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Edited Transcript of PFDAVVNDA.BG earnings conference call or presentation 20-Nov-19 2:30pm GMT

Q3 2019 Banco Davivienda SA Earnings Call

Dec 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Banco Davivienda SA earnings conference call or presentation Wednesday, November 20, 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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* Neha Agarwala

HSBC, Research Division - Analyst, LatAm Financials

* Piedad Alessandri Cuevas;Credicorp Capital;Buy-side Research 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 Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Davivienda Third Quarter 2019 Earnings Conference Call. (Operator Instructions)

I will 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 Third Quarter 2019 Earnings Conference Call. Today's call is for investors and analysts only, therefore, question 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 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) 406-3693.

I would like to remind you that today's call may contain forward-looking statements by Davivienda's management and are subject to various conditions and may differ materially. These conditions are outlined in the last page of the company's press release and 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 Third Quarter 2019 Earnings Conference Call.

Before we review Davivienda's quarterly performance, I would like to comment briefly on the macro environment for Colombia and Central America. During the third quarter, the Colombian economy accelerated to 3.3% from 3% last quarter, and 2.6% compared to the same period last year. The growth is the highest since the third quarter 2015. This improvement mainly reflected the strength in consumer spending, which increased at 4.7% rate. In this sense, the gross loan portfolio for the financial system grew at a 9% rate, mainly driven by higher dynamic on the consumer book, which grew almost 14%, followed by mortgages with a 9.8% growth. There were other improvements in commerce and public administration. For this year, we expect to close with a GDP growth of around 3.2% to 3.3%. For 2020, our economy research team is expecting a similar behavior in GDP growth as the one expected for this year. As for the exchange rate, there has been a 17% devaluation in the last 12 months, mainly due to international uncertainty.

Moving on to Slide 4, we can see the highlight of the macroeconomic situation in Central America. Economic growth continued showing a slowdown for the whole region, mainly due to a dry season affecting coffee and African [pulp] crops as well as lower international prices. Also, we have seen lower consumer confidence and impact in different sector 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 is expected to remain within the target range set by each country's Central Bank. Considering these 2 situations, the Central Bank of Costa Rica has cut the interest rate by 150 basis points since March this year, while in Salvador, the rate has remained stable.

Moving on to Slide 5, we would like to highlight the bank's result for the third quarter. Core net profit closed at COP 344 billion, increasing 19% compared to the same period last year. Accumulated net profit reached around COP 1.1 trillion, 7.3% higher than 2018. This represents a return on average of 12.7% for the last 12 months. Consolidated gross loans grew at an annual rate of around 60%. Mainly due to Colombia's performance, around 4% of this growth is explained by the exchange rate devaluation. In the last 12 months, we have been able to increase our market share in all portfolios in Colombia. In this way, Davivienda has consolidated itself as the second-largest bank in the country with a 15.1% market share by loans. This performance is explained by the positive dynamics of the consumer commercial and regionally small portfolio. Regarding credit quality, PDLs decreased by 15 basis points in the last 12 months, closing at 3.81%. During the quarter, PDLs increased 12 basis points due to impairments in diverse companies in the corporate and medium-sized segments. Consolidated cost-to-income ratio closed at 45.8%, improving 71 basis points compared to last year. Among other relevant events, we securitized mortgage loans in Colombia for COP 300 billion between August and October and issued senior bond for COP 700 billion last September.

Now turning to Slide 6, I would like to share with you our progress in Davivienda's digital transformation. I am glad to announce that Plug and Play, an open-innovation platform based in Silicon Valley, has recognized Davivienda as the most active bank in their fintech ecosystem. This is the first time a Latin American bank obtained such recognition among 65 companies from 28 countries. This confirms our commitment to become a digital bank and recognize our leadership in the way we are transforming ourselves.

As for our activity during the quarter, product sales behaved according to our plans, both in digital and traditional channels, growing at 43% rate compared to the same period last year. 48% of sales were done through digital channels and 52% in the traditional way. Almost 77% of our saving accounts are being opened digitally, increasing 10% compared to the previous quarter. We have now almost COP 900,000 digital deposits, including savings and term deposits with an outstanding balance of COP 744 billion. On the other hand, our portfolio of digital loans reached almost COP 1.7 trillion, representing 7.8% of Colombia's consumer book. This shows the continuous progress of how customers operate with the bank and how we are evolving and providing more services and products through our digital channels. This is changing the way we do business, our distribution and operating model.

