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

Welcome to Davivienda Second Quarter 2021 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; and Mr. Pedro Bohorquez, Strategic Risk and Financial Planning Director, will join us to discuss the quarterly results that have been released. If you haven't yet received a copy of the earnings report 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 in any forward-looking statements due to macroeconomic conditions, market risks and other factors beyond our control. [Operator Instructions] With that, 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 the Davivienda's Second Quarter of 2024 Earnings Conference Call. Thank you for joining us today. This quarter's results were in line with the expectations shared on our last call, marked by continued positive trends in different aspects of our business amidst a still challenging operating environment. As we'll see during the presentation, some external situations and variables continue to generate uncertainty and are far from normalizing. In this sense, although we are expecting positive signals to continue to consolidate into improvements in our financial results, the pace of recovery might be slow. In the following slides, I will elaborate on the current macro and financial conditions and this quarter's main results, focusing on the recent evolution of our margins and credit risk. On Slide 3, we have an overview of the macroeconomic environment in Colombia. The second quarter of 2024 has shown moderate signs of higher economic activity in the country. As we can see in the top left graph, the Economic Activity Index shows that April and May presented an average annual growth of 4%, accelerating from the previous 0.7% average recorded in the first quarter of the year, led by the dynamism observed in sectors such as agriculture and public administration. In turn, the annual inflation rate experienced some stagnation after a deceleration phase, averaging 7.17% for the second quarter of the year, although this figure is lower than the 7.82% average recorded for the first quarter of 2024, it remained almost unchanged for 3 consecutive months, mainly due to the acceleration in put prices during the second quarter. In line with this behavior, the Central Bank decreased the intervention rate by 50 basis points in each of the April, June and July meetings, which reflects a significant caution in the pace of interest rate cuts, considering the risk associated with exchange rate imbalances and misalignment between inflation's results and expectations. Consequently, consumer confidence show a marginal decline, reflecting higher uncertainty and the Colombian Peso depreciated by 8% quarterly, mainly influenced by the Dollar's appreciation against the world's main currencies. According to what I just described, normalized macroeconomic conditions are still distant and despite the latest annual inflation figure closing at 6.86%, the Colombian economy continues to be in an important adjustment process with inflation far from the 2% to 4% target range. Our base scenarios still forecast a decreasing trajectory of the inflation and monetary policy rate with remaining sources of price pressure, such as the increase in rents on shelter and higher prices of diesel and energy. In this sense, our updated macro expectations for this year are inflation close to between 5.5% and 5.9%, and a monetary policy rate of around 8.5% by the end of 2024, and a GDP growth of around 1.8% to 1.9%. Please move on to Slide 4, where we will see some figures of the Colombian Financial System. The system's portfolio continued to show moderate dynamics during the quarter with an annual growth of 1.4%. This is primarily explained by the still contractionary behavior of the consumer portfolio, offset by stable growth in the commercial and mortgage books. And looking closely at loan interest rates, we observed that they have been falling faster than deposit rates, mainly influenced by the cap rate reduction and higher competition across the system. Finally, regarding the system's asset quality as of May, we continue to see upward pressures across consumer and mortgage segments, with commercial loans seem to show more stability. Moving on to Central America on Slide 5. The most recent figures show that economic activity in the region continues to have a positive dynamic, but presented a slight deceleration compared to the previous quarter. This slowdown is primarily explained by the lower performance of the free trade zones in Costa Rica, transportation and commerce in Panama and the manufacturing sector due to lower external demand in El Salvador and Honduras. Annual inflation slightly increased during the quarter in El Salvador and Costa Rica. In the latter, inflation is close to leaving deflation territory and the Central Bank expects inflation to return to the target range in the first quarter of 2025. Annual inflation remained stable during the quarter in Honduras and decreased in the case of Panama. The Central Banks of Honduras and Costa Rica kept their monetary policy rates stable at 3% and 4.75%, respectively. It's important to note that the main inflationary risk for the region stem from fuel prices. In the past, countries such as El Salvador, Honduras and Panama have