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

Welcome to the Davivienda's Fourth quarter of 2022 Earnings Conference Call. My name is Karen 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. Javier Suarez, Chief Executive Officer; and Mr. Ricardo Leon Otero, Chief Risk Officer. During the call, they will be discussing in depth the quarterly results released. If you have not yet received a copy of the earnings report and presentation, please visit our Investors kit or the Financial Information section at ir.davivienda.com. [Operator Instructions] Please note that this conference call is being recorded. [Operator Instructions] Before proceeding, let me mention that any looking forward statements are being made under the safe harbor provided by the Securities Litigation Reform Act of 1995. Actual performance could differ materially from anticipated in any forward-looking statements due to macroeconomic conditions, market risks and other factors beyond our control. I'm pleased to turn the call over to Mr. Javier Suarez, Chief Executive Officer. Mr. Suarez, the floor is yours.

Good morning, and welcome to Davivienda's Fourth Quarter 2022 Earnings Conference Call. Thank you very much for joining us today. Before we start, I would like to mention that the second half of the year turned out to be even more challenging than we anticipated with rapidly changing conditions that impacted our financial results. Despite this environment, we continued to consolidate our strategy, working hard in our digital transformation initiatives and reaching relevant goals on the ESG front. We see this landscape as a source of opportunities to work in different ways to continue building a profitable and sustainable business. At the beginning of 2022, the World Bank expected the global economy to grow at a 4% to 1% rate but later had to revise its expectations to 2.9%. This deterioration in global growth forecast was related to higher-than-expected inflation, which led to more restrictive monetary policies in the majority of countries, coupled with the Russian Ukraine conflict and oil scarcity. In light of this scenario, Colombia's GDP growth during the fourth quarter closed at 2.9%, reaching a 7.5% average growth for 2022, below market expectations. In the same way, as shown on the top right, confidence deteriorated during the year. Colombia ended with a 13.2% inflation, the highest in the last 23 years, considerably impacted by pressures in the food basket and non-alcoholic beverages, which contributed to over 1/3 of total annual inflation. Restaurant and hotel prices also showed upward pressures and the Colombian peso depreciation also generated an impact on new and used car prices, electricity, flights, home appliances, among others. Facing this situation, the Colombian Central Bank accelerated the normalization cycle, increasing the monetary policy rate by 8x during the year, taking it to 12% in December, 900 basis points over the 1 of December 2021 and in levels not since 1999. As of today, the rate stands at 12.75%. In addition to the central bank rate increases, funding costs were also impacted by the new net stable funding ratio requirements that have been phased in during the previous years, accounting for more than 400 basis points. The Colombian peso depreciated by 21% over the year, explained by the dollar appreciation worldwide and uncertainty about the local political environment. This behavior had an important impact on our results as we will explain later. All of these situations led us to remain cautious about the evolution of the macro environment for this year. We are expecting GDP to grow around 1%, a monetary policy rate of 8.5% by year-end and inflation of around 9.5%. Moving on to Central America on Slide 4. The region's economy decelerated in 2022, mainly impacted by external conditions, such as global interruptions on international commerce, higher oil and agricultural input prices and lower growth of Central America's main trading partners. El Salvador, Honduras and Panama took measures to control price increases, such as subsidies and lower taxes, which led inflation to reach its peak around midyear. In terms of monetary policy, Costa Rica Central Bank took its integration rate to 9%, while Honduras rate remained at 3% throughout the year. The Costa Rica and Colon appreciated by 7% during the year and 14% since its peak in June, supported by tourism recovery, higher foreign investment inflows and a better perception of country risk. We expect the region's GDP to grow around 3% and inflation to keep its normalization path in the different countries. Regarding the situation of El Salvador, the risk of a credit event in the short term has decreased as the country complied with its 2023 international bond payment. The next external payment schedule will be in 2025, which gives the country the opportunity to stabilize its income sources and improve its debt profile. Additionally, during 2022, the government was able to gradually reduce its fiscal deficit through limited expenditure and measures to control tax evasion. In light of these events, Moody's changed El Salvador credit outlook from negative to stable at the beginning of February. We continue to feel comfortable with our operation in the country, as we have seen healthy asset quality, stable margins and low cost of rising. Nonetheless, we continue to monitor the evolution of the economy and anticipate potential side effects in our results. Moving on to the main results of our business on Slide 5. We reached accumulated profits of COP 1.62 trillion, increasing 28% over the year. This translates into a 10.7% return on average equity below our expectations due to an even more challenging economic environment than anticipated and a materialization of a complex credit cycle, as mentioned before. One relevant component of this result corresponds to the exchange rate effects that we record in the other comprehensive income instead of passing them through the P&L. Remember that this is a particular strategy we use to immunize our CET1 ratio towards FX volatility. This accounts for almost COP 700 billion that are not recognized in total net profit. With such a result, our return on average equity would have been close to 16%. On the other hand, our CET1 ratio would have been between 20 to 30 basis points lower, and we have shown higher volatility during the year. Our loan portfolio grew around 22% on an annual basis with moderated dynamics during the quarter in line with our risk appetite. Our CET1 closed at 11.07%, supporting business growth during the year. In terms of margins, we were able to provide stability to our NIM during the year despite the higher-than-expected increase in interest rates and our liability-sensitive structure. Cost of risk reached 2.38%, mainly due to impacts on our consumer portfolio derived from the turn of the credit cycle, showing some pressure on PDLs, write-offs and provisions. We have reached 50 years in which we have been able to reach more people and companies by strengthening our value proposition, thereby delivering sustainable growth and supporting progress in the places where we operate. During 2022, our loan portfolio in retail and commercial banking reached double-digit growth with healthy dynamics also in the international operations. Additionally, the incorporation of ESG issues and development and digital capabilities are a comprehensive part of each business line as you can observe on the results presented. We have doubled the number of customers in 4 years, reaching $21.8 million by the end of 2022. We are very excited for the future that weighs upon us where we want to keep leveraging on technology, being more responsible with the planet and the people and supporting innovation and use entrepreneurs. Please move on