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Edited Transcript of PFDAVVNDA.BG earnings conference call or presentation 16-Aug-19 2:30pm GMT

Q2 2019 Banco Davivienda SA Earnings Call

Sep 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Davivienda SA earnings conference call or presentation Friday, August 16, 2019 at 2:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Efraín Enrique Forero Fonseca

Banco Davivienda S.A. - President & CEO

* Ricardo Leon Otero

Banco Davivienda S.A. - EVP of Risk

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Conference Call Participants

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* Jorg Friedemann

Citigroup Inc, Research Division - Director

* Natalia Corfield De Melo Monteiro

JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research

* Sebastián Gallego

CrediCorp Capital, Research Division - Associate of Andean Banks

* Rafael Borja

i-advize Corporate Communications Inc. - SVP

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Presentation

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Operator [1]

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Good morning. My name is David, and I will be your conference operator today. At this time, I would like to welcome everyone to Davivienda's Second Quarter 2019 Earnings Conference Call. (Operator Instructions)

I'll now turn the conference over to Rafael Borja of i-advize Corporate Communications. Mr. Borja, please go ahead.

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Rafael Borja, i-advize Corporate Communications Inc. - SVP [2]

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Thank you, and good morning, everyone. Welcome to Davivienda's Second Quarter 2018 Earnings Conference Call. Today's call is for investors and analysts only. Therefore, questions from the media will not be taken. Joining us today from Bogotá, Colombia are Mr. Efraín Forero Fonseca, Chief Executive Officer; and Mr. Ricardo Leon Otero, Chief Risk Officer. They will be discussing the results of the press release distributed yesterday by the company. If you have not yet received a copy of the earnings report or the presentation, please visit www.davivienda.com on the Investor Relations section where there is also a webcast presentation to accompany the discussion during this call. If you need any assistance, please contact i-advize in New York at (212) 406-3693.

Also, I would like to remind you that any forward-looking statements made today by Davivienda's management are subject to various conditions and may differ materially. These conditions are outlined in the last page of the company's press release in the disclaimer, and we ask that you refer to it for guidance.

It is now my pleasure to turn the call over to Mr. Efraín Forero, Chief Executive Officer of Davivienda, who will begin the presentation. Mr. Forero, please go ahead.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [3]

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Thank you, Rafael. Good morning, and welcome to Davivienda's Second Quarter of 2019 Earnings Conference Call. Before we review Davivienda's quarterly performance, I would like to comment briefly on the macroeconomics of Colombia and Central America.

First of all, Colombia's economic activities suggest a lower dynamic in the past few months. Local activity has suffered the impact of great tension between the U.S. and China, affecting the oil price and generated an annual devaluation of 9.4% in the exchange rate at the close of June. As confidence has been impacted by local and international environment, we are expecting a GDP growth between 3% and 3.1%, 20 basis points lower than expected at the beginning of the year.

Moving on to Slide 4, we can see the highlights of the macroeconomic situation in Central America. Economic growth has slowed down for the whole region, mainly due to some difficulties in trades and commerce, explained by the situation in Nicaragua, which affects the normal transit of goods. We have seen lower consumer confidence and impact in different sectors such as commerce, construction and manufacturing.

Regarding inflation, a generalized price increase in agricultural supplies added some pressure to the agricultural sector. However, the region inflation is stable, and we expect it to remain within the target range set by each country's central bank. Finally, the International Monetary Fund and Honduras central government reached a standby credit facility arrangement aiming to maintain macroeconomic and fiscal sustainability.

On Slide 5, we would like to highlight the bank's results for the second quarter. Quarterly net profit closed at COP 362 billion, increasing 28.8% compared to the same period last year. Accumulated net profit reached COP 755 billion, 2.7% higher than 2018. This represents the return on average equity of 12.6% for the last 12 months.

Consolidated growth loans grew at an average range of 11.8% mainly due to Colombia's performance. Around 2% of this growth is explained by the exchange rate devaluation. We increased our loan market share in Colombia by 50 basis points, reaching 14.7%. Credit quality continued to show a positive evolution. PDLs decreased by 19 basis points, closing at 3.68%. PDLs for the commercial portfolio improved 54 basis points compared to the previous quarter. Consolidated cost-to-income ratio closed at 46%, improving 57 basis points compared to last year. Among other relevant events, we securitized mortgage loans in Colombia for COP 280 billion in June and issued senior bonds for COP 600 billion last month.

