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

Welcome to Davivienda Second Quarter of 2023 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 Investor Kit on the Financial Information section at ir.davivienda.com. Please note that this conference is being recorded. [Operator Instructions] Before getting started, 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. Javier Suarez, Chief Executive Officer. Mr. Suarez, the floor is yours.

Good morning, and welcome to Davivienda's Second Quarter of 2023 Earnings Conference Call. Thank you very much for joining us today. I would like to start by mentioning that this year has proven to be even more challenging than anticipated. Macroeconomic conditions continue impacting our results, especially margins and credit risk. In this sense, we believe that the rest of 2023 will also be challenging, leading us to revise our expectations for the year. Considering this, we are working to reverse the trends through short- and medium-term actions while remaining focused and committed to our vision for the future. We believe our efforts in digitalization, customer experience and our different value-creating initiatives will continue to give us a significant competitive advantage that will help us deliver even more value to all of our stakeholders in the future. In the following slides, I will explain the current macro and financial system conditions, the main results for this quarter, the evolution of our margins and credit risk and our expectations going forward. On Slide 3, we can observe how Colombia's economy continues decelerating, following the trends seen throughout 2023, in line with the contractionary policy of the Central Bank. The economic activity index for April and May has shown practically no growth, in line with the correction of macroeconomic imbalances through rate hikes and a moderation in the fiscal deficit. Aligned with this trend, we are expecting a 1.1% GDP growth for this year. When looking at the exchange rate behavior, the Colombian peso appreciated against the dollar during the quarter, explained by the dollars lost in value around the globe, as well as lower uncertainty following the base on the government's reforms. The local market in Colombia has faced some liquidity restrictions in recent months. This is explained by increased government deposits with the Central Bank due to higher tax collections and lower budget execution. These impacts have led term deposit rates to increase again after the normalization we have seen in March when banks complied with a net stable funding ratio. As a result, we have not yet seen the decrease in interest rate we were expecting, which maintains the pressure on our financial expenses. Regarding inflation, we began seeing a decrease in this ratio during the quarter from 13.3% in March to 11.8% in June, supported by lower food prices. Despite the improvement in July's inflation figure, it remains at a very high level, which in turn continues impacting the payment capacity of households, affecting PDLs for the whole system. The last increase of the Central Bank's rate occurred in April and has remained stable at 13.25%, signaling the end of the increasing cycle given the GDP and inflation behavior. We expect inflation to gradually decrease to 9.5% by the end of 2023, and the monetary policy rate to start to decrease around October, closing at levels between 11.5% and 12%. Regarding 2024, we expect Colombia's economy to behave similarly to 2023 with GDP growing around 1.7% and inflation continuing with its downward trend closed in 2024 in the range of 3% to 4.5%. Lastly, in line with reduced inflation, we expect interest rate to return to levels of around 6.75%. Moving on to Slide 4, taking the overall state of the economy into account, we can see how the financial systems loan portfolio has normalized its growth, in line with the high inflation and interest rate environment as well as the adjustments in origination policies from credit establishments to reduce disbursements. As you can see in the graph, the consumer segment is experiencing the most pronounced decrease. In line with lower credit demand and high competition, average loan rates have decreased in recent months but remain at historically high levels, which continue to pressure payment capacity. These conditions have impacted asset quality through our Colombia's financial system with the consumer portfolio being the most effective. Total PDLs over 30 days have been increasing since the end of last year, while the consumer segment has shown an upward trend since June 2022, reaching levels above those of the pandemic. Moving on to Central America on Slide 5. The region's economy showed signs of stabilization during the first quarter of 2023, while Costa Rica presented some improved trends, growing by 4.3% and El Salvador and Honduras had moderate results with increases of 0.8% and 1.9%, respectively. Regarding inflation, the downward trend continued throughout the quarter, mainly attributed to the decrease in fuel prices and lower food costs. Costa Rica presented the highest decrease in inflation with a result of minus 1%, supported by the colón appreciation throughout the year followed by Panama with minus 0.6%. Taking these positive results in terms of inflation, Costa Rica Central Bank was able to decrease its intervention rate to 7%, while the rate remained stable at 3% in Honduras. In terms of the region's currencies, the Costa Rican colón presented a slight depreciation of 0.75% during the quarter and an appreciation of 9.4% this year while the Honduran lempira remained relatively stable. We expect region's GDP to grow between 3% and 4% and inflation to behave in a more stable manner by the end of the year. Moving on to the main results of our business on Slide 6. In line with our risk appetite adjustments and the different actions we've taken, our portfolio remained stable during the quarter when excluding the FX impact, reflecting our focus on controlling growth and recomposing our loan mix. On an annual basis, the loan book has grown by 8%. Regarding credit risk, total PDLs reached 4.42%, mainly driven by further deterioration in the consumer portfolio. This led us to continue increasing provisions, resulting in a 3.3% cost of risk for the last 12 months. However, even if these levels are higher than the initially forecasted for the year, the risk segments that are currently affected within our portfolio have already been identified. We are carefully managing the situation to rebuild the loan book and return to these higher credit risk levels in the future. In terms of margins our NIM remains stable considering the high interest rate environment and liquidity conditions, which have increased funding costs as well as a decrease in lower income due to lower growth, as mentioned before. As a result, our accumulated profit closed at COP 262 billion, representing a 77.6% decrease over the year, translating into a 12-month ROAE of 4.5%. However, in this context of lower profits, our CET1 stands at 10.74% among the best levels in system, demonstrating a solid capital structure to support our business in this scenario. Despite these results, we want to share with you some highlights of the development of our business in the past few months. In terms of ratings, S&P and Moody's recently ratified our international ratings with a stable perspective. In the case of S&P, we continue to be capped by the sovereign rating, even though we have a higher stand-alone credit profile. We were also ratified as AAA by BRC at the local level. Additionally, we continue to find opportunities to keep evolving and advancing in our strategic path, which continues to show results. In this sense, we proudly announced that we deployed the first interoperable QR in Colombia, which overcomes the payment barrier for businesses and customers could only receive and send payments from accounts of the same bank. Now merchants can obtain their QR code at no