounts and savings accounts.
|
In the Bank, the market risks are identified,
measured, monitored, controlled and reported in order to support the decision-taking process for their mitigation, and to create
greater shareholder value added.
The guidelines, policies and methodologies
for market risks management are approved by the Board of Directors, thus guaranteeing the congruence and consistency in the risk
appetite among subsidiaries. Each country has a local Market and Liquidity Risk Management Office that applies at an individual
level the principles of the Bank´s Market Risks Management Strategy. The Board of Directors and senior management have formalized
the policies, procedures, strategies and rules of action for market risk administration in its “Market Risk Manual”.
This manual defines the roles and responsibilities within each subdivision of the Bank and their interaction to ensure adequate
market risk administration.
The Bank´s Market and Liquidity Risks
Management Office, responsible for monitoring and permanently controlling compliance with the limits established, is set up with
clear independence from the trading and businesses units, ensuring enforcement authority. This independent control function is
complemented by regular reviews conducted by the Internal Audit.
The Bank’s Market and Liquidity Risks
Management Office is responsible for: (a) identifying, measuring, monitoring, and controlling the market risk inherent in the Bank’s
businesses: (b) the Bank’s exposure under stress scenarios and confirming compliance with the Bank’s risk management
policies: (c) designing the methodologies for valuation of the market value of certain securities and financial instruments: (d)
reporting to senior management and the Board of Directors any violation of the Bank’s risk management policies: (e) reporting
to the senior management on a daily basis the levels of market risk associated with the trading instruments recorded in its treasury
book, and (f) proposing policies to the Board of Directors and to senior management that ensure the maintenance of predetermined
risk levels. The Bank has also implemented an approval process for new products across each of its subdivisions. This process is
designed to ensure that each subdivision is prepared to incorporate the new product into its procedures, that every risk is considered
before the product is incorporated and that approval is obtained from the Board of Directors before the new product can be sold.
Market risks arising from trading instruments
are measured at the Bank using two different Value at Risk (VaR) methodologies: the standard methodology required by the SFC, and
the internal methodology of historical simulation. The standard methodology is established by “Chapter XXI of the Basic Accounting
Circular”, based on the model recommended by the Amendment to the Capital Accord to Incorporate Market Risks of Basel Committee
of 2005. The internal methodology of historical simulation uses a confidence level of 99%, a holding period of 10 days, and a time
frame of one year or at least 250 days from the reference date of the VaR calculation is used, obtained from the reference date
of calculating the VaR. The standard methodology is used to report the market risk exposure to the Financial Superintendency and
is also used to measure the capital requirements for the Bank, therefore the analysis below is based on information obtain from
this model.
The Bank’s VaR limits structure for trading
activities, is sufficiently granular to conduct an effective control of the various types of market risk factors on which an exposure
is held. It ensures that the market risk is not concentrated in certain asset classes and maximizes the portfolio diversification
effect. These limits are defined by companies, products or by risk takers. The majority of the limits are based on the maximum
VaR values to which a certain portfolio can be exposed, nevertheless, loss triggers, stop loss and sensitivity warning levels are
also set, especially in the derivatives portfolios. The limits are approved by the Board of Directors, and set based on factors
such as tolerance for losses, capital resources and market´s complexity and volatility. They are monitored daily, and their
excesses or violations are reported to the Board of Directors and the Risk Committee.
Additional measurements like stress tests are
done, to identify extreme unusual situations that could cause severe losses. Stress simulations include historical events and hypothetical
scenarios. Back testing or model validation technics through comparison of predicted and actual loss level are applied on a regular
basis to analyse and contrast the accuracy of the VaR calculation methodology in order to confirm its reliability, and make adjustments
to the models if necessary.
Within the control and monitoring processes
of market risks, reports are elaborated on a daily and monthly basis. They include an analysis of the most relevant risk measures
and allow for monitoring the exposure levels to market risks and to the legal and internal limits established for each one of the
levels of the Bank. These reports are taken as an input for the decision-taking process in the different Committees and management
of the Bank.
Market Risk Management
The following section describes the market
risks to which the Bank is exposed and the tools and methodologies used to measure these risks as of September 30, 2019. The Bank
faces market risk as a consequence of its lending, trading and investments businesses.
The Bank uses VaR calculation to limit its
exposure to the market risk of its Treasury Book. The Board of Directors is responsible for establishing the maximum VaR based
on its assessment of the appropriate level of risk for Bancolombia. The Risks Committee is responsible for establishing the
maximum VaR by type of investment (e.g., fixed income in public debt) and by type of risk (e.g., currency risk). These limits
are supervised on a daily basis by the Market Risk Management Office.
For managing the interest rate risk from banking
activities, the Bank analyses the interest rate mismatches between its interest earning assets and its interest bearing liabilities.
In addition, the foreign currency exchange rate exposures arising from the banking book are provided to the Treasury Division where
these positions are aggregated and managed.
a.
|
Measurement of market
risk of trading instruments
|
The Bank currently measures the treasury book
exposure to market risk (including OTC derivatives positions) as well as the currency risk exposure of the banking book, which
is provided to the Treasury Division, using a VaR methodology established in accordance with “Chapter XXI of the Basic Accounting
Circular”, issued by the SFC.
The VaR methodology established by “Chapter
XXI of the Basic Accounting Circular” is based on the model recommended by the Amendment to the Capital Accord to Incorporate
Market Risks of Basel Committee of 2005, which focuses on the treasury book and excludes investments classified as amortized cost
which are not being given as collateral and any other investment that comprises the banking book, such as non-trading positions.
In addition, the methodology aggregates all risks by the use of correlations, through an allocation system based on defined zones
and bands, affected by given sensitivity factors.
The total market risk for the Bank is calculated
by the arithmetical aggregation of the VaR calculated for each subsidiary. The aggregated VaR is reflected in the Bank’s
Capital Adequacy (Solvency) ratio, in accordance with Decree 1771 of 2012.
For purposes of VaR calculations, a risk exposure
category is any market variable that is able to influence potential changes in the portfolio value. Taking into account a given
risk exposure, the VaR model assesses the maximum loss not exceeded, over a given period of time. The fluctuations in the portfolio’s
VaR depend on volatility, modified duration and positions changes relating to the different instruments that are subject to market
risk.
The relevant risk exposure categories for which
VaR is computed by the Bank according to “Chapter XXI, Appendix 1 of the Basic Accounting Circular” are: (i) interest
rate risks relating to local currency, foreign currency and UVR; (ii) currency risk; (iii) stock price risk, (iv) fund risk and
credit default swaps risk.
·
|
Interest Rate Risk (Treasury
Book)
|
The interest rate risk is the probability of
decrease in the market value of the position due to fluctuations in market interest rates. The Bank calculates the interest rate
risk for positions in local currency, foreign currency and UVR separately; in accordance with Chapter XXI of the Basic Accounting
Circular issued by the SFC.
In the first instance, the interest rate risk
exposure is determined by the sensitivity calculation for the net position of each instrument. This sensitivity is calculated as
the net value market product, its corresponding modified duration and the estimated variation of interest rates. The possible variations
in the interest rates are established by the SFC according to the historical behavior of these variables in the markets, and they
are a function of the duration and currency, as seen in the following table.
Zone
|
Band
|
Modified Duration
|
Changes in Interest Rates (bps)
|
Lower Limit
|
Upper Limit
|
Legal
Currency
|
UVR
|
Foreign Currency
|
Zone 1
|
1
|
0
|
0.08
|
274
|
274
|
100
|
2
|
0.08
|
0.25
|
268
|
274
|
100
|
3
|
0.25
|
0.5
|
259
|
274
|
100
|
4
|
0.5
|
1
|
233
|
274
|
100
|
Zone 2
|
5
|
1
|
1.9
|
222
|
250
|
90
|
6
|
1.9
|
2.8
|
222
|
250
|
80
|
7
|
2.8
|
3.6
|
211
|
220
|
75
|
Zone 3
|
8
|
3.6
|
4.3
|
211
|
220
|
75
|
9
|
4.3
|
5.7
|
172
|
200
|
70
|
10
|
5.7
|
7.3
|
162
|
170
|
65
|
11
|
7.3
|
9.3
|
162
|
170
|
60
|
12
|
9.3
|
10.6
|
162
|
170
|
60
|
13
|
10.6
|
12
|
162
|
170
|
60
|
14
|
12
|
20
|
162
|
170
|
60
|
15
|
20
|
|
162
|
170
|
60
|
Once the sensitivity factor is calculated for
each position, the modified duration is then used to classify each position within its corresponding band. A net sensitivity is
then calculated for each band, by determining the difference between the sum of all long-positions and the sum of all short-positions.
Then a net position is calculated for each zone (which consists of a series of bands) determined by the SFC. The final step is
to make adjustments within each band, across bands and within each zone, which results in a final number that is the interest rate
risk VaR by currency. Each adjustment is performed following the guidelines established by the SFC.
The Bank’s exposure to interest risk
primarily arises from investments in Colombian government’s treasury bonds (TES).
|
·
|
Currency (Treasury and
Banking Book), Equity (Treasury Book) and Fund (Treasury Book) Risk
|
The VaR model uses a sensitivity factor to
calculate the probability of loss due to fluctuations in the price of stocks, funds and currencies in which the Bank maintains
a position. As previously indicated, the methodology used in these financial statements to measure such risk consists of computing
VaR, which is derived by multiplying the position by the maximum probable variation in the price of such positions (“∆p”).
The (“∆p”) is determined by the SFC, as shown in the following table:
Currency
|
Sensitivity Factor
|
United States Dollar
|
12.49%
|
Euro
|
11.00%
|
Other currencies
|
13.02%
|
Equity and Fund Risk
|
14.70%
|
The SFC according to historical market performance
establishes the interest rate’s fluctuations and the sensitivity factors for currency, equity and fund risk used in the model.
The total market risk VaR is calculated as
the algebraic sum of the interest rate risk, the currency risk, the stock price risk, fund risk and the credit default swaps risk
which are calculated as the algebraic sum of the Parent Company and each of its subsidiaries’ exposure to these risks.
The total market risk VaR, had a 15.00% surge
going from COP 1,447,384 in December 31st, 2018 to COP 1,662,843 as of September 30st, 2019, due mainly to
increase in the exposure to currency risk, as a consequence of an increase of the 10.99% in the net position in US. dollars in
Bancolombia. Followed by the interest rate risk that presents a variation of 36% compared to previous period, explained by a greater
exposure in fixed income instruments.
The following table presents the total change
on market risk and every risk factor.
September 30, 2019
|
In millions of COP
|
Factor
|
September 30, 2019
|
Average
|
Maximum
|
Minimum
|
Interest Rate
|
339,185
|
304,231
|
409,369
|
242,568
|
Exchange Rate
|
1,013,439
|
830,408
|
1,013,439
|
496,565
|
Share Price
|
102,716
|
104,906
|
108,709
|
101,757
|
Collective Portfolios
|
207,503
|
201,760
|
207,503
|
195,944
|
Total Value at Risk
|
1,662,843
|
1,441,305
|
1,663,667
|
1,092,446
|
December 31, 2018
|
In millions of COP
|
Factor
|
December 31, 2018
|
Average
|
Maximum
|
Minimum
|
Interest Rate
|
249,070
|
241,602
|
317,524
|
204,478
|
Exchange Rate
|
909,648
|
712,435
|
909,648
|
563,322
|
Share Price
|
91,847
|
103,127
|
112,372
|
91,847
|
Collective Portfolios
|
196,819
|
192,920
|
198,227
|
187,842
|
Total Value at Risk
|
1,447,384
|
1,250,084
|
1,447,384
|
1,108,052
|
·
|
Assumptions and Limitations
of VaR Models
|
Although VaR models represent a recognized
tool for risk management, they have inherent limitations, including reliance on historical data that may not be indicative of future
market conditions or trading patterns. Accordingly, VaR models should not be viewed as predictive of future results. The Bank may
incur losses that could be materially in excess of the amounts indicated by the models on a particular trading day or over a period
of time, and there have been instances when results have fallen outside the values generated by the Bank’s VaR models. A
VaR model does not calculate the greatest possible loss. The results of these models and analysis thereof are subject to the reasonable
judgment of the Bank’s risk management personnel.
b. Non-trading instruments
market risk measurement
The banking book’s relevant risk exposure
is interest rate risk, which is the probability of unexpected changes in net interest income as a result of a change in market
interest rates. Changes in interest rates affect the Bank’s earnings because of timing differences on the reprising of the
assets and liabilities. The Bank manages the interest rate risk arising from banking activities in non-trading instruments by analyzing
the interest rate mismatches between its interest earning assets and its interest-bearing liabilities. The foreign currency exchange
rate exposures arising from the banking book are provided to the Treasury Division where these positions are aggregated and managed.
·
|
Interest
Risk Exposure (Banking Book)
|
The Bank has performed a sensitivity analysis
of market risk sensitive instruments estimating the impact on the net interest income of each position in the Banking Book, using
a repricing model and assuming positive parallel shifts of 50 basis points (bps).
The table 1 provides information about Bancolombia’s
interest rate sensitivity for the statement of financial position items comprising the Banking Book.
Table 1. Sensitivity to
Interest Rate Risk of the Banking Book
The chart below provides
information about Bancolombia’s interest rate risk sensitivity in local currency (COP) at September 30, 2019 and December
31,2018:
|
September 30, 2019
|
December 31, 2018
|
In millions of COP
|
Assets sensitivity 50 bps
|
377,471
|
361,427
|
Liabilities sensitivity 50 bps
|
194,778
|
185,477
|
Net interest income sensitivity50 bps
|
182,693
|
175,950
|
The chart below
provides information about Bancolombia’s interest rate risk sensitivity in foreign currency (US dollars) at September
30, 2019 and December 31, 2018:
|
September 30, 2019
|
December 31, 2018
|
In millions of USD
|
Assets sensitivity 50 bps
|
36
|
39
|
Liabilities sensitivity 50 bps
|
33
|
36
|
Net interest income sensitivity50 bps
|
3
|
3
|
A positive net sensitivity denotes a higher
sensitivity of assets than of liabilities and implies that a rise in interest rates will positively affect the Bank´s net
interest income. A negative sensitivity denotes a higher sensitivity of liabilities than of assets and implies that a rise in interest
rates will negatively affect the Bank´s net interest income. In the event of a decrease in interest rates, the impacts on
net interest income would be opposite to those described above.
