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

Good morning. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Davivienda Third 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 go ahead.

Thank you, Leo, and good morning, everyone. Welcome to Davivienda's Third 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 per 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. Good morning, and welcome to Davivienda's Third Quarter of 2020 Earnings Conference Call. Although, current circumstances continue to be extremely challenging, we remain confident in our ability to adequately manage risk, while helping to reactivate the economy by offering our customers opportunities so they can return to a better situation. In today's presentation, we will discuss the evolution of the economies that we operate. We will also comment on the bank's financial results, the steps we have taken in our digital reformation path and how we are expecting our business to evolve. When looking at Colombia's economic evolution on Slide 3, we see that the economic activity has started to show recovery time in the third quarter of the year, as most activities reopening. Along with these dynamics, Davivienda's confidence index showed positive trends enjoying by higher vehicle savings on oil demand. As consumption has started its rebound and there were higher needs to finance import, the exchange rate devaluated 3% over the quarter and 11% during the year. Additionally, oil prices increased between July and September due to higher demand and reactivation worldwide. Finally, the Central Bank continue to decrease the monetary policy rate, taking it to a historic low of 1.75% in its strategy to boost the economy amidst the COVID-19 pandemic. Moving to the Slide 4, we can see the highlights of the macroeconomic situation in Central America. COVID-19 left a negative balance for Central America countries in the second quarter of the year, with Honduras and El Salvador GDPs being the most affected. Meanwhile, Costa Rica was more resilient as initial restrictions were not as strong. In general, the region was deeply impacted by lower tours, transportation and commerce activity as well as lower remittances levels. In line with this behavior, the region's inflation rates and the monetary policy rate remained low through the third quarter. Available ratio for July and August showed that the region presented some recovery, registering lower annual contraction for the third quarter as well as better remittances dynamics for El Salvador and Honduras. Moving on to Slide 5, I would like to comment on the bank's main results. The third quarter net profit closed around COP 48 billion, decreasing 60% quarterly. As a result, accumulated net profit reached COP 394 billion, 64% lower compared to the same period of the previous year. The bottom line remains affected by higher provision and operating expenses related to our digital strategy, pandemic-related costs and foreign exchange. Provisioning continues to be within our priorities as we are aiming to recover for peso deterioration going forward. During the quarter, we continue to offer our customers financial support through different relief programs. Over the last month, the first wave of relief has been gradually expiring, and we are observing payments, resuming both in Colombia and Central America. In the coming slides, Ricardo will go more in depth about the status of our loan book. Overall, we are permanently monitoring our customers' payment behavior and placing special attention to credit qualities, to support economic growth by allocating the resources in line with our risk appetite. In this sense, given some improvement in confidence and this positive dynamic, our loan book increased by 1.8% over the quarter, mainly driven by the commercial and mortgage portfolio. In terms of capital, we are comfortable with the current level. Total capital adequacy ratio increased by 25 basis points quarterly and 10 basis points over the year. In September, we acquired $120 million in subordinated debt with IDB Invest and the Canadian Climate Fund for the Americas. These resources allow us to increase funding for SME and dream project while strengthening our Tier 2. I am glad to announce that we issued Colombia's first gender-focused social bond for around $100 million, thereby, reinforcing our commitment to promote human empowerment, benefiting women health, households and women-owned SMEs. In this sense, since December last year, we have acquired over $600 million in resources to fund human SMEs, social housing and refinancing. Finally, in September, we announced a new credit line to enable our customer to finance electric or