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 Fourth 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, and good morning, everyone. Welcome to Davivienda's Fourth 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 from the press release issued 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 the discussion during this call. If you need any assistance, please contact i-advize in New York at (917) 710-4806. 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 Fourth Quarter of 2020 Earnings Conference Call. Before I start, I just wanted to acknowledge what a challenging year it has been for everyone due to the coronavirus pandemic. Particularly, I want to pass on our best wishes to our customers, to our people in Colombia and Central America and to all our different stakeholders. During this year, we have been doing our best to support our customers adapt to the new circumstances and continue to execute our strategy to deliver results across all our main objectives. In today's presentation, we will discuss the evolution of the economies where we operate. We will also comment on the bank's financial results, the step we have taken in our digital transformation path and how we are expecting our business to evolve. When looking at Colombian's economy evolution on Slide 3, with Colombian economy contracted 6.8% in 2020, the largest drop since 1975. The pandemic had consequence for employment and the economy in general and led to structural changes in the monetary policy. Mining, manufacturing, construction, commerce and artistic activity also recorded the worse figures in history, registering falls of more than 15%. Through the PMI indicator, we have observed better dynamics in the manufacturing industry in recent months. We expected the Colombian economy to grow by 5% during 2021. The Central Bank cut its interest rate by 250 basis points during the year, reaching a historical low of 1.75%. For this year, we are expecting interest rate to remain stable, considering the low expected pressure from inflation. Moving to Central American on Slide 4. The situation was not different from the rest of the world. Panama presented the largest contraction in the region, following by El Savador, Honduras and Costa Rica. The latter did not have as severe restriction as the rest of the region. We expect growth of close to 4% for the entire region for this year. In the current scenario of low rates and COVID-19 restrictions, banks will have a challenging environment. Moving on to Slide 5. You can see the main financial figures of the year and some relevant strategic advance achieved in 2020. As we have discussed before, the current environment significantly changed the risk landscape of the bank, impacting the financial result this year, closing at COP 408 million. During 2020, COP 4.2 trillion were established as provision to protect the loan portfolio, credit risk increasing 72.5%, and reaching a cost of risk of 3.94%. Despite being a challenging year, we made relevant progress on different strategic fronts. In Colombia, we increased our market share by loans by about 90 basis points, reaching a participation of 16.4%. We remained as the first player in mortgage financing and continue to increase our share in the SMEs business in Central America. We also had the opportunity to reach more people and companies, increasing our participation to 10%. As a result, our consolidated gross loan portfolio grew 9.5% this year, mainly driven by the dynamics of the commercial and mortgage portfolios. We continue to consolidate our leadership, closing the year with nearly 70.5 million customers in Colombia and Central America. These results come with prudent balance management thanks to the bank's resilient capital funding and liquidity position. The total consolidated capital adequacy ratio increased 69 basis points over the year, while the common equity Tier 1 ratio increased by 27 basis points. Continuing to Slide 6, I would like to share some results of our main business lines. It is important to note that our priority had been support our customer through this crisis and contribute to the economic reactivation of the countries where we operate. We were able to act as quickly as possible, thanks our people's commitment, our technology capabilities and our strong financial position. Our retail banking portfolio grew over 9% during the year, driven mostly by the modest dynamics in the Colombian market. During last year, we were able to provide financial relief to over 1.2 million customers in Colombia and Central America in this segment. We were also able to adapt our mobile credit process in record time to facilitate access to self-employed customers in Colombia to create lines with the support of the National Guarantee Fund. We disbursed over COP 350 million in this credit line, being the leader in the financial sector. Through DaviPlata, we facilitated payments of subsidies to about 4.5 million Colombians participating with 68% of the total payments, consolidating ourselves as a strategic ally for the Colombian government financial inclusion programs. As for the commercial banking segment, the bank grew 9.6% over the year. We helped companies and business adapt to the current environment, facilitating the access to solution and new resources that would allow them to resume their operating activity and maintain their liquidity positions. We disbursed more than COP 2 trillion in new lending under government's guarantee program and second level banks' credit lines. Regarding