Welcome to Davivienda's Second Quarter of 2023 Earnings Conference Call. My name is 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 taken. Today, joining us from Bogotá, Colombia, is Mr. Javier Suárez, Chief Executive Officer, and Mr. Ricardo León Otero, Chief Risk Officer. During the call, they'll be discussing in-depth the quarterly results released. If you have not yet received a copy of the earnings report and presentation, please visit our investor kit or the financial information section at ir.davivienda.com. At this time, all participants are in a listen-only mode. Please note that this conference is being recorded. Afterwards, management will be available for a Q&A session.
Before getting started, let me mention that any forward-looking, 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 that anticipated in any forward-looking statements due to macroeconomic conditions, market risks, and other factors beyond our control. It is now my pleasure to turn the call over to Mr. Javier Suárez, Chief Executive Officer. Mr. Suárez, the floor is yours.
Good morning, and welcome to Davivienda's second quarter of 2023 earnings conference call. Thank you very much for joining us today. I would like to start by mentioning that this year has proven to be even more challenging than anticipated. Macroeconomic conditions continue impacting our results, especially margins and credit risk. In this sense, we believe that the rest of 2023 will also be challenging, leading us to revise our expectations for the year. Considering this, we're working to reverse the trends through short- and medium-term actions while remaining focused and committed to our vision for the future. We believe our efforts in digitalization, customer experience, and our different value-creating initiatives will continue to give us a significant competitive advantage that will help us deliver even more value to all of our stakeholders in the future.
In the following slides, I will explain the current macro and financial system conditions, the main results for this quarter, the evolution of our margins and credit risk, and our expectations going forward. On slide three, we can observe how Colombia's economy continues decelerating, following the trend seen throughout 2023, in line with the contractionary policy of the central bank. The economic activity index for April and May has shown practically no growth, in line with the correction of macroeconomic imbalances through rate hikes and a moderation in the fiscal deficit. Aligned with this trend, we are expecting a 1.1% GDP growth for this year. When looking at the exchange rate behavior, the Colombian peso appreciated against the dollar during the quarter, explained by the dollar's loss in value around the globe, as well as lower uncertainty following the debates on the government's reforms.
The local market in Colombia has faced some liquidity restrictions in recent months. This is explained by increased government deposits with the central bank due to higher tax collections and lower budget execution. These impacts have led term deposit rates to increase again after the normalization we had seen in March, when banks complied with the net stable funding ratio. As a result, we have not yet seen the decrease in interest rate we were expecting, which maintains the pressure on our financial expenses. Regarding inflation, we began seeing a decrease in this ratio during the quarter, from 13.3% in March to 11.8% in June, supported by lower food prices. Despite the improvement in July's inflation figure, it remains at a very high level, which in turn continues impacting the payment capacity of households, affecting PDLs for the whole system.
The last increase of the central bank's rate occurred in April and has remained stable at 13.25%, signaling the end of the increasing cycle given the GDP and inflation behavior. We expect inflation to gradually decrease to 9.5% by the end of 2023, and the monetary policy rate to start to decrease around October, closing at levels between 11.5% and 12%. Regarding 2024, we expect Colombia's economy to behave similarly to 2023, with GDP growing around 1.7% and inflation continuing with its downward trend, closing 2024 in the range of 3%-4.5%. Lastly, in line with reduced inflation, we expect interest rates to, to return to levels of around 6.75%. Moving on to slide four.
Taking the overall state of the economy into account, we can see how the financial system's loan portfolio has normalized its growth in line with the high inflation and interest rate environment, as well as the adjustments in origination policies from credit establishments to reduce disbursements. As you can see in the graph, the consumer segment is experiencing the most pronounced decrease. In line with lower credit demand and high competition, average loan rates have decreased in recent months, but remain at historically high levels, which continue to pressure payment capacity. These conditions have impacted asset quality throughout Colombia's financial system, with the consumer portfolio being the most affected.... Total PDLs over 30 days have been increasing since the end of last year, while the consumer segment has shown an upward trend since June 2022, reaching levels above those of the pandemic.
Moving on to Central America on slide five, the region's economy showed signs of stabilization during the first quarter of 2023. While Costa Rica presented some improved trends, growing by 4.3%, El Salvador and Honduras had moderate results, with increases of 0.8% and 1.9%, respectively. Regarding inflation, the downward trend continued throughout the quarter, mainly attributed to the decrease in fuel prices and lower food costs. Costa Rica presented the highest decrease in inflation with a result of -1%, supported by the colón appreciation throughout the year, followed by Panama with -0.6%. Taking these positive results in terms of inflation, Costa Rica Central Bank was able to decrease its intervention rate to 7%, while the rate remained stable at 3% in Honduras.