hybrid vehicles, up to 110% of its price. These actions allow us to advance in our commitment, to encourage and develop business models that solve economic, social and environmental programs in line with our sustainability strategy. Please continue to Slide 6. We continue to advance in our digital transformation path, completing our mobile portfolio and delivering solution for our customers in Colombia and Central America, thereby, connecting more people to the financial systems and promoting economic recovery. I'm glad to share that we have become the first bank in Colombia to offer all of our retail banking portfolio through digital channels. Today, all our services, offerings, savings, investment, insurance and payment methods are accessible through a mobile device. We recently enabled all digital products to reach our customers with new, agile and friendly experience, joining them in important moment, as buying their first car or their dream house. Today, they can apply and get credit in 5 minutes to buy a car and they can also get digital loan approval to buy their home. We are also offering them the opportunity to open payroll account and consolidate their outstanding credit balance in Davivienda without leaving their house. On the right side of the slide, you can observe our progress in resolving our traditional banking service. We now have around 1.5 million digital deposit accounts, with an outstanding balance of COP 0.8 trillion, increasing 110% annually. Our digital loan portfolio reached COP 2.7 trillion, increasing 60% over the year. In less than 3 years, our digital loans have become around 11% of Colombian consumer book and digital saving accounts represent about 8% of Colombian retail deposits. We are glad to share this result with you, showing you how we are transforming into a digital bank, where our customers can enjoy the simplicity of managing all their finance in one place, getting loans, making easier transactions or deposits, anytime and anywhere without the need to go to a physical branch. Now moving on to the DaviPlata section. By the end of October, our native digital bank reached 11.2 million customers in Colombia and rolling up new 5.5 million customers this year. Out of this, 36% didn't have any financial problems before and have been included into the system, 44% are other financial institution customers and 20% are shared with Davivienda's customer base. Nowadays, almost 30% of the adult population in Colombia are DaviPlata's customers. On the right side of the slide, you can see some remarkable results compared to 2018. Transactions are growing more than 4x. The outstanding balance in deposit reached COP 425 billion, increasing to 270% and income transaction fees were double, reaching almost COP 50 billion. I'm also proud to share with you that our platform was recognized as best mobile money offering, best digital wallets and assets growing payment solution in Colombia in the framework of the future digital awards and the global banking and finance awards for being at the forefront of innovation and making significant products in financial inclusion. As you can see, we continue to gain traction, consolidating DaviPlata, our native digital bank, and we continue to strengthen our platform by attracting the best talent and increasing its operational capacity. There is still a lot of uncertainty about the pandemic's evolution and there are remaining challenges to overcome in the coming quarter. However, we will keep managing through this environment in the best possible way, aligned with our business sustainability strategy. 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. Please move on to Slide #8, where we will analyze the asset evolution. Total assets grew 15% over the year, which generate annual devaluation spend [indiscernible] of this growth. We maintained solid liquidity levels, although we have been reducing the excess of liquidity, we have built up in previous quarters to face the market volatility. In Colombia and El Salvador the regulator decreased their little asset requirement, but increased mandatory investments. As a result, the investment portfolio showed an increase of [ 30% ] compared to the last year. Gross loan portfolio increased 15% on an annual basis and 1.8% compared to previous quarter. Regarding [indiscernible] our loan loss reserve reached COP 6.2 trillion as we continued to increase provision across all segments. In this sense, loan loss reserves to gross loans reached 5.5%, increasing over 120 basis points in the year, reflecting our provisioning efforts to cover the underlying risk of the portfolio. Colombia's assets showed an annual growth of 16.1% due to higher gross