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

Welcome to Davivienda's Third Quarter 2021 Earnings Conference Call. My name is Sylvia, 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. Miguel Cortes, CEO of Grupo Bolivar; Mr. Efrain Forero Fonseca, Chief Executive Officer; Mr. Ricardo Leon Otero, Chief Risk Officer; and Mr. Javier Suarez, appointed CEO of Davivienda. During the call, 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 the investor kit or the financial information section at ir.davivienda.com. [Operator Instructions] Please note that this conference is being recorded. Afterwards, management will be available for question-and-answer session. 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 risk and other factors beyond our control. It is now my pleasure to turn the call over to Mr. Miguel Cortes, CEO of Grupo Bolivar.

Good morning to all of you. Thank you for joining us. My name is Miguel Cortes. And I want to start off the conversation this morning, the report with a big thank you to our Chief Executive Officer of the Bank, Efrain Forero, who has been with us 31 years leading the Bank and 43 years in our Group. Mr. Efrain has done an amazing job. I don't have enough words to thank him. He has taken our Bank in Colombia from 2% market share in Colombia 31 years ago to be in the Top 20 banks in Latin America, from this 2021 report. He has been extremely successful in creating an amazing team of executives and he's well recognized for all his innovation and development of the banking industry. We -- Efrain, thank you so much for everything you have done for the Bank, for the countries where we're in and for your leadership and the creation of the teams you have created. Javier Suarez, which will be our new CEO beginning in January 1, 2022, is an outstanding leader. He has been with us in the Group for 29 years. In the past 7 years, he has led our insurance companies through rapid innovation, Seguros Bolivar. He is also the Executive VP of Grupo Bolivar. He has been on the Board. He has been on the Board for the last 20 years. He has been helping Davivienda in many of their biggest challenges also for the last 20 years. He is well-known in the sector and he has led the banking -- the insurance association [Indiscernible] as President and CEO for 2 years. He also is our Head of Risk of the whole Group. The Board of Directors unanimously elected him to follow the huge steps that Efrain has -- is going leave behind. Javier comes -- he is an engineer form The University of The Andes in Colombia and has a Masters degree in Actuary and Finance from a well-known entity -- University of Georgia in the United States. So we want to let you know all that we are in good hands with Javier. We're very excited. We're very sad to let Efrain go. Efrain has chosen this path where he feels he wants to continue developing some personal things. And so he has asked to step aside. So we are saddened by his thing -- by his decision, but we want to thank him immensely for his outstanding leadership throughout these 31 years at the Bank. So Efrain, Good morning.