additional cost, allowing them to receive payments instantly from other banks and digital wallets, helping them to increase their sales. For 2023, we expect to have 800,000 businesses using either a physical or digital QR. Our digitalization efforts in matters such as digital channels, infrastructure and artificial intelligence have led us to be recognized as the best digital bank in Latin America by Euromoney and as the most innovative bank in Latin America by The Innovators. Additionally, we were the only Colombian company to be awarded in the World Economic Magazine Awards being recognized in 3 categories: Best Bank in Sustainable Finance, thanks to our commitment to environmental issues Best Digital Bank and Best Bank for Financial Inclusion, thanks to DaviPlata. These recognitions show that we continue progressing towards our long-term vision, developing different capabilities and leveraging technologies to generate sustainable business growth and capitalize on higher value in the future. In the following 2 slides, I will comment on the evolution of our margins and credit portfolio. On Slide 7, we present information regarding our margins in Colombia. On the asset side, as we keep our efforts to control growth, recompose the portfolio and improve new originations, our loan book has decreased temporarily. At the same time, there has been an increase in nonperforming loans affecting the income generation of our loan portfolio. In addition, we had an impact during this quarter related to lower inflation which has affected the rates of the loan portfolio tied to the inflation-linked unit. We also had a lower result in investment income when compared to the previous quarter, which explains the reduction in its implicit rate. However, our investments have shown a very positive trend during the past 2 quarters, in line with the decrease in the yield curves in the market. On the liability side of the equation, in line with the stabilization of the monetary policy rate, we have seen a slight decrease in funding implicit rates as shown in the top right graph. This behavior has helped moderate financial expense growth during this quarter. However, there are still pressures in funding costs, especially in longer-term funding in line with the limited liquidity, we are observing in Colombia's financial system. This pressure is not allowing our liabilities to reprice downwards as fast as we were expecting. As we mentioned during our previous conference call, we're making efforts to reduce our cost of funding by decreasing the amount of high-cost demand deposits. However, this effect is taking longer to consolidate mainly due to the increase in term deposits, in line with long-term funding needs and customer demand for these instruments. These situations led us to believe that the initiatives we are implementing will take a little longer to materialize into improvements in our margins, thereby taking us to adjust our NIM expectations for 2023 in the range of 6.0% to 6.3%. For 2024, we expect our NIM to recover to more normal levels, supported by a lower concentration of high-cost liabilities and the normalization of interest rates. Please move on to Slide 8, where I will talk about the evolution of credit risk. As we have shared with you before, last year, we started to identify some segments of the consumer portfolio because payment capacity was hardly affected by the substantial and rapid change in macroeconomic conditions. This situation led us to implement the different measures we have shared with you in the last couple of calls. And now with increasing provisioning levels since the fourth quarter of 2022, reaching the current 3.3% cost of risk for the last 12 months. More recent analysis have revealed a deeper deterioration than the 1 we had forecasted for those vintages, which will lead us to continue making the important provisioning efforts during the coming quarters. As you can see in the top left graph, in December, we did an important provisioning effort anticipating part of 2023 deterioration through parameters calibration and forward-looking adjustments and that's why the first quarter of the year was quarter with these provision expense. However, as conditions turn out to be harder than we were expecting, we increased provisions during the second quarter. If instead of anticipating provisions through the adjustments, I just mentioned, we have made them as the portfolio impairment materialize. The provisioning expense would exhibit a more gradual trajectory as shown in the graph with a smooth decline in this and the next quarter returning to a more normalized trajectory in the midterm. In this sense, we believe we have already observed around 2/3 of the credit cycle shock related to that portfolio. During the second half of the year, we will cover another 25% and in 2023 with around 90% of the cycle absorption, which translates into a cycle of high cost of risk in the next 2 quarters. We will cover the remaining impact in 2024. This leads us to significantly modify our cost of risk guidance for 2023 with the ratio closing at levels between 3.6% to 3.9% for the whole year, which is also impacted by almost no loan growth. We continue working very hard in implementing different actions to revert the trends observed and have already seen some progress on those fronts. As you can see in the top right graph, there has been a noticeable downward trend in disbursements in the consumer portfolio since the third quarter of 2022, given the changes to our origination policies. In line with these efforts and our risk appetite adjustments, we are seeing some recomposition in our consumer portfolio towards more secured segments, such as payrolls and credit cards, while unsecured personal loans have begun to lose some participation as observed in the bottom left. Thanks to the adjustments we have made in our policies, models and controls, we are having signs of improvement in more recent vintages, which are behaving similarly to 2021 levels, leverage on the lessons we have learned while building our digital capabilities. Going forward, better asset quality, new disbursements and lower portfolio growth should result in lower provisions. We expect to return in 2024 to cost of risk levels more aligned with the historical levels for our consumer portfolio, considering the slower economic activity expected for the remainder of the year. To end my presentation, please turn to Slide 9 for an overview of DaviPlata. DaviPlata customers increased by 11% annual, reaching 16.4 million, adding 1.7 million during the last 12 months. When looking at the annual evolution, we observed positive trends regarding low amount deposits, income, transactions and purchases. DaviPlata's total income slightly decreased during the quarter, mainly explained by FTP income due to the decrease in funding implicit rates. As for DaviPlata nanocredit, as you can see in the bottom left graph, both the portfolio and disbursements have decreased during the quarter in line with our current loan origination efforts implemented in the operation overall. Lastly, we would like to highlight that DaviPlata in the digital wallet that brings the most remittances in Colombia. Thanks to our strategic alliances with 13 remittance companies worldwide, we have helped more than 73,000 Colombians receive money from abroad, translating into 600,000 transactions for a total value of around COP 234 billion. Also, we continue expanding the platforms reached by allowing teenagers, over 14 years old to access their own DaviPlata account with their parents' permission. This initiative will give 3.2 million young people access to a financial system, renovate the financial world and how to save and manage their money responsively through the -- with active learning modules. As of June, there have been 47,000 new users of DaviPlata, thanks to this initiative. Let me now turn the call over to Ricardo Leon, our Risk Executive Vice President to continue with the presentation.

