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

Welcome to Davivienda's First Quarter of 2024 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, Chief Executive Officer; Mr. Alvaro Cobo, Chief Risk Officer; and Mr. Pedro Bohorquez, Strategic Risk and Financial Planning Director, are joining us to discuss the quarterly results released. If you have not yet received the copy of the earnings reports and presentation, please visit the 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 question-and-answer session. Before proceeding, let me mention that any forward-looking statements are being made under the Safe Harbor provided by the Securities Litigation Reform Act of 1995. Actual performance could differ materially from the anticipated one in any forward-looking statements due to macroeconomic conditions, market risks and other factors beyond our control. I'm pleased to turn the call over to Mr. Javier Suarez, Chief Executive Officer.

Good morning, and welcome to Davivienda's first quarter of 2024 earnings conference call. Thank you for joining us today. This quarter was in line with the expectations shared on our last conference call, reflecting a still challenging operating environment. However, we're starting to see positive signals in different aspects of our business, leading us to expect gradual improvements going forward, especially during the year's second half. In the following slides, I will explain the current macro and financial system conditions, this quarter's primary results, and the evolution of our margins and credit risk. On Slide 3, we have an overview of the macroeconomic environment in Colombia. The first period of 2024 has shown signs of moderate economic growth. According to the Economic Activity Index, January and February showed an average annual growth of 2.2%, accelerating from the 1% recorded in the last 2 months of 2023. Additionally, there has been a marginal increase in Davivienda's Consumer Confidence Index. Inflation continued decreasing during the quarter to 7.16% as of April, enabling the Central Bank to continue with monetary policy rate cuts, with the intervention rate reduced to 12.25% in the March meeting and 11.75% in April. Deposit rates have been falling in line with rate cuts, inflation expectations, and higher liquidity levels in the system during the first months of this year. Despite these trends, risk and inflationary outbreaks have not yet disappeared, which introduces uncertainty about the speed of the country's disinflation process, and monetary policy rate cuts. In this sense, we're estimating inflation to close the year between 5% and 5.5%, with a monetary policy rate of around 8.5%, and GDP growth of around 1.4% to 1.5%, especially due to the denomination in sectors such as trade, transportation, hotels and financial activities. In this sense, normalized macroeconomic conditions are still far away and the environment remains challenging for the banking business. The Colombian Peso slightly devaluated against the dollar during the quarter, influenced by the dollar's appreciation against the world's main currencies, given changes in the expectations of monetary policy decisions in the U.S., the increase in Colombian's risk premium and the behavior of international oil prices. Please move on to Slide 4, where we will see some figures of the Colombian financial system. As shown in the top left chart, the system's portfolio continued to decelerate in March amidst lower demand for credit and reduced appetite among banks. The total portfolio shows a moderate annual growth of 1.5%, primarily influenced by the contraction of the consumer segment. Regarding interest rates, after peak in between March and June 2023, commercial and mortgage average loan rates have decreased by around 300 basis points remaining at still higher levels compared to historical average. Meanwhile, average consumer loan rates have decreased faster, around 700 basis points in the year, mainly related to the methodological change in the cap rate calculation, which accelerated the decrease in interest rates. The observed normalization path of lowering interest rates has already started to impact loan income potential in the system. Finally, the system PDLs increased in the first 2 months of 2024, particularly in the consumer and mortgage segments, reflecting the impact of the operating environment for the banking industry. Moving on to Central America on Slide 5. The most recent figures show that economic growth in 2023 was uneven in the region. Costa Rica and El Salvador experienced great dynamism. Meanwhile, Honduras and Panama experienced decelerations with growth of 3.9% and 3.3%, lower than the figures seen in 2022. Despite these differences, growth in all countries was above the last decades average. Inflation in Costa Rica maintained its negative position for the 10th consecutive month, standing at negative 1.2% as of March. This situation enabled the Central Bank to reduce their