Finally, I would like to comment on the most recent developments of the Ruta del Sol II corporate case. Last week, the arbitration court established the final project liquidation value of COP 211 billion to be paid to bank and other good faith third parties. Out of this amount, COP 8 billion corresponds to taxes and labor obligations. We expect to receive close to COP 33 billion on top of the previous payment, which added up to COP 230 billion. As of now, we have a coverage of around 40%, and we expect to increase it up to 100% of the remaining amount during this year. This will have an impact of around 10 to 15 basis points in our cost of risk and 3% of the estimated net profit for the year. We will continue to analyze this case with our legal counsels to try to find possible solution to recover the pending amounts.

Now turning to Slide 6. I would like to share with you the progress in Davivienda's digital transformation. I am glad to announce 2 new solutions to our digital offer that will leverage the transformation process of our wealth management division. These services include the possibility to invest in one of our mutual funds and our voluntary pension funds. Now our clients will be able to manage their investment in a simple way with the support of technology, but especially with the support of the bank's advisers.

For these new services, we expect that by the end of the year, 70% of new account openings will be made through our digital channel. In this way, we will continue working on the digital transformation through different strategies that will allow our clients to manage all of the problems they have with the bank in one place.

In the last quarter, digital sales reached 40% of the total. This represents a 10x growth of the percentage of digital sales made 1 year ago. In particular, digital products are showing a good performance during the first semester of this year, as shown in the bottom of the slide. Our clients have opened about 600,000 accounts through our digital channel. This means that 70% of the new accounts are opening through digital channels versus 60% last year.

Regarding unsecured personal loans, we have reached more than COP 1 trillion outstanding balance and about 157,000 credits. Digital disbursements represent 85% of this product's total sales.

Mobile payroll loans opened digitally reached a balance of COP 128 billion. Since March this year, we have opened close to 60,000 new credit cards, which represents a 33% of total new credit cards issued in this period. We believe that our digital efforts continue to deliver promising results to benefit our customer.

Turning to Slide 7, I would like to share some figures of our progress in digital channels and footprint evolution. Monetary transactions composition has been changing during the past years. As you can see on the left side of the slide, during the first semester of this year, 28% of the monetary transactions were made through digital channels versus 24% made during 2017. Compared to the first semester of 2018, digital monetary transactions grew 24%. Monetary transactions made at branch represents 70% in the first semester versus 22% 2 years ago. Compared to the same period last year, branch transactions decreased by about 2% in volume.

The digital transformation process plus our effort to become more efficient have allowed us to decrease our footprint by closing around 7% of our branches during the past couple of years. We will continue working in our digital transformation efforts to be able to provide high-quality financial services, products and experience to our customers.

Now let me turn the call over to Mr. Ricardo Leon, our Executive Vice President of Risk, who will provide you with further detail on the bank financial results.

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [4]

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Thank you for the introduction, Mr. Forero. Good morning, everyone. Please move on to Slide #8 where we will analyze the evolution assets.

Total assets grew 14.1% over the year and 4% during the quarter. Colombia's assets grew by 13.4% over the year and 4.9% during the quarter driven by cash, investments and gross loans.

International subsidiaries, which represent almost 24% of total assets, grew by 5.8% over the year in dollar terms mainly driven by the increase in cash and gross loans in spite of a flat growth during the quarter. The exchange rate explained 2% of the total growth due to the 9.4% depreciation during the year.

Moving to Slide 9. Consolidated gross loans grew 11.8% over the year and 2.8% over the quarter. Consumer and mortgage portfolio continued to be dynamic, expanding 12.9% and 12.8%, respectively, over the last year.

Consumer portfolio performance is mainly driven by an increase in unsecured personal loans and payrolls. Growth dynamics continued to be supported by digital initiatives where we have disbursed over COP 1.6 trillion in the last 12 months. As of June, digital products balance [was 10], 5% of the total consumer book. Mortgage growth is mainly driven by the leasing and social housing segments in Colombia, which grew 15% and 9%, respectively.

Corporate and construction segments, those -- the growth dynamics in the commercial book, which grew 12.7% and 7.4%, respectively. As we mentioned before, almost 2% of the loan growth is explained by the behavior of the exchange rate.

