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

Welcome to Davivienda's Third 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; and Mr. Pedro Bohorquez, Vice President of Strategic Risk and Financial Planning, will join us to discuss the quarterly results that have been released. If you have not yet received a copy of the earnings report and presentation, please visit Davivienda's Investor kit or the Financial Information section at ir.davivienda.com. [Operator Instructions] Please note that this conference is being recorded. 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 anticipated in any forward-looking statements due to macroeconomic conditions, market risks and other factors beyond our control. [Operator Instructions] I am now pleased to turn the call over to Mr. Javier Suarez, Chief Executive Officer. Mr. Suárez, the floor is yours.

Good morning, and welcome to Davivienda's Third Quarter 2024 Earnings Conference Call. I'm pleased to have the opportunity to address you today. Our financial results for the quarter aligned with our previously provided guidance. Several key factors, including decreases in cost of funding and provision expenses and our ongoing commitment to cost control primarily fueled the positive outcomes we've achieved. We are optimistic about the trajectory we're at. Our digitalization strategy is heading in the right direction, and we have made significant progress in sustainable financing and climate risk management. These advancements are positioning us for the long term as these capabilities will definitely be an edge to remain as leaders in the system and to increase value for our stakeholders. As we look ahead, we anticipate these positive trends will continue. However, we acknowledge that the pace of improvement may moderate as we navigate some external variables I will cover later. Despite these challenges, we remain confident in our ability to adapt and deliver sustainable growth. On Slide 3, we have an overview of the macroeconomic environment in Colombia. Recent economic indicators paint a picture of cautious optimism. The economic activity index exited in an annual growth of 2.9% in July and August, primarily driven by the performance of agriculture, mining and public services. This outcome exceeded both analysts and our projections, leading us to revise slightly upward our GDP growth forecast for 2024 to around [ 3% ]. Inflation has notably declined, dropping from 7.18% in June to 5.81% in September, primarily due to a slowdown in food price increases. We anticipate this downward trajectory to continue, potentially accelerated by group weather conditions, boosting food supplies, but with some risk related to an underlying peso depreciation, which could slow these progress. In this sense, we expect inflation to close to around 5.2% this year. In response of these trends, the Central Bank has cautiously cut interest rates by 50 basis points in July and September meetings, reaching 10.25% at the quarter's end and 9.75% in October. We expect this measured approach to persist, with a further 50 basis points cut in December, bringing the year-end rate to 9.25%. We'd read that this prudence is related to fiscal uncertainty, and concerns our exchange rate instability. Additionally, our reduced likelihood of our U.S. recession would suggest fewer Fed rate cuts, giving room for further domestic monetary easing. Meanwhile, deposit rates have continued down, driven by decreasing inflation, interest rate cuts and stable macro liquidity. And the Colombian peso has depreciated against the U.S. dollar, influenced by decreasing oil prices and a rising country risk training. Finally, we saw the companies in this slightly improving during the month of September, probably signaling consumers' optimism in light of interest rate decreases. However, this sentiment is not yet materializing into increased credit demand as we will see in the next slide, where we will see some figures over the Colombian financial system. The financial sector's total credit growth was 1.1% in the third quarter, slightly below the previous figure. This reflects a still contracting consumer credit portfolio and stable growth in commercial and housing loans. In an effort to stimulate lending and promote economic recovery, the government and banks collaborated to launch El Pacto [ por aporte ], their [ Pact ] for Credit initiative in August, which aims to increase the flow of economic resources towards strategic sectors such as mortgages and residential construction, infrastructure, manufacturing, energy transition, agriculture and tourism through increased disbursements from credit establishments and market conditions and within each bank's risk framework. We are optimistic about the possibility of working with the government and the real sector to find solutions to existing challenges that can help us increase funding close to the economy. The launch of this initiative are the proactive measures we and other banks still to witness mortgage interest rates demonstrate our commitment to supporting economic recovery and promoting access to credit for businesses and innovations. Loan rates, especially for consumer and credit card loans have significantly decreased, attributed to the decrease in the cap rate. The overall loan portfolio quality of the system remained stable at 3.6% in August with improvements in consumer credit, offset by a slight deterioration in the commercial portfolio and upward pressure in mortgage loans. In summary, the economic landscape presents a mix of encouraging trends and persistent challenge. While growth has exceeded expectations and inflation is declining, fiscal uncertainty and external factors post risk. The Central Bank's cautious approach to interest rates and the government's efforts to stimulate credit reflect this complexities. We remain attended to these developments as we navigate the path ahead. Moving on to Central America on the Slide 5. Economic activity in the region showed mixed results during the second quarter of 2024. Honduras and Panama experienced accelerated growth, driven by the financial sector in Honduras and construction and commerce in Panama. Conversely, although Costa Rica's economic activity decreased its growth remains above the executed loan average, bolstered by it's freight [indiscernible]. In El Salvador, the deceleration was largely due to a decline in the construction segment. Deflation across the region continued its downward trend in September, primarily attributed to lower the fuel and food prices. Regarding monetary policy, Costa Rica further reduced its reference rate, while Honduras increased its policy rate to manage liquidity. Currency wise, the Costa Rican colón appreciated against the U.S. dollar during the quarter, while the Honduras lempira remained relatively stable. We expect the region to grow by 3% this year and inflation to continue stabilizing in most [indiscernible]. Moving on to the main results of our business on Slide 6. Our loan portfolio grew by 0.8% during the quarter, supported by the commercial and mortgage segments. Growth dynamics remain modest, in line with the adjustment process of macro variables and weak credit demand. The 12-month NIM including the results of FX and interest rate management through derivatives was 5.64%, increasing by 9 basis points quarterly, and the 12 months cost of risk was 4.27%, decreasing by 45 basis points quarterly. Consequently, the quarter's profit was COP 109 billion, which translates into a 2.81% ROA improved significantly compared to the previous quarter as we have previously anticipated. Our CET1 closed at 10.37%, comfortably above the 7% minimum required, and improving during the quarter and the year. 