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Edited Transcript of PFDAVVNDA.BG earnings conference call or presentation 24-May-19 2:30pm GMT

Q1 2019 Banco Davivienda SA Earnings Call

Jun 5, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Davivienda SA earnings conference call or presentation Friday, May 24, 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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* Alonso Acuna Aramburú

Banco BTG Pactual S.A., Research Division - Strategist

* Andres Soto

Santander Investment Securities Inc., Research Division - Head of Andean Research

* Natalia Corfield de Melo Monteiro

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

* Tiago Binsfeld

Itaú Corretora de Valores S.A., Research Division - Analyst

* 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'll be your conference operator today. At this time, I would like to welcome everyone to Davivienda's First 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 First Quarter 2019 Earnings Conference Call. Today's call is for investors and analysts only. Therefore, questions from the media will not be taken. If you are a member of the media and wish to raise any questions to the company, please contact the company directly after the call.

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 per the press release distributed yesterday. If you have not yet received a copy of the earnings report, 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) 406-3691.

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, everyone, and welcome to Davivienda's First Quarter 2019 Earnings Conference Call. We would like to start with some notes on Colombia's macroeconomic situation. During the first quarter, Colombian economy accelerated to 2.8% from 2.7% last quarter and 2% compared to the same period last year. There were improvements in oil, mining, commerce and financial activities. For this year, we expect a moderate improvement, reaching a growth of around 3.2%. During the last 12 months, the exchange rate had devaluated 14% mainly due to the international uncertainties.

Continuing to Slide 4, we can see the highlights of this macroeconomic situation in Central America. We are especially monitoring the political and economic situation of Costa Rica. The local government approved a fiscal reform by the end of last year, which represents a relief of the complex fiscal situation. We expect the economy to show some improvement due to all the adjustments applied by the authorities.

In general terms, Central America rose, and inflation were in line with our expectations. We are expecting similar trends and better macroeconomics environment for this year.

On Slide 5, we will highlight the bank's results for the first quarter. Net profit reached COP 393 billion, 5% higher than last quarter. This represents an ROE of 12.2% for the last 12 months. Consolidated gross loans grew at an annual rate of 13.2%, mainly due to the performance of loans in Colombia and the exchange rate devaluation. Total past due loans ratio decreased by 6 basis points, closing at 3.87%, explained by better credit allocation and lower past-due loan [formation].

Finally, we closed the first quarter with a total capital adequacy ratio of 12.12% and a Tier 1 ratio of 8.72%, increasing 74 basis points due to the capitalization approved last March.

Now turning to Slide 6, I would like to share some insights about our digital strategy and the ways we plan to develop this transformation in the following year. As you may know, our transformation began several years ago when we realized the change that the digital world was going to introduce in the financial business. We are using this digital transformation to consolidate ourselves as a leader in retail banking, a top player in commercial banking through a stronger presence in the medium and small business and a benchmark in wealth management business.

In order to achieve our roles, we are transforming ourselves from within to be able to offer our customers a full digital portfolio of processes, channels and products. We are transforming the way we work, aiming to be more agile in this new era and attracting and retaining top digital talent. We are creating a new ecosystem with allies in order to offer simple, reliable and user-friendly experience, adapting better to the customer needs so they can spend more of their time living their life rather than banking. We are transforming Davivienda into a data-driven organization where we will use analytics, machine learning and artificial intelligence to convert all available data into business, delivering more added-value experience.

In the whole process, we are investing around $300 million between 2019 and 2021 in digital and technology-type initiatives. This transformation will expand our customer base and will enable us to serve our customers better as well as reduce our costs and improve our own margins.

One of our most recent initiatives is the opening of our first digital interaction space in alliance with Claro Colombia, which in addition to offering paperless banking process and service, we also integrate to the business and commercial [model] ecosystem to offer added-value experience to these center visitors.

Turning to Slide 7, I would like to share some few words of our progress in this process. Now there is -- 70% of our local customers use our digital channels on a frequent basis. Digital customers in Colombia increased by 24% during the year, closing at 6.8 million. Digital sales now represent 27% of total sales in Colombia compared to 1% last year. Such results are mainly due to the performance of our unsecured personal mobile loans where we have disbursed more than COP 1 trillion since May last year, our mobile savings accounts and other services we offer through our website and mobile phone application.

We are launching new products and services faster than ever and expect to share more news in the near future.

Moving on to Slide 8, I am pleased to share with you our new strategic alliance with Rappi, the first Colombian unicorn start-up. Rappi is a megahigh-growth consumer tech start-up, looking to be the everything store of Latin America. In addition, they have a payment platform called Rappi Pay. As you already know, DaviPlata is the main mobile platform for financial service in Colombia with more than 5 million customers. With this alliance, DaviPlata and RappiPay will create a new digital payment model that will transfer payments in Colombia by having a bank managing Rappi's monetary transactions allowing customers to easily pay, buy, sell and transfer money. On the other hand, retailers will benefit by improving substantially their sales operation. This new alliance open the doors to future banking payment system in Colombia and will boost e-commerce as well as QR payment consolidation in a reliable, secure, cheaper and friendly way. Through this initiative, we are showing that banks and fintechs can work together to generate reliable added-value offer to simplify people's lives.