Thank you, Miguel, for your kind words. Good morning, everyone, and thank you very much for joining us for our regular meeting. Today, I would like to comment on the main macroeconomic highlights, key financial trends, the progress in our digital transformation path and some of the recent updates on ESG. When looking at Colombia; the economic evolution in Slide 3, it is important to highlight the GDP growth which reached 13.2% compared to September 2020, mainly driven by the commerce and manufacturing sectors. Confidence increased during the quarter, in line with higher vaccination figures and consumer demand as shown by Davivienda's confidence in this rebound. Regarding inflation, the ratio closed the quarter at 4.5%, the highest level since 2017 with accommodation, public service, food and beverage prices showing upward pressures. Consequently, after 11 months of good stability in the monetary policy rate at 1.75%, the Central Bank decided to take it to levels of 2% in September and 2.5% in October. Additionally, after the approval of the new tax reform and the national budget for 2022, Moody's affirmed Colombia's sovereign rating at Baa2 and changed its outlook to stable. For the end of this year, we are expecting Colombia's GDP growth to reach 8.9%, inflation to close around 5% and the monetary policy rate to increase to 3%. For 2022, the Colombian economic activity should moderate with GDP growth closing at around 3.4%, the inflation rate decreasing to level of 3.7% and monetary policy rate of 4.5%. Moving on to Central America on Slide 4, we can see the main macroeconomic highlights of the region. The region continued to recover during the second quarter of this year, mainly due to higher external demand, vaccination campaigns, lower restriction and positive interest in remittances, especially in Honduras and El Salvador. This factor positively impacted the manufacturing industry, commerce, transportation and touring, reflecting improvements in the different economies. In this sense, Panama, Honduras and El Salvador showed annual increases over the 20% figures, while Costa Rica's growth was 7.9%. For 2021, we expect the GDP growth for the region between 8% and 9%. Despite inflationary pressure related to increase in international commodity prices, Costa Rica and El Salvador inflation rates remained in the Central Bank's target rates. So far, Honduras and Costa Rica Central Bank have considered this upward pressure to be temporary. As a result, they have maintained historically low level in monetary policy rates. Finally, Moody's downgraded El Salvador's Sovereign credit rating from B3 to Caa1, due to the risk of successfully implementing the fiscal adjustments required by the country. Similarly, Standard & Poor's changed its outlook from stable to negative of Panama and El Salvador. Moving on to Slide 5, I would briefly talk about the main result of our business. Accumulated net profit reached COP 928 billion, around 2.4x the accumulated by September last year, which led to a return on equity of 7.1% for the last 12-month period. This result are explained by lower financial and provision expenses, higher operating income, better economic activity and recovery in confidence and demand. Our loan portfolio increased by 2.4% over the quarter, mainly driven by dynamics in the mortgage segment and the pickup in consumer disbursements. Our NIM, which included our hedging strategy for interest rate risk and FX movements closed at 6.28%. Our cost of risk continued to decrease, closing at 3.22% due to an updated macro expectation and better performance of our loan book. In terms of capitalization, our common equity Tier 1 ratio closed at 12.3%, well above the fully loaded requirement under Basel III. Moving on to other results, I'm glad to say that we continue to increase our market share in the countries where we operate. In this sense, we have increased around 70 basis points in Colombia and about 50 basis points in Central America in terms of gross loans when compared to 2018. In this sense, we are focused on developing different ways to serve more people, while providing sustainable financial service that help them fulfill their dreams. Of the 19.3 million customers that Davivienda reached by September, 88% will consider digital. In Colombia, we have the most complete digital portfolio in retail banking and continue to [ strengthen ] our digital offered businesses. In Central America, we have been navigating the challenge that each country presents and has successfully launched digital products such as mobile loans, credit cards and saving accounts among other functionalities to ease people's and business' experiences. In terms of recognitions, Davivienda received the Google Cloud's customer award during this quarter, which acknowledge the most innovative, technically advanced and transformative cloud developments world-wide. This award demonstrate our ability to drive operational resilience, regulatory compliance and better customer experience. DaviPlata also received the FELABAN-CLAB Financial Innovation award, to reflect the [ initiatives ] in financial inclusion, its technological ability to develop innovative problem-solving initiatives while successfully managing risk and reaching meaningful goals. Going forward, we will continue placing our efforts in the digital transformation paths to face the challenge of the current competitive landscape. Finally, during the third quarter, Davivienda acquired Promociones y Cobranzas Beta, a collection company that we started to consolidate with Davivienda's results and is aligned with the Bank's core business. This acquisition was made through Corporacion Financiera Davivienda, our merchant bank in a reorganization process with Grupo Bolivar. Please move to Slide 6 where we present our regular update regarding the digital transformation journey in Colombia. Accumulated digital sales and monetary transaction through our digital channels increased their share compared to the last year, reaching 54% by September. As you can see in the upper right corner of the slide, physical channels continue to decrease their returns transactionality, even with the reopening of the economy. These facts reflect that our customers are successfully adopting digital channels. Regarding our digital portfolio, digital deposit, loans and investment showed significant increase on a Y/Y basis and are becoming more relevant in Colombian's balance sheet. In this