In terms of the region's currencies, the Costa Rican colón presented a slight depreciation of 0.75% during the quarter and an appreciation of 9.4% this year, while the Honduran lempira remained relatively stable. We expect the region's GDP to grow between 3% and 4%, and inflation to behave in a more stable manner by the end of the year. Moving on to the main results of our business on slide six. In line with our risk appetite adjustments and the different actions we've taken, our portfolio remained stable during the quarter when excluding the FX impact, reflecting our focus on controlling growth and recomposing our loan mix. On an annual basis, the loan book has grown by 8%. Regarding credit risk, total PDLs reached 4.42%, mainly driven by further deterioration in the consumer portfolio.
This led us to continue increasing provisions, resulting in a 3.3% Cost of Risk for the last 12 months. However, even if these levels are higher than the initially forecasted for the year, the risk segments that are currently affected within our portfolio have already been identified. We are carefully managing the situation to rebuild the loan book and return to desired credit risk levels in the future. In terms of margins, our NIM remains stable, considering the high interest rate environment and liquidity conditions, which have increased funding costs, as well as a decrease in loan income due to lower growth, as mentioned before. As a result, our accumulated profits closed at COP 262 billion, representing a 77.6% decrease over the year, translating into a 12-month ROAE of 4.5%.
In this context of lower profits, our CET1 stands at 10.74%, among the best levels in the system, demonstrating a solid capital structure to support our business in this scenario. Despite these results, we want to share with you some highlights of the development of our business in the past few months. In terms of ratings, S&P and Moody's recently ratified our international ratings with a stable perspective. In the case of S&P, we continue to be capped by the sovereign rating, even though we have a higher standalone credit profile. We were also ratified as Triple A by BRC at the local level. We continue to find opportunities to keep evolving and advancing in our strategic path, which continues to show results.
In this sense, we proudly announce that we deployed the first Interoperable QR in Colombia, which overcomes the payment barrier, where businesses and customers could only receive and send payments from accounts of the same bank. Now, merchants can obtain their QR code at no additional cost, allowing them to receive payments instantly from other banks and digital wallets, helping them to increase their sales. For 2023, we expect to have 800,000 businesses using either a physical or digital QR. Our digitalization efforts in matters such as digital channels, infrastructure, and artificial intelligence, have led us to be recognized as the best digital bank in Latin America by Euromoney, and as the most innovative bank in Latin America by The Innovators .
Additionally, we were the only Colombian company to be awarded in the World Economic Magazine Awards, being recognized in three categories: Best Bank in Sustainable Finance, thanks to our commitment to environmental issues, Best Digital Bank, and Best Bank for Financial Inclusion, thanks to DaviPlata. These recognitions show that we continue progressing towards our long-term vision, developing different capabilities, and leveraging on new technologies to generate sustainable business growth and capitalize on higher value in the future. In the following two slides, I will comment on the evolution of our margins and credit portfolio. On slide seven, we present information regarding our margins in Colombia. On the asset side, as we keep our efforts to control growth, recompose the portfolio, and improve new originations, our loan book has decreased temporarily. At the same time, there has been an increase in non-performing loans, affecting the income generation of our loan portfolio.
In addition, we had an impact during this quarter related to lower inflation, which has affected the rates of the loan portfolio tied to the inflation-linked unit. We also had a lower result in investment income when compared to the previous quarter, which explains the reduction in its implicit rate. However, our investments have shown a very positive trend during the past two quarters, in line with the decrease in the yield curves in the market. On the liability side of the equation, in line with the stabilization of the monetary policy rate, we have seen a slight decrease in funding implicit rates, as shown in the top right graph. This behavior has helped moderate financial expense growth during this quarter. However, there are still pressures in funding costs, especially in longer-term funding, in line with the limited liquidity we are observing in Colombia's financial system.
This pressure is not allowing our liabilities to reprice downwards as fast as we were expecting. As we mentioned during our previous conference call, we're making efforts to reduce our cost of funding by decreasing the amount of high-cost demand deposits. However, this effect is taking longer to consolidate, mainly due to the increase in term deposits, in line with long-term funding needs and customer demand for these instruments. These situations lead us to believe that the initiatives we are implementing will take a little longer to materialize into improvements in our margins, thereby taking us to adjust our NIM expectations for 2023 in the range of 6.0%-6.3%. For 2024, we expect our NIM to recover to more normal levels, supported by a lower concentration of high-cost liabilities and the normalization of interest rates.
