Banco Bilbao Vizcaya Argentaria Colombia S.A. (BBVACOL.CL) Earnings Call Transcript & Summary

Good day, everyone, and welcome to BBVA Colombia's First Quarter 2023 Earnings Call. My name is Diana Katherine Ruiz. I am part of the Legal Department of BBVA Colombia. With us today is the ALM and Investor Relations, David de Iscar; and the Main Economist, Alejandro Reyes. I would like to remind you that today's presentations will be available to download on our website in the section Investor Relations, on the link [ agenda ]. Please note, this call is being recorded. [Operator Instructions] Today's agenda includes a brief overview of the macroeconomic scenario, a few highlights of our financial performance and our recent achievements. Without further ado, I will now turn over the call to David de Iscar.

Thank you, Diana. Good morning, everyone, and thank you for joining us today. First, I will start with our economic outlook on Slide #2. In 2022, Colombia's economy maintained exceptional levels of activity, not only when measured by GDP, which had 2 fantastic years, expanding 11% in 2021 and 7.5% in 2022, but also when other critical economic variables are improved. Colombia created 1.6 million jobs in the last year, greatly above the century's average annual employment growth base of 0.3 million. This resulted in historic levels of private consumption, which, even when calculated per capita, surpassed actual per capita spending before the pandemic by more than 15%. At the same time, consumer credit increased above historical averages, showing the economy's continued availability to domestic finance. Finally, Colombia's international e-commerce benefit from increased [ trade in terms of trade ], which increased overall [ sports ] significantly more than in prior years. Since the end of 2022, there have been a few signals of a slowdown in economic growth, mainly in household spending on the [ label ] goods and the property market. This is a warning sign that the economy will be unable to maintain its current high growth rates. This is desirable and sought after by monetary policy to reduce inflation, stimulate private savings and eliminate macroeconomic imbalances. The Central Bank has been raising its policy rate and is nearing the conclusion of its rate-hiking cycle. It will then leave it at the level for the majority of the year before beginning the gradual easing of monetary policy at the end of 2023 and continuing in 2024. The global decline in inflation and the slower rate of growth will allow for this interest rate cut. However, although the economy will start a new cycle of lower growth in 2023 and 2024, the country maintains key supports that will allow it to continue growing, albeit at a slower rate. First of all, the labor market has become more formalized. The national formality rate increased from 39.8% on average in 2021 to 41.8% in 2022, reflecting that many more Colombians now have secure jobs with legal benefits and improved productivity. As a result of this, they will be able to sustain more consistent spending over time. Second, fiscal spending will rise this year, not only because of the increase in the national budget allowed by the enhanced tax collection and additional resources from the tax reform, but also because this year marks the end of the [ majors and governance terms ], which is characterized by [ greater ] execution of the territorial entities investment and expenditure plans. Third, lower growth will continue to be positive. Furthermore, the job market in the United States remains solid with unemployment rates at historic lows, pointing to another year of a strong remittance inflows to the country. Finally, and perhaps most important, total inflation is expected to decline gradually from 13.1% in 2022 to 9.2% in 2023, with food inflation falling from 27.8% in December 2022 to 7.6% in December 2023, improving the purchasing power of Colombian's households. Now I would like to emphasize a few key messages, which are included in Slide #3. The complex scenario during the first quarter of 2023 came in with huge challenges, not only for the sector, but for the economy in general. During this quarter, BBVA Colombia managed to report a net profit of COP [ 97 ] billion, with a 0.20% return on assets and a 3.28% return on equity. The high rates environment lead to a tight net interest margin and increased the cost of -- the cost to 2.08%, yet it is still in the [ 10 ] lowest costs of the risk sector. On the other hand, the CET1 stood at [ 7.96% ]. That said, the efficiency ratio stood near 55% with a 14-basis-point increase when compared to the same period in 2022. And on other operating income increased by 77%, driven by the increase in dividends and investment portfolio. On Slide 4, by evaluating the needs of our customers and creating customized solutions that can be easily found on the web or the mobile app since 82% of our active customers are digital customers, will [ remark ] no one of the banks with this value. The customer comes first. The total of digital sales over total sales remained at levels near 86% and contributed to the consumer portfolio growth. We will keep working to bring the era of opportunities to all. Bearing this in mind, for BBVA Colombia, sustainability is a fundamental part of its relationship with its customers. As a financial institution, the bank has recognized its potential to maximize the positive impact on society and the environment through various solutions that facilitate the transition to a more sustainable economy in the country. In Slide 5, we can see the 2 pillars of the bank's strategy. The first one, inclusive growth seeks to stimulate economic development that promotes opportunities for all, in particular, for those who are less forward in society. For this aspect, in the first quarter of 2023, BBVA financed COP 830 billion, mainly in the items of social interest housings and small and medium enterprises achieving financing for COP 51 billion and COP 22.5 billion, respectively. The second pillar, climate action aims to mobilize timely resources to manage the challenges of climate change and address the sustainable development goals. In this area, BBVA has financed COP 322 billion. The bank has promoted the energy transition with a broad portfolio of financial products and services that contribute to mitigating and adapting to climate change such as green leasing, green mortgage and sustainable working capital, among others. These results have been achieved, thanks to the alignment of the BBVA sustainability standard, with local standard such as the Colombian green taxonomy, building initiatives with allies, peers and industry, and active participation in major initiatives such as the climate finance leadership initiative. Keeping up with BBVA Colombia's [ compromise ] with improving the living conditions of our Colombians, in Slide #6, over 35,000 Colombians benefit from action focused on supporting the school permanence of children, families affected in the -- by the rainy season at the beginning of the year and [indiscernible] generated by a possible eruption of the Nevado del Ruiz Volcano, represented more than COP 600 million in aids. To contribute to the permanence of children in school in the country, the entity delivered more than 4,300 school kids -- students throughout the country so that they could carry out the school activities during the year. Likewise, through the Bogota Food Bank, BBVA benefited more than 20,000 Colombians in the departments of Nariño, Teorama and Caldas. In the case of Nariño, the beneficiaries were families affected by heavy rains that hit during the first part of the year and caused floods and land slides. In this case, 1,000 food aid items were delivered to families in Pasto and Tumaco. On the other hand, the possibility of an eruption of the Nevado del Ruiz volcano located in the departments Teorama and Caldas has led to the evacuation of hundreds of Colombian families, who have been forced to move to other locations to minimize the risks of a possible eruption. For this reason, BBVA expressed its solidarity with the Colombians who are going through this difficult situation and sent 1,000 kits with basic food, hygiene and personal hygiene items and blankets for families. On Slide 7, as mentioned before, the high interest rate scenario represents an opportunity in the management of the interest margin. During the first quarter of 2023, the funding costs has been increasing rapidly, difficulty in the catch up with the interest income and limiting the gross margin growth to 0.6%. On the other hand, the net fee income and the other operating income represented 45% of the gross margin. This was mainly driven by the increase of 200% in dividends. Moreover, operational costs, especially personnel expenses have increased due to aim of the bank to train and develop the best and most [ compromised ] team to deliver best possible results. Continuing on Slide #8. Portfolio activities saw a positive revolution throughout the first quarter of 2023, reaching a year-on-year growth of 16.4%. The commercial portfolio showed the most dynamic behavior, with an increase of 28%, thanks to the enterprise segment. Although the retail portfolio also showed a favorable evaluation. At the end of the first quarter of 2023, customer funds remained in line with the group's liquidity needs, and deposits behaved in line with the portfolio growth dynamics. Total customer funds increased by 15%, closing the period at COP 72.3 trillion. Time deposits represented 44.6% of total funds and presented a variation of 13%. On Slide #9, during the quarter, the joint efforts with the recoveries area standout, making projections of the portfolio behavior to provide the management areas with tools that allow them to add opportunity before the clients' difficulties, which may reduce the impact on local and consolidated delinquencies, which finally contribute benefits in terms of the reorganization of the bank's provisions. 2022 was a year of significant economic and political challenges, with an uncertain environment that ended with the highest inflation of the decade, which had significant ramifications on debt payment behavior and led to an increase in default entries in the last 5 months of the year. In Slide 10, we can illustrate our recovery area efforts. Different plans were established, focusing efforts and seeking to anticipate, [ contain ] and mitigate a larger impact on write-offs for the year. With a strong emphasis on the containment of the local [indiscernible] portfolio and the challenge of having an annual average month risks of COP 300 million. Recoveries averaged COP 75 million per month, with the main sources of the recovery being effective client payment, the suite of the recovery engine and, to a lesser extent, [ restrictive ]. Continuing with our equity and solvency metrics on Slide 12, we can see that BBVA Colombia closed the first quarter of 2023 with a robust capital structure. Tier 1 capital represented 65% of the regulatory capital due to the policy of increasing the legal reserves with undistributed profit each year. The group's stockholders equity closed at COP 6.4 trillion. This increase is mainly explained by increase in the surplus of COP 850 billion. Based on the above considerations, during the first quarter of the fiscal year, the solvency ratio closed at 12.22%, exceeding the minimum regulatory. Our planned remarks for the first quarter of 2023 are now complete. We expect to keep improving the bank's performance through our digital and sustainable transformation, where the main aim is to make the opportunity of this new area available to everyone, seeking to meet [indiscernible] objectives of our customers, being a driver of opportunities and having a positive impact on the lives of people that -- the businesses and the businesses of companies, bearing in mind the 6 strategic priorities that help us to fulfill this vision. Please use the Chat feature or the Raise Your Hands button in the bottom right corner of the screen to ask any questions you might have.

