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

Welcome to Davivienda's Second Quarter 2021 Earnings Conference Call. My name is Hilda, 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. Today, joining us from Bogota, Colombia is Mr. Efrain Forero Fonseca, Chief Executive Officer; and Mr. Ricardo Leon Otero, Chief Risk Officer. During the call, they will be discussing in-depth the quarterly results release. If you have not yet received a copy 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 due to macroeconomic conditions, market risks and other factors beyond our control. It is now my pleasure to turn the call over to Mr. Efrain Forero, Chief Executive Officer.

Thank you. Good morning, and welcome to Davivienda's Second Quarter of 2021 Earnings Conference Call. I hope you all continue to stay safe and healthy. Thank you very much for joining us for our regular call. I will briefly walk you through the macroeconomic highlights. Then we will discuss key financial trends, the progress we are making in our ESG strategy, digital transformation and other key initiatives. When looking at Colombian's economy evolution on Slide 3, it is important to recall that Colombia went through a new wave for contagions during May and June. However, the latest figures show that 30 million Colombians have received at least one dose of the vaccine and nearly 30 million have received the total dose. During April and May, the economic activity registered an average annual growth rate of 21%, favored by the opening of the economy, liquidity injection to SMEs and the social transfer by the government. This positive rebound in the economy is despite the demonstration and social unrest experienced during May that caused the shutdown of local roads and major highways affecting the normal dynamic of the economy. Consequently, inflation show a strong rebound during the second quarter, reaching a level of 3.6% compared to 1.5% recorded at the end of March. By the end of this year, we expect to close with the level above 4%. Overall economy trends improved during the quarter. And while there are risks, the likelihood of improvement continues to increase. We expect better growth than the previous quarter in terms of GDP, closing the year at leverage between 7% to 7.5%. Despite Colombia having lost its vending grade, we have seen foreign appetite for Colombia's debt as the net inflow source to COP 10.8 trillion in the second quarter. The latter demonstrates the market confidence in Colombia, thanks to the economic dynamics and the likelihood that the revised tax reforms will likely pass with significant changes as the government consulted widely on its proposals. Moving on to the Central America. We can on the Slide 4 see the main macroeconomic highlights of the region. We observed a better performance than the previous quarter, where Honduras and El Salvador showed higher growth, while Panama has the lower growth dynamics. In general, we observed inflationary pressures derived from the current situation. However, regarding remittances in the region, we have seen positive inflows, especially in Honduras and in El Salvador, even higher than pre-pandemic periods. We expect GDP growth for the region between 4% to 5%. For the case of Panama, we see a rebound of around 12%. Moving on to Slide 5, I will briefly talk about the main financial results and other key topics. Accumulated net profit reached COP 533 billion, increasing 54% compared to last year, leading to a return on equity of 0.6% for the last 12-month period. This result came on the back of a better dynamics on net interest income due to business volume growth, better expectation on the cost of risk and recovery on operating income to levels above pre-pandemic figures. Our gross loan portfolio increased 2.6% over the quarter, mainly driven by the behavior of mortgages and commercial loans in Colombia and Central America. Total PDL ratio continued to show a positive trend due to disbursements dynamic on some write-offs, resulting in a level of 3.9%. Our 12-month cost of risk decreased to 3.76% due to the recalibration of our risk model, including the updated macro expectation and better risk performance of our loan book. Ricardo will cover this topic later. Moving on to other key innovation and digital transformation initiatives, I am glad to announce that we continue to advance in the process of creating a new digital native bank. For this purpose, we received the regulator's authorization to incorporate RappiPay financing company along with Rappi. However, we still have to comply with some more legal requirements before starting the operation of this new entity. We will keep you informed along the way. We continue to expect the beginning of our operation by the fourth Q or first Q of 2022. This quarter, we have been recognized for our innovation model by the Colombian Ministry of Science with the research, development and innovation unit certification. This recognition reflects our innovation models efforts that rely on R&D activities and systematic structure that allow us to be at the forefront of the latest market trends. In this sense, I'm glad to announce that we are working with IDB Group, Banco de la Republica, and the innovation standpoints of the Colombian regulator to launch the pilot of Colombian's first blockchain bond. We will issue the bond and IDB invest will underwrite the entire issue. With this pilot, we will try the whole lifecycle of the debt, including secondary markets, trading and redemption. Last but not least, we extended our alliance with Google to improve our IT infrastructure, continue to migrate process to the cloud and develop artificial intelligence tools to improve response time with customer increased agility and gain efficiency. Please continue to Slide 6. Now let's turn to our ESG highlights, and let me briefly recap our main results where we aim to create value for our stakeholders on the economic, social and environmental dimensions. On the environmental side, our green financing portfolio reached almost COP 2.86 trillion, increasing 4% compared to last quarter. We had an active participation in financial sustainable construction projects or companies dedicated to supporting the development of a low-carbon footprint and promoting a more sustainable environment. On the other hand, we continue working to reduce our carbon footprint, decreasing each by 18% compared to last year. On the social front, our portfolio dedicated to social housing and human entrepreneurs reached almost COP 7.57 trillion, increasing compared to both periods. I want to share with you also we recently heeded the call of Vice President Kamala Harris to continue driving economic development and financing inclusion in Central America. The U.S. government led this coalition to promote business lending environments, greater investment and long-term sustainable economic development to stimulate growth in Honduras, Guatemala and El Salvador. On the corporate governance front, aiming to adopt international best practice, we increased our Board of Directors to 7 principal members this year, out of which 4 are independents and one of them is a woman. In addition, we decided to marriage our Corporate Governance Committee and Sustainability Committee into one. The new ESG committee will be in charge of the supervision, review and implementation of policies and guidelines reporting directly to the Board of Directors. Davivienda's sustainable strategy recognizes that the environmental social dimensions are fundamental to achieving company sustainable development and the well-being of our stakeholders. In this sense, we have created and published the responsible investment policy and the statement on diversity and inclusion to continue developing our ESG agenda. Please move to Slide 7. We have made significant progress over the last year in our digital transformation journey, as you can see on the right side of the slide. Accumulated digital sales represent 53% of the total sales, showing a positive trend compared to last year. In addition, monetary transaction through our digital channels increased their participation from 48% last year to 54% of the total monetary transaction. As you can see at the bottom of the slide, digital deposits, loans and investment show relevant increase over the year. Moving on to Slide 8. DaviPlata, our digital native bank, continued to show positive result as well. Our customer base increased around 500,000 customers during the quarter, reaching 12.7 million. With DaviPlata, we have coverage of 98% of Colombia's municipalities and almost 40% of the adult population. We continue to attract customers from other banks and customers who only have DaviPlata as an active financial product in the system. One of the most important results is the increase in the outstanding digital deposits, reaching COP 563 billion, increasing 1.7x compared to last year. Accumulated transaction income during the first semester reached COP 35 billion, increasing 0.8x compared to last year. Also, transactions, e-cards and total payments volume showed positive trends during the second quarter of this year. To conclude my presentation, I would like to say that the results achieved this quarter allow us to be more confident about how the economy is evolving. We have updated our outlook despite the third wave of contagions and the impact generated by the social unrest in Colombia. We expect that the recovery of the countries where we operate will be a little faster, thanks to the speed up of vaccine rollouts, allowing a quicker opening of economies and a decrease in population lockdowns. Nonetheless, we have to wait to see how the loan portfolio evolves and if another contagions peak affect the recovery path. Now let me turn the call over to Mr. Ricardo Leon, our Risk Executive Vice President to continue with the presentation of the bank's financial results.