to our ESG results on Slide 6. Consist of our ability to mobilize resources on the role we play as an engine of economic development, we are committed to promoting actions aimed at positive social impact, climate change mitigation and adaptation. In this sense, we have been growing our sustainable loan portfolio at a 19% rate during the last 2 years, thereby reaching COP 14.8 trillion, representing around 10% of our total loan portfolio. We were included in the S&P Dow Jones 2020 Sustainability Yearbook and the corresponding index as we continue to be considered among the top performers in the sector in terms of sustainable business practices. Additionally, we are strengthening our climate strategy and actively managing our footprint as shown by our most recent verifications of renewable energy use and carbon neutrality. These verifications mean that 100% of the electric energy used in our operations came from renewable sources and that our Scope 2 net emissions are 0 [ tox ]. The implementation of energy efficiency projects, generation of key energy, compensation actions and promotion of sustained culture across the organization allowed us to reach these goals. We have been working on evaluating climate risk associated with our loan and investment portfolio by measuring our Scope 3 emissions, leverage in the Partnership for Carbon Accounting Financials and incorporating the party's agreement capital transition assessment. We expect to disclose this information in our TCFD report this year. We will also continue participating in the transformation towards a more responsible inclusive financial system. By 2030, 30% of our loan portfolio is expected to have social or environmental purposes. On Slide 7, we present the evolution of the bank's digital transformation and direct platform. Generally speaking, our digital transformation continues to deliver positive results. In Colombia, digital sales and transactions continue to gain space compared to physical ones. Our digital loan portfolio grew almost 100% on a compounded basis over the past 2 years, while deposits grew 44%. More than 90% of our customers are considered to be digital. In the case of Central America, we have been dedicating efforts to increase our digital capabilities. And even though it lacks [indiscernible] results, we are starting to see positive trends in terms of digital sales and customers. We continue in the process of exporting and adapting most of our digital assets so that we can accelerate its transformation. DaviPlata continues to advance with interesting results with the customer base increasing 16% over the past 3 years, the average of low amount deposits increasing 46%, and the transactional income, excluding subsidies, distribution fees growing at 35% on a compounded basis. Going forward, we want to keep increasing our recurrency in the platform, active customers and service levels. With the capabilities of our DaviPlata platform and its team and with the synergies created with our commercial network, we see opportunities to keep positioning DaviPlata as to move money seamlessly for all. We're preparing to make DaviPlata the best option for people to pay on for businesses to receive payments. We will continue enhancing our credit offering, focusing on low amount credits using previous customer knowledge of their transactional highlights. These results show that we are on the right track. We expect to continue delivering results and planning opportunities to do so as we will discuss on the following slide. To end my presentation, please turn to Slide 8 as I would like to share with you the main strategic focuses in which we will be working on in the coming years to continue improving our results. The first is related to loan portfolio management, where we are working to enhance our credit business by improving our underwriting decisions. Our analytics capabilities are now allowing us to make more informed decisions based on an integrated view of customer product and channel. In this way, by better knowing and understanding our customers, we will be able to build the adequate offer and successfully reach them through the right channel. As part of this approach, we will leverage on our analysis and choose strategic segments to gradually adjust our loan mix in line with our appetite, aiming to increase our margins. As part of our efficiency efforts, we will continue working to simplify and optimize processes and structures to become a more agile organization. We want to work towards end-to-end digitalization and be able to offer our customers a 100% digital journey in which they are not only able to access a complete product offering through digital channels, but they are also able to manage the [ whole floor ] products associated services. By serving their needs this way, we will be able to better target our commercial stack efforts, increasing productivity and business dynamics through our branch network, which has been proven to be essential in pursuing growth and market share. By putting these actors in place, we will continue capitalizing on our digital transformation efforts, improving our efficiency. The tools mentioned before will be key for our next strategy, which is to increase our presence in the physical and dial monetize transactions of people and companies. We have been developing different transactional solutions as [indiscernible] Mi Comercio and Mi Negocio that help us reach entrepreneurs and small businesses, and we also have DaviPlata to be an active player in the payment and transfer ecosystem for all, as I mentioned before. Through these and other means, we will be working to reach and deepened relationships with employees, retirees and Colombians with remittances needs as well as developing specialized tailored offerings for businesses, corporates and allies, better integrating our solutions into their systems and even offering them improved cash management and advisory services. Another exciting work front is being more than a bank by going beyond the financial world. This is built over a deep understanding of the context in which our customers need to be able to develop strategic alliances that leverage the connection to different ecosystems in which we can create new digital experiences that so their needs while delivering high service standards. In the end, our goal is that people can rely on Davivienda as a mean to reach their agreements through either banking as a service or banking as channel strategies and by being part of the different ecosystems in which they live their lives. A key element of Davivienda’s value offered is customer service. In this matter, our goal is to offer a world-class service experience supported by a customer relationship model based both on our branch network and digital capabilities. proactive health that anticipates customer requirements with memorable resolution, self-management tools based on end-to-end digitalization and platform availability. Finally, we will continue to strengthen our operations in Central America, working specifically on 3 initiatives, focusing on SMEs aiming to be their preferred bank, serving regional companies with presence in the countries in which we operate, offering them central class and differentiated service to their transversal needs and enhance our insurance business through digital efforts and ecosystem development. The second part of last year posted a very complex environment that inevitably impacted our business. 2023 also seems challenging with significant uncertainties along the year. However, every difficult environment is full of opportunities, and we will do our best to seize them, leveraging on human talent, analytics and technology. Let me turn the call over to Mr. Ricardo Leon, our Executive Vice President, to continue with the presentation.