monetary policy rate to 4.75% in April, down 125 basis points from December 2023. El Salvador continued its downward trajectory in annual inflation, while Honduras and Panama observed increase. Despite the negative trends in inflation, Honduras has kept its monetary policy rate stable at 3%, and has undertaken other measures to reduce liquidity in the system. Regarding exchange rates, the lempira remained stable during the quarter, while the Costa Rican colon continued to appreciate by 3.75%. Since mid-2022, the Costa Rican colon has appreciated over 25%, supported by fiscal control, tourism recovery, export dynamism, and foreign investment flows among other variables. More recently, we have seen a stabilization in the currency and expect a slight devaluation this year. We expect the region's GDP to grow around 3% and inflation to continue stabilizing this year. Moving on to the main results on Slide 6. Our loan portfolio continued contracting during the quarter, mainly due to lower disbursements in the consumer segment and lower credit demand. During the last 12 months, the portfolio has decreased by 6.5%. Our 12-month NIM closed at 5.7% due to the pressure in the gross financial margin over the last year. However, as we'll see in the coming slides, the latest trends show better signals, supported by liabilities repricing. Our 12 months' cost of risk closed at 4.89% due to slightly higher provision during the quarter and loan portfolio contraction. Provision expenses for the quarter came very much in line with our estimates, and we're seeing that the marginal increase is decelerating. Net losses for the quarter were COP 288 billion, reflecting a still challenging first half of the year as we anticipate. Regarding our capital structure, CET1 closed at 10.41%, 341 basis points above the 7% minimum required. Among the positive trends we've seen recently are asset quality and coverage behavior. Asset quality is starting to improve, mainly supported by consumer PDL and total coverage has slightly increased, starting its stabilization process, supported by our measures to increase the ratio. Additionally, efficiency and cost controlled strategies are materializing into results with operating expenses reducing their growth rate, and remaining relatively stable compared to the size of our operations. On Slide 7 and 8, I'd like to elaborate on our margins, performance and outlook. As we can see in the top left graph, our funding mix in Colombia continues to recompose. We have been able to maintain the share of low-cost demand deposits among our liabilities, despite still high interest rate levels in the market. One of our priorities is to acquire more low-cost transactional resources, and we expect to start to see results of this strategy gradually as interest rates decrease. Additionally, mid- and high-cost demand deposits continued to decrease compared to a year ago, supported by our active funding management strategy. Although, term deposits continue to gain weight over total funding, it is important to mention that our CDs maturity profile allow us to renew these instruments at lower rates. As a result, as you can see in the bottom graph, monthly implicit rates already reflect liabilities repricing. Moving on to the next slide. The implicit loan and funding rates have started to decrease, and we observed that the speed at which the implicit funding rate is falling, is higher than the loan rate decrease, supporting our expectations of a gradual margin expansion that is starting to reflect in our quarterly NIM. In this sense, we maintain our expectations for 2024 NIM, closing between 6.1% and 6.4%. Please move on to Slide 9, where I will talk about the evolution of credit risk. We continue to take a selective growth approach in accordance with our objective of gradually improving the loan portfolio's risk profile. In this sense, as you can see in the top graphs, disbursements remain relatively low and primarily focused on specific profiles that allow us to continue adjusting the mix. Additionally, early PDLs of recent vintages continued to show good performance, and we expect them to continue supporting the improvement in consumer asset quality as they gain share within the book. Consequently, due to the improvements we are starting to see in the consumer portfolio, the quarterly provision expenses for this segment were below our last conference call estimates, as shown in the graph at the bottom right. We expect these positive changes to gradually consolidate, improving our expense estimates for the consumer segment this year. However, these improvements will be offset by higher provisioning needs in the commercial and market portfolios. Alvaro will elaborate on this later. As a result, we expect the year's cost of risk to be between 3.5% and 3.8%. Please note that this guidance does not imply an increase in total provision expenses, but lower loan growth. Let me turn the call over to Alvaro to continue with the presentation.