our wealth management division, assets under management increased above 12% despite the higher volatility and uncertainty faced during the year. Part of this result is explained by the effort made by our team to improve the way in which they communicate with our customers to help them navigate through these difficult times. As an example, our market share in mutual funds increased 130 basis points in this period. We also launch our first ESG mutual funds to offer new investment possibility to our customers in line with our sustainability strategy. It's important to recall that in 2019, we established a financial corporation through which we aim to diversify the investment alternatives to our operation, helping us in the process of increasing our value offer to our customer. In this sense, during 2020, we have started to build our portfolio that is expected to be comprised of start-ups, fintechs and renewable energy initiatives, among other types of investment that fit our strategy. With this, we seek to stay on the leading edge of innovation and maintain our digital banking leadership position. Please move on to Slide 7. We are committed to sustainable and responsible business practice following the higher purpose we shared with Grupo Bolivar: to enrich life with integrity. And we work every day to generate prosperity, welfare and joy in people. In this sense, we have continued working on developing our environment and social commitments. In 2020, we acquired loans worth $640 million with multilaterals and international agency to finance our environmental and social portfolios, while increasing our capital ratio with a portion of these resources. Our sustainable portfolio reached COP 2.8 trillion. We also became official follower of the task force on climate-related financial disclosure or TCFD. We have a lot work ahead of us, but we already started working on these guidelines. In the meantime, we continue to be part of the Dow Jones Sustainability Index and the RobecoSAM yearbook, along with other initiatives which will drive the inclusion of sustainability best practice across our different businesses. For the social sphere, we have helped to include in the financial system over 4.2 million people through DaviPlata, contributing to increase in digital adoption and decreasing the use of cash in Colombia. This year, we increased donations to COP 52 billion to contribute mainly to improve health infrastructure and deliver 1 million food packages to the most affected sectors for the COVID pandemic. Please continue to Slide 8, where we will review the evolution of our digital transformation. As you know, the pandemic accelerated digital adoption around the world, and we were no exception to that situation. Nowadays, 84% of our customer frequently use our digital channels to do their banking. Digital depositors and loans show a relevant increase compared to 2018. Outstanding deposit balance grew 3.8x, while loans increased over 6x. As you can see on the right side of the slide, trades through digital channels reached around 50% of total sales and 52% of total monetary transactions were done in a digital way. This progress is the result of our continued effort to evolve our business's model through investments in technology and innovation. Now please move on to the DaviPlata section. DaviPlata, our digital native bank, consolidated itself as 1 of the most important platforms during the pandemic, becoming a tool to facilitate access to resources and electronic payments to more than 11.6 million people. In 2020, our platform almost doubled the number of customers, adding 5.5 million during the year, almost 4.7 million customers out of the total as other products in the financial system and become an opportunity for the bank to offer them all of our service and product. On another front, I am proud to announce our new alliance with Metro de Medellín to create a smart city ecosystem through the Civica App. This alliance involves creating a unique model for people to commute and manage their money easily. Civica App is an all-in-one city app that integrates your cab payments for the transport system, explore purchases and fund transfer from mobile devices supported by a bank and specifically, in this case, by the Davivienda platform, becoming a world-class innovation. On the bottom of the slide, you will see some main figures about DaviPlata. The outstanding balance in digital deposits reached COP 521 billion, increasing 352% compared to 2018. During the same period, transactions income fees double, reaching almost COP 76 billion. Also, we have been able to process 4x the number of total transactions and triple the number of e-cards. As you can see, we continue to gain traction and consolidate our DaviPlata as our native digital bank. During my presentation, I would like to say that there is considerable uncertainty in this period ahead. However, we have consistently focused on executing our strategy and continue to manage our business. We have a strong balance sheet, diversified funding sources and adequate capital ratio to support different economic scenarios. We will continue working hard to support the economic recovery of the countries we operate in, developing our people's talents, basing our decision on using data and analytics, making alliance with world-class partners, and transforming us to be closer to our customers, enriching their lives with simple, reliable and friendly experiences. Let me turn the call over to Mr. Ricardo Leon, our Executive Vice...