Thank you, Javier. Good morning, everyone. Please move on to Slide 9, where we analyze the evolution of assets. Our assets grew at a pace of around 4% over the quarter and close to 21% over the year, reaching a total asset balance of COP 184 trillion. As mentioned before, the Colombian peso depreciation of 5% during the quarter and 21% during the year had a considerable impact on our results. In this sense, excluding this effect, our assets all have grown 2.6% over the quarter and around 13% annually. Overall, the main driver for assets growth were the loan book dynamics, the increase in our investment portfolio in line with our liquidity management policies and according to our financial structure and derivatives and accounts receivables. In addition, our loss reserves increased due to our provisioning effort to manage credit risk. We're looking at each of our operations, Colombia's assets grew at a 15.5% rate and Central Americas at 11.7 rate in dollar. Please move on to Slide 10. Our gross loan portfolio grew by 22% on an annual basis, slightly higher than our expectation for the year. The depreciation of our currency accounted for around 740 basis points of the total loan book annual growth. Given the still strong credit demand despite the evolution of macroeconomic conditions, we adjusted our origination policies to contain reimbursements and improve the quality of new ones during the year. As a result, the consumer portfolio grew by around 28% annually, showing signs of deceleration during the quarter. Regarding the commercial portfolio, we observed credit demand dynamics mainly in Industrial and Services segment. Finally, [indiscernible] continued to grow at a good pace in the different segments, mainly in Colombia, mostly driven by our participation in low-income housing. In the international operation, the loan portfolio continued growing at a good pace, increasing by 12.4% annually, mainly explained by the commercial and consumer savings in Honduras and Panama. During the year, we continued working to complement our service offering for commercial customers, providing them with more digital solution that supported business dynamics. In the case of the consumer portfolio, we have seen significant demand for payable loans and credit cards. When analyzing the evolution of our loan mix, we see that it remained stable during the quarter, with retail banking accounting for 55.5% of the book and the commercial portfolio representing the remaining 44.5%. We will continue actively managing our credit business to target strategic segment, which will help us to increase our margins aligned with our risk appetite and strategy. Moving on to Slide 11. We present an update of our PDLs and coverage ratios. As you can see on the top graph, total PDLs over 90 days increased over the quarter as we have anticipated. The higher-than-expected inflation during the year and the accelerated increase in interest rates started to impact the portfolio, especially the consumer book, the increase in inflation and interest rates with no pressure on our customers' existing indebted levels and the payment capacity of previously aspire obligations. Moreover, despite the credit policy had just been made during the year to control the profile and quality of new disbursements, the vintage of 2022 are higher than expected, pressing asset quality and provision even for 2023. PDL for commercial and mortgage portfolio presented slightly increased during the quarter, which was expected given the credit cycle. Total coverage ratio closed around 14% decrease over the quarter in line with the higher pay loans. However, compared with 2021 levels, coverage has increased in line with our provisioning effort, mainly in the consumer segment. The mortgage and commercial portfolios to lower coverage levels as we released some provisions in the commercial segment due to improved risk profile and optimized provision for some of our mortgage loans with higher collaterals. However, we feel comfortable with these levels and we'll keep monitoring customers' condition to anticipate additional needs. Please move on to Slide 12, where we can see the evolution of cost of risk provision expenses and loans by state. The annualized quarter, cost of risk closed at 3.66%, and the 12 months cost of risk reached 2.38% in the higher end of our expectations. This results from the materialization of more challenging economic conditions during the second half of 2022, reflected not only in the their [ day models parameters ], but also in the forward-looking company recognizing the effect of macro variables. We expect the cost of risk to continue having pressure into 2023. Looking at our loan sales, we observe on stability during the quarter. Stage 1 increased is small due to portfolio growth. Stage 2 increase in absolute terms in the Consumer segment due to the mentioned conditions. As for Stage 3 loans, there is share decrease due to the improved commercial risk profile and consumer write-off during the year. Now please move on to Slide #13. Liabilities increased by around 21% over the year, supporting asset growth and contributing to maintaining an adequate balance sheet structure. General deposits increased by around 6% during the quarter and 52% on an annual basis, in line with the demand for this kind of product and due to the stable funding acquiring for the financial system. Bonds decreased 11.4% over the year, mainly due to the maturity of 2 of our international issuances and some others at the local level. Credit with entities grew around 53% annual, mainly explained by FX impact, our results acquired with the multilaterals and corresponding banks. We have been adjusting our funding structure during the last 2 years to support business growth