adopted price subsidies to mitigate the internal impact. Currently, fuel subsidies in Honduras remain in place. Regarding exchange rates, The Honduran Lempira showed a slight depreciation of 0.3% over the quarter, while the Costa Rican Colon depreciated by 4.85% during the same period, mainly explained by the lower inflow of foreign currency from key sectors such as Tourism and Experts. Market participants are expecting the Colon to moderately depreciate further during the year, in line with more normalized economic activity. As a result of these trends, we are expecting the region's GDP to grow around 3.2% during 2024 and inflation to close out the year within the target range set by the Central Banks in the region. Moving on to the main results of our business on Slide 6. Our loan portfolio expanded by 3% during the quarter, supported by greater dynamism in the Commercial and Mortgage segments. The quarter's NIM, including the results of FX and interest rate management was 5.91%, increasing by 20 basis points, and the quarter's cost of risk was 4.26%, decreasing by 91 basis points over the March figure. As a consequence, the quarter result was negative COP 74 billion, reflecting still challenging conditions but improved significantly compared to the previous quarter, as we had previously anticipated. Regarding our capital structure, CET1 closed at 10.12%, comfortably above the 7% minimum requirement, among the positive trends we observed during the second quarter, our asset quality and provisions. Total asset quality continued to improve, primarily supported by the consumer portfolio, which has also translated into lower total provisions expenses for this quarter. Additionally, our efficiency strategy continues to yield positive results, with operating expenses reducing their annual growth rate in an environment marked by high inflation. On Slide 7, I'd like to elaborate on our margins performance, starting on the liability side. As we can see in the top-left graph, our funding mix continues its adjustment process in which we are gradually acquiring more low-cost transactional resources. Term deposits continue to increase as they have been our main funding source recently. However, we've been careful to maintain a maturity profile that allows us to continue renewing these instruments at lower rates in the short term. Going forward, we expect our funding cost to continue improving, supported by the decrease in the intervention rate and recomposition of the funding mix. As a result of recent inflation, we anticipate an accelerated decrease in the monetary policy rate starting in September, although in real terms, the cost of funding will continue to be relatively high. Moving on to Slide 8 to talk about the asset side, we can see that the average implicit rates for the different segments of our loan portfolio are starting to show a decreasing trend in line with the dynamics observed across the system in previous slides, where interest rates on loans are decreasing rapidly. Additionally, changes in our loan mix are impacting our loan income with the Commercial and Mortgage segments gaining a higher share of the total book. Although this impacts our margin potential, we should benefit from a lower cost of risk associated with this new loan mix in the medium term. In the case of income from the investment portfolio, we will continue to see positive performance of the more normalized figures compared to last year's results as inflation and interest rates stabilize. Amidst this volatile environment, the interest rate risk management strategies we've been developing are helping to provide stability to our NIM. Part of these strategies are included in our NIM with foreign exchange and derivatives, which has been improving quarter-on-quarter. Consequently, we anticipate a more gradual margin expansion and expect our 12-month NIM to close the year between 6% and 6.2%, considering the interest rate strategies we have in place to manage our margins actively. Please move on to Slide 9 where I will talk about the evolution of credit risk. As we saw at the beginning of the presentation, the consumer book consistently shows positive trends and we expect this portfolio to drive improvements in asset quality and cost of risk for this year. We remain focused on a selective growth strategy supported by our origination models, which have allowed us to gradually increase disbursements in adequate risk profiles, while maintaining very low levels of early PDLs as seen in the bottom-left graph. These capabilities will continue to support our loan portfolio recomposition adjusting its risk profile. After the significant provisioning efforts we've made for the consumer book, we have continued to observe a second consecutive decrease in net expenses for this portfolio. We expect this trend to continue materializing throughout the remainder of the year. In terms of our Commercial and Mortgage portfolios, we continue to expect PDL ratios to remain pressured and the commercial portfolio to require additional provisions, a portion of which we have already anticipated these 2 quarters. As a result, we are maintaining our cost of risk guidance in 3.5% to 3.8% to reflect the current situation. Let me turn the call over to Pedro to continue with the presentation.