Total Exposure:
As of September 30, 2019, the net interest
income sensitivity in local currency for the banking book instruments, entered into for other than trading purposes with positive
parallel shifts of 50 basis points was COP 182,693. The change in the net interest income sensitivity between September 2019 and
December 2018 is due to the increase in the sensitivity of variable loans due to their growth.
On the other hand, the net interest income
sensitivity in foreign currency, assuming the same parallel shift of 50 basis points, was at September 2019 the same at December
31, 2018, without changes.
Assumptions and limitations:
Net interest income sensitivity analysis is
based on the repricing model and considers the following key assumptions: (a) does not consider prepayments, new operations, defaults,
etc., (b); the fixed rate instruments sensitivity, includes the amounts with maturity lower than one year and assumes these will
be disbursed at market interest rates and (c) changes in interest rate occur immediately and parallel in the yield curves from
assets and liabilities for different maturities.
·
|
Structural
equity risk exposure (Banking Book)
|
Bancolombia’s investment banking affiliate,
in its role of financial corporation, holds, directly and through its affiliated companies, structural equity investments. These
positions are maintained mostly in the energy and financial sectors. The market value of those investments increased by 26.64%
during the year, from COP 163,136 million as of December 31 st, 2018 to COP 206,602 million as of September 30 st, 2019, because
of the increase in the market value of Renta Fija Valor Fund investments.
The structural equity positions are exposed
to equity price risk. Sensitivity calculations are made for those positions:
Table 2. Share Price Sensitivity
|
|
September 30, 2019
|
|
December 31, 2018
|
Fair Value
|
|
206,602
|
|
163,136
|
Delta
|
|
14.70%
|
|
14.7%
|
Sensitivity
|
|
30,370
|
|
23,981
|
A negative impact of 14.70%, applied to the
market value, produces a decrease of COP 30,370 on the structural equity investments market value, which would decrease from COP
206,602 to COP 176,231
19.3 Liquidity risk
Liquidity risk is defined as the inability
of a financial firm to meet its debt obligations without incurring unacceptably large losses. Thus, funding liquidity risk is the
risk that a firm will not be able to meet its current and future cash flow and collateral needs, both expected and unexpected,
without materially affecting its daily operations or overall financial condition. The Bank is sensitive to funding liquidity risk
since debt maturity transformation is one of its key business areas.
At the Bank, liquidity prevails over any objective
of growth or revenue. Managing liquidity has always been a fundamental pillar of its business strategy, together with capital,
in supporting its statement of financial position.
The Bank’s liquidity management model
promotes the autonomy of subsidiaries, which must be self-sufficient in their structural funding. Each subsidiary is responsible
for meeting the liquidity needs of its current and future activity, within a framework of management coordination at the Bank level.
The metrics used to control liquidity risk are developed based on common and homogeneous concepts, but analysis and adaptation
are made by each subsidiary.
In line with best governance practices, the
Bank has established a clear division of function between executing liquidity management, responsibility of the Asset and Liability
Division, and their monitoring and control, responsibility of the Market and Liquidity Risks Management Office.
The different authorities of senior management
define the policies and guidelines for managing liquidity risk. These authorities are the Board of Directors, the Risk Committee,
and senior management of the Parent Company, which set the risk appetite and define the financial strategy. The ALCO committees
(asset and liability committee) define the objective positioning of liquidity and the strategies that ensure the funding needs
derived from businesses. The ALM division (Asset and liability management) and the Market and Liquidity Risks Management Office
support the mentioned committees, which elaborate analysis and management proposals, and control compliance with the limits established.
Liquidity Risks Management Office is responsible
for proposing the minimum amount of the liquidity reserve, the policies of the liquidity portfolio, defining premises and metrics
in order to model the behaviour of the cash flows, proposing and monitoring liquidity limits in line with the Bank's risk appetite,
simulating stress scenarios, evaluating and reporting the risks inherent to new products and operations; and submitting the reports
required by the internal authorities for decision-making, as well as by regulators. All of the above activities are verified and
evaluated by the Internal Audit.
The measures to control liquidity risk include
maintaining a portfolio of highly liquid assets, and the definition of triggers and liquidity limits, which enable evaluating the
level of exposure of each one of the entities in a proactive way.
The methodologies used to control liquidity
risk include the liquidity gaps and stress scenarios. The liquidity gaps measure the mismatches of assets, liabilities and off-balance
sheet position´s cash flows, separately for local currency and foreign currency. Regulatory metrics are also applied, in
which the contractual maturities are used; and internal models in which the cash flows are adjusted by different ratios, to reflect
a more accurate behaviour.
Each subsidiary creates their liquidity gap
according to the characteristics of their business and they tackle them through the different financing resources they have available.
The recurrence of the businesses that are going to be financed, the stability of the financing sources, and the ability of the
assets to become liquid are the fundamental factors that are taken into account in the definition of this metric. In practice and
given the different behaviours of a same item in the Bank’s subsidiaries, there are common standards and methodologies to
homogenize the construction of liquidity risk profiles for each unit so they can be presented in a comparable way to the Bank's
Senior Management.
Periodically, a validation of the policies,
limits, processes, methodologies and tools to evaluate liquidity risk exposure is performed, in order to establish its pertinence
and functionality, and to carry out the necessary adjustments. The Market and Liquidity Risks Management Office elaborate reports
daily, weekly and monthly basis in order to monitor the exposure levels and the limits and triggers set up, and to support the
decision-making process.
Each subsidiary has its own liquidity contingency
plan, which is tested annually. These contingency plans procure the optimization of different funding sources, including obtaining
additional funding from the Parent Company.
Liquidity risk management
The Bank’s Board of Directors sets the
strategy for managing liquidity risk and delegates responsibility for oversight of the implementation of this policy to ALCO committee
that approves the Bank’s liquidity policies and procedures. The Treasury Division manages the Bank’s liquidity position
on a day-to-day basis and reviews daily reports covering the liquidity position. A summary report, including any exceptions and
remedial action taken, is submitted regularly to Risk Committee and ALCO committees.
a.
|
Liquidity risk exposure:
|
In order to estimate liquidity risk, the Bank
measure a liquidity coverage ratio to ensure holding liquid assets sufficient to cover potential net cash outflows over 30 day.
This indicator allows the Bank to meet liquidity coverage for the next month. The liquidity coverage ratio is presented as follows:
Liquidity Coverage Ratio
|
September 30, 2019
|
December 31, 2018
|
Net cash outflows into 30 days*
|
9,786,686
|
7,004,662
|
Liquid Assets
|
27,185,570
|
26,506,750
|
Liquidity coverage ratio
|
277.78%
|
378.42%
|
*Net
cash outflows into 30 days: (Interbank borrowings, Financial assets investments,
Loans and advances to customers, Derivative financial instruments), minus 30 days contractual maturities of liabilities. Demand
deposit Time deposits, Interbank deposits Borrowings from other financial institutions Debt instruments, Derivative financial instruments.
One of the main guidelines of the Bank is to
maintain a solid liquidity position, therefore, the ALCO Committee, has established a minimum level of liquid assets, based on
the funding needs of each subsidiary, to ensure, as far as possible, that it will always have sufficient liquidity to meet its
liabilities when they are due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage
to the Bank’s reputation.
The following table shows the liquid assets
held by Bank´s:
Liquid Assets(1)
|
September 30, 2019
|
December 31, 2018
|
High quality liquid assets*
|
|
|
Cash
|
16,783,625
|
15,370,693
|
High quality liquid securities
|
8,200,397
|
9,268,481
|
Other Liquid Assets
|
-
|
-
|
Other securities**
|
2,201,548
|
1,867,576
|
Total Liquid Assets
|
27,185,570
|
26,506,750
|
|
(1)
|
Feature possesses the high liquidity available
in all cases, and those liquid assets received by the Central Bank for its operations expansion and monetary contraction. Liquid
assets are adjusted by a haircut. The following are considered as liquid assets: cash, repos held for trading and investments held
for trading in listed shares in Colombia’s stock exchange, in investment funds units or in other trading debt instruments.
|
*High-quality
liquid assets: cash and shares that are eligible
to be reportable or repo operations, in addition to those liquid assets that the Central Bank receives for its monetary expansion
and contraction operations described in paragraph 3.1.1 of the Foreign Regulatory Circular DODM-142 of the Bank of the Republic.
**Other
Securities: Securities issued by financial and corporate
entities.
c.
|
Contractual maturities of financial assets
|
The tables below set out the remaining contractual
maturities of principal and interest balances of the Group’s financial assets:
Contractual
maturities of financial assets
September 30, 2019
Financial Assets
|
0 - 1 Year
|
1- 3 Years
|
3- 5 Years
|
More than 5 years
|
Cash and balances with central bank
|
16,538,443
|
-
|
-
|
-
|
Interbank borrowings - Repurchase agreements
|
2,250,180
|
3,685
|
-
|
-
|
Financial assets investments
|
8,437,590
|
7,443,719
|
1,587,798
|
3,161,672
|
Loans and advances to customers
|
67,078,903
|
65,035,045
|
39,181,873
|
64,778,337
|
Derivative financial instruments
|
3,410,334
|
2,019,931
|
817,241
|
888,218
|
Total financial assets
|
97,715,450
|
74,502,380
|
41,586,912
|
68,828,227
|
Contractual maturities of
financial assets December 31, 2018
Financial Assets
|
0 - 1 Year
|
1- 3 Years
|
3- 5 Years
|
More than 5 years
|
Cash and balances with central bank
|
15,833,017
|
-
|
-
|
-
|
Interbank borrowings - Repurchase agreements
|
2,965,646
|
-
|
-
|
-
|
Financial assets investments
|
7,512,098
|
4,557,121
|
2,585,777
|
3,608,511
|
Loans and advances to customers
|
61,653,720
|
52,485,542
|
33,393,032
|
59,347,861
|
Derivative financial instruments
|
1,073,804
|
174,475
|
486,746
|
247,268
|
Total financial assets
|
89,038,285
|
57,217,138
|
36,465,555
|
63,203,640
|
d.
Contractual maturities of financial liabilities
The tables below set out the remaining contractual
maturities of principal and interest balances of the Bank’s financial liabilities:
Contractual maturities of
financial liabilities September 30, 2019
Financial Liabilities
|
0 - 1 Year
|
1- 3 Years
|
3- 5 Years
|
More than 5 years
|
Demand deposit from customers
|
84,640,595
|
-
|
-
|
-
|
Time deposits from customers
|
45,736,205
|
17,249,012
|
4,420,538
|
2,601,228
|
Interbank deposits-Repurchase agreements
|
6,992,427
|
29,061
|
-
|
-
|
Borrowings from other financial institutions
|
9,124,854
|
4,008,019
|
1,467,348
|
1,581,286
|
Debt securities in issue
|
4,902,717
|
12,172,374
|
3,654,671
|
4,904,553
|
Derivative financial instruments
|
3,083,844
|
1,908,686
|
676,310
|
912,056
|
Total financial liabilities
|
154,480,642
|
35,367,152
|
10,218,867
|
9,999,123
|
Contractual maturities of
financial liabilities December 31, 2018
Financial Liabilities
|
0 - 1 Year
|
1- 3 Years
|
3- 5 Years
|
More than 5 years
|
Demand deposit from customers
|
85,275,330
|
-
|
-
|
-
|
Time deposits from customers
|
39,104,963
|
14,120,231
|
5,096,152
|
2,037,330
|
Interbank deposits - Repurchase agreements
|
3,132,911
|
531,734
|
-
|
-
|
Borrowings from other financial institutions
|
11,149,381
|
2,952,158
|
1,158,784
|
1,844,290
|
Debt securities in issue
|
3,721,909
|
8,078,228
|
7,489,901
|
5,813,722
|
Derivative financial instruments
|
636,410
|
101,836
|
391,930
|
240,727
|
Total financial liabilities
|
143,020,904
|
25,784,187
|
14,136,767
|
9,936,069
|
The expected cash flows for some financial
assets and liabilities may vary significantly from their contractual maturity. The main differences are the following:
|
·
|
The demand deposits historically
have maintained a tendency to remain stable.
|
|
·
|
The mortgages loans, despite
having contractual maturity between 15 and 30 years, its average life is less than these terms.
|
e. Financial guarantees
The tables below set out the remaining contractual
maturities of the Group’s financial guarantees.
September 30, 2019
|
0 - 1 Year
|
1- 3 Years
|
3- 5 Years
|
More than 5 years
|
In millions of COP
|
Financial guarantees
|
2,968,315
|
957,919
|
40,108
|
149,357
|
December 31, 2018
|
0 - 1 Year
|
1- 3 Years
|
3- 5 Years
|
More than 5 years
|
In millions of COP
|
Financial guarantees
|
3,370,845
|
1,426,992
|
277,710
|
177,828
|
19.4 Capital management
In order to cover future unexpected losses
and be prepared against economic crisis, the Bank is engaged with an active capital management role. To this end, one of the main
Director of Financial Control´s responsibility, is to monitor constantly the capital adequacy allocation and suggest the
appropriate measures before crisis take place.
Exercises such as stress testing assessment
and Internal Capital Adequacy Assessment Process (ICAAP), are run for internal and external purposes and reported to the Board
of Directors and senior levels to ensure all risks are managed according to our risk appetite, policies and regulation.
Simultaneously, senior management is engaged
in maintaining a balance between an adequate capital allocation and our shareholders value proposal compliance. In doing so, upcoming
investment plans will be funded by capital markets and operational flows without causing negative results among our shareholders´
interests.
In accordance with the Capital Adequacy Requirements
explained above (see Supervision and Regulation ITEM4 B8), financial institutions in Colombia are required to achieve a minimum
solvency ratio (Basic Solvency Risk Index, Tier 1) above 4.5%, and a total solvency risk index (Tier 2) greater than or equal to
9.0%.