and comply with the stable funding permit, and we feel comfortable with our current liquidity position. Please continue to Slide 14, where you will see our capital structure. We remain among the best capitalized banks in the region. As you can see, we have a credit and sufficient capital levels over the regulatory minimums to support expected growth. Our core equity Tier 1 ratio grows at 11.07%, remaining relatively stable over the quarter, mainly explained by lower weight asset growth, in line with the loan portfolio deceleration. The total capital adequacy ratio increased over the quarter due to FX impact despite the maturity of our international [indiscernible] Tier 2 subordinary bonds in July. When looking at the capital ratios evolution over the year, we observe a reduction mainly due to credit and operational risk-weighted assets, dividend distribution and lower levels of subordinated debt. Please take into account that we anticipate [indiscernible] and put in place a capital management strategy to proactively maintain our capital structure by issuing new [ 5G ] to issuing between 2019 and 2021 and AT1 notes in 2021. Finally, as Javier mentioned at the beginning of the call, due to our CET1 hedging strategy, an important portion of the FX depreciation is recorded in the other comprehensive income in equity. This helps us stabilize the core equity Tier 1 ratio keeping our exposure to assets in dollars in a year with significant depreciation to equity growth corresponding instead of having higher profit results. DTL 1 trillion were recognized in the OCI. If you were to recognize this as an income in the P&L net of taxes, would have approximately COP 2.3 trillion in profits. In this sense, our return on average equity would have been 15.9% for 2022. The flip side is that our [ core equity ] Tier 1 ratio will be more volatile and '22 [indiscernible] been lower at the end of the year. Due to our hedging strategy, our [ core equity ] Tier 1 ratio remained close to neutral to changes in the FX during the year. Please move to Slide 15, where we present our margins. The gross financial margin increased by 18% on an accumulated basis, mainly due to loan pricing to higher interest rates and a recovery in our investment income. However, these results are still offset by financial expenses considering higher-than-expected interest rate and pressure in cost of funding due to the implementation of the net stable funding range. As a result, our NIM closed at 6.04% at a lower end of our guidance for 2022. FX changes and derivatives has a loss during the quarter, mainly explained by our hedging strategy in Central America as the Costa Rica Colon continued depreciating against the U.S. dollar. This represents a loss in our P&L, compensated by an increase in the OCI within the equity. For 2023, there could be a potential expansion for our NIM depending on when the interest rates start to decrease. However, there is still some uncertainty regarding the path of inflation and interest rate for this year. Please continue to Slide #16. Nonfinancial income increased around 18% on an accumulated basis within our guidance. This behavior is mainly due to credit and debit card commissions, transaction fees as well as a base effect due to the goodwill impairment in El Salvador last year. On an accumulated basis, OpEx increased by around 17%, mainly explained by the increased UAS and benefits to employees, commercial staff incentive and other operational expenses. This growth was slightly above our expectation, mainly because of inflation and the depreciation of the Colombian peso. However, real OpEx growth was around 3.5%, taking into account year inflation of [ 13.12% ]. We are working to optimize our cost structure by implementing new strategies aiming to improve our efficiency ratios. Please move on to Slide 17 to analyze the bank's profits. Net profit decreased during the quarter, reaching COP 48 billion. This behavior is explained by higher provisions and operational expenses as well as a reduction in exchange and derivative income. On an accumulated basis, net profit closed around COP 1.6 trillion, increasing 28% compared to last year. However, considering what we explained before regarding our hedging strategy, our 12 months return on average equity closed at 10.74%. To finish the presentation, please move on to Slide 18 to comment on our update guidance for 2023. Considering Colombia's GDP is expected to grow around 1% at interest rates remain at higher levels. We expect our consolidated loan book to grow between 8% to 10%. We are expecting growth of 8% to 10% in the commercial and consumer portfolios and 9% to 10% in the mortgage portfolio. Regarding asset quality, we still expect some further impact of macroeconomic conditions with total PDLs closing between 2.9% to 3.3%. Our NIM should close between 6% to 6.3%, with some expansion room due to asset repricing, depending on when the Central Bank starts to decrease interest rates. We are expecting one last fees of 25 basis points in the [ intervention ] rate in March. As long as inflation is controlled, the rate should gradually decrease to 8.5% by year end. Our cost of risk closed about 2.3% to 2.6% as we anticipate a more challenging credit cycle. Nonfinancial income should grow between 9% to 11%, in line with portfolio activity. We expect an OpEx growth from 11% to 13% aligned with expected inflation levels, the Colombian peso depreciation and business growth. Finally, our return on average equity should close between 11% to 14%. We will continue monitoring the evolution of macro and business dynamics for any potential [ a base ] to our guidance on the year. Thank you for your attention. At this time, we can move on to the question-and-answer session.