Thank you, Javier. Good morning, everyone. Please move on to Slide 10 where we will analyze the evolution of assets. Our assets, close at COP 183 trillion, increasing by 4.1% over the quarter, mainly driven by loan portfolio growth and exchange rate depreciation. Cash and Interbank deposits increased by 11.9% quarterly, and the investment portfolio increased by 2.8% during the same period, explained by the Bank's liquidity management strategies, which seek to guarantee sufficient liquid resources. Loan loss reserve decreased by 1% due to our provisioning efforts and write-offs during the quarter. Colombia's assets, which represent 74% of our total operation, increased by 2.8% quarterly. In contrast, the Central American operation remains stable during the same period as the growth observed in El Salvador and Honduras was offset by a decrease in Costa Rica's and Panama's operations. On an annual basis, our consolidated assets have grown by 1.3%, mainly explained by Central America's behavior where El Salvador's, Honduras' operations have presented the highest growth. Please move on to Slide 11. Our loan portfolio grew by 3% during the quarter, mainly due to the impact of FX and better dynamics in the Commercial and Mortgage portfolios. Excluding the FX impact, the commercial segment grew by 3.8% in the quarter, mainly due to higher disbursements across different sectors in Colombia, where we have been focusing on specific well known customers with solid balanced sheets and risk profiles. The mortgage portfolio also showed good dynamics, growing by 1.6% over the quarter when excluding FX driven by greater dynamism in both traditional housing and the low income housing sectors. The consumer portfolio decreased due to low dispersions, write-offs and the natural paying dynamics. However, as Javier previously mentioned, we have [ cultural pick-up ] growth in some specific segments, supported by the information provided by our origination models and the low PDL formation we've maintained in new disbursements for over a year. As a result of these dynamics, we continue to experience a recomposition of our loan mix with the Commercial and Mortgage portfolios gaining a higher share of the total book. It is important to consider that margins, costs of risk and coverages can all change depending on the loan portfolio needs. With a portfolio more focused on Commercial and Mortgage segments, provisioning expenses should be lower in the future, resulting in a potentially lower cost of risk going forward. Consequently, as these segments naturally have higher levels of collaterals, our coverage needs may be lower looking ahead. In this sense, aligned with lower associated credit risk, these portfolios usually have lower returns on the income side as the rates are lower than those charged for consumer credits. This fact is crucial when thinking about our margins going forward. Regarding our International operation, the loan portfolio increased by 1.4% quarterly, supported by positive dynamics across the different sectors. During the last 12 months, Central America's loan book has grown by 7.3% in dollars, mainly driven by Honduras and Panama. Our Central American operation continues to provide diversification to our overall business. We remain committed to our long term vision and are actively working to build this best value offering for our customers while leveraging our acquired digital capabilities and contributing to the region's growth. Moving on to Slide 12, we present and update our PDLs and coverage ratios. As we can see in the top-left graph, total PDLs over 90 days continue showing positive results after peaking in the fourth quarter of 2023, mainly supported by the consumer book in which we continue to observe lower [ PSU loan formation. ] Consumer PDL has already improved 161 basis points over the past 2 quarters and we expect new disbursements to continue driving this positive trend as the most affected portfolio continues to roll over to our balance sheet. In the last months, we've observed some improvement in rolling rates, which, along with long roll and some write offs, have allowed our commercial portfolio PDLs to remain relatively stable. However, as we have shared with you before, we have been seeing effects in some segments of the commercial book, such as SMEs in the Retail and Agriculture segments, small contractors associated with the construction value change, and some isolated cases in other sectors. In general, these segments have been more affected by the economic cycle facing an extended period of high interest rates and other situations specific to their activities. We've been closely monitoring their revolution and have increased their coverage accordingly. In this sense, we expect commercial PDLs to remain slightly pressed in the coming quarters and to continue allocating provision for this book throughout the year. Please bear in mind that this portfolio's coverage, including collaterals, stands at 145%. In the case of the Mortgage portfolio, the deterioration that has been observed during the year is related to customers whose failing capacity has been affected by some disbursements that were made at high interest rates. Please also note that the mortgage asset quality indicator will remain at higher levels as a result of the change in our write-off parameters implemented since March of 2023, which only seeks to write-off when the real recovery's flotation is very low. Although we expect the mortgage PDL to continue at high levels during the remainder of the year, these portfolio is strongly collateralized and is not expected to require additional material provisions. Furthermore, recent disbursements are showing better asset quality. When looking at coverage by type of loan on the right side of the slide, we observe that coverages for all segments improved during the quarter, primarily due to lower deterioration and our conscious provisioning efforts. However, total coverage for loans over 90 days remains stable during the quarter as a result of the current loan mix as the Commercial and Mortgage portfolios have upgraded weight in the total book. By the end of the quarter, our Coverage plus Collaterals ratios stood at 138.8%, a level that is in line with our risk appetite. Including collaterals, all our portfolios have coverages above 125%. Please move on to Slide 13, where we will see the evolution of the cost of risk, provision expenses and loans by stages. As