Please move on to Slide 7. Digital monetary transactions have gained a share of up to 29%, while branch transactions has dropped to 16% from 21%, 2 years ago. Over the last 3 years, we have reduced the number of branches by 9%. This means 68 branches less in cooperation with our figures in 2016, which is aligned with our efficiency and digitalization strategy. We believe that our digital efforts continued to deliver promising results to benefit our customer and the bank's profitability.

Please now go to Slide #8, where I would like to share some figures about DaviPlata. Our e-wallet has reached more than to 5.7 million customers at the close of September and is growing at 25% annual rate. Over 41% of the total consumer base uses the mobile app, whereas around 60% uses the SIM card functionality. Nowadays, close to 15,000 companies are using DaviPlata to distribute their payrolls to more than 590,000 employees. Since May this year, we have enabled more than 300,000 e-cards and processed more than 560,000 purchases at 0 cost to our customers. In this way, DaviPlata opened the door to new alliance with ecosystem, facilitate payment service in Colombia, as well as increasing e-commerce and QR payment consolidation in a reliable, simple and friendly way.

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, where we will analyze the evolution of assets. Total assets grew 15.8% over the year and 4.1% during the quarter. Colombia's assets showed an annual growth of 13.4% and 2.7% quarterly due to a higher balance in investments and gross loans. International subsidiaries, which account for 25% of total assets, grew 5.2% 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 (inaudible) explained almost 4% of total annual growth due to the 17% devaluation during the year.

Moving on to Slide 10, please. Consolidated gross loans grew 15.9% over the year and 6.3% over the quarter. 3.3% of the annual growth is explained by exchange rate behavior. The consumer portfolio registered an important acceleration during the quarter, reaching an annual growth of 24.5%, mainly explained by unsecured personal loans, payables and credit cards. In this way, we have been able to increase our market share in the consumer segment in Colombia by more than 65 basis points in the last 12 months. This behavior is explained by a better macroeconomic environment, analytics-based strategies and our digital initiatives allowing us to identify growth opportunities in [adequate risk] profiles from current and new customers. The mortgage and commercial portfolios continue to be dynamic, expanding 14.6% and 12.2%, respectively, over the year. Mortgage growth is mainly driven by leasing and social housing segment in Colombia, which grew 15% and 9%, respectively. Corporate and SME segment showed a growth of 15.6% and 13.2%, respectively, driving the commercial book performance, in which we have increased our market share in Colombia by 42 basis points. Analyzing the performance by region, gross loans in Colombia increased above 14% compared to the last year. Our international operation increased 5.3% in dollars, with Panama and Honduras leading the annual growth. As a result of the strategies developed, especially in personal banking, we are guiding our growth forecast. By the end of this year, we expect a loan growth of 14% to 15%. The consumer book should lead the growth with an increase between 26% to 28%. Mortgage should grow a little more, in the level of 11% to 12%. The commercial portfolio to close with a growth around 9% due to a lower dynamic expected in the last quarter compared to last year and some prepayments in the corporate segment.

