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

Welcome to Davivienda's Third Quarter of 2023 Earnings Conference Call. I'm Luisa, 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 addressed. Today, Mr. Javier Suarez, Chief Executive Officer; and Mr. Ricardo Leon Otero, Chief Risk Officer, are joining us to discuss the quarterly results released. If you have not yet received a copy of the earnings report and presentation, please visit Davivienda's Investor kit or the Financial Information section at ir.davivienda.com. [Operator Instructions] Please note that this conference is being recorded. [Operator Instructions] Before proceeding, let me mention that any forward-looking statements are being made under the safe harbor provided by the Securities Litigation Reform Act of 1995. Actual performance could differ materially from that anticipated in any forward-looking statements due to macroeconomic conditions, market risks and other factors beyond our control. I am pleased to turn the call over to Mr. Javier Suarez, Chief Executive Officer. Mr. Suarez, the floor is yours.

Good morning, and welcome to the Davivienda's Third Quarter of 2023 Earnings Conference Call. Thank you for joining us today. As we anticipated, the third quarter proved to be a challenging period for the bank with a decelerating loan portfolio, high provision levels and further pressured margins. The macroeconomic situation we've been facing for several quarters persist and the conditions for our monetary policy rate reduction still need to be met. In this sense, we keep working on estimating as accurately as possible the duration of this cycle and our recovery path. All though, we continue to expect a difficult fourth quarter, we are already passing through the most challenging part of the cycle. In the meantime, we remain determine to improve our results and become a better bank while focusing on the value creation initiatives communicated in previous quarters, building on our extensive experience, digital capabilities, commitment to sustainability and innovation culture. In the following slides, I will cover the current macro and financial system conditions, the main results of this quarter and our expectations for margins and credit risk going forward. On Slide 3, we have an overview of the macroeconomic environment in Colombia. The third quarter has shown a marginal growth in activity. According to the Economic Activity Index, July and August grew by 0.6% annually. Although this figure is modest, this slowdown aligns with the strong monetary policy measures the Central Bank to control inflation. Considering this reality, our estimates point to a GDP growth of approximately 1.5% in 2023. The Central Bank has kept the monetary policy rate at 13.25% for the last 8 months as inflation has not decreased at the expected pace. Since August, annual inflation has gradually decreased, partially supported by the contraction in food prices. However, it has continued to be pressed by housing costs and utilities, food and non-alcoholic beverages and transportation. Factors such as the increasing fuel prices and El Nino phenomena have driven this behavior in some parts of the country. In this sense, we're not expecting further adjustments in the intervention rate for the rest of 2023, and we are anticipating that rates will remain high for an extended period, similar to what has been observed in other countries. The path of both inflation and interest rates still has an important level of uncertainty. However, we are currently expecting inflation to end 2023 between 9.5% and 10% and to decrease to levels around 4% by the end of 2024. With inflation being controlled, the monetary policy rate should begin its downward trend around March 2024, closing next year between 6.5% and 7%. With these changes in the monetary policy rate track, 2024 will not show short-term conditions for business growth, which leads us to update our estimates for GDP growth to around 1.3%. After the impacts related to the NSFR implementation in Colombia and restricted liquidity in the system by mid-September, we started to see an improvement in long-term funding rates, driven by some temporary adjustments made by the regulator or NSFR weights. Generally, these changes release some pressure in NSFR for the system, thereby slightly decreasing competition for long-term funding. However, 1 year CD rates still remain high, continuing to press funding costs. Concerning the exchange rate behavior, the Colombian peso appreciated against the dollar during the quarter, driven by balances in the Colombian economy due to interest rates, fiscal adjustments and higher oil prices in international markets. Please move on to Slide 4, where we will see some figures of the Colombian financial system. As of October, the systems loan portfolio continued to decelerate due to lower credit demand and lower appetite from credit establishments, reflecting the challenging conditions in which the banking system is currently operating. As shown in the graph, the overall portfolio showed moderate annual growth of 5%, primarily influenced by the contraction of consumer credit. [ Previously ] average loan rates have continued term normalization trend but remain high, discouraging customers from acquiring debt. The cap rate in Colombia started to decrease after its peak in April, in line with the behavior of the systems disbursement rates. Additionally, the superintendents of finance adjusted the calculation methodology for this rate waiting by disbursement volumes of each credit type, which has led to a faster decrease in the cap rate. Since the beginning of the stage transition in August, we have seen a steep decrease of 485 basis points in the cap rate, partially explained by this new methodology. We continue to evaluate the potential impact of this adjustment on the Colombian financial system and our business as it adds additional pressure to margins and poses challenges to reaching some segments of the population, whose risk profile requires high rates. Finally, the system as a whole has been experiencing increases in PDLs mainly since December 2022. The consumer portfolio has been the most affected across the board with PDLs rising since May 2022, and the commercial portfolio has started to show some affectations to naturally impacted by economic conditions, not easing. Moving on to Central America on Slide 5. During the second quarter of 2023, the region showed signs of recovery. By June, El Salvador and Honduras had reached annual growth of 3%. And by September, Costa Rica represented a 5.6% growth. Regarding inflation, Honduras and Panama have experienced recent increases mainly due to the pressure of oil prices in these countries. Meanwhile, in Costa