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 the key variables explaining our margin performance. On the liability side, we have been able to capture significant improvements in our cost of funding, since 2023. Our 12-month Implicit Rates in Colombia have decreased by 108 basis points from their peak in December. Looking forward, we believe that there is still some room for further improvements in our cost of funding, supported by the decrease in the monetary policy rate and the gradual adjustment of our funding mix. However, there are some factors that have pressed [ loan income ], and will further delay margin expansion, such as the temporary recomposition of our portfolio towards commercial and mortgage loans, the macro conditions setting up for modest growth and interest rates on loans decreasing rapidly across the system amidst cut rate drops and competition. Consequently and taking into account the Central Bank's conservative approach to decreasing interest rates, we anticipate a more gradual margin expansion of our 12 months NIM to close the year between 5.7% and 6%. Please bear in mind that this is an improvement compared to 2023 levels, when we closed the year with a 5.48% NIM. Please move on to Slide 8, where I will update you on the consumer portfolio. The consumer books underlying trends continue to be positive, with its risk profile is still improving and with very low levels of early PDLs in recent disbursement. After the significant provisional efforts we've made for the consumer book, we have a third consecutive decrease in net expenses for this portfolio, and we expect this trend to continue materializing going forward. As you can see in the top left graph, we are gradually increasing disbursements with a selective approach supported by our origination model. However, they have not increased at the pace we expected, and we continue working to find the right opportunities to grow amidst more normalized credit conditions. Moving on to Slide 9. I would like to broaden into the rest of the loan book. The consumer portfolio is driving the improvement in total PDLs and cost of risk. And as anticipated, the commercial and mortgage segments have shown some pressure in terms of their PDLs, naturally impacted by the cycle of high interest rates. However, we've been deploying different strategies to manage the deterioration in these portfolios, and increased collections. Even though the commercial portfolio has been requiring additional provisions, which we anticipate during the year, it is highly diversified in terms of industries and operation status, with high levels of collateral. Once we account for collaterals, total coverage increases to 142%. In the case of the mortgage portfolio, even though PDLs have been pressed, the cost of risk stands below 0.5% as residual losses are very small, considering a 40% on average loan-to-value ratio. To sum up, despite the commercial and mortgage loans continuing to press total PDL, we are confident that we have the tools to continue managing the persisting challenges individuals and businesses face, and to continue posting gradual improvements in total asset quality and cost of risk. We're maintaining our cost of risk guidance at 3.5% to 3.8% for this year, and total PDL guidance of 4% to 4.5%. Moving on to Slide 10. I would like to discuss the strategy we implemented to complement our detailed offering for small businesses. The acquisition of ePayco, a leading Colombian digital payments platform. This decision aligns with our strategy for the small business segment, in which we strive to be their allies by supporting their growth and allowing them to achieve their full potential through a comprehensive suite of digital financial services, ensuring a seamless and secure payment experience. ePayco's technological capabilities, expertise in online payment processing and deep understanding of the e-commerce sector will evolve how we serve this critical segment of our customer base. This acquisition was executed through our investment arm for Inversiones Financieras Davivienda, and we look forward to locking new growth opportunities through this powerful synergy. Please turn to Slide 11 for an overview of DaviPlata. As of the third quarter of 2024, DaviPlata has reached 18.3 million clients, consolidating its position as one of the leading neobanks in the region. Our core strategy remains focused on providing accessible and user-friendly financial solutions that meets every needs for our clients. We've worked to position DaviPlata as a trusted platform, where individuals can seamlessly receive, pay, save and even borrow funds, when necessary. In line with that strategy, average deposits have increased by 20%, transactions by almost 60% and purchases by 30% annually. Furthermore, DaviPlata is currently generating approximately COP 40 billion in income as of September, the accumulated annual income reached COP 132 billion. In terms of credit, our ongoing improvements within the credit cycle are positioning us to increase disbursements, aligned with our origination standards and backed by our enhanced credit risk models. We remain committed to enhancing the platform. This includes introducing new AI-based personalities and a refreshed interface, along with technological advancements that bolster the platform's stability and resilience. Thanks to these efforts, DaviPlata's Net Promoter Score stands above 75 points. We are very excited on DaviPlata's path and the opportunities ahead. We are confident that we will continue to lead financial inclusion while also serving a broad bridge of population segment. Moving on to Slide 12. I would like to share some recent milestones on the ESG front. We have continuously increased our sustainable portfolio, which now stands at approximately COP 20 trillion, representing nearly 14% of our consolidated portfolio. This achievement reflects our commitment to promoting prosperity, inclusive growth and environmental stewardship in the countries where we operate. Furthermore, we recently published a policy that outlines our sustainable strategy and serves as a roadmap for our path forward and will guide us toward achieving the following ambitious goal: increasing our sustainable portfolio to 30% by 2030, becoming a carbon-neutral organization, achieving net zero emissions by 2050. This policy also identifies the assets and activities we intend to promote and prioritize to contribute to the well-being of our communities and the preservation of our plan. In developing this new sustainable taxonomy, we have drawn on reputable frameworks, such as the social taxonomy of the European Union graph, the social and green bond principles of the International Capital Market Association, the Climate Bonds Standard and the Colombian Green Taxonomy. These frameworks provide a clear and transparent classification of economic activities and assets considered green, as well as projects with clear and measurable social benefits, while also encouraging the adoption of sustainable business and financial practices that support the transition to a low carbon economy. To further catalyze the flow of resources for our sustainable solutions, we subscribed an agreement with the IFC to issue a $50 million biodiversity bond to support companies and other entities that address environmental challenges by financing projects focused on biodiversity conservation and usage, agricultural development, sustainable water management, sustainable production, circular economy and bioenergy. This bond represents the first of its kind in the Colombian capital market, and the second global. At Davivienda, we firmly believe that our commitment to prosperity, people and the planet is achievable, relevant and enduring. It's not a separate objective from our business strategy, but rather an integral part of every decision we make. Let me turn the call over to Pedro to continue with the presentation.