Thank you for the introduction Mr. Forero. Good morning, everyone. Please move on to Slide #10, where we analyze the assets evolution. Total assets grew around 12% in 2020, mainly driven by increases in the investments on loan portfolios. The share rate and devaluation explains around 2% of this growth. During the year, we maintained adequate liquidity levels with cards and interbank funds increasing 14% over year, in line with the excess of liquidity observed in the market. Our investment portfolio grew 32%, mainly due to mandatory investments in Colombia. And it has also related to lower legal reserve requirements as well as movement in our trading portfolio. Gross loans increased by 9.5% on annual basis and decreased 4.4% compared to the previous quarter. Our loan loss reserve reached COP 6.4 trillion, increasing over 54% annually. In this sense, loan loss sales to gross loans reached 6%, increasing over 170 basis points, reflecting our constant provisioning effort throughout the year. Colombia assets showed an annual growth of 13% due to higher gross loans investments and interbank funds. While our international subsidiaries have slightly grew 1.5% over the year in dollar terms and mainly driven by higher investments. Please move on to Slide 11. Gross loans grew 9.5% over the year, mainly explained by corporate demand in the first quarter of the year and the dynamics in mortgage in Colombia. Part of the annual growth is also explained by the evolution of the consumer portfolio during the first quarter and accelerating heavier during the year. During this quarter, the gross loans portfolio contracted 4.4%, mainly due to prepayments of corporate customer for COP 1.1 trillion, write-off in the commercial portfolio of around COP 640 million and the lower dynamic of the consumer portfolio. Excluding the foreign exchange effect, gross loan contracted 2.4% over the quarter. In the international operation, mortgage and consumer loans grew mainly in El Salvador and Honduras. And the commercial portfolio decreased due to repayments and lower credit demand. Moving on to Slide #12. On this slide, you can observe how relief and collection has been evolving since the beginning of the pandemic. By the end of December, around 7% of Colombia's loan portfolio and 17% of the Americas loan book were under some kind of relief. In Colombia, the debtors relief program was extended until June this year. So we might see more customers being restructured under this framework mainly driven by the commercial segments as individual analysis and negotiations take more time to be in place. In Central America, regulatory measure for relief accounting treatment were also extended and will be expiring throughout the year. However, we leave a special collection measure maybe offer until June if needed. Regarding the collection from the total portfolio, we continue to see recovery, Colombia, reaching 91%; and Central America to 95% compared to the last February. And of today, around 87% of our consolidated loan book is up to date. In any case, we are looking at customers whose relief already ended. We observe that around 2% to 3% of them remain with the payment capacity affected. Please move on to Slide 13, where we can see the evolution of past due loans, cost of risk and loans by stages. And you can see on the top-left table, PDLs are already reflecting the pandemic effect with the consumer and mortgage portfolio being the most impacted. There are some factors to take into account when analyzing current consumers PDLs. The first is related to the loan growth deceleration observed since March 2020, which explained around 140 basis points of the current deteriorations. The second effect is related to relief mitigation. As we offered over 4 months of deferrals in the consumer portfolio, loans were up to date for our loan period. And the deferral right up to 2020, for the consumer book were lower than a normal year average, especially in the second half of the year. This effect accounts for around 200 basis points of the ratios deterioration. And finally, we have the portfolios' reaction to the pandemic, which explains away the [indiscernible]. The negative PDL for the mortgage portfolio is showing some deterioration. However, we expect our customers to catch up with their debt and don't see much risk materializing in the 120 days PDL. Additionally, this portfolio is adequately covered with a loan-to-value of around 45%. PDL for the commercial portfolio are showing the lower levels of the year, mainly due to growth in low risk profile as well as different restructuring process in Colombia under the debtors relief program framework [indiscernible]. At the bottom of the slide, you can observe our cost of risk, which closed at 3.94% for 2020 and at 4.44% for the quarter. Provision expenses for this quarter result mainly from the increase in our stage 2 and 3, in line with delinquencies observed mainly in the consumer and mortgage portfolio. However, we also continued to strengthen our coverage for these stages, as you can see at the bottom right of the slide. We have been taking different measures to establish adequate provision levels for our portfolio by better understanding possible scenarios, incorporating new information about our customers' schedule as well as adapting our origination policies. However, it's important to know that the countries where we operate are facing through the second peak of the pandemic, which may have further effects on that economic and bank results. Now please move on to Slide #14. Funding sources grew 12.4% over the year and 3% over the quarter. We accelerated