Good morning, everyone. Please move on to Slide 10, where we will analyze the evolution of assets. Our assets closed at COP 176 trillion, decreasing by 1.2% over the quarter and by 6% annually, driven by the loan portfolio contraction. Cash and interbank deposits decreased by 18.6% in the quarter, while the investment portfolio increased by 7.2% for the same period. This is explained by the bank's liquidity management strategies through which we guaranteed sufficient available resources, while efficiently and profitably managing our assets. Loan loss reserves decreased by 1.2% as a result of the effort made in terms of provision expenses and write-offs due to the credit cycle. Our international business continues to provide diversification, representing 25% of our assets. Please move on to Slide 11. Our loan portfolio remained relatively stable in the quarter and decreased by 6.5% annually, mainly explained by the operation in Colombia due to the FX impact and the decrease in the consumer book, along with lower credit demand resulting from high interest rates and macroeconomic uncertainty. Excluding the peso appreciation during the year, the loan portfolio will have decreased by 1.8%. The commercial segment grew by 2.2% in the quarter, mainly due to better dynamics in the services, financials and trade sectors. The mortgage portfolio also present a positive performance in the quarter, with a 1.1% growth driven by the low-income housing segment, which has had greater dynamics in coverage disbursements. In line with lower disbursement and write-offs, the consumer portfolio decreased by 5.6% in the quarter. As a result of these dynamics, we continue to experience recomposition in the loan mix. In terms of our international operation, the loan portfolio increased by 2% quarterly, supported by healthy growth across the different segments. And during the last 12 months, the loan book has grown by 6.2% in dollars, mainly driven by Honduras and Panama. Moving on to Slide 12, we present an update on our PDLs and coverage ratios. As shown in the top left graph, total PDLs over 90 days and our total coverage are starting to show an inflection point. This quarter, we started to see an improvement in the total PDL, primarily attributed to the consumer portfolio, which decreased by over 90 basis points. Within the Consumer segment, we have started to see that past due loan formation has been decreasing. Going forward, we expect new disbursements to continue to drive the ratios improvement as the most effective portfolio continues to roll over through the balance sheet. As we shared with you before, we are expecting to see the commercial and mortgage segments pressed by the prevailing challenges posed by the macroeconomic and operating environment. In this sense, we have been seeing some deteriorations in the commercial portfolio, mainly SMEs and some customers in certain sectors that are presenting some payment capacity challenges that would require higher provision this year. In the case of mortgage segment, deterioration comes from customers whose payment capacity has deteriorated amidst disbursements at high interest rates. In this sense, the challenges shown nitially in the consumer segment are starting to be seen in commercial and mortgage customers. And we are expecting these portfolios to require slightly higher provisions which are already considered in our guidance. Regarding coverage, we see improvements across the different segments. The traditional coverage for the total loan portfolio increased to 91.4% due to our provisions, efforts and decrease in 90-day past due loan portfolio. During this year, we will work to gradually increase the ratio, maintaining it between 90% and 100%. Last quarter, we introduced our coverage ratio, including collaterals, which better recognize our credit risk exposure. At the end of the quarter, it stood at 136.8%, a sufficient level within our risk appetite. All segments have coverage about 125% when including collaterals. Please move on to Slide 13, where we can see the evolution of the cost of risk, provision expenses and loans by stages. As shown in the top left graph, the annualized CoR, cost of risks closed at 5.17%, and the 12-month cost of risk reached 4.89%. During the first quarter, the growth pace of provision expenses decreased, pointing to the stabilization signs. We expect provision expenses to continue to be relatively high this year, an improvement to be more visible in the second half of the year. Looking at our loans by stages, we observed a slight migration from Stage 1 to Stage 2, primarily due to deterioration in a portion of the consumer and commercial portfolios. Consequently, coverage for Stage 1 and 3 remain stable throughout the quarter, while coverage for a Stage 2 increase, reflecting our ongoing efforts to gradually strengthen it. Now please move on to Slide #14. Funding sources decreased by 1% during the quarter and by 4.3% annually, in line with the loan portfolio behavior and no substantial needs for funding sources. We maintain sufficient levels in terms of short- and long-term liquidity. Last quarter, we