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

Welcome to the Davivienda First Quarter 2021 Earnings Conference Call. My name is Richard, and I'll be your operator for today's call. Today's presentation 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. Pedro Uribe, International Executive Vice President. During the call, they will be discussing the results for the press release distributed yesterday. If you have not yet received a copy or of the earnings report, please visit our Investor kit or the Financial Information section at ir.davivienda.com. [Operator Instructions] Please note that this conference is being recorded. [Operator Instructions] Before proceeding, let me mention that any forward-looking statements are being made under the safe harbor provided by the Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking statements as a result of macroeconomic conditions, market risks and other factors beyond our control. It is now my pleasure to turn the call over to Mr. Efraín Forero, Chief Executive Officer.

Good morning, everyone. Welcome to Davivienda's First Quarter of 2021 Earnings Conference Call. Thanks for joining us today. I hope that all of you are safe and healthy. Moving to Slide 3, I would like to talk about the macroeconomic environment we face right now. During the first part of this year, we have observed some positive events in the world economy, driven by the effectiveness of some vaccine and economic evolution in the United States given its leadership in this process, improving growth expectation. In addition, demand for raw materials has increased due to the behavior of the Chinese economy showing positive effects on the prices. In this sense, the improvement in U.S. growth has increased inflation, which has generated an increase in treasury interest rate, dollar appreciation and increased risk premium for emerging countries. When looking at Colombia's economy evolution, we observed better growth in the first quarter, driven by the increase in oil prices, lower mobility restrictions and a base effect compared to last year's GDP. Nonetheless, economic expectation and business confidence have deteriorated by the social unrest generated by the fiscal reform and the social impact that the pandemic has developed on the most vulnerable groups in society. Demonstrations have affected the regular activity across the country, decreasing growth expectation for the second quarter. In response to the events, the government withdrew the fiscal reform bill and is working on a new proposal that is expected to be the full [ use ] of consensus. This fiscal reform is a critical factor for Colombians public debt dynamics, and we will expect a net increase in revenues worth at least 1.3% to 1.5% of GDP. However, the final proposal is still under definition and it is still too early to quantify its potential impact. Despite this, we trust in the stability and independence of the economic institution in Colombia and highlight that the debt management by the Colombian government has been exemplary throughout history. Considering all the above, our GDP expectation for this year are around 5% compared to the Central Bank's expectation of 6%. Moving to Slide 4. We can see the highlights of the macroeconomic situation in Central America. In 2020, Costa Rica was the country with the lowest economic contraction, while Panama showed the most relevant impact derived from the COVID-19 pandemic. During the first quarter, the regional economy showed better activity in all countries where we operate. Economic dynamics in the United States contributed positively to the region's growth as we observe a higher flow of remittances in El Salvador and Honduras. Also, lower mobility restriction during the first month contributed to the increased economy activity. However, the increase in oil price, the increase in infection rate and the speed of vaccination rollout in the region might impact the recovery path. Moving on to Slide 5. I will briefly walk you through the highlights of our financial results. In the first quarter of 2021, we generated COP 101 billion in profit, increasing over the quarter due to lower financial expenses, lower operating costs and higher income from exchange and derivatives. On the year-over-year comparison, profits were impacted by higher provision expenses and lower financial net income both explained by the COVID-19 pandemic. Our consolidated loan book expanded by 1.4% in the quarter to COP 108 trillion. Both mortgages and commercial loans showed positive dynamics. Regarding the net interest margin, we saw a compression of 20 basis points during the last 12 months, while the Central Bank interest rate decreased by 250 basis points. Investment income mainly explain the contraction in the last quarter. On the other side, we present the official capital adequacy ratios under the new standard adopted by the beginning of this year. Our consolidated CET1 ratio reached 11.81%, and our total capital adequacy ratio stood at 16.68%. On top of that, last month, we became the first Colombian financial institution to issue a per payroll Basel III-compliant additional Tier 1 bonds in the international capital markets. The principal amount was $500 million with bid-to-cover ratio of around 3.5x. The order book was composed of investors from over 26 countries, demonstrating the confidence of the international market in Colombia and the financial sector. Continuing to Slide 6, I would like to update you about our digitalization path. Our digital initiatives continue to gain traction at transactional and commercial tools. Digital sales represent 52% of the total sales, showing a positive trend during last year. In addition, monetary transactions through our digital channel increased their participation from 38% last year to 52% of the total monetary transaction. As you can see at the bottom of the slide, digital deposits, loans and investments showed really an increase over the year regarding digital product evolution. This year, we will continue working on this digital transformation path using technology to leverage our commercial potential and increasing our ability to offer more competitive products and solutions to our customers. Moving on to Slide 7. DaviPlata, our digital native bank, continues to show positive results as well. Our customer base increased around 600,000 customers during the quarter reaching COP 12.2 million. In this way, we continue to attract customers from other banks to use DaviPlata as a transactional platform that becomes an opportunity for the bank to offer them all of our services and products. The outstanding balance in digital deposits reached COP 503 billion, increasing 2.1x compared to 2020. Transactional income during the first quarter reached COP 22.4 billion, increasing 3.9x the amount generated in the first quarter last year. Also, transactions and eCard showed positive trends during the first part of this year. Purchases processed through the e-card, QRs and API reached close to COP 84 billion, increasing 4.9x compared to the previous year. In this sense, moving on to the next slide, I'm glad to announce the launch of 2 new features in our platform. Seeking to contribute to the economic reactivation, last month, we announced a social seller functionality called Mi Negocio, or my business in English, where entrepreneurs can create their own digital business channel with their DaviPlata. The e-entrepreneur will display their product offering on a digital platform at 0 cost, allowing them to leverage sales, share catalogs easily through the social network, control their inventory among others. Also, they can receive their payments directly to their DaviPlata accounts via direct transfer, QR code or interbank transactions. On this front, we have a serviceable available market of around 600,000 mom-and-pop stores and over 1.2 million social sellers. We aim to reach around 300,000 new customers in the following year. On the other hand, we also launched a marketplace where we seek to offer DaviPlata's customers' nonfinancial products and service to buy quickly and easily with their DaviPlata balance. We started with 35 different brands in the diverse categories, such as restaurants, clothing, digital content, and we continue to increase our offer going forward. With these new 2 functionalities, we aim to increase the activity of DaviPlata and promote economic reactivation in Colombia. To end my presentation, I would like to say that there is a considerable uncertainty in the periods ahead. This year will be more challenging than we expected after recent weeks in Colombia. We should see some short-term impacts on the cost of risk, NPLs and loan growth. Now let me turn the call over to Mr. Pedro Uribe, our International Executive Vice President, who will provide you with further details on the bank's financial results.

