Edited Transcript of PFDAVVNDA.BG earnings conference call or presentation 3-Mar-20 2:30pm GMT

The exchange rate devaluated less than 1% during the last 12 months while revaluating around 6% during the quarter.

Moving on to Slide 4, we can see the highlights of the macroeconomic situation in Central America. As of September 2019, economic growth continued to show slowdown for most of the region. Although Costa Rica, El Salvador and Honduras presented improvements in the last quarter, Panama slowed down mainly due to lower activity in transfer and commerce.

Regarding inflation, the region presented a generalized price decrease as a result of economic deceleration, higher unemployment and lower pressure for oil prices. Considering this situation, Costa Rica’s interest rates has been cut by 2,050 basis points since March 2019, and Honduras rates has been cut in 25 basis points during the same period.

Moving on to Slide 5, we would like to highlight the bank’s result for the fourth quarter. Accumulated net profit for 2019 reached COP 1.48 trillion, 6.1% higher than 2018. This represented return on average equity of 12.4% for the last 12 months, in line with our last call guidance. Quarter net profit closed at COP 385 billion, increasing 11.7% over the third quarter and 2.7% compared to the same period of the previous year. Consolidated gross loan grew at an annual rate of 10.9% mainly due to the deceleration of the consumer segment in Colombia.

Regarding credit quality, total PDL ratio decreased by 47 basis points in the last 12 months, closes at 3.46% due to a lower ratio in the consumer book and some write-offs made in the corporate segment in Colombia. Consolidated cost-to-income ratio closed at 46.2%, improving 25 basis points compared to the last year. This improvement is mainly explained by a higher level of income compared to Spain growth.

Among other relevant events, in December last year, we acquired $335 million subordinated loan from IFC to support women-owned SMEs, social housing and sustainable construction. This is the first loan granted by IFC in Latin America and the Caribbean under the new regulation on additional solvency of Basel III. This created the strength our capital ratio and diversified our funding sources while contributing to sustainable development. We also issued senior loan for COP 700 billion last February in Colombia.

Now turning on to Slide 6, I would like to share with you the advance we have made in our strategic call. As a result of traditional and digital effort, we were able to grow our consolidated retail banking book at a 20% rate over the year, reaching an outstanding balance of COP 52 trillion. In Colombia, we increased our market share in the consumer segment by 190 basis points over the year, and we continue adapting our offer to the international operation, improving our market share in most of the countries where we operate.

Regarding commercial banking, we continue to focus on reaching more SMEs by actively offering customized product and service to help them through the business cycle. As a result, our SME portfolio in Colombia increased more than 15%. In Central America, our corporate book grew 8.7%.

As for the wealth management division, we have been able to deliver better experience to our customers, allowing them to open and manage their investment portfolio directly from our app and website. This progress, along with other strategies implemented in this segment, resulted in a 22% annual growth in assets under management and an increase of 90 basis points in our market share.

Finally, we will include both in the Dow Jones Sustainability Index and the RobecoSAM Sustainability Yearbook being recognized among the 35 most sustainable banks and within the top 50% sustainable companies in our industry. Our portfolio of projects with social and environment impact reached over COP 1.3 trillion. We will continue to finance this type of project through different initiatives such as the IFC loan mentioned earlier.

Moving to Slide 7, I would like to share with you our progress in Davivienda’s digital transformation. Our consolidated customer base reached 11.9 million, out of which we consider 74% are digital. DaviPlata has user increased 94% over the year, allowing us to reach 6.1 million customer. Almost 7% were RappiPay customer.

Regarding product evolution, we have now more than 1.1 million digital deposits, including saving and term deposits with an outstanding balance of COP 875 billion. Our digital loans portfolio reached COP 1.9 trillion, increasing more than 100% compared to 2018. In the last 2 years, our digital loans have become around 8% of Colombia consumer book.

On Slide 8, we can offer the evolution of our channel’s digital transformation. Product sales grew at a 44% rate compared to 2018. 39% of sales were done through digital channels and 61% in the traditional way. While in 2017, all of our sales were generated through the traditional channels. 29% of monetary transactions were done in our digital channel, while branch transactions dropped to 16% from 21% 2 years ago. We have reduced the number of branches by 10% over the last 3 years. This means 72 branches less, in line with our efficiency and digitalization strategy.