experienced an increase in the 30-day liquidity coverage ratio due to the lower liquid assets required, in line with lower demand deposits and lower CD maturities. Please continue to Slide 15, where you will see our capital structure. The CET1 ratio closed at 10 41%, increasing 16 basis points in the quarter. This increase is explained by the share issuance and lower credit risk-weighted assets due to the lower consumer portfolio and some capital management efficiencies. The AT1 increased by 2 basis points during the quarter due to the exchange rate depreciation, and Tier 2 decreased by 8 basis points, mainly due to the lower weighting of subordinated debt. As a result, the total capital adequacy ratio closed at 14.63%. Please move to Slide 16, where we present our margins. Gross financial margin increased by 0.5% in the quarter, remaining relatively stable, positively supported by the financial expenses decrease. Financial income also decreased mainly due to the following impacts: first, growing interest rates are normalizing across the system, so new disbursements are being made at marginal lower rates. Second, change in our loan mix over the year with the commercial and mortgage segments, gaining share over the total portfolio. And third, lower investment income than previous quarters due to the lower valuation income than last year's higher than usual results. Despite these trends in income, we expect margin to expand towards the second half of the year, supported by lower funding cost. We also expect a more normalized investment income below 2023 levels, but probably a still higher than historical values. Finally, foreign exchange and derivatives income showed a varied performance during the quarter, mainly due to the peso devaluation against the dollar. Please continue to Slide #17. Non-financial income grew by 6% during the quarter, primarily due to higher dividends from companies in which we are shareholders. Better results from joint ventures and changes in valuations of asset received as payment. Fees decreased during the quarter due to the lower transactional dynamics and revenues related to card franchise, related to the seasonality effects usual in December. In terms of expenses, we are seeing the results of our efficiency strategy with total expenses decreasing by 5.4% in the quarter, mainly explained by the implementation of cost saving measures across the organization, optimization and processes and higher productivity. As a result, we see our cost-to-income ratio that begins to decrease and appropriate level of expenses for the size of the operation. Please move on to Slide 18, to analyze the bank's results. As we anticipated, we saw a challenging trend this quarter, and therefore, the consolidated result was minus COP 288 billion, which was reflected in a 12-month ROE of minus 5.81%. As we have been guiding, we expected the first half of the year to be challenging with marginal improving trends quarter-on-quarter. To finish the presentation, please move on to Slide 19, where we will share our expectation for the end of this year. Gross loans are expected to grow around 5% to 7%, with the commercial portfolio growing at around 12% to 14%, and mortgages between 6% to 8%, supported by better economic activity and disbursement in customers and sectors of strong risk profiles. Regarding the consumer portfolio, we expect a contraction of 6% to 8% by year-end, as we have seen that optimal conditions for growth are not yet in place. We will continue monitoring dynamics and placing disbursement under our origination policies in the segments alike with our risk appetite. Regarding assets quality, we maintain our expectation of a progressive improvement to reach levels between 4% and 4.5% by the end of the year. We are also dedicating efforts to improving coverage, and we expect to increase this ratio as the formation of nonperforming loans stabilizes. As Javier explained, our net interest margin should close between 6.1% to 6.4%. Please keep in mind that the end result might be impacted by the achievement of our loan portfolio growth and mix expectations. Likewise, we are exposed to local and international uncertainty regarding macroeconomic variables such as inflation and the monetary policy rate, and depending on the level at which these variables reach, we will be able to see these expected results. Regarding the cost of risk, it should close between 3.5% to 3.8% by the end of the year. It is important to mention that this change in relative value guidance does not necessarily incorporate higher-than-expected provision for the total book, but lower loan growth compared to our previous expectations. Non-financial income should grow between 8% to 10% due to lower expected fee income related to lower growth and FX impact. Regarding OpEx, we expect to grow between 3% and 6%, supported by our efficiency program and FX impact. As a result, we expect ROE to be between 1% and 5% by year-end. Finally, regarding capital ratios, we expect a CET1 between 10.5% and 11%. Thank you for your attention. At this point, we can move on to the question-and-answer session.