Thank you, Efraín. Good morning, everyone. I'm glad to join you today. Please move on to Slide #9, where we will analyze the asset evolution. Total assets slightly decreased over the quarter, mainly due to lower interbank funds and derivatives, reflecting lower counterparty operations and movement in the trading portfolio. When compared to March 2020, assets decreased by 2.6%, mainly impacted by a decrease in the loan portfolio. When excluding the exchange rate annual revaluation, assets remained stable during the year. The investment portfolio grew around 2% over the quarter and close to 16% over the year, mainly due to mandatory investments, as we have explained in previous calls. Gross loans increased by 1.4% during the quarter and compressed by 1.1% over the year. We will see the details of this behavior on the next slide. Our loan loss reserves closed at COP 6 trillion, decreasing around 6% over the quarter. This is explained by the current write-offs and despite the provision expenses made during the quarter. Write-offs totaled COP 1.7 trillion in the consolidated operation. However, on an annual basis, our loan loss reserves increased by 30%, reflecting our consistent provisioning efforts in line with the expectations we have previously shared with you. Colombia's assets showed a compression due to the lower cash interbank funds and derivatives, while our international subsidiaries assets decreased in dollar terms, mainly driven by lower interbank funds. Let's move on to Slide 10, please. Gross loans increased by 1.4% quarter-on-quarter, mainly due to the dynamics on the leasing and residential housing segments within the mortgage portfolio, and to the FX impact mainly over the commercial portfolio. The consumer portfolio decreased due to lower disbursements as well as write-offs during the quarter, which were resumed after a year of lower-than-average write-offs related to the relief measures. On an annual basis, the loan portfolio decreased by around 1%, explained by 2 reasons. First, the commercial book decreased as a result of our base effect related to specific disbursements during the first quarter of the last year as well as prepayments and write-offs during the fourth quarter of the year 2020. Second, the consumer book was also impacted by a base effect related to high growth rates seen before the pandemic, together with what we explained earlier. Excluding the exchange rate revaluation during the year, gross loans would have increased by 1%. In the international operation, the commercial portfolio increased by 1.1%, mainly driven by El Salvador and Costa Rica. And the mortgage segment grew in El Salvador and Honduras. Moving on to Slide #11. You can observe how relief have been evolving since the beginning of the pandemic. By the end of March, around 8% of Colombia's loan portfolio and 10% of Central America's loan book were under some kind of relief. In Colombia, the debtors relief program, or PAD program, will be in place until June this year. So we might see loans under relief stabilizing within the 7% to 10% range of Colombia's loan book. In most of our international operations, we are offering structural solutions on a case-by-case basis and will continue to offer special collection measures until June, if that is needed. In these countries, loans under relief continue to gradually decrease as the programs end. Regarding the underlying payment behavior of these relief loans, in Colombia, around 89% of the portfolio is up to date, and the proportion of past due loans over 90 days is 3%. In Central America, around 94% of the portfolio is up to date, and past due loans over 90 days account for 1%. Even so, we remain cautious about the evolution of this portfolio as the coming contraction waves in the different operations could further impact economies on top of the current situation in Colombia. Please move on to Slide 12, where we can see the evolution of past due loans, cost of risk and loans by stage. As you can see on the top left table, the total PDL over 90 days decreased over the quarter as we did some write-offs mainly in the consumer portfolio after a year of lower-than-average write-off products due to relief measures and a synthetically up-to-date portfolio. The commercial portfolio PDL increased mainly due to customers in the air transportation and construction sectors. The 120 days PDL for the mortgage portfolio returned to slightly higher levels than before the pandemic, reflecting the increase seen earlier on the 90-days PDL and the end of the relief periods. Although recent behavior shows these ratios already stabilizing, we do expect them to remain around current levels, at least during this year, due to the portfolio's longer duration. At the bottom of the slide, you can observe our cost of risk, which closed at 4.1% for the last 12 months and 4.2% for the fourth quarter. Provision expenses reached COP 1.14 trillion. This comes in line with our guidance and with our staged distribution, where both stages 2 and 3 present a decrease in trend, while stage 1 gains weight over the total. This is explained by: new disbursements, mainly in the mortgage portfolio; updates on commercial customers' credit rating due to better 2020 results; and the write-offs already explained. Coverage by stages remain at adequate levels, as you can see at the bottom right of the slide. Now please move on to Slide #15. Funding sources grew 0.6% over the quarter and decreased close to 4% over the year, in line with the loan portfolio behavior. When excluding the exchange rate effect, funding sources decreased by 1% quarterly and by 1.3% annually. Low-cost funding sources remain growing, as shown by demand deposit behavior, while term deposits remained stable during the quarter. Bonds increased by around 6% quarterly due to a COP 700 billion senior issuance in Colombia as well as instruments issued in Costa Rica, while decreasing on an annual basis as a result of the FX effect. The outstanding credits reduced compared to both periods due to payments of obligations with foreign entity. Regarding our funding structure, deposits are now accounting for around 77% of total funding, which has allowed us to take advantage of lower financial expense. I would like to