In spite of the above, the management has directed
its efforts towards the equity strengthening as shown in table below.
|
As of
|
|
|
September 30, 2019
|
December 31, 2018
|
|
In millions of COP
|
Regulatory Capital and Capital Adequacy Ratios
|
|
|
Basic Ordinary Equity
|
24,822,372
|
23,965,972
|
Deductions Basic Ordinary Equity
|
(4,304,392)
|
(4,251,247)
|
Total Basic Ordinary Equity
|
20,517,980
|
19,714,725
|
Additional Equity
|
6,321,398
|
6,704,144
|
Total Regulatory Capital
|
26,839,378
|
26,418,869
|
Capital Ratios
|
|
|
Primary capital to risk-weighted assets (Tier I)
|
9.72%
|
10.05%
|
Secondary capital to risk-weighted assets (Tier II)
|
2.99%
|
3.42%
|
Technical capital to risk-weighted assets
|
12.71%
|
13.47%
|
NOTE
20. IMPACTS ON APPLICATION OF NEW STANDARDS
|
a)
|
Recently Issued Accounting
Pronouncement Applicable Since January 01, 2019
|
IFRS
16 Leases: On January 13, 2016, the IASB issued IFRS 16 Leases replacing
IAS 17 leases, IFRIC 4 Determination of whether a contract contains a lease, SIC 15 Incentives in lease agreements and SIC 27 Evaluation
of the substance of the transaction. This standard establishes the principles of recognition, measurement, presentation and disclosure
of leases and requires lessees to account for all their leases under the same balance sheet model similar to the accounting under
IAS 17 of the Finance leases. The standard includes two recognition exemptions for lessees: leasing of low-value assets (for example,
personal computers) and short-term leases (that is, leases with a term of less than 12 months). At the beginning of the lease,
the lessee recognizes a liability for lease payments (liability for lease) and an asset that represent the right to use the underlying
asset during the term of the lease (right to use the asset). Lessees must separately recognize the interest expense of the lease
liability and the depreciation expense of the right to use.
Lessees must also remeasure the lease liability
upon the occurrence of certain events (for example, a change in the term of the lease, a change in future lease payments as a result
of a change in the rate or rate used to determine such lease payments). The lessee generally recognizes the amount of the remeasurement
of the lease liability as an adjustment in the right of use asset.
The accounting of the lessor under IFRS 16
does not have substantial modifications with respect to the requirements of IAS 17. The lessors continue to classify all their
leases using the same classification principles of IAS 17, between financial and operating leases.
For leases previously classified as finance
leases the entity recognized the carrying amount of the lease asset and lease liability immediately before transition as the carrying
amount of the right of use asset and the lease liability at the date of initial application. The measurement principles of IFRS
16 are only applied after that date.
The Bank chose to use the following practical
expedients when adopting IFRS 16 using the modified adoption method for leases previously classified as operating leases using
IAS 17:
|
a)
|
Do not carry out an assessment
of the impairment of the value of the assets for the right-to-use lease contracts, because prior to the transition to IFRS 16,
said contracts were evaluated and none was determined to be onerous;
|
|
b)
|
For contracts whose maturity
is within 12 months following the date of initial application, they will be recognized as short-term leases.
|
|
c)
|
The initial direct costs
of measuring the asset by right to use were excluded on the date of initial application; and
|
|
d)
|
Used hindsight to determine
the lease term.
|
The interest rate implicit in the lease could
not be readily determined, that is why The Bank perform an analysis taking in count the currency, lease term, economic environment
and class of underlying assets to determinate the weighted average lessee’s incremental borrowing rate. The weighted average
lessee’s incremental borrowing effective rate applied to the lease liabilities on January 01, 2019 was 7.19%.
The Bank adopted as of January 01, 2019 the
IFRS 16 using the modified retrospective adoption method, where the right-of-use assets are measured as if IFRS 16 had always been
applied, using the lessee’s incremental borrowing rate known at the date of transition. Its effects are the following:
The net impact on retained earnings (decrease)
as of January 01, 2019 corresponds to COP 186,020:
|
January 1, 2019
|
Operating lease commitments disclosed as of December 31, 2018
|
4,002,163
|
Discounted using the lessee´s incremental borrowing rate of at the date of initial application
|
1,857,506
|
Add: finance lease liabilities recognized as of December 31, 2018
|
-
|
(Less) short-term leases recognized on a straight-line basis as expense
|
(3,633)
|
(Less) low-value leases recognized on a straight-line basis as expense
|
(5,040)
|
(Less) contracts reassessed as services agreements
|
-
|
Add/Less adjustments as a result of a different treatment of extension and termination options
|
-
|
Add/Less adjustments relating to changes
in the index or rate affecting variable payments
|
-
|
Lease liability recognized as of January 01, 2019
|
1,848,833
|
Of which are:
|
|
Lease liabilities
|
1,848,833
|
|
|
The recognized right-of-use assets relate to
the following types of assets:
Types of Assets
|
January 01, 2019
|
Buildings
|
1,487,175
|
Vehicles
|
34,956
|
Technological equipment
|
49,736
|
Furniture and fixtures
|
579
|
Total right of use assets
|
1,572,446
|
The change in accounting policy affected the
following items in the balance sheet as of January 01, 2019:
Concepts
|
January 01, 2019
|
Property, plant and equipment
|
Decrease by 146,444
|
Right of use assets
|
Increase by 1,543,427
|
Deferred tax assets
|
Net by (119,173)
|
Lease liabilities
|
Increase by 1,848,833
|
Subleasing
|
Increase by 94,829
|
Effect of changes in foreign exchange rate
|
Net by (9,560)
|
Retained earnings
|
Decrease by 186,020
|
IFRS
9, Financial Instruments: In July 2014 the IASB issued the final
version of IFRS 9 that completed the replacement project of IAS 39 –Financial instruments. Classification and measurement
mainly introducing new criteria for classification and subsequent measurement of financial assets and liabilities, impairment requirements
related to expected loss accounting and hedge accounting. The effective application of the final version of this IFRS will be from
January 1, 2018. Except for hedge accounting.
Hedge accounting: These requirements align
hedge accounting more closely with risk management, establish a more principle-based approach to hedge accounting and address inconsistencies
and weaknesses in the hedge accounting model in IAS 39. Entities have been provided with an accounting policy option between applying
the hedge accounting requirements of IFRS 9 or continuing with the application of the existing hedge accounting requirements of
IAS 39 for all hedge accounting, as the project on macro hedge accounting has not yet been completed. In consequence, the Bank
opted for continuing the application of IAS 39 requirements for hedge accounting.
The Bank adopted IFRS 9 as issued in July 2014
regarding to hedge accounting from and as of from January 1, 2019. As permitted by the transitional provisions of IFRS 9.7.2, the
Bank elected not to restate comparative figures. There were no adjustments to the carrying amounts of financial assets and liabilities
at the date of transition to be recognized in retained earnings.
All hedge relationships designated under IAS
39 as of December 31, 2018, qualify for hedge accounting considering specified qualifying criteria under requirements provided
by IFRS 9 on January 1, 2019.
NOTE
21. PROVISIONS AND CONTINGENT LIABILITIES
The following tables show the detail of the
provisions:
|
September 30, 2019
|
December 31, 2018
|
In millions of COP
|
Judicial proceedings
|
43,729
|
36,872
|
Administrative proceedings
|
1,096
|
469
|
Financial Guarantees (1)
|
13,967
|
23,100
|
Onerous contracts
|
3,246
|
3,033
|
Total provisions
|
62,038
|
63,474
|
(1) Changes in financial guarantees
refers to lower provisions in Bancolombia.
No further significant changes in provisions
and contingent liabilities were presented during 2019.
NOTE
22. SUBSEQUENT EVENTS
These condensed consolidated interim financial
statements were approved for issue on 6 November 2019 by CFO. The financial statements have been reviewed, not audited.
On November 5, 2019 the Colombian Constitutional
Curt ruled that the 4% income tax surcharge applicable to Financial Institutions during 2019 was not constitutional and as a result,
should be eliminated. This ruling has immediate effect.
PROSPECTUS
Debt Securities
Preferred Shares
American Depositary Shares representing
Preferred Shares
Rights to Subscribe for Preferred Shares
From time to time,
we may offer, issue and sell debt securities, preferred shares, American depositary shares (“ADSs”) representing preferred
shares and rights to subscribe for preferred shares in one or more offerings. This prospectus may also be used by a selling security
holder to sell securities from time to time. This prospectus describes some of the general terms that may apply to these securities
and the general manner in which they may be offered. When securities are offered under this prospectus, we will provide a prospectus
supplement describing the specific terms of any securities to be offered, and the specific manner in which they may be offered,
including the amount and price of the offered securities. The prospectus supplement may also add, update or change information
contained in this prospectus. If any securities are to be sold by selling security holders, information concerning the security
holders will be included in a supplement or supplements to this prospectus. The prospectus supplement may also incorporate by reference
certain of our filings with the U.S. Securities and Exchange Commission. This prospectus may not be used unless accompanied by
a prospectus supplement or the applicable information is included in our filings with or submissions to the U.S. Securities and
Exchange Commission. You should carefully read this prospectus and any prospectus supplement, together with any documents incorporated
by reference, before you invest in any of our securities.
Our ADSs are listed
on the New York Stock Exchange (“NYSE”) and trade under the ticker symbol “CIB”. Our common shares and
preferred shares are listed on the Bolsa de Valores de Colombia (the “Colombian Securities Exchange”) and trade
under the symbols “BCOLOMBIA” and “PFBCOLOM”, respectively. On April 24, 2019, the closing price of our
ADSs on the NYSE was U.S.$ 52.48 per ADS, and the closing price of our preferred shares on the Colombian Securities Exchange was
COP 42,240 per preferred share. Our headquarters are located at Carrera 48 # 26-85, Avenida Los Industriales, Medellín,
Colombia, and our telephone number is +(574) 404-1837.
We and/or the selling
security holders may offer and sell the securities directly to purchasers, through underwriters, dealers or agents, or through
any combination of these methods, on a continuous or delayed basis. If securities are sold by selling security holders, we will
not receive any proceeds from such sale.
Investing in our
securities involves risks. You should consider carefully the information included under the caption “Risk Factors”
in our Form 20-F for the year ended December 31, 2018, filed with the Securities and Exchange Commission on April 24, 2019, as
well as the risk factors included in the applicable prospectus supplement.
Neither the U.S.
Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon
the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
Prospectus dated April 25, 2019.
TABLE OF CONTENTS
ABOUT THIS PROSPECTUS
In this prospectus,
unless otherwise indicated or the context otherwise requires, references to “Bancolombia,” the “Bank,”
“we,” “us” and “our” mean Bancolombia S.A., a banking institution organized under the laws
of the Republic of Colombia, and its subsidiaries on a consolidated basis.
This prospectus is
part of a registration statement that we filed with the U.S. Securities and Exchange Commission (the “SEC”), using
a “shelf” registration process. Under this shelf process, the securities covered by this prospectus may be sold in
one or more offerings. Each time we or any selling security holder offers securities under the registration statement, we will
provide a prospectus supplement that will contain specific information about the terms of that offering. The prospectus supplement
may also add, update or change information contained in this prospectus. You should read this prospectus and the applicable prospectus
supplement together with the additional information described under the heading “Available Information.” The registration
statement that contains this prospectus (including the exhibits to the registration statement) contains additional information
about us and the securities offered under this prospectus. Statements contained in this prospectus and the applicable prospectus
supplement about the provisions or content of any agreement or other document are only summaries. If SEC rules require that any
agreement or document be filed as an exhibit to the registration statement, you should refer to that agreement or document for
its complete contents. The registration statement can be read at the SEC website or at the SEC offices mentioned under the heading
“Available Information.”
You should rely only
on the information contained or incorporated by reference in this prospectus, any related free writing prospectus or the applicable
prospectus supplement. We have not authorized anyone else to provide you with additional or different information. This prospectus
may only be used to sell securities if it is accompanied by a prospectus supplement or the applicable information is included in
our filings or submissions to the SEC. This prospectus may only be used where it is legal to sell these securities. You should
not assume that the information contained or incorporated by reference in this prospectus, the applicable prospectus supplement
or any other offering material is accurate as of any date other than the dates on the front of those documents.
AVAILABLE INFORMATION
We are subject to
the information requirements of the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), applicable
to a foreign private issuer and, accordingly, file or furnish reports, including annual reports on Form 20-F, reports on Form 6-K,
and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements and other
information regarding issuers that file electronically with the SEC, including us. The address of the SEC website is http://www.sec.gov.
We have filed with
the SEC a registration statement on Form F-3 relating to the securities covered by this prospectus. This prospectus is a part of
the registration statement and does not contain all of the information in the registration statement. Whenever a reference is made
in this prospectus to a contract or other document of ours, please be aware that the reference is only a summary and that you should
refer to the exhibits that are a part of the registration statement for a copy of the contract or other document. You may review
a copy of the registration statement at the SEC’s Internet site.
INCORPORATION OF CERTAIN INFORMATION
BY REFERENCE
The SEC’s rules
allow us to “incorporate by reference” information into this prospectus. This means that we can disclose important
information to you by referring you to another document. Any information referred to in this way is considered part of this prospectus
from the date we file that document. Any reports filed by us with the SEC after the date of this prospectus will be incorporated
by reference into this prospectus and will automatically update and, where applicable, supersede any information contained in this
prospectus or incorporated by reference in this prospectus (other than, in each case, documents or information deemed to have been
furnished and not filed in accordance with SEC rules).
We incorporate by
reference into this prospectus the following documents or information filed by us with the SEC:
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our Annual Report on Form 20-F for the fiscal year ended December 31, 2018 (filed with the SEC on April 24, 2019) (the “Annual Report”);
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any future annual reports on Form 20-F filed with the SEC under the Exchange Act after the date of this prospectus and prior to the termination of the offering of the securities offered by this prospectus; and
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(3)
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any future reports on Form 6-K that we furnish to the SEC after the date of this prospectus and prior to the termination of the offering of the securities offered by this prospectus that are identified in such reports as being incorporated by reference in our Registration Statement on Form F-3.
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We will provide without
charge to each person, including any beneficial owner, to whom this prospectus is delivered, upon his or her written or oral request,
a copy of any or all documents referred to above which have been or may be incorporated by reference into this prospectus.
You may request a
copy of these filings by writing or telephoning us at our principal executive offices at the following address:
Bancolombia S.A.
Carrera 48 # 26-85, Avenida Los Industriales
Medellin, Colombia
Attention: Investor Relations
Telephone Number: (574) 404-1837
DEFINITIONS
For purposes of this
prospectus and unless otherwise specified or if the context so requires, terms used herein will have the meaning set forth in our
Annual Report, which is incorporated in this prospectus by reference.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING
STATEMENTS
This prospectus, the
accompanying prospectus supplement and the documents incorporated in this prospectus by reference contain 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 our belief regarding
future events, many of which, by their nature, are inherently uncertain and outside our control. Words such as “anticipate”,
“believe”, “estimate”, “approximate”, “expect”, “may”, “intend”,
“plan”, “predict”, “target”, “forecast”, “guideline”, “should”,
“project” and similar words and expressions are intended to identify forward-looking statements. It is possible that
our actual results may differ, possibly materially, from the anticipated results indicated in these forward-looking statements.
