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

Welcome to Davivienda's Fourth Quarter of 2023 Earnings Conference Call. I'm 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 addressed. Today, Mr. Javier Suarez and Mr. Ricardo Leon Otero are joining us to discuss the quarterly results released. If you have not yet received a copy of the earnings reports 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. Afterwards, management will be available for a Q&A session. Before proceeding, please note that any forward-looking statements are released under the safe harbor provided by the Securities Litigation Reform Act of 1995. Actual performance could differ materially from the anticipated one in any forward looking statements due to macroeconomic conditions, market risks, and other factors beyond our control. I'm now pleased to turn the call over to Mr. Javier Suarez, Chief Executive Officer. Mr. Suarez, the floor is yours.

Good morning and welcome to Davivienda's fourth quarter of 2023 earnings conference call. Thank you for joining us today. 2023 was a challenging year for the Davivienda and the banking industry in general. However, we maintain a firm and determined perspective. We see adversity as an opportunity, as a catalyst for growth and evolution. For over 50 years Davivienda has been a driving force for innovation in the industry, consistently meeting and overcoming challenging. Each obstacle has served as a valuable lesson, strengthening our resilience and propelling us to become one of the leading banking franchises in the region. In this sense, we reaffirm our commitment to becoming the bank of the future. We are aware of the challenges ahead and the innovation opportunities they represent, leveraging our digital skills and our focus on sustainability to grow and generate value for our stakeholders. On Slide 3 we have an overview of the macroeconomic environment in Columbia. Although 2023's global growth was higher than initial estimates, it was lower than historical averages, mainly due to the removal of fiscal stimulus and the higher monetary policy rates established to control inflation worldwide. As for local economic activity, Columbia's GDP growth during the fourth quarter closed at 0.3%, reaching an average increase of 0.6% for 2023, a notable decrease compared to the 7.3% observed in 2022. The year's performance was lower than ours and market's expectations being the lowest growth figure in the last decade, excluding the pandemic. Inflation peaked at 13.34% in March last year, and the central bank kept 13.25% rate stable for 7 consecutive months, which allowed inflation to drop to 9.28% in December and continue improving in January. For 2024, we expect a 1.2 to 1.4 GDP growth, inflation to close between 4.75% to 5.5%, and the monetary policy rate to continue decreasing to 7.5% to 8.25% by year end. Deposit rates decreased during the fourth quarter of 2023, supported by lower inflation expectations, NSFR methodology adjustments and higher liquidity levels in the system in line with an increase in government execution by year end. On an annual basis, 1 year deposit rates have fallen over 350 basis points, which we expect to positively impact funding costs. Regarding the exchange rate, the Colombian peso appreciated almost 6% during the quarter and over 20% over the year, explained by the stabilization of interest rates in the United States and lower consumption and demand for imported goods in Colombia. Please move on to Slide 4 where we will see some figures of the Colombian financial system. During 2023, the financial sector experienced an annual loan portfolio growth of 2% as shown in the top-left graph the moderation of the mortgage and commercial segments plus the contraction with the consumer book reflect both weakened demand and origination amidst a challenging credit cycle. Average loan rates continue to normalize and the cap rate closed 2023 at 37.6% decreasing by around 950 basis points compared to a maximum observed in April 2023. This reduction is mainly linked to a methodological change in the cap rate calculation, which may pressure the sector's margin, especially for consumer loans. Finally, the asset quality of the financial system continue to increase during the quarter, mainly in the consumer and mortgage segments. Moving on to Central America on Slide 5. The economic slowdown in the region was less pronounced than expected. Costa Rica experience an acceleration, while El Salvador, Honduras and Panama showed lower growth due to decreased external demand from the region's main trading partners. Inflation decreased compared to 2022 levels thanks to lower pressures in food and transportation. We expect the region's GDP to grow around 3% in 2024 and inflation to stabilize at 3%. With the pronounced decrease in inflation and its expectations, the Central Bank of Costa Rica reduced the monetary policy rate from 9% at the beginning of 2023 to 6% by year end. The Costa Rican colon appreciated by around 12% against the dollar in 2023 due to lower country risk. Despite this being positive news for the value of our operation in Costa Rica, the colon appreciation has a negative impact on our P&L, which is compensated to our equity value due to our hedging strategy for capital ratio. Besides the impact of the exchange rate, our regional operations have been performing well, proving to be a good diversification source. Amidst Columbia's macro and credit challenges. We remain confident in Central America's potential, the opportunities we have there and the strategic importance of this operation for our business. Moving on to the main results on Slide 6. In line with our guidance, the loan portfolio decreased by 6.1% over the year, closing at COP 136 trillion. CET1 slightly increased during the quarter to 10.25% supported by capital management initiatives to increase capital efficiency. Our NIM and OpEx closed within our guidance. The cost of risk was above our expectations, compensated by better results of non-financial income. Net net, our return on average equity for the year closed at minus 2.38%, which aligns with what we guided in our last conference call. Besides the evident challenges we went through this year, we continue