invite you to Slide #14, where we want to share with you the details of Basel III implementation. As of December 2020 figures and under the previous regulatory capital requirements, our CET1, or common equity Tier 1, was 8.26%, and our total capital adequacy ratio was located at 12.31%. By implementing Basel III methodology, our pro forma figures for 2020 results as follows. Our CET1 increased by 370 basis points, while our total capital adequacy ratio increased by 451 basis points. As we have mentioned in previous opportunities, this impact results from the inclusion of current and retained earnings, other reserves and [ full goodwill ] deduction into the equity; a more precise measurement of risk-weighted assets by considering the types of assets, credit ratings and collateral; the inclusion of capital requirements for operational risk. Taking into account the business evolution and with official numbers as of March 2021, our CET1 closed at 11.81% and the total capital adequacy ratio at 16.8%. This leaves us fully compliant and with quite comfortable levels over the fully loaded requirements shown on the right side of the slide. 7% for the CET1, which includes the systemic and conservation buffer; 8.5% for the Tier 1, which adapts to the AT1 new minimum to the CET1; and 11.5% of total capital, which accounts for the Tier 2. Moreover, as Efraín mentioned before, we recently issued an AT1 instrument aiming to improve the quality of our capital structure and anticipated to maintenance, while leveraging our business growth and digital initiatives. This issuance will officially compute into our second quarter figures. However, under much pro forma figures, the inclusion of this one takes the total capital adequacy ratio to 18.53%, allowing us to reach similar capital levels to our regional peers. On Slide 15, the gross financial margin decreased when compared to both periods, impacted by lower financial income. The low interest rate environment, portfolio mix changes and higher competition led to a decrease in loan income. However, our loan NIM remains resilient, compressing only by 9 basis points over the year, taking into account a monetary policy rate decrease of 250 basis points in the same period in Colombia. Investment income was also affected as the rate's upside movement impacted the portfolio valuation. However, it is important to note that the investment income does not include our hedging strategy results, which compensate for this impact as we will see in the coming slides. On the other hand, liabilities continue to reprice as shown by financial expenses decreases of 10.5% during the quarter and over 30% on an annual basis. Yet the 12 months net interest margin ratio decreased 20 basis points, closing at 6.08%. Provision expenses closed around COP 1.4 trillion, decreasing 4% over the fourth quarter's expense, while increasing 28% annually. Consequently, the net financial margin closed at COP 571 billion, decreasing compared to both periods. Please continue to Slide #16. The first quarter's expenses decreased by 7.6% due to lower administrative expenses in Colombia and our cost control efforts. On an annual basis, OpEx increased by around 3%, impacted by IT and digital expense. 12-month cost-to-income ratio closed at 46.9%, slightly decreasing over the quarter. I would like to go to Slide #17 to analyze the bank's profits. During the first quarter of the year, operating income closed at COP 367 billion, slightly increasing over the quarter and 17% over the year, thereby reaching higher than pre-pandemic levels. Operating income recovery during the last couple of quarters is explained by the reactivation of some fees, higher transaction and billing activity as well as insurance premiums. Changes and derivatives income closed at COP 204 billion, increasing over 100% over the previous quarter and around 77% annually, reflecting our hedging strategy for market movements and the exchange rate devaluation, while compensating for investment income loss. Net profit for the quarter closed around COP 101 billion, substantially higher than the fourth quarter's profit, but decreasing around 55% over the first quarter of 2020. Our return on average equity for the last 12 months closed at 2.2%, while the return on average assets was 0.2%. To finish the presentation, please move on to Slide 18, where we will share with you our updated guidance. Given lower growth expectations in Colombia resulting from the pandemic and recent social unrest, we remain cautious and are updating the numbers and general trends for our business this year. However, we continue to closely assess the situation as there remains high uncertainty, and we'll update our view, if needed, throughout the year. We expect our consolidated loan book to grow between 5% to 7%, mainly explained by the following behavior: 5% to 7% growth in the commercial portfolio, moderated growth in the consumer segment between 4% and 6%, and an increase between 9% to 11% in the mortgage book. The 90 days PDL ratio should remain around 4% during the year, and we see a slightly higher pressure from the consumer and mortgage books. We expect our cost of risk to close the year at around 3.3% to 3.6%. Regarding margins, our NIM, net interest margin, should end the year at around 6% due to assets repricing, given our low-rate environment and higher competition and lower room for a decrease in liability expense; changes in asset mix due to the growth in the commercial portfolio; and lower investment income, as we have been mentioning in previous calls. Our operating income should increase over pre-pandemic level as alternative income sources through our strategic alliances and other investments take place. As part of our efficiency and cost control efforts, we expect to end this year with a 3% to 5% OpEx growth, which includes our digital and transformation projects and initiatives. Finally, our return on average equity should locate between 5% and 7% for 2021. As for our capital ratios, we expect them to remain stable and we are pretty comfortable with the levels obtained from the Basel III implementation and our AT1 issuance. 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] We will take the first question -- go ahead, please.