[Operator Instructions] The first question comes from Jitendra Singh from HSBC. Her question is, in the worst-case scenario with no economic growth, 0% GDP growth, how do you think that will have an impact on your credit growth as quality and profitability of the bank? Will ROE reach the level that we have seen during the pandemic?

This is Ricardo Leon [indiscernible] thank you for your question. In your first question, in this scenario, credit growth may decrease a little bit asset quality to increase towards the higher end of our guidance, and profitability could be slightly affected. It's important to mention that we have been more [indiscernible] in our in institutions. So we include our scenario in our all looking as to mention, pillars sorry. Related to your second…

Our second question, comes…

Related to the second question. So in the second question, when grow reach the level we have seen in the pandemic. Actually, we are not pursuing such a scenario at the time. For the moment, we expect it to grow between 11% to 14% in the [indiscernible]. Thank you.

Our second question comes from Fiorella Lastretto from AFP Integra. What are the strategies that you are going to apply in order to create a balance between growth of loans and the cost of risks in a context of high inflation and low growth of GDP.

Fiorella, this is Javier Suarez. Regarding your question, we are definitely seeing a change in the cycle since the second -- third quarter of last year, and we are adjusting to that. Our underwriting standards have been tightening. So we're expecting to see lower growth on our loan portfolio, as mentioned by Ricardo, in our guidance, we're aiming to close to single-digit growth in the loan portfolio, basically because we see a challenging macroeconomic scenario and [ that wouldn’t by ] being more selective on the type of loans that we will be disposing. So definitely, we will move towards lower growth and better quality of our loan portfolio during to the macro conditions.

Our third question comes from Manuela Mora from Compass. Could you please give us more color on why provisions increased so much? Did your models in the last update didn't incorporate the macroeconomic outlook for 2023? Could this continue throughout the year?

Manuel thank you for your question. During the fourth quarter, we saw an increase in the provision expense in the -- especially due to timing effects in the first, almost half of provisions are due to remuneration and deterioration, similar to what we saw in the quarter. [ Multiply of ] the provision due to parameters doesn’t change, a debt parameter, which take into account the increase in risk profile and increase the provision level for the rest of the performance portfolio. 20% is due to forward companies reflecting a challenging economic environment going forward. So only looking -- forward-looking days, if it represents around 70 basis points for our annualized credit cost of risk and around 20 basis points of our base points cost of risk. Thank you.

Now our fourth question comes from Maria...

[indiscernible] Second question.

I'm sorry.