to achieve results in digitalization and continue creating initiatives to generate greater value for the bank and our clients. In 2023, we expanded our mortgage portfolio. And in partnership with [indiscernible] and the national government, we promoted 14,000 small agricultural producers to be insured with parametric insurance to protect them against natural climate risk. Regarding our digital solutions, this year we continue enabling new functionalities to facilitate our customers' access to the Davivienda products such as Google Pay Wallet for retail customers, and the API for queries and payments for our corporate customers. In addition, we're proud to be pioneers in offering a digital portfolio in Central America, driving the adoption of products such as mobile credit cards, mobile payroll loans, and digital balance transfers. To complement our investment offering abroad, we launched Davivienda Advisors, an international subsidiary of Davivienda Corredores in the United States, providing more global investment opportunities and diversification for our customers, harnessing the benefits of both the digital and physical worlds. On the Slide 7 and 8, I'd like to elaborate on our margins, performance and outlook. As seen in the upper-left graph, between 2019 and 2021 we maintain a stable positive gap between loans and funding implicit rates. However, with the monetary policy rate increases and in line with our balance sheet repricing profile, our loans have taken some time to adjust to new [indiscernible] rate levels while our liabilities reprise faster, narrowing the gap and pressing our new. Despite this situation, positive results and investments during 2023 have partially offset impacts on our margins. When looking at our funding mix from a longer term perspective, we see that demand deposits share has remained relatively stable when compared to the levels before the pandemic. At the same time, [indiscernible] have gained some share to bonds and credits given that during 2020, 2022 and 2023, we did not see favorable market conditions to issue these type of instruments. Moreover, [indiscernible] demand deposits on our balance sheet have decreased their share from over 20% in 2022 to 16% in 2023. And we expect this path to continue in line with our initiatives to bring low-cost transactional deposits, including retail and commercial customer through strategies in payrolls, [indiscernible], cash management, the payment business, and on others. When looking at more recent trends on the next slide, we can observe that the cost of term and demand deposit is already falling, and that given the maturity profile of our cities in Colombia, around COP 30 trillion should be maturing in the next 12 months, which will be renewed at lower rates. We're closely working on optimizing our funding mix, considering loan growth needs, the interest rate path and local and international market opportunities. In this sense, we expect our NIM to improve in 2024, closing between 6.1% and 6.4%, supported by rate cuts and balance sheet management. Please move on to Slide 9 where I will talk about the evolution of credit risk. We continue to control the growth of the consumer portfolio and as a result of our changes in appetite and origination, the portfolio mix is being adjusted, reducing the exposure of 2 unsecured loans below 2021 levels. And we have increased the share of payroll and credit cards, which are segments with lower risk levels. As per our most recent disbursements, we continue to closely monitor their performance. Although we've been experiencing some deterioration recently, we have identified the cost and implemented corrective measures. And we should be seeing improvements in these early ratio by the end of the first quarter. Despite this situation. Please note that early delinquency for these vintages is still below our historical reference and better than 2021 and 2022 level. Provision expenses for the quarter were above the estimates we provided during the last conference call as the result of changes in our collective strategy and challenges in reachability and portfolio recovery, in the context of the implementation of the privacy protection law and a macroeconomic environment that continues to be affected. We believe we're close to the end of this credit cycle for the consumer portfolio, and we will be reaching a hundred percent absorption of the expense associated with the high risk portfolio as previously guided. In this sense, we see 2024 as a transition year with unexpected cost of risk of 3.4% and 3.7%, where we will see gradual improvements, especially during the second half of the year. We strive to continue improving the profile of our overall portfolio, adjusting its mix and managing the associated risk to achieve solid and sustainable profitability. We will focus on selective origination, supported by the constant calibration of our origination projects and quality while strengthening our collection strategies supported by our analytical skills, artificial intelligence, and of course early alerts in our models. Please turn to Slide 10 as I would like to update you on the many strategic focuses we have set for this year. Besides margins and credit risk management, we're also working on other fronts such as increasing different types of key income, prioritizing efficiency, being the best of providing service and experience to our customers and leveraging our operations in Central America. In terms of revenue generation, we will continue strengthening our payment business and the development of ecosystems potentiating the synergies built with our partners. We have a cross-functional efficiency strategy where we use our technological capabilities to increase productivity, integrating the best of the physical and digital worlds to optimization processes and scaling the productivity of our branches and commercial networks. We remain committed to providing the best service and a world-class experience through our digital channels, enabling digital end-to-end processes, memorial solution and self-management features so that our governments prefer and promote Davivienda. Finally, we will continue strengthening our operations in Central America to ensure