Banco Davivienda S.A. (PFDAVVNDA) Earnings Call Transcript & Summary

Good morning. My name is David, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Davivienda First Quarter 2020 Earnings Conference Call. [Operator Instructions] I will now turn the conference over to Rafael Borja of i-advize Corporate Communications. Mr. Borja, please begin.

Thank you, David, and good morning, everyone. Welcome to Davivienda's First Quarter 2020 Earnings Conference Call. Today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Joining us today from Bogotá, Colombia are Mr. Efraín Forero Fonseca, Chief Executive Officer; and Mr. Ricardo Leon Otero, Chief Risk Officer. They will be discussing the results of the press release distributed yesterday. If you have not yet received a copy of the earnings report, please visit www.davivienda.com on the Investor Relations section, where there is also a webcast presentation to accompany discussion during this call. If you need any assistance, please contact i-advize in New York at (212) 406-3693. I would like to remind you that any forward-looking statements made today by Davivienda's management are subject to various conditions and may differ materially. These conditions are outlined in the last page of the company's press release in the disclaimer, and we ask that you refer to it for guidance. It is now my pleasure to turn the call over to Mr. Efraín Forero, Chief Executive Officer of Davivienda, who will begin the presentation. Mr. Forero, please go ahead.

Thank you, Rafael. Good morning, and welcome to Davivienda's first quarter of 2020 earnings conference call. I hope that you and your families are all healthy and safe during these times. The situation we are currently living in is very challenging for the different economic sectors and the whole society. There will be significant impacts. But at the same time, it is an opportunity to provide solutions to different needs, develop new products and potentialize the existing ones. In today's presentation, we will discuss some preliminary impacts in the economies where we operate and the bank result as well as some positive developments. When looking at Colombia's economic evolution on Slide 3, we see that GDP for the first quarter grew at the level of 1.1%, impacted by the global slowdown, drop in oil prices, capital outflows and confinement measures taken by the government. Agriculture, public administration, education and health contributed to growth, while construction, artistic events, mining and manufacturing were the most affected activities. Davivienda's confidence index reached a new minimum in April as a result of the high level of uncertainty. The exchange rate devaluated 28% during the year and 24% during the quarter, reaching historical highs during March. This related to oil price behavior and capital outflows. Under these circumstances, the Central Bank implemented diverse measures aiming to provide liquidity to the market, both in U.S. dollars and Colombian pesos. Additionally, after 2 years of stable interest rate, the Central Bank cut the reference rate by 50 basis points in their last 2 meeting, taking it to 3.25%. Given the likely weakening of the fiscal deficit related to the economic downturn, oil price and pandemic shocks, the Standard & Poor's revised Colombian outlook to negative and Fitch downgraded its rating BBB-. Moving on to Slide 4. We can see the highlights of the macroeconomic situation in Central America. As of February, growth for most of the region continued to show a slowdown compared to December 2019. The economies were affected by commodities global prices, adverse climate condition and lower activity level in construction and commerce, mainly in Costa Rica and Panama. Regarding inflation, the real rates located within or below target range as a result of economic deceleration and lower oil prices. Considering the economic performance and impact from the pandemic, Costa Rica's interest rate was cut by 150 basis points in January, and Honduras rate was cut by 75 basis points in mid-March to face the crisis. Risk rating for Costa Rica were downgraded by Moody's and Fitch due to persistent fiscal deficits. Outlooks for El Salvador and Panama were also updated by Standard & Poor's, Fitch and Moody's, reflecting mixed perspective on the performance of this country. Moving on to Slide 5. We would like to comment on the bank's main result for the first quarter. Net profit reached COP 224.6 billion, decreasing 41.6% over the quarter and 42.9% compared to the same period of the previous year, mainly affected by lower investment income related to market volatility and higher provision levels driven by a riskier environment. This represents a return on average equity of 10.7% for the last 12 months. Consolidated gross loans grew 12.3% over the quarter, explained by the consumer portfolio, specific disbursements in the commercial segment in Colombia and the exchange rate devaluation. On an annual basis, loan growth reached 