[Operator Instructions] Right now, we're standing by for questions. But in the meantime, let me turn the floor back to Mr. Javier Suarez for additional comment.

I would like to mention that David Pedraza who has been the Head of IR and Capital Management for the last 7 years is transitioning to a new role in Davivienda, where he will help us further develop Davivienda's corporate business. In this sense, Paula Botia, who has been with us in the IR team for over 6 years, will be assuming the role of Head of Investor Relations. We would like to thank David for his efforts and results during his time leading the Investor Relations team and wish him the best of luck in this new role. We can now proceed with the question-and-answer session.

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

So I have a number of questions. So the first one is, so in this past quarter, you raised $180 million of equity, and you reported a net loss of $73 million. I think it's the third consecutive net loss. Then my question is, if we should see that equity raise that you did in the first quarter, as kind of raising the estimated amount of net losses that you were forecasting, especially for the first half of this year. In other words, if we should expect another net loss in the second quarter? And again, the equity raise was seen as preemptive given that you were expecting net losses in the first quarter of the year. That's the first question. Second question, you mentioned in the -- so together with the equity raise, you also mentioned in the earnings release that you created a holding company that's going to own the shares of your banks in Central America. I think you already transferred the shares of your banks in Panama and in Costa Rica. Then my question is, what kind of the rationale behind this transaction? And if you're envisioning any changes to the structure of your banks in Central America, either divestments or potentially even inorganic growth in Central America? Or if you are doing this basically to increase the funding options and basically to fund the Central America business out of this new holding company entity? That's my second question. And then my third question, I want to confirm on the triggers for coupon cancellation on the -- on your perpetual bond. And I think it's basically to -- my understanding is that either that you don't have enough distributable items to make the coupon payment. And I see that you mentioned in the earnings release, you had COP 2.1 trillion or a bit more than $500 million in that accounting shareholders' equity? And second -- or second, if your capital ratios are below the minimum requirements or below the 7% common equity Tier 1, but I want to confirm, again, on the triggers for the coupon cancellation on the perpetual bond.

Nicolas, thank you for your question. With regard to the first one about the equity capital that we raised. As we mentioned during the last call, the intention of the equity -- the additional equity that we raised was to maintain capital levels that would help us keep developing our strategy, both in terms of having levels of capital that are in accordance with our risk framework and also having the opportunity for growth. And if you look at the numbers, we're 340 basis points above the required minimum. So we have ample space to keep growing. Even though there's still opportunity for the CET1 ratio to go up as we're in the process of validating with the Colombian superintendency in our internal model for operating risk, which would help us increase our CET1 significantly, something that we have already done on the separate financial statement -- the individual financial statements. So we're in the process of approval for that. So the reason for raising capital were the ones that we mentioned before. We didn't raise capital based on numbers of expected losses for the coming quarters. It's just to maintain the level of capital that we believe is the level of capital that is in line with our expectations, with our growth expectations that even though we are still below what we would expect on a normal economic environment, we still see opportunities going forward. In terms of the holding in Central America...

Sorry. If I can do -- sorry, if I can do just a follow-up question on that. So your revised guidance for the year is an ROE between 1% and 5%. You just reported first quarter results. We are halfway through the second quarter. At this point, you have a projection for your net profit or loss in the second quarter?

Yes. We mentioned, also during the last quarter that the first half of this year will be challenging. And let me give you some color on that. This first quarter was the quarter in which we were expecting the higher losses during the year. And actually, very similar to the ones that we had in the last quarter of last year because of the dynamics of the loss provisioning expenses on the consumer book, that's like the main driver. Of course, there are other drivers such as margins and even FX changes that have affected our P&L. But the most important one was consumer loan provisioning. And the dynamics that we're seeing on the consumer loan provisioning are improving very significantly. This first quarter, the numbers, as we showed during the presentation, are below our expectations. And if you look at the chart on the slide on credit risk, you see that there's a downward trend on provisioning for consumer loans. We are fully expecting to go with that guidance even probably better than the guidance as has happened with this first quarter. What we're seeing is a dynamic in -- the dynamic that we're seeing in past due loan formation is changing significantly. We've had 4 months in a row in which this -- the formation of new past due loans is improving significantly. So this quarter is a quarter in which we're presenting the negative results. We could still have negative results during the next quarter. But in terms of loss provisioning, we're expecting a significant improvement as compared to this first quarter. I don't know if that answers your question, Nicolas, on the first point.

It does, it does. Yes. And then we can move to the second question, the holding company, the creation of this holding company.