Thank you, Javier. Good morning, everyone. Please move on to Slide 13, where we will analyze the evolution of assets. Our assets closed to around COP 183 trillion, showing relative stability during the quarter. The slight loan growth was compensated by a decrease in cash and interbank deposits, given lower liquidity needs. On an annual basis, asset grew by 1%, mainly supported by Central Americas performance, which grew by almost 6% in dollars during the last 12 months and now accounts for 26.5% of our operations. Please move on to Slide 14. Our loan portfolio grew by 0.8% during the quarter, mainly due to the dynamics in the commercial and mortgage books and a slightly lower contraction in the consumer segment. The commercial portfolio growth has been driven by specific well-run customers with solid balance sheets and risk profiles, while the mortgage book has exhibited improving trends, especially in the low-income housing segment, supported by government subsidies and lower interest rates. The pace at which the consumer segment is decreasing has decelerated as we have been gradually increasing disbursements, focusing on clients with a risk profile that aligns with our credit risk appetite and origination policies. As a result of these dynamics, we are experiencing a temporary recomposition of our loan mix, with the consumer portfolios chair reducing from the peak of 31.2% in the second quarter of 2022 to 24.7% in the third quarter of 2024, which translates into 6.5 percentage points that the commercial and mortgage books have gained. This process has impacted our margins, but we also decreased provisioning needs in the medium term. Regarding our international operation, the loan portfolio increased by 1.4% quarterly, supported by positive dynamics in the mortgage and consumer portfolios. During the last 12 months, Central America's loan book has grown by 8.3% in dollars, mainly driven by Honduras, Panama and El Salvador. Central America's growth over the past years has been steady and healthy. Even though these countries have also experienced macro and fiscal challenges, our operations have performed well, and the compound annual growth rate of the region's loan book for the past 2 years is 8% in dollars. By October of this year, we had finished the consolidation process we started in [ November ] 2023. All our Central American operation are under Holding Davivienda Internacional, a subsidiary in Panama, 100% owned by Banco Davivienda in Colombia. As we have shared, the rationale behind this process is a simpler organizational structure to facilitate the operations management. Moving on to Slide 15, we present an update on our PDLs and coverage ratios. Regarding PDLs, the strategies we adopted since 2022 to improve asset quality have materialized for 4 consecutive quarters. In fact, after reaching a bit of 6.97% in fourth quarter of 2023, the consumer PDL has decreased 226 basis points, supporting a 30 basis points decrease in total PDL. As we shared in previous calls, macroeconomic conditions also strained some commercial sectors and mortgage portfolio segments. In the case of the commercial portfolio, part of the impact comes from the SMBs, which are already showing some stabilization threats. The other part comes from isolated cases that were identified with Naptha. We are comfortable with the coverage levels for the commercial portfolio as we have been carefully anticipating provisions during these quarters, and we also count with appropriate collateral levels for the customers that have been affected more recently. As you can see on the top right graph, coverage plus collaterals this stands around 144% for this segment. Regarding the mortgage portfolio, the increase in delinquency is mainly driven by clients, whose loans were disbursed at high interest rates, securitizations and our write-off parameters change. Please take into account that given the long-term nature of this portfolio, PDLs will remain longer on the balance sheet. However, recovery levels are high as it is 100% collateralized. When including the provision reserves we have for this portfolio, coverage increases to 126%. In the same way we've done with the consumer segment, we have adjusted our origination models, improve our collection scheme and continue monitoring the evolution of these portfolios to reduce further deterioration. Please move on to Slide 16, where we will see the evolution of the cost of risks, provision expenses and loans by stages. In line with our guidance, provision expenses decreased by 29% during the third quarter after a 15% decrease in the previous quarter. In fact, this quarter's cost of risk was 3%, a reduction of 126 basis points compared to the second quarter. Regarding loans by stages, we observed an increase in Stage 1 and a decrease in the Stages 2 and 3, which aligns with improvements in the overall portfolio, Sugef's portfolio. Please consider that the decrease in coverages for Stages 2 and 3 is mainly explained by commercial clients that have been classified in these stages, but have high levels of collateral, does not require an increase in provisions. Please move on to Slide 17. Funding sources have behaved in line with our operations