Please move on to slide eight, where I will talk about the evolution of credit risk. As we have shared with you before, last year, we started to identify some segments of the consumer portfolio whose payment capacity was hardly affected by the substantial and rapid change in macroeconomic conditions. This situation led us to implement the different measures we have shared with you in the last couple of calls, along with increasing provisioning levels since the fourth quarter of 2022, reaching the current 3.3% Cost of Risk for the last 12 months. More recent analyses have revealed a deeper deterioration than the one we had forecasted for those Vintages, which will lead us to continue making important provisioning efforts during the coming quarters.
As you can see in the top left graph, in December, we did an important provisioning effort, anticipating part of 2023 deterioration through parameters calibration and forward-looking adjustments, and that's why the first quarter of the year was supported with less provisioning expenses. However, as conditions turned out to be harder than we were expecting, we increased provisions during the second quarter. If instead of anticipating provisions through the adjustments I just mentioned, we had made them as the portfolio impairment materialized, the provisioning expense would exhibit a more gradual trajectory, as shown in the graph, with a smooth decline in this and the next quarter, returning to a more normalized trajectory in the midterm. In this sense, we believe we have already absorbed around 2/3 of the credit cycle shock related to that portfolio.
During the second half of the year, we will cover another 25%, ending 2023 with around 90% of the cycle absorption, which translates into a cycle of high Cost of Risk the next two quarters. We will cover the remaining impact in 2024. This leads us to significantly modify our Cost of Risk guidance for 2023, with the ratio closing at levels between 3.6%-3.9% for the whole year, which is also impacted by almost no loan growth. We continue working very hard in implementing different actions to reverse the trends observed and have already seen some progress on those fronts. As you can see in the top right graph, there has been a noticeable downward trend in disbursements in the consumer portfolio since the third quarter of 2023, given the changes to our origination policies.
In line with these efforts and our risk appetite adjustments, we are seeing some recomposition in our consumer portfolio towards more secure segments, such as payrolls and credit cards, while unsecured personal loans have begun to lose some participation, as observed in the bottom left. Thanks to the adjustments we have made in our policies, models, and controls, we are having signs of improvement in more recent vintages, which are behaving similarly to 2021 levels, leveraged on the lessons we have learned while building up our digital capabilities. Going forward, better asset quality in new disbursements and lower portfolio growth should result in lower provisions. We expect to return in 2024 to cost of risk levels more aligned with the historical levels for our consumer portfolio, considering the slower economic activity expected for the remainder of the year.
To end my presentation, please turn to slide nine for an overview of DaviPlata. DaviPlata's customers increased by 11% annual, reaching COP 16.4 million, adding COP 1.7 million during the last 12 months. When looking at the annual evolution, we observe positive trends regarding low amount deposits, income, transactions, and purchases. DaviPlata's total income slightly decreased during the quarter, mainly explained by FTP income due to the decrease in funding implicit rates. As for DaviPlata Nanocredit, as you can see in the bottom left graph, both the portfolio and disbursements have decreased during the quarter, in line with our current loan origination efforts implemented in the operation overall. Lastly, we would like to highlight that DaviPlata is the digital wallet that brings the most remittances in Colombia.
Thanks to our strategic alliances with 13 remittance companies worldwide, we have helped more than 73,000 Colombians receive money from abroad, translating into 600,000 transactions for a total value of around COP 234 billion. We continue expanding the platform's reach by allowing teenagers over 14 years old to access their own DaviPlata account with their parents' permission. This initiative will give 3.2 million young people access to a financial system, learn about the financial world, and how to save and manage their money responsibly through the didactic learning modules. As of June, there have been 47,000 new users of DaviPlata, thanks to this initiative. Let me now turn the call over to Ricardo León, our Risk Executive Vice President, to continue with the presentation.
Thank you, Javier. Good morning, everyone. Please move on to slide 10, where we will analyze the evolution of assets. Our total assets closed at COP 181 trillion, contracting by around 3% over the quarter due to the decrease of our loan book, cash and investments, on top of an exchange rate effect. Excluding the Colombian peso appreciation, assets grew 0.8% compared to the fiscal. On an annual basis, assets increased around 9% over the year. When looking at each of our operations, Colombia's assets decreased by 0.6%, while Central America grew 0% in USD over the quarter. Please move on to slide 11. As you can see on the top left graph, the loan portfolio shows a more moderated growth both in Colombia and Central America, increasing by 8% over the year at the consolidated level.
