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

And welcome to the BBA Columbia's Third Quarter 2023 Earnings Call. My name is Diana Katherine Ruiz. I am part of the legal department of BBVA Colombia. With us today, the main economist, Alejandro Reyes, Felipe Vega and Daniel Leonardo Vargas from the Financial Planning and Performance team. Nicolás Tripodi as part of the Risk Department and the ALM and Investor Relations leader, Mario Sanchez. I would like to remind you that today's presentation will be available for download on our website in section Investor Relations at the link Agenda. Please note, this call is being recorded. [Operator Instructions] Today's agenda includes the highlights of the quarter, a brief overview of the macroeconomic scenario, a brief description of our financial performance and our recent achievements. Without further ado, I will now turn over the call to Mario Sanchez.

Thank you, Diana. Good morning, everyone. I am delighted to welcome you all to our earnings result call day, where we will reflect on our achievements in what has [undefinable] been a challenging economic environment. This quarter, we want to bring you a panel of experts to review the topics that drove the earnings of this quarter. Along the call, I will invite the members of our panel to give focus on relevant topics. Let us begin on Slide 2 by highlighting our financial performance. Our net profit surged to a remarkable [ 267 billion ], a testament of our teams unwavering dedication and strategic foresight despite the hurdles posted by the tough economy, we achieved an 11% growth in net loans, showing the resilience of our commercial and consumer portfolios. It is worth mentioning that our operational efficiency remains a cornerstone of our success. With an efficiency ratio of 58%, we have managed to maintain our net profit in positive. However, the difficult funding levels and the base effect from the outstanding 2022 drive a 5% decrease -- a 5.4% decrease in operating income year-on-year. Moreover, our commitment to managing risk has paid off with the cost of risk at a commendable 2.02% and a coverage ratio [soaring] 176.29%. We will now continue with our economic outlook in Slide 3. For this topic, I will hand over the call to Alejandro Reyes, our main economist.

Thank you, Mario. Good day, everyone. Let me start with our economic outlook on Slide 3. On the global side, activity has continued to show a downward trend with mixed performance by the top economies. The U.S. has grown -- has shown great resilience and is expected to achieve a 2.4% year-on-year growth in 2023. This on the back of a still strong labor market and pent-up household savings. The Eurozone has seen a weaker performance and is expected to grow 0.4% in 2023 due to this lag caused by higher energy prices and the weakening of private consumption. On the other hand, China has seen significant volatility this year with a strong start of the year on the back of the lifting of COVID related restrictions but has since shown a significant moderation and growth is expected to stand at 5.2% in 2023. This moderation in activity is expected to continue into 2024, particularly in the U.S. and China, with 1.5% and 4.8% year-on-year growth, respectively. While the Eurozone should see some marginal improvement in activity, world growth is expected to stand at 3.0% in 2023 and 2024. In this context, inflation remains the main concern of economic authorities. During the year, inflation has moderated mainly driven by lower commodity prices and the effects of -- on demand of tighter monetary conditions. Despite this performance, core inflation has seen greater persistence and is moderating at a slower pace. We expect inflation to continue to its downward trend, but should remain above target in 2024 in most economies. In this scenario, monetary authorities have maintained a hawkish stance, but have passed through hiking cycle in the latest policy meetings. We consider rates will remain stable at current levels for a while, at least until June in the U.S. and September in the Eurozone. Once inflation approaches its target and activity moderates as we expect, the monetary authorities will start a gradual rate reduction cycle. Shifting to the Colombian economy, we have observed a significant moderation in activity. With the latest print on growth for the third quarter of 2023 standing at minus 0.3% year-on-year. This was the result of a strong contraction in internal demand, minus 6.8% year-on-year and within a contraction of investment, minus 11% year-on-year. Despite this important moderation, activity is still at high levels, particularly for private consumption and aggregate GDP, while the investment and imports stand at low levels. We expect growth to stand at 1.2% in 2023, a low number from a historical perspective, but following 2 strong growth years. Leading indicators on Slide 4, point to a weak activity, and we don't expect growth to rebound significantly until the second half of 2024. GDP will grow 1.5% in 2024, still a low number and will imply a U-shaped recovery for the Colombian economy. This result will be driven by a recovery in private consumption mainly durable and semi-durable goods in the second half of the year by public expenditure and by a rebound in some components of the investment, such as machinery and civil works. On the downside, we expect housing construction to remain weak in 2024. Inflation has reduced gradually in Colombia, lagging the performance of other economies in the region. This may be due to some delayed shocks experienced by Colombia, but also due to a stronger demand cycle than other countries. We have observed a significant moderation in food inflation in 2023, while core inflation has reduced on the back of goods inflation. While administrative prices due to fuel price increases have remained the main source of inflationary pressures. For the year-end, we expect inflation to close at 9.7%. For 2024, inflation should continue to moderate helped by both inflation and core inflation.