23.3%. Regarding credit quality, total PDL ratio closed at 3.45%, decreasing by 42 basis points in the last 12 months and remaining stable through the course. Consolidated cost-to-income ratio closed at 46.5%, remaining at the same level compared to March 2019 and increasing 31 basis points quarterly. This is mainly explained by our digital transformation effort and foreign exchange devaluation. Among other relevant events, we capitalized COP 819 billion into our Tier 1 capital as a result of our Annual General Meeting last March. We also acquired a $100 million credit with IFC in April directed to women-owned SMEs, social housing and sustainable projects, an issue bond for $31 million in Costa Rica. Please move to Slide 6. A very good part of our attention in the last month has been directed towards our risk management system. Contingency plans, crisis committees, scenario analysis and a full set of action and measures have been brought in place in order to guarantee the adequate operation of the bank. In this sense, we increased our liquidity reserve by more than 60%, bringing our liquidity coverage ratio to level of 1.42x. This reflects an adequate position in terms of liquidity assets to cover short-term needs. In terms of credit risk, 52% of our loan book has some type of collateral in addition to having a well-diversified portfolio by region, type of products and customers. However, we took some provisioning measure to recognize higher risk in the different segments. Finally, we have adequate levels of capital compared to the minimum requirements allow us to face stress periods such as the current one. Moving on to Slide 7. I would like to mention some of the alternatives we are providing to support our customers during this period of uncertainty. We are giving our retail banking clients the possibility to defer their payments for up to 6 months, and we are doing case-by-case analysis on commercial banking, offering grace period to our customers and the option to renegotiate some credit conditions. As of May 15, around 1.2 million customers has benefits from these relief measures, which represent COP 29 trillion of Colombian's loan balance and around $2.5 billion of Central America loan book. As you might know, the Colombian government has taken different initiatives to improve liquidity across the economy through the National Guarantee Fund and second floor banks by backing loans or ramping resources to finance medium and small business, working capital and payroll needs as well as self-employed people. We have been active participants in these programs. We have disbursed COP 440 billion in credit lines backed by the National Guarantee Fund, reaching more than 19,000 customers and participating with 24% of disbursements within the system. Finally, we are the only bank disbursing backed resource to self-employed customers as we were able to adjust a good credit process in record time to offer this product in a completely digital way, thereby participating 100% of this line disbursements. Please continue to Slide 8. In order to face the current situation, we have made some adjustment to the traditional and digital channels. At the same time, it's important to highlight that the investment we have made in technology and digital transformation over the past year has enabled us to react timely to the new challenges as well as to find new opportunities. We were able to improve our customer service through traditional channels by increasing more than 2x our contact center capacity and by enforcing safety policies and procedures in our branches, where 81% are now open to the public. We have been able to maintain our digital channels fully operational to provide business continuity. 66% of our more than 17,000 employees are currently working from home. In April, transactions increased by more than 80% in our app and more than 57% in DaviPlata compared to the monthly average. We are working very closely with the local authority and the national government in order to facilitate the distribution through DaviPlata of subsidies and VAT through funds helping the people in most needs. As a result, we have contributed with the timely disbursements of these resources to almost 3.5 million people in Colombia. As of May 15, we reached 8.9 million customers, increasing 35% compared to the close of March. During the past 2 months, we have bancarized around 1 million Colombian citizens that did not have any financial products before. We will continue advancing in our digital bank programs, aiming to reach more people in Colombia and Central America, thereby improving access to financial services. It is impossible to foresee how severe or long the virus impact will be. However, we will keep doing our best to support the countries where we operate by enabling fiscal and monetary policy to reach the real economy and by helping our clients, employees and community navigate during this uncertain times. 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.