When excluding the exchange rate, the portfolio grew by 0.2% over the quarter, in line with our origination policies. The consumer portfolio contracted by around 4.9% during the quarter, mainly explained by the effects appreciation, lower disbursements, and write-offs. This is aligned with the different measures we are taking to recompose the portfolio towards segments within our current risk appetite. Regarding the commercial portfolio, we observe a slight 1% growth during the quarter when excluding effects, as there has been lower business dynamics in the context of an uncertain environment for investment and low activity during the quarter. Despite the 2.2% growth of the mortgage portfolio during the quarter with excluding effects, growth was affected by some restriction on low-income housing subsidies, allocation, and granting, which led to lower disbursement levels when compared to other periods.
Regarding our loan mix, we are already observing changes compared to a year ago, with the consumer portfolio decreasing its share and the mortgage and commercial portfolio gaining space over the total portfolio, showing that our efforts are already translating into a loan book recomposition. We will keep adjusting our portfolio in order to target segments with better profitability and risk profiles. Moving on to Slide 12, we present an update of our PDLs and coverage ratios. As you can see on the top graph, total PDLs over 90 days kept increasing over the quarter above what we originally expected for the year. As Javier mentioned, customer payment capacity continued to be deeply affected by high interest rates and inflation, causing our PDLs to increase, particularly affecting the consumer segment. Additionally, it's important to mention that PDLs are also impacted by a lower portfolio base.
The PDL formation within the consumer portfolio is mainly explained by consumers with medium to high risk profiles and lower income levels. This was mostly in 2022 in the unsecured personal loans portfolio, whose financial body was importantly affected by the rapid change in macroeconomic conditions. In the case of the commercial book, PDLs increased during the quarter, mainly due to the deterioration of some customers in the service, industrial, and commerce sectors, also affected by macroeconomic conditions. Lastly, the mortgage portfolio presented an increase during the quarter due to the inflation and the interest rate increases, as well as changes in the write-off parameters for this portfolio that will maintain the ratio at slightly higher levels going forward. Out of the 32 basis points increase of the ratio during the quarter, around 20 basis point are explained by these changes.
In terms of coverage, the total ratio closed around 107%, decreasing over the quarter, affected by the past due loans, despite our provisioning efforts. Please take into account that in the case of the commercial and mortgage portfolios, we have been optimizing coverage levels through better recognizing collaterals and risk profiles. Please move on to slide 13, where we can see the evolution of Cost of Risk, provision expenses, and loans by stages. The annualized quarterly Cost of Risk closed at 4.32%, and the 12-month Cost of Risk reached 3.3%, increasing over the quarter. This behavior is mainly explained by the increase in provision expenses and lower growth, as our portfolio has deteriorated at a faster pace than what we initially expected, in line with the challenges we have mentioned before.
Looking at our loans by stages, we observe the Stage 2 and 3 increase the share in the overall portfolio due to the evolution of the consumer and commercial segments during the year. In terms of coverage by stages, we see the ratios remaining relatively stable, given our provisioning effort during the quarter. Now, please move on to slide number 14. Liabilities increased by around 9% over the year, in line with asset behavior and our funding needs. As we have been observing throughout the system, the funding mix structure has been changing, with term deposits increasing and partially replacing demand deposits. This might be explained by different reasons, such as the system's need for long-term instruments to comply with the NSFR, limitations on going to the market with bond issuance due to the current conditions, and higher customer preference for more profitable instruments as term deposits.
However, as you can see in the bottom left graph, our demand deposits account for around 41% of the total funding, and we continue gradually decreasing our high cost demand deposits to improve funding costs. Bonds decreased 22.8% over the year, in line with the maturity of some of our issuances over the past year. Lastly, credits with entities grew around 13% annually, mainly explained by resources acquired throughout the previous year with multilaterals and corresponding banks. In terms of liquidity ratios, as you can see in the bottom right graph, the LCR decreased during the quarter, as the ratio for the first quarter was unusually high. This behavior is explained due to an increase in term deposit funding, anticipating methodology changes in the NSFR. We feel comfortable with the current levels of both the liquidity coverage ratio and net stable funding ratio.