sense, 4% of Colombian's deposits are digital. Digital loans account for 14% of the retail banking portfolio and 27% of the consumer portfolio. Moving on to Slide 7, I would like to elaborate on our native digital bank result over the quarter. Daviplata, reached 13.3 million customers by September this year, becoming the second largest native bank in Latin America in term of customers. Daviplata's clients increased by around 600,000 during the quarter and about 2.3 million compared to a year ago. On average, we are incorporating around 190,000 new customers every month. Out of the total, 74% do not have additional products with Davivienda. This becomes an opportunity for the bank to deepen the relationship with some of these customers by offering them other types of products and services. Daviplata outstanding digital deposits remained relatively stable compared to the quarter and reached 1.3x last year period. Accumulate transactional income reached COP 59 billion, which represents 1.2x of the previous year figure. Daviplata's Ecard reached 1.7 million today, end of September and around 60,000 entrepreneurs have enabled their social selling profile functionality. In this sense, Daviplata continues its contribution to the country by increasing access to the financial service and offering tools to help small businesses grow. I believe Daviplata will continue to build on its current value and develop its ability to work with the different ecosystem, providing financial and nonfinancial services to more people in other countries. Please continue to Slide 8, where we have some ESG highlights. On the environmental side, our Green Financing portfolio closed the quarter at COP 2.7 trillion, decreasing due to customer payment in Colombia, Costa Rica and Panama. However, throughout this year, COP 6.3 trillion were evaluated with our environmental and social risk framework and were successfully [Indiscernible] contributed to mitigating climate and social risks. We will continue working with fund projects aligned with the criteria of our prospering new green business model that add value to our customers. Our social financing portfolio reached almost COP 8.1 trillion, where we continue our commitment to support social housing and new [Indiscernible]. In this sense, we are active and participating in government programs and continue to be the first player in social housing in Colombia with around 30% market share by loans. It is also important to mention that 52% of this homeowner are women. Additionally, Davivienda was ratified for the 8th time in a row as a member of the Dow Jones Sustainment index. This recognition reflects the work we have been doing to strengthen our sustainability strategy, improve our human capital development and a disclosure of green and social markets. We will continue to address global sustainability challenges while working to better incorporate the relevant issue for all our stakeholders into our strategy. 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 join you today. Please move on to Slide #9, where we analyze the asset's evolution. Total assets closed around COP 145 trillion, increasing 3.5% over the quarter and 3.2% on an annual basis. Cash and Interbank increased over the second quarter and over prior year as a result of higher liquidity. Regarding investments, the increase over both periods reflect a higher level in the liquidity reserve to maintain its relative size in line with the balance sheet growth. Gross loans increased by 2.4% during the quarter and by 1.9% over the year, continuing to reflect recovery signs in Colombia and Central American economies. Overall, loan reserves closed at COP 5.6 trillion, decreasing around 1.5% quarterly and 9.1% on a Y/Y basis. This is explained by a better risk profile of our loan portfolio as well as the write-offs made over the year. Colombia's and Central America's assets in dollars showed a quite similar behavior in terms of growth. As of September, Colombia accounted for close to 75% of the consolidated operations and Central America for the remaining 25%. Moving on to Slide 10, please. In line with the economic trends observed during the quarter, gross loans increased by 2.4%, explained by dynamics of the different segments within the mortgage portfolio in line with the trends observed in the housing sector in Colombia, supported by the subsidies program from the government as well as an increase in the consumer portfolio as both confidence and demand have increased. In the international operation, the loan portfolio remained stable during the quarter. On an annual basis, the loan portfolio increased by 1.9% despite a 14% growth of the mortgage portfolio. Please remember that the commercial book is still impacted by a base effect mainly related to prepayments and write off. However, it has grown 5.1% since December 2020. In Central America, gross loans increased by 4.5% year-on-year, mainly due to retail banking dynamics driven by El Salvador and Honduras. Moving on to Slide #11, we present an update of Reliefs and their behavior. Loan classified under some kind of relief or a [ soothing ] program continued to decrease during the quarter, closing at around 8%, both in Colombia and Central America. When looking at the payment behavior of Colombia's relief loans, 85.4% of the portfolio is up-to-date and the proportion of past due loans over 90 days is 6.5%. Regarding Central America, we see that around 90% of the relief portfolio is up-to-date and past due loans over 90 days account 3.5%. Although we have seen relief loans over 90 days past due slightly increasing, please take these 2 considerations into account. First, these numbers are already incorporated in our reported figures. And second, our provisioning effort has considered the potential recovery level of these portfolios. Please move on to Slide 12, where we can see the evolution of past due loans, cost of risk and loan by stages. As you can see on the top left table, total PDL over 90 days decreased 20 basis points over the quarter, mainly due to the consumer and mortgage portfolio. The commercial portfolio PDL increase is related to some deterioration in construction, commerce and food sector. As for the consumer portfolio, past due loans show a decrease due to write-offs in the quarter, higher portfolio growth and better payment behavior. In the case of Mortgage book, most of the recovery is explained by the portfolio growth and a better performance