Overall, we are glad to share these results with you. However, we have to continue working to be able to reach more customers in Colombia and Central America by transforming our products, our services, developing our talent, making new alliance with other ecosystems and using more and more analytics. We want to offer a frictionless, friendly and reliable solution to our customers and have the capacity to be there to help them achieve their goals.

Now let me turn the call over to Mr. Ricardo Leon, our Executive Vice President of Risk, who will provide you with further details on the bank’s financial results.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [4]

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Thank you for the introduction, Mr. Forero. Good morning, everyone.

Please move on to Slide #9, where we will analyze the evolution of assets. Total assets grew 10.4% over the year. Colombia’s assets showed an annual growth of 10.4% due to higher gross loans and the effect of IFRS 16 on property, plant and equipment. Our internal subsidiaries, which account for 25% of total assets, grew 9.4% over the year in dollar terms, mainly driven by the increase in investments and gross loans.

Regarding the evolution during the quarter, total assets grew 1%, impacted by a decrease in the investment portfolio, stable gross loans and lower loan loss reserve.

Moving on to Slide 10, please. Consolidated gross loans grew 10.9% over the year and 0.4% over the quarter. The mortgage portfolio reached a 10.9% growth, mainly due to leasing and social housing segments in Colombia, which grew 14% and 10%, respectively.

In the international operations, mortgage grew mainly in El Salvador, Panama and Honduras. The consumer portfolio grew 8.1% during the quarter, reaching an annual growth of 29.1%, mainly explained by unsecured personal loans and credit cards in Colombia and payroll loans and credit card in Central America. We have been able to achieve the performance, both through our traditional sales force and digital channels.

The commercial portfolio decreased by 4.7% over the quarter explained by different loan prepayments from corporate and construction customers and some write-off in the corporate portfolio. These 2 effects resulted in a consolidated growth of 1.8% for the year despite of 4.5% increase in Central America, led by the construction sector.

Analyzing the performance by region. Gross loans in Colombia increased around 12% compared to the last year. Our international operation increased 6.3% in dollars, with El Salvador and Honduras leading the annual growth. Loan loss reserve increased 11.9% on an annual basis due to higher provisions in the consumer and corporate portfolio. As for the quarter, reserve decreased 9.4% mainly due to the write-off explained before.

By the end of 2020, we expect a loan growth of around 14% to 15%. The consumable should lead the growth with an increase between 18% to 20%, mortgage portfolio should grow a little more in the level of 11% to 12% and the commercial portfolio to close with a growth of around 12% to 13%.

Please move on to Slide 11, where we can see the 90 days PDL ratio, cost of risk and coverage levels. Total PDL ratio closed at 3.46%, decreasing 47 basis points over the year and 35 basis points over the quarter, positively impacted by the commercial and consumer portfolios. Commercial PDL ratio showed an annual and quarter decrease of over 50 basis points, resulting from corporate write-off, including Electricaribe, and different restructuring process made over the year, both in Colombia and international operation. Consumer PDL continues to improve, decreasing 52 basis points over the year and 21 basis points on a quarterly basis. This is explained both by our risk management issues as well as the portfolio growth dynamics. Mortgage PDL increased around 16 basis points over the year, mainly due to securitization by COP 830 billion in Colombia during the year and situation with specific segments in Panama. Mortgage PDL in Colombia remained stable over the quarter.

We continue working to improve our PDL ratio, and we are expecting the following levels for the end of the year, total portfolio between 3.3% to 3.4%; commercial portfolio around 3.8% to 3.9%; consumer portfolio between 2.1% to 2.2% and the mortgage portfolio around 4%. We closed the year with a cost of rate of 2.5%, and we are expecting to close 2020 between 2.3% to 2.4%, taking into account the growth dynamics of all portfolios. Total reserve coverage ratio closed around 151% and is expected to remain at the same level.

As for the coverage for the main corporate cases in Colombia, we can find Electricaribe reached 100% by the end of the second quarter of the last year and was written off in December. We increased total reserve coverage ratio to 100% as we plan it. Mass Transportation System closed at around 45% coverage ratio and is expected to end the year at the same level.