Rica and El Salvador inflation continues to decrease. Considering this behavior, Costa Rica Central Bank continued to normalize the intervention rate with a further reduction to 6.25% by the end of October. The Costa Rican colon kept appreciating by 1.3% during the quarter and 14.1% during the year, while the Honduran lempira remained relatively stable. We expect the region's GDP to grow between 3.5% and 4% and inflation continuing its stabilization. Moving on to the main results of our business on Slide 6. Consolidated gross loans continued to decrease, reflecting our risk appetite adjustments. However, they have contracted faster than expected due to lower demand, still high interest rates and FX appreciation. In this sense, our loan portfolio is currently decreasing by 0.4% annually, and we believe it will continue to compress during these months, leading us to update our growth guidance for 2023. Regarding credit risk, total PDLs reached 4.73% and the 12 month cost of risk was 3.95%, taking into account our guidance of our third quarter significantly marked by provisions. We continue to see pressure in our NIM and have been experiencing additional impacts, which I will cover in the next slide. The cost-to-assets ratio remained relatively stable at 3.21%, demonstrating that our expenses remain aligned with the size of our operations. In this sense, our accumulative result was a loss of [ COP 103 billion ], translating into a 12 month negative ROAE of 0.34%. Finally, our CET1 closed at 10.23% mainly impacted by the quarter's losses. We want to highlight that this figure is 323 basis points higher than the minimum fully loaded requirement of 7%. On Slide 7, I'd like to elaborate on our margins performance and outlook. As we have explained before, our NIM has been impacted by some factors, such as lower consumer and mortgage loan income due to a decrease in the performing portfolio and contractions in the inflation link unit. Increased funding costs due to limited liquidity in the system as the government's partial execution has trapped resources in the Central Bank. And a shift in the funding mix towards terms deposits, substantially driven by higher customer sensitivity to the current interest rate levels as interest rates in international markets are also higher than expected, we're still waiting for better market conditions for issuing other types of long-term instruments, such as bonds in the local or international markets. As explained earlier, inflation and the monetary policy rate have not decreased at the pace we were expecting. Our last conference call estimates pointed to 2 interest rate cuts in 2023, 1 in October and another in December, with the rate closing between 11.5% and 12%. Now as I mentioned earlier, we expect the intervention rate to remain stable until March of next year. In this sense, and given our balance sheet profile as long as interest rates remain high, we still have not been able to benefit from material improvements in our funding costs. However, we have diligently worked to readjust our funding mix by increasing our share in the transactional business to acquire local deposits. For instance, payroll accounts opened increased by 30% annually and received amounts from commercial customers have shown annual growth of over 20%. These strategies have allowed us to bring an additional volume of local deposits, partially offsetting changes in the total funding mix despite the market strength of high preference providing returns. Going forward and given all the variables I just mentioned, there is still ample uncertainty in terms of our NIM guidance for 2024. However, we continue to believe that we will be able to observe improvements once the intervention rate starts decreasing. Initially, we believe the margins will expand towards the year's second half. Please consider that additional external variables, such as institutional funding spreads, liquidity levels in the system and the cap rate adjustment or headwinds for margins performance in both the rest of 2023 and 2024. And therefore, we are currently estimating the NIM between 5.7% and 6% for 2023 and 6% to 6.2% for next year. Please move on to Slide 8, where I will talk about the evolution of credit risk. As you can see in the top left graph, we continue to have a conservative approach and remain control in disbursements in the consumer segment effectively. Additionally, we continue to adjust the consumer portfolio mix in Colombia with unsecured personal loans, losing share while increasing our focus on segments and profiles with better performance. When looking at the recent behavior of insurance, we see improvements in early PDLs, which are currently located at even lower levels than 2021's. Despite the macroeconomic uncertainty, these new disbursements reflect better quality, thanks to the different adjustments we've made through our models and management. Provision expenses for the third quarter were very much in line with the estimates we provided during the last call, and we calculate that the absorption path will be on track with a 90% absorption of the losses for the high-risk profile portfolio in 2023 forecasted previously. Regarding the fourth quarter, we assess that the efforts we will have to make might be slightly higher than we anticipated as a result of additional challenges that we have been pursuing in collections. The new schemes we have implemented are still evolving and a lot of lower regular collection process in Colombia, starting in October this year will present some limitations and challenges that might impact recovery rates. In this sense, our expectations for 2023 cost of risk are between 4% and 4.2%. Please be aware that the rate increase compared to what we guided on our last conference call is partially explained by further loan portfolio compression. We're constantly focusing on improvements of the risk profile of new loans, even if this approach implies a short-term deterioration of some metrics such as cost of risk or PDLs. As next year will be impacted by higher interest rates during the first half of the year, and therefore, low economic growth, it will not necessarily imply a full normalization of credit cycle but instead a transitioning period with a cost of risk between 3.1% and 3.4%. We would like to highlight that our guidance for 2024 is still very preliminary as we are going through a volatile and a certain period with multiple external variables that are not in our control. Loan growth, NIM and credit risk ratios depend highly on the economy's behavior and might change depending on inflation, intervention rate and GDP performance. Now let me turn the call over to Ricardo, our Risk Executive Vice President to continue with the presentation.