Before moving -- I'm sorry?

Go ahead, please.

Yes. Before moving to the question-and-answer session, we would like to make a brief comment on the downgrade on Colombia's risk rating. I will let Andrés Langebaek to make a brief comment on that. Please, Andrés, go.

Thank you, Pedro. Good morning to everybody. I would like to address some of the issues regarding the impact of the downgrade we received from S&P on the Colombian economy. First, I would like to talk about the causes of this downgrade and then I would like to mention some of the impacts in the long term and the short term that we could expect from this measure. Let us start by saying that when Colombia received investment grade in year 2011, total central government debt to GDP was around 32.5%. That rate, too, increase as a result of the oil prices coming down in year 2014. So in year 2019, total debt to GDP was 50.3%. Last year, as a result of the pandemic and the reduction in revenues for the central government and increase in expenses, the -- that increased to 64.3%, which is above the average for high -- for our investment-grade country. So of course, the international rating agencies were expecting Colombia to present to the congress a reform, a fiscal reform, in order to curb the trends of the debt. Unfortunately, this reform was withdrawn from congress by the government as a result of the social unrest. And the announced -- the new announced fiscal reform will probably have a lower impact in terms of revenues and the possibility of getting track on a lower trend for debt. It will be somehow smoothed and delayed in time. So there are some consequences for the Colombian economy. And regarding the long-term consequences, I would like to start by saying that Colombia is a middle income country that depends on foreign savings. And as a result of the limitations that they will be in place as a result of this downgrade, it is highly probably that the country will not receive the same amount of foreign savings that received in the past. So that could somehow limit the extent of the increase in investment in the country, both public and private. And we could expect a reduction in potential GDP growth for the coming years. We could also expect an average long-term [ equilibrium ] exchange rate to be higher than the one that we had before the downgrade took place. Regarding the short-term impact of the decision by Standard & Poor's, we have to say that at this time, the proportion of the [ test ] in the hands of foreigners is about 40 -- it's about 24%. But only 6% of the total outstanding [ debt ] somehow are conditioned to the investment in investment-grade countries. So the potential of selling of sales in Colombia is around $1.5 billion, which somehow is considered to be a moderate figure. And also, we should say that the decisions for foreigners to go out of the country as a result of this decision will also depend on what other rating agencies will do in the coming weeks. Well, I think that's all for now. I will let Jaime Castañeda, the Treasury Vice President to talk about this impact regarding the bank.