loans, investments and derivatives. Our international subsidiaries, which account for 25% of the total assets, grew 6% over the year in dollar terms, mainly driven by the increase in investments and the loan portfolio. Move on to Slide 9, please. Loans have increased by 1.8% in the quarter and 15% over the year. I would like to recall that annual growth results from the dynamics of previous periods on the commercial and consumer portfolio as well as currency change effects, which accounts for around 4% of the increase. Regarding the quarter's growth, it was driven by dynamics in commercial and mortgage portfolio, within profile aligned to our appetite and partially supported the National Guarantee Fund program. The growth in consumer mainly explained by a base effect in the second quarter where the portfolio contracted. As for the annual growth, the consumer portfolio continues to show lower levels compared to previous quarters. In the international operations, mortgage and consumer loans grew mainly in El Salvador and Honduras and the commercial portfolio decreased by lower originations in Panama and in El Salvador. For this year, we expect our loan growth between 10% to 12%. Our expectation for 2021 is to have an expansion of around [ 10% ], mainly driven by the commercial sector and some contribution for the retail segment. However, these dynamics might impact the financial margins, with a mix change and the low interest rate environment. Moving on to Slide #10, you can observe how relief and collections have been evolving since the beginning of the pandemic. By the end of September, around 7.3% of Colombia's loan portfolio was under some kind of relief, either with active deferral of the first wave or under the [ PPE ] program. It is important to know that this number has been increasing in its peak in April and considerably period progressing end. Regarding Central America, loans under some kind of relief were around 5% by the end of September. As you may see, most programs for the region expired in June, while others remain active on the [indiscernible] as in the case of Panama. As of today, around 86% of our consolidated loan portfolio is active today, in line with retail portfolio collection dynamics, almost reaching pre-pandemic levels with Colombia getting to [ 83% ] of February's collection and Central America to 86%. Although collections may show positive trends along on the relief adequacy, there is still uncertainty regarding customers that are already indicating into early PDL ratio, consumers who are in the process of being admitted to second relief and payment which [indiscernible] after exceeding this program. Please move on to Slide 11, where we can see the evolution of past due loans, cost of risk and loans by sales. On the first table, you will see the [ 30-day ] delinquency ratio started to show the pandemic effect, closing at 4.9%, mainly driven by increasing risk levels in the consumer and commercial portfolios, although still lower than pre-pandemic levels. Given the deferral programs and flexible loan terms offered during the last 2 quarters, PDL ratios over 90 days are not yet showing the [ rich ] situation of the portfolio. In this sense, we will continue to see increases in past due loans in the coming quarters with 90-days PDL, beginning to relax by the end of the year and the beginning of the next one. At the bottom of the slide, you can see the consistent behavior of our cost of risk during this period of high levels of uncertainty and the deterioration of the economic levels. The cost of risk for the last 12 months closed at 3.22%, and the annualized [indiscernible] ratio closed at [ 4.13% ]. Third quarter's provision expense resulted from the following reasons. We update our forward-looking parameters based on more recent estimate of potential deceleration in the countries where we operate. This nature drove most of the quarter's expense. We also recalibrate our customers' stage specification based on newly available information regarding the payment behavior after the first relief, second relief request and delinquency. During the second quarter, we increased the Stage 2 in line with the volume of relief ranking at that time. However, as payments resumed, our Stage 2 decreased to 8.9%. Our Stage 3 increased to 4.5%, reflecting customers, whose payments capacity is still affected. In any case, our coverage of all stages have increased over this quarter, as you can see at the bottom right of this slide. Finally, we individually analyze meaningful corporate customers in diverse affected sectors and adjusted their provision accordingly. Our credit management has focused on monitoring the evolution of the