growth, which has been relatively steady during the last 12 months. Demand deposits decreased by 4.2% over the quarter, primarily due to a reduction in high-cost deposits from institutional clients. In anticipation of expected cards in monetary policy rates, these clients have shifted to turn deposits, thereby supporting part of the 5.9% increase in CDs the quarter. Please note that although the proportion of term deposit has continued to increase around 70% of our term deposits in Colombia will mature within the next 12 months. Moreover, bonds decreased squarely and annually due to maturities, and credits increased by 6.1% in the quarter as a result of obligations acquired with foreign entities. We maintain sufficient liquidity levels and are comfortable mature and long-term ratios. Please continue to Slide 18, where we will see our capital structure. Our CET1 ratio increased by 25 basis points compared to second quarter of 2024, mainly due to profits during the quarter and lower risk-weighted assets. The decrease in risk-weighted assets is mainly explained by lower exposure to consumer credits and lower market risk value. Both the AT1 and Tier 2 ratios increased during the quarter, supported by FX depreciation, growing by 5 and 6 basis points, respectively. As a result, the total capital adequacy ratio closed at 14.74%, increasing quarterly and annually. We expect our capital levels to expand slightly further during the remainder of 2024, positively impacted by profits and lower operational risk-weighted assets. We are comfortable with these levels, and we believe there will be enough to continue supporting our operations growth in 2025. Please move to Slide 19 where we present our markets. As seen in the bottom graphs, the overall trend of our NIM has been positive over the past quarters, as our funding structure has enabled us to observe reductions in funding costs. In this sense, financial expenses have decreased by 4.6% quarterly and 10.8% accumulated. While looking specifically at this quarter's need, including the FX and derivative strategy, we had 2 impacts temporarily affecting the result. First, the cyclical behavior of yield year, which is the Colombia's inflation linked unit, impacted revenue during the quarter, given inflation decreases. Second, we had a lower result on FX within the colon appreciation during the quarter. Please continue to Slide #20. Nonfinancial income decreased by 1.4% during the quarter, explained mainly by the seasonality of transactional services and the increase of expenses related to franchise [indiscernible] some payment. Other net income and expenses increased due to changes in valuation of assets received as payment. However, on an accumulated basis, nonfinancial income is growing by 13%. Expenses decreased by 3% in the quarter, supported by FX impact and due to a base effect of second quarter of 2024, when we had a one-off expense related to employees collective agreement. In general, we see a payoff from our efficiency strategy. On an accumulated basis, our expenses grew by 3% on nominal terms. And when discounting the one-off of the second quarter, accumulated expenses will grow by 1.7%. Please note that although expenses are under control, efficiency ratios stands above historical levels as our margin has been pressed and our operation size has temporarily shrunk. Please move on to Slide 21 to analyze the [indiscernible] result. In line with what we have guided, this quarter's results returned to positive territory and closed at COP 109 billion, representing a quarterly annualized return on average equity of 2.81%. After the challenging cycle, we have been through, the bottom line has started to reflect all the strategies we have implemented over the past 2 years to improve profitability. To finish the presentation, please move on to Slide 22 where we'll share our expectations for the end of this year. We maintained our guidance from the last quarter regarding gross loan growth, which is expected to increase around 5% to 7%. However, given the macro and demand conditions we have shared with you, the consumer portfolio growth has been adjusted downward to a range of minus 8% to minus 6% due to a lower pace of disbursements that we projected in previous quarters. This contraction is offset by the upward revision of the commercial portfolio growth to 11% to 13% and mortgages between 8% to 10%. Regarding asset quality, we maintain our expectations of further improvement to close with total PDL levels between 4% and 4.5% by the end of the year. Given the loan portfolio's recomposition and a slower-than-expected reduction in the monetary policy rate, we are expecting a more limited improvement of our [ NIM ], with a 5.7% to 6% range for this year. Regarding cost of risk, we maintain guidance between 3.5% and 3.8%. We're also maintaining our expectations for nonfinancial income in OpEx which are expected to grow by 8% to 10% and by 3% to 6%, respectively, this year. As a result of the adjustment of expectations, we expect return on average equity to be between 0 and 2% by the end of the year. Finally, we expect our CET1 to close between 10.3% and 10.8%. Thank you. And with this, we can move on to the Q&A session.