Thank you, Efrain. Good morning, everyone. I'm glad to hear you today. Please move on to Slide #9 where we will analyze the asset evolution. Total assets closed around COP 140 trillion, increasing 3% over the quarter and decreasing 1.5% on an annual basis. When excluding the exchange rate devaluation, assets would have increased by 2.5% quarterly. Cash and interbank increased over the first quarter as a result of higher money market operations, mainly in Colombia and decrease of June 2020 due to a base effect of the previous year when the bank increased short-term liquidity to face the initial effects of the pandemic. Regarding investments, the contraction of both periods reflect a lower position in Colombia's lending portfolio, which is natural for this portfolio strategy and depends on market conditions. Gross loans increased by 2.6% during the quarter and by 1.3% over the year, reflecting recovering signs in Colombia and Central American economies. We will see further details of the loan book on the next slide. Our loan loss reserve closed at COP 5.7 trillion, decreasing around 5% quarterly due to write-off, which reached close to COP 1.2 trillion in the consolidated operation. However, on an annual basis, loan loss sales increased by 12.5% underlining our provisioning efforts. Colombia and Central America's assets in dollar showed quite similar behavior. As of June, Colombia accounted for close to 75% of the consolidated operation, and Central America for the remaining 25%. Please move on to Slide 10. In line with the economic trends mentioned by Mr. Efrain, gross loans increased by 2.6% quarter-to-quarter, explained by the dynamic of the social housing and leasing segments within the mortgage portfolio, disbursements to corporate and SMEs within the commercial loan portfolio; an increase in the consumer portfolio, mainly led by the payable segment, which was partially offset by the quarter's write-off. And the exchange rate effect, which explains 0.4% of the quarter's growth. On a normal basis, the loan portfolio increased by 1.3% despite the 11.9% growth for the mortgage portfolio. The commercial book is still impacted by a base effect compared to the last year. However, it has grown close to 5.3% since December 2020. Something similar occurs in the consumer portfolio, where we have seen some positive behavior in this business in the last few months. In the international operation, the quarter's loan growth came mainly from the consumer portfolio, which increased by 2.6%, driven by the behavior in Honduras and in El Salvador. On an annual basis, the consumer segment showed a 9.3% growth while mortgage, a 5.8% increase. Moving on to Slide #11. We present a date of the relief and the behavior. By the end of June, around 9% of Colombia's and Central America's loan book was under some kind of release. In the case of Colombia, the debtors relief program was stated on the August this year, and we observed more companies adhering to this program as a result of impacts since for the strikes during May and June. When looking at the payment behavior of Colombia's relief loans, around 91% of the portfolio is up-to-date and the portion of the past due loans over 90 days is 3.5%. In Central America, loans on the relief continued to regularly decrease as the programs already ended in the most of the countries. We see that around 93% of the relief portfolio is up-to-date and past due loans over 90 days account for 3%. Although we have seen collections reaching pre-pandemic level, we remain cautious about the relief portfolio, as there might be customers that remain affected going forward. 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, total PDL over 90 days decreased 8 basis points over the quarter, mainly due to the consumers' book ratio. The commercial portfolio PDL's increase is related to impacts in services, infrastructure and transportation sectors. As for the consumer portfolio, past due loans show a decrease due to write-off during the quarter as well as better behavior of recent EBITDAs. In the case of mortgage book, most of the deterioration is explained by COP 326 billion securitization of low-risk portfolio June. We also see a bigger portion of social housing within the loan book, which has marginally higher risk compared to the other segment. Finally, take into account that mortgage write-off take place mostly than in the consumer and commercial segment. It is important to highlight that this is our lower segment with a loan-to-value ratio close to 45%. So it doesn't generate the concerns going forward. At the bottom of this slide, you can observe our cost of risk closed at 2.52% for the second quarter and at 3.76% for the last 12 months. In the sales provision expenses closed at COP 700 million for the quarter and reached COP 1.8 billion for the first half of the year. This result comes from updates in our forward-looking parameters, which aim to reflect better macroeconomic expectations for the rest of the year and from our efforts to contain further deterioration in their loan performance. As a result of this improvement in expectations, covenants meet a natural role. This explains lower coverage level for our stages when compared to last quarter when we remained more conservative regarding for the impact in our loan book. However, as you may see, the ratios remain at adequate levels higher than the figures since a year ago. Now please move on to Slide #13. Funded sources grew 3.2% over the quarter and decreased 0.6% on an annual basis. When excluding the exchange rate effects, funded sources increased by 2.7% quarterly. Demand deposits remain growing on a quarter and