Thank you for the introduction, Mr. Forero. Good morning, everyone. Before we go into the numbers, it's important to mention that as the current situation is extremely uncertain, the guidance we provided in the last conference call is no longer applicable. We will do our best to describe to you the general trends we would expect to see during the coming quarters until we have a clear view of the duration and impact of the current situation. Please move on to Slide #9, where we will analyze the evolution of assets. Total assets grew 24.9% over the year. A bit of this growth is explained by the annual devaluation of exchange rates. Colombia's assets showed an annual growth of 20.4% due to higher gross loans, investments and derivatives. As Mr. Forero mentioned before, we're in a comfortable liquidity position to face the COVID situation. As you can see, cash increased by 28% versus last year and our investment portfolio increased by 32.5% on a yearly basis. Our high-quality assets stand at a good level. Loan loss reserves increased 17.4% on an annual basis as we increased provisions across all segments. As for the quarter, reserves increased by 11.4%. Our international subsidiaries, which account for 27% of total assets, grew 8.2% over the year in dollar terms, mainly driven by the increase in the loan portfolio, cash and investments. Regarding the evolution during the quarter, total assets grew 14.2%, and the foreign exchange devaluation explains half of this growth. Move on to Slide 10, please. Consolidated gross loans grew 23.3% over the year and 12.3% over the quarter. The foreign exchange devaluation account for 7% of gross loans and growth and half of the quarter's growth. The mortgage portfolio reached 16% growth over the year, mainly due to leasing and residential housing segments in Colombia, which grew 15% and 21%, respectively. In the international operations, mortgage grew mainly in Costa Rica and El Salvador. The consumer portfolio grew 37.9% in the year, mainly explained by unsecured personal loans and credit cards in Colombia and payroll loans and credit cards in Central America. It's important to note that this growth is mostly explained by the second half of 2019 dynamics and due to a base effect as the consumer portfolio was growing at a quarterly rate of 1% in March 2019. The commercial portfolio increased by 70.7% over the quarter, reaching an annual growth of 19.4%. The specific disbursements to customers in the energy, communication and commerce sectors explain most of this growth, accounting for 6% of commercial loans growth and 3% of the total loan growth. As of April, however, our disbursements in Colombia have decreased by 46% compared to March and by 61% in Central America. We have been very careful in allocating resources according to our resource size and available liquidity, and we will continue working to be there for our customers through this uncertain time. Growth for the rest of the year is expected to be supported by the government programs such as one-off offers by the National Guarantee Funds or second floor banks. We seek to improve access to credit by granting guarantees or resources. We feel credit demand for the rest of the year will be driven mainly by the company's [indiscernible]. Please move on to Slide 11, where we can see the 90 days PDL ratio and cost of risk. Total PDL ratio closed at 3.45%, decreasing 42 basis points over the year and remaining stable over the quarter, explained by the growth of the commercial and consumer portfolio. Commercial PDL ratio showed an annual and quarter decrease of 95 basis points and 23, respectively, resulting from the books acceleration, corporate write-off made last quarter and different restructuring processes made over the last 12 months. Consumer PDL decreased 24 basis points over the year, explained by the portfolio growth dynamics, and increased 4 basis points quarterly, due to deterioration of customers not covered by the relief measures. Mortgage PDL increased 54 basis points over the quarter, impacted by the pandemic in Colombia as well as deterioration in Panama and Costa Rica. Over the year, mortgage PDLs increased 73 basis points, also impacted by the decision made in Colombia during the year by COP 850 billion, which account for 14 basis points of this deterioration. By the end of February, however, our mortgage PDL were at the same level as the month of December 2019. We might see increase in PDLs mainly through the second half of the year as credit that's adjusted to relief measures will start to account in PDLs 90 days after deferral period end. Cost of risk for the last 12 months closed at 2.5%, remaining stable over the year and the quarter, as we have had a high level of provision this last year, mainly due to the situation with a specific customer. However, our annualized quarter cost of risk closed at 3.24%, which represent increases of over 50% in provision expenses over the quarter and year. These increases result both from our decision to cover for a very materialized rate situation across our portfolio, as well as from the following 3 measures. In the first place, we recognized higher risk level with each customer who request relief measures by updating their specification, thereby increasing provisions. As you can see, our stage 2 increased to 12.9% from 5.8% in December 2019. Secondly, we also adjust provision for many corporate customers in the various affected sectors. Lastly, we updated our forward-looking parameters with the available information we have by the end of March, materializing a well macroeconomic scenario. We will continue to