The second question, sorry, related to the model is the model incorporate, not the macroeconomic outlook. The macroeconomic projection or figures, I think [indiscernible] in the macroeconomic forward-looking estimation. The model are also a gate to incorporate the new plans of the liquidity of the portfolio and obviously, the inflation that we are expecting for the year. Another element that in all moments we have testing to estimate our better figure for the next 12 months. Actually, there are more variables in Corporate but are maybe much important anyway. Thank you.

Now our fourth question comes from María-José Quiñones from Seminario SAB. For such higher provisions for this quarter, do you expect a higher increase of PLs during 2023??

María-José thank you for your question. At the end of 2022, we have some iteration in totals [indiscernible] related to the heavier similar in the consumer portfolio. As we anticipate -- anticipated, we saw some impact in our customers paying capacity past due to high interest rates and household indebtedness levels which been affected due to the current inflation. So 2023, we are expecting a PDL ratio navigates around 2.9% to 3.3%. Of course, in commercial portfolio, we are expecting 2.2% in use ratio, consuming around 3% and more as around in a high of or 24%. Thank you.

Now our fifth question comes from Daniel Mora from CrediCorp Capital. Can you provide additional comments regarding the consumer segment deterioration. This increase in NPLs is explained by past loans or the new disbursements in quarters of 2022 and I'd like to understand if growing in this challenging year, knowing a material deterioration of asset quality indicators in 2023 was a good strategy. What is the outlook for the 2023 consumer segment NPLs and the strategy to control the NPL formation?

Daniel, this is Javier Suarez. Thank you for your question. Regarding your first question on Consumer segment deterioration, we saw an increase in our consumer loan book at the beginning of last year, especially during the first half of last year. And during the third and fourth quarter of the year, we saw a slight decrease, and we started a downward trend in terms of new loan disbursements. That happened because of the way we were tightening our underwriting policies. So we -- by mid of last year, we started tightening those underwriting policies. So we started to see a flow business that was decreasing. And it's something that is happening more clearly during the end of last year. And coming into 2023, we're definitely seeing a level of new disbursement that is significantly lower than the one we had 1 year before. In terms of your question out whether growing in this challenging year is essential strategy. We are coming from more than 20% growth for the end 2022 by -- for 2023, as we saw during the guidance presentation that Ricardo went through, our expectation is growth on 8% to 10%. If you take into account the inflation that we're expecting, we're actually in real terms, our loan portfolio will be decreasing. So definitely, we are prioritizing quality or growth on the strategy for 2023. In terms of the outlook for 2023, consumer segment NPLs and the strategy to control the NPL formation. As I mentioned before, during the second half of last year, in several times, we've been tightening the underwriting standards for new loans. Of course, the macroeconomic environment has been changing, and that's definitely something that has impacted our results. And as conditions have deteriorated, we have been timing the standards in terms of credit scoring in terms of segments, in terms of collaterals that we're looking for in some lines of loans. So definitely, we're seeing a significant change in the way we are originating loans since the second half of last year. It takes some time for the loans that have been originated before that to go through the process of payment and NPL formation, and we are in -- right in the middle of that process. So that I would say is like a recap of what we're doing, we are definitely focusing on quality over growth, and that has been the case for many months for the last 2 quarters already.

Our next question comes from Camila [indiscernible] from Bancolombia. Could you please repeat the reasons on why the provisions increased so much? The sound quality wasn't the best, and it was hard to understand.

Camilla, thank you for your question. Just to clarify, our fourth quarter provisions were COP 1.3 trillion and more than half of that number comes from forward-looking adjustments as well as parameter adjustments. So, we're definitely including in this quarter, a forward-looking view that is consistent with our macroeconomic view of the environment and the way that the portfolio has been performing. We had updated these numbers in -- by the June quarter of last year. So, the adjustment now for this quarter takes into account what happened during the last 6 months. So definitely, there is a significant amount of provisions that we are incorporating due to forward-looking views. That's more than half of the provisions that we are taking into consideration for the quarter. We believe that the sensible approach as economic conditions have tightened, we believe that is the best way to go is to for now, be very consistent with our economic outlook and update the parameters. We might be going a little bit more than what we could in terms of adjustment of the parameters, but we believe that given the uncertainties that we have in front of us that the best approach.

Our next question comes from Andreas [indiscernible] from Banco de Bogota. I have 2 questions. The first one is, what is your CET1 expectation for 2023? The second question is related to the dividends distribution. What is your dividend payout ratio expectation for this year?

[ Andres, ] thank you for your question. Related to the credit 1 level. By the end of 2022, we are expecting adequacy level to leverage business growth around 11%. For [ equity Q1 ], around 81% for the total capital adequacy ratio between 15% to 16%. This is mainly explained by higher risk assets due to the business expectation growth and lower rate of Q1 issuings in our financial statement.