Thank you, Javier. Good morning, everyone. Please move on to Slide 9, where we will analyze the evolution of assets. Our assets experienced a slight contraction of 0.3% over the quarter, explained by the reduction in our loan book and a lower investment portfolio, which decreased in line with the balance sheet size and mix. On an annual basis, assets have grown by 1.9%, driven by increases in cash and investments. The behavior of loan loss reserves is explained by the important provisioning effort we have made since the third quarter of 2022, at the write-off we have recognized during the year given a challenging credit cycle. However, when we look at the coverage we have built for the total book, we see that the figure stands at 4.7%, almost 50 basis points over the levels we used to have before the pandemic. We're looking at each of our operations, Colombia and Central America grew at a similar pace annually, and Colombia accounts for 75% of total assets. Please move on to Slide 10. As you can see, our loan portfolio continues to show a deceleration both in Colombia and Central America. At a consolidated level, we observed a 7.4% reduction annually and a 4% decrease on a year-to-date basis. The consumer portfolio decreased in the quarter, mainly attributed to changes in our origination standards and write-off. The commercial portfolio also contracted quarterly primarily driven by lower activity, as we have perceived less credit demand and investment intentions given the still high interest rate environment overall and macroeconomic uncertainty. In contrast, the mortgage portfolio grew by 2.1% in the quarter, mainly due to increase in disbursements in the low-income housing segment, supported by better dynamics in government subsidy allocation. Finally, when analyzing the composition of the portfolio mix, we see the consumer book shares level increasing at a mortgage portfolio gaining a couple of points. We will continue actively managing our own portfolio mix in line with the bank's risk appetite to continuously evaluate the segments in which to grow in light of a weak economic performance in 2024. Moving on to Slide 11, we present an update on our PDLs and coverage ratios. As you can see on the top graph, total PDLs over 90 days continued to increase. In the Consumer segment, we kept observing deterioration in the portfolio, we have identified as highly risky, and we anticipate PDL will be reaching it bit soon. Please bear in mind that lower loan growth has post impacted this ratio. PDLs of the commercial portfolio has been increasing, mainly explained by some corporate customers in the construction and services sectors and some impact on SMEs. We are expecting this ratio to remain depressed in the coming quarters, but we are not expecting a material additional amount of provisions since we have adequate coverage levels for these customers. We continue to closely work with them to find alternate solutions. The mortgage portfolio PDLs have increased mainly since the second quarter, explained by the macroeconomic conditions and the adjustment made in March to write-off parameters, which intends to write-off only as our last Eastern resource in cases where recovery action has been extinguished. Although, we expect a slightly additional increase in this ratio, we have adjusted some policies to contain further deterioration and have sufficient coverage and collateral for this portfolio. In terms of coverage, the total ratio closed at 100%, decreasing in line with the higher partial loans. Please remember that we did some optimizations in the past for the commercial and mortgage portfolios to do a better recognition of collateral and customer's performance, which allowed us to improve our estimation of the adequate coverage levels for this portfolio. Looking ahead to 2024, we expect to start to increase the consumer coverage as PDL formation decreases and the portfolio begins to normalize. However, the total ratio may remain around current level, considering that we are changing the mix of our book less intensive in consumer credit. And therefore, our overall coverage needs might change. We are continuously monitoring the provision model by status to have adequate coverage for each type of portfolio. Please move on to Slide 12, where we can see the evolution of cost of risk, provision expenses, annualized stages. The annualized quarter cost of risk closed at 4.67% and the 12 month cost of risk reached 3.95%, in line with our projection, we experienced an increase in provision expenses compared to the previous quarter. As we continue to absorb losses for vintages that are performing poorly, giving a challenging credit cycle materializing for the overall economy. Looking at our loans by stages, we observe Stage 3 increasing as a part of the consumer portfolio roles. However, there is a slight increase in the Stage 1 portfolio due to the better behavior of new disbursements. Now please move on to Slide #12. Funding sources increased by 0.6% during the quarter and by 3.4% annual, in line with no significant increase in the loan portfolio, and therefore, no substantial need for funding resources. In the third quarter, we observed very positive increase in term share, this is explained by some CD renewals at a lower rates and consumers' preference for the still attractive returns aligned with market expectation of a potential rate drop soon as inflation decelerates. This is toward term deposits has been observed across the system. On the other hand, despite the fact that demand deposit decrease in share, we continue working to retain and increase low cost deposits through the strategies we have shared with you before. Bonds balance has been decreasing mainly due to the maturity of local and international issuances and FX appreciation. Finally, credits with entities grew primarily explained by the increase in financial obligation with foreign entities acquired during the year. In term of liquidity, we feel comfortable with the current levels of both the liquidity coverage ratio and net stable funding ratio. Please continue to Slide 14, where you will see our capital structure. Our CET1 ratio closed at 10.23%, decreasing by around 51 basis points over the quarter and 80 basis points over the year. The quarter losses mainly explain the quarterly behavior. On an annual basis, the CET1 decreased due to dividend distribution and higher value in operational risk related to a parameter changes in the January 2023, in line with the regulation. The AT1 and Tier 2 decreased quarterly due to the FX appreciation annually due to lower weight of subordinated debt and FX. As you can see, despite the decrease in the quarter, we have adequate capital levels over the regulatory minimums to manage the current cycle. Please move to Slide 15, where we present our margins. Different factors has been impacting our margins, as Javier has explained. In general terms, loan income has been affected by a lower performing loan portfolio decreases and inflation-linked unit and lower disbursements rates of commercial loans, particularly in Central America. Investment income for the quarter was impacted by the volatility observed in the public debt yield curve, which affected portfolio valuation. On the other hand, financial expenses experienced a slight decrease quarterly primarily due to the peso appreciation during the quarter. Despite the fact that we have renewed and captured CDs and institutional deposits at lower rates, we continue to experience pressures on funding costs related to current funding mix and market conditions. In this sense, our 12 month NIM growth at 5.94%. FX and derivatives showed positive results this quarter due to a lower position in U.S. dollars and lower quarterly appreciation compared to the one of the second quarter. Please continue to Slide #16. Non-financial income decreased by about 10% quarterly, mainly due to lower results from joint operations and FX. On an accumulated basis, non-financial income is increasing by 10%, mainly explained by the operation in Colombia due to higher revenues from the insurance business, credit card commission and transactionality. We want to highlight that we have been able to maintain income growth throughout the year despite the loan portfolio contraction. In terms of expenses, they increased by around 3% quarterly. Thanks to the different efficiency plans, we have implemented related to cost control, streamlined processes and productivity increase among others. In the annual comparison, operating expenses increased by 15.9%, mainly due to the impact of inflation, FX and salary increases. When excluding the FX impact, expenses will have grown by 12%. The cost-to-income ratio has continued to increase due to lower income throughout the year, in line with margins compression and FX and derivative results of previous quarter. However, when looking at expenses in terms of our asset size, we continue to see a stability. Please move on to Slide 17 to analyze the bank's results. In line with our last guidance, on an accumulated basis, the result was minus [ COP 102 billion ] with a 12 month ROAE of minus 0.34%, explained by losses of COP 364 billion in the due quarter. To finish the presentation, please move on to Slide 18, where we will share our expectation for the end of this year and 2024. We expect the loan portfolio to decrease between minus 6% to minus 3% this year, in line with our current risk appetite and for their deceleration due to lower credit demand across the system and FX appreciation. For 2024, we expect to cautiously pick up growth with the total loan portfolio increasing by 6% to 8%, still with a conservative approach and aligned with the economic dynamics. Regarding asset quality, 90 days PDL ratio should close this year at around 4.2% to 4.7%. By the end of next year, we expect better performance of around 3.8% and 4.2%. Our NIM should close between 5.7% to 6% by the end of the year. For 2024, we're expecting our NIM to expand depending on when the Central Bank start to decrease interest rates, we are considering a 6% to 6.2% range, and we believe that improvement may be seen mainly by this year's second half. We expect our cost of risk to close 2023 between 4% to 4.2%. As Javier mentioned, this change in the range is more aptly explained by lower loans growth rather than materially higher provision expenses. By the end of 2024, we expect our cost of risk to close around 3.1% to 3.4%, and we go through a transitioning period towards our normalized levels. Non-financial income should end 2023 with an increase of 12% to 14% and of 10% to 12% by the end of 2024. In terms of OpEx, we're estimating an increase of 11% to 14% by the end of this year. And if we exclude the expected inflation for the year end, we had OpEx growth for this year will be around 2% to 4%. For 2024, OpEx should grow between 8% to 10%. Finally, our return on average equity to close between minus 3% to 0% this year and recover to levels between 3% to 8% in 2024. While we have made every effort to be as accurate as possible when looking ahead to next year, we want to acknowledge a level of uncertainty in our projection due to different external variables that could impact our business, as we discussed during the call. In this sense, please consider that our estimates are subject change. However, we will continue to closely monitor the situation to timely adjust expectation if needed. In general terms, we see 2024 as a transition year, where business conditions will still be changing in a context of high interest rates. If and so, we expect 2024 to be average year with improvement across the different items. Thank you for your attention. At this point, we can move on to the question-and-answer session.