sustainable growth, positive results and efficiency. We will reinforce the value offering mainly in digital banking, SMEs and bancassurance, leveraging the competitive advantages of our [indiscernible] bank. In general terms, our main strategic focus is to prioritize profitability and risk management, and we see that some of the strategies I just shared are starting to materialize into tangible results. However, we believe they will help us improve our financial performance, mostly towards the second half of this year. Please move on to the next slide, 11. One of our main leverages to deliver results on this strategic focus is related to our digital capabilities. Our business has undergone a remarkable evolution in the last years [indiscernible] continuously expanding offering and our deepening strategy, enabling us to be recognized as a leader in digitalization. Digital adoption reflected scope of what we've achieved. In Colombia and Central America, we've reached close to 93% and 69% of digital customers respectively which demonstrates a solid acceptance and growing companies in our digital channels, where transactions and sales are increasingly being made through these channels. On the other hand, DaviPlata continues to have positive results in terms of consumer acquisition, deposit balances and income, and we continue to see great monetization potential in its value proposition, which have proven to be successful in reaching several segments of the population, promoting financial inclusion and small businesses growth. As you know, one of the fundamental pillars of our business is our innovative DNA, and we strive to find new ways to reach our customers through different services so they have our offering at their fingertips in the ecosystems in which they live. This brings me to Slide 12 to share some highlights of our new apps. We recently launched our Super App for individuals and a new app for companies through which we want to redefine how we relate to our customers through an entirely new set of functionalities and service models. In the Super App, we have a new modular tool that integrates financial and financial services. For instance, we have Mi Casa, an consistent that allows our customers to finding in Davivienda's Super App a comprehensive experience related to their home. They can apply for mortgage and leasing loans, receive 100% digital approval, request home assistance services and even options for buying and selling a unit. Additionally, we're implementing a new relationship model with new ways of connecting with our customers, and we've also put in place an AI-based chat that is currently solving around 70% of requests in the first contact and is proving to be a promising service solution among other functionalities. With our Business App, we designed a new channel that is at the forefront, easy to use an acceptable for corporations and SMEs. They can acquire new products and perform different transactions digitally, such as transfers, cash advances and cardless payments. They can also conveniently make payments for payroll suppliers and utilities and enable different financial services that enhance our relationship and strengthen our value offer for corporate banking. In sum, our innovative and digital DNA will allow us to build the bank of the future, capable of adapting quickly to market changes and anticipating emerging needs. We are committed to excellence and cutting-edge financial service delivery, thus ensuring an optimal experience for our customers and consolidating our position in the banking industry. With this in mind, we have more opportunity today than ever before. Please turn to Slide 13. Given the strategy described in previous slides, we believe there's an opportunity to raise capital under current circumstances. A couple of weeks ago, our shareholders approved a program to issue common and preferred shares for up to 48 million shares. Subsequently, our Board of Directors approved 2 first issuances for a total of 36 million shares, out of which approximately 76.1% will be common and the remaining 23.9% will be preferred shares, in line with our current shareholder structure. The purpose of this issuance is to maintain our solvency levels, leverage business growth and develop our strategy. While we already have a robust capital structure with a 325 basis points buffer above the minimum regulatory requirements, we see this as good timing to raise equity from our foreign shareholders and a step that will allow us to continue developing our strategic initiatives and be ready to grasp on growth opportunities that we find adequate. The total issuance size will be of COP 720 billion, which is expected to improve our capital ratios by around 55 basis points. At Davivienda, we still see many opportunities. And with our innovative culture and focus on sustainability, backed by our strategic approaches, we're building the bank of the future. Grupo Bolivar, our controlling shareholder has been a fundamental actor in our growth and has supported our projects. And they recently expressed interest in participating in the capitalization and approved the analysis of the investment. Finally, I want to share with you a recent organizational change. Ricardo Leon, who has been our Executive Vice President of Risk for more than 7 years and has performed with outstanding leadership several goals during his 15 years with Davivienda will be in a new role as Executive Vice President of Technology and Operations, where he will take on exciting challenges related to the modernization of our bank. In turn, [ Alvaro Carrillo ], who has over 23 years of working experience within Grupo Bolivar has been appointed as Executive VP of Risk. Alvaro has developed his career in different companies of the group, including Davivienda, assuming challenges in treasury financial risk, credit risk and personal banking credit management. Recently, he was leading the Vice President of Bancassurance and Digital Business at Seguros Bolivar, our sister insurance company. We are confident that his experience and expertise will contribute to continuous strengthening Davivienda's risk tracks. Now let me turn the call over to Ricardo to continue with the presentation.