[Operator Instructions] We have our first question coming from Mr. Nicolas Riva from Bank of America.

So this week, there's been some newspaper articles mentioning that Davivienda would potentially be interested in bidding for or acquiring Scotiabank in Colombia. So my question is, are there any comments that you want to make on this topic? And then related to this, given the size of Scotiabank in Colombia, the sixth largest bank in the country and about $700 million in equity, I guess the question is, are there any minimum capital levels, any minimum capital ratios that you would like to keep after a hypothetical transaction? And yes, that was my question.

Nicolas, thank you for your question. Somehow I had the feeling that this question was coming. So thank you for putting it upfront. We've always -- for the last 25 years, we've always been looking for opportunities. We have our team that is actually looking for inorganic opportunities as a day-to-day job. We've seen hundreds of opportunities. And that's a team that permanently does that. You may recall that when we issued our capital increase by the beginning of this year within the March results call, we mentioned that we wanted to be in a position to take advantage of opportunities that may come, including both organic and inorganic, and that's what we've been doing. So as of now, we're working on opportunities, both internally and also on the M&A side. But we don't comment on opportunities that haven't been finalized. So I guess what I could say is we are following through with what we mentioned in the March call, which was we will be looking for opportunities, and that makes sense from a strategic perspective. And regarding your second question, we have a very clear view in terms of any opportunity that we may pursue, either organic or inorganic, has to be consistent with our standards on the capital side, of course, on liquidity and capital, those are main drivers in terms of any transaction that may arise. So we don't -- whatever we do in terms of transactions, we will be very careful on maintaining levels, similar to the levels that we have currently on our books. We don't have any comment -- any specific comments on any transactions because as we only comment when their business have been closed, and this is not the case at the time. But I can give you the reassurance that any possible transaction going forward, we will be very careful with maintaining solvency ratios that are consistent with the past levels that we've seen within our operation.

My interpretation from what you are saying is that you are participating in the process because you are saying -- I mean, multiple times you said that the transaction has not been closed -- it hasn't been closed. So my assumption, I assume that you are participating on this. And then in that case, because you mentioned the equity raise in the first quarter. I believe that equity raise was from memory, roughly like $170 million, $160 million. The target right now is ScotiaBank Colombia, they have in equity roughly $700 million, it will be a significant acquisition. How would you -- I mean, do you think you would need to raise additional capital in that case to finance this transaction?