[Operator Instructions] We have Mr. Alonso Aramburu from BTG Pactual.

I have 2 questions. The first one is on the NIM. It seems you're expecting a limited improvement in 2024. I'm wondering when do you expect interest rates to start coming down? And I need the sensitivity of your balance sheet that has changed given the change in your balance sheet in recent quarters? Or do you still have the same sensitivity you had over the last couple of years? And my second question is regarding DaviPlata. Can you just comment on the path to continue to monetize the platform and what initiatives you're taking? It seems like income has been fairly flattish the last year.

The first one regarding NIM, we're expecting the monetary policy rates to start coming down by around March or the second quarter of next year, which implies that it will have a descending trend during the year. So the benefits of lower rates, we will be capturing them every quarter by considering that the rates are coming down, we will be able to capture a little bit more of that. So we are not expecting any benefits during the first quarter and mostly of the second quarter. And probably for the second half of the year, we should be getting some of the benefits. This could, of course change, we're forecasting this trend. There could be even some reductions on the interest rate by the end of this year. But our expectations, our base case scenario is a scenario in which the monetary policy rates start lowering by the second quarter of the year. So that's why our NIM is not improving at the pace that we wanted it to improve because it will take a few months, and part of the year will be still at high interest rates. In terms of our sensitivity, it has slightly changed because of the migration of some low cost deposits to interest-bearing deposits, which is a trend that we've seen across the market. And of course, that has made a little change in the sensitivity. So with that in mind, we will benefit from lower interest rates. But as I said, it will take some time. In terms of DaviPlata, we're happy with how DaviPlata is performing. If you consider that DaviPlata has been growing in terms of active customers during the second half of the year. We're also deploying the interoperable QR, which is this payment rail that will be available for very small merchants. We're very happy with it. We're close to 900,000 QRs deployed during the last few months. So there will be a new source of income through acquiring business of these very small merchants, as well as transactions and purchases that are going on a healthy basis. If you look at transactions, they are up 131% and purchases 60%, and income should start increasing because of those transactions. Some of them will start to monetize and because of the QR, the interoperable QR as well as some other avenues of monetizing that where we have on our pipeline. Probably around the second half of the year, we'll be seeing better results in DaviPlata in terms of monetizing, some of them earlier than that, but mostly by the second half of next year.

[Operator Instructions] We have Mr. Daniel Mora Ardila from CrediCorp Capital.

I have a couple of questions. The first one is regarding risk metrics. When do you expect to reach the peak in the cost of risk and also the peak in terms of asset quality indicators? Do you feel comfortable with the current figures of coverage ratios considering that now the consumer coverage ratio is at 155% below the 250% 1 year ago, and also the commercial coverage ratio is below 100%? That will be my first question. The second one is regarding loan strategy. What will be the growth strategy going forward, considering the consequences observed in 2023? And also, where is this 6% to 8% annual growth in the loan portfolio coming from? What will be the segments and the products that you will try to target to reach this loan growth?