Thank you, Javier. Good morning, everyone. Please move on to Slide 10, where we will analyze the evolution of assets. Our total assets closed at COP 181 trillion, contracting by around 3% over the quarter due to the decrease of our loan book, cash and investments on top of an exchange rate effect. Excluding the Colombia peso appreciation, assets grew 0.8% compared to the first quarter. On an annual basis, assets increased around 9% over the year. When looking at each of our operations, Colombia's assets decreased by 0.6%, while Central America grew 0% in dollars over the quarter. Please move on to Slide 11. As you can see on the top left graph, the loan portfolio shows a more moderated growth both in Colombia and Central America, increasing by 8% over the year at the consolidated level. When excluding the exchange rate, the portfolio grew by 0.2% over the quarter, in line with our origination policies. The consumer portfolio contracted by around 4.9% during the quarter, mainly explained by the FX appreciation, lower disbursements and write-off. This is aligned with the different measures we are taking to recompose the portfolio towards segments within our current risk appetite. Regarding the commercial portfolio, we observed a slight 1% growth during the quarter when excluding FX as there has been lower business dynamics in the context of an uncertain environment for investment and lower activity during the quarter. Despite the 2.2% growth in the mortgage portfolio, during the quarter, with excluding FX, growth was affected by some restrictions on low-income housing, subsidies allocation and granting, which led to lower disbursement levels when compared to other periods. Regarding our loan mix, we are already observing changes compared to a year ago with the consumer portfolio decreasing its share and the mortgage and commercial portfolio, getting the space over the total portfolio, showing that our efforts are already slated into a loan book recomposition. We will keep adjusting our portfolio in order to target segments with better profitability and risk profiles. Moving on to Slide 12, we present an update of our PDLs and coverage ratios. As you can see on the top graph, total PDLs over 90 days kept increasing over the quarter above what we originally expected for the year. As Javier mentioned, customer payment capacity continued to be deeply affected by high interest rates and inflation, causing our PDLs to increase, particularly affecting the consumer segment. Additionally, it's important to mention that PDLs are also impacted by a lower portfolio base. The PDL formation within the consumer portfolio is mainly explained by consumers with medium to high risk profiles and lower income levels. This both mostly in 2022 in the unsecured personal loans portfolio, [ whose ] financial volume was importantly affected by the rapid change in macroeconomic conditions. In the case of the commercial book, PDLs increased during the quarter, mainly due to the deterioration of some customers in the service, industrial and commerce sectors also affected by macroeconomic conditions. Lastly, the mortgage portfolio presented an increase during the quarter due to the inflation and the interest rate increases as well as changes in the value of parameters for this portfolio that will maintain the ratio at slightly higher levels going forward. Out of the 32 basis points increase of the ratio during the quarter, around 20 basis points are explained by these changes. In terms of coverage, the total ratio closed around 107%, decreasing over the quarter, affected by the past due loans despite our provisioning efforts. Please take into account that in the case of the commercial and mortgage portfolios, we have been optimizing coverage levels to better recognizing collaterals and risk profiles. Please move on to Slide 13, where we can see the evolution of cost of risk, provision expenses and loans by sales. The annualized quarterly cost of risk closed at 4.32%, and the 12-month cost of risk reached 3.3%, increasing over the quarter. This behavior is mainly explained by the increase in provision expenses and lower growth as our portfolio has deteriorated at a faster pace than what we initially expected in line with the challenges we have mentioned before. Looking at our loans by stages, we observe Stage 2 and 3, increase their share in the overall portfolio due to the evolution of the consumer and commercial segments during the year. In terms of coverage by sales, we see the ratios remaining relatively stable given our provisioning effort in the quarter. Now please move on to Slide #14. Liabilities increased by around 9% over the year in line with asset behavior and our funding mix. As we have been observing throughout the system, the funding mix structure has been changing with term deposits increasing and partially replacing demand deposits. This might be explained by different reasons, such as the systems need for long-term instruments to comply with the NSFR limitations on going to the market with bonds issuance due to the current conditions and higher customer preference for more profitable instruments as term deposits. However, as you can see in the bottom left graph, our demand deposits account for around 41% of the total funding, and we continue gradually decreasing our high-cost demand deposits to improve funding costs. Bonds decreased [ 22.8% ] over the year, in line with the [ activity ] of some of our issuances over the past year. Lastly, credits with entities grew around 13% annually, mainly explained by resources acquired throughout the previous year with the referrals and corresponding banks. In terms of liquidity ratios, as you can see in the bottom right graph, the LCR decreased during the quarter as the ratio for the first quarter was unusually high. This behavior is explained due to an increase in term deposit funding, anticipating methodology