loan book, improving the collection process and adapting originations to this new reality through analytics strategies and provision policies, ensuring the bank's sustainability in the long term. While still going through an uncertain period and our perspective over the next quarters is to maintain similar provision levels aiming to absorb potential credit losses. In this sense, which should be ending 2020 with a cost of risk between 3.5% and 3.8%. For next year, we expect cost of the risk levels between 2.9% and 3.4% with higher provisions during the first half of the year. Please take into account that this outlook depends on several variables, such as the evolution of our loan book, how the pandemic continues to develop and the potential [indiscernible]. Now please move on to Slide #12. Funding sources grew 70.2% over the year and decreased over the quarter with share [ raised ] devaluation explains around 4% of the annual growth. Demand in policies continue to increase, reaching [ 34.6% ], annual growth due to customer preference for liquidity instruments. In this sense, time deposit decreased compared to [indiscernible] period. Bonds has an annual increase of 5% annually and almost [ 2% ] quarterly. In terms of credits [indiscernible] reached 25% over the year, in line with the transaction mentioned in previous calls with foreign entities, multilateral and [indiscernible] bank. Our funding structure continues to be stable with deposits representing 75% of total funding and our loan-to-funding ratio closed at 94.7%. I would like to invite you to Slide #13. Total adequacy ratio closed the quarter at 11.15%, 225 basis points above the regulatory need. In December of the year, we have acquired $505 million in subordinated debt with foreign agencies to diversify our funding and to strengthen our capital ratios. Total capital adequacy ratio increased 25 basis points, explained by increases both in Q1 and Q2, as a result of our capital maintenance strategy, lower asset growth and higher provisions. Total equity increased 5% over the year and around 1% over the quarter. On Slide #14, the gross financial margin for the 2 quarters compared to our financial income. The low interest rate environment, higher competition, lower growth, increase in Stage 3 and portfolio mix change were the driver for the loan income. Investment increased quarterly as most valuation effects were captured in the second quarter of the year when the financial market recovered. However, the gross financial margin still shows resiliency on an accumulated basis, increasing by [ 12.6% ], helped by faster repricing of liabilities. 12-month net interest margin ratio closed at [ 6.36%], contracting compared to both periods, mainly by higher growth in performance assets versus the gross financial margin. We should continue to see compression in margin this year and part of 2021 due to lower rate effects and changes in FX mix. The third quarter provisional expenses reached to COP [ 1.2 ] trillion, increasing 17.6% quarterly. Accumulated provision expenses reached over COP 3 trillion, increasing [ 62% ] over the same period in 2019. Consequently, the accumulated net financial margin had an annual decrease of [ 16.8% ]. Please continue to Slide #15. The third quarter expenses decreased by 1.2%, in line with our last quarter guidance due to lower administrative expenses in Colombia and personnel expenses in Central America, and at March COVID-related costs were executed in the previous quarter. Accumulated OpEx continued to be impacted, increasing [ 13.2% ] as the first half of this and a part of this quarter was highly charged with pandemic costs, industrial formation and personnel expenses. However, when excluding currency change depreciation, COVID and [ new types of ] formation expenses over accumulated OpEx growth around 1%. 12 months cost-to-income ratio closed at 47.3%, increasing over the year. We expected to end this year with an OpEx growth between 9% to 11%, and our cost to fee income ratio to remain around current levels as income levels are expected to be low. To finish the presentation, I would like to go to Slide #16 to analyze the bank's profit. During the third quarter of the year, operating income showed recovery, increasing 12.3% as we resumed the charge of [indiscernible]. However, we expect operating income to remain pressured by lower economic activity. Net profit for the quarter closed around COP 48 billion and accumulated net profit at COP 394 billion. Our return on average equity for the last 12 months closed at 6.1%, while the return on average assets was [ 0.6% ] . 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. Thank you for your attention.