Please bear with us for a few moment. We are solving a connection issue. Thank you. [Technical Difficulty]

Okay. Daniel, related to the peak of the rate of the risk, we are estimating that we will reach the peak by the end of 2023. Today, the loan rates have been stabilizing during the quarter, but we are still faced on uncertainty pressure in Colombian environment, mainly there are some specific regulation related to the new -- the privacy protection law, we have some short-term impacts in collection. But at the peaks in the last quarter of this year -- in the next -- in the last quarter of this year. In terms of the strategy and portfolio, Mr. Javier will explain. Coverage, okay. Related to the coverage -- in coverage, we are in 100% at the end of the third quarter. And however, that explain mainly the explain is supported by the -- that we have been absorbing in the consumer portfolio. So remember that you have expected losses and previously to the losses is materialized. We have the provision. So when we materialize that, obviously, the relation decrease. But we expect to increase in the first semester of 2024, this coverage, but very aligned with the composition of the mix of the portfolio loans. So it's possible that the structure of the cover will be different to the coverage that we have maybe in 2020 or 2019.

Daniel, this is Javier. For the second part of your question in terms of loan strategy, growth strategy. Of course, we've been very, very careful during the last few quarters in terms of new policies for new loans, given the difficult environment that we've been all facing. We believe that we have achieved a point in which the vintages that we've been disbursing over the last 3 or 4 quarters are very healthy in terms of the quality. You saw that in one of the slides in the presentation. And we're, of course, thinking that it's time to grow carefully because the economy is still facing some challenges in terms of growth. So we have to be very careful with it. But the mix of all that is that we're expecting a growth between 6% and 8%, that it's partly focused on commercial and mortgage loans. In the consumer loans, we might still be decreasing the size of the overall portfolio of the consumer loans. Even though our new loans, our new disbursements will start picking up. We're expecting growth in terms of consumer loan disbursements for next year, anywhere from 10%, 10% to 12% as compared to the disbursements of this year. But given the size of the portfolio that we had during -- we achieved during 2022, that is going through the P&L, we're still facing a period in which the size of the overall consumer portfolio will keep coming down. We see the opportunity to start growing again in terms of new disbursement, but it will take some time until that becomes growth in the overall portfolio. So for the next year, we're still expecting for the consumer loan, we will probably not grow as a portfolio, and the total portfolio of the bank will grow at a rate of 6% to 8%.

We have Mr. Diego Espinoza from BTG Pactual on the line with a question.

Just a quick question regarding the next quarter. I was wondering if, in your opinion, did you reach a bottom in the results? And if we could see some improvement during the next quarter in terms of asset quality? Or do you expect to -- still expecting a deterioration in that sense in the NPL and the delinquency ratio? And regarding the capital ratio, do you think you also think that you reached a bottom there? Or are you expecting some improvement from the next quarter? That's it from me.

Diego, thank you for your question. In terms of the credit risk, as Ricardo mentioned before, we're expecting the peak of the risk cycle to be at the end of this year. So next quarter will still be a quarter in which we'll see some efforts on our side in terms of provisioning. And then beginning next year, we should start seeing an improvement because of the fact that most of those vintages that were disbursed in early 2022 will have already gone through the P&L. So, we're very close to the peak. We are expecting the peak, as I said, by the end of this year, which will also have an impact on our P&L. So P&L might be -- we are close to the peak in this quarter, and we are giving this guidance of minus 3% to 0% for the P&L for the end of the year. And then for next year, we should start to improve quarter-over-quarter because of the credit risk improvements and because of the NIM improvements that I mentioned in a previous question. In terms of capital ratios, we're at 10.23% on Tier 1, as I mentioned during the opening remarks, and we're expecting a level around 10% for the end of the year and for next year. It will, of course, depend on growth on how growth will come up during the next year, and that's in line with our -- with the growth of the portfolio of 6% to 8% that I mentioned before. So that's consistent with a Tier 1 level of around 10% for the whole year and around 14% on the total capital adequacy ratio. So, we're comfortable with that level of solvency for next year. And of course, we'll be monitoring that against the growth opportunities that we see during the coming year.

We have Mrs. Camila Arismendy Restrepo from Bancolombia on the line with a question.

Yes. Okay. I just wanted to ask if you can give us any idea of what will be your strategy for the next year to generate in content profits because you say that you'll be able to have the better results or once their rates start to decrease, but what happens if the bank keeps their interest rate high? Do you plan to increase your net financial income or make some changes on your balance sheet composition? Because you said that you don't plan to grow in terms of disbursements. So I just want to know if you have any strategy that you can share with us.

Thank you, Camila, for your question. In terms of sources of income, of course, we have the nonfinancial income that has been growing during this year, and we have some of our strategies aim at basically increasing the nonfinancial income in lines of business such as bancassurance in which we are expecting growth for next year as well as other sources of nonfinancial income. We're also working on strategies on low-cost funding that in case that the interest rates don't come down in the -- with the speed that we were expecting, this will have a benefit on our balance sheet. We've been growing on payroll accounts and other transactional services in which we believe that we have an opportunity -- a growth opportunity there that will bring us low-cost funding that will benefit from a higher interest rate environment. So on the liability side, we have a strategy that is on low income and low-cost deposits. And on financial income, of course, we have strategies such as the bancassurance strategy that I mentioned and others on income generating from transactional services. And also on the asset side, some of the growth will come in the form of commercial loans that are variable rate loans. So if interest rates don't come down, they will benefit from that strategy also. So we have an overall mix of sources of income that will benefit even if the environment of interest rate is not a decreasing one as we expect.

We have Mr. Andres Soto from Santander on the line with the question. I believe that there were some audio issues. So we'll move on with a question from Mrs. Mariel Abreu from T. Rowe Price is in line with a question. We'll try to connect again. Okay. We have Mrs. Natalia Corfield from JPMorgan on the line with a question.