shown in the top-left graph, the quarter's cost of risk closed at 4.26%, decreasing by 91 basis points, supported by a considerable 15% decrease in provision expenses during the quarter, explained by the consistent improvement in the consumer portfolio despite higher provisions for commercial loans. Although we expect the Commercial segment to require higher provisioning this year, we're expecting provisions to improve quarter-on-quarter driven by the consumer book. With regards to our loan buy stages, we observed a slight increase in Stage 1, mainly explained by the growth dynamics of our loan book over the quarter. Both Stage 2 and 3 remained relatively stable during these periods. When looking at coverage by stage, we observe a slight decrease in Stages 2 and 3, mainly due to portfolio composition. In Stage 2, there is a higher proportion of mortgages fully collateralized, therefore requiring lower provisions, and in Stage 3, a higher proportion of commercial loans, which also have lower coverage needs. Coverage for Stage 1 remained relatively stable during the quarter. Please move on to Slide 14. Funding sources increased by 2.6% during the quarter and 1.8% over the year, aligning with loan growth dynamics and FX impact during the quarter. Demand deposits increased by 1.3% quarterly, mainly due to our strategy of providing a comprehensive transactional offering to businesses along with [ direct IRE ] and payroll accounts for retail segments, which are allowing us to increase low cost deposits. Term deposits increased by 6.5% in the quarter and by 14% annually as these instruments have been one of the primary available funding sources during the past year, along with the market preference for high return instruments. Moreover, bonds and credits with entities decreased quarterly and annually due to maturities and a lower rollover of term-end credits in foreign currency as part of our funding management strategies. We maintain sufficient liquidity levels and are comfortable with churn and long-term ratios. Please continue to Slide 15, where you will see our capital structure. Our CET1 ratio closed at 10.4%, decreasing by 28 basis points compared to the first quarter, mainly due to the previous losses and higher risk weighted assets in line with quarterly loan growth. The additional Tier 1 capital increased by 5 basis points during the quarter due to exchange rate depreciation, and Tier 2 remained relatively stable, decreasing slightly due to lower weighting of subordinated debt. As a result, the total capital adequacy ratio closed the quarter at 14.38%. Although our CET1 is temporarily affected by the results of the last 12 months, we remain comfortable with our capital structure, which has enough space above meeting requirements. A better performance throughout the second half of the year should help reveal capital ratios. Please move to Slide 16 where we present our margins. We've been capturing an improvement in the cost of funding as our liabilities have been repricing downwards in line with our balance sheet profile. However, both loan and investment income have been impacted by interest rate normalization in Colombia, along with one misrecomposition and high-level competition partially offset by our interest rate management strategies executed through derivatives, which are supporting NIM stability. We continue to expect our NIM to gradually improve going forward, although at a slower pace as Javier explained earlier. Please continue to Slide #17. Nonfinancial income decreased by 13.9% during the quarter, primarily due to a base effect related to dividends received in March and income from assets received as payment during the first quarter of the year. On an accumulated basis, nonfinancial income grew by 12.4% over the year, continuing to show a positive result supported in fee performance, particularly in commissions for transaction services, foreign trade and the acquiring business. Regarding expenses, we continue to see the result of efficiency strategy. This has performed well, especially in high inflation environments. It is important to point out that the growth we observe in total expenses on a quarterly and annual basis is mainly explained by a personal expense one-off related to the employees collective agreement. Excluding these effects, total expenses will have grown by 1.3% quarterly and by 1.4% annually. Please move on to Slide 18 to analyze the Bank results. The net result for this quarter was minus COP 74 billion, which represents a quarterly analyzed ROE of minus 1.92% improving over the previous quarter and we guided on our last call, and pointed out to a return to positive results during the second half of the year. To finish the presentation, please move on to Slide 19 where we'll share our expectations for the end of this year. Gross loans are expected to grow around 5% to 7%, with the Commercial portfolio growing at around 10% to 12% and Mortgages between 7% to 9%. Regarding the Consumer portfolio, we expect a contraction of 4% to 6% by year-end as we have slightly increased disbursements in the specific segments with strong risk profiles. Regarding asset quality, we maintain our expectation of a progressive improvement to close with total PDL levels between 4% and 4.5% by the end of the year. Regarding coverage, we expect to keep levels between 90% and 100%. It is important to mention that this estimation reflects our loan needs recomposition where the Commercial and Mortgage segments gain a higher share within the total book, resulting in a change in our provision needs towards lower required coverage. Our NIM should close the year between 6% and 6.2% as margin recovery may take slightly longer than anticipated, as Javier explained. Regarding the cost of risk, we maintained the range between 3.5% and 3.8%, although we anticipate additional provisions in the commercial pool. Nonfinancial income is expected to grow between 8% to 10% supported by favorable [ PE ] performance. Regarding OpEx, we're also maintaining our expectation based on the consistent results we are seeing in our efficiency initiatives. In this sense, we expect expenses to grow between 3% and 6% this year. As a result, we expect return on average equity to be between 1% and 4% by the end of the year. Finally, regarding our capital ratios, we expect our CET1 to close between 10.3% and 10.8%. Thank you for your attention. At this point, we can move on to the question-and-answer session.