[Operator Instructions] And we'll take a question from Olavo Arthuzo of UBS.

I have 2. And the first one, I just wanted to understand the banks. Have you related to the scenario for the unemployment rate in the country and the impact on overall delinquency. Because as you may know, a large number of economists is expecting for Colombia to post one of the highest unemployment rates among the Latin American countries for this and also the next year. So my question is, how does the bank see such an impact on delinquencies? And will the cost of risk continue trading high for the next year? And if so, at what levels could we expect it to reach?

Yes. My name is [ Andres Langeberg ]. I'm the Chief Economist of the Banco Davivienda. I would like first to address the question regarding the interest rates. Definitely, we expect the Central Bank to have very low interest rates for the coming months, even more than 1 year, it could be probably 2 years. So you have to take that into account. I would not answer the questions related to the bank, to the effect of the interest rates on the bank. I will leave that question for Ricardo. The second question is regarding the unemployment rate. But if you -- I think you have to look at the change in employment, not the unemployment rate. And the thing is that, yes, the participation ratio in Colombia increased very much as a result of the pandemic. But if you look at the comparison of the variation in employment and you compare that with other countries, especially Peru or even Chile, you will find out that the situation in Colombia is not so different. So the very high unemployment rate is the result of the very high participation rate, which is somehow related to the size of the informal sector in the economy. But as I mentioned before, if you adjust for the participation rates, you will find out that the unemployment situation in Colombia is not as high as the unemployment rate shows. Then I will give -- Ricardo Leon will answer the second part of your question. Thank you.

Thank you for your question. Associated to the forecast that we have related to the GDP and inflation unemployment we establish -- we use a model to estimate our -- the behavior of our customers, consequently, estimate the cost of risk. But however, it's important to explain the behavior of the PDL. Our 30-day PDL ratios are already showing some of pandemic effect with the consumer and commercial portfolio having more pressure. However, our 90-days PDL are still affected by relief [indiscernible] starting to react by the end of this year and beginning of the next year as our relief programs end. The peak in the ratios might be by the first semester of 2021, second half of 2021. It is still too early to determine the levels. They could range. It depends on several variables of the economic evolution, the pandemic and the potential resurgence of the virus. But at the end of 2020, we estimate the PDL around 4%. And in 2021, the peak will be around 4.5%. In terms of cost of risk, we have been consistent in the provision expenses to [indiscernible] incorporating adjustment to macroeconomic variables, as I said before, and information about our customer risk profile and obviously, the behavior of our customer when they have been returning to their habit to pay the obligation. So we are still under uncertainty. We will maintain similar provision level for the [ fourth ] quarter of 2020 and end the year with a cost of risk between 3.5% to 3.8%. For 2021, we expect level of 2.9% to 3.5% with a very important effort in provision during the first half of the year. And so that is our forecast related to the cost of risk for the end of the year and for 2021.

Okay. Okay. That's very, very helpful, those guidelines. So my second question, if I may, it's related to the profitability levels for the future. So very straight to the point, during this 9 months of this year, the bank reached an ROE of 4% -- 4.1%. So what is the sustainable ROE the bank believes as feasible to achieve? And what should be the main drivers for that?

Thank you [Audio Gap] our profitability level has [Audio Gap] OpEx [Audio Gap] a lower operating [indiscernible]. For this year, we expect an ROE around [ 3% ]. And in 2021, an ROE between to -- 7% to 8% to return to a level of 14% in 2023. So these are preliminary figures. So you have to understand that there a lot of uncertainties. But [indiscernible] our [indiscernible] figures for 2021 and obviously 2020.

Sorry, if you could repeat, what is the expectations for 2021 because I just missed it?

Okay. For [indiscernible] 2021, we are expecting an ROE between 7% to 8%.

[Operator Instructions] We'll move next to Carlos Gomez-Lopez of HSBC.

Could you give us some details about how both activity and asset quality are evolving in the different geographies where you operate? And just the considerable differences between Costa Rica and the rest of Central America versus in the Colombian market?

[Audio Gap] [ negative 5% ] and that is mainly Honduras and in El Salvador and Panama around [Audio Gap] and Costa Rica being around minus 5% to 6%. The asset quality of all those countries are very [indiscernible]. We have around 5% to 7% of our portfolio [Audio Gap] payment plan. And then we expect to have also [Audio Gap] for this year and 2021, as Ricardo mentioned, and [Audio Gap], as he mentioned before.

So can you repeat again? So you expect the cost of ratio, you expect it to increase next year. As you have explained, you already have reserves to loans of around 5.5%, I think. And where do you think you need to go?

In terms of cost of risk or...

In terms of reserve -- accumulation reserves to loans?

In terms of [indiscernible] provisions, we expect to end this year with around a 45% [ increase ], and we expect to have loan loss expense for next year about the same amount for the -- some of the whole countries for next year 2021.