So first of all, a clarification. When you said that your Tier 1 is going to be at 10% at the end of this year and next year. I would like to clarify that -- I don't think you're referring to your Tier 1. I think you're referring to your AT1, that would be good to have a clarification on that. Secondly, for the holders of your CET1, it's -- there is room that says that if you don't have a profit in the year, it seems that this is going to be the case in 2023, you only pay your coupon from your profit reserves. So I want to clarify if this is indeed a room? And two, I want to know how much you have in your -- if this is true, if you have enough in your profit reserves to pay your coupons? Those are my 2 questions.

Thank you, Natalia, for your questions. On your first part, you're right. It's a CET1, the number that we were referring to. And in terms of the AT1, we have enough reserves from previous years to pay the coupons and that's what we expect to do.

Right. Do you know the number? Can you disclose the number for us?

On reserves, we have more than COP 2 trillion on reserves from previous years.

Natalia, this is David Pedraza. Just in order to elaborate a little bit on that. Please take into account that we anyway are paying our coupons out of the traditional P&L of the bank. So that reserve is just the last resource in case we may require it. I'm just taking into account that every shareholders' meeting, we have been making a reserve specifically for the payment of that coupon. That coupon is estimated every year, taking into account the interest rate of the bond plus the expected evolution of the foreign exchange rate. So overall speaking, we have that reserve created on the equity side of our business. Anyhow, we will always intend to pay our coupon out of the P&L and it's considered within our budget, et cetera. So that is basically our last resource in case something happens, and we need to use those distributable items. But generally speaking, we are always expected to pay out of the P&L.

David, I'm just clarifying just because like this year, it looks like you're going to have a loss for the entire year. That's why I'm standing to believe that you will need to go to your profit reserves.

Yes, Natalia, just to clarify, we will have enough reserves from previous years in case the P&L is not there this year to pay for the coupons. So we have the full commitment to pay the coupons next year out of previous reserves in case we don't have a P&L -- a positive P&L for this year.

Okay. So we are going to proceed with the webcast questions. The first question we have is from John Wright from Gramercy. It has 2 questions. What lessons has risk taken from this period of weak asset quality and the digital app opportunity set? The second question is, could you provide guidance for CET1 ratio for 2024?

Thank you, John, for your question. And on the first question, on lessons, there's a lot of lessons. Of course, we've been going through a pretty difficult cycle in terms of, as we mentioned before, inflation and interest rate going up with a very, very high increase in both of them that has put some pressure -- put a lot of pressure on our customers. And of course, in terms of new ways to underwrite consumer loans, we have put in place many, many different strategies that are, of course, we're seeing the benefits of those strategies and the quality of the new vintages that we've been disbursing that includes anywhere ranging from fraud protection with digital abilities to an analytical abilities to find fraud schemes to also better ways to get information from other sources that complement the information that is given to us from our customers to have a better view of the payment ability of the customers; and all that through our detailed opportunity set, as you mentioned, that is also been improving. We are focusing on -- still working on digital loans as a main source of growth. We believe there's a lot of efficiency there. There's a lot of tools that we have that we didn't have in the analog process in terms of a better information and real-time information to make better decisions, better -- more informed decisions in terms of underwriting. So we see many opportunities there, and that's what we've been doing over the last few quarters in terms of improving our ability to grow on this segment. That's why we expect next year to be a year in which our consumer loan will -- in terms of the disbursement will grow at a 10% rate, basically because we see that as a better opportunity with better tools that we already have on our apps. In terms of guidance for CET1 ratio, we're expecting anywhere around 10%. That's the guidance that we're giving for next year. Thank you, John, for your question.

We have a question from Mr. Juan Berrios from Pictet Asset Management. What do you think about the perpetual bonds trading at a very big spread? I would like to get insights on what regulators say about this with potential ability from financial sector to keep using AT1?

Thank you, Juan. This is David Pedraza. Well, the behavior of the pricing of the bond is basically a reflection of the market behavior. Generally speaking, how markets have behaved overall across the board. And also, it reflects a little part of the results that we are providing to the market as of now. So obviously, it has the 2 components. Regarding the regulators insights, we haven't had any feedback from them in that sense. We know this is just a market reflection. It should change once results from our site change and it also should change once the market conditions overall upgrade. So we don't have any specific feedback on them in that sense. Okay. So for the next question, we have a question from Mario Estrella from Itau AGF. The first question is just back an increase in NIM because you will retake your consumer focus in loan? The second question is, would you give more details on vintages?

Okay. Thank you, Mario. Related to the vintages. At the beginning of the year, we changed a lot of policies related to new score and your control to mitigate the risk of the new vintages. Right now, the quality of the vintages are absolutely in a better risk than the previous vintages. And consumer vintage have been improving, maybe since October, the recent vintages are already at the levels of 2021 despite the economic environment due to the policy that I commented a few minutes ago. So right now, the portfolio, the new vintages has been in below the quality that we have in 2021. For example, in 2021, the quality of the vintages is after 3 months, in 30 days was around 2.2% right now are below 2%. So with that figure, we are expecting that the portfolio has started to improve the risk profile. So our expectation for PDLs in next year is a good improvement and also the cost of risk for the [ year ] we are estimating between 3.1% to 3.4%.

And Mario, this is Javier. Going back to your first question in terms of NIM, and NIM will improve basically because our performing loan portfolio will start to grow next year. So our overall portfolio growth will be positive, and cost of funds will come down. Cost of funds will come down. One of the reasons why they'll come down is because we are expecting the monetary policy rate to come down. But also, and it's important to take into account that we had to bring funds from cities at a very high rates at the end of the year and the first quarter of this year. Those CDs are up for renewal, and we're seeing renewal rates that are anywhere from 300 basis points to 350 basis points below the rate at which those CDs were issued last year and at the beginning of this year. So there are several reasons why NIM will -- should improve. One is, as I mentioned before, monetary policy rate expectations. Second one is, just the spread on top of that monetary policy rate on our CDs and for the market as a whole, that's coming down; and also because the performing portfolio is expected to grow for next year. So a combination of all those is what give us the view -- that supports the view that our NIM will be increasing.