update our models every quarter, and we should expect to see additional provision expenses according to the evolution of the economic situation. Finally, as you may know, Avianca filed for Chapter 11 [indiscernible]. Our exposure to this company by the end of March was around $53 billion and has a calling coverage of 50%. We expected to increase this coverage to 70% during the year, and we'll continue to monitor the situation very closely. Now please move on to Slide #12. Funding resources grew 27.8% over the year and 70.4% quarterly, in line with the growth of our loan portfolio. The exchange rate devaluation explained around 9% and 8% of the annual and the quarter growth. Demand deposits reached 30.7% annual growth as the public moved their resources from investment funds and term deposits to safer and more liquid instruments in response to uncertainty and higher volatility. Bonds had an annual increase of 17.9%, mainly explained by local senior issuances in Colombia of around COP 2 trillion in the last 12 months. In terms of credit, growth reached 40.8% over the quarter and 62.8% over the year, due to higher credit at competitive rates with foreign entities. It's important to mention that the foreign exchange devaluation accounts for 20% of the credits annual and quarterly increase. Our funding structure continues to be stable with deposits representing 73% of the total funding and where we continue sizing market opportunities to diversify resources and to access competitive funding rates. Our loans to funding ratio reached 91.7%, decreasing both annually and quarterly. I would like to then move to Slide #13. Total capital adequacy ratio closed the quarter at 11.29%. This means 33 basis points lower than the previous quarter explained by higher risk-weighted assets relating mainly to loan growth. Q1 increased 9 basis points over the quarter, positively impacted by the COP 819 billion capitalization approved in the Annual General Meeting, although offset by the portfolio's acceleration. Q2 compares around 42 basis points quarterly due to the relocation of capitalized early into the Q1. Total equity increased at 13.2% ratio over the year and by 2% over the quarter. Regarding our capital level, we expect to remain with stable and solid levels due to lower loan growth. I would like to proceed to Slide #14. The gross financial margin increased by 3.2% over the year, although loan income increased by 13.1%, mainly led by the consumer segment. Our overall financial margin was significantly impacted by lower investment income. This was due to a general devaluation of investment instruments as a result of the market reaction to the international situation and the COVID-19 pandemic. It's important to note, however, that this situation was already corrected by mid-April. 12 months net interest margin ratio closed at 6.28%, contracting over the year and the quarter. In terms of margin, we should expect a compression due to a decreased loan and investment income related to lower growth and economic activity as well as change in the asset mix. Our provision expenses reached COP 885 billion, which represents 1.5x over 2019 quarterly average, reflecting the initial measures taken to recognize higher risk across our portfolio, as mentioned before. As a consequence, net financial margin had an annual decrease of 22.3%. Please continue to Slide #15. Total expenses grew 13% over the year. If we exclude the foreign exchange devaluation impact, expenses will have grown by 8% on annual basis. Personnel expenses grew by 9.2%, mainly due to inflation-adjusted wages and the minimum wages increase in Colombia. Operating and other expenses increased by 16% as a result of higher costs related to our digital transformation and service initiatives and additional charges at marketing, software development and strategic alliance. On a quarterly basis, expenses decreased by 5.5%. This is explained by lower personal entities as well as the decrease in training and maintenance and transportation and public services expenses. As a result, the cost-to-income ratio closed at 46.5%, remaining stable over the year, 51 basis points higher than the last quarter. We are fully aware that digital transformation is key to our sustainability. Therefore, we will continue working to develop a well-established project in this front while remaining in our path to better efficiency. We are expecting a higher cost-to-income ratio in the following quarters as income levels will be lower. To finish the presentation, I would like to go to Slide #16, where we can analyze the bank's profits. Net profit closed at COP 224.6 billion, 42.9% lower than the one of March 2019. On a quarterly basis, net profit decreased by 41.6%. Operating income decreased by 10.5% as a result of lower credit calculation as well as fees waived on transaction. Taxes increased due to the reform of financial institution for tax received through -- during December in Colombia, which resulted in a lower base for that period. Our return on average equity for the last 12 months grows at 10.7%, while the return on average asset was 1.08%. In general, these are the results we have prepared for you today. Although our results in the first quarter were impacted by the economic and market uncertainty caused by the pandemic, we maintain a strong liquidity and capital position. There is a lot of uncertainty today. However, we expect to give you more visibility as the situation evolves and the impact of the pandemic in our business is better understood. At this time, we can move on to the question-and-answer session. Thank you for your attention.