Information regarding
important factors that could cause actual results to differ, perhaps materially, from those in our forward-looking statements appear
in a number of places in this prospectus and the documents incorporated in this prospectus by reference, principally in “Item
3. Key Information—D. Risk Factors” and “Item 5. Operating and Financial Review and Prospects” of our Annual
Report, which is incorporated in this prospectus by reference, and include, but are not limited to:
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changes in general economic, business, political, social, fiscal or other conditions in Colombia, El Salvador, Panama, Guatemala where we operate;
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changes in capital markets or in markets in general that may affect policies or attitudes towards lending;
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changes in tax laws in Colombia, El Salvador, Panama, Guatemala;
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unanticipated increases in our financing and other costs, or our inability to obtain additional debt or equity financing on attractive terms;
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inflation, changes in foreign exchange rates, and changes in interest rates;
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internal security issues and sovereign risks affecting the countries where we operate, especially Colombia;
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increases in delinquencies by our borrowers;
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lack of acceptance of new products or services by our targeted customers;
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competition in the banking, financial services, credit card services, insurance, asset management, remittances, business and other industries in which we operate;
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adverse determination of legal or regulatory disputes or proceedings;
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changes in official regulations or the Colombian Government’s banking policy as well as changes in laws, regulations or policies in the jurisdictions in which we do business;
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regulatory issues relating to acquisitions;
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changes in business strategy; and
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decreases in our capital levels.
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Forward-looking statements
speak only as of the date they are made and are subject to change, and we do not intend, and do not assume any obligation, to update
these forward-looking statements in light of new information or future events arising after the date of this prospectus and the
documents incorporated in this prospectus by reference.
BANCOLOMBIA
We are Colombia’s
leading financial institution, with a 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.
We are a stock company
(sociedad anónima) domiciled in Medellin, Colombia and operate under Colombian laws and regulations, mainly the Colombian
Commerce Code, Decree 663 of 1993 and Decree 2555 of 2010, as amended from time to time. 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
Panamá acquired Banagrícola, which controls several subsidiaries, including Banco Agrícola in El Salvador,
and is dedicated to banking, commercial and consumer activities and brokerage. Through its first international acquisition, Bancolombia
gained a leadership position in the Salvadorian market.
In October 2013, Bancolombia
Panamá acquired a 40% interest in Grupo Agromercantil, the parent company of Banco Agromercantil de Guatemala, and certain
other companies dedicated to securities brokerage, insurance, and other financial businesses, and acquired an additional 20% interest
on December 30, 2015.
Also in October 2013,
Bancolombia acquired a 100% interest in the ordinary voting shares, and 1,325,780 preferred shares of Banistmo, a Panamanian banking
entity and its subsidiaries involved in the securities brokerage, trust, consumer finance, leasing, and insurance businesses.
Since 1995, we have
maintained a listing on the NYSE, where our ADSs are traded under the symbol “CIB”, and on the Colombian Securities
Exchange, where our preferred shares are traded under the symbol “PFBCOLOM”. Since 1981 our common shares have been
traded on the Colombian Securities Exchange under the symbol “BCOLOMBIA”.
We have grown substantially
over the years, both through organic growth and acquisitions. As of December 31, 2018, Bancolombia had, on a consolidated basis:
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COP 220,114 billion in total assets;
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COP 163,583 billion in total net loans and advances to customers and financial institution;
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COP 142,128 billion in total deposits from customers; and
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COP 24,849 billion in stockholders’ equity attributable to the owners of the parent company.
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Our 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 our headquarters are as follows: Carrera 48 # 26-85, Medellín, Colombia; telephone + (574) 404-1837. Our agent
for service of process in the United States is Puglisi & Associates, presently located at 850 Library Avenue, Suite 204, Newark,
Delaware 19711. Our web address is www.grupobancolombia.com; however, the information found on our website is not part of
this prospectus.
RISK FACTORS
Investment in any
securities offered pursuant to this prospectus involves risks. You should consider carefully the risk factors incorporated by reference
to our most recent Annual Report on Form 20-F and the other information contained in this prospectus, as updated by our subsequent
filings under the Exchange Act and the risk factors and other information contained in the applicable prospectus supplement before
acquiring any of such securities.
USE OF PROCEEDS
Unless we indicate
otherwise in the applicable prospectus supplement, we intend to use the net proceeds from any initial sales of the securities offered
under this prospectus and the accompanying prospectus supplement to provide additional funds for our operations, strengthen our
capital structure and regulatory compliance, as well as for other general corporate purposes. General corporate purposes may include
the repayment or reduction of indebtedness, financing acquisitions and meeting working capital requirements. Unless we indicate
otherwise in the applicable prospectus supplement, we will not receive any proceeds from any sales by selling security holders.
THE SECURITIES
We, or the selling
security holders, as the case may be, may from time to time offer under this prospectus, separately or together:
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senior or subordinated debt securities;
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preferred shares, which may be represented by ADSs and evidenced by American Depositary Receipts (“ADRs”); and
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rights to subscribe for preferred shares, including rights to subscribe for ADSs.
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LEGAL OWNERSHIP
In this prospectus
and in any accompanying prospectus supplement, when we refer to the “holders” of securities as being entitled to specified
rights or payments, we mean only the actual legal holders of the securities. While you will be the holder if you hold a security
registered in your name, more often than not the registered holder will actually be either a broker, bank, other financial institution
or, in the case of a global security, a depositary. Our obligations, as well as the obligations of the trustee, any transfer agent,
any registrar, any depositary and any third parties employed by us or the other entities listed above, run only to persons who
are registered as holders of our securities, except as may be specifically provided for in deposit agreement or other contract
governing the securities. For example, once we make payment to the registered holder, we have no further responsibility for the
payment even if that registered holder is legally required to pass the payment along to you as a street name customer but does
not do so.
If we choose to issue
preferred shares, they may be represented by ADSs. The underlying preferred shares represented by ADSs will be directly held by
a depositary. Your rights and obligations will be determined by reference to the terms of the relevant deposit agreement. A copy
of the deposit agreement, as amended from time to time, with respect to our preferred shares is on file with the SEC and incorporated
by reference in this prospectus. You may obtain a copy of the deposit agreement from the SEC’s Public Reference Room. See
“Available Information.”
Street Name and Other Indirect Holders
Holding securities
in accounts at banks or brokers is called holding in “street name.” If you hold our securities in street name, we will
recognize only the bank or broker, or the financial institution that the bank or broker uses to hold the securities, as a holder.
These intermediary banks, brokers, other financial institutions and depositaries pass along principal, interest, dividends and
other payments, if any, on the securities, either because they agree to do so in their customer agreements or because they are
legally required to do so. This means that if you are an indirect holder, you will need to coordinate with the institution through
which you hold your interest in a security in order to determine how the provisions involving holders described in this prospectus
and any prospectus supplement will actually apply to you. For example, if the debt security in which you hold a beneficial interest
in street name can be repaid at the option of the holder, you cannot redeem it yourself by following the procedures described in
the prospectus supplement relating to that security. Instead, you would need to cause the institution through which you hold your
interest to take those actions on your behalf. Your institution may have procedures and deadlines different from or additional
to those described in the applicable prospectus supplement.
If you hold our securities
in street name or through other indirect means, you should check with the institution through which you hold your interest in a
security to find out:
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how it handles payments and notices with respect to the securities;
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whether it imposes fees or charges;
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how it handles voting, if applicable;
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how and when you should notify it to exercise on your behalf any rights or options that may exist under the securities;
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whether and how you can instruct it to send you securities registered in your own name so you can be a direct holder as described below; and
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how it would pursue rights under the securities if there were a default or other event triggering the need for holders to act to protect their interests.
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Global Securities
A global security
is a special type of indirectly held security. If we choose to issue our securities, in whole or in part, in the form of global
securities, the ultimate beneficial owners can only be indirect holders. We do this by requiring that the global security be registered
in the name of one or more financial institutions or clearing systems, or their nominees, which we select and by requiring that
the securities included in the global security not be transferred to the name of any other direct holder unless the special circumstances
described below occur. A financial institution or clearing system that we select for any security for this purpose is called the
“depositary.” A security will usually have only one depositary which will act as the sole direct holder of the global
security but it may have more. Any person wishing to own a security issued in global form must do so indirectly through an account
with a broker, bank or other financial institution that in turn has an account with the depositary. The prospectus supplement indicates
whether the securities will be issued only as global securities.
Each series of securities
will have one or more of the following as the depositaries:
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The Depository Trust Company, New York, New York, which is known as “DTC”;
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a financial institution holding the securities on behalf of Euroclear Bank S.A./ N.V., as operator of the Euroclear system, which is known as “Euroclear”;
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a financial institution holding the securities on behalf of Clearstream Banking, société anonyme, Luxembourg, which is known as “Clearstream”; and
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any other clearing system or financial institution named in the applicable prospectus supplement.
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The depositaries named
above may also be participants in one another’s systems. Thus, for example, if DTC is the depositary for a global security,
investors may hold beneficial interests in that security through Euroclear or Clearstream, as DTC participants. The depositary
or depositaries for your securities will be named in the prospectus supplement; if none is named, the depositary will be DTC.
A global security
may represent one or any other number of individual securities. Generally, all securities represented by the same global security
will have the same terms. We may, however, issue a global security that represents multiple securities of the same kind, such as
debt securities, that have different terms and are issued at different times. We call this kind of global security a master global
security. The prospectus supplement will not indicate whether your securities are represented by a master global security.
The depositary, or
its nominee, will be the sole registered owner and holder of all securities represented by a global security, and investors will
be permitted to own only indirect interests in a global security. Indirect interests must be held by means of an account with a
broker, bank or other financial institution that in turn has an account with the depositary or with another institution that does.
Thus, an investor whose security is represented by a global security will not be a holder of the security, but only an indirect
owner of an interest in the global security.
If the prospectus
supplement for a particular security indicates that the security will be issued in global form only, then the security will be
represented by a global security at all times unless and until the global security is terminated. We describe the special situations
in which this can occur below under “—Special Situations When a Global Security Will Be Terminated”. If termination
occurs, we may issue the securities through another book-entry clearing system or decide that the securities may no longer be held
through any book-entry clearing system.
Special Considerations for Global Securities
As an indirect owner,
an investor’s rights relating to a global security will be governed by the account rules of the depositary and those of the
investor’s financial institution or other intermediary through which it holds its interest (e.g., Euroclear or Clearstream,
if DTC is the depositary), as well as general laws relating to securities transfers. We do not recognize this type of investor
or any intermediary as a holder of securities and instead deal only with the depositary that holds the global security.
If securities are issued only in the form
of a global security, an investor should be aware of the following:
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An investor cannot cause the securities to be registered in his or her own name, and cannot obtain non-global certificates for his or her interest in the securities, except in the special situations we describe below;
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An investor will be an indirect holder and must look to his or her own bank or broker for payments on the securities and protection of his or her legal rights relating to the securities;
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An investor may not be able to sell interests in the securities to some insurance companies and other institutions that are required by law to own their securities in non-book-entry form;
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An investor may not be able to pledge his or her interest in a global security in circumstances where certificates representing the securities must be delivered to the lender or other beneficiary of the pledge in order for the pledge to be effective;
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The depositary’s policies will govern payments, deliveries, transfers, exchanges, notices and other matters relating to an investor’s interest in a global security, and those policies may change from time to time. We and the trustee (in the case of debt securities) will have no responsibility for any aspect of the depositary’s policies, actions or records of ownership interests in a global security. Neither we nor any trustee for our debt securities supervise the depositary in any way;
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The depositary will require that those who purchase and sell interests in a global security within its book-entry system use immediately available funds and your broker or bank may require you to do so as well; and
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Financial institutions that participate in the depositary’s book-entry system and through which an investor holds its interest in the global securities, directly or indirectly, may also have their own policies affecting payments, deliveries, transfers, exchanges, notices and other matters relating to the securities, and those policies may change from time to time. For example, if you hold an interest in a global security through Euroclear or Clearstream, when DTC is the depositary, Euroclear or Clearstream, as applicable, will require those who purchase and sell interests in that security through them to use immediately available funds and comply with other policies and procedures, including deadlines for giving instructions as to transactions that are to be effected on a particular day. There may be more than one financial intermediary in the chain of ownership for an investor. We do not monitor and are not responsible for the policies or actions or records of ownership interests of any of those intermediaries.
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Special Situations When a Global Security
Will Be Terminated
In a few special situations
described below, a global security will be terminated and interests in it will be exchanged for certificates in non-global form
representing the securities it represented. After that exchange, the choice of whether to hold the securities directly or in street
name will be up to the investor. Investors must consult their own banks or brokers to find out how to have their interests in a
global security transferred on termination to their own names, so that they will be holders.
Unless we specify
otherwise in the prospectus supplement, the special situations for termination of a global security are as follows:
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if the depositary notifies us that it is unwilling, unable or no longer qualified to continue as depositary for that global security and we do not appoint another institution to act as depositary within 90 days;
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in the case of a global security representing debt securities issued under an indenture, if we notify the trustee that we wish to terminate that global security; or
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in the case of a global security representing debt securities issued under an indenture, if an event of default has occurred with regard to these debt securities and has not been cured or waived.
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The prospectus supplement
may also list additional situations for terminating a global security that would apply to the particular securities covered by
the prospectus supplement. If a global security is terminated, only the depositary, and not us or the trustee for any debt securities,
is responsible for deciding the names of the institutions in whose names the securities represented by the global security will
be registered and, therefore, who will be the holders of those securities.
Considerations Relating to Euroclear
and Clearstream
Euroclear and Clearstream
are securities clearance systems in Europe. Both systems clear and settle securities transactions between their participants through
electronic, book-entry delivery of securities against payment.
Euroclear and Clearstream
may be depositaries for a global security. In addition, if DTC is the depositary for a global security, Euroclear and Clearstream
may hold interests in the global security as participants in DTC.
As long as any global
security is held by Euroclear or Clearstream, as depositary, you may hold an interest in the global security only through an organization
that participates, directly or indirectly, in Euroclear or Clearstream. If Euroclear or Clearstream is the depositary for a global
security and there is no depositary in the United States, you will not be able to hold interests in that global security through
any securities clearance system in the United States.