Thank you, Javier. Good morning, everyone. Please move on to Slide 14 where we will analyze the evolution of assets. Our assets decreased 3.2% annually, closing with a total balance of COP 178 trillion due to a lower loan portfolio and the exchange rate appreciation during the year. Excluding the appreciation of the Colombian peso, our assets will have grown 3.8% annually. The loan loss reserves presented a reduction of 3.9% due to the write-off as we made great efforts in recognizing the credit cycle. In addition, the coverage for the total book stood at 4.47%, still above prepandemic levels. When looking at each of our operations, Colombia's assets grew at a 3.4% rate over the year and Central Americas by 5.2% in dollars. Please move on to Slide 15. Our gross loan portfolio decreased by 6.1% annually, in line with our expectation for the year. As shown in the top graph, growth was mainly led by Central America, which has presented more stability in terms of asset quality and growth opportunities in the loan cycle. In this sense, the international operation grew by 8% in dollars, mainly driven by consumer and commercial loans. Honduras and Costa Rica led the region's growth. Regarding the performance by segments and due to our adjustment in origination policies and exchange movement, the consumer portfolio decreased by 14% during the year. On the other hand, the commercial portfolio decreased by 7% annually, explained by the effects of exchange rate and lower demand given the current macro and business environment. In the mortgage portfolio, we observed a more restricted dynamic in the first part of the year due to changes in the government subsidies for housing. However, with the [indiscernible] program was partially reactivated by the year's second half, resulting in increased activity in this portfolio. We have focused on gradually adjusting our loan mix for several quarters. We have observed a lower share of the consumer and commercial segments in our portfolio mix, while mortgage contribution has increased. Moving on Slide 16, we presented [indiscernible] on our PDLs and coverage ratios. Total PDLs increased by 31 basis points during the quarter, mainly explained by higher delinquency levels of the consumer and mortgage portfolios. In the case of consumer loans, we are experiencing 2 effects. On one hand, the higher risk portfolio continues to be pressured, explained especially by some previously restructured clients who have accelerated their deterioration due to adjustments in collection process. And on the other hand, the loan portfolio has been decreasing, which accounts for around 1/3 of the PDL's increase in the quarter. In the case of mortgage book, the increase in [indiscernible] is explained by the deterioration of some clients whose ability to pay has been affected by the rise in interest rates. Moreover, the quality of the commercial loans portfolio improved, which can be attributed to agreements with some clients for whom we maintained provision levels and to write off. Regarding the traditional coverage for loans over 90 days -- the ratio closed at 9% explained by 2 reasons. First, there has been an improvement in recognition of the collaterals with all fully commercial and mortgage portfolio, allowing us to have better estimates regarding the adequate coverage levels. And second, the deterioration of the consumer loan portfolio has been naturally consuming provisions. Our expectation for the traditional coverage ratio is to remain below 100% during 2024. And we have better estimated provision needs for the commercial and mortgage portfolio, and we are comfortable with the current coverage level for these 2 books. In the case of consumer loans, despite the deterioration has been consuming provision while starting to observe our composition in this level within this portfolio. The risk allowance are near the end of the [indiscernible] in the balance sheet, and we will be working to gradually increase coverage for this segment during 2024 and 2025, in line with the new portfolio mix that we are building. Starting this quarter, we are presenting a new indicator that shows the collaterals we have for the past year [indiscernible], allowing us to better recognize actual credit risk exposure since collaterals are assets that back potential defaults, they help us to mitigate exposure, resulting in lower expected losses when factoring in the potential recovery from collaterals. By the end of the year, this ratio stood at 132.3%, which represents as official levels in our risk appetite framework. [Indiscernible] portfolio are covered above 120% when including collaterals. Please move on to Slide 17. In terms of cost of risk, we see that the quarterly provision expenses is starting to stabilize. For this quarter, the update of macroeconomic expectation as well as the effect of collection adjustments resulted in a slightly higher expense than the previous quarter. As we have shared with you in the past, we still see a challenging third half of the year and are expecting gradually improvement toward the second semester. [Indiscernible] remain relatively stable compared to the previous quarter, but the riskier portfolio has increased [indiscernible] as we have been communicating. Regarding the coverage by stages, the coverage for Stage 1 and 2 has decreased during the year due to an effect in which the portfolio rose to risky levels with its respective provision by [indiscernible] in the previous stages have lower deterioration levels requiring a lower portion of provisions. Coverage for Stage 3 portfolio have been increasing due to our effort to cover the high-risk loans so they can finish their transition through the balance sheet. Now please move on to Slide #18. Funding sources decreased by 2.5% annually, mainly due to the Colombian peso appreciation [indiscernible]. At year-end, our consolidated funding mix was mainly composed of demand deposits in which we have been able to increase our low cost [indiscernible], although high-cost deposits have slightly increased recently. The share of total fund is still below what was observed a year ago. As for CDs and given the explanations we have previously shared, they had a 39% share of the total by the end of the year. However, during the quarter, the only increased the balance by 7.6%, reflecting the growth is decelerating. As for bonds and credits, they have been losing participation due to maturities and exchange rate effects. And we will continue evaluating the possibility of going to the market when seeing favorable conditions. In terms of liquidity, both the liquidity coverage ratio and the net stable funding ratio remains at levels in which we feel confident. Please continue to Slide 18 where you will see our capital structure. Our CET1 ratio growth at 10.25%, slightly increasing during the quarter. This is explained by some capital management initiatives we implemented during the quarter that allowed us to improve capital efficiency, compensating the losses of the quarter. CET1 and 2 levels decreased due to the appreciation of the exchange rate. As for our total capital adequacy ratio, we closed at 14.54%. As Javier mentioned at the beginning of the presentation, the issuance of shares will help us maintain our capital levels, allowing us to continue executing our growth strategy and take advantage of the opportunities available in the markets where we operate. Please move to Slide 20 where we present our margins. Gross financial margin increased by 10.8% in the quarter and by 5% on a cumulative basis. While loan income has decreased recently due to the normalization of interest rates and funding costs have affected financial expenses, the investment income has provided some stability to the margins. As a result, our 12 months NIM closed at 5.87%. Please continue to Slide #21. Nonfinancial income increased around 27% in the quarter and by 16% on an accumulated basis. The main drivers of this performance were insurance placement fees, income related to car franchises and transactional income from debit and credit cards. Other revenues related to our insurance operation, sale of asset received as a payment and extraordinary income from the Colombian stock exchange also contributed to these positive results. Expenses grew 13.2% on an accumulated basis, in line with our guidance, mainly affected by inflation, exchange rate volatility throughout the year and salary increases. However, continuing inflation levels for 2023, real OpEx growth was close to 4%. Please move on to Slide 22 to analyze the bank's results. Net result was minus COP 270 billion for the quarter and minus COP 372 billion for the year, resulting in 12 months ROE of minus 2.38%, within the guidance we shared on our last conference calls. To finish the presentation, please move on to Slide 23, where we will share our expectation for 2024. We expect our consolidated loan book to grow between 6% to 8%, primarily driven by the commercial and mortgage segments. But expecting growth of 10% to 12% in the commercial portfolio, from 7% to 9% in mortgage portfolio, between 0 and 2% in the consumer portfolio. Regarding asset quality, we expect a progressive improvement in our indicators with a total 90-day PDL ratio of 4% to 4.5% by the year-end. Our net interest margin should grow between 6.1% to 6.4%, demonstrating a gradual recovery as monetary policy rate cuts and reducing funding costs take effect. Our cost of risk should close around 3.4% and 3.7%. Nonfinancial income grow between 10% to 12%, leveraged by our diversification of income sources. We expect OpEx growth between 4% to 7% due to our strategies for improving efficiency. As a result, our return on average equity should close between 2% to 6%. Thank you for your attention. At this point, we can move on to the question-and-answer session.