annual basis, increasing share of total common. Meanwhile, term deposits continue to decrease and now account for 28% of 2020. Bonds increased both over the quarter and year due to the $500 million H1 issue as well as bond issuances for $94 million in Costa Rica. Credits increased over the quarter due to El Salvador and Costa Rica for the strategies, and decreased compared to June last year due to payments of loans with [indiscernible]. During the last 12 months, our funding structure has slightly changed with demand deposits and bonds increasing its share, resulting in positive impacts for our financial expenses. I would like to invite you to Slide #14, where you will see our capital structure. Our total capital adequacy ratio as of June closed at 18.64%, increasing 195 basis points over the quarter. This is explained by 2 effects, an increase of 23 basis points in our core equity Tier 1 due to higher profits; and the second inclusion of the AT1 instrument issued in April this year into our ranges. Our Q2 decreased by 16 basis points due to lower weight of subordinate instruments. As you can see, we have a comfortable level over the fully loaded requirings shown on the website of the client. Please move to Slide #15, where we present our margins. When looking at the quarter's behavior, we observed that the gross financial margin increased by 16%, mainly due to higher financial income and lower financial expenses for [indiscernible] with entities and term deposits. As a result, the annualized NIM for the quarter closed at 6.41%, which represents an 83 basis point increase over the previous period. On accumulated figures, the gross financial margin contracted by 1% as a result of first lower loan income related to the book pricing, mix changing and higher competition observed during the year. Second, lower income related to the investment portfolio devaluation, mainly seen during the first quarter of 2021. Finally, it's important to mention that these effects were partially offset by financial expenses, which continued to decrease by taking advantage of low interest rates and the funded mix. As a result, our 12-month net interest margin ratio closed at 6.08%, remaining relatively stable over the quarter and increasing 21 basis points over the year. However, it's important to note that this net interest margin ratios don't reflect the result of our hedging strategy, which aims to mitigate interest rate risk and foreign exchange movement. In this sense, when taking into account changes and the relative income, we see that the quarter NIM growth at 6.65%, and the ratio for the last 12 months at 6.30%. As you saw before, provision expenses decreased 38% quarter-on-quarter and 1.6% on an accumulated basis, which ended up in a net financial margin close to COP 1.3 trillion for the second quarter and of COP 1.8 billion for the year. Please continue to Slide #16. The second quarter expenses increased by 10.7%, mainly due a one-off payment to employees within the collective agreement framework, which is updated every year as well as expenses related to insurance, marketing and IT. On accumulated basis, OpEx increased by around 5%. However, when excluding personnel not recurring expenses, OpEx would have increased by 7% quarterly and by 3.4% on accumulated basis. 12-month cost-to-income ratio closed at 46.3%, decreasing over the quarter and the year. Please move on to Slide #17 to analyze the bank's profit. Operating income remained stable over the quarter and increased by around 24% on accumulated figures due to a higher billing activity [indiscernible] among other banking service. Change in the income growth at COP 66 billion in the quarter and COP 270 million by the first half of the year, reflecting our healthy strategy for market movement as the exchange rate evaluation, while compensating for investment income losses, as explained before. Net profit for the quarter closed around COP 432 billion and reached COP 534 billion for the year, increasing by around 54% when compared to the same period last year. As a result, our return on average equity for the quarter reached 13% and 4.6% for the last 12 months. To finish the presentation, please move on to Slide 18, where we present our guidance. Given the better recovery trends seen in the economies where we operate, we are updating the number for our business region. In any case, we are closely monitoring the credit situation of our portfolio as there are still impacts across some segments. We can continue to face uncertainty given the evolution of the pandemic. We expect our consolidated loan book to grow between 5% to 7%, mainly explained by the following behavior. 3% to 5% growth in the commercial portfolio, moderated growth in the consumer segment between 3% to 4% and an increase between 11% to 13% in the mortgage book. The 90 days PDL ratio should close around 4%, where we see some additional pressure in the mortgage book. Given the effects we have explained in previous calls related to asset repricing, changes in asset mix and lower investment income over net interest margin should end year at around 6%. We expect our cost of risk to grow the year at around 2.9% to 3.1%. Regarding operating income, it should end the year with an increase between 20% to 25%, improving compared to the pre-pandemic levels. We're expecting an OpEx growth within 4% to 6%. Please take into account that this figure includes our digital transformation projects and initiatives and the FX impact. Finally, our return on average equity should close between 7% to 9% for 2021. Thank you for your attention. At this time, we can move on to the question-and-answer session.