Thank you, Alejandro. Now on Slide 5, let me tell you about our digital market impact. Our dedication to innovation has yielded remarkable outcomes, driving a growth of 14.5% in digital customers and 10.05% in mobile customers year-on-year. It is not just the numbers, but it's also the impact this innovation have had on reshaping our customer interactions that truly matter. We are proud to reveal that a substantial 83% of our valued clients are actively engaging with our digital channels, highlighting the deep trust they place in our tech offering. A testament of our effort is the fact that [ 83% ] of the sales were seamlessly executed through our website and app, showcasing an easy and convenience we bring to our tech savvy clientele. BBVA's believes that solutions like [indiscernible] that aims to promote financial inclusion and enhance user engagements with digital transactions will improve the customer experience of our clients on the web, and in the near future in all of our digital channels and attract new clients. Let us now address some key financial indicators on Slide 6 and 7. Please, Daniel, could you talk us through these subjects?

Good day to everyone. As a Alejandro shows at the beginning of the call, 2023 has been a challenging year for the national economy. In this context, we have been able to continue growing and gaining market share in strategic and highly profitable sectors, aiming to build a very profitable portfolio of credits for the upcoming scenario of lower interest rates. This is how we have grown by 1.8% in our portfolio building quarters, totaling an 11% year-on-year growth rate. We continue to grow further in consumer portfolios, but with a losing ground in the commercial portfolio, which has [indiscernible] more rapidly in the last quarter than the individual portfolio. But during year, the growth has still been remarkable. Moving to the profits on Slide 7. We observed previously a net interest income affected by the sharp rise in interest rates and the high liquidity pressure in the sector, particularly during the first half of the year. However, thanks to our funding strategy, which Mario will elaborate on later, we were able to have a better quarter than the previous one by approximately [ 48 billion ]. Provisions have also been a challenging area during this quarter as we continue to experience significant deterioration in the personal loans portfolio, resulting in an increase of approximately 10 basis points in the cost of risk placing it at 2.1%. We have also had to implement some efficiency plans to address the challenges posed by inflation in the expense account. Some of these plans involve optimizing costly computer processes, streamlining our cash management logistics or reducing variable employee compensation due to results that are less favored than expected. All of this, while we continue to invest in the development of new products and maintaining our commitment to growth with a much higher level of CapEx execution in 2023 compared with 2022 without considering stop doing things. All of the above has allowed us to be one of the few banks in Colombia capable of maintaining a positive growing result despite the complex environment. Thus, our net result grew by 64% in the quarter, reaching [ 267 billion ] as we continue to build value for our stakeholders.

Thank you, Daniel. On Slide 8, I would like to highlight important key points regarding our funding strategy. Our client resources have been managed with precision aligned with the bank's liquidity requirements, demonstrating our commitment to fostering our roast financial foundation a total client resources surged by an impressive 7% culminating in outstanding [ 75.5 trillion ]. Our remarkable highlight is the substantial 44% year-on-year surge in term deposits, a testament of the unwavering trust of our clients place in us. The search fortified the dynamic resource trajectory in parallel, while transactional deposits, including demands and savings experienced a [ 3.05 ] deep, they closed September 2023 with a notable balance of [ 38 trillion ]. These transactional deposits continue to be a cornerstone representing a significant 50.4% of the total client resources. Moving forward on Slide 9, Nicolás Tripodi from our risk department will talk about the exceptional work from his team that makes BBVA asset quality a reference in the market.