[Operator Instructions] Our first question comes from Mr. Nicolas Riva from Bank of America.

I'm Nicolas Riva from Bank of America. First question on the equity offering. So I see the plan is to issue 36 million shares, which represents about $180 million or 50 basis points of capital. I want to ask what's the timing on the equity offering. Also is Grupo Bolivar going to participate in that? I know that Grupo Bolivar is getting roughly $400 million from selling a stake in Sura Asset Management. So potentially they could use that to participate in this capital increase. Second question, in the last earnings call you had said the plan was to pay no dividends this year, given the net loss reported in fiscal year 2023. Is that still the case? You expect to pay no dividends this year? And then my third question on the coupon payment on the [ AET1 ], I want to confirm that nonpayment of the coupon and automatic cancellation of the coupon would be triggered by the line -- the reserve distributor items not being enough to make the coupon payment, and I believe you have COP 2 trillion or roughly $500 million in that line.

Thank you, Nicolas, for your questions. Let me address the first one about the issuance. The timing is very -- is actually in the coming days. We've already published the offer. So the offer is live now, and it will be around 3 weeks from last Monday that the offering will be open to the market. To be precise, March 8 will be the closing of the offering. With regard to Grupo Bolivar, Grupo Bolivar has issued a relevant information stating that they are interested in participating and they have structured the administration. This is the Board of Directors of Grupo Bolivar, who has instructed the administration of the company to proceed with the relevant authorizations for participating in the issuance, but they have expressed their interest in participating. In terms of dividends, Nicolas, we've already mentioned in previous calls, and we want to reaffirm in this one that we have no plans to pay dividends. It's actually the capitalization goes in the other direction. So instead of distributing part of our capital, we're actually raising capital. So we continue with the same plans of paying no dividends for this year. With regard to AET1, we have the full intention to honor the coupon of the AET1 as with any other financial obligations that we have. We have the relevant reserves in our equity, and it's actually included as part of our financial expenses within our guidance. So the guidance that Ricardo presented a few minutes ago already includes provisioning for the payment of the coupon.