our provision expense around 2% of the annual growth and almost all of parties' compression. This year, we had an increase in low-cost funding sources, as shown by the 31.2% growth of demand deposits, while the term deposits decreased compared with both periods as consumers overall had preference for higher liquidity. Bonds decreased by around 7% quarterly due to maturities of subordinated instruments, both in Colombia and Central America. In terms of credits, growth reached 6.3% over the year due to the different transaction with foreign entities and multilaterals by $640 million. Our funding structure has slightly changed by deposits now accounting for 76.4% of total funding, which allows us to take advantage of lower financial expenses as we will see in the coming slides. I would like to invite you to Slide #15. Total capital adequacy ratio closed the quarter at 12.3%, 331 basis point above the regulatory minimum, increasing both over the quarter and the year due to higher Tier 1 and Tier 2. This is explained by our capital maintenance strategy, lower asset growth, higher provisions as well as adjustment on the value of risk estimation with the bonds. Since December 2019, we have acquired $775 million new Tier 2 issuance with foreign entities to diversify our funding, increase our capital ratios and improve the quality of our capital. Total equity remained stable over the year and decreased 2.2% quarterly, mainly due to the foreign exchange effect over Central America's equity. On Slide #16, the gross financial margin remains resilient, thanks to our liability management strategies and faster liabilities divesting. The current interest rate environment, higher competition and level of nonperformance loans as well as portfolio mix changes lead to our own income decrease over the quarter. On the accumulated basis, however, loan income increased 7.4% due to a base effect after commercial loan income was lower in 2019. Investment income fell quarterly due to valuation effects captured during the third quarter of the year, while remaining relatively stable on accumulated basis. As a result, the gross financial margin expanded 3.1% over the quarter, and 13% on the accumulated basis. 12-months net interest margin ratio rose at 6.29% slightly increasing quarterly and contracting over the year as a result of higher growth in performance assets versus gross financial margin increase. Provision expenses closed around COP 1.2 trillion in the fourth quarter, reaching an accumulated figure of COP 4.2 trillion for the year, which means a 72.5% increase compared to 2019. Consequently, the accumulating net financial margin had an annual decrease of 21%. Please, continuing to Slide #17. The fourth quarter expenses increased by 6.4% due to administrative expenses in Colombia related to marketing, IT development and depreciation. Accumulated OpEx closed the year with a growth of 11% in line with our guidance, explained by the pandemic costs, exchange rate and digital transformation. When excluding these 3 effects, OpEx rose around 2% over the year. 12-month cost-to-income ratio closed at 47.1%, increasing over the year. I would like to go to Slide #18 to analyze the bank's profits. During the fourth quarter of the year, operating income continued to recover, increasing by 16.9% due to higher transaction and productivity as well as insurance premiums. Net profit for the quarter closed around COP 14 billion, leading to an accumulated profit of COP 408 billion. Our return on average equity for the last 12 months, closed at 3.2%, while the return on average assets was 0.3%. To finish the presentation, please move on to Slide #19, where we will share with you the general trends we expect for our business this year. For 2021, we expect our consolidated book to grow between 7% to 9% with the corporate and SME segment leading the recovery followed by lower-risk personal banking, mainly [ no risk ]. We will continue to see increases in the baseline during the coming quarters with 90-days PDL ratio remains above 4% during the year. We should be ending 2021 with a cost of risk around 3% to 3.2% with higher provision with the first half of the year. Please take into account that this outlook depends on the performance of our loan book and the evolution of the economy, to no [ continuous ] wave and vaccination calendars. Regarding margins, our net interest margin should slightly compress, closing the year around 6% due to higher competition, changes in asset mix, assets repricing lower, leading for an increase in liability expenses as well as lower income from investments. We will continue to look for alternative income sources through our strategic alliance and other investments and expect operating income to return to pre-pandemic levels. On the OpEx side, we will continue working our efficiency and growth control while reaping the benefits of our digital transformation process. We expect to end the year with an operating expense worth between 5% to 7%. We have an investment plan of $250 million between 2021 and 2023 to develop new projects and digital transformation initiatives. As a result of the latter, our profits should remain pressured during this year with a return on average equity around 6% to 9%. As for -- on capital ratio, we will be reporting Basel III numbers next quarter and expect to have increases of around 300 basis points in our ratios, which will leave us with adequate levels to leverage our business model. In general, these are the results we have prepared for you today. At this time, we can move now to the question-and-answer session. Thank you for your attention.