Please move on to Slide 11, where we can see the 90 days PDL ratio, cost of risk and coverage levels. Total PDL ratio closed at 3.81%, decreasing 15 basis points over the year, positively impacted by the commercial and the consumer portfolios. Compared to the last quarter, total PDL increased 12 basis points, mainly impacted by the commercial portfolio. Commercial PDL ratio showed an annual decrease of 16 basis points, resulting from different restructuring process made over the year. Quarterly, the 35 basis point increase is explained by some projects in the construction sector as well as some companies in (inaudible). Consumer PDL continues to improve, decreasing 10 basis points over the quarter and 27 basis points on a yearly basis. This is explained both by our risk management measure as well as the portfolio growth dynamic. Mortgage PDLs remained stable over the quarter and increased around 20 basis points over the year. This was due to the evolution of accepted loans and securitizations by COP 630 billion made during the last 12 months, which account for half of the duration. In general terms, we continue working to improve our PDL ratio towards the end of the year 2020. Some corporate cases that are fully provisioned will be weighted off by the end of this year. In that way, we're expecting the following PDL levels for the end of the year, considering the inclusion of Ruta del Sol II total portfolio between 3.5% to 3.6%, commercial portfolio around 4% to 4.1%, consumer portfolio between 2.2% to 2.3% and the mortgage portfolio around 4%. We closed the quarter with a cost of risk of 2.45%, where we continued to increase coverage levels for corporate clients in Colombia and benefit from some renegotiation made in some cases. Cost of risk for 2019 should close between 2.4% to 2.5%, taking into account growth dynamics in the consumer portfolio, additional provisions for Ruta del Sol and some benefits from further negotiation with [duration] customers. Total reserve coverage ratio closed nearly at 142%. As for the coverage for the main [corporate] case in Colombia, we can find Electricaribe reached 100% by the end of the second quarter. Mass Transportation System closed at around 48% coverage, and we expect to end the year on the same level. This means an update of the last quarter guidance due to improvement in the operator's risk profile resulting from negotiations and restructuring process. Ruta del Sol coverage increased to 78% and will reach 100% by the end of the year.

Now please move on to Slide #12. Funding sources grew 15.6% over the year and 5.1% quarterly, in line with the growth of our loan portfolio. Deposits increased at a rate close to 19% over the year and term deposits accelerated during the quarter, increasing at a rate of 5.3%. Bonds annual increase above 28% is mainly explained by local senior issuances in Colombia of COP 1.3 trillion during the quarter as well as issuances in Central America. Our strategy to fund the growth through bonds and term depositors aims to take advantage of the low interest rate environment and provide a stability in funding toward the medium term. Our funding structure continued to be stable with deposits representing 74% of the total funding. Our loan to funding ratio reached 96.5%, in line with our expectations.

I would like to invite you to Slide #13. As of September, total capital adequacy ratio closed at 11.15%. Tier 1 ratio reached 8.15%, well above the minimum required. The level is lower compared to the third quarter of 2018, explained by the higher growth of portfolio this year. However, we feel the capital levels [are] the credit to continue developing our operations. Total equity is increasing at a rate of 13.3% over the year and 4.5% over the quarter.

I would like to proceed to Slide #14. Accumulated gross financial margin increased by 12.7% over the year. As you may see, both financial income and expense grew at a similar pace due to stability in Central Bank interest rate and higher valuation in investment income due to lower market interest rates and valuation adjustment of securitization instruments in the first quarter. As a result, 12-month net interest margin ratio closed at 6.55%, remaining relatively stable. Accumulated net interest margin grew at 9.1%, impacted by a 19.2% growth in provisioned expenses, driven by the growth dynamics in different portfolios as well as higher coverage of particular cases. For the end of this year, we are expecting a net interest margin between 6.4% to 6.5%, explained by higher cost of funding due to a long-term structure, as mentioned before, and some increased competition in interest rates for [new loans] allocations.

Please continue to Slide #15. Total accumulated expenses grew 7.9% over the year. Cost-to-income ratio closed at 45.8%, improving 20 basis points over the quarter and 70 basis points over the year. Both personnel and operating expenses remained under control with accumulated increases of 3.5% and 1.7%, respectively. However, other expenses grew at 39%, mainly due to additional depreciation expenses resulting from IFRS 16 adoption. If we exclude this effect, other expenses will have grown by 9.5% and total accumulated expenses will have increased by 3.6%. Expenses grew 4.6% compared to the second quarter, mainly driven by higher marketing alliances and software development expenses among others. Personnel expenses slightly decreased due to lower commission and [entities] payment. For this year, we're expecting an increase in operating expenses by 9%, as we expect an OpEx pickup in the last quarter of the year driven by cybersecurity and technology development related to digital transformation initiatives. As a result, our cost-to-income ratio should close around 46%.