Good day, everyone, and thank you for the opportunity to participate in this forum. It's my first time. My name is Nicolás and I am the Head of Retail Credit. And regarding to our asset quality, I would like to share with you several messages. First, we have expectations of redirecting risk metrics toward third quarter of 2024. Throughout this year, our growth strategy has been focused on payroll customers. These customers have demonstrated better credit behavior. And moreover, they are sources of liabilities. Also, we have deployed new capabilities in digital channels and we still have room for more improvement in our mission policies in this segment of clients. On a different note, we have made significant advance in our risk models. We deployed new models through the last year and 2 more are coming in the next semester. And last but not least, we implement a new risk-based price model that will help us make better decisions. This risk-based price model aims to determine price based on customer profiles. Thank you, Mario.

Thank you, Nicolás. Moreover, on Slide 10, we have summit the state of the deferred loans due to COVID-19. After the payment assistance period, we swiftly resumed recovery activity, embracing a spectrum of alternatives such as restructures, foreclosures and litigations all aiming at ensuring the best outcomes of our value clients. With these loans necessitating fresh approach, we now restructure them in Stage III underlying our prospective approach to adapt to evolving circumstances. In navigating the challenge stemming from the pandemic induced credit relief, our resilience shines through a commendable 52% of granted reliefs has been successfully amortized and impressive 48% of our existing loans are maintaining their impeccable track record, a testament to the determination of our clients, while 9.8% are facing temporary obstacles and 5.6% have been write-off, our commitment to support and assist remain unwavering. Continuing with Slide 11, I would like to invite Felipe Vega to talk about capital, 1 of the most important features of a bank in a challenging year like 2023.

The capital position of BBVA is solid. We ended the third quarter of 2023 with a total capital ratio of [indiscernible]%. When compared to the regulatory limit, we are at 78 basis points above it. Although in our CET1 ratio, we have a difference of 95 basis points above the regulatory minimum. During the quarter, we had a positive evolution in our ratios, increasing 12 basis points in the total ratio and plus 23 basis points in CET1 when comparing versus last quarter. This increase mainly due to the positive results in the last line of the income statement. The risk-weighted assets during the quarter had a slight decrease of 0.9%, mainly driven by market risk -- by market risk, which had a reduction of 18%. Credit risk and operational risk weighted assets increased by 1.6% and 1.1%. Credit risk-weighted assets represented 81% of total risk-weighted assets, market risked 10% and operational risk, the remaining 9%. In BBVA, we keep constant monitoring of capital ratios and risk-weighted assets, always making sure that we stay above the minimum requirements.

Thanks, Felipe. Moving forward to Slide 12, at BBVA Colombia, we embrace our commitment to sustainability, aligned our efforts with the greater good of our customers and the environment. One example of this commitment is that during this quarter, we issued our first blue bond in partnership with IFC. This noteworthy [ USD 50 million ] bond will fund projects with water treatment plants, ocean preservation, more protection and mangrove conservation. This is only the beginning as we plan to additionally issue [ USD 100 million ] during the last quarter of 2023. Last but not least, we continue in BBVA with our voluntarism, supporting SMEs, education initiatives, support for families in emergency situation and humanitarian aids in Colombia. Our planned remarks for the third quarter of 2023 are now complete. We expect to continue to improve the bank's performance through our digital and sustainability transformations and to make the opportunity of new era available to everyone, seeking to meet the digital objectives of our customers being a driver of opportunity and having a positive impact on the lives of the people and on the business of companies. Please use the chat to future or rise your hand button in the bottom right corner of the screen to ask any questions you may have?

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

Thanks.

Thank you, everyone.

Bye, everyone. Good morning.

Thank you. Have a good day.