So the same amount in absolute terms and in terms of provisions that you have to create to the income statement?

[Operator Instructions] And there are no further lines -- actually, we do have a follow-up on the telephone line, Olavo Arthuzo of UBS.

Yes. And it should be a very, very quick question related to the fintech risk and especially when talking about new bank because, as we know, the banks are starting to focus on Colombia. And I just wanted to understand the bank's view related to the start of the operations of new bank with the offering of credit cards free of charges and no payments for maintaining the checking accounts, et cetera. I just wanted to hear from you guys, what is your view related to the debut of new bank in the country?

Thank you very much for the question. Well, I think that we will have, here in Colombia, new bank and many other players, digital banks very, very soon. We have been working in our bank, making big effort to the sales, become a digital banker to -- Davivienda to become a digital bank and to have a very important advise to develop the strategy. So that is a sample of [ rapid ] as well. As we are working with them with the very successful results so far, and we expect to [indiscernible] to work with them. As well, we are working with others like Apple. And we are the players in several countries, and we are going -- we are offering customers with different type of products in their store. On the other hand, we have DaviPlata. We have developed this platform that are today and about 11.2 million customers and in this pandemic [Audio Gap] time we have got 5 million new customers. And it has about 1 million debit [indiscernible] [ digital ] card. So we are offering [indiscernible], all of deposits with no cost [indiscernible]. So they don't have to pay for the debit card or paying for the [Audio Gap] digital accounts. So what we have now is a set of different strategies that will become -- will make Davivienda become [indiscernible] competitor to these new players or a new [indiscernible] be able to make -- [ keep in tight ] alliance with them. And new bank announced that it's going to start [indiscernible] with more lines in -- more banking lines at the beginning. They are offering -- they announced that they will offer credit card. But I think that we have the chance to be finally very good compared to those new players in Colombia. And finally, we will be able as well to increase our market share in the personnel and retail banking in the country. So we welcome them. We know that they are going to be very good players, but we think that we have been working these 5 year very hard to become the player -- the big digital player that are going to be an important player in the future.

We'll take our next question from Johanna Castro of Itaú.

I was just curious because I was wondering you -- I guess, you manage a lot of big data from your SME clients for a large history. And I was wondering if you can share with us if you have had any sort of analytics that you can share about the volume of the transactions, the interactions and payments between the SME that you can actually use as an anticipated indicator of how the SME are behaving in the economy as a whole, and as clients of yours. I was just wondering if you can share any data that from the bank's operational data that you can tell us just to be a little bit ahead of what's going on in the payments and in the SMEs portfolio.

Johanna, thank you for your question. Actually, we have been working in analytics to identify or to define different cluster to analyze our customers, not only in SMEs, but also in retail bank. So when we started this process, we used in an already defined, in the case of SMEs, more than 14 different cluster to analyze -- in the simple term, we define customers in red, in orange yellow, blue, green, et cetera. And depending on the cluster, we define different policies to define what kind of situation request any customers. So in -- with that definition, we define with the credit area, the structure of the liquidity of [indiscernible] and define what kind of relief each customer can take. So in terms of the quality of the store volumes, obviously, in the smaller SMEs, the behavior is a little bit different to other SMEs because many sectors of the economy have been probably -- especially in that level. But we have been analyzing each [indiscernible] elements, not only since the credit area, but also joint effort with the commercial area. So now we don't see any different -- we don't have any different explanation related to small business more than that the level of relief has been right now around 7%. And obviously, the most important portfolio that has been incorporated in this process are the retail business and also the small and medium business in that segment, the small and medium business. I don't know, Ricardo, you have another comment about that?

Well, I was more asking about volume transaction, if you can follow-up, if your SME clients are actually paying their providers, but like in big data, consolidated numbers. Like if you compare quarter-on-quarter, they pay or not on the third-party providers, not to you directly, but I guess you manage a lot of the payment systems of these SME. So I was just wondering if you could share some of that third-party kind of information, but it's fine.