Now please move on to Slide #12. Funding sources grew 12.4% over the year and 1.1% quarterly, in line with the growth of our loan portfolio. Demand deposits accelerated during the quarter, reaching a growth of 13% over the year. Term deposit decreased 3.3% during the quarter due to seasonal effect, growing 11.8% on an annual basis. Both have an annual increase of 16%, mainly explained by local senior issuance in Colombia of around COP 1.8 trillion as well as some issuances in Central America. During the quarter, bonds decreased 2.8% mainly due to maturities and exchange rate effect.

In terms of credits, half of the annual growth took place during the last quarter due to the Q2 subordinated bonds mentioned before. Our funding structure continues to be stable with deposits representing 74% of total funding. Our loans-to-funding ratio reached 95.9%, in line with our expectation.

I would like to invite you to Slide #13. Total capital adequacy ratio closed 2019 at 11.61%. This means 46 basis points higher than the previous quarter, explained in part by the new Tier 2 loans acquired with the IFC. Q1 remained stable over the year in spite of the higher consumer loan growth, while Q2 compressed around 32 basis points due to lower weight of subordinated debt. Total equity is increasing at a rate of 10.9% over the year and 2.2% over the quarter.

I would like to invite you to Slide #14. Accumulated gross financial margin increased by 12.5% over the year with loan income growing at a similar pace as the portfolio and a positive result for investment. Out of the 13.3% growth in financial expenses, almost 200 basis points are explained by IFRS 16 implementation. As a result, the 12-month net interest margin ratio closed at 6.52%, slightly expanding over the year and contracting over the quarter. Accumulated net financial margin grew at 9.9%, impacted by growth in provision expenses, which was driven by a higher volume of the consumer portfolio as well as the higher coverage for corporate cases. For the end of the year, we are expecting a NIM between 6.5% to 6.6%, mainly explained by changes in the loan mix.

Please continue to Slide #15. Total accumulated expenses grew 9.3% over the year. Personnel expenses grew by 7.3% mainly due to higher incentive related to greater loan volume and employees bonds. Operating and other expenses increased by 10.7% due to retail expenses and additional depreciation resulting from IFRS 16 adoption. Expenses grew 12.9% during the quarter compared to the same period of 2018. This is explained by higher personnel expenses due to sales, commission and increase in retail expenses related to marketing alliance and software development and IFRS 16 implementation. As a result, the cost-to-income ratio closed at 46.2%, improving 25 basis points over the year and increasing 46 basis points over the quarter. For this year, we’re expecting an increase in OpEx between 10% and 11%, driven by digital transformation expenses such as cybersecurity and technology development. In this sense, our cost-to-income ratio should close 2020 around 45% to 46%.

To finish the presentation, I would like to go to Slide #16, where we can analyze the bank profit. Accumulated net profit growth at COP 1.48 trillion, 6.1% higher than the one of 2018. Net profit for the quarter increased by 11.7% over September due to stable financial expenses, lower provision expenses and a decrease in tax. Our return on average equity for the last 12 months reached 12.4%, while the return on average assets was 1.27%. Given the latest update on the financial law, our effective tax rate forecast for this year is expected to be around 23% to 25%, including the surtax of 4% for 2020. Our ROE for the year should be around 12.5% to 13.5%.

In general, these are the results we have prepared for you today. At this time, we can move on to the question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We’ll take our first question from Mayara Riddlebaugh with Wells Fargo.

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Mayara Riddlebaugh;Wells Fargo;Vice President & Portfolio Manager, [2]

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Congratulations on the results.

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Operator [3]

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(Operator Instructions)

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Mayara Riddlebaugh;Wells Fargo;Vice President & Portfolio Manager, [4]

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Hello? Can you hear me now?

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Operator [5]

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Yes. Please go ahead.

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Mayara Riddlebaugh;Wells Fargo;Vice President & Portfolio Manager, [6]

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All right. Thank you. Congratulations on the results.

Here, if I heard it correctly, you were expecting growth of around 12% for the corporate portfolio in 2020. So I was wondering, how do you expect to achieve this growth level coming out of a year where this portfolio grew less than 2%. And then my second question was just if you can break down your growth expectations for the loan portfolio between Colombia and Central America.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [7]

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Okay. Mayara, thank you for your question. I will answer the second question, the loan expectation in Colombia and Central America. The — for the loan portfolio, the total loan portfolio, we are expected to grow around 14% to 15% in 2020. Relating to commercial portfolio, we think that we can grow around 12% to 13%. In a few minutes, Mr. Carrillo will explain the figure. In consumer, we think that we can grow around 18% to 20% where in the last year, we grew around 29%, and we have been developing different analytic strategies to increase the level of wallets that we have in our customers and an important process to acquire more customer and to deepen the wallet that we have with our customers.