Okay. The holding company in Central America is a project that's been around with us for about 3 years. We've been thinking on making the structure an easier structure to understand as when we acquired the operations of HSBC about 10 years ago in the region, and some other operations through our other acquisition, they were all done directly by Davivienda. So Davivienda Colombia Bank owns several different companies in Central America, which makes it difficult to do some transactions such as the funding transactions that you were mentioning that we could take opportunities in the market by consolidating the operations in Central America under a single holding company. So basically, what we've done is a project that we had in mind for 2 or 3 years. And it's -- as you mentioned, it's going well. The holding was incorporated in November of last year, that month, the Panamanian operations were transferred from the Davivienda Colombia to the holding. And recently, we did the same with the Costa Rican operations, and we're still waiting for regulatory approvals in Honduras and in El Salvador. Once we've gone through with the process, we'll have a holding company that has the ability to consolidate the numbers of our Central American operations. It will have the ability to raise funding for the operations that are specifically directed to the Central American operations, and that would give us more flexibility in terms of access to markets. And also, it will give us more transparency in terms of reporting of our results on Central America. So that's the basic reason of that project that has -- is going according to our schedule. With regard to the -- does that answer your question, Nicolas?

It does. It does, yes. Thanks very much for that. It does, yes.

On the third one, in terms of the trigger for coupon cancellation. The first part is correct. We do have enough reserves to pay the coupons of the AT1. That's something that is -- doesn't worry us at all. We've been paying the coupons. And every year when we have our shareholders' assembly, we allocate a reserve for payment of the expected coupons, and that's what we did during the last shareholders' assembly. So we definitely don't have any concerns in terms of complying with the payments of the AT1s.

One follow-up there. So that account distributable items in shareholders' equity, you have COP 2.1 trillion or again a bit more than $500 million. I would assume that -- so let's say that you have additional losses -- net losses for $550 million. Then in that case, that account would be depleted and that would trigger the cancellation of the coupon on the AT1. Is that correct? That account should be moving based on your net profit, net of dividend payments, is that correct?

Nicolas, this is David Pedraza. That could be partially correct considering that we have a reserve on those occasional reserves that we have set aside specifically for the payment of the coupon. So considering that, we should be able to honor our commitment. And remember that the reserve is a last resort reserve. As Javier just mentioned, we do pay the coupon out of the P&L, and we will pay the coupon first before actually getting to the losses that you are mentioning. So it will be considered on the P&L first. I don't know if that address your question.

Yes. But David, again, my understanding is, if that account is depleted. And right now, you have around $550 million in that account. If that account is depleted, then that automatically is going to trigger a cancellation of the coupon payment on the AT1. And again, I would assume that net losses -- additional net losses would continue to subtract from that account from the distributable items.

Yes, that could be true, but it's definitely a scenario that we are not hoping for, and we are seeing that as a very, very last situation. We don't believe that we could reach that point.

I guess, the way to answer that question is, once all possible reserves to pay for the coupon are depleted, we would definitely be in that situation. We're very far from that scenario. So we're not considering it at all. As I mentioned before, we're at 340 basis points above the minimum requirement, and our expectations in terms of results for this year are very, very far from those scenarios.

There seems to be no further questions on our phone lines. So we'll now proceed with our chat questions. The first question comes from Daniel Mora Ardila from CrediCorp Capital. His question is: Even though there's slightly higher provisions coming from the commercial and mortgage portfolios are included in the guidance, do you believe the first quarter of 2024 financial results will be the peak of provisions? Or are we far from the inflection point? Under this scenario, is there another quarter that will be net losses possible for you? What indicators make you feel that the pickup provisions was already achieved during the first quarter of 2024?

Daniel, thank you for your question. As I mentioned in the previous answer, we are expecting the losses on the consumer portfolio to start decelerating. We've seen that during the first quarter. As I mentioned before, if you look month-by-month, we're reporting here quarterly results. But if you look at internally within the quarter, the month of January was higher -- was lower -- significantly lower than December in terms of gross provision expenses on the consumer book. February was lower than January. March was similar to January, although there is a seasonality effect because of the Holy-week ending of the month. And what we're seeing in the second quarter is that trend continuing. So actually, what we're seeing is, definitely, we believe that we've gone through the inflection point and loss provisioning is actually starting to decrease. That doesn't mean that the second quarter will have a positive net result. We could still have a negative result. But definitely, we've gone through the inflection point and we're expecting better results for the coming quarters.