changes in the NSFR. We feel comfortable with the current levels of both the liquidity coverage ratio and net stable funding ratio. Please continue to Slide #15, where you'll see our capital structure. Our CET1 ratio grows at 10.74%, increasing by around 25 basis points over the quarter and decreasing by 32 basis points over the year. The quarterly behavior is mainly explained by lower risk-weighted assets in line with the decrease in the loan portfolio and reduced market value at risk as we have decreased our position in dollars. The total capital adequacy ratio slightly decreased over the quarter mainly due to the volatility of the exchange rate and lower weight of subordinated debt issuing denominated in Colombian pesos. As we already mentioned, despite the trend seen during the previous quarter, we have adequate and sufficient capital levels over the regulatory means to support further growth and the risk we assume in developing our business. Please move to Slide 16, where we present our margins. In line with the decrease in our loan portfolio and higher nonperforming loans, we saw some impact in loan income, which decreased by 1.4% over the quarter. Income from our investment portfolio continues behaving positively, however, the decrease seen during the quarter is mainly due to a base effect given the high results obtained during the previous one. Financial expenses increased by 1.2% over the quarter, moderating its growth in line with our efforts to reduce financial expenses above still pressured by high rates in the market. This condition leads over 12-months NIM to remain stable, as the decrease in loan income is compensated with the result of our investments. On the other hand, our 12-month NIM including FX and derivatives remains impacted by the appreciation of the Colombian peso during the quarter and the Costa Rican colón call on during the year. Please continue to Slide #17. Nonfinancial income increased by around 12% on an annual basis, close to our expectation for the year. This behavior is mainly due to credit and debit card omissions, handling fees and income from insurance placement from our bank assurance business. On a quarterly basis, other income is showing a base effect since we received dividends during the first quarter. On the other hand, OpEx increased by around 19% over the year as it remains affected by inflation, salary increases and the volatility of the different currencies we handle in our operation. Please bear in mind that when excluding the FX impact, expenses will have grown by 12.7% on an accumulated basis. Additionally, we see a reduction in [ credit ] terms which is helped by the appreciation of the exchange ratio in the quarter and reduced performance expenses due to lower incentives to our sales force in line with lower portfolio growth. The result is our 12-month cost-to-income ratio and in the quarter at 51.5%, importantly impacted by pressure in margin and losses in derivative income. However, our cost-to-asset ratio remained stable during the quarter, showing that our expenses remain aligned with the size of our operation. Please move on to Slide 18, where we present the bank's profits. Net profit closed at COP 25 billion during the quarter, and COP 262 billion on a cumulated basis, show an important reduction compared to the bank's normal figures. This result slated into a 12-month return on average equity of 4.5%. As we have been able to see throughout the presentation, our financial has been impacted by a pressure in margins, higher provisions and the currency volatility, which has affected both our expenses and our derivatives results. To finish the presentation, please move on to Slide 19, where I will comment on our updated guidance for 2023. We have revised our guidance for the year, taking into account the challenges we are facing and the economic outlook for Colombia with very low growth for the year and inflation and interest rates impact in several sectors and segments of the economy. We know this represents an important change to what we guided in our last call but we are recognizing as securely as possible the situation we are currently facing. Please bear in mind that there are some variables such as economic growth, interest rates and currency movements that present some uncertainty, and that might impact real results. Given the Colombia peso appreciation, we have been seeing presently, as well as our origination adjustments, we are expecting our loan book to remain relatively stable over the year, with an annual growth of around 0% with the consumer portfolio decreasing around 9% to 11%. The commercial book growing by 2% to 4% and mortgage between 4% to 6%. Regarding asset quality, we expect PDL ratios to close between 4% to 4.5%, impacted by additional formation of past due loans and by a lower portfolio base. Our NIM should grew between 6% to 6.3% and our cost of risk around 3.6% to 3.9% as Javier already explained. Nonfinancial income to grow between 14% to 16% in line with our income generation and business development strategies. We expect OpEx growth between 11% to 14%, impacted by expected inflation levels, FX movements, but we saw compensation for our efficiency strategies. As a result, our return on average equity should close between 0% to 3%. 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 Mr. Olavo Arthuzo. He says, on Slide #8, you showed the disbursement of the consumer portfolio. And since the peak in the first quarter 2023, it's been decreasing. I just wanted to understand a little bit more on the breakdown by income of these new disbursements. That means, could you please share with us how much of the new loans is composed of high-income clients, mid-income clients and low-income clients, just for us to understand the mix here. And the second question is, at what NPL levels, does the bank feel comfortable to start to increase the credit appetite once again?