Please continue to slide 15, where you see our capital structure. Our CET1 ratio closed at 10.74%, increasing by around 25 basis points over the quarter and decreasing by 32 basis points over the year. The quarterly behavior is mainly explained by lower risk-weighted assets, in line with the decrease in the loan portfolio and reduced market value at risk, as we have decreased our position in dollars. The total capital and equity ratio slightly decreased over the quarter, mainly due to the volatility of the exchange rate and lower weight of subordinated debt instrument denominated in Colombian pesos. As we already mentioned, despite the trend seen during the previous quarter, we have adequate and sufficient capital levels over the regulatory minimums to support further growth and the risk we assume in developing our business. Please move to slide 16, where we present our margins.
In line with the decrease in our loan portfolio and higher non-performing loans, we saw some impacts in loan income, which decreased by 1.4% over the quarter. Income from our investment portfolio continues behaving positively. However, the decrease seen during the quarter is mainly due to a base effect, given the high result obtained during the previous one. Financial expenses increased by 1.2% over the quarter, moderating its growth in line with our efforts to reduce financial expenses, although is still pressured by high rates in the market. This condition led our 12-month NIM to remain stable, as the decrease in loan income is compensated with the result of our investments. On the other hand, our 12-month NIM, including FX and derivatives, remains impacted by the appreciation of the Colombian peso during the quarter and the Costa Rican colón during the year.
Please continue to slide number 17. Non-financial income increased by around 12% on an annual basis, close to our expectation for the year. This behavior is mainly due to credit and debit card commissions, handling fees, and income from insurance placement from our bancassurance business. On a quarterly basis, other income is showing a base effect since we received dividends during the first quarter. On the other hand, OpEx increased by around 19% over the year, as it remains affected by inflation, salary increases, and the volatility of the different currencies we handle in our operation. Please bear in mind that when excluding the FX impact, expenses would have grown by 12.7% on an accumulated basis.
Additionally, we see a reduction in quarter terms, which is helped by the appreciation of the exchange rate during the quarter and reduced personal expenses due to lower incentive to our sales force, in line with lower portfolio growth. The result is our 12-month Cost-to-Income Ratio ending the quarter at 51.5%, importantly impacted by pressure in margin and losses in derivatives income. However, our Cost-to-Asset Ratio remained stable during the quarter, showing that our expenses remain aligned with the size of our operation. Please move on to slide 18, where we present the Bank's profits. Net profits closed at COP 25 billion during the quarter and COP 262 billion on accumulated basis, show an important reduction compared to the Bank's normal figures. This result translated into a 12-month Return on Average Equity of 4.5%.
As we have been able to see throughout the presentation, our financial has been impacted by a pressure in margins, higher provisions, and the currency volatility, which has affected both our expenses and our derivatives results. To finish the presentation, please move on to slide 19, where I will comment on our updated guidance for 2023. We have revised our guidance for the year, taking into account the challenges we are facing and the economic outlook for Colombia, with very low growth for the year and inflation and interest rates impacting several sectors and segments of the economy. We know this represents an important change to what we guided in our last call, but we are recognizing as accurately as possible the situation we are currently facing.
Please bear in mind that there are some variables, such as economic growth, interest rates, and currency movements, that present some uncertainty and that might impact real results. Given the Colombia peso appreciation we have been seeing recently, as well as our origination adjustments, we are expecting our loan book to remain relatively stable over the year, with an annual growth of around 0%, with the consumer portfolio decreasing around 9%-11%, the commercial book growing by 2%-4%, and mortgage between 4%-6%. Regarding asset quality, we expect PDL ratios to grow between 4%-4.5%, impacted by additional formation of value loans and by a lower portfolio base. Our NIM should grow between 6%-6.3%, and our Cost of Risk around 3.6%-3.9%, as Javier already explained.
Non-financial income to grow between 14%-16%, in line with our income generation and business development strategies. We expect OpEx growth between 11%-14%, impacted by expected inflation levels, FX movements, but with some compensation for our efficiency strategies. As a result, our return on average equity should grow between 0%-3%. Thank you for your attention. At this time, we can move on to the question and answer session.
... Thank you very much. With that, we will begin our Q&A session. We will first take the question on call, and then we will read the webcast questions. Questions, please press the star button and six to access the Q&A feature, and then press one to raise your hand. If you're using a speakerphone, you may need to pick up your handset first before pressing the numbers. Once again, if you have any questions, please press the star button and then press six to access the Q&A feature. After that, press one to raise your hand. For the participants, click the button with the question mark at the bottom of the webcast screen. If you have more than one question, we kindly recommend sending just one single message with all your questions. Right now, we're standing by for questions.