[Operator Instructions] Your first question comes from the line of Thiago Batista of UBS.

I have 2 questions, the first one about DaviPlata. We are seeing several banks in Latin America trying to split or at least to have a kind of independent structure for their digital business. Do you see any room to do that with DaviPlata? And if you can share to us if DaviPlata would have a positive bottom line if this business become independent. So how profitable is DaviPlata right now? And my second question is about the medium-term ROE. I know that the situation -- the outlook is not so clear yet, but what's the level of ROE that you believe Davivienda could achieve in a couple of years?

Thank you very much. I'm going to answer about DaviPlata. Last year was really a fantastic year for DaviPlata. We could -- we were able to have new customers, 5.5 million customers. Among them about 2 million where people that didn't have any type of relationship with the system and about other 2 million were customers from other banks. So DaviPlata is giving us a very important value, having the opportunity to work with the base of the pyramid businesses in which we are really very interested. And as well, we are having now the chance to offer for about 4 million customers that have products with other banks, to offer our banking financial products for them. So that give us really a very good opportunity, and it has a lot of value. However, we are working now to develop the ecosystem that we hope to have this year mainly with the business, with the alliance that we made with Medellín and -- with Metro de Medellín and also to work with an ability, an improved ability to offer value-added services to those people that are going to have the subsidies from government. We are going to pay about 2 million payments every 2 months, making this possible to pay to those people, the subsidy that actually we are giving them in cash. But we wanted to work -- to have different offers to them in terms of having the ability to buy its own products and better condition for them. So we are going to work very hard improving the ability of the bank to develop this ecosystem and these value-added services. And then we will have -- we will think that we are ready to become an autonomous bank, a native digital banks, and at that time, we will make the spin-off of the DaviPlata business. Not before that. But we believe that the value of DaviPlata is really very, very, very high. And we will improve it in the moment that we are able to offer it out possibilities to different countries, not only in Colombia, but in other places in Central America or maybe to become an international player.

Related to your second question about the ROE that we are going for the coming years. Our -- the ROE that we're expecting for 2022 is to have an ROE around 10%. And in 2023, we believe that it's possible to return, again, our regular ROE with ROE close to between 12% to 14%, obviously, supported by a recovery in the economy with a GDP growing in a regular basis in Colombia.

[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. Actually, we do have a question, my apologies. We do have a question from Natalia Corfield of JPMorgan.

It's about the impact of the introduction of Basel III in your capitalization. If you could give a little bit of color, how much are you expecting in terms of increase of your core equity?

This is David Pedraza. Effectively, we have been working throughout this year in the implementation of the new standard. Considering the different evolutions that the regulation has had, there has been some improvement in the previous guidance we were providing the market about the improvement of the implementation of the new regulation. As of now, we believe that perhaps it should have a positive impact of around 300 basis points of increase by including all of the different changes that the regulation establishes. It is also important to mention that even though we have been working through 2020. At the end of 2019, we were working in obtaining new credits that were considered as Tier 2 instruments. In total, since December 2019, we obtained $775 million for that purpose. And that is the continued process of maintenance of the different capital levels. And that's something that even though we obtained the 300 basis points, we will continue to do going forward in order to guarantee that we have the most adequate levels to leverage the business.

Okay. And then another question, if I can. Regarding your existing bond in international markets, do you have any plans of liability management?

Sorry, could you repeat the question, please?

Yes. Regarding your international bonds, do you have -- which is Tier 2, and I understand is already losing regulatory capital treatment. So my question is, are you considering any type of liability management of this bond.

Yes. The bonds actually are losing treatment for capital purposes, and that's one of the reasons why we were doing maintenance in the Tier 2 instruments, obtaining the new credits. As of now, those bonds have 2 years left. They are weighting 40% for capital purposes. And it's possible that we could do a liability management transaction. That's something that we are currently analyzing and it depends on the levels of the interest rates, et cetera. It's part of the maintenance that I was mentioning in the previous answer.

[Operator Instructions] We have a follow-up from Thiago Batista of UBS.

Just one small question about the PDL. You mentioned that you guys are expecting the NPL ratio to be above 4%. But can you give a little bit more details on how much NPL should increase during this year?

Thank you, Thiago. Ricardo Leon. At the end of the year, we believe the PDL level will be around 4.2%, 4.4%. This number includes a write-off, which will be concentrated in the first half of the year. We believe that in Colombia, we already saw the peak, and that PDL could be closing around 4.5%. And in Central America, the peak may happen by midyear with leverage close to 2.7%.

And there does appear 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 everyone for being with us today. Thank you a lot. It's been a really very difficult year for all the year 2020, and we foresee a complicated year for the year 2020 (sic) [ 2021 ], however, it's going to be really very different because we will be expected the positive evolution gradually in the recovery of the economies in the countries that we are working. So we believe that we are going to improve our results, as we mentioned before, for this year. And finally, during the year '22 and '23, we hope to be able to increase the ability of the bank to generate profits. Thank you very much.

This concludes today's conference call. You may now disconnect.