Thank you, Andrés. Regarding to the impact of Standard & Poor's rating action in our bank, we want to highlight the following: a downgrade for Banco Davivienda in the Standard & Poor's risk rating from BBB- with negative outlook to BB+ with a stable outlook, given the limitation of the sovereign rating according to the Standard & Poor's model. However, it is worth that the downgrade in our rating is not related to a deterioration in our individual credit profile, which stands at BBB-. Additionally, this downgrade leave us in the same level of notch of our peers in Colombia at Standard & Poor's rating. And the other rating agencies' scale, we are still investment grade. Thus, we do not see a material effect from the downgrade right now. In the terms of the numbers of the bank, we could have a potential impact in terms of cost of funding in our investment portfolio as well. Nonetheless, we had already perceived higher level of risk in the government instruments and the foreign exchange rate. Today, we see the market with a small movement due to the downgrade of Standard & Poor's and due to the movement of the price. So the impact right now in the market in our investment portfolio has been marginal. So Pedro, I return to you to answer the questions the audience may have. Thank you very much.

Thank you. We can move on to the questions-and-answer section. Thank you.

[Operator Instructions] We have Carlos Gomez on the line from HSBC.

You have already talked about this, but the -- if you could elaborate as to why provisions remain so high this first quarter. We have seen most of your peers, both locally and internationally, having much lower provisions compared to last year. That's not the case for you. And if you could also explain to us whether that is more in Colombia or in Central America and how you see the rest of the year.

Thank you, Carlos. This is Paula Reyes, Vice President -- Credit Risk Vice President. During this first 3 months of the year, we were seeing a good behavior in the Colombian economy and the provision expense for the first quarter came in line with the expectations shared with you by the end of February in our conference call. However, taking into account the beginning of strike in Colombia by the end of April and impact from the first contagion wave, we expect loan growth and asset quality to be affected in line with lower commercial activity and potential impact on employment. In this sense, we have increased our guidance on cost of risk. Probably during the first quarter, we saw higher provisions than our peers than our peers aiming to be conservative. We maintain the same scenarios used by the end of the last year, which included [ UTPs ] from Colombia below the 5% we have now on expectations and in Central America from 1% to 5% for 2021. So the first quarter was a little bit higher as we've been conservative and also our expectations for the rest of the year .

Very good. And between Central America and Colombia?

Between Central America and Colombia, Colombia had higher cost of risk. Central America was around 2% and Colombian was a little bit higher, around 4.6%, and that's why our cost of risk consolidated figures is 4.11%. Central America is a lot lower historically.

And congratulations on the issuance of the perpetual bond.

Thank you, Carlos.

[Operator Instructions] It does now appear that we have any questions on the web at this time. I would like to turn the floor back over to our presenters for closing comments. Mr. Forero, please.

Okay. Thank you very much everyone for being with us today. We are having a challenging time where we have this problem in the third wave of the pandemic, as well as the [indiscernible] we are facing in Colombia. So we'll have a more difficult year in this '21. Now we have to face the situation with the new downgrade of Standard & Poor's also for Colombia. However, we think that the bank is prepared, is strong enough. It has high solvency and the balanced source of funds. And we will be working and we will keep in our strategy to be able to help our customers to become better companies and to help governments in the countries as well to increase their speed of the reactivation of the economy. We know that we are in difficulty as many other contracts in the world, but we still are optimistic about how we're going to behave in the 2021 and 2022 to recover from the effects of the pandemic as well. Thank you very much for being with us today.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.