To finish this presentation, I would like to go to Slide #16, where we can analyze the bank's profit. Accumulated net income closed at almost COP 1.1 trillion, 7.3% higher than the one recorded during the same period last year. Quarterly net income decreased 4.8% over the quarter and increased 19.1% over the year. [Decrease] over the quarter is mainly explained by lower investment income related to higher valuation during the second quarter of the year, lower operating income explained by higher debit and credit card expenses, and higher taxes due to adjustment in the long-term income tax rate during the second quarter, which created an important benefit in the last quarter. Our return on average equity for the last 12 months reached 12.7%, while the return on average assets was 1.3%. Given the latest updates on the financial, our effective tax rate forecast for this year is expected to be around 22% to 24%. We will continue to monitor the evolution of the next tax bill in Congress, where the expected result is to have a similar regulation as the one approved last year. Our ROE forecast for this year continues to be around 12% to 13%. In general, these are the results we have prepared for you today.

At this time, we can move on to the question-and-answer session. Thank you for your attention.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take a question from Piedad Alessandri of CrediCorp Capital.

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Piedad Alessandri Cuevas;Credicorp Capital;Buy-side Research Analyst, [2]

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Before you mentioned some NPL cases on the corporate cases regarding the construction sector, those cases, you specified in the earlier call that were some payments related, and I wanted to know what affected the payment ratio? It was a specific case, it was something coming? Do you have -- can you give any more detail on those cases?

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

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Thank you, Alessandri. In the case of the NPLs in the construction sector, it's related to 2 specific cases. It is not [ordinarily sized] situation.

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Operator [4]

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(Operator Instructions) We'll move next to Neha Agarwala of HSBC.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [5]

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I wanted to follow-up on the Basel III implementation. When would you be implementing Basel III, early or -- early next year or later on? And what is the impact that you expect to have in 2020 from that implementation? And my second question, if you can update us on the specific questions, Electricaribe, Ruta del Sol. What level of provision coverage have you reached? And do you anticipate to make more provisions during this year or next year? That would be very helpful.

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

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Neha, thank you. Related to Electricaribe, the level of coverage is 100% in terms of the level of provisions. So it absolutely covered the Electricaribe. Related to Ruta del Sol, the coverage level today is 78%. That's expected to increase to 100% at the end of the year, the level of provision.

In terms of Basel III, we are expecting to implement it -- the implementation for the next year, according to the (inaudible) estimation, we're expecting a positive impact around 100, 150 basis points in the total solvency ratio, including not only the general solvency ratio but also the Tier 1 relation with the increase in that basis point, 100 to 150 basis points. That is the total effect over the solvency ratio, it's a positive effect, including not only Basel -- not only the rules relating to the risk level of the commercial and mortgage portfolio and other specifically related to the -- some buffer in the capital adequacy, but also including the operational risk. That is the total effect.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [7]

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Okay. And just to clarify, you'll be implementing it in 2020, in first half or second half, any time line regarding that?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [8]

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The regulation gave us the opportunity to implement this rule between 2020 to 2021. But also, we are developing the -- all steps to implement this rule in 2020.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [9]

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Okay. So you will implement it before, right? Earlier in the year? I know that there's a period through which you can decide when you want to implement. So you'll likely implement it earlier?

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Ricardo Leon Otero, Banco Davivienda S.A. - EVP of Risk [10]

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The rule did establish the regulation begins on January 1, 2021. We are also open -- anticipate to -- a rule to implement it in the 2020.

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Neha Agarwala, HSBC, Research Division - Analyst, LatAm Financials [11]

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Yes. So do you want to wait until 2021 to implement it or will you implement in 2020? Have you decided on that? Or are you still thinking?

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

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We have to implement it in 2020.

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Operator [13]

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(Operator Instructions) There appears to be no further questions at this time. I would like to 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 [14]

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Well, thank you very much, for -- everyone, for being with us today. We are very optimistic about how we are going to close this year. And we feel that working very hard and working on our strategy, trying to make this digital transformation in bank and growing in the different sectors, we will have very good results for the year 2019, and we expect to have a good year in 2020 as well.

Thank you very much for being with us.

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Operator [15]

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This conclude today's conference call, you may now disconnect.