of [Indiscernible]. At the bottom of the slide, you can observe our annualized cost of risk for the 3 quarter falls at 2.26% and at 3.22% for the last 12 months. In this sense, provision expenses closed at COP 641 million for the quarter and reached almost COP 2.5 trillion as of September. These result comes from advancing our Y/Y key balances, reflecting better macroeconomic expectation for the rest of this year and for 2022. Regarding classification by stages, you can observe Stage 1 slightly increasing over the quarter and year, while higher Stage 2 and 3 decrease, accounting for less than 12% of the total portfolio. Coverage ratio remained at adequate levels, higher than the figures seen a year ago. Now please move on to Slide #13. Funding sources grew 1.8% over the quarter and 2.5% on an annual basis. Demand deposits remain growing on a quarter and annual basis, increasing its share over the total fund. Meanwhile, term deposits continue to decrease and now account for 26% of funding sources. Bonds increased over the year due to the additional Tier-1 issuance, COP 700 billion senior bond issuance in Colombia as well as issuances in El Salvador and Costa Rica. Credits increased over the quarter due to a lower balance of financial obligations in Colombia. During the last 12 months, our funding structure has slightly changed with demand deposits and bonds increasing its share, which allow us to take advantage of the low interest rate period. I would like to invite you to Slide #14, where you will see our capital structure. Our current equity tier 1 closed at 12.29%, increasing by 25 basis points, mainly due to higher profits. Our total capital adequacy ratio as of September closed at 18.46%, decreasing 18 basis points over the quarter, in line with our expectations. This is explained by 2 effects; lower weight of Tier 2 bonds issued in 2012 and a higher risk weight assets related to better improvement in performance in the consumer portfolio. However, as you can see, we have comfortable levels over the fully loaded brand shown on the left side of the slide and remained among the best capitalized banks in the region. Please move to Slide #15, where we present our margins. When looking at the quarter behavior, we observed that the global financial margin decreased by around 6.6%. This is explained by lower investment income related to upside movement in interest rates and higher financial expenses explained by the bond issuance within the year and FX behavior. As a result, the annualized NIM for the quarter closed at 5.88%, which represents a 53 basis point decrease over the previous period. On accumulated figures, the gross financial margin contracted by 1.4% as a result of loan book re-pricing, mix changes and higher competition as well as lower income related to the investment portfolio devaluation as has been observed in the general market. As a result, our 12 months net interest margin ratio closed at 6.03%, remaining relatively stable over the quarter and increasing 20 basis points over the year. When taking into account the result of our hedging strategy, we see that the quarter's NIM growth at 6.13% and the ratio for the last 12 months at 6.28%. As we saw before, provision expense decreased 8.4% quarter-to-quarter and 17.9% on an accumulated basis. And net financial margin close to COP 1.2 trillion for the 3 quarter and COP 3.1 trillion for this year. Please continue to Slide #16. The second quarter expenses increased by 0.9% during the quarter. On an accumulated basis, OpEx increased by 6.8%, mainly due to a one-off payment to employees during the collective agreement framework, which is updated every 3 years. However, when excluding personnel non-recurring expenses, OpEx would have increased by 5.6% on an accumulated basis. 12 months cost-to-income ratio closed at 46.6%, increasing over the quarter but decreasing on YoY basis. Please move on to Slide #17 to analyze the Bank's profits. Operating income increased 28.6% over the quarter and by 33% on accumulated figures, mainly explained by higher activity in the credit card business, income for the insurance business and transactionality levels as well as new fee co-generated by Cobranzas Beta, a collection company recently acquired. Changes and derivatives income closed at COP 87 billion in the quarter and COP 357 billion on an accumulated basis. Net profit for the quarter closed around COP 395 million and reached COP 928 million for the year, almost 2.4x the accumulated as of September last year. As well our return on average equity for the quarter reached 11.49% and 7.12% for the last 12 months. To finish the presentation, please move on to Slide #18, where we present our guidance. As we continue to observe better macroeconomic trends in the countries where we operate, we are updating our expectation for the year and improving what we could expect for 2022. For the year, we expect our consolidated loan growth to grow between 7.5% to 8.5%, mainly explained by the following behaviors; 4.5% to 5.5% growth in the commercial portfolio; higher growth in the consumer segment between 7% to 8%; and an increase between 14% to 15% in Mortgage group. For 2022, we expect our consolidated loan book growth from 10% to 11%. The 90 days PDL ratio should close this year around 3.7% to 3.8%. For the next year, it should grow between 3.3% to 3.5%. Our net interest margin to end 2021 around 6% and to close between 6.0% and 6.3% and by the end of next year. We expect our cost of risk to close 2021 at around 2.7% to 2.9% and at the levels between 2.4% and 2.6% in 2022. Regarding operating income, it should end the year with an increase between 20% to 25%, improving compared to pre-pandemic sales. For this year, operating income should grow between 13% to 15%. We're expecting an OpEx growth around 8% in 2021 and between 8% to 9% in 2022. Finally, our return on average equity to close between 8.5% to 9.5% for the year and between 11% to 12% in 2022. Before finishing my presentation, I would like to thank Mr. Forero for all the support he has given us during these years, for the knowledge he has shared, but above all for his great human quality and his qualities. His vision and leadership ability allowed the Bank to evolve and become a reference in digital transformation and one of the most important banks in Latin America. Thank you, Mr. Forero. Thank you for your attention. This time, we can move on to your questions-and-answer session.