I leave value your interpretation of my comments, but I will stick to my comments. I'm not commenting on any transaction that has not been finalized because as I mentioned before, we are always in the process of looking for opportunities. I'm not making any specific comments on any specific transactions. But in general, what I can tell you is that in any moment that we've done any transactions in the past or in the future, we will be careful. We've been very careful, and we will be very careful in terms of maintaining capital levels consistent with the levels that we currently have.

With that, we'll move on to our second question coming from Mr. Brian Flores from Citibank.

Can you just guide us through the main drivers here that made you revise the guidance? And if you think also that maybe we can expect a better 2025 given the also positive trends we're seeing in your risk appetite, particularly in mortgages. So just, of course, thinking maybe we see an adjustment in 2024, do you think we can dream of a better 2025? That is my first question. I'll ask my second one afterwards.

Yes. But on the credit risk side and margins, which are, of course, related. On credit risk, you saw during the presentation that the performance of the consumer portfolio is actually improving significantly. And it's improving for reasons that I mentioned in previous calls. One is the fact that the vintages that were more problematic are vintages that are now 2 years old or maybe more than that. So they're actually going through the P&L and the participation of those vintages within the consumer portfolio is getting smaller and smaller as time goes by. So the impact of those -- of the nonperforming loans of those vintages is getting smaller. And on the other hand, those vintages are being replaced with new loans that are performing very well, as was mentioned during the slide presentation. The PDLs that we're seeing for vintages from last year and this year are actually way below our appetite. So what we see is that we have an opportunity to start growing carefully. Of course, we believe that the environment is an environment in which you have to be careful. But the models, the improvement in our underwriting models, our policies, our processes, our fraud algorithms, many of the tools that we're using to grow on the consumer side are working very well. So we believe there's an opportunity to start growing again, which is something that we also mentioned during the presentation. If you look at the numbers, the third quarter, you see -- the second and third quarter of this year, you see a clear trend of consumer loans growing. So in terms of credit risk, we believe that we have still an opportunity to keep improving. And as Pedro mentioned in the guidance, we are seeing a credit -- a cost of risk amount that is coming down, and we expect that to continue for next year. As that happens, we will be able to be a little bit more aggressive on the consumer side, and the mix of the portfolio will start trending back to a higher percentage on the consumer side, improving our NIM. So I guess, the fact that the credit cycle is going in the right direction, help us not only on the credit side, but also on the NIM side because of the mix that we are expecting on the portfolio going forward. In terms of NIM, we've been affected -- compared to our guidance, we've been affected by 3 factors mainly. One of them is the cap rate that has been decreasing at a faster rate because of changes in the way the cap is calculated. The second one is the mix of the portfolio, a temporary has strong the consumer portfolio and the share of the mortgage and commercial books is -- has been growing with lower rates. And the third is the contraction of the book. As those trends turn around, we're expecting an improvement for the margin going forward. The other factor is the Central Bank rate that has been decreasing at a at a slower pace as well as compared to what we were expecting, we are seeing a consolidation on the decrease of inflation. So we're expecting the Central Bank to continue lowering interest rates and eventually move in a more aggressive way, and that would definitely help us on our margins. So I believe both margins and credit risk will turn in the right direction in the following quarters.

No. Perfect. Super clear. Just wanted to also maybe to explore -- you saw our proposal, right, the units of regulatory production, the [foreign language] in Spanish, with a proposal, right, to change some of the dynamics of the payment systems in Colombia. Do you think, one, that this could impact positively digitalization? And then second, what is your take rate, because we know maybe on the fees side, we could have some impact for some players. So just maybe how are you thinking about this impact on your exchange with the regulator? Any insights here could be very helpful.

The payment space is probably one of the most interesting exciting spaces because it's changing so rapidly. So many things are happening in this space, not only due to regulation from the Minister of Finance, but also the Central Bank introducing this system for transfers or P2P transfers, but also because of the dynamics of the market. You see the players in Colombia, both financial institutions like Davivienda as well as the platforms that provide payment services and all the other players is a very, very active space. And that has already have -- has had an impact on the business model for the payment industry. Let me give you an example. On the acquiring side, the acquiring side is a business that has become -- has been commoditized and the traditional acquiring business. So we see trends in which you have to have a value-added proposals to small merchants to a specific type of merchants. And if you don't do that, then you -- your fees will start coming down, and that's what we've seen in many of those businesses. On the P2P side, we are used to having 0 cost P2P transactions for many years. Another example is we've had DaviPlata for more than 13 years in which P2Ps are at 0 cost. So this is a space in which we're used to participate actively, proactively, being disruptors in this space. And most of the impacts of lowering cost of transactions have already been put in place by the major financial institutions. So I don't see that as changing the landscape for us in terms of fees. In the coming months, there will be new possibilities for the market to have transactions. And although there might be some reduction in fees on some specific lines of businesses, which as I mentioned, they have already been put in place. What I see is opportunity. It's opportunity for growth in terms of volume and to go against cash that is still clinging in Colombia. And the fact that we can bring some of that cash into the system and increase the deposit volumes is also helpful. So what I see is opportunities. It's a changing landscape, and I believe that we are very well positioned to take advantage of it.