[Operator Instructions] We'll take our first phone question from Neha Agarwala with HSBC.

Could I ask about your exposure in the mortgage portfolio? What level of deterioration do you see there? And have you done any stress test for your entire loan portfolio? And any expectations regarding the levels of cost of risk that can happen? And the levels of capital, if any stress test impact you have for those, that would be very helpful. I'll ask my second question later. Hello? [Technical Difficulty]

Presenters may have muted their phones. Please, may they double-check those?

Ratio stands at 3.5%, 90.6 points lower compared to the 90 days ratio. For us, this mission reflects better data associated with this portfolio. So we have LTV ratio close to 40% to 45%. So for us, it's a portfolio with a very good collateral and a low-risk profile. In this year, we have to develop a stress test for the -- our portfolio. And in this case, we do not serve any special or additional difficult. But also, when we established the condition of this pandemic, obviously, impacted in March the level of provision, but we don't see a high risk in this portfolio because, as I said, we have a very good relation between the loan and the collateral.

If I may ask regarding the level of provisions, there was some increase in the provisions in the first quarter due to the impact from the pandemic. Should we expect higher level of provisions, significantly higher, to cover for the probable losses in the future in the second quarter? Or will the increase in provisions be more in line with the increase in NPLs? And my second question is on the credit bureau. It is being discussed at the Congress. What do you -- what is your expectation regarding that? And what could be the impact on the banks if it is passed?

Related to the rate that we are expecting in mortgage portfolio, of course, that in March, we increased the level of provision for different customers that receive the relief relating to move the payment for the next 6 months. In this quarter, we are estimating additional provision for this portfolio and obviously impacting the model that established the results related to the low GDP, and obviously, the level of employment is increasing. So our internal model capture these effects in the level of the deterioration estimation.

Good morning, everyone. This is Álvaro Montero, Head of Legal. In regards to your question about the credit bureau initiative, let me explain that this initiative include 3 main proposals, that is to reduce from quarter to year the negative reporting period in addition to the default duration and reduce the default duration from 10 to 5 years. The second proposal is that the loans below 50% of the minimum wage can only be reported after at least 2 notification to the customer. And the third proposal is to grant a 12-month amnesty for currently defaulted borrowers. If the initiative pass through the Congress, it could have the following negative impacts, probably higher loan rates and lower appetite due to lack of credit bureau data, higher PDL levels. And probably that the most important impact is in regards to the low-income population that has a good credit score that could be excluded as they don't have additional collaterals. We consider that then around 30 million Colombians with credit history will be affected. The next steps of the law or as part of the next steps of the discussion of this bill, previously to the last debate of the bill in the Congress, the Congress decided to held a public hearing today in order to have the different point of views of the impacts, pros and cons of this act. And we expected that the Congress will analyze these impacts and make the most appropriate decision in this case.

If I can just clarify on the credit bureau. The -- it will reduce the negative information from 10 years to 5 years?

Yes. The proposals include the reduction to the negative information for the customers that don't pay his obligation to 10 -- from 10 to 5 years.