This is Javier Suarez. Regarding your first question in terms of the disbursements and the breakdown by income. By the beginning of last year, around 50% of our disbursements were close to low income segment of the market. And then that 50% has been coming down, and it's now currently around 30%. So -- and at this time, around 1/3 of our disbursements are low-income clients and 1/3 medium and 1/3 high income. That's part of the recomposition of the disbursement due to the new policies that we're putting in place to underwrite new loans, so it's close to 1/3, 1/3 and 1/3. Regarding to your second question, as we saw in the presentation on Slide 8, new vintages are behaving very well, actually before -- better than the levels before pandemic. So we believe that we're getting there. We're getting there at the point in which we're feeling comfortable with the level of risk of the new vintages. We expect to start growing our appetite in line with this new quality of the portfolio were actually disbursing at this time. We won't expect a very high growth, and we are being very conservative on our guidance in terms of loan growth because we know that the environment, the macro environment is still challenging, but we see opportunities to retain some growth at the current level. It would be a gradual return to growth levels. And that's why we're still going with a guidance that it's very conservative.

Now we do have some questions on our phone. The first question comes from Mr. Daniel Mora from CrediCorp.

I have 3 questions. The first one is, can you provide further color regarding to when do you expect to see an improvement in the asset quality indicators? And when do they expect to see the peak in NPLs? Do you believe this cycle will have an impact on results in 2024? And if -- and can we expect regarding NPLs and cost of risk upward next year? That will be the first question. The second one is -- so you believe 2024 will be a normalized year in terms of financial resource and profitability? Or it will be a transition year, given the scenario in asset quality indicators. That will be the second question. And the third one is what percentage of term deposits are due in less than a year. Do you expect to see again some pressures in term deposit rates in Colombia given the compliance with net stable funding ratio?