With that, we'll move on to our third question coming from Mr. Carlos Gomez from HSBC.

First of all, congratulations for coming back into profit. You're obviously on the recovery path. So I wanted to ask 2 questions. One is how long this recovery you expect to take? Is this a 1-year process, 2-year process longer? And second, the destination, where -- what level of profitability given what you know about the Colombian economy today or interest rates of your own business, where do you think that you can end up in terms of profitability, whether it is in '26 or '27 or when do you think that segment to normalize?

Carlos, thank you for your question. And yes, we are excited of going back to profitability, and we believe that there's a trend that is a consistent trend. It is not going to be a short-term adjustment. It's going to take some time. We believe that next year, we're not giving guidance as of today for next year. But in general, the high view of what we're expecting for next year would be ROEs in the mid- to high single digits for next year, which is still not our long-term expectation for profitability. And we see, for 2026 as a year in which we would be getting closer to those levers of profitabilities on our range from 10% to 15% ROEs, but that's something that we're expecting for 2026. It won't be happening next year because we see still a trend in which even though cost of risk is coming down, it will take some time, and margins also take some time to improve the way we want them. So I would say it's mid- to high single digits for ROEs for next year.

In terms of 2026 and beyond 10%, 15% ROE, should we understand that you think that is still possible given where the interest rate cap is now? We are the expected level of interest rate is going to be where the taxation is today. Are those 10%, 15% ROEs still achievable for a company like yours?

I think so. Yes, I think so, and that's -- we have to adjust to these levels. In terms of operating expenses, for example, what we're seeing is an improvement in our operations, in efficiency. Based on what -- all that we've been investing on the digital platforms. We're seeing that trend actually functioning well. Our expenses, our operating expenses are not growing this year. And that's with an inflation that began the year at more than 10%. So we're finding ways to consistently lower the cost of serving our customers. The fact that our platform, our digital platforms can handle almost 100% of the services that our retail customers need, is an opportunity that we still have to take advantage in terms of lowering the cost to customers. So I guess when you put into account the fact that margins will be recovering, the cost of risk is coming down. Even with margins that have a cap rate, we will be able to attain these margins. We will have to keep working very hard on improving our model in terms of efficiency. But I think it's perfectly doable. You have to take into account that the cap rate has been here for a long time. It's not a new thing. We had a very high interest rate the last couple of years. But before the pandemic, we had levels of interest that are consistent with the level that we have now. So it's not an environment that we're not used to.

With that, we'll move on to Mr. Andres Soto from Banco Santander.

My first question is regarding corporate structure. You mentioned that now the Central American operations are under the Panama subsidiary. And we recently heard from Bancolombia that they are changing the corporate structure to have a holding company that, among other things, is going to be able to buy back shares. Is this something that you guys may consider -- and just to clarify, when we look at your Colombia or you consolidated core equity Tier 1, that reflects the effect of the consolidation of the Central American operation? Is there any opportunity for capital optimization this [indiscernible] those operations sort of Colombia?

Andres, for your question, yes, the project of the Central American holding has been around for 3 years, and we finally are -- actually this month, this month of November, is the month in which we're actually consolidating all of our operations under this holding. I guess the keyword here is flexibility. We want to have a flexible structure in which we can take advantage of different opportunities. Let me give you an example. Nowadays, we -- when we get dividends from many of our Central American operations, we can move reassign that capital into other operations. In the previous structure, we had to bring those funds to Colombia via dividends and then with tax implications and then moving them back was also difficult. So there's flexibility in that sense, it's flexibility in the sense that we can issue capital markets instruments either bonds or eventually equity at the level of a holding company for the region without getting involved in the Colombian operation. So in general terms, it gives us a lot of flexibility. In the short term, of course, we're not considering any buyback of stocks because of the fact that we believe that there are growth opportunities and the level of capital that we have is not consistent with buying back stocks. But we believe that having the flexibility to move around capital and bring partners to specific parts of our business is a much better way to unlock value that might be captured when you have a single structure in which a bank in Colombia is the holding company for the complete organization.