Payments, deliveries,
transfers, exchanges, notices and other matters relating to the securities made through Euroclear or Clearstream must comply with
the rules and procedures of those systems. Those systems could change their rules and procedures at any time. We do not have control
over those systems or their participants and we take no responsibility for their activities. Transactions between participants
in Euroclear or Clearstream, on one hand, and participants in DTC, on the other hand, when DTC is the depositary, would also be
subject to DTC’s rules and procedures.
Special Timing Considerations for Transactions
in Euroclear and Clearstream
Investors will be
able to make and receive through Euroclear and Clearstream payments, deliveries, transfers, exchanges, notices and other transactions
involving any securities held through those systems only on days when those systems are open for business. Those systems may not
be open for business on days when banks, brokers and other institutions are open for business in the United States.
In addition, because
of time-zone differences, U.S. investors who hold their interests in the securities through these systems and wish to transfer
their interests, or to receive or make a payment or delivery or exercise any other right with respect to their interests, on a
particular day may find that the transaction will not be effected until the next business day in Luxembourg or Brussels, as applicable.
Thus, investors who wish to exercise rights that expire on a particular day may need to act before the expiration date. In addition,
investors who hold their interests through both DTC and Euroclear or Clearstream may need to make special arrangements to finance
any purchases or sales of their interests between the U.S. and European clearing systems, and those transactions may settle later
than would be the case for transactions within one clearing system.
In the remainder
of this document, “you” means direct holders and not street name or other indirect holders of securities. Indirect
holders should read the previous subsection starting on page 11 entitled “Street Name and Other Indirect Holders.”
DESCRIPTION OF DEBT SECURITIES
We will set forth
in the applicable prospectus supplement a description of the debt securities that may be offered under this prospectus. The debt
securities will be issued under an indenture between us and a trustee to be named in the applicable prospectus supplement. Each
such indenture, a form of which is filed as an exhibit to the registration statement of which this prospectus forms a part, will
be executed at the time we issue any debt securities thereunder.
DESCRIPTION OF THE PREFERRED SHARES
The following description
of our preferred shares is a summary of the material terms of our by-laws and Colombian corporate law regarding our preferred shares
and the holders thereof. They may not contain all of the information that is important to you. To understand them fully, you should
read our by-laws, copies of which are filed with the SEC as an exhibit to our Annual Report on Form 20-F for the year ended December
31, 2018, filed on April 24, 2019. The following description is qualified in its entirety by reference to our by-laws and applicable
law.
References to “we”,
“us”, or “our” in this section refer to Bancolombia S.A. only and not to the subsidiaries of Bancolombia
S.A.
General
Our preferred shares
have been approved for issuance from our authorized capital stock and are non-voting (except as described below), non-cumulative
preferred shares. On March 31, 2019, there were 452,122,416 preferred shares outstanding. The Colombian Securities Exchange is
the principal non-U.S. trading market for the preferred shares. As of December 31, 2018, the market capitalization for our preferred
shares on the Colombian Securities Exchange was COP 14.196 billion. There are no official market makers or independent specialists
in the Colombian Securities Exchange to assure market liquidity and, therefore, orders to buy or sell in excess of corresponding
orders to sell or buy will not be executed. The aggregate equity market capitalization of the Colombian Securities Exchange, as
of December 31, 2018, was COP 339,132 billion, with 80 companies listed as of that date. A substantial portion of the trading on
the Colombian Securities Exchanges consists of trading in debt securities.
Neither the registration
of our preferred shares in the Registro Nacional de Valores y Emisores (the National Registry of Securities and Issuers)
nor the approval of any public offer by the SFC should be understood as a rating or assumption of liability by the SFC with respect
to us, the price, quality or the tradeability of the securities or of our solvency.
Registration and Transfer
The preferred shares
are evidenced by a dematerialized global certificate held for custody by Deposito Centralizado de Valores de Colombia - Deceval
S.A. (“Deceval”), in registered form without dividend coupons attached. We maintain a stock registry through Deceval
and only those holders listed in that stock registry as holders of preferred shares are recognized by us as holders of preferred
shares. Each registration or transfer of preferred shares will be effected only by the book entry record on such stock registry.
Any such registration will be effected without charge to the person requesting such registration, but subject to payment by such
person of any taxes, stamp duties or other governmental charges payable in connection therewith. The Bank of New York Mellon, which
acts as depositary (the “depositary”) for our ADR facility, or the depositary’s nominee shall be the registered
holder on behalf of beneficial owners of ADSs representing the preferred shares, which shall be deposited with Fiduciaria Bancolombia
S.A. (formerly Fiducolombia S.A.), as agent of the depositary (the “custodian”).
In general, transfers
of shares of listed companies in Colombia are required to be effected through the Colombian Securities Exchange. The following
transfers, however, are not required to be effected through the Colombian Securities Exchange: (i) transfers between shareholders
that have the same beneficial owner provided that such condition is evidenced to the SFC; (ii) transfers by operation of law (such
as inheritance, liquidation of companies or judicial decisions, among others); (iii) transfers as payment in kind provided that
a one year pre-existence of the payment obligation is evidenced to the SFC; and (iv) transfers whose amount do not exceed the value
of 66,000 Unidades de Valor Real (or “UVRs”, a Colombian inflation-adjusted monetary index calculated by the
board of directors of the Central Bank and generally used for pricing home-mortgage loans; as of March 31, 2019 approximately U.S.$5,487).
Neither we nor the depositary will be liable for any failure to comply with the ownership limitation or failure to respond to any
request for information to determine compliance with the ownership limitation.
Colombian securities
regulations forbid a shareholder to pre-arrange transactions on shares of listed companies unless the pre-arrangement is disclosed
publicly and to the SFC at least one month in advance.
Pursuant to Colombian
Banking laws, no individual or corporation may hold 10% or more of a Colombian financial institution’s capital stock or increase
any such ownership without the prior authorization of the SFC.
Voting Rights
The holders of preferred
shares are not entitled to receive notice of, attend or vote at any general shareholders’ meeting of holders of common shares
except as described below.
The holders of preferred
shares will be entitled to vote on the basis of one vote per share at any general shareholders’ meeting, whenever a shareholders
vote is required on the following matters:
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In the event that changes in our by-laws may impair the conditions or rights assigned to such preferred shares and when the conversion of such shares into common shares is to be approved. In this event, a favorable vote of a minimum of 70% of the subscribed capital stock, including the favorable vote of a minimum of 70% of the preferred shares, is required.
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When voting the anticipated dissolution, merger or transformation of the corporation or change of its corporate purpose.
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When the preferred dividend has not been fully paid during two consecutive annual terms. In this event, holders of such preferred shares shall retain their voting rights until the corresponding dividends have been fully paid to them.
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When the in kind payment of dividends in shares is subject to vote in the general shareholders’ meeting.
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If at the end of a fiscal period, our profits are not enough to pay the minimum dividend and the SFC, by its own decision or upon petition of holders of at least 10% of preferred shares, determines that benefits were concealed or shareholders were misled by our directors or officers with regard to benefits received from us, thus decreasing the profits to be distributed, then, the SFC may resolve that holders of preferred shares should participate with speaking and voting rights at the general shareholders’ meeting, in accordance with the terms established by law.
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When the register of shares at the Colombian Securities Exchange or at the Registro Nacional de Valores y Emisores (the Colombian National Registry of Securities and Issuers or “RNVE”) is suspended or canceled. In this event, voting rights shall be maintained until the irregularities that resulted in such cancellation or suspension are resolved.
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Except under certain
of the conditions set forth above, holders of preferred shares are not entitled to vote for the election of directors or to influence
our management policies.
The holders of preferred
shares will not be entitled to receive notice from us of a general meeting of the holders of common shares unless they have the
right to vote on any of the matters to be addressed at such meeting, as described above. Each holder of preferred shares shall
have the right to vote individually on any of the matters on which the holders of preferred shares have voting rights.
In accordance with
our by-laws, notice of meetings at which holders of preferred shares are entitled to vote shall be published in at least one daily
newspaper with a wide circulation in Bancolombia’s principal place of business, Medellin, as is the case for any other shareholders’
meeting. Each notice must state: (i) the date of the meeting, (ii) a description of any resolution to be proposed for adoption
at the meeting on which the holders of preferred shares are entitled to vote and (iii) instructions for the delivery of proxies.
General shareholders’
meetings may be ordinary meetings or extraordinary meetings. Ordinary general shareholders’ meetings occur at least once
a year during the three months after the end of the prior fiscal year. Extraordinary general shareholders’ meetings may take
place when duly called for a specified purpose or purposes, or, without prior notice, when holders representing all outstanding
shares entitled to vote on the issues presented are present at the meeting.
Quorum for both ordinary
and extraordinary general shareholders’ meetings to be convened at first call requires the presence of two or more shareholders
representing at least half plus one of the outstanding shares entitled to vote at the relevant meeting. If a quorum is not present,
a subsequent meeting is called at which the presence of one or more holders of shares entitled to vote at the relevant meeting
constitutes a quorum, regardless of the number of shares represented.
Ordinary general meetings
may be called by our board of directors and our president. Extraordinary general meetings may be called by our board of directors,
president or external auditor. In addition, two or more shareholders representing at least 20% of the outstanding shares have the
right to request that an extraordinary general shareholders’ meeting be convened. Notice of ordinary meetings and extraordinary
meetings convened to approve fiscal year-end financial statements, the increase of authorized capital, the reduction of the outstanding
capital, the merger, spin-off or sale of more than 25% of the assets, liabilities and contracts, must be published in one newspaper
of wide circulation at Bancolombia’s principal place of business at least 30 calendar days prior to such meeting. Notice
of other extraordinary meetings, must be published in one newspaper of wide circulation at Bancolombia’s principal place
of business at least 15 calendar days prior to such meeting listing the matters to be addressed at such meeting.
Except when Colombian
law or our by-laws require a special majority, action may be taken at a general shareholders’ meeting by the vote of two
or more shareholders representing a majority of common shares present. Pursuant to Colombian law and/or our by-laws, special majorities
are required to adopt the following corporate actions:
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a favorable vote of at least 70% of the common shares represented at a general shareholders’ meeting is required to approve the issuance of shares without preemptive rights available to the shareholders;
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a favorable vote of at least 78% of common shares represented at a general shareholders’ meeting is required to decide not to distribute as dividend at least 50% of the annual net profits of any given fiscal year;
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a favorable vote of at least 80% of the holders of common shares represented at a general shareholders’ meeting, and 80% of the holders of outstanding preferred shares is required to approve the payment dividend in shares; and
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a favorable vote of at least 70% of the holders of common shares and of outstanding preferred shares is required to effect a decision to impair the conditions or rights established for such preferred shares, or a decision to convert preferred shares into common shares.
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If the SFC determines
that any amendment to the by-laws fails to comply with Colombian law, it may demand that the relevant provisions be modified accordingly.
Under these circumstances, we will be obligated to comply in a timely manner.
Dividends
The holders of common
shares, once they have approved the year-end financial statements, determine the allocation of distributable profits, if any, for
the preceding year.
Under the Colombian
Commerce Code, a company must distribute at least 50% of its annual net profits to all shareholders, payable in cash, or as determined
by the shareholders, within a period of one year following the date on which the shareholders determine the dividends. If the total
amount of all reserves of a company exceeds its outstanding capital, this percentage is increased to 70%. The minimum dividend
requirement of 50% or 70%, as the case may be, may be waived by a favorable vote of the holders of 78% of a company’s common
shares present at the meeting.
Under Colombian law
and our by-laws, annual net profits are to be applied as follows:
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first, an amount equivalent to 10% of net profits is allocated to the legal reserve until such reserve is equal to at least 50% of our paid-in capital;
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second, payment of the minimum dividend on the preferred shares; and
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third, allocation of the remainder of the net profits is determined by the holders of a majority of the common shares entitled to vote on the recommendation of the board of directors and the President and may, subject to further reserves required by the by-laws, be distributed as dividends. In accordance with Colombian law and our by-laws, the dividends payable to the holders of common shares cannot exceed the dividends payable to holders of the preferred shares.
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Holders of preferred
shares are entitled to receive dividends based on the profits of the preceding fiscal year, after canceling losses affecting the
capital and once the amount that shall be legally set apart for the legal reserve has been deducted, but before creating or accruing
for any other reserve, of a minimum preferred dividend equal to 1% yearly of the subscription price of the preferred share, provided
this dividend is higher than the dividend assigned to common shares. If this is not the case, the dividend shall be increased to
an amount that is equal to the per share dividend on the common shares.
Payment of the preferred
dividend shall be made at the time and in the manner established by the general shareholders’ meeting and in the priority
indicated by Colombian law.
The general shareholders’
meeting may allocate a portion of the profits to welfare, education or civic services, or to support economic organizations of
our employees.
The dividend payments
may be made in installments which must be approved at the annual general shareholders’ meeting. In the general shareholders’
meeting, shareholders will determine the effective date, the system and the place for payment of dividends.
Dividends declared
on the preferred shares will be payable to the record holders of those shares, as they appear on our stock registry, on the appropriate
record dates as determined by the general shareholders’ meeting. Generally, any stock dividend payable by us to the holders
of preferred shares will be paid in preferred shares. However, the general shareholders’ meeting may authorize the payment
in common shares to all shareholders. Any in-kind dividend payable in shares requires the approval of 80% or more of the voting
interest of the common shares present at a shareholders’ meeting and the approval of 80% or more of the voting interest of
the outstanding preferred shares. In the event that such voting majority is not obtained, shareholders may individually elect to
receive a stock dividend or a cash dividend.
Liquidation Rights
We will be dissolved
if certain events take place, including the following:
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our term of existence, as stated in the by-laws, expires without being extended by the shareholders prior to its expiration date;
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losses cause the decrease of our shareholders’ equity below 50% of our outstanding capital stock, unless one or more of the corrective measures described in the Colombian Commerce Code are adopted by a general shareholder’s meeting within six months;
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by decision of the general shareholders’ meeting; and
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in certain other events expressly provided for by Colombian law and our by-laws.