Daniel, going to your first question. As we showed in probably Slide 8, if I'm not mistaken, we have a graph that shows how the provisions will look for the coming quarters. And you can see that we believe that this last quarter, the second quarter of this year and this current quarter, the third one at the peak in terms of provisioning levels. We expect a downward trend after that. And as we mentioned in that slide, around 25% of the loss of the vintages that are showing a bad behavior in terms of credit risk is going to be absorbed, and we should be all the way to 90% of the losses absorbed by the end of this year. So we believe that we're at the peak with this third quarter of the year and then we'll start coming down after that. And then after that, for next year, there might be some deterioration due to the macro conditions. But that we expect to be of an order of magnitude smaller than what we're seeing now with the vintages that come from last year. So we actually expect next year to be better, which is your second question in terms of 2024, we were expecting 2024 in which we'll be having ROEs close to 2 digits growth that is on the positive side, close to 9%, 10%, although we don't want to commit ourselves with the specific guidances for next year because of the uncertainties that we're facing. But just to give you a rough idea, we expect next year to be much more a normalized year. That all depends, of course, on the macro environment. We expect the macro environment to hold and have growth, as we mentioned, of around 1.5% next year. And if that happens, then we expect this to be a normalized year for 2024. In terms of term deposits, we are all going through a renewal of some of the CDs that were opened last year and at the beginning of this year in order to comply with the net stable funding ratio. That's happening over the next coming months at rates that are high, but we have expectations that the rates will come down as we are seeing opportunities on the government side to start using some of the funds that are at this time with the Central Bank, we expect interest rates to come down. We know that both the government and of course, we, as the agents in the market are aware that there needs to be a change in the liquidity conditions in the market. We are expecting those changes in liquidity conditions that we actually start lowering the rates at which we are actually renewing the CDs at the time. In terms of the amount of CDs that will be renewed during the coming months. It's -- around 70% of our CDs will be renewed during the coming 12 months. And of course, those CDs have been renewed at lower rates than the ones that were open when we were getting ready to comply with the NSFR by March 31 of this year. And we expect -- although there's been a short-term increase in rates during the last months, we expect that to improve over the coming months that will give us also the opportunity to improve our margins for the coming months, especially for next year.

Now we'll move on to the second question coming from our phone line, which is coming from Natalia Corfield from JPMorgan.

So a follow-up on asset quality. I just want to understand what exactly led to the deterioration that we're seeing in the consumer book? It was a combination of the deceleration of the colón, inflation, very high growth that you guys had last year? What exactly was the cause? And I am taking that you -- based on what you have said during the conference, and based in your previous answers that you think that the peak is going to be the pick of NPL ratio is going to be in the third quarter of this year. So if you could confirm that as well, it would be great. Then I have a question also on your capitalization. You had a CET1 of 11%. Now it's below that level. What is the level that you feel comfortable? And given the results that you were having in 2023, what are you thinking about your dividend payments for next year? So those are my questions.

Over in the past years, there's been a challenging macroeconomy shift. We haven't seen those kinds of shifts in many, many years in the Colombian economy, both in magnitude and speed, our models somehow took into account this deterioration when we were -- disbursement -- going through a phase of growth during the first half of last year that was very, very intense, then when these market conditions started to change, we started to tighten our underwriting standards for our consumer portfolios. As we mentioned in the presentation, you can see the disbursements coming down. But our models were not calibrated to change so sudden in the economic variables. So what we've seen is a deterioration that has been deeper than what we were expecting. We are expecting losses, and that's why we, at the end of last year had a special provisioning for the consumer portfolio. But the reality was that during the first 2 quarters of this year, we've seen behavior of the portfolio that was below our expectations. So we had actually to adjust our models and look deeper into the reasons why the portfolio was taking longer to develop the losses. And actually, it was taking longer and the losses were deeper than what we were expecting. So we actually went through a remodeling of our views on these portfolios. And now we have understood much better what was going on with the portfolios in which some of the losses were taking longer than expected because of probably the challenging conditions that our clients were suffering. So there's, of course, households with an increase in their financial burden some medium to high-risk profile that behave worse than our expectations. And part of the portfolio was geared towards lower income levels. So we've been changing those conditions and our underwriting standards, and that's why we are disbursing lower levels of new loans that take into account these new conditions. We, of course -- we understand that last year, we were very well advanced in terms of digital capabilities and easiness for our customers to take loans. So we grew a lot because not only in loans, but in any product in the digital value proposition that we have for our customers. We saw growth in investments in accounts and loans in cities because actually, our digital platform was very capable of handling that growth. We believe that we attracted a lot of growth. And actually, we grew more than we were expecting in terms of the consumer loans. And that's why we were changing our standards to decrease these loans levels. After that -- after this happened during the second half of last year, we started changing our standards, and that's why our disbursements started coming down during the second, third and fourth quarter of last year and the first and second quarter of this year to adjust to the new conditions. These new conditions, of course, imply policies in our controls in our processes that actually make the bank much more resilient to these type of pressures. But we still have to handle the vintages that were disbursed with those difficulties. That's what we're seeing with the peak in the third quarter, we expect that peak to be the moment at which we have realized most of the losses, as I was saying before, close to 2/3 of the losses have already been -- have already been absorbed. We're expecting that 25% for the second half of the year. We're comfortable with the CET1 level that we have now. And in terms of the distribution, our expectations are still not set. We still need to see how the second half of the year behaves. So we're being very prudent in terms of our guidance and -- and we'll see probably during the call of the third quarter, we'll have a much more color to give you an insight into what our dividend distribution would be for next year.