[Operator Instructions] Our first call comes from Mr. Andres Soto from Banco Santander.

My first question is regarding the deposits evolution and the funding costs. We have seen competitors -- new competitors in the market, offering very aggressive rates, specifically Nubank. How do you see the competitive environment for [ the positives ] in Colombia at this point in the cycle? And how confident are you that we are going to see improvement in funding costs as the Central Bank starts to cut rates?

Good morning, Andres, and thank you for your question and for being in the call. Yes, we're seeing definitely a change in dynamics in the market with new competitors entering the market with high-yield accounts. You have to consider that for a long time, we have had a value proposition for our customers that incorporates not only traditional savings accounts, but also other instruments such as CDs and investment funds that are a significant part of our funding, and that's still there. And we believe that there's a -- we have a complete portfolio of solutions that we can offer to our customers in a segmented way. Of course, new entrants into market make us rethink some of our specific strategies on the funding side. But we believe we are prepared. We have the digital capabilities to maintain our customers. And it probably will lower the pace and with -- the funding costs will decrease on average. But we are confident that we can continue serving our customers with competitive rates. We'll have to see how this evolves over the medium term as the Central Bank keeps reducing interest rates. We'll see a general reduction in interest rates on the asset side also it will put some pressure on the deposit rates for everyone in the market. So we're -- we believe we're ready with the solutions that we have for our customers. It, of course, will have some impact on the funding cost of the system, the fact that there are players with high interest rates, but that's part of the new normal, and we have to adjust to it and make sure that we are competitive and we have a good solution. At the end, the market will actually converge to an equilibrium, which we believe we are competitive to maintain our leading position.

Javier, can you remind us what is the sensitivity of your NIM to lower interest rates?

As we've seen, there's -- we've been very impacted by the increase in interest rates over the last couple of years. We are seeing the trend in the opposite direction. And what we're seeing is a benefit -- a clear benefit from lowering funding costs. And we expect that to continue being the case. So just to give you an idea, we expect the Central Bank to be around 8%, 8.5%. So our analysis showed that a 100 basis point decrease in the reference rate translated into 7 to 10 basis points expansion of our net interest margin.

That's very clear, Javier. And then talking about your loan mix rebalancing that we have seen over the past few years. Do you expect that to continue? Have you rethought your strategy in terms of the loan book composition, including mortgages, consumer loans and commercial loans?

That's a good question. Of course, we've seen a significant recomposition of our book based on the decrease in the size of the consumer portfolio. That decrease was based on the fact that we had to control losses on the consumer book. We're doing well as we saw during the presentation in actually controlling those losses and the consumer book. So what we're seeing now is a shift in the trend in the consumer loan. It will take some time because of the inertia and dynamics of the book, but we will start to see lower rates of decrease in the consumer book. And then eventually, we'll start growing in the consumer book. So for the short term, we will still see a recomposition of the book moving towards Mortgage and Commercials. But in a few quarters, what we'll see is the consumer loan book will start growing at a rate that is comparable to the ones on the Commercial and Mortgage books. So we expect our composition to stabilize. At this time, what we're seeing is an increase in disbursements on the Commercial -- on the, I'm sorry, on the Consumer book, a significant increase from the second quarter to the first quarter, and we're seeing the same trend in the third quarter. So it's still because of the size of the decrease that we've been experiencing. It's still -- it will take some time before the book starts growing. But what we're seeing is the leading indicator, which is growth in disbursements is going well in the Consumer book, well within our risk appetite. So what we'll see is stabilization of our mix. And probably during next year, Consumer will start getting a little bit back of the percentage that it had in the mix. So for the -- in summary, for the following couple of quarters, we'll still see a shift towards Commercial and Mortgage, but the underlying trends will indicate us that the next year will probably have a much more stable growth dynamics in the 3 books and probably Consumer will start picking up a little bit of the composition that lost during these couple of years.

And regarding the mortgage composition, part of the problem for Colombian banks and in particular, that was clear with you guys was the fact that mortgages were at fixed rate -- and with the increase in interest rates, the margin that you were getting in those loans were extremely, extremely low. Have you rethought that strategy? Is there any way you can have more variable rate in your Mortgage portfolio?