Now let me turn the call over to Mr. Ricardo Leon, our Executive Vice President of Risk, who will provide you with further details on the bank's 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 #9. Before starting to discuss the bank financial results, I would like to mention the implementation of IFRS 16, which introduced a new accounting model for leases since January 1, 2019. As a result, Davivienda recognized right-of-use assets and generated lease liabilities, representing its obligation to make lease payments.

The main impact on the financial condition statement was an increase of around COP 1.1 trillion in assets and liabilities. For the P&L, the impact was the reclassification of lease expenses from operating to depreciation expenses of around COP 56 billion and higher financial expenses of COP 18 billion due to the new liabilities. That effect were mainly offset by a total decrease in lease expenses of COP 46 billion. Assets closed at COP 111.8 trillion in March, representing an annual growth of 15%. The 14% exchange rate devaluation in the last 12 months explains 3% of the total growth.

Analyzing the performance by region, Colombia's assets grew above 10% in annual terms, while the Central American operations recorded an annual increase of 6% in U.S. dollars and 21% in Colombian pesos.

Let's continue to Slide 10, please. Here, we can see the evolution of the gross loan portfolio. Consolidated gross loans grew 13.2% in the last 12 months. Discounting the exchange rate effect, gross loans portfolio grew 10.5% on a yearly basis. In Colombia, gross loan portfolio grew 11%, led by mortgage and commercial portfolio.

Our international operation grew above 6% in dollars with El Salvador and Honduras leading this growth. We're expecting a total loan growth of around 9% to 10% for the year. The consumer book should lead the growth with an increase of between 11% to 12% mainly driven by the digital initiative in Colombia, followed by the mortgage portfolio with an increase of 9% to 10% and commercial loans between 8% to 9%.

Please move on to Slide 11. In this slide, we want to review the performance of loans in terms of risk. 90 days PDL ratio dropped at the level of 3.8%. Consumer and mortgage PDL ratios improved the last quarter due to the better credit allocation. Commercial PDL ratio reached 4.76%, posting a slight increase due to further deterioration in corporate and SME segment.

In general terms, we expect to have a gradual improvement in PDL levels towards 2018 and 2020.

For the end of this year, we are expecting the following lift: total portfolio between 3.6% to 3.7%, commercial portfolio around 4.3% to 4.4%, consumer portfolio between 2.4% to 2.5% and mortgage portfolio between 3.7% to 3.8%. We closed the quarter with a cost of risk of 2.47% as a result of provision to increase the coverage levels for some corporate clients in Colombia. Cost of risk for 2019 should close between 2.4% to 2.5%.

Please move on to Slide #12. Funding sources grew 12% on a yearly basis and 3% compared to the last quarter. Gross loans to funding sources ratio reached 95%, showing an improvement compared to the last quarter, mainly explained by the issuance of bonds in our local and international operations and the increase of demand deposit during the last quarter.

I would like to invite to Slide #13, please. Last March shareholder meeting authorized the capitalization of 68% of the last year profit, allowing us to close the quarter with a total capital adequacy ratio of 12.12%. Q1 ratio increased 74 basis points during the quarter, closing at 8.72%. IFRS 16 implementation increased capital ratios in 14 basis points.

I would like to proceed to Slide #14, please. Net financial margin increased by 10.4% quarter-over-quarter and 6.2% year-over-year. These results were mainly driven by higher financial income and lower funding cost reported during the year. As a result, 12-month net interest margin ratio expanded 7 basis points, closing at 6.56%. IFRS 16 adoption had a negative impact of 3 basis points on the ratio.

For the end of this year, we are expecting a NIM between 6.5% and 6.6%. Net provision expenses reached COP 582 billion, increasing 13.4% compared to the previous quarter. The increase of 25% compared to the first quarter of 2018 is explained by the level of provision required last year due to IFRS 9 implementation.

Please continue to Slide #15. Total expenses decreased by 5.6% quarter-over-quarter mainly explained by IFRS 16 implementation, which reduced the operating expenses, as explained before, and higher expenses by the end of last year. Compared to the same quarter last year, total expenses grew 10%, mainly explained by inflation adjustments, minimum wage increase, higher variable personal remuneration and IFRS 16 implementation. Consolidated efficiency ratio closed at 46.5%, remaining stable versus last quarter. Efficiency ratio should close the year around 46% to 47%.

To finish the presentation, I'd like to go to Slide #16 where we can analyze the bank's profit. Net profit closed at COP 393 billion, quarter-over-quarter increased by 5% and year-over-year increased by 13%. On a yearly basis, performance is explained by the previous quarter of 2018, which was unusually high as a result of the adoption of IFRS 9 when we reclassified reserves from the other comprehensive income to loan-loss reserves, resulting in a lower provision expenses in the P&L.