Once again, if you're on your phone and you have any questions, please press the star button and six to access the Q&A feature, and then press one to raise your hand. If you're using a speakerphone, you may need to pick up your handset first before pressing the numbers. Once again, if you have any questions, please press the star button on your phone and then press six to access the Q&A feature. After that, press one to raise your hand. Right now, we're standing by for questions from our phone. In the meantime, we'll move on with the webcast participants. Again, if you have more than one question, we kindly ask you to send one single message with all your questions. To ask your questions, please click the button with the question mark at the bottom of the webcast screen.
The first question comes from Mr. Olavo Arthuzo. He says, "On slide number eight, you show the disbursement of the consumer portfolio, and since the peak in the first quarter, 2023, it's been decreasing. I just wanted to understand a little bit more on the breakdown by income of these new disbursements. That means, could you please share with us how much of the new loans is composed of high-income clients, mid-income clients, and low-income clients? Just for us to understand the mix here." The second question is, what NPLs levels does the bank feel comfortable to start to increase the credit appetite once again?
Good morning, Olavo. This is Javier Suárez. Regarding your first question, in terms of the disbursements and the breakdown by income. By, by the beginning of last year, around 50% of our, our disbursements were, were close to low income segment of the market, and then that 50% has been coming down, and it's now currently around 30%. At this time, around one-third of our, of our disbursements are, are low-income clients and one-third medium and one-third high income. That's part of the recomposition of the disbursement due, due to the new policies that we're putting in place to underwrite new loans. It's, it's close to one-third, one-third and one-third.
Regarding to your second question, as we saw on the presentation on slide eight, new vintages are behaving very well, actually, before, better than the levels before pandemic. So we believe that we're getting there. We're getting there at the point in which we're feeling comfortable with the level of risk of the new vintages. We expect to start growing our appetite in line with this new quality of the portfolio, we're actually disbursing at this time. We won't expect a very high growth, and we are being very conservative on our guidance in terms of loan growth, because we know that the environment, the macro environment, is still challenging. We see opportunities to retake some growth at the current level.
It would be a gradual return to growth levels. That's why we're still going with a guidance that it's very conservative.
Thank you very much. Now, we do have some questions on our phone. The first question comes from Mr. Daniel Mora from Credicorp Capital. Mr. Mora, please go ahead. The floor is yours.
Hi, good morning, and thank you for the presentation. I have three questions. The first one is: Can you provide further color regarding to when do you expect to see an improvement in the asset quality indicators, and when do you expect to see the peak in NPLs? Do you believe this cycle will have an impact on results in 2024? Can we expect regarding NPLs and cost of risk for the next year? Will be the first question. The second one is, do you believe 2024 could be a normalized year in terms of financial resource and profitability, or it will be a transition year given the scenario in asset quality indicators?... that will be the second question. The third one is, what percentage of term deposits are due in less than a year?
Do you expect to see again some pressures in term deposit rates in Colombia, given the compliance with the net stable funding ratio? Thank you so much.
Thank you, Daniel. Going to your first question, as, as we showed in probably slide eight, if I'm not mistaken, we have a graph that shows how the provisions will, will look for the coming quarters. You can see that, that we believe that the last quarter, the second quarter of, of this year and this current quarter, the third one, are the peak in terms of provision levels. We, we expect, we expect a downward trend after that, and, and as, as we mentioned in that slide, around 25% of the, of the loss of the, of the vintages that are showing a, a bad behavior in terms of of credit risk, is, is going to be absorbed.
We should be all the way to 90% of the losses absorbed by the end of this year. We, we believe that we're at the peak with this third quarter of the year, and then we'll start coming down after that. After that, for next year, there might be some, some deterioration of due to the macro conditions, but that we expect to be of an order of magnitude smaller than what we're seeing now with the vintages that come from last year. We actually expect next year to be better. Which is your second question in terms of 2024. We're expecting 2024 in which we'll be having ROEs close to two digits growth.
That is, is on the positive side, close to 9%-10%. Although we, we don't want to commit ourselves with the specific guidances for next year because of, of, the uncertainties that we're facing. Just to give you a rough idea, we expect, next year to be, much more a normalized year. That all depends, of course, on the macro environment. We, we expect the macro environment to, to hold and, and have growth, as we mentioned, of around 1.5% next year. If that happens, then we expect this to be, a normalized year for 2024.