Okay. And the negative items will also disappear earlier, right? It's -- that is what it means?

Maybe additional information related to the level of provision of our loan portfolio and obviously, mortgage portfolio, is that in this quarter, we define additional provision, as you know we shared, for a figure close to COP 300 billion in our portfolio. 60% of this provision expenses was allocated in retail banking due to the recognition of higher risk of deferral credits as well as by higher risk of consumer portfolio. We have an additional 26% of provision expenses related to commercial and SMEs business as well as by provision for new fully corporate customers in affected sectors. And the remaining 14% correspond to our forward-looking parameters updated and the materialization of an adverse scenarios given the current situation. It's important to mention that the expenses for these items is in times the expenses registered in March 2019. In addition, the stress of capital, we also have been working in that maybe 2 or 3 years ago. I mean, in this year, we can see that the level of activity in terms of loan portfolio create an equilibrium with the level of capital because, at the end of the year, the growth of the loan portfolio will be very conservative.

[Operator Instructions] As there are no further phone questions on the line, I'll turn the call over to i-advize for questions on the webcast.

Thank you, operator. We have one question from Ursula Menendez from Creditcorp Capital. "I would like to have more color about why have the Colombian mortgages NPLs increased. Is that related to the social housing sector? What do you expect in the near future?" And the second question is "What is the amount of provisions related to COVID-19 during 1Q '20? What GDP growth for 2020 are you applying in your expected provisions model?"

Thank you for your question related to the mortgage portfolio. The mortgage portfolio ratio is 3.5% in 120 days PDL ratio. This makes sure we reflect better the results associated with the mortgage portfolio. Around 20 basis points are explained by the deterioration of some customers whose spending capacity has been affected by COVID-19. Additional, in 2018, we modified the write-off policy from 540 days to 90 days which increases the past due balance. On the other hand, portfolio securitization made in the last year for COP 830 billion represented around 14 basis points of the increase. Another important thing is that this portfolio has an LTV growth to 45%, which represents a low risk for the bank. And obviously, in this period of the COVID-19, of course, the PDL will increase because the income of the people can be reduced in this period.

Complementing the answer of this question, I might say that it is not related mainly with social housing. Social housing portfolio is behaving according our -- it is behaving the same as past quarter. And how we expect this in the near future. We obviously think that it's going to have -- the mortgage portfolio is going to have a deterioration related with the unemployment that most of our customer will have to face in the second semester. However, in general terms, we believe that we have the capacity to handle it with them and to finally make the support to all our customers and builders so that construction is going to be, again, the main sector to reactivate our economy. And housing is going to be one of the first things to have in mind, government and the private companies. So we believe in the near future, even though we will have some problems in the second semester, however, we are optimistic about in the -- for the coming year.

The second part of your second question, the GDP that's reduced in the process. So regarding the macroeconomic scenarios, forward-looking estimation will materialize the adverse scenario that we had with the information available by the end of March. In that case, we -- points the GDP, the growth that we estimated at the end of 2018 and the GDP that we used was 1.4% and unemployment rate close to 14.5%. That was some element that we use in our forward-looking estimations. And obviously, the second quarter, we have been defining new scenario for the estimation.

There appear no further questions in the webcast. I will turn the call over to the operator.

There are no further questions at this time. I will turn the floor over to Mr. Forero for any closing remarks.

Thank you very much, everybody, for being with us today. It is difficult time, but we will keep on working very hard to be able to support our customers, our partners, and at the same time, to keeping our risk and our solvency, our liquidity in a way in which we will be able to handle with this crisis. We will have to work very hard during the second semester when the economy is opening. We know the process is going to be slow and it will take us, at least this year and the coming year, to recover from the hit of different sectors and economy and our customer patrimonies affected by the crisis. But we believe that we are going to be very hard working people, and we will take advantage of the different opportunities that this crisis is giving us, mainly related with the ability of strength, our digital bank, which is becoming every time more and more important in the country.

This does conclude today's program. Thank you for your participation, and you may now disconnect.