And our third and last question from our phone line comes from Mr. Andres Soto from Santander.

I have a couple of questions. The first one is regarding your commercial portfolio. We have spoken a lot about the consumer one. I would like to understand what is going on with the commercial side of your business. We saw some deterioration in this quarter, which segments economic sectors are the ones being under pressure right now and for that part of this business, how long do you think the negative cycle will continue? It is the peak of it or we will continue to see a deterioration as the economy continues to remain under pressure?

For the commercial portfolio. I'll hand it over to Pedro Uribe, our Executive Vice President of the Commercial business.

Thank you, Andres, for your questions. Yes, I would say that we have seen some deterioration, small deterioration, not compared to the consumer loans in the commercial portfolio. This deterioration is mainly focused on SMEs, on small and medium enterprises, especially in sectors related to constructions, housing construction or infrastructure contractors and in the retail segment. We have had some events in the corporate segment just a few, 3 to 4. And I would say the biggest one is related to massive transportation in Bogota, a loan that was granted in 2013, and that has been going out and in the NPLs for a while. But we feel that those corporate cases are adequately reserved with our loan loss reserves and provisions.

And regarding your expectation of -- or how long the -- what type of commercial loan will continue. Do you have any visibility at this point?

We don't expect a major deterioration for this for what remains of this year for 2023. It depends on the economic conditions that we will have in 2024, but we don't expect major deterioration for 2023.

Understood. And my second question is regarding DaviPlata. Do you have any updated views on when are you expecting this to reach breakeven?

Andres, regarding DaviPlata, we're thrilled with the way DaviPlata is behaving. We're seeing growth and the activity within the platform that is very healthy. We're actually pushing very hard in terms of the interoperable QR, which is the new way in which small -- small mom shops -- mom-and-pop shops that will have the ability to get paid for their goods and services. And DaviPlata is actually growing. We're happy with it. If you take into account the funding that DaviPlata is bringing at this environment of high interest rates, DaviPlata is very, very close to breakeven. We are seeing some quarters during this year in which DaviPlata is actually at the breakeven level.

Perfect. And is there any specific plan to spin off this unit to get a separate bank license or any way in which investors can see value creation based on this platform?

We still see there's a lot of growth opportunities within the Davivienda for DaviPlata. We -- the architecture that we have for the DaviPlata platform, both in terms of technology and in terms of organization are separate from the bank, although there's a tremendous benefit of being part of the bank. We have a structure that is ready to be spun off at any time we wanted to do it. We still don't believe it is the best way to go because there's still growth opportunities within Davivienda. So we don't have short-term plans, although that's something that we keep considering in our reviews of the strategy of DaviPlata. But at the time, we see that the opportunity of growth is still within Davivienda.

With that, we will move on to the webcast questions. The first question coming from our webcast comes from Jitendra Singh from HSBC. Her question is regarding the outlook for profitability for the next year. How do you think your margins will evolve with lower rates and lower credit growth given the economic outlook? Do you think you'll be able to reach your medium-term ROE target of 15%, 16% in 2024? Or there is a downside risk to it? And the second question is could you talk about some of the risks you see for the next year?

Jitendra. Regarding your first question in terms of outlook for next year. In general terms, we expect higher growth, probably single-digit growth, close to around 8%, 10%. In terms of margins, we're definitely expecting an improvement in margins. Of course, we've been having very tight margins because of the net stable funding ratio requirements and the high interest rates. But with inflation coming down and changes in the market in terms of growth of the loan portfolio, we expect in the medium term, better conditions for our margins. So we expect actually margins improving to traditional levels for next year. And in terms of credit risk, we're definitely seeing much better behavior. We were expecting more than 100 basis points of improvement for credit risk for next year, which will turn out to be an ROE that won't probably be around the medium-term 15% to 16% ROE target, but probably on the 2-digit range -- in the low 2-digit range. So that will be our expectations. Of course, as I mentioned before, there's still -- it's still too early to give guidance -- specific guidance on what we'll see for the next year. And we expect that to come with the quarter call -- with the call for the third quarter. In terms of risk for next year, we still see credit risk as the main focus in terms of risks. We expect that to be better because of the vintages that we will be -- already have developed their losses during this year, and because of the quality of the new loans that we are originating. But at the same time, you have to take into account that the economy is growing at a very low rate and that puts some pressure on credit risk. Yet we still believe that the year will be much better in that sense. So in terms of other factors such as margins, efficiency, noninterest income. We're actually expecting a much better 2024 in terms of efficiency. There are many opportunities that we'll be capturing this year. We are actually capturing some of them this year and will be captured next year. And so we're very optimistic in terms of the operations of the bank for next year.