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Upon dissolution,
a liquidator must be appointed by the general shareholders’ meeting to wind up its affairs. In addition, the SFC has the
power to take over the operations and assets of a bank and proceed to its liquidation under certain circumstances and in the manner
prescribed in the Colombian Financial Statute (Estatuto Orgánico del Sistema Financiero - Decree 663 of 1993 –
the “Financial Statute”)
Upon liquidation,
holders of fully paid preferred shares will be entitled to receive in pesos, out of the surplus assets available for distribution
to shareholders, pari passu with any of the other shares ranking at that time pari passu with the preferred shares,
an amount equal to the nominal value of those preferred shares before any distribution or payment may be made to holders of common
shares or any other shares at that time ranking junior to the preferred shares with regard to participation in our surplus assets.
If, upon any liquidation, assets that are available for distribution among the holders of preferred shares and liquidation parity
shares are insufficient to pay in full their respective liquidation preferences, then those assets will be distributed among those
holders pro-rata in accordance with the respective liquidation preference amounts payable to them.
Subject to the preferential
liquidation rights of holders of preferred shares, all fully paid common shares will be entitled to participate equally in any
distribution upon liquidation. Partially paid common shares must participate in a distribution upon liquidation in the same proportion
that those shares have been paid at the time of the distribution.
To the extent there
are surplus assets available for distribution after full payment to the holders of common shares of the nominal value of the common
shares, the surplus assets will be distributed among all holders of shares of capital stock pro-rata in accordance with
their respective holdings of shares.
Preemptive Rights and Other Anti-Dilution
Provisions
Pursuant to the Colombian
Commerce Code, we are allowed to have an amount of outstanding capital stock equal to or smaller than the authorized capital stock
set out in our by-laws. Under our by-laws, the holders of common shares determine the amount of authorized capital stock, and the
board of directors has the power to (a) order the issuance and regulate the terms of subscription of common shares up to the total
amount of authorized capital stock and (b) regulate the issuance of preferred shares, when expressly delegated by the general shareholders’
meeting. The issuance of preferred shares must always be first approved by the general shareholders’ meeting, which shall
determine the nature and extent of any privileges, according to the by-laws and Colombian law.
At the time a Colombian
company is formed, its outstanding capital stock must represent at least 50% of the authorized capital. Any increases in the authorized
capital stock or decreases in the outstanding capital stock must be approved by the majority of shareholders required to approve
a general amendment to the by-laws. Pursuant to the Financial Statute, the SFC may order a commercial bank to increase its outstanding
capital stock under certain special circumstances.
Our by-laws and Colombian
law require that, whenever we issue new shares of any outstanding class, we must offer the holders of each class of shares the
right to purchase a number of shares of such class sufficient to maintain their existing percentage ownership of our aggregate
capital stock. These rights are called preemptive rights.
The general shareholders’
meeting may suspend preemptive rights with respect to a particular capital increase by a favorable vote of at least 70% of the
common shares represented at a general shareholders’ meeting. Preemptive rights must be exercised within the period stated
in the share placement terms of the increase, which cannot be shorter than 15 business days following the publication of the notice
of the public offer of that capital increase. From the date of the notice of the share placement terms, preemptive rights may be
transferred separately from the corresponding shares.
The SFC will authorize
decreases in the outstanding capital stock decided by the holders of common shares only if:
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we have no liabilities;
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our creditors consent in writing; or
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the outstanding capital stock remaining after the reduction represents at least twice the amount of our liabilities.
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Other Provisions
Limits on the Issuance of
Shares with Preferred Dividends and No Voting Rights
Preferred shares may
not represent more than 50% of the outstanding capital.
Limits on Purchases and
Sales of Capital Stock by Related Parties
Pursuant to the Colombian
Commerce Code, the members of our board of directors and certain of our senior officers may not, directly or indirectly, buy or
sell shares of our capital stock while they hold their positions, except when dealing on a non-speculative basis and in that case
they need to obtain: (i) the prior authorization of the board of directors passed with the vote of two thirds of its members, (excluding,
in the case of transactions by a director, such director’s vote); or (ii) the prior authorization of the general shareholders’
meeting approved with the vote of the majority as provided in the by-laws, excluding the vote of the petitioner.
No Redemption by Bancolombia
Colombian law prohibits
Bancolombia from repurchasing shares of its capital stock, including the preferred shares.
DESCRIPTION OF AMERICAN DEPOSITARY RECEIPTS
The following description
of American Depositary Receipts evidencing American Depositary Shares is applicable to any international offering of preferred
shares represented by American Depositary Shares and evidenced by ADRs.
On March 31, 2019,
there were 452,122,416 preferred shares outstanding. A total of 199,701,912 preferred shares, representing 43.71% of all outstanding
preferred shares, were directly held by the depositary in the United States (ADR Program). Because certain of the preferred shares
and ADSs are held by nominees, the number of record holders may not be representative of the number of beneficial owners. A beneficial
owner includes anyone who has the power to receive the economic benefit of ownership of the securities. ADRs evidencing ADSs are
deliverable by The Bank of New York Mellon, as depositary pursuant to the deposit agreement, dated as of July 25, 1995 and amended
and restated as of January 14, 2008, entered into by Bancolombia, the depositary and the owners and beneficial owners from time
to time of ADRs (the “deposit agreement”), pursuant to which the ADSs are issued. Copies of the deposit agreement are
available for inspection at the Corporate Trust Office of the depositary (the “Corporate Trust Office”), currently
located at 111 Sanders Creek Parkway, East Syracuse, New York 13057, and at the office of the custodian, currently located at Carrera
48 # 26–85, Medellin, Colombia or Calle 31 # 6-39, Bogota, Colombia. The depositary’s principal executive office is
located at One Wall Street, New York, New York 10286. The deposit agreement is also an exhibit to the registration statement of
which this prospectus is a part.
The following is a
summary of material provisions of the deposit agreement. This summary does not purport to be complete and is subject to, and qualified
in its entirety by reference to, the deposit agreement, including the form of ADR which is an exhibit to the deposit agreement.
Terms used herein and not otherwise defined will have the meanings set forth in the deposit agreement. ADRs evidencing ADSs are
issuable pursuant to the deposit agreement. Each ADS represents four preferred shares or evidences the right to receive four preferred
shares (together with any additional shares of preferred stock at any time deposited or deemed deposited under the deposit agreement
and any and all other securities, cash and property received by the depositary or the custodian in respect thereof and at such
time held under the deposit agreement, the “deposited securities”). Only persons in whose names ADRs are registered
on the books of the depositary will be treated by the depositary and us as owners.
Restrictions Regarding Foreign Investment
in Colombia
The following includes
a very brief summary of certain restrictions on foreign investment in Colombia and does not purport to be complete.
Colombia’s International
Investment Regime, Part 17 of Decree 1068 of 2015, as amended (the “International Investment Regime”) regulates the
manner in which nonresident entities and individuals can invest in Colombia and participate in the Colombian securities markets.
Among other requirements, the regime mandates registration of certain foreign exchange transactions with the Central Bank of Colombia
(the “Central Bank”) and specifies procedures to authorize and administer certain types of foreign investments. International
investments are regulated by the Central Bank by means of External Resolution 1 of 2018 and External Circular DCIN 83, both as
amended, setting forth in detail regulation and procedures regarding foreign investment in Colombia.
Investors who wish
to participate in our ADR facility and hold our ADRs will be required to submit to the custodian of the ADR facility certain information
and comply with certain registration procedures required under the foreign investment regulations in connection with foreign exchange
controls regarding currency conversion (generally COP/USD, related to the foreign investment). Holders of ADRs who wish to withdraw
the underlying preferred shares will also have to comply with certain registration and reporting procedures. See “Description
of American Depositary Receipts—Deposit, Transfer and Withdrawal.” Under Colombian foreign investment regulations,
the failure of a non-Colombian resident investor to report or register foreign exchange transactions relating to investments in
Colombia with the Central Bank, on a timely basis, may prevent the investor from obtaining remittance rights, constitute an exchange
control infraction and result in a fine.
Approval was obtained
from the SFC for the depositary facility established for the ADSs pursuant to the deposit agreement (and the agreement between
the depositary and the custodian referenced therein) as an institutional fund pursuant to the International Investment Statute.
In addition, the SFC authorized the initial and subsequent deposits of preferred shares with the custodian for the purpose of issuing
ADSs, as described below. Under such law, the custodian acts as the local administrator of such fund and has certain reporting
obligations to the Central Bank and to the SFC.
Deposit, Transfer and Withdrawal
The depositary has
agreed, subject to the terms and conditions of the deposit agreement, that upon delivery to the custodian of preferred shares (or
evidence of rights to receive preferred shares) and pursuant to appropriate instruments of transfer in a form satisfactory to the
custodian, the depositary will, upon payment of the fees, charges and taxes provided in the deposit agreement, execute and deliver
an ADR or ADRs, registered in the name or names of the person or persons named in the notice of the custodian delivered to the
depositary or requested by the person depositing such preferred shares with the depositary. Such ADR or ADRs shall evidence any
authorized number of ADSs requested by such person or persons and shall be executed and delivered at the depositary’s Corporate
Trust Office. Each deposit must be accompanied by a written notice describing the price paid for the preferred shares being deposited
(including any commissions paid to a securities broker in Colombia) in order to enable the custodian to comply with the foreign
exchange regulations of the Central Bank with respect to the fund or such other matters as may be required from time to time under
applicable Colombian law.
Pursuant to the Financial
Statute, no individual or corporation may hold 10% or more of a Colombian financial institution’s capital stock without the
prior authorization of the SFC.
Upon surrender at
the Corporate Trust Office of the depositary of an ADR for the purpose of withdrawal of the deposited securities represented by
the ADSs evidenced by such ADR, and upon payment of the fees of the depositary for the surrender of ADRs, governmental charges
and taxes provided in the deposit agreement, and subject to the terms and conditions of the deposit agreement, our by-laws and
the terms of the deposited securities, the owner of such ADR will be entitled to delivery, to him or upon his order, of the amount
of deposited securities at the time represented by the ADS or ADSs evidenced by such ADR. The forwarding of share certificates,
other securities, property, cash and other documents of title for such delivery will be at the risk and expense of the owner. Any
non-resident owner or beneficial owner requesting withdrawals of preferred shares or other deposited securities upon surrender
of ADRs must deliver to the depositary a written notice specifying either that those preferred shares or other deposited securities:
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have been or are to be sold in Colombia simultaneously with such withdrawal of the preferred shares or other deposited securities; or
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are to be held by such owner or beneficial owner, or to its order, without sale, in which case such owner or beneficial owner must acknowledge its obligations to register its investment under the foreign investment regulations, if applicable, and make the required foreign exchange report to the Central Bank.
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Such non-resident
withdrawing owner or beneficial owner must also deliver or cause to be delivered to the Central Bank a written notice relating
to the sales price realized (net of sales commissions paid or payable to a Colombian securities broker) in respect of the sale
of preferred shares (or other deposited securities, as the case may be) and such other certifications as may be required from time
to time under applicable Colombian law.
A non-resident owner
or beneficial owner who withdraws preferred shares or other deposited securities to or for its or his own account or the account
of a nonresident third party and who does not sell or cause to be sold such preferred shares or other deposited securities in Colombia
simultaneously with such withdrawal will be subject to the foreign investment regulations and will be required individually to
comply with one of the authorized forms of foreign investment in securities of Colombian issuers described below:
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investment through an institutional fund; or
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investment through an individual fund.
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Such owner, beneficial
owner or third party may be required to register its foreign capital investment in the preferred shares (i.e., the purchase price
of preferred shares plus any securities brokerage commissions paid to Colombian brokers) deposited pursuant to the terms of the
deposit agreement by or on behalf of such owner or beneficial owner, or the purchase price of ADSs, if ADSs were purchased from
a prior owner or beneficial owner thereof, with the Central Bank, in accordance with the requirements of the exchange declaration
used.
Non-resident owners
or beneficial owners should consult with their investment advisers prior to any withdrawal of preferred shares in the event that
such securities may not be sold or held by such owner or beneficial owner in Colombia at the time of such withdrawal. Neither we,
the depositary nor the custodian will have any liability or responsibility whatsoever under the deposit agreement or otherwise
for any action or failure to act by any owner or beneficial owner relating to its obligations under the foreign investment regulations
or any other Colombian law or regulation relating to foreign investment in Colombia in respect of a withdrawal or sale of preferred
shares or other deposited securities, including, without limitation, any failure to comply with a requirement to register such
investment pursuant to the terms of the foreign investment regulations prior to such withdrawal or any failure to report foreign
exchange transactions to the Colombian Central Bank, as the case may be. In addition, the deposit agreement provides that the owner
or beneficial owner will be responsible for the report of any false information relating to foreign exchange transactions to the
custodian or the Central Bank in connection with deposits or withdrawals of preferred shares or other deposited securities.
Subject to the terms
and conditions of the deposit agreement and any limitations established by the depositary, unless requested by us to cease doing
so, the depositary may deliver ADRs prior to the receipt of preferred shares (a “pre-release”) and deliver shares upon
the receipt and cancellation of ADRs which have been pre-released, whether or not such cancellation is prior to the satisfaction
of that pre-release or the depositary knows that any ADR has been pre-released.
The depositary may
receive ADRs in lieu of preferred shares in satisfaction of a pre-release. Each pre-release must be:
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preceded or accompanied by a written representation from the person to whom the ADRs or preferred shares are to be delivered that such person, or its customer, beneficially owns the preferred shares or ADRs to be remitted, as the case may be, and assigns all beneficial right, title, and interest in such preferred shares or ADRs to the depositary;
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at all times fully collateralized with cash or such other collateral as the depositary deems appropriate;
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terminable by the depositary on not more than five business days’ notice; and
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subject to such further indemnities and credit regulations as the depositary deems appropriate.
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Dividends, Other Distributions and Rights
Subject to any restrictions
imposed by Colombian law, regulations or applicable permits, the depositary is required, as promptly as practicable:
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to convert or cause to be converted into U.S. dollars, to the extent that in its judgment it can do so on a reasonable basis and can transfer the resulting U.S. dollars to the United States, all cash dividends and other cash distributions denominated in a currency other than U.S. dollars, including pesos (“Foreign Currency”), that it receives in respect of the deposited preferred shares; and
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to distribute, as promptly as practicable, the resulting U.S. dollar amount (net of reasonable and customary expenses incurred by the depositary in converting such Foreign Currency) to the owners entitled thereto, in proportion to the number of ADSs representing such deposited securities evidenced by ADRs held by them, respectively.