[Operator Instructions] We have a question from Olavo Arthuzo from UBS.

Okay. I actually would like to explore only one topic here, mainly related to the mid- to long-term review of the bank. So I think this opportunity that we have the management, this quarter, the bank presented a very important rebound of profitability. But as the new guidance for the 0 points to high single-digit, it should decrease along the next quarter when compared to this quarter. But beside this, the stock is trading below book, which is kind of justified by the areas below the cost of capital for the bank, at least during the next couple of years. But my point here, guys, is that the only discussion on the macro and political scenario in Colombia and the sustainable ROE for the bank, I would like to shift the discussion to both DaviPlata and the partnership with Rappi, that is gained shape. I mean, these 2 types of business are continually attracting attention from the market, and I see this project as a potential catalyst for the stock and a booster for the bank's profitability in the medium to long term. So given this backdrop, I have 3 questions in regard to this topic. First, how much attention from the management team these 2 initiatives have in the strategic pipeline of the bank? And my second question, I would like to have a number from you guys about the number of clients the bank expects to have enrolled to DaviPlata because we are talking about almost 30 million clients so far. So what is the target for DaviPlata? And also the number of clients expected to have a current account within this new approved partnership with Rappi for the creation of a digital bank, how much client does the bank expect to have in this digital bank for the next year or the next following years? What is the goal? And my third and last question, what are the main competitors in Colombia of these 2 initiatives, DaviPlata and the digital bank with Rappi? If you could share some names and how much competitive they are, it would be great.