Thank you, Javier. The next question comes from Jitendra Singh from HSBC. The question says, on capital, given the current asset quality cycle and the prevailing macro condition, does management foresee a need for capital raising? If yes, what are the measures are being considered to bolster the capital base? The second question is, could you comment on the dividend payout for next year?

Jitendra, this is Javier. Thank you for your question. In terms of capital, we're comfortable with the levels that we have now and the level are expected for next year, that as I mentioned before, was a CET1 of around 10%. We believe that's a level in which we can operate safely. And in terms of -- and that's more than -- more than 300 -- more than 320 basis points above the minimum regulatory requirement of 7%. So we're comfortable with those levels. Of course, we will be actively management -- we'll be actively managing our capital levels, and if there's -- if we see opportunities, if growth is better than what we expect and we see opportunities to go to the market, we would consider that. It's not something that we're considering at this time, but we would be open to consider that if the opportunity arises. And in terms of dividend payout for next year, that's a decision that we have not taken yet, but it's -- at this point, it's very unlikely that we will be paying out dividends next year.

And the next question we have is from Mariel Abreu from T. Rowe Price. Can you explain what has changed from your guidance provided in the second quarter for 2023 for asset quality? Do you feel comfortable with the new guidance for 2023-2024? What are the problems with collections that you were not able to anticipate? It has been disappointing to see the consecutive changes in guidance and puts in question the bank's ability to anticipate risk. And the third question is, do you feel comfortable with your capital equation?

Maybe related to your second question related to the collection process. It's important to highlight that during the last year, a new regulation related to the collection and some rule related to the privacy protection law that may ask -- make some adjustment in our collection process, and we have a short-term effect in recoveries. We still have effects on families and debtness. And since interest rates are still high, some customers are not able to regain payment capacity. So that are the main driver that we have been focused on the last quarters.

Maria, this is Javier. In terms of our ability to anticipate risk, of course, we're seeing a challenging environment. And we're -- every quarter, we're seeing how the conditions come and how the results come. And we are adjusting our models to incorporate new situation that we've seen in the market. We -- what we are providing with the new guidance is our best effort to come up with numbers that reflect the environment that we're seeing. And then don't always come close to what we are expecting. The environment has been more challenging than what we were expecting, and that's why we're revising our guidance. We believe that -- what we're seeing is the most difficult part of the cycle is, already in this quarter and next quarter, as we mentioned before. But of course, we cannot give any guarantees on how those environments will prevail for next year. Our models somehow show that we'll be having a difficult quarter for this end of the year, and then an improvement for next year. We strongly believe that, that will be the case, although, of course, the environment is a challenging environment. In terms of the guidance, that we are -- that we provided and how comfortable we feel with the guidance for 2023 and 2024. Part of the guidance is -- the change of the guidance is explained by lower growth. As we are -- have a lower growth in the consumer portfolio because we are consciously being very careful on growth at this time. That somehow deteriorates some of the ratios, even though in absolute terms, what we are seeing in terms of provisions for the third quarter, we're very, very close to what we have forecasted for this quarter. So there are slight variations on provisions for the end of the year, which are part of the volatility that we are expecting within this market. In terms of capital question, I think I already went through that question in -- with the answer to a previous one, in which I mentioned that the level of capital that we have with the 10% CET1 is a level that we are comfortable with.

The next question comes from Andrea Atuesta from Bancolombia. In terms of results, the strongest impact have already passed for the last quarter of 2023, the results are expected to improve a little bit or will continue presenting losses?

As we mentioned, Andrea, thank you for your question. As we mentioned before, we're expecting the last quarter to be a peak of the cycle in terms of provisions. So, we are expecting an improvement and a slight improvement for the last quarter, but is still will be a quarter in which there will be a high level of loan provisioning for the end of the year. We are expecting, as I mentioned before, improvements for next year as most of the vintages that have are very large in terms of relative size to the rest of the portfolio, and have a difficult performance based on the time that they were disbursed and how they were exposed to the cycle of increasing interest rates and inflation. Those will be behind us during -- after the next quarter. So we'll start seeing improvements quarter-over-quarter for next year.

The next question we have is from Juan Berrios from Pictet Asset Management. It reads, are you able to do any purchase in the open market of the AT1 at what point? So the question here, Juan is that taking into account the Colombian regulation and the offering memorandum of the perpetual AT1 bond, we cannot really [ announce before the 10 year ] after the issue date unless one of the following events occur. The first one is that there are changes in the government regulation, as a result of which we cannot be able to compute the AT1s as AT1s; or the second change is that there are changes in the Colombian tax laws that may affect the [ physical ] treatment of the instrument cash flows. If none of those things occur, we can't repurchase before the [ 10-year ] -- the instruments. Anyhow, in any of those cases, we will have to get prior approval from the SFCs or the Superintendents of Finance. And it's important to mention as well that as per this outstanding regulation, we cannot create expectations regarding the payment reduction or early repurchase of the instruments. With this, we finish the webcast questions, we can please proceed to give the floor to Andres Soto via telephone, please.

Yes, Mr. Soto from Santander.

And most of my questions have been already answered, but I would like to follow up on 2 issues. One, funding; and second capital. On funding, I'm curious about your decision or your guidance to grow your loan portfolio between 6% to 8% next year in the current context. You are paying very high yields when I see your debt outstanding. So what will be the rationale for [ funds growing ]. You are already at a capital level that although it's above the minimum requirement, it looks thin compared to your international peers?