So far, the market still is very much focused on fixed interest rates. So although we have variable rates with inflation-linked rates that are around 25%, 30% of our portfolio. What we're doing is on the Treasury side and with the derivatives, we're actually hedging those positions, and we're doing a very good job during the last year on hedging those positions. So if we were going to experience a certain increase in interest rates, such as the one that we experienced a couple of years ago, we would be in a much better position in terms of our margins.

Thank you. Our second question comes from Mr. Nicolas Riva from Bank of America.

Javier, before asking my questions, just let me state that I think that even though you reported a net loss in the quarter, I think there were many positive aspects to the quarter, including there was a decline in loan loss provisions, a decline in NPLs are decline in write-offs of bad loans. And then looking at the guidance, and this is going to be my question. Looking at the guidance for the full year. Clearly, the guidance points to relatively large profits in the second half. So I calculate profit of at least $130 million that you're expecting in the second half of the year, even using the bottom end of the guidance for the ROE, the 1% ROE? And also, if I look at the guidance for cost of risk, the guidance for the full year is 3.5% to 3.8%. That implies cost of risk in the second half of the year below 3%. So then my question is, instead of providing this full year guidance, right, which again implies a very significant improvement in profits in the second half of the year as well as cost of risk. Why not just provide guidance for the second half of the year? So particularly, if you can provide us guidance for net profit for the second half of the year and cost of risk as well? Because to me, from the point of view of the bondholders of AT1 the important conclusion from this guidance is you're expecting profits any profit -- net profit in the second half of the year? And given that the cancellation of the coupon payment on the AT1 is only triggered by additional losses of $500 million, which is your distributor items. That to me gives comfort to the bondholders knowing that you expect to see some profits in the second half of the year. But again, the question is if you can maybe provide guidance specifically for the second half of the year, profits and cost of risk, and if you feel confident in that guidance in that significant improvement second half of the year for profits and cost of risk?

Nicolas, thank you for your question. First, we're going to suggest that you help us with our marketing team because you do a much better job than what we do in terms of showing our information. You're right. I think your analysis at the beginning of your question is completely in line with our expectations. Our ROE is in that range between 1% and 4% because of the cost of risk, the year-end cost of risk, which implies a significant reduction on the cost of risk when we compare what we've seen during the first half of the year with what we are expecting for the second half. So we are actually expecting profits for the second half. Those profits should cover the losses that we've been experiencing. And if you see -- if you look at the trend on the results in the first quarter and the second quarter that we are announcing, we see that trend continuing into the future because of the way our models -- our internal models in terms of losses for the consumer book, which is the most significant driver of change in our numbers. We are expecting a trend of improvement that is consistent with those numbers of 3.5% -- with 3.8%. It would be actually a little bit lower, but we're keeping it at that range because we are also expecting some headwinds on the commercial book in terms of provisioning. Although we've done a very conscious job during the first half of the year and provisioning for the consumer -- the commercial book. So yes, we are expecting an improvement in the results for the second half of the year. Of course, there's still many sources of uncertainties in terms of the -- what we're seeing on the regulatory side, what we're seeing on the macro environment, still the consumer confidence, the loan demand, there are still some uncertainties, but we are actually seeing a better -- our expectations are better for the second half of the year based mostly on the fact that we are leaving behind many of the efforts that we've done on loan provisioning for the consumer book. Our internal models actually show that most of the -- at least more than half of the loan provisioning that we're still doing for the consumer loans come from all vintages. As they mature, these numbers actually coming down. And when this number comes down, actually, it's being replaced by the very good performance of the new vintages and the consumer book. So that's why we're confident that this -- there's a steady improvement that should keep being in the same way for the second half of the year. We'll take a look and actually we could provide you with information on guidance for the second half of the year.

Maybe if we can do just one quick follow-up. Now that we are halfway through the third quarter on -- about August 15. Do you have like preliminary guidance just for net profits for the third quarter? If you're on track to meet what kind of profits for the third quarter specifically?

We're not giving a specific guidance for the quarter. But what I can tell you is we're in line. We're in line with that 1% to 4% range. We're actually in line with that. The third quarter is actually behaving in the way we were expecting. So we are expecting actually profits that we'll start compensating the losses that we have during the first half. And there's also a trend, the underlying trend in the way we see the leading indicators in loan losses makes us believe that the fourth quarter is also in line with that expectation. So we should be having good results. I wouldn't want to commit with the numbers for the third quarter specifically, but it's going in the right direction.