Okay. And I understand the willingness clearly and the commitment to pay the coupon. The other thing is I believe there is an automatic cancellation of the coupon payment if you don't have enough distributable items to make the coupon payment. And I want to confirm that actually is the case and that you have COP 2 trillion or roughly around $400 million in distributable items to make the coupon payment. I understand the commitment of the bank to make the payment.

We have more than enough on reserves. So there's no question on whether we have the ability to pay the coupon. So with the reserves that we have, it's plenty of reserves that we have to pay for the coupon.

Our second question comes from Mr. Daniel Mora from CrediCorp.

I have a couple of questions. The first one is regarding the capital increase. I would like to understand why did you announce a capital increase in this moment. The question is about the timing considering that capital ratios are adequate according to your financial report and also the guidance of loan growth should be low in our scenario. We believe that you could support that loan growth without pressuring capital ratio. So I would like to understand what is the view of the timing of the capital increase. And I believe a better question will be what will have happened to capital ratios, especially the CET1 without the capital increase. What was that scenario, and I believe it will help us to better understand the internal targets of the capital and which levels are considered to be pressure for the bank.

Thank you, Daniel, for your questions. On the timing of the capital increase, I agree with you. We have enough capital to support our strategy. We have enough capital to support the growth loan -- the growth of the loan portfolio that we're expecting. But in these terms, there are terms in which the markets are changing, there's a change in the economic conditions. We've learned over the years that it's very good to have a very strong position within the market to take advantage of the opportunities that may arise. So that's why we believe that even though we have enough capital to support our business, we want to send a clear signal to the market that we have the strength to continue developing our strategy. And that's the type of signal that you send at this time. We have the support of our shareholders, and we believe that we may take advantage of different opportunities that may come in the future. With regards to the effect of the capital increase, let me stress that the numbers that Ricardo presented as guidance do not include the effect of the capital increase. So actually we will have around 50 -- a little bit more than 50 basis points as additional solvency levels, capital levels when you compare it to the guidance that Ricardo just went over. In terms of our target, we don't manage the bank with a specific target. What we do is we have a reference of around 9.5%. That is a reference that we monitor closely, and we want to take actions when we believe that we might be getting close to 9.5%, which is not the case. At this time, we're around 10.25% and that's the expectation without the capital increases to maintain the same levels. So that's our internal reference that we use, but it's not a target. We're not aiming to go to 9.5%. What we're doing is just taking advantage of the moment and going to a market and having the strength to take advantage of possible opportunities coming to the future. In that sense, we are going with a capital increase, a capital issuance that is directed to the existing shareholders. And we do that because we know that the price of the stock is actually below historical levels. And we want to give this opportunity to existing shareholders, which, by the way, can actually see their rights to participate in the offer to other investors. But we believe that this should be now offered directed towards the existing shareholders that have been with the bank and have and we believe that they are the ones that should benefit from the recovery of the price that might come into the future.

Our third question is coming from Mr. Andres Soto from Santander.

I have several questions. But first, I would like to hear from you what are the macro assumptions that you are using in your forecast. Because based on that macro assumption, I may have different questions regarding loan growth margins and expenses.

Andres, thank you for your question. In terms of macro assumptions, we're working with an estimate of 1.2% to 1.4% GDP growth, inflation around 4.5% and 5.5%. And those are mainly the most important assumptions that we're working with at this time. In terms of the [indiscernible] policy rate is we're expecting a 7.5% to 8.25% as a rate for the end of the year.

And finally, in terms of FX.

In terms of FX, let me defer this to Andres Langebaek, our Chief Economist.

Good morning, Andres. Well, we think that there will be an upward tendency for the exchange rates -- to the exchange rate because there will be a reduction in domestic interest rates that is going to be higher than the reduction we expect for the U.S. interest rates. And also as long as the economy recovers some growth in the second part of the year, there were also a higher demand for imports and upward pressure in the exchange rate. So at this time we think that the -- at the end of this year, the exchange rate could be around COP 4,300, around that figure.

[indiscernible] So Javier, with 10% -- over 10% currency depreciation and 5% inflation, I see you are forecasting operating expenses to grow in between 4% to 7%. That sounds low. So I would like to understand what specific measures are you guys intending to implement in order to reduce cost because basically this is what this guidance implies?

Yes. Andreas, in terms of efficiency, we've been working hard on many -- on several fronts in which we believe that there are opportunities in terms of gaining efficiency on our branch operations, also gaining efficiency by actually taking the benefits of a lot of investments that we've made over the last few years in terms of digitalization of the bank. If you look at the bank, the bank has become a very digital bank in terms of the operations towards the customers. So in terms of service, in terms of the experience of the customers, you see that we are practically all the way through the transformation of the bank with almost 100% of -- on the retail banking side of the products and services that we offer are basically offered in our digital channels, especially in Super App. But internally, we had a lot of work to do in terms of the back office. So we're working on making sure that we streamline our back office by taking advantage of these digital investments that we've made over the years. So we see a lot of opportunities there, opportunities with artificial intelligence, opportunities by just traditional cost-cutting efforts that have also opportunities. And some of them have already been in place, have been put in place by the end of last year. So we didn't get the benefits of a full year of efficiencies on some of the programs that we implemented last year. This year, we will. As well as other programs on the efficiency side that will help us also improve our efficiency ratios.