We will now begin the question-and-answer session. We will first take the questions from the phone call, and then we will read the webcast questions. [Operator Instructions] And we have a question from [ Jose Quanta ] from Citigroup.

I'd like to understand, looking at the update to the 2021 guidance. For example, in terms of other operating income -- sorry, in terms of overall growth metrics, we see that they are relatively unchanged, yet with higher -- what I want to understand is how is it that with higher expenses we are able to -- and potentially higher effective tax rate, how are we able to achieve a higher ROE.

Thank you, Jose. Related to the guidance for the mid-year. Related to ROE, we are expecting an ROE between 11% to 12%. And in terms of net interest margin, we consider that it's possible to improve the NIM estimate an in-between 6.0% to 6.2%. And related to the cost of risk, we are expecting that the cost of risk, we will improve. It will be allowing 24 -- 2.4% to 2.6% for 2020. This year, we hope to finish the year with a cost of risk close to 2.7% to 2.9%. And to be in a regular per-pandemic in 2023, with a cost of risk close to 2.2%.

And sorry, just a quick follow-up if I may. What would be like a normalized effective tax rate that we could expect going forward?

Hi, this is David Pedraza. We should expect a normalized tax rate between 33% to 34%.

[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 and Mr. Javier for any closing remarks.

Well, thank you very much to everyone for being here today. This is my last time in this type of investor meeting. That is really very, very important for Davivienda. And I once more thank you, every one of you, and thank you all the investor community. It's been very important support what we have got during these 31 years that I was -- have been in Davivienda. Thank you, Miguel, for your words and for all your confidence with the good job that we are doing in Davivienda with a very good thing that we have in the Bank. It's been really a privilege and honor to be the CEO of Davivienda during these years. I am very glad to be now leaving the Bank and having Davivienda in this being one of the 20 largest banks and more representative bank in Latin America. It's been a bank that is been a pioneer in innovation. And we have now Daviplata as well as different alliance like Rappi and [ merging ] that allow us to believe that we are ready and in the right track to see how the world -- this financing world that is changing every day is going to do and how Davivienda is going to be one of the main players as well in the region. It is really a privilege to having in Davivienda. I want to thank Miguel and Jose Alejandro and all the shareholders and Board of Directors. But as well, I need to have the chance to say thank you to Ricardo for the words that you said, in the presentation of a very important team that we have in Davivienda. Now I want to share with you that I really feel very, very glad that Javier Suarez is going to be -- was selected by the Board to be the next CEO of Davivienda. As you know, Javier is [Indiscernible] and a very good friend of mine. He is a very talented man. He has been involved in most of our most relevant transaction M&A that we have made so far and as well as -- he was our -- he was always with us in all the different meetings and all the different opportunities in the place that we have made in the local and the international operation that we have made. I know, Javier is going to be a very fantastic CEO. And I wish you the best, Javier.

Thank you, Efrain, for your very generous words. Thank you also, Miguel, for your also generous introductory words. For me it's an honor to be appointed as the next CEO of Davivienda. I'm very grateful with the shareholders and the Board of Directors for this designation. But I've been very, very close to the bank for the last 20 years, and I've been a privileged witness of how Efrain has led a team that has made Davivienda the institution that we all know today from a small saving on loans institution back in the early '90s to what it's today. It's a fantastic journey that Davivienda has gone through, always under the leadership of Efrain. Davivienda, as we all know, it's -- today, it's a leading institution in the region and in digital transformation, digital offers to our customers that have been very well accepted. It's clearly a driving force in the changes that are happening in the market. So I'm very excited to be part of the team again, and be leading a team that has been carefully crafted for the last several years by Efrain, and it's definitely the most important asset that the Bank has is the management. The management is a tremendous team that has brought the bank to the place that it is now. So I'm very happy to be part of the team again. And with all the excitement, we'll be working very hard on making sure that the road map that Davivienda has been following for the last years is the roadmap that we'll keep pushing forward. We see exciting opportunities still ahead on the Daviplata from the Rappi and alliance as well as the digital transformation of the Bank. We see also opportunities in -- for growth in Central America. So we're very, very excited to be part of the team again. And I want to also thank you, the investor community that has been part of Davivienda for many years. And also, ask for your support, your support in the coming years as we'll try to move forward. And of course, you are a very important stakeholder in what we're planning to keep going with Davivienda. So thank you for being supportive for many years, and thank you for your continued support going forward. Once again, thank you, Efrain, for what has been a very remarkable career and there's a lot of admiration from all of us who have been around you and we want to wish you the best on your new endeavors. And in the meantime, we'll keep working hard with Davivienda. And to all the investors that are with us today, we'll see you soon in our next call and following forward on the events that we'll have attending our investors. Thank you also to our IR team that it's a very good team, and we're very happy also to have the support of this team that will be with us also going forward. Thank you very much, and good day for all of you.

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