And in terms of dividends, our expectation is to -- the Board of Directors has recommended shareholders to distribute 40% of Colombia's profit, which corresponds to COP 1010 per share. In consolidated terms, this represents a distribution of around 28%.

There seems to be no further questions in our webcast. So we'll now turn to then -- I'm sorry, there is a new question webcast. This question comes from Andrea Testa from Bancolombia. Good morning. Taking into account the bank's digital strategy, how do you expect digital transactions and sales to continue to behave in 2023? Is it possible to know how the number of clients has grown since the alliance with Rappi? And how do you expect this alliance to continue contributing to the origination of new credits?

Thank you, Andrea. In terms of the first question on the bank's digital strategy, we're fully committed to moving forward with our digital transformation. We expect digital transactions to keep growing, and our sales will definitely move towards digital sales, especially on the retail banking side in which the number of -- the percentage of sales that we do through our digital platforms is dominating now, but it's close to anywhere from 70% to 80% of new products are being opened through digital channels. And in terms of digital transactions, just to give you a number, less than 10% of transactions are branch office anacondas. So we're definitely moving forward with the detail transformation, and we will be deploying new capabilities for our clients in the next few months that will not only enable them to transact or to open new products but also to have a full end-to-end service customer journey so that the need to go to a branch office are pretty much on for retail customers that will be able to self-serve within the app for close to 95% of the services that are being performed at branch offices. With regard to Rappi alliance, we are not incorporating the numbers of Rappi within the Davivienda financials as we don't consolidate that operation. But I can tell you that the number of customers that are already using the platform and other products is close to 1 million in one of the products and more than 500,000 debit cards that have been issued. On the credit card business, there's also good numbers, more than 200,000 new credit cards that are part of the Rappi operation in terms of the credit card business. So we're seeing traction there. Of course, it's also subject to the same macroeconomic conditions that we already mentioned before. So we know that probably growth will not be as fast as we were expecting the year before because of also tightening underwriting conditions for credit card new businesses.

There seem to be no further questions on our webcast at the moment. So we will now move on to the phone line. [Operator Instructions]

This is [ Austin Rodrigo from Ashmore ]. I have 3 questions today. The first one is on the FX strategy and the overall hedge that you mentioned during the presentation regarding the capital position and the overall hedging strategy. Could you comment on the rationale on why should you keep this strategy going forward? The reason I'm asking is because, as you mentioned during the presentation, there was a negative effect on profitability. But on the other hand, the potential effect on capital would been just 20 to 30 basis points on CET1 ratio. And you have one of the highest capital position in the local industry. So I'm just wondering why do you keep this strategy? The second question is related to probably follow up on cost of risk provision and asset quality. But just wondering, again, the rationale of management decision here is when you see the credit cycle of 2019 leading to the pandemic, you were growing very fast on consumer. And obviously, nobody expected the pandemic. But when you go to 2022, there were already signs that 2023 going -- it was going to be very challenging, particularly after the presidential election and the overall economic slowdown. So my specific question here is why didn't you tighten before your credit and origination policies so that there was a further prevention to what we're seeing today. I would ask those 2 questions, and then I would ask a final one after the answers.

So Austin, thank you for your questions. Regarding the FX strategy, that strategy has been in place for many years, many years in which we were -- as you were mentioning, we were somehow prioritizing our capital position. The growth of the bank during in the last few years have been very significant. So we needed to have room to support our strategy, our growth strategy. And that came out very well over the last 5 or 6 years, including the U.S. pre-pandemic. Conditions changed rapidly. As we all know, last year, exchange rates changed dramatically due to several reasons. And definitely, there's an impact on our P&L. We're looking into that strategy into the future to see if there's any adjustments that we should go through because as you mentioned, there's sort of volatility on the P&L that at the time the conditions of the recycle is something that we are addressing. So just to summarize, this is a strategy that has been there for many years, and we are looking into it because of the change in the curing conditions. Regarding the speed at which we've been tightening our underwriting policies for the consumer loans. We started making adjustments by June of last year. It's something that began at the end of last year. The adjustment were gradual adjustments, and we were monitoring the -- how the disbursement were moving. And as we saw that the growth of the portfolio was still a large significant growth, we kept tightening our underwriting standards in the -- during every month of the second half of last year. It takes some time for that to go to the pipeline in terms of applying those new criteria to new loans. And as we are seeing that if we look at the loans that were being [ reignited ] by September, October -- those have definitely a very different behavior to the ones that we had during the first half of last year. So even though we're seeing the impact of the deterioration of the loan portfolio and now especially in the last quarter of last year. That doesn't mean that the corrections were not in place during a significant part of the year. It means that it takes some time for us to understand the effect of each one of those changes in adjustments in underwriting standards as well as how they go through the cycle with our clients. So we were aware by the second half of last year, by the beginning of the second half of last year that we needed to slow down the growth in the consumer loan portfolio, and we actually took action in that sense. We will see that in the coming months in terms of the growth of the consumer portfolio. The impact of those changes in the standards will be felt in -- during these coming quarters in terms of much lower growth.