Thank you, Javier. And then in terms of loan growth, you are forecasting growing in line with nominal GDP or little bit higher than that. When I look at your main competitor, the guidance that they are providing is much lower than this. So why you guys decided to grow in this part of the cycle in Colombia, cost of risk is so high and still there are so many uncertainties on the market picture.

Yes. Our growth expectations are between 6% and 8%. That's close to inflation. So we're actually looking at -- basically, in real terms, we would maintain the same level of size of the book. If you look at commercial, we see some opportunities in commercial, and that's -- there's also some seasonality there because at the end of the year, we lowered our commercial portfolio because of some prepayments of large operations that will have already come back. So there's some seasonality there, but we see a 10% to 12% of the commercial book. On consumer loans, we are flat basically, 0% to 2%, and that's because we are coming from a cycle of contraction of the portfolio, and we believe that we will be contracting for a few months on because of the dynamics of the portfolio when we're -- of the large disbursements that we had during 2021 and 2022 that are going through the P&L. We are seeing a contraction, a large contraction last year, and there will be some contraction during the first months of this year, but then it will level off, and we will start actually growing by the end of the year. That's our expectation. In terms of the mortgage portfolio, there's also -- we are seeing some catch up on some of the mortgage portfolio because many of the projects of the construction companies that were being built during last year did not actually were handed out to the customers because of difficulties with subsidies and other frictions in that process. And we're just seeing an inventory that is being actually sold to customers. It's already been sold. It's been actually handed to the customers, and that's the source of growth for the mortgage portfolio. Last year was a slow year in terms of mortgages because of some of the frictions on the social housing programs. And there's also some catch-up there on that 7% to 9%. So we don't believe that we're being actually very bullish in the loan growth. We believe that there are some reasons in each one of the portfolios and being the most important consumer that we're still being very prudent with our portfolio, and that's why we have a 0% to 2% growth expectation for that book.

[indiscernible] with this forecast, where do you see your Common Equity Tier 1 by year-end 2024?

I'm sorry, Andres, I couldn't catch your question. Could you repeat your question?

Sure, Javier. No, I'm wondering what is your forecast for core equity Tier 1 by year-end 2024.

Yes. Without considering the capital increase, our forecast is between 10% and 10.5%, which is basically the same level that we're ending this year. If you take into account the 55 basis points that we are expecting from the capital increase, we should be anywhere between 10.5% and 11%.

The first question comes from Ms. Andrea Atuesta from Bancolombia. Her question is, "Good morning and thanks for the presentation. Can you please explain to me the rationale behind the issuance of COP 20,000 taking into account that the bank has comfortable capital levels?" And the second question is, "Could you please explain the expected portfolio to grow by segment in 2024? What will be the strategy to adopt?"

Thank you, Andrea, for your question. With regard to the price of the capital issuance, the COP 20,000, you have to put it into context with the fact that this issuance is being directed towards the existing shareholders. So if just by the fact that they're willing to participate, they will get the benefits of what we expect would be a recovery on the results of the bank in the coming future that eventually could be reflected on the price of the stock. The COP 20,000 is a reference that we're taking from the market price at this time that has been around COP 19,000 to COP 21,000. So we believe the pricing shouldn't be far from the market values. And the fact that it's directed towards existing shareholders somehow benefits the existing shareholders in the sense that they can take advantage of any recovery process that the bank will go through. With respect to the loan portfolio growth, it's a question that I have already answered with Andres, unless you have, Andrea, any other specific questions about that topic or any other topic.

The second question from our webcast comes from [ Ms. Sloana Clogan ] from [ Inside Investment ]. She's got 2 questions. The first question is, "Did you get any regulatory pressure to skip the coupon?" The second question is, "What is the amount of reserves available to pay the coupon? Please state the number. Thank you."

Thank you, Selena, for your question. With the first one, no, we did not. We have not received any pressure from the regulator at all with respect to our coupon. And as I mentioned before, we fully expect to pay the coupon. We have COP 161 billion approximately on reserves, which is equivalent to around USD 33 million. This is an amount that is renewed every year based on the expectation of the size of the coupon. And at this time, this is enough reserves to honor the coupon. This number is actually published in our financial results for the reference of the market and investors.

The third question from our webcast comes from [ Mr. Christian Godchaux ] from [ Citi ]. He's got 2 questions. The first question is, "What are the action plans to overcome asset deterioration in Colombia?" Second question is, "Are you making any haircut in the value of the collateral to make sure [ LLR ] plus collateral to NPL ratio?