Thank you for your question. The first question related to the midterm view, we are expecting the ROE another figure for the bank. And the first thing is that we are expecting a recovery this year, as we could see in our figures. And for end of the year, we are expecting ROE close to 11% to 12.5%, obviously improving the cost of risk. We are expecting a cost ROE around 2.6%. In terms of 2023 and the next year, we think that our cost of risk will be more normalized around 2.2%, 2.3%. Obviously the ROE will be around 12%, 14%. And obviously, if the economy has been recovering in a good way in the next year, we are expecting that our ROE and long-term return to figures close to 14% to 16%. That is our view about the near feature and an overview after 2023.

Okay. But I just wanted to understand more about these new ventures of the bank because -- I just wanted to shift this topic from the profitability looking solidly to the core business of the bank, but trying to understand the potential related to DaviPlata and especially this new digital bank with Rappi. So being very straight to the point, how much clients do you expect to achieve with this partnership with Rappi during the next following years? What is the goal in terms of number of clients with this partnership?

Well, thank you for the question. I'm Efrain Forero. I'm going to speak about our general strategy and mainly related about DaviPlata as well as our alliance that we are about to close with Rappi. First, yes, in terms, we have 3 prongs in Davivienda. One, we want to become a completely digital bank, let's call that the traditional bank. And we are doing very well about that. And about 70% of our sales, we expect to be able to have at the end of the year in the traditional bank, let's say. But on the other hand, we have another strategy that is DaviPlata. What we want there is to have finally a native bank. We are doing very well so far. We have 13 -- about 30 million customers as you mentioned. And we expect to become -- to grow to have about 16 million customers in the year 2022. About 30% of those customers are customers that are actually customers that have different businesses with other banks. So that is a very powerful benefit for Davivienda. So since we have these new customers with a very low cost, and we use that information to offer those customers with new products for Davivienda. So that is already happening. But on the other hand, we want to have in DaviPlata a bank that is willing to offer customers with value-added solutions. And we are doing several alliance, and we expect to have their marketplace that allow customer individuals to take advantage of the offer that we can make with different alliance. So for instance, we are actually paying about COP 2.8 million payments every 2 months with the subsidies of the government. So what we want is to offer them in DaviPlata's app, different type of options so that they can buy groceries, buy insurance, buy the different things that allow them to use much better their money, the benefit of the subsidy. So that's what we are working to build an ecosystem in DaviPlata. And we believe that it's going to be a new operation bank that might be -- we are planning and preparing the organization so that it is going to be autonomous DaviPlata, supported by Davivienda. But at the same time, we have another better focus that is our different alliance, in which Rappi is one of them. About 2 years ago, we signed an alliance with Rappi that is already giving us very good results. Actually, we have about 700,000 new customers that come from that alliance. And we launched out in March, the credit card business that we are now having about 200,000 customers -- new customers that are going to have this new card that is very attractive for customers. And we already have 30 of them -- 30,000 of them that are being used, and we have a very good result so far. It's a new concept, and we are going to have very good -- we have a lot of expectation about this product in our alliance. But about 3 months ago, we also announced the creation of a new institution, Corporacion Financiera with Rappi, in which we are really creating a new native digital bank that is going to work within the app, the Rappi app and it is going to offer customers with different type of different financial services, and we expect to be one of the main players in the new market, in this new market that we are very sure that it's going to be in Colombia and Central America very, very soon. We have already know that we will have a new bank here in Colombia. And we have -- all of us have listened about what he's doing right now in the market. And we have the presence of new bank related, who are going to be the new players. We already have already as well Mercado Pago, Mercado Libre. That's going to be another good, very new player. It's going to be very important, we believe, about that. But at the same time, obviously, we will have other 2 additional banks that are coming to Colombia. So we are preparing ourselves with these 3 strategies to be able to grow our market share in a very important way in the coming years, let's say, semester and -- or month. But things are going to change very quickly in Colombia. And we believe that we are leading in Colombia this process because we have these 3 strategies in which we want to become a player that is going to increase the share of the market, increase our efficiency, increase our ability to all of these customers, mainly in the retail banking in this country.

[Operator Instructions] At this moment, we show no questions. I would like to turn the floor back over to our presenters for closing comments. Mr. Forero, please proceed.

Thank you very much for -- everyone, for being with us today here. It is very good for us to see that things are going better. We believe that the recovery of the economies in the different countries in which we are working are going to keep in the way it's going and if so happen, well, we will have a very better results, financial results, as we mentioned during the presentation. We feel confident about it. We are working very hard in our digital process that we mentioned. And we believe that, finally, at the end of this, we will get over the problems that we are facing, and we are optimistic about the new -- the future operation. Obviously, we know that there are different uncertainties in the product with the COVID-19. However, we believe that things are going to be much better in the coming month. Thank you very much.

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