Thank you, Andres, for your question. In terms of funding, as I mentioned before, we are seeing a renewal of CDs that were issued about a year ago or at the beginning of this year at very high rates, that are being renewed at lower rates. So we're seeing a change in the funding cost and the marginal funding cost for the bank, which opens the opportunity to go to market and get those funds and start growing again with the loans that have margins that are healthy [indiscernible] that level that we have. It's consistent with that 6% to 8%. We, of course, will be monitoring the capital ratios to make sure that we are comfortable with the levels of capital, and we will be optimizing the capital ratios through securitization or any other transactions that we believe are the best ways to manage capital and still keep growing. We -- in our road map, we have some possibilities to improve our capital ratios consistently with this 6% to 8% growth in the loan portfolio. Basically, the fact that we can securitize some loans, they have the fact that we are expecting profits during next year, and those profits will support growth is what we are balancing out to make sure that we keep in line with the healthy levels of capital that we believe that we should have.

Thank you, Javier. And besides those securitizations, are there any other opportunities or in a way, if things get worse, what will be the alternative for Davivienda? Would you consider selling assets, maybe a spin-off of DaviPlata selling Central American operations, raising capital? If things deteriorate further, and you definitely need to look for capital alternatives, what will be the order of revenues? Will be that raising capital in the market or selling some of these assets?

We don't believe that those scenarios -- we will get to scenarios, which we will need to go through measures such as the ones that you are suggesting. But in case that we need more capital, we probably would go with raising capital before others. We still see a lot of value creation opportunities with DaviPlata, so we're very committed with it. We're committed to keep improving our digital platforms, so we see a lot of opportunities for the bank going forward. So -- and that's what our controlling shareholders are also in line with that view. So, we're definitely looking for growth opportunities, and we will be passing through the cycle that has been a challenging cycle. But of course, what we're seeing is more opportunities than any [ other ].

That's very clear. Javier. And my third question is more on the results. When I see the numbers, I saw a decline in income from loans on a quarter-over-quarter basis. You mentioned some factors like inflation, lower yield, I imagine write-offs. If you can give us a sense of one of those factors, which are the ones that are weighting the most in your lower income from loans?

Yes, Andreas, the NIM -- the drop in NIM for the quarter is explained partially by investments, by the behavior of investment this quarter as compared to previous quarter. That explains around 60 basis points, and 40 basis points are explained by different reasons. One of them is the mortgage portfolio that is inflation-linked, given that inflation is coming down and that's a cyclical portfolio in which the variation of the inflation index, what we call the UVR is -- has a seasonality -- [ a pleasing ] seasonality. This third quarter, it meant around 25 basis points lower income for the mortgage portfolio. On Central America, we have around 8 basis points basically in Costa Rica. There was a period in which the market went to a lower levels of interest rate that is -- that's something that is rebounding, but during the quarter, it was there. And there's also -- in the consumer loans, that's around 8 basis points based on the nonperforming portfolio of consumers. That is also affecting also the NIM.

And there are no further questions at this time. I would like to turn the floor back to Mr. Suarez for any closing remarks. Mr. Suarez, the floor is yours.

Thank you, and thank you all for being with us for joining us today. We're very -- of course, we're very conscious of the challenges that we're facing. And we're taking every measure to improve our results. As mentioned during the call, the third quarter was mostly in line in terms of the credit risk as we were expecting. That's our expectation also for the fourth quarter, as I mentioned before. We know that this year has been full of challenges. And even though the results in the short term are not what we want, we're confident of our recovery in the midterm, and as we continue to strengthen our practices at different levels. Despite the U.S. environment and the challenges that we've covered during the call this morning, we didn't stop in advancing in our sustainability practices and digitalization of our bank, as we believe that those are important sources of value that will allow us to continue being leaders in innovation in the financial system. So we're focusing on the short term on managing the cycle, and we believe that we're going through the most difficult part of the cycle, and there will be an improvement during next year. But at the same time, we haven't stopped working and investing on the value generation drivers for the future, which we believe will be on the sustainability side as well as on the digital side. On the sustainability side, we've recently adhered to the United Nations Principle for Responsible Banking, and we keep improving our investment practices and overall in terms of sustainable investments. And because we are fully aware that we play a role in the transition to a low-carbon economy, and these are additional steps we're taking to contribute to this purpose. We've been recognized as a leading bank in terms of ESG management in the bank by Euromoney, and we've been also recognized as a Digital Innovation Champion by the Financial Alliance for Women. And we believe we keep focusing on improving our capabilities on that front. Specifically on the digital front, we're working on very interesting initiatives. We're launching a new -- a brand new platform and a brand new app for all the -- all our customers in Colombia, and we will be doing the same next year for the Central American customers as well as our small and medium business customers in which we -- by the end of this month, we will be out with a platform that has a new way to interact with our customers in a digital way that has many of the learnings that we've had over the last few years in terms of digital capabilities to our customers in terms of offering services that go beyond the traditional banking services, and we're very excited. We're very excited to go to the market with these solutions that will definitely keep bringing us to the forefront of the digital transformation of the banking industry in Colombia and in Central America. For DaviPlata, we're also seeing growth in various segments and small merchants. I believe that we're becoming a leading bank in the small merchant segments, and we're very happy with the trend in that segment with DaviPlata. And overall, we continue building a better bank. We believe that what we have in terms of our capabilities, our team, our digital assets, our ability to come to market our brand is very strong -- put us in a very strong position to keep taking advantage of the opportunities that we'll definitely keep seeing in front of us in the market. Thank you very much to all of you for joining us today, and we look forward to seeing you on our next conference call.

Thank you, ladies and gentlemen. With this, we conclude today's conference. Thank you for participating. You may now disconnect from the call.