In terms of term deposits, we, we are all going through through a renewal of some of the CDs that were that were opened last year and at the beginning of this year in order to comply with the net stable funding ratio. That's happening over the, the, the next coming months, at rates that are high, but we have expectations that the rates will, will come down as we are seeing opportunities on the government side to, to start using some of the funds that are at this time with the central bank. We expect interest rates to come down.
We know that both the government and of course, we as the agents in the market are aware that there needs to be a change in the liquidity conditions in the market. We are expecting those changes in liquidity conditions that will actually start lowering the rates at which we are actually renewing the CDs at the time. In terms of the amount of CDs that will be renewed during the coming months, it's around 70% of our CDs will be renewed during the coming 12 months.
Of course, those, those CDs are being renewed at lower rates than the ones that were open when we were getting ready to comply with the NSFR by, by March 31st of this year. We expect, although there's been a short-term increase in rates during the last month, we expect that to improve over the coming months. That will, that will give us also the opportunity to improve our, our margins for the coming months, especially for next year.
Perfect. Thank you so much for the answers.
Thank you, Daniel.
Thank you very much. Now we'll move on to the second question coming from our phone line, which is coming from Natalia Corfield, from J.P. Morgan. Mrs. Corfield, please go ahead. The floor is yours.
Thank you very much for taking my question. A follow-up on asset quality. I just want to understand, what exactly led to the deterioration that we are seeing in the consumer book? It was a combination of the deceleration of the economy, inflation, very high growth that you guys had last year. What exactly was, was the cause? I, I am stating that you, based on what you have said during the conference and based in your previous answers, that you think that the peak is gonna be, the peak of NPL ratio is gonna be in the third quarter of this year. If you could confirm that as well, it would be great. I have a question also in your capitalization. You had a CET1 of 11%, now it's below that level.
What is the level that you feel comfortable? Given the results that you are having in 2023, what are you thinking about your dividend payments for next year? Those are my questions. Thank you.
Thank you, Natalia, for your question. Over the past year, there's been a challenging macroeconomic shift. We haven't seen those kinds of shifts in many, many years in the Colombian economy, both in magnitude and speed. Our, our, our models somehow took into account the, the, this deterioration when we, we were disbursing the, the, going through a phase of growth during the first half of last year that was very, very intense. When these market conditions started to change, we started to tighten our underwriting standards for, for our consumer portfolios. As we mentioned in the presentation, you can see how the disbursements coming down. Our models were not calibrated to a, a, a change so sudden in the economic variables.
What we've seen is a deterioration that has been deeper than what we were expecting. We were expecting losses, and that's why we, by the end of last year, had a special provisioning for the consumer portfolio. The reality was that during the first two quarters of this year, we've seen behavior of the portfolio that was below our expectations. We had actually to adjust our models and look deeper into the reasons why the portfolio was taking longer to develop the losses. Actually, it was taking longer, and the losses were deeper than what we were expecting.
We actually went through a remodeling of our views on, on these poor portfolios, and now, now we have understood much better what was going on with, with the, with the poor portfolios, in which some of the losses were taking longer than expected because of probably challenging conditions that our clients were suffering. There's, of course, households with an increase in their financial burden, some, some medium to high-risk profiles that, that behave worse than, than our expectations. Part of the portfolio was, was geared towards lower, lower income levels. We've, we've been changing those conditions and, and our underwriting standards, and that's why we are disbursing lower levels of, of new loans that take into account these, these new conditions.
We, of course, we, we understand that last year, we, we were very well advanced in terms of digital capabilities and easiness for our customers to take loans. We grew a lot because not only in loans, but in any product in the digital value proposition that we have for our customers. We saw growth in investments, in accounts, in loans, in CDs, because actually our digital platform was very capable of handling that growth. We believe that we attracted a lot of growth, and actually we grew more than we were expecting in terms of the consumer loans, and that's why we were changing our standards to decrease these loans levels. After that, after the...
This happened during the second half of last year, we started changing our, our standards, and that's why our disbursements started coming down during the second, third, and fourth quarter of last year and the first and second quarter of this year to adjust to the new conditions. These new conditions, of course, imply policies in our, in our controls and in our, in our processes that actually make the, the bank much more resilient to, to these type of pressures. We still have to handle the vintages that were disbursed with those difficulties. That's what we're seeing with the peak in the third quarter. We, we expect that, that peak to, to be the moment at which we have realized most of the losses.
As I was saying before, close to 2/3 of the losses have already been absorbed. We're expecting that 25% for the second half of the year. We're comfortable with the CET1 level that we have now. In terms of dividend distribution, our expectations are still not set. We still need to see how the second half of the year behaves. We're being very prudent in terms of our guidance, and we'll see probably during the call of the third quarter, we will have a much more color to give you an insight into what our dividend distribution will be for next year.