That's very clear. Yes. But just to be specific on the 10.4% profit in Tier 1, there is still impact from the consolidation of Central America? Or that the impact is already eliminated out of that number?

No, the consolidated financial statements, there is no impact at all from the Central American consolidation. That is -- that's on the separated financial statements, which are under Colombian GAAP. But on the consolidated the numbers that you are following, there's no impact on this transaction because it's within the consolidation process, it's eliminated. So it makes no difference at all.

Understood. When I look at the valuation, that we end up [indiscernible] trading are less than 0.6x priceable value. And when you think about capital deployment alternatives when you consider the possibility of doing M&A, will it be the most accretive transaction for you to buy back shares instead of buying another bank? And do you think about buying, do you guys consider that the bar is extremely low and any potential transaction would be dilutive to shareholders?

Well, we are very aware of the multiple that our shares trading. And of course, if in any transaction, of course, we will look to -- we have to look for value generated for our shareholders in terms of the elements being brought to any transaction. And that's a rule that we've been following in all the transactions that we've gone through, and it's a rule that we believe that we have to keep going forward. Whatever we do with our capital, we'll always be consistent with finding the best value for our shareholders. In terms of buybacks, that's something that is not allowed by Colombia regulation, the financial institutions are not allowed to do that, which is one of the reasons why a different structure is also health. But as of now, we don't have plans to buy back shares because of the capital levels that we have are consistent with growth. And of course, either organic or inorganic growth has to be consistent with the valuation that we have on our shares. Of course, we will be careful going forward, both organically and inorganically and making sure that we make our decisions consistent with value accretion for our shareholders.

We will now move on to the webcast questions. Our first question comes from Mr. Juan Camilo Dauder from Bancolombia. His question says, "How do you expect the bank to perform in terms of NIM in the following quarters? Do you expect the bank to be more asset or liability sensitive?"

Thank you, Juan Camilo, for your question. The bank has -- over the last couple of years, we've experienced a compression of our margin because of the liability sensitive nature of the bank. That has been changing because of some restructuring on our portfolios by hedging strategies that have been put in place that actually make us less liability sensitive. So that in case -- in a scenario, which interest rates were going up again, we would be less liability sensitive. But still, going forward, we expect NIM to improve based on the fact that the Central Bank will still be bringing the interest rate down. And we still see an opportunity because of the repricing of our funding is very heavily concentrated in the short term. So what we'll see is probably -- what we're expecting is an improvement in our NIM during the following quarter because of that. Of course, we're seeing trends on the asset side. And as I mentioned before, on the cap rate and the consumer loans. But the overall scenario implies for us an improvement in the NIM for the following quarters.

Our second question comes from Mr. Juan Nicolás Pardo from Bancolombia. The question says, "Does the new operational risk assessment model for Colombian operation is already in place? And if so, how much is the impact on solvency metrics?"

Thank you, Juan Nicolas, for your question. It's in place on the separate financial statements, but it's not in place for the consolidated. The numbers that Pedro presented previously in terms of solvency do not include those numbers as of the third quarter. We're expecting it to be included by year-end. And if that happens, it could be around 30, 40 basis points of improvement.

As of now, we have no further questions either through our phone line or our webcast chat. So with that, there are no further questions, and I want to turn the floor over to Mr. Javier Suarez for any closing remarks. Mr. Suarez, the floor is yours.

Well, thank you for attending our conference call. We're excited to see the numbers improving. And we'll, as I mentioned before, the trend is a consistent trend looking forward. And that trend is not only based on the financials and the numbers, but also what we're seeing internally on our road map in terms of digital capabilities for our platforms. This year has been a year in which we've been transitioning from platforms -- the legacy platforms to new digital platforms, and we've been focusing on making sure that the transition is a transition that give us the -- give our customers the opportunity to experience consistent platforms that are with good performance and with good stability. That has been the focus of this year, and we are finishing the year with good numbers in terms of stability and consistency of our platforms, which leave us open the opportunity to improve in our capabilities -- sorry detailed capabilities with new functionalities for next year that will be very exciting for our customers. We believe that we are in a very good shape. The fact that the numbers are beginning to support our strategy and the fact that our teams are very committed to moving forward with the digital strategy, make us very, very excited about what is coming in the following quarters. We're also excited to be very consistent on our sustainability strategy, how our strategy is sustainable, how we're working to make sure that everything is aligned. And we expect to provide you with better results in the following quarters and with expectations with the guidance also for year 2025. Thank you very much for attending the call, and we look forward to listening to you in the following quarters.

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