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If the depositary
determines that in its judgment any Foreign Currency received by the depositary or the custodian cannot be converted on a reasonable
basis into U.S. dollars transferable to the United States, or if any approval or license of any government or agency thereof which
is required for such conversion is denied or in the opinion of the depositary is not obtainable, or if any such approval or license
is not obtained within a reasonable period as determined by the depositary, the depositary may distribute the Foreign Currency
received by the depositary or the custodian to, or in its discretion may hold such foreign currency uninvested and without liability
for interest thereon for the respective accounts of, the owners entitled to receive the same. If any such conversion of foreign
currency, in whole or in part, cannot be distributed to some of the owners entitled thereto, the depositary may in its discretion
make such conversion and distribution in U.S. dollars to the extent permissible to the owners entitled thereto, and may distribute
the balance of the foreign currency received by the depositary to, or hold such balance uninvested and without liability for interest
thereon for, the respective accounts of, the owners entitled thereto.
If we declare a dividend
in, or free distribution of, preferred shares, the depositary may, and will if we request, distribute to the owners of outstanding
ADRs entitled thereto additional ADRs evidencing an aggregate number of ADSs that represents the amount of preferred shares received
as such dividend or free distribution, in proportion to the number of ADSs evidenced by the ADRs held by them, subject to the terms
and conditions of the deposit agreement with respect to the deposit of preferred shares and the issuance of ADSs evidenced by ADRs,
including the withholding of any tax or other governmental charge and the payment of fees of the depositary. The depositary may
withhold any such distribution of ADRs if it has not received satisfactory assurances from us that such distribution does not require
registration under the Securities Act or is exempt from registration under the provisions of the Securities Act. In lieu of delivering
ADRs for fractional ADSs in the event of any such dividend or free distribution, the depositary will sell the amount of preferred
shares represented by the aggregate of such fractions and distribute the net proceeds in accordance with the deposit agreement.
If additional ADRs are not so distributed, each ADS will thenceforth also represent the additional preferred shares distributed
upon the deposited securities represented thereby.
If we offer or cause
to be offered to the holders of any deposited securities any rights to subscribe for additional preferred shares or any rights
of any other nature, the depositary will have discretion as to the procedure to be followed in making such rights available to
any owners of ADRs or in disposing of such rights for the benefit of any owners and making the net proceeds available in U.S. dollars
to such owners or, if by the terms of such rights offering or for any other reason, the depositary may not either make such rights
available to any owners or dispose of such rights and make the net proceeds available to such owners, then the depositary shall
allow the rights to lapse; provided, however, if at the time of the offering of any rights the depositary determines in its discretion
that it is lawful and feasible to make such rights available to all owners or to certain owners but not to other owners, the depositary
may distribute to any owner to whom it determines the distribution to be lawful and feasible, in proportion to the number of ADSs
held by such owner, warrants or other instruments therefor in such form as it deems appropriate. If the depositary determines in
its discretion that it is not lawful and feasible to make such rights available to certain owners, it may sell the rights, warrants
or other instruments in proportion to the number of ADSs held by the owners to whom it has determined it may not lawfully or feasibly
make such rights available, and allocate the net proceeds of such sales for the account of such owners otherwise entitled to such
rights, warrants or other instruments, upon an averaged or other practical basis without regard to any distinctions among such
owners because of exchange restrictions or the date of delivery of any ADR or ADRs, or otherwise.
In circumstances in
which rights would not otherwise be distributed, if an owner of ADRs requests the distribution of warrants or other instruments
in order to exercise the rights allocable to the ADSs of such owner, the depositary will make such rights available to such owner
upon written notice from us to the depositary that:
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we have elected in our sole discretion to permit such rights to be exercised; and
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such owner has executed such documents as we have determined in our sole discretion are reasonably required under applicable law.
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Upon instruction pursuant
to such warrants or other instruments to the depositary from such owner to exercise such rights, upon payment by such owner to
the depositary for the account of such owner of an amount equal to the purchase price of the preferred shares to be received in
exercise of the rights, and upon payment of the fees of the depositary as set forth in such warrants or other instruments, the
depositary will, on behalf of such owner, exercise the rights and purchase the preferred shares, and we will cause the preferred
shares so purchased to be delivered to the depositary on behalf of such owner. As agent for such owner, the depositary will cause
the preferred shares so purchased to be deposited, and will execute and deliver ADRs to such owner, pursuant to the deposit agreement.
The depositary will
not offer rights to owners unless both the rights and the securities to which such rights relate are either exempt from registration
under the Securities Act with respect to a distribution to all owners or are registered under the provisions of the Securities
Act; provided, that nothing in the deposit agreement will create, or be construed to create, any obligation on our part to file
a registration statement with respect to such rights or underlying securities or to endeavor to have such a registration statement
declared effective. If an owner of ADRs requests the distribution of warrants or other instruments, notwithstanding that there
has been no such registration under the Securities Act, the depositary will not effect such distribution unless it has received
an opinion from recognized counsel in the United States for Bancolombia upon which the depositary may rely that such distribution
to such owner is exempt from such registration. The depositary will not be responsible for any failure to determine that it may
be lawful or feasible to make such rights available to owners in general or any owner in particular.
Although Colombian
law permits preemptive rights to be transferred separately from the preferred shares to which such rights relate, a liquid market
for preemptive rights may not exist, and this may adversely affect the amount the depositary would realize upon disposal of rights.
Whenever the depositary
receives any distribution other than cash, preferred shares or rights in respect of the deposited securities, the depositary will
cause the securities or property received by it to be distributed to the owners entitled thereto, after deduction or upon payment
of any fees and expenses of the depositary or any taxes or other governmental charges, in proportion to their holdings, respectively,
in any manner that the depositary may reasonably deem equitable and practicable for accomplishing such distribution; provided,
however, that if in the opinion of the depositary such distribution cannot be made proportionately among the owners entitled thereto,
or if for any other reason (including, but not limited to, any requirement that we or the depositary withhold an amount on account
of taxes or other governmental charges or that such securities must be registered under the Securities Act in order to be distributed
to owners or beneficial owners) the depositary deems such distribution not to be feasible, the depositary may adopt such method
as it may deem equitable and practicable for the purposes of effecting such distribution, including, but not limited to, the public
or private sale of the securities or property thus received, or any part thereof, and the net proceeds of any such sale (net of
the fees and expenses of the depositary) will be distributed by the depositary to the owners entitled thereto as in the case of
a distribution received in cash.
If the depositary
determines that any distribution of property (including preferred shares and rights to subscribe therefor) is subject to any taxes
or other governmental charges which the depositary is obligated to withhold, the depositary may, by public or private sale, dispose
of all or a portion of such property in such amount and in such manner as the depositary deems necessary and practicable to pay
such taxes or charges and the depositary will distribute the net proceeds of any such sale after deduction of such taxes or charges
to the owners entitled thereto in proportion to the number of ADSs held by them, respectively.
Changes Affecting Deposited Preferred
Shares
Upon any change in
nominal or par value, stock split, consolidation or any other reclassification of deposited securities, or upon any recapitalization,
reorganization, merger or consolidation or sale of assets affecting us or to which we are a party, any securities which shall be
received by the depositary or custodian in exchange for, in conversion of, or in respect of deposited securities will be treated
as new deposited securities under the deposit agreement, and the ADSs will thenceforth represent, in addition to the existing deposited
securities, the right to receive the new deposited securities so received in exchange or conversion, unless additional ADRs are
delivered pursuant to the following sentence. In any such case the depositary may, and will, if we so request, execute and deliver
additional ADRs as in the case of a distribution in preferred shares, or call for the surrender of outstanding ADRs to be exchanged
for new ADRs specifically describing such new deposited securities.
Record Dates
Whenever:
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any cash dividend or other cash distribution shall become payable or any distribution other than cash shall be made;
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rights shall be issued with respect to the deposited securities;
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for any reason the depositary causes a change in the number of preferred shares that are represented by each ADS;
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the depositary shall receive notice of any meeting of holders of preferred shares or other deposited securities; or
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the depositary shall find it necessary or convenient,
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the depositary will fix a record date
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for the determination of the owners who will be (A) entitled to receive such dividend, distribution or rights, or the net proceeds of the sale thereof, or (B) entitled to give instructions for the exercise of voting rights at any such meeting; or
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on or after which each ADS will represent the changed number of preferred shares, all subject to the provisions of the deposit agreement.
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Voting of Deposited Securities
Holders of preferred
shares, and consequently holders of ADS, have very limited voting rights. See “Description of the preferred shares—Voting
Rights”.
In the event holders
of preferred shares are entitled to vote, upon receipt of notice of any meeting or solicitation of consents or proxies of holders
of preferred shares or other deposited securities, if requested in writing by us, the depositary will, as soon as practicable thereafter,
mail to all owners a notice, the form of which notice will be in the sole discretion of the depositary, containing:
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the information included in such notice of meeting received by the depositary from us;
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a statement that the owners as of the close of business on a specified record date will be entitled, subject to any applicable provision of Colombian law and of our by-laws, to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the amount of preferred shares or other deposited securities represented by their respective ADSs; and
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a statement as to the manner in which such instructions may be given.
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Upon the written request
of an owner on such record date, received on or before the date established by the depositary for such purpose, the depositary
will endeavor, insofar as practicable, to vote or cause to be voted the amount of preferred shares or other deposited securities
represented by the ADSs evidenced by such ADRs in accordance with the nondiscretionary instructions set forth in such request.
The depositary will not vote or attempt to exercise the right to vote that attaches to the preferred shares or other deposited
securities other than in accordance with such instructions. If the depositary does not receive instructions from the owner on or
before the date established by the depositary for such purpose, the depositary shall take such action as is necessary, upon our
request, subject to applicable law, the by-laws and the terms and conditions of the deposited securities, to cause the underlying
preferred shares to be counted for purposes of satisfying applicable quorum requirements.
There can be no assurance
that the owners generally or any owner in particular will receive the notice described above sufficiently prior to the date established
by the depositary for the receipt of instructions to ensure that the depositary will in fact receive such instructions on or before
such date.
Reports and Other Communications
The depositary makes
available for inspection by ADR owners at its Corporate Trust Office any reports and communications, including any proxy soliciting
material, received from us, which are both:
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received by the depositary as the holder of the preferred shares or other deposited securities; and
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made generally available to the holders of such preferred shares or other deposited securities by us.
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The depositary will
also send to the owners copies of such reports and communications furnished by us pursuant to the deposit agreement. Any such reports
and communications including any proxy soliciting material furnished to the depositary by us will be furnished in English when
so required pursuant to any regulations of the SEC.
Amendment and Termination of the Deposit
Agreement
The form of ADRs and
any provisions of the deposit agreement may at any time and from time to time be amended by agreement between us and the depositary
in any respect which they may deem necessary or desirable without the consent of the owners of ADRs; provided, however, that any
amendment that imposes or increases any fees or charges (other than taxes and other governmental charges, registration fees, cable,
telex or facsimile transmission costs, delivery costs or other expenses), or which otherwise prejudices any substantial existing
right of ADR owners, will not take effect as to outstanding ADRs until the expiration of 30 days after notice of any amendment
given to the owners of outstanding ADRs. Every owner of an ADR, at the time any amendment becomes effective, will be deemed, by
continuing to hold such ADR, to consent and agree to such amendment and to be bound by the deposit agreement as amended thereby.
In no event will such amendment impair the right of the owner or any ADR to surrender such ADR and receive therefor the preferred
shares or other deposited securities represented thereby, except to comply with mandatory provisions of applicable law.
The depositary will
at any time at our direction terminate the deposit agreement by mailing notice of such termination to the owners of the ADRs then
outstanding at least 90 days prior to the date fixed in such notice for such termination. The depositary may likewise terminate
the deposit agreement by mailing notice of such termination to us and the owners of all ADRs outstanding if, at any time after
90 days have expired after the depositary will have delivered to us a written notice of its election to resign, a successor depositary
will not have been appointed and accepted its appointment, in accordance with the terms of the deposit agreement. If any ADRs remain
outstanding after the date of termination of the deposit agreement, the depositary thereafter shall discontinue the registration
of transfers of ADRs, will suspend the distribution of dividends to the owners thereof and will not give any further notices or
perform any further acts under the deposit agreement, except the collection of dividends and other distributions pertaining to
the deposited securities, the sale of rights and other property and the delivery of underlying preferred shares or other deposited
securities, together with any dividends or other distributions received with respect thereto and the net proceeds of the sale of
any rights or other property, in exchange for surrendered ADRs (after deducting, in each case, the fees of the depositary for the
surrender of an ADR and other expenses set forth in the deposit agreement and any applicable taxes or governmental charges). At
any time after the expiration of one year from the date of termination, the depositary may sell the deposited securities then held
thereunder and hold uninvested the net proceeds of such sale, together with any other cash, unsegregated and without liability
for interest, for the pro-rata benefit of the owners that have not theretofore surrendered their ADRs, such owners thereupon becoming
general creditors of the depositary with respect to such proceeds. After making such sale, the depositary will be discharged from
all obligations under the deposit agreement, except to account for net proceeds and other cash (after deducting, in each case,
the fee of the depositary and other expenses set forth in the deposit agreement for the surrender of an ADR and any applicable
taxes or other governmental charges).
Charges of Depositary
The depositary will
charge any party depositing or withdrawing preferred shares or any party surrendering ADRs or to whom ADRs are issued (including,
without limitation, issuance pursuant to a stock dividend or stock split declared by us or an exchange of stock regarding the ADRs
or deposited securities or a distribution of ADRs pursuant to the deposit agreement) where applicable:
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taxes and other governmental charges,
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such registration fees as may from time to time be in effect for the registration of transfers of ADSs generally on the ADS register of the issuer or foreign registrar and applicable to transfers of ADSs to the name of the depositary or its nominee or the custodian or its nominee on the making of deposits or withdrawals,
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such cable, telex and facsimile transmission expenses as are expressly provided in the deposit agreement,
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such expenses as are incurred by the depositary in the conversion of foreign currency pursuant to the deposit agreement,
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a fee of $5.00 or less per 100 ADSs (or portion thereof) for the execution and delivery of ADRs pursuant to the deposit agreement, and the surrender of ADRs pursuant to the deposit agreement,
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a fee of $1.50 or less per certificate for an ADR or ADRs for transfers made pursuant to the deposit agreement, and
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a fee for, and deducted from, the distribution of proceeds of the sale of rights pursuant to the deposit agreement, such fee being in an amount equal to the fee for the execution and delivery of ADSs referred to above which would have been charged as a result of the deposit of ADSs received upon the exercise of such rights, but which rights are instead sold and the proceeds of such sale distributed by the depositary to owners.