Seems there are no questions, which conclude our event. And we wait one minutes for questions. There is 1 question on the chat.

Yes, I can see it. What are your profitability and asset quality expectations for 2023? Well, related to the asset quality expectations, I would say that, after the year 2022, it is expected a likely increase of the, I would say -- let me think the answer, please. Related to the profitability, we expect to maintain more or less the same profitability that we had in 2022. We know that the interest rate increase make a complex environment in order to have a significant increase of the profitability, but we think that the portfolio and the balance is prepared to be able to maintained during 2023. Related to the asset quality, I would say that the growth that the system showed in 2022 may have a light effect of the asset quality that we have actually. But we think it is not going to be a problem in order to maintain that profitability that we have in 2022. Even we have been seeing that in the results of some competitors in the market can be lightly affected because this increase of the interest rate. We think that in the case of BBVA Colombia, it's not going to be a real problem. But as I said before, we are not expecting significant increases in the profitability. I can see another question relating to implementation of Basel III [indiscernible] on the local net stable funding ratio in Colombia. And the question is, has the implementation of the Basel III through the [indiscernible] rules in Colombia affected your funding objectives? In fact, it has not affected our funding objectives, but this is because, as a European bank, we are -- since more or less 6, 7 years ago, we have implemented the net stable funding ratio. And we are managing it in our balance in fact. So if you see our ratio [indiscernible], it is around 120%. And we have enough space related to local funding not to affect our funding strategy, so this is the main reason. I don't know if there is any other question.

Okay. Seems there are no more questions, we conclude our event. We appreciate your participation, and we hope you have an excellent day.