Our return on average equity for the last 12 months reached 12.2%, while the return on average assets was 1.3%. For the year, we expect an ROE between 12% to 15%.

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 will take our first question from Tiago Binsfeld from Itau.

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Tiago Binsfeld, Itaú Corretora de Valores S.A., Research Division - Analyst [2]

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Congratulations on your alliance with Rappi. Mr. Forero, I would like to hear from you what is the potential cross-sell that you see in the structure. How do you plan to offer loans in this platform? If you could also breakdown how many new clients would Davivienda be able to access through Rappi?

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

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Thank you, Tiago. Well, we are really very optimistic about the results of this alliance. We're expecting to have about 2 million customers -- new customer for Davivienda -- to RappiPay Davivienda in the coming 18 months. We will be offering customers different type of services. And actually, we are offering saving accounts. And in the other hand, we have for individuals, we have debit card. And -- but we will be offering very soon nano-credit and also we will be offering credit card and other type of loan services.

And -- but at the same time, we are offering to all the different retailers saving accounts with a lot of different benefits. And very soon, we will be offering them as well with the loans that are going to be analyzed with the information that we have within the platform. That will give also information about the behavior of the sales. We will be working very hard because we see that this is only the beginning. We are expecting to grow and to do many different things because we see as well that Rappi is becoming every day a more stronger and super app and we saw any customer will be willing to enter to the app and be in the bank.

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Operator [4]

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We'll take our next question from Andres Soto with Santander.

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Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [5]

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I would like to understand better the performance of your fee income this quarter. I see that fee expense is growing significantly. I would like to understand if this is going to continue over the next few quarters and the flattish performance in terms of the income that you posted in the first quarter is what we should expect for the full year?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [6]

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Andres, thank you for the question. Our net income remained stable for the year. Consolidated income grew around 8% due to higher income related to handling fees, insurance fees, among others. However, our expenses increased around 8.6% as a result of the expansion in our network of commerce -- customers by diversifying expenses with -- to franchise use. In addition, in this year, the withholding tax increased to around 15% to 20%. That have remained -- that explains this behavior. We are implementing different strategies related to transaction and negotiating with different channels to improve our resulting years items. Thank you.

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Operator [7]

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The next question comes from the line of Alonso Aramburú with BTG.

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [8]

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Just following up on the previous question, so what is your guidance then? Or do you have any guidance on what net fee income can grow for the year? And also can you comment on your expenses, which -- if you exclude IFRS 16, they grew double digits. What do you expect in terms of corporate expenses for this year?

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

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Thank you, Alonso, for the questions. We are expecting this year to increase the operational income in around 6% as a result of some possible changes and negotiating with the franchises and to -- and we're trying new [products] to increase the fees that are [in this item].

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Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [10]

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Great. And regarding your operating expenses, what should we expect for this year?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [11]

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In operating expenses, we see that we can increase it by tax basis about [11%] because, in this year, we have a lot of investment related to the digital transformation. The amount is explained by that strategy.

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Operator [12]

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(Operator Instructions) We'll take our next question from the line of 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 [13]

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First, I'd like to have an update on the mega corporate case, the level of provision that you have for them? And secondly, if you could comment on the possibility of tariff changes in Colombia, that would be appreciated as well.

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [14]

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Natalia, thank you for your questions. And as of March 2019, our coverage for the fiscal year closed at 100% of the capital. And the way we define capital for us is interest and other interest. And we closed the total coverage in 75%, and we are expecting to finish the year in 100% including capital and interest. Mass transportation system is about 48%. The result is in a figure close to 50%. And now by the end of the year, the level for (inaudible) would be 100%. In last fiscal, they were just around 50%, 55%. And definitely, we expect it to remain at this level. And that are the general coverage ratio for the main corporate.

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Natalia Corfield de Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [15]

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And what about the second question?

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [16]

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Okay. Thank you, Natalia, for your question. In the first quarter, the interest tax rate increased because in December, we have adjusted effective tax rate because according to financial law, the target for the long-term tax rate changed from 30% to 12%. In this quarter, we don't have this adjustment for this condition. The tax rate is almost 27%.

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Natalia Corfield de Melo Monteiro, JP Morgan Chase & Co, Research Division - Head of Latin America Corporate Research [17]

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And if I could ask a third question. Do you have exposure to Avianca?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [18]

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Our exposure in Avianca is not a significant exposure. It's below than 0.4% of our total loan commercial portfolio. It's really low, and that's concentrate in facilities in short term.

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Operator [19]

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(Operator Instructions) No further questions on the line at this time. I would like to turn the floor back to Mr. Forero for any closing remarks.

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Efraín Enrique Forero Fonseca, Banco Davivienda S.A. - President & CEO [20]

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Thank you very much for everyone for being with us today. We are very pleased that we can share with you all these results. And as you may see, we really are -- we're really very excited about our commitments and our interest to get our results according to our strategic plan that we have been sharing with all every 3 months. Thank you very much for your company.

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Operator [21]

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That concludes today's conference call and you may now disconnect.