We have just received another question through our phone line, Mr. Olavo Arthuzo from UBS.

I have one question on the asset quality trend of the banks, specifically talking about the delinquency over 90 days. On Slide 12, we can see some sort of improvement on the consumer segment, while continued deterioration over a mortgage and commercial segment. So given that, I just wanted to hear from you guys, what exactly happened all those -- on these 3 segments. Basically, to understand the improvement -- the robust improvement on consumer segment. And also on commercial segment, if you could share with us some specific industry, I understand that you cannot mention about any type of clients, any sort of a name. But if you could just share with us about the industry related, which you are seeing these problems continue since 2022 or at the beginning of the last year? That would be helpful.

Thank you, Olavo. As you point out, we are seeing a change in trend, specifically in the consumer book that, as you mentioned on Slide 12, the PDLs go from 6.97% to 6.04%, and that's actually the reflection of the comments that I previously made in terms of the improvement on the consumer portfolio. That improvement comes from, I guess, 2 services. The first one is that most of the losses come from the vintages that were originated during 2021 and 2022. And as time goes by, most of those vintages have already gone through the P&L, and the effect of them is the new formation of losses is actually winding down. So that's one of the reasons why we are seeing these numbers coming down. The second one is the quality of the portfolio originated during last year is definitely better -- is way better than what we had in the previous years. And that's a reflection of a stricter underwriting policies for the consumer book, that the quality of the book that was originated last year is actually very good. So when you combine those 2 elements, what we're seeing is actually an inflection point, as I mentioned before, in the consumer book that is actually the reason why we're expecting improvements -- a consolidation of those improvements in the coming quarters. For the mortgage portfolio, of course, the mortgage portfolio is also subject to the same economic environment that we've been going through. The fact that some of the portfolio was originated at very high interest rates is affecting some of our clients, which is something that will probably evolve as interest rates are coming down, and there are some refinancing options for their customers in which interest rates are coming down. So we believe that even though the numbers -- the PDL numbers for the mortgage business are going up, it's a problem that has to be managed, and there's a solution for them, for those customers, especially when you consider the quality of the collateral that we have on those portfolios. So even though the number is going up, we are confident that we can manage that segment of our portfolio in accordance to some solutions that will help us solve those issues. In terms of the commercial book, we are seeing some deterioration on some sectors in the economy, the contractors, there are some potential issues on the health sector, infrastructure, some other sectors. And while we're waiting -- what we're seeing is being very prudent in terms of the management of loan loss reserves for those segments where during this quarter, we anticipated some of the expected losses, and we included those on our P&L. We are seeing that trend, although we believe that, that's a portfolio that we can also manage. There are some sectors in which we'll see some deterioration going forward. But we definitely believe that we can manage that deterioration with a provisioning levels that are higher than what we've had before. But the dominant effect in our results will be the lower provision is on the consumer portfolio.

So just to let things clear here. On your guidance for the year in terms of delinquency of 4% to 4.5%, which of those segments do you expect to improve the most for you guys to deliver the guidance? Just to let it be clear here.

The 4% to 4.5% guidance is, of course, an average of the portfolio. We are expecting an improvement on the consumer portfolio, as mentioned before. There will be some deterioration on the commercial portfolio still and as well as housing. So those numbers will go up a little bit. And then the consumer portfolio will be the main driver of the recovery. So on average, that takes us to that 4% to 4.5%, which is as compared to last year's -- to end of the last year, which was close to 5% is a significant improvement, and that's -- those are the drivers behind those numbers.

Now we'll turn back over to our chat questions. We received another question by Mr. Alonso Aramburu from BTG Pactual. His question is: Profitability in Central America has also been under pressure. ROE was under 2% this quarter. Can you talk about profitability expectations in Central American in 2024? And in the medium term, the last 10 years average has been an ROE of 8%.