We have just received a new question through our webcast. This question comes from [indiscernible] from Gramercy. Can you comment on cost of funding, given higher for longer interest rate environment.

Thank you for your question. Maybe I can explain that in terms of net interest margin. For 2023, we are expecting our NIM to grow between 6% to 6.3%. There could be an expansion compared to 2022, depending on when the interest rate start to decrease. And the iteration and entire policy rate, [indiscernible] 2023 is still uncertain. A whereabout expecting our last 25 basis point increase in interest rates in the rate on March. And as long as the inflation is being controlled, directly gradually decreased to 8.5% at the end of the year. In this scenario, we could see some improvement in our NIM as ability to pricing may be close to its end, and our other will still have some room product pricing. In this context, our new may expand as regard between financial income and expenses, widen.

Let's move on to our phone line. Our Sebastian seem to have a further question, Sebastian Gallego, do you have any other questions? Sebastian Gallego from Ashmore.

Okay. Sorry for the confusion. Yes. I just had one final question, and it is regarding if you could comment on the competition in the local market, particularly on the acquiring business? And how are you seeing your capabilities and your opportunities compared to other participants or to other competitors? And yes, if you could comment a little bit on the competitive landscape within the acquiring business.

Thank you, Sebastian. We're seeing a very active landscape in terms of the acquiring business and in general, in terms of all the payment systems are full of innovation, new players, new entrants, new business models. And we definitely believe that we have a very good opportunity there. We already have a significant market share in the acquiring business. And we are working in different strategies to improve our position there. One that I mentioned during the initial remarks was we are working very hard in small businesses acquiring and through different strategies that complement each other. One is Mi Comercio, which is the opportunity to enroll a small business within our app, our retail Davivienda app as a merchant. And that's a strategy that we are working hard on it. And we believe that it makes sense -- it makes a lot of sense for us to give a very easy-to-use digital capabilities for a small merchant to open an acquiring account, and that has been a strategy that we've been preparing for many months, and it's already out in the market, and we are actually with our sales force are working hardly with very good results. The second one is Mi Negocio goes to a lower end of the permit to very small mom-and-pop shops that can actually accept digital payments through DaviPlata. And actually, we will open that to other platforms. But for now, it's through DaviPlata through -- close to 16 million customers that DaviPlata has will be able to pay a very small merchants. We're close to 1.8 million merchants that we didn't have 2 years ago. So that's definitely a competitive position in which we want to be part of. With regard to traditional segments of the market, which are more oriented towards digital sales and e-commerce, we also have a very good presence. And actually, we are a net winner during the last couple of years in terms of our market share on e-commerce. That's part of our strategy, and we will be working also -- we have some products in the pipeline that will definitely be part of it. So the acquiring business and the overall payments business is something that we're very invested and we're actually very committed to keep growing our market share in those markets.

There seem to be no further questions at this time. With that, I'd like to turn the floor back to Mr. Suarez for any closing remarks. Mr. Suarez, the floor is yours.

Thank you very much for -- to everybody for being here this morning. For us, it's a pleasure to share with you our results for last year. We understand that it's a challenging environment that some of our results are below our expectations. We believe that the challenging market conditions will be here for this year, for some time during this year, and we are prepared for that. Our capital ratios and our capital numbers are given the ability to manage these difficult macro times, especially for our loan portfolio and the consumer loan portfolio. And we're definitely expecting to see improving conditions during the second half of this year. During the first half, we'll still see that we will have to go through part of the cycle, the credit cycle that we are going through. The provisions that we are incorporating into the numbers include forward-looking views, as I mentioned before that in our view is a sensible approach in terms of making sure that we incorporate the expectations for the market conditions. In terms of new strategies and new businesses, we were very excited with all the developments on the digital platforms of the bank, both DaviPlata and Davivienda. The pipeline is full of new releases that will help us get closer to our customers in terms of ease of use and a complete portfolio of digital products and we'll definitely reap the benefits of this strategy in the coming months. This will also have an impact on our efficiency numbers that should also improve as compared to this quarter for the next coming quarters. We are optimistic even though the conditions are challenging, and we are optimistic in terms of the results for the coming months. Thank you very much to everyone for being here with us, and we look forward to see you again at the end of the next quarter.

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