Analyzing the performance by region, gross loans in Colombia increased above 11% compared to date by year. Our international operation increased 5% in dollars with Honduras and Panama leading the annual growth. During the quarter, some corporate clients in Costa Rica and El Salvador made prepayments affecting the growth of international subsidiaries portfolio.

By the end of the year, we expect a total loan growth between 10% to 11%. The consumer book should lead the growth with an increase between 13% to 14% while the commercial book should increase between 9% to 10% and mortgage should grow between 10% to 11%.

Please move on to Slide 10. In this slide, we can see an improvement in the 90 days PDL ratio and the coverage levels. This improvement is the result of a slower pace of deterioration and the restructuring process of some corporate clients in Colombia and Central America.

PDL ratio closed at 3.68% for the total portfolio, decreasing 19 basis points compared to the last quarter and 17 basis points compared to last year. Commercial PDL ratio increased 54 basis points, closing at 4.2%. This improvement is mainly explained by the renegotiation process made between the Mass Transportation System and Bogotá's local government, which allowed us to establish new loan conditions with some of those operators. Consumer PDL ratio performed well during the year due to our risk management policies, decreasing 25 basis points during this period, in line with our forecast.

Finally, the 90 days mortgage PDL ratio closed at 4% while the 120 days mortgage PDL ratio reached 3.17%. Almost half of the duration is mainly due to the securitization of around COP 620 billion during the last 12 months and was also driven by the maturity of structured loans made in previous months, which generated an increase in the ratio for this portfolio. In general terms, we expect to continue the recovery path in PDL's levels toward the end of the year and 2020.

For the end of this year, we are expecting the following levels: total portfolio between 3.7% to 3.8%, commercial portfolio around 4.2% to 4.3%, consumer portfolio between 2.4% to 2.5% and mortgage portfolio around 4%. We closed the quarter with a cost of risk of 2.46% as a result of provisions expenses to increase the coverage levels for some corporate clients in Colombia. Cost of risk for 2019 should close between 2.4% to 2.5%.

Total reserves coverage ratio reached a level of 145%. As for the coverage for the main corporate case in Colombia, during the quarter, we fully provisioned Electricaribe to 100%, Mass Transportation System reached a coverage level of 51%, and we expect to end the year with a coverage level around 60%. Ruta del Sol II has a coverage of around 40% and we plan to reach 100% in the coming quarters, as mentioned by Mr. Forero.

Please move on to Slide #11. Funding sources grew 12% over the year and 2.4% compared to the last quarter. Our funding structure continues to be stable with deposits representing 76% of funding sources. Our loans to funding ratio reached 95.5%.

I would like to move to Slide #12. As of June, we reached a total capital ratio of 11.91%. Q1 ratio reached 8.51%, well above the minimum required and stable compared to last year.

I would like to proceed to Slide #13. Accumulated net financial margin increased by 7.6% over the year mainly due to the higher funding cost and provision expenses reported throughout the first semester. As you may know, the central bank rate stands at 4.25% since April last year, which allowed us to have a stable cost of funding while we have seen lower loan rates during the last quarter affecting the margin, therefore, impacting the 12 months net interest margin ratio, closing at 6.52%.

For the end of this year, we are expecting a NIM between 6.4% to 6.5%, 10 basis points lower than the last conference call forecast. Accumulated net provision expenses showed an annual growth of 16.6%, in line with our expectations. As I mentioned before, for the year, we expect a cost of risk between 2.4% to 2.5%. These numbers include additional provision expenses to cover part of the risk of specific cases that we discussed before.

Please continue to Slide #14. Total accumulated expenses grew 5.7% over the year. By quarterly figures, expenses grew 2.8% compared to the last quarter. During the quarter, the cost-to-income ratio closed at 46%, more than 50 basis points lower compared to both periods. Personnel expenses remained under control with an accumulated growth of around 1.2% over the year while operating expenses decreased 1.1%. The latter was mainly due to the change in the accounting standard as the bank adopted IFRS 16 since January this year. Without the IFRS 16 effect, total accumulated expenses will have decreased by 8%.