Yes, absolutely. We use the all information related to different kind of transaction, the behavior in the past. And with a lot of information, we estimate the provider of the follow of the company. And obviously, if it's possible to give a release or not. But if you want Johanna, we can explain a little bit more in the scenario with -- by mail, okay?

And there are no further questions over the phones. I'd be happy to return the call to i-advize for any webcast questions.

Thank you, Leo. We have a couple of questions on the webcast. The first one is from Piedad Alessandri from Credicorp Capital. Could you give us a bit more detail on your NIM expectation for 4Q '20 and 2021? Regarding asset quality, do you see any segment in commercial book at high risk of corporate cases?

Thank you, Piedad. Your first question will be taken by David Pedraza. And the second question by Reinaldo Romero. So please answer.

Thank you, Piedad. This is David Pedraza. In terms of NIM, we are expecting the margins and NIM in general to decrease, considering the following elements. The first one is that we are operating under a lower interest rate environment as the Central Bank rate is at historical lows and is expected to remain stable for the next of this year and perhaps at least the first half of the next one. Second element to take into account is the lower income that we are receiving due to the economic activity slowdown. On the other hand, changes in our portfolio mix, given the commercial segment growth, which is growing a little bit extra than the other 2 segments. And finally, the increase in Stage 3 loans. So with all of this mix together, what we are expecting is that the NIM for 2020 should be around 6% to 6.2%. And for 2021, we should be expecting a NIM between 5.8% and 6%.

Piedad, my name is Reinaldo Romero, the Corporate Credit President. We are permanently and closely monitoring the different sectors in the countries where we operate. We continue to evaluate the different sectors affected by pandemic. And we have clarified them according to how long the recovery time take. For example, in the long-term recovery, transportation, the hotel, stores, services, travel agencies, restaurants and entertainment, our exposure in this sector is less than 2.5 of our portfolio, and we don't have behavioral situation that we layer up. In the medium-term recovery, we have some sectors, real estate funds held, our exposure at this moment is near to 10% of the portfolio. And the short-term recovery in energy, infrastructure and in other sectors is more or less the 6.5% of the consolidated exposure. In this moment, we are probably holding conversations with all those customers, trying to get a more present diagnostic of their current situation, anticipating to more complex situations as they needed the thing with them a condition for their credit. But in general terms, we think that the portfolio is a good situation. We have to issue the level of the risk continually in this process.

We have another question from [ Diego Alban ] from [ Global Lex ] . Do you expect any changes in 2021 tax growth affecting the Colombian financial sector on the brink of a new tax reform?

Diego, thank you for your question. Juan Carlos Hernandez, please?

Okay. Diego, Juan Carlos Hernandez, Accounting and Tax Vice President. Okay. According to the government explanation, in 2020, Colombia will not have any tax reform. On an [indiscernible] considered is not proper for the country to do a tax reform regardless of our revenue impact. The initiative depends on the legislation process evolution and the recommendation on the government and the [indiscernible] group that advice. As of today, there is nothing concrete about it. And in this condition, until now, we don't have information regarding on this tax reform in 2020. If we have any valuation, we comment in our next conference call. Thanks.

At this time, I'm showing no further questions. I would like to turn the call over to the operator.

[Operator Instructions] And there appears to be no further questions at this time. I would like to turn the floor back over to Mr. Forero for any closing remarks.

Thank you very much for everybody for being with us today. We will keep working very, very hard to handle this difficult situation that we have in all of our countries. However, we feel optimistic that we will have a new year 2021 in which we'll be willing to recover, the economies in the consistent year than we are actually. So we expect to have a better result coming in the coming years, and we are optimistic about evolving in the difficult situation. Thank you very much for your attention and support.

This concludes today's conference call. You may now disconnect. Everyone, have a good day.