Christian, thank you for your question. With regards to the first one, there are many, many action plans. We've been going through a process in which our -- specifically in the consumer book, we've gone through a revision of many of the elements that are part of our consumer business. First, on the origination side, we've already included many other factors that were not included in the previous years in the origination policies. And actually, you can see the results on that, if you look at the new vintages that we've been disbursing since early last year. You see a much better performance in terms of loan default, of course, in terms of being more strict in terms of income levels, in terms of debt capacity, in terms of identity management of the customers. So in origination, the origination side, we have a lot of new tools that we've been using during last year. In terms of collections, we've also done a lot of work with the artificial intelligence, with the changes in our processes, understanding the dynamics of the collection process that are changing rapidly in Colombia because of new regulations that have come in place that actually limit the ability of the banks to contact customers for collection purposes. So we've actually adapted to a new scheme that has been working. Of course there are some challenges in terms of the reachability of these customers because of the new regulation. But we put in place many strategies to help the customers that actually need help and help them go through a difficult process, but also, at the same time, protect the bank by collecting from those customers that have the ability to pay. So there are many, many plans that are already put in place and that have been put in place during last year that actually have made our operation more resilient in terms of asset deterioration. We're actually beginning to see benefits. As I was mentioning, there's a graph in the presentation on new vintages that shows the impact of these new practices. And in terms of collections, what we're seeing is even though the environment is challenging, we're seeing an improvement in the trend of our collection and the deterioration of the consumer book over the last couple of months. So even though the macro environment is still challenging, we are confident that the most difficult part of our high-risk portfolio has already gone through the P&L. With respect to the haircut on the value of collaterals, yes, we're actually considering the loss [indiscernible] part of the process. We also update collateral values every year following regulations established by the Colombian [indiscernible].

We now have a fourth question by Ms. Cynthia Huaccha from CrediCorp. "Could you give us comments about the bank's interest in the new international market issuances? Maybe unsecured or Tier 2 notes in some part of the year? Or there is no interest at all because the modest loan growth expected? Thank you."

Thank you, Cynthia, for your questions. Over the last couple of years, we haven't gone through the international market because of the market conditions. We're always looking for the right market conditions to go to the market. If these market conditions change, we will probably look into opportunities regardless of the loan growth because there's also the management of the funding of the bank, that's a line of funding that we always want to tap when the opportunity is there. So we will be looking at opportunities. We don't have the need to go to the market because of the reasons that you are mentioning because of the modest loan growth. Yet, we believe that it's important to be open to opportunities in the market because of the optimization that we can get from tapping different sources of funding. And one of them is the international market that has been closed for this last 2 years. As we see any opportunities in that market with interest rates coming down, we might look into it. In terms of Tier 2, we don't see any need for additional capital instruments at this time.

Thank you very much. There seem to be no further questions at this time. So I'd like to turn the floor back to the management for any closing remarks.

Thank you to everyone for being part of this call. For us, as I mentioned during the opening remarks, it's been a challenging time last year, and we believe that the first few months of this year -- the first half of this year will still be challenging, although we believe that we are on the right track. We see an improvement in the performance of the bank in several of our internal variables that we monitor closely in terms of the quality of the book -- of the loan book. We see an improvement in the margins. So we are confident that there will be better result for this year. Of course, it's important to mention that we are still going through a challenging macro environment. As mentioned during the presentation, there's a drop -- a significant drop in GDP growth for the country last year. And this year will still be a year with modest growth. And it's also -- we are also exposed to a lot of uncertainties in the market at this time. So we believe that the guidance that we've given is a guidance that is consistent with the view that we have with a slow-growing economy, but still a recovering economy. And for our business, there are opportunities there. As I mentioned in previous calls, even though the short-term results are -- have been challenging, we have never lost the opportunity to look into the future and keep working on our capabilities to being the best bank that we can be. And we are making progress in that sense with our digital products, with the service that we're providing to our customers, with the efficiency initiatives that I mentioned before. So we're very excited. Even though it's been challenging, we are looking into these coming months with optimism, with the opportunity to improve our value offerings. The pipeline is a very robust pipeline in terms of solutions for our customers. So we believe that we are beginning this phase in which the recovery will probably be the note in the coming months. I want to express once again my gratitude to Ricardo for being part of this team on the financial side. Ricardo, has had a long history with the technology operations in the past and he's coming back to that role. And we believe that he will be a part of that transformation into the future. And also welcome, Alvaro, who will be also key in the -- in instrumenting new practices on risk management and other topics that are his expertise. Thank you very much for -- to everyone for being part of this call. And we expect you all to be looking at the results for the March quarter in the coming months. Thank you very much to everyone.

Thank you, ladies and gentlemen. This concludes today's conference call. Thanks for your participation. You may now disconnect from the call.