For the second half of the year, we expect higher expenses driven by a greater marketing cost associated with our new product launches. Also, we continue to spend on cybersecurity and technology developments, in line with our digital transformation strategy. For this year, we're expecting an increase in operating expenses by 10% as a result of our cost-to-income ratio to be closed around 46% to 47%.

To finish the presentation, I would like to go to Slide #15 where we can analyze the bank's profit. Accumulated net income closed at almost COP 755 billion, 2.7% higher than the one recorded during the same period last year.

Finally, net income grew 28.8% over the year and presented a decrease of 8% over the quarter. The annual growth is explained by the higher net financial margin, cost control and higher operating income over the year. Our return on average equity for the last 12 months reached 12.6% while the return on average assets was 1.3%. Our ROAE forecast for this year will be around 12% to 13%.

In general, these are the results we have prepared for you today. Thank you for your attention. At this time, we can move on to the question-and-answer session. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we'll take our first question from Jorg Friedemann with Citibank.

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Jorg Friedemann, Citigroup Inc, Research Division - Director [2]

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I have 2 questions, if I may. The first, just a follow-up on what you guided for cost of risk. You mentioned 2.4% to 2.5%, if I got it right, including already is the specific provisions, which is more or less what you have been expending, I know, so far, in the first half. So in that case, how do we expect the coverage ratios to behave going forward? This is the first question.

And the second question, just like to understand, you mentioned very interesting numbers during the presentation on Slides 6 and 7 about the digital transformation strategy. And it could be very helpful if you could give us a bit more color about how the strategies for DaviPlata and also the new agreement with Rappi would help. And what are the key objectives of those developments in DaviPlata and Rappi?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [3]

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Thank you for your question. The first answer related to the cost of risk. The cost of risk that we expect to have at the end of the year is around 2.4% to 2.5%. And in this forecast, we include the cost of the Ruta del Sol II. In addition, the coverage ratio that we are weighting at the end of the year is 140 to 144.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [4]

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Okay. And related to the second question. We have this alliance with Rappi that is really very important for us. And in that alliance, what we are doing is we are providing Rappi and customer of Rappi with DaviPlata's platform to be used in the Rappi's wallet. DaviPlata is actually reaching 5.5 million customers in Colombia. And last year, we launched DaviPlata in El Salvador.

What we are looking now with the alliance is to take advantage of the possibility of reaching 2 additional million customer -- new customer to DaviPlata through the RappiPay wallet. At the same time, we are looking to have access to at least 50,000 new merchants that are actually working with Rappi so that we can become the bank of those companies as well as those 2 new million customers. We are planning on offering customers of Rappi with new services like insurance, like nano credit and credit card. Actually, we are offering them with the, let's say, savings account that we in Colombia call deposits accounts and that offer the same services that any bank offer in a saving account. The services includes a debit card that is offered to customer.

Things are going very well. We have a very interesting experience, and we expect to learn a lot so that we can have more abilities to make this type of alliance and, in that sense, to enrich the DaviPlata transfer and to enrich the ecosystem to offer services to all the different participants in Colombia and in any country in the world.

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Jorg Friedemann, Citigroup Inc, Research Division - Director [5]

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That's perfect. Very helpful. Just a quick note -- additional question, if I may, Efraín and Ricardo. You gave very good guidance about different lines, but just would like to understand if you could also provide some ideas about how we should expect effective tax rate for this year given the changes that we observed in this quarter. It would be very enlightening if you could give us a bit more color on this line in particular.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [6]

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Okay. Thank you for your question. In this quarter, effective already the case over the quarter as the year before (inaudible) of the adjustment in the deferred income tax rate for the difference in loans provision between the individual and consolidated financial statement. And for this reason, we expect a new effective tax rate from 24% to 26% for this year.

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Operator [7]

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(Operator Instructions) We'll take our next question from Sebastián Gallego with CrediCorp Capital.

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Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [8]

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I have 3 questions. The first one, if you can provide more color on the restructuring deal with the Mass Transportation System in Colombia. Second, I would like to understand better also the behavior of the mortgage portfolio. I know you mentioned in your press release 2 effects that weighted in the numbers, but I just want to get a sense how should we expect the evolution on the mortgage portfolio going forward. And lastly, I would like to ask about the rates or NIMs going forward? I know you lowered guidance on your NIMs, but how are you seeing the strategy? Would you focus more also on the consumer segment? How can you mitigate the effect on the corporate side?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [9]

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As of June of 2018, our exposure to Bogotá Mass Transportation System had a coverage of around 51%. And however, each operator case has been carefully analyzed. And some operators have coverage between 75% to 100%. And in term of Colombian national development plan includes a solution to this particular case. The renewed contract between the Bogota local government and the system operator was amended in order to allow operators to receive a higher income. The bank is evaluating implementing different consideration process to bring the debt up to today. Meanwhile Bogota transportation system operates regularly.