Thank you, Alonso for your question. This quarter, we've experienced once again something that happened during last year, which is a revaluation of the Costa Rican colon, which actually drove the result of the Costa Rican operation with an ROE for us of negative 7%. That's explained mostly definitely by the revaluation of the colon. So it's a very specific number. So if you look at the rest of the region, the numbers are around 10.5% and 10% for Honduras and Panama. El Salvador is around 4%. So on average, we would be close to the 8% ROE, if you take out the effect of revaluation in Costa Rica. Our view in terms of the Costa Rica colon is that the revaluation process has come to an end, and we are expecting a change in that trend. We're already starting to see a trend in which the colon is stabilizing and actually devaluation -- devaluating. So we expect the ROEs going forward to improve once you take away the effect of the revaluation of the Costa Rican colon.

Now the next question comes from Mario Estrella from Itau. His question is: What is the reason for lower taxes refund in the first quarter of 2024 compared to the fourth quarter of 2023? Is it because of operational -- operationally the quarter was marginally better than the previous one?

This is Juan Carlos Hernandez, Accounting & Taxes, Vice President. For tax purposes, we liquidate the income tax over the profit tax in this quarter. We have a nontaxable income related with dividends. In addition, we need to calculate the -- our exchange rate expenses for tax purposes. For the reason the income is not necessarily the same basis for the tax purposes. In this quarter, we liquidated our exchange liquidity position for different tax rate that we used in the last quarter. For the reason, we have a different basis in this condition, our income tax reform is mineralized last quarter.

And there seems to be no further questions at this time. I'd like to turn the floor back to Mr. Javier Suarez for any closing remarks. Mr. Suarez, the floor is yours.

As we have discussed during the presentation and during the question-and-answer section. We are seeing a quarter with negative results. But with an underlying trend that is definitely changing. We're seeing an inflection point during this quarter. So -- which is basically what we have in our guidance. As we mentioned during the last quarter call, we were expecting a first half of the year with difficult results, and that's basically because we -- the dynamics of the loan provisioning, were still going through the P&L, but that's actually what is happening. And our results in that -- in the other part of our business are actually better than what we were expecting. So our expectations for the remainder of the year positive in terms of improvement in results as well as some growth opportunities. We still see a challenging environment in terms of the economic -- the macroeconomic indicators in the country. But at the same time, we're ready to take advantage of the opportunities that may come during the coming months and the coming quarters. There seems to be another question, so we would be more than willing to take it.

Yes, there is another question by Diego Espinoza from BTG Pactual. His question is. Could you remind us the capital triggers for a coupon on principal cancellation?

Thank you. Diego, this is David Pedraza. So for principal cancellation, the trigger should -- or is established at 5.125%. In the case of the coupon, it depends on whether if we don't have enough distributable items as we discussed in the previous question. Or if we fall below the 7% CET1 requirement established by the regulation. Now that bridge of the 7% doesn't imply a total cancellation of the coupon, but rather a proportion of the coupon in the portion in which we reach those levels. So basically, the buffer is established of 2.5% above the minimum requirement of 4.5% established by the absolute regulation. In that sense, depending on how much we breach that 2.5% of buffers, there should be a proportion in which the coupon is cancelled, that's very specific, which we could discuss that in a particular call, if you want. But overall, 5.125% for the principal cancellation and the coupon depending on the distributable items or the level of breach of the 7% of CET1.

Thank you, David. As I was mentioning before, we are expecting to see better quarters in terms of our results. Still, we might have a negative second quarter with losses that probably will be lower than what we are experiencing during the first quarter, and the improvement trend consolidated. This improvement trend has been with us for 4 months. So that's why we are confident that this is a trend that give us a view of what's coming ahead. In terms of the strategy of the bank, the bank keeps moving forward with our detail strategy. We're very excited with the road map that we have in front of us. And we'll be very happy to share in the next call some of the offers that we're bringing to a market that will actually make Davivienda offer definitely the best offer in terms of personal bank in the country. Thank you very much for your participation during the call, and we expect to see you in 3 months. Thank you very much.

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