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The depositary, pursuant
to the deposit agreement, may own and deal in any class of securities issued by us and our affiliates and in ADRs.
Liability of Owner for Taxes
If any tax or other
governmental charge shall become payable by the custodian or the depositary with respect to any ADR of any deposited securities
represented by the ADSs evidenced by such ADR, such tax or other governmental charge will be payable by the owner or beneficial
owner of such ADR to the depositary. The depositary may refuse to effect any transfer of such ADR or any withdrawal of deposited
securities underlying such ADR until such payment is made, and may withhold any dividends or other distributions, or may sell for
the account of the owner or beneficial owner thereof any part or all of the deposited securities underlying such ADR and may apply
such dividends, distributions or the proceeds of any such sale to pay any such tax or other governmental charge and the owner or
beneficial owner of such ADR will remain liable for any deficiency.
General
Neither the depositary
nor we nor any of our respective directors, employees, agents or affiliates will be liable to any owner or beneficial owner of
ADRs, if by reason of any provision of any present or future law or regulation of the United States, Colombia or any other country,
or of any other governmental or regulatory authority or stock exchange, or by reason of any provision, present or future, of our
by-laws, or by reason of any provision of any securities issued or distributed by us, or any offering or distribution thereof,
or by reason of any act of God or war or other circumstances beyond its control, the depositary or us or any of our respective
directors, employees, agents or affiliates shall be prevented, delayed or forbidden from, or be subject to any civil or criminal
penalty on account of, doing or performing any act or thing which by the terms of the deposit agreement or the deposited securities
it is provided will be done or performed; nor will the depositary or us incur any liability to any owner or beneficial owner of
any ADR by reason of any non-performance or delay, caused as aforesaid, in the performance of any set or thing which by the terms
of the deposit agreement it is provided will or may be done or performed, or by reason of any exercise of, or failure to exercise,
any discretion provided for under the deposit agreement. Where, by the terms of a distribution pursuant to the deposit agreement,
or an offering or distribution pursuant to the deposit agreement, or for any other reason, such distribution or offering may not
be made available to owners, and the depositary may not dispose of such distribution or offering on behalf of such owners and make
the net proceeds available to such owners, then the depositary will not make such distribution or offering, and will not allow
the rights, if applicable, to lapse.
Neither we nor the
depositary assumes any obligation, nor we or the depositary will be subject to any liability under the deposit agreement to owners
or beneficial owners of ADRs, except that we and the depositary agree to perform our respective obligations specifically set forth
under the deposit agreement without negligence or bad faith.
The ADRs are transferable
on the books of the depositary, provided, that the depositary may close the transfer books at any time or from time to time when
deemed expedient by it in connection with the performance of its duties or upon our written request. As a condition precedent to
the execution and delivery, registration of transfer, split-up, combination or surrender of any ADR or withdrawal of any deposited
securities, the depositary, the custodian or the registrar may require payment from the person representing the ADR or the depositor
of the preferred shares of a sum sufficient to reimburse it for any tax or other governmental charge and any stock, transfer or
registration fee with respect thereto (including any such tax or charge and fee with respect to preferred shares being deposited
or withdrawn) and payment of any applicable fees payable by the holders of ADRs. The depositary may refuse to deliver ADRs, to
register the transfer of any ADR or to make any distribution on, or related to, preferred shares until it has received such proof
of citizenship or residence, exchange control approval, approval or registration under the foreign investment regulations or other
information as it may deem necessary or proper. The delivery, transfer, registration of transfer of outstanding ADRs and surrender
of ADRs generally may be suspended or refused during any period when our or the depositary’s transfer books are closed or
if any such action is deemed necessary or advisable by us or the depositary, at any time or from time to time.
The depositary keeps
books, at its Corporate Trust Office, for the registration and transfer of ADRs, which at all reasonable times is open for inspection
by the owners, provided, that such inspection is not for the purpose of communicating with owners in the interest of a business
or object other than our business or a matter related to the deposit agreement or the ADRs.
The depositary may
appoint one or more co-transfer agents for the purpose of effecting transfers, combinations and split-ups of ADRs at designated
transfer offices on behalf of the depositary. In carrying out its functions, a co-transfer agent may require evidence of authority
and compliance with applicable laws and other requirements by owners or persons entitled to ADRs and will be entitled to protection
and indemnity to the same extent as the depositary.
DESCRIPTION OF THE RIGHTS TO SUBSCRIBE
PREFERRED SHARES
We may issue rights
to subscribe for our preferred shares in order to comply with the requirements described under “Description of the Preferred
Shares—Preemptive Rights and Other Anti-dilution Provisions.”
The applicable prospectus
supplement will describe the specific terms relating to such subscription rights and the terms of the offering, as well as a discussion
of material U.S. federal and Colombian income tax considerations applicable to holders of the rights to subscribe for our preferred
shares.
PLAN OF DISTRIBUTION
The securities offered
by this prospectus may be sold from time to time by us or a selling security holder as follows:
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to dealers or underwriters for resale;
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directly to purchasers; or
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through a combination of any of these methods of sale.
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In addition, we may
issue the securities as a dividend or distribution or in a preemptive rights offering to our existing security holders. In some
cases, we or dealers acting with us or on our behalf may also repurchase securities and reoffer them to the public by one or more
of the methods described above. This prospectus may be used in connection with any offering of our securities through any of these
methods or other methods described in the prospectus supplement.
The securities we
or selling security holders distribute by any of these methods may be sold to the public, in one or more transactions, either:
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at a fixed price or prices, which may be changed;
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at market prices prevailing at the time of sale;
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at prices related to prevailing market prices; or
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We or selling security
holders may solicit offers to purchase the securities directly from the public from time to time. We may also designate agents
from time to time to solicit offers to purchase securities from the public on our behalf. The prospectus supplement relating to
any particular offering of securities will name any agents designated to solicit offers, and will include information about any
commissions we may pay the agents, in that offering. Agents may be deemed to be “underwriters” as that term is defined
in the Securities Act.
From time to time,
we may sell, or selling security holders may resell, securities to one or more dealers as principals. The dealers, who may be deemed
to be “underwriters” as that term is defined in the Securities Act, may then resell those securities to the public.
We may sell, or selling
security holders may resell, securities from time to time to one or more underwriters, who would purchase the securities as principal
for resale to the public, either on a firm-commitment or best-efforts basis. If we sell securities to underwriters, we will execute
an underwriting agreement with them at the time of sale and will name them in the prospectus supplement. In connection with those
sales, underwriters may be deemed to have received compensation from us in the form of underwriting discounts or commissions and
may also receive commissions from purchasers of the securities for whom they may act as agents. Underwriters may resell the securities
to or through dealers, and those dealers may receive compensation in the form of discounts, concessions or commissions from the
underwriters and/or commissions from purchasers for whom they may act as agents. The prospectus supplement will include information
about any underwriting compensation we pay to underwriters, and any discounts, concessions or commissions underwriters allow to
participating dealers, in connection with an offering of securities.
If we offer securities
in a subscription rights offering to our existing security holders, we may enter into a standby underwriting agreement with dealers,
acting as standby underwriters. We may pay the standby underwriters a commitment fee for the securities they commit to purchase
on a standby basis. If we do not enter into a standby underwriting arrangement, we may retain a dealer-manager to manage a subscription
rights offering for us.
We or any selling
security holder may authorize underwriters, dealers and agents to solicit from third parties offers to purchase securities under
contracts providing for the payment and delivery on future dates. The applicable prospectus supplement will describe the material
terms of these contracts, including any conditions to the purchasers’ obligations, and will include any required information
about commissions we or any selling security holders may pay for soliciting these contracts.
We or any selling
security holder may enter into derivative transactions with third parties, or sell securities not covered by this prospectus to
third parties in privately negotiated transactions. In connection with those derivatives, the third parties may sell securities
covered by this prospectus, including in short sale transactions. If so, the third party may use securities pledged by us or borrowed
from us or others to settle those sales or to close out any related open borrowings of securities, and may use securities received
from us in settlement of those derivatives to close out any related open borrowings of securities. The third party in such sale
transactions will be an underwriter or will be identified in a post-effective amendment.
Underwriters, dealers,
agents and other persons may be entitled, under agreements that they may enter into with us, to indemnification by us against civil
liabilities, including liabilities under the Securities Act.
In connection with
an offering, the underwriters may purchase and sell securities in the open market and may engage in transactions that stabilize,
maintain or otherwise affect the price of the securities offered. These transactions may include overalloting the offering, creating
a syndicate short position, and engaging in stabilizing transactions and purchases to cover positions created by short sales. Overallotment
involves sales of the securities in excess of the principal amount or number of the securities to be purchased by the underwriters
in the applicable offering, which creates a short position for the underwriters. Short sales involve the sale by the underwriters
of a greater number of securities than they are required to purchase in an offering. Stabilizing transactions consist of certain
bids or purchases made for the purpose of preventing or retarding a decline in the market price of the securities while an offering
is in progress.
The underwriters may
also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount
it received because the underwriters have repurchased securities sold by or for the account of that underwriter in stabilizing
or short-covering transactions.
These activities by
the underwriters may stabilize, maintain or otherwise affect the market price of the securities. As a result, the price of the
securities may be higher than the price that otherwise might exist in the open market. If these activities are commenced, they
may be discontinued by the underwriters at any time. These transactions may be effected on an exchange or automated quotation system,
if the securities are listed on that exchange or admitted for trading on that automated quotation system, or in the over-the-counter
market or otherwise.
The underwriters,
dealers and agents, as well as their associates, may be customers of or lenders to, and may engage in transactions with and perform
services for, us and our subsidiaries and affiliates.
Maximum compensation
to any underwriters, dealers or agents will not exceed any applicable limitations set out by the Financial Industry Regulatory
Authority.
VALIDITY OF THE SECURITIES
The validity of the
securities and other matters governed by Colombian law will be passed upon for us by Brigard Urrutia S.A.S., our Colombian counsel,
and for any underwriters or agents by Colombian counsel named in the applicable prospectus supplement. The validity of New York
law-governed debt securities we may issue will be passed upon for us by Sullivan & Cromwell LLP, New York, New York and Washington,
D.C., our U.S. counsel, and for any underwriters or agents by counsel names in the applicable prospectus supplement.
EXPERTS
The consolidated financial
statements as of December 31, 2017 and for the year ended December 31, 2017 incorporated in this Prospectus by reference to the
Annual Report on Form 20-F for the year ended December 31, 2018 have been so incorporated in reliance on the report of Deloitte
and Touche Ltda., an independent registered public accounting firm, given on the authority of said firm as experts in auditing
and accounting.
The consolidated financial
statements as of December 31, 2018 and for the year ended December 31, 2018 and management’s assessment of the effectiveness
of internal control over financial reporting (which is included in Management’s Report on Internal Control Over Financial
Reporting) incorporated in this Prospectus by reference to the Annual Report on Form 20-F for the year ended December 31, 2018
have been so incorporated in reliance on the report of PricewaterhouseCoopers Ltda., an independent registered public accounting
firm, given on the authority of said firm as experts in auditing and accounting.
ENFORCEMENT OF CIVIL LIABILITIES AGAINST
FOREIGN PERSONS
We are a Colombian
company, a majority of our directors and management and certain of the experts named in this prospectus are residents of Colombia,
and a substantial portion of their respective assets are located in Colombia.
We have been advised
by Brigard Urrutia, our Colombian counsel, that the Supreme Court of Justice of Colombia (Corte Suprema de Justicia de Colombia),
determines whether to enforce a U.S. judgment predicated on the U.S. securities laws through a procedural system known under Colombian
law as exequatur. The Supreme Court of Justice of Colombia will enforce a foreign judgment, without reconsideration of
the merits, only if the judgment satisfies the requirements of articles 605 through 607 of Law 1564 of 2012, which provide that
the foreign judgment will be enforced if:
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a treaty or convention exists between Colombia and the country where the judgment was granted or there is reciprocity in the recognition of foreign judgments between the courts of the relevant jurisdiction and the courts of Colombia;
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the foreign judgment does not relate to “in rem rights” vested in assets that were located in Colombia at the time the suit was filed
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the ruling does not contradict Colombian laws relating to public order other than those governing judicial procedures;
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the foreign judgment, in accordance with the laws of the country where it was rendered, is final and is not subject to appeal and a duly certified and authenticated copy of the judgment has been presented to a competent court in Colombia;
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the foreign judgment does not refer to any matter upon which Colombian courts have exclusive jurisdiction;
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no proceeding is pending in Colombia with respect to the same cause of action, and no final judgment has been awarded in any proceeding in Colombia on the same subject matter and between the same parties; and
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in the proceeding commenced in the foreign court that issued the judgment, the defendant was served in accordance with the law of such jurisdiction and in a manner reasonably designated to give the defendant an opportunity to defend against the action.
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In the course of the
exequatur proceedings, both the plaintiff and the defendant are granted the opportunity to request the production of evidence in
connection with the requirements listed above. In addition, before the judgment is rendered, each party may file final allegations
in support of such party’s position. The United States and Colombia do not have a bilateral treaty providing for automatic
reciprocal recognition and enforcement of judgments in civil and commercial matters. However, the Colombian Supreme Court has generally
accepted that reciprocity exists when it has been proven that either a U.S. court has enforced a Colombian judgment or that a U.S.
court would enforce a foreign judgment, including a judgment issued by a Colombian court. Nevertheless, such enforceability decisions
are considered by Colombian courts on a case-by-case basis.
As of today, neither
this prospectus, nor the accompanying prospectus supplement, nor the documents incorporated by reference into this prospectus,
nor any documents in connection therewith, are subject to arbitration.
Colombia is party
to international treaties such as the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the
“New York Convention”), the 1975 Inter-American Convention on International Commercial Arbitration, and the 1965 Washington
Convention for the Settlement of Disputes between States and Nationals of Other States.
No dealer, salesperson or other person
is authorized to give any information or to represent anything not contained in this prospectus. You must not rely upon any unauthorized
information or representations. This prospectus is an offer to sell only the securities it describes, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.
Bancolombia S.A.
Debt Securities
Preferred Shares
American Depositary Shares representing
Preferred Shares
Rights to Subscribe for Preferred Shares
Bancolombia (NYSE:CIB)
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