Until now we finished soon the consideration process with some company, and yet, all the cases is processed. Obviously, in this case, it's a case with a special condition. Maybe we have to extend the terms, the year of the loans. And obviously, we will negotiate the interest rate with the operators.

Okay. Your second question, the behavior of mortgage portfolio. The ratio of the mortgage portfolio in 98 and 108 have increased due to the following reasons: In Colombia, we securitized a very important portion of the portfolio, a figure close to COP 620 billion over the last 12 months. And that is impacting something like 10 basis points [this ratio]. And I believe we have an additional deterioration of some loans (inaudible) to it in the previous periods. In general, there is escalation but we don't have any concern -- any special concern in this portfolio because the level of LTV is around 50%, so we have enough coverage in this case.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [10]

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And talking about our strategies in the near future that might impact our NIM, I would have to say that our Board of Directors is considering not going forward with new participation in 4G transactions. However, all other lines of the commercial line of business, we will -- really very concerned to work very heartily. And at the same time, we are working as well, improving our ability for being a player in consumer and mortgage business. So in the near future, what we feel, as Ricardo mentioned before, is we are expecting to be able to grow in general terms above 10% in our loan portfolio. What we have in mind is to finally have more or less -- we will grow in the commercial lines about 9% to 10%; consumer, 13% to 14%; and mortgage around 10% to 11%. So I really don't see that we would have any type of impact in our NIM even though it might be better if we have a higher result than we expect in the consumer lines that have very little impact in the NIM of the company.

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Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [11]

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Okay. Just to clarify, the LTV is 60% right now or 80%? I wasn't -- I didn't understand, sorry.

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [12]

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The current LTV is 45% on average. But to new credit, this level is 70%. And in specific cases, it's possible to have a little bit more. But the average is 70% in the moment of the disbursement, and our average portfolio is 45% LTV.

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Operator [13]

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(Operator Instructions) We'll take our next question from Natalia Corfield with JPMorgan.

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Natalia Corfield De Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [14]

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Actually, it's a follow-up on the company, Ruta del Sol II. I think I missed your initial remarks when you were talking about it. I understand that now you have a 40% coverage, that you're going to take this coverage to 100%. Then my question is like, how much does that represent? Like how much is your exposure now? How much are you getting from the COP 211 billion that's going to be paid? And how much would this increase in your coverages represent for you in absolute terms? That's my question.

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [15]

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The coverage exposure to this case is COP 245 billion, including capital and interest, corresponding to our 16% participation in the syndicated loan. Given the arbitration court decision, we are expecting a preliminary recovery of COP 33 billion, which would allow us to recover slightly more than 50% of the initial exposure. With a coverage level of around 40%, we plan to increase it to 100% in this quarter. We will -- this would have an impact around 10 to 15 basis points in our cost of risk. However, in our forecast of cost of risk that is 2.4% to 2.5%, it's included with the level of provision because we forecast around 60% of the allowance that we'll have to do this year in our forecast. And the additional 40% that we need to include this year is compensated with other corporate credit that will request lower element. Sorry, I -- maybe I -- just one mistake. The total exposure is COP 245 billion.

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Operator [16]

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And there appears to be no further questions on the line at this time. I'll turn the floor back over to Mr. Forero for any closing remarks.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [17]

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Well, thank you, everybody, for attending this call. It is, for us, really very important to know your different interest about the development of our strategy and our performance. And we believe that we have to keep our line of strategies so that we can become pretty much a better bank mainly in this process in which we are investing and trying to improve, becoming a more digital bank and a bank that is willing to offer customers much more added value. We will keep on working on that field, and we believe that countries, Colombia and Central America, even though are facing difficulties in this year, we still are very optimistic about what we will be willing to make on this year and in the coming year. Thank you very much.

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Operator [18]

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This does conclude today's conference call. You may now disconnect.