We will now pursue with the webcast questions. [Operator Instructions] And our first question comes from Mr. Daniel Mora from CrediCorp. The CET1 ratio is now below what you had before the pandemic. Thus, can we think about new capital increase in the short term? The key message of the last capital increase was to have enough resources to take advantage of growth opportunities. Still, it seems that capital is now pressured after absorption losses and it might be difficult for Davivienda to take a more aggressive stance regarding the loan growth when the economic scenario improves. What is the CET1 target in the short term?

Thank you, Daniel, for your question. You have to consider that in terms of CET1, we are basically at the inflection point. This is the -- this should be the lowest CET1 ratio that we have during this process because of the fact that we've been starting to grow. And at the same time, we were still registering losses at the bottom line. So looking forward, we have 2 reasons why we believe we have enough capital to maintain our growth strategy: the first one is, the fact that we are expecting to see profits going forward that we'll actually improve our capital position; and the second one is, that the CET1 is based on the current standards that we're using for operating risk capital allowances. We've already been approved by the superintendency, on our separate financial statements to use our internal model. We're in the process of doing the same for the consolidated statements. This is a process that -- there's a technicality on the regulation that says that it has to be after many years of incorporating the last new entity that is supervised by the financial superintendency. And that deadline is bound to happen in November of this year. So when we consider that we've already been approved with the internal model and that -- there's just a technicality that has to be met, our expectations is that CET1 should improve around 40 basis points because just of the fact of this new charge on operating risk. So because of those 2 reasons, because the fact that we are starting to see profits for the coming quarters and the fact that we have a buffer that is not registered at this time in our financial statements of around 40 basis points. We're confident that the levels that we have are enough to sustain our growth strategy. That's why we're actually guiding 10.3% to 10.8% levels that we believe that we could actually show by the end of the year.

Thank you very much. Our second question from our webcast comes from Mr. Daniel Mora from CrediCorp. What are your thoughts about the potential implementation of mandatory investments in Colombia?

With regard to mandatory investments, what we see is we're having a discussion with the government, specifically with the economic team in the government, showing them the benefits of using the capabilities that the financial system has in terms of deploying credit to sectors of the economy that actually should benefit from these type of programs. Going through a process of mandatory investments is a lengthy difficult process because it has to go through Congress. So the expectations of that path as a countercyclical measure are difficult to understand because of the fact that it takes at least 1 year, maybe more than 1 year, close to 1.5 years before the first loan is disbursed, because of the that it has to go through a legislative process. So we're working with the government with -- the industry is working with the government on finding ways to actually deploy credit to the segments of the market that actually are in line with the expectations of the government. We've been doing it. The good signs on this would be the housing, the mortgage business in which by lowering the rates and anticipating the interest rate decrease in the system. The financial system is actually moving forward on helping those sectors of the economy that need that boost. We believe that this dialogue with the government will be fruitful and will come to an understanding. And if that doesn't happen, then the mandatory investment -- in the worst case scenario where the mandatory investments are faced into regulation, we won't see an effect in our balance sheet until at least 12, 18 months from now.

Thank you very much. Our third question comes from Mr. Eliseo Santi from LarrainVial. He's got 2 questions. The first one, why did your expectation for NIM decreased in the last months? The second question, you expect a relevant reduction in cost of risk, but the aggregated NPL should remain stable; consumer, down; commercial, up. Fault. Will the coverage decrease by the end of the year?

For the first one, in terms of our NIM expectations, you have to consider, as Pedro mentioned during his remarks, that the fund -- that the composition of the book is changing. And as it changes, there's a lower percentage of consumer loans in our portfolio. So actually, that's one of the reasons why our expectation of NIM is lower and also because of the accelerated decrease on the cap rate that has an impact on part of our portfolio. So when you combine those elements, we are seeing an improvement in the NIM, but it will take a longer time. We expect NIM to keep steadily improving, but with a mix of the loan portfolio that is a little bit different than the one we had before. That implies that our cost of risk should also come down. And that's an effect that we won't see during this year because of the fact that we are still carrying some of the losses on the consumer book. But going forward, this new composition should imply a lower cost of risk that would compensate the lower NIMs. I can see there is a second question from Eliseo based on the -- whether we expect a relevant reduction in cost of risk, but the aggregate NPL should remain stable, consumers down, commercial up, will the coverage decrease by the end of the year? We expect coverage to remain stable between 90% and 100%. We actually expect consumer coverage to increase gradually in the coming quarters. And by year-end, we should be around 135% to 140%. Our overall coverage will remain stable given the Commercial and Mortgage portfolios will drive growth. So it's important to mention that these portfolios are more collateralized, and we expect coverage including collaterals to remain around 130%.