Our next question from the webcast comes from Mario [ Laprue ] from [ Turow ]. Can you comment what are specific buckets of the portfolio products behave worse than expected?

Thank you, Mario, for your question. Mostly the worst performance of the portfolio was in unsecured personal loans. And the specific profile that we already mentioned, low income segment of the markets and some more segments with the profile -- the risk profile was a little higher than what we were expecting. And those are the profiles that are actually with the new underwriting standards are being -- somehow being left out of our new loan disbursement, but mostly was unsecured personal loans.

We'll move on now to the next question coming from the webcast. This question comes from Angie Rojas from Casa de Bolsa. What is or are the plans to control to increase in provisions for the next quarters. As we mentioned, we believe we have -- I'm sorry, -- that's the first question and the only question. What are the plans to control the increase in provisions for the next quarters?

Yes. We discussed during the presentation, we've already gone through most of the provisioning of the vintages that are difficult vintages. Close to fifth -- 2/3 of them have already been absorbed. We expect that to be 25% for the remainder of the year. Provisions are -- you control provisions through collection practices mostly because those loans have already been disbursed, and you have to keep monitoring their behavior, and we're also working on monitoring them with our models. And the forecast that we're presenting is a forecast that is based on models that we've been fine-tuning based on much better information that we've been gathering for those customers. In terms of control of the increase of provisions, basically, we lowered the disbursement rate and the new loan portfolio is not growing because of the new policy that I mentioned before. And that's one of the ways we expect provisions to come down is actually because new loans have much better quality and the size of the portfolio in terms of new loans is smaller. So those 2 factors as compared to what we had for last year make us believe that provisions will be lower during the following quarters. And the other -- the actions are actions that we're taking on collections and collections, we are being very active on looking for solutions for our customers, looking for ways for our customers to be able to handle tightening in their economic conditions and get a win-win situation in which we provide some relief for customers that need it. And at the same time, we protect the quality of the portfolio in the way that we can with these type of customers.

Our next question comes from Andrea Atuesta from Bancolombia. When would you expect to return to double-digit profitability levels? And the second question is, do you have some guidance for loan portfolio growth for 2024?

Andreas, in terms of doubling profitability, we answered that in the previous question, is we expect 2024 to be a year in which we will return to double-digit profitability levels. Of course, that's depending on many of the assumptions that we mentioned before. But our view at this time is that we should be on ROEs of 2 digits for next year. In terms of growth for the portfolio of 2024, it's still too early, but we expect that to be a single-digit growth, probably in the high end of the single-digit range. That's our expectation for next year.

Our next question comes from Camila Arismendy Restrepo from Bancolombia. Her question is about having a little detail about the growth of investment income, the growth Y-o-Y is too big and she would like to know why?

Camilla, this is Daniel Cortes, Vice President of Treasury and Wealth Management. Basically, the answer to your question is that last year was extremely low for our investment income. Basically, if you can recall last year at this time or the first semester, we were having an important increase in the interest rates of our loan portfolio -- of our test portfolio and those created negative or very low returns. During the last 2 years, the income has accounted by around 11.9% of the net financial margin. So this year, this semester has been better-than-expected one.

It seems that there are no further questions at this moment. With that, we will conclude today's session. But before that, I would like to turn the floor back over to Mr. Suarez for his closing remarks. Mr. Suarez, the floors yours.

Thank you, and I want to thank all of you for participating in our call. This year results, of course, will be lower than what we initially forecasted. But in the meantime, we keep working diligently to improve our practices and capitalize on the lessons of this process to do better going forward. Although the situation temporarily affected the bank profits, and we're aware of that, we're very conscious. What actually comes out of this is a better bank. It's a bank that has enhanced models, better processes and ability to withstand scenarios as the one we're facing. So we believe it's actually giving us the opportunity to look at the coming years with optimism. It has been a challenging period that underscores the right resilience, the ability and strength, which also reflects on our capital levels. We continue to be among the highest in the Colombian financial systems in terms of CET1 ratios, and that's something that give us the ability to focus on handling the credit situation at this time, but also at the same time looking into the future. We continue actively working on building an exciting future through an interesting pilot of initiatives to reach more people and segments of the population, aiming to unlock Davivienda's potential and value. We're optimistic about the positive evolution of our performance towards 2024, as we mentioned before, with the specific answers to the questions. And we will also keep improving our practices on different fronts to take our business to the next level, while remaining leaders in innovation. We believe that innovation is a force that is driving change in Davivienda, and we'll actually make us a better bank in the value proposition for our customers. But also on the risk management of our portfolio, there's been a lot that we've improved during these last few months that will be put also in place and will help us be much better bank with better results for next year. Thank you very much for being here with us in the call, and we expect to see you for the call for the third quarter of the year. Thank you very much.

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