Related to…

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. – President & CEO [8]

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Excuse me. The growth expected for Central America will be 9% in dollars.

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Álvaro Alberto Carrillo Buitrago, Banco Davivienda S.A. – Corporate EVP [9]

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This is Alvaro Carrillo. About the growth of the corporate portfolio, we are expecting a bigger growth last year. Last year, we have some payments, some important payments, not only for Davivienda, but for all the banks in Colombia. This year, we’re expecting that our clients will need more grade because they are in AGR of well growth in the economy. We are expecting a growth of 3.5% in the economy and an inflation rate about 3.5%. This will increase the demand of grade of our more important clients, and we are around 7% to 8%. And we’re expecting a growth in new and small business that began last year, growing about 15%, and we are expecting a growth similar for this year. So we expect a growth consolidated around 12% to 13%.

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Mayara Riddlebaugh;Wells Fargo;Vice President & Portfolio Manager, [10]

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And just if you can clarify where you stand now in terms of provisions for the transportation system operators.

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Álvaro Alberto Carrillo Buitrago, Banco Davivienda S.A. – Corporate EVP [11]

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The level of provision for transportation system closed the last year in 45%, and we think that we will remain this level of coverage for 2020.

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Operator [12]

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We’ll take our next question from Piedad Alessandri with Credicorp.

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Piedad Alessandri Cuevas, Credicorp Capital Ltd. – Buyside Research Analyst [13]

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You mentioned you had situations with a specific segment in Panama. I would like if you could give us a bit more detail those situations, and if you have seen in, I don’t know if I could say, troublesome or more worrying segments in Colombia for the following year.

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Álvaro Alberto Carrillo Buitrago, Banco Davivienda S.A. – Corporate EVP [14]

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We don’t expect any special situation for any segment in Panama. We expect to have loan loss reserves similar to what we have in 2019.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [15]

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In terms of Colombia, we’re improving the level of rate in the whole — in our portfolios. So we’ve seen that in corporate business and commercial portfolio. We will decrease the PDL ratio, and the same thing happened in retail business. So until now, we don’t see any specific concern related to our portfolio.

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Piedad Alessandri Cuevas, Credicorp Capital Ltd. – Buyside Research Analyst [16]

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You had another income guidance I couldn’t listen to. If you could repeat, please.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [17]

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Related to operating income, we expect to decrease our operation — operating income around 6% to 8% in the year.

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Piedad Alessandri Cuevas, Credicorp Capital Ltd. – Buyside Research Analyst [18]

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Okay. And expenses?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [19]

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Expenses will be growing around 10% to 11% because the digital transformation requires a lot of investments.

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Operator [20]

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(Operator Instructions) We can go next to Carlos Gomez with HSBC.

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Carlos Gomez-Lopez, HSBC, Research Division – Senior Analyst, Latin America Financials [21]

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I have 2 questions. First, on asset quality, you mentioned this, but could you clarify again the level of coverage for specific loans. You said you are at 100% and already written off for Electricaribe. And I didn’t get Ruta del Sol, and you said 25% for the Mass Transport companies? So if you could clarify that. Second, on capital. You are now at 7.99% for Tier 1. Where would you expect to finish the year? And could you give us an update about the implementation of Basel III?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [22]

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Related to the asset quality, the level of coverage for Ruta del Sol is 100% at the end of 2019, and we don’t need to do any effort to increase that level. In terms of Mass Transportation System, we closed the year with 45% in terms of coverage level, and we see that we will keep that — this level of coverage will be around 45% this year. We don’t need to increase the level of coverage for this segment.

Related to capital, actually, Q1 closed 7.99%. We see that we will finish 2020 in a similar level because remember that it is March or April, we capitalize a figure close to 70% of the profit. So that capitalization increased over Q1. And considering the growth, we will finish in a similar level.