Thank you very much. Now we have another question by [ Mrs. Andrea Rodriguez from Scotiabank. ] Could you please provide more color on what's driving the difference between NIM, and NIM including FX and derivatives? Are you taking any specific strategy to hedge interest rate risk?

Andrea, thank you for your question. Yes, there are some strategies that we're incorporating to hedge interest rate risk. When we look at NIM, including FX, it has both the effects of our hedging strategy, but also some other effects on our Treasury that are not linked to interest rate hedging. But there's a part of the difference that is explained by hedging of our interest rate risk.

Thank you very much. Right now, we're standing-by for some further questions. [Operator Instructions] It seems like we have another question through our phone line by Mr. Carlos Gomez from HSBC.

Okay. All right. So, I have 2 questions. The first one refers to the uncertainties on the regulatory side that you mentioned for the second half. Is that referring to these compulsory investments, or there is something else that we should be aware of? And second, when you raised capital in the second half of last year, part of the rationale was to be able to take opportunities in any possible M&A or consolidation that took place in the Colombian market. Do you see that still happening? Or you have changed your mind on that?

Thank you, Carlos, for your questions. On the regulatory side, what we're seeing is this compulsory investments. But as I mentioned before, that's an uncertainty that we see that will not affect us in the short term, but it could have an impact on the medium term, although I see a low probability of that happening. That's like the main regulatory issue. Of course, this is -- there's a political dynamics in Colombia that actually we should be aware of. Changes in regulations going over, there's still reforms like a pension reform that has been passed into law. We will have to see how it's implemented. So there are many things moving in the general regulatory and legislative environment in Colombia, many reforms. But so that's like a general statement on uncertainties. I'm not thinking about a specific regulations for the banking sector besides the compulsory investments. With regards to capital, as we mentioned in previous calls, our capital injection was -- the rationale behind it was taking advantage of the opportunities in the market. We're seeing organic growth as the main driver more than any M&A expectations. We always are looking for M&A opportunities when and where they have a strategic fit. We'll look at those opportunities. But our main focus in terms of growth at this time is based on internal growth.

Thank you very much. There seems to be no further questions at this time. With this, I'd like to turn the back -- the floor back to Mr. Javier Suarez for any closing remarks. Mr. Javier, the floor is yours.

Thank you. This quarter, we continue to see positive trends, as you've seen during the call. These positive trends have been materializing in different aspects of our business, such as funding, credit risk and operational efficiency. So moving forward, we expect these trends -- these positive trends to continue to consolidate and drive us closer to a full recovery. In this sense, we will continue to work hard on the various fronts of our business to turn things around as fast as possible and return to the strong, consistent and positive results we know we are capable of delivering. We're confident that the results will improve going forward. And we are convinced of our Bank's resilience. We maintain capital levels, as I mentioned before, that are comfortable of our minimum requirements. We understand that the number that we're showing is lower than our expectations. But I already explained why we have an expectation of those capital [ the solvency ] ratios improving in the coming months. And with all this together, we've seen the credit rating agencies S&P and Moody's affirmed our long-term international risk ratings in July of this year. We remain focused on our long-term vision, where we continuously observe improvements and progress in our detailed strategy, which has been a focus during this process, in this couple of years, we've been working tirelessly on improving our digital capabilities, and we're very happy to see that that's coming to fruition. We have a very interesting road map in front of us in terms of new capabilities for our customers, and that's actually already driving growth on one front. And also part of the efficiencies that we've been capturing are the benefits, the dividend on those digital investments. We're actually capturing some of those benefits through efficiency. We are closing in Colombia to 93% of our customers being digital. These digital capabilities and lessons are also moving towards our corporate offering and the SMEs, and we keep continuing our deployment of these digital capabilities in Central America, with digital adoption actually showing a very good progress in the region. In DaviPlata, we launched a new interface this quarter, seeking to make navigation in the app faster, more efficient and user-friendly. We've been also working on generative artificial intelligence initiatives on DaviPlata to make transactionality even easier within the app. And we're seeing also very healthy numbers in terms of transactions and in terms of volumes, of purchases, and in terms of the dynamics -- internal dynamics of DaviPlata. We're very satisfied with those dynamics. On the ESG front, we continue to actively manage our sustainable business strategy. This quarter, we adhered to the Equator Principles to further strengthen our Environmental and Social risk management practices, reaffirming our commitment to ensuring that the infrastructure projects that we finance are developed in an environmentally and socially responsible manner. Thank you very much for your participation during the call, and we expect to see you in our next conference call to discuss the third quarter results. Have a good day.

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