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Carlos Gomez-Lopez, HSBC, Research Division – Senior Analyst, Latin America Financials [23]

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If I could follow up on the — sorry, if I could follow up on the asset quality. So you have Ruta del Sol at 100% and Electricaribe already written off. Do you expect any additional recoveries on either of those 2 credits?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [24]

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So in our forecast, we are not expecting any recovery related to this business.

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Carlos Gomez-Lopez, HSBC, Research Division – Senior Analyst, Latin America Financials [25]

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And I interrupted you. I think you are going to say about the Basel III. Sorry about that.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [26]

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Okay. Related to Basel III, I would like to explain a little bit more. In the last September, the superintendent and the authority issued a new capital aggressive regulation, where define new risk-weighted assets for different kind of assets. Our net impact in the solvency ratio is positive. We will increase a figure close to 150 basis points to 170 basis points with the new regulation. We will increase our solvency ratio in the figures, 150% to 180%, including personal risk.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. – President & CEO [27]

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Basis points.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [28]

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So we have a room for our forecast in terms of loan portfolio growth.

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Carlos Gomez-Lopez, HSBC, Research Division – Senior Analyst, Latin America Financials [29]

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So again, to clarify, your Tier 1 ratio with the new risk weighting will be 150 to 175 basis points higher. Will — does this include any possible deductions that the new rules will come? Or this is just strictly for the risk weighting?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [30]

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We’re growing the whole impact. The Q1 will increase around 150% to 170%, 180%, okay?

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. – President & CEO [31]

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Basis points.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [32]

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Basis points with the new regulation, 150 basis points to 170 basis points, Q1. So that is the total impact with the new regulation. However, remember that the new regulation will start in 2021.

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Operator [33]

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(Operator Instructions) And we do have a question from Alonso Aramburú with BTG.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division – Strategist [34]

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I was wondering if you can give us a breakdown of the ROE you expect between Colombia and international. And what are your expectations in international of when you can get to a double-digit ROE, which is something you had expected in the past?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [35]

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Thank you for your question. Our forecast for ROE by the end of 2020 is to grow a level between — towards 12.5% to 15.5%. And in Colombia, the ROE that we are expecting is to be around 13% to 13.5% and in Central America to be around 8%, 8.5% in dollars.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division – Strategist [36]

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Okay. So Central America, I think, closed the year around 6% to 7%, right? So you do expect an improvement in Central America as well?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [37]

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Yes, we do expect that in Central America. The increase in our equity is around 11%, but we have to take into account the charge for the coverage that we have for Colon to U.S. dollars in Costa Rica, which is important for us. That was around $14 million for last year, and we have the other leg of that coverage on our equity. So if we take that into account, we’ll be around 9% in Central America for last year. So we expect to have something around that for 2020.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division – Strategist [38]

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Okay. And just to clarify, in Colombia, you said 15%, 1-5 percent?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [39]

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No, no. Lower. 13%. In Colombia, we are waiting…

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division – Strategist [40]

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13%.

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [41]

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13% to 13.5%, 13% in Colombia, and the total ROE is to be 12.5% to 13.5%.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division – Strategist [42]

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Okay. Got it. And just — I mean, when you look at the ROE consolidated, the ROE of the bank has been fairly stable for 3 years now, ’17, ’18 and ’19. And I believe you’ve commented in the past that you want to get to levels of 14%, 15% ROE. Your guidance for this year is, again, roughly around 12.5% to 13%. I mean, when do you expect to get to those levels of 14%-plus ROE? Is that a 2021 maybe figure or maybe 2022?

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Ricardo Leon Otero, Banco Davivienda S.A. – EVP of Risk [43]

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In medium term, our guideline is to be around ROE between 14% to 16%, okay?

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. – President & CEO [44]

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And that will be for 2021 to 2022.

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Operator [45]

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And it appears we have no further questions. I’ll return the floor to Mr. Forero for closing remarks.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. – President & CEO [46]

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Thank you very much for everyone for being with us today. We are pleased for what we got in 2019, and we are working very hard to keep on working in the transformation of the bank into a new bank, a bank that is able to give customers with value-added solutions, and to improve our ability and our efficiency to be more flexible. We expect to be able to develop our strategy successfully to — in the year — in this year. Thank you very much for being with us today.

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Operator [47]

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And this will conclude today’s program. Thanks for your participation. You may now disconnect.