Okay. Thank you.
Thank you, Natalia.
Thank you very much. Our third and last question from our phone line comes from Mr. Andres Soto from Santander. Mr. Soto, please proceed. The floor is yours.
Good morning, how are you, Ricardo? Thank you, so much for the presentation. I have a couple of questions. The first one is regarding your commercial portfolio. We have spoken a lot about the, the consumer one. I would like to understand what is going on with the, with the commercial side of your business. We saw some deterioration this quarter. Which segments, economic sectors are the ones being under pressure right now? For that part of this business, how long do you think the negative cycle will continue? It is the peak of it, or we will continue to see deterioration as the economy continues to remain under pressure?
... Thank you, Andres, for your question. For the commercial portfolio, I'll hand it over to Pedro Uribe, our Executive Vice President in the commercial business.
Thank you, Andres, for your questions. Yes, I will say that we have seen some deteriorations, some small deterioration, not compared to the consumer loans in the commercial portfolio. This deterioration is mainly focused on SMEs, on small and medium enterprises, and especially in sectors related to constructions, housing construction or, or infrastructure contractors, and in, in the retailers, in the retail segment. We have had some, some events in the corporate segment, just a few, three to four, and, I would say the biggest one is related to, to massive transportation in Bogotá. A loan that was granted in 2013, and that has been going out and, and in, in the NPLs for, for a while. We feel that those corporate cases are, are, adequate reserved with our loan loss reserves and provisions.
Regarding your expectation of, for how long the that cycle for commercial loans will continue, do you have any visibility at this point?
We, we don't expect a major deterioration for this, for what remains of this year, for 2023. It depends on the, on the economic, conditions that we will have from 2024, but, we don't expect major deterioration for 2023.
Understood. Thank you. my, my second question is regarding DaviPlata. Do you have any updated views on when, when are you expecting this to reach breakeven?
Andres, regarding DaviPlata, we're thrilled with the way DaviPlata is behaving. We're seeing a growth on the activity within the platform, that it's very healthy. We're actually pushing very hard in terms of the Interoperable QR, which is the new way in which small mom-and-pop shops that will have the ability to get paid for their goods and services. DaviPlata is actually growing. It's. We're happy with it. If you take into account the funding that DaviPlata is bringing at this environment of high interest rates, DaviPlata is very, very close to breakeven. We're seeing some quarters during this year in which DaviPlata is actually at the breakeven level.
Perfect. Is there any specific plan to spin off this unit to get a separate banking license, or any way in which investors can see value creation based on this platform?
We, we still see there, there's a lot of growth opportunities within Davivienda for DaviPlata. We, the architecture that we have for the DaviPlata platform, both in terms of technology and in terms of organization, are separate from the bank, although there's a tremendous benefit of being part of the bank. We, we have a structure that is ready to be spun off at any time we want to, we wanted to do it. We still don't believe it is the best way to go because there are still growth opportunities within Davivienda. We don't have short-term plans, although that's something that we keep considering in our reviews of the strategy on DaviPlata. At the time, we see that the opportunity of growth is still within Davivienda.
Understood. Thank you very much, Javier.
Thank you, Andres.
All right. Thank you very much. With that, we will move on to the webcast questions. The first question coming from our webcast comes from Jitendra Singh from HSBC. Her question is regarding the outlook for profitability for the next year. How do you think your margins will evolve with lower rates and lower credit growth, given the economic outlook? Do you think you will be able to reach your medium-term ROE target of 15%-16% in 2024, or there is a downside risk to it? The second question is, could you talk about some of the risk you see for the next year?
Thank you, Jitendra. Regarding your first question, in terms of outlook for next year, in general terms, we expect a higher growth, probably single-digit growth, close to around 8%-10%. In terms of margins, we're definitely expecting an improvement in margins. Of course, we've been having very tight margins because of the net stable funding ratio requirements and the high interest rates. With inflation coming down and changes in the market in terms of growth of the loan portfolio, we expect in the medium term better conditions for our margins. We expect actually margins improving to traditional levels, but for next year. In terms of credit risk, we're definitely seeing much better behavior.
We were expecting more than 100 basis points of improvement for credit risk for next year, which will turn out to be an ROE that won't probably be around the medium term 15%-16% ROE target, but probably on the 2-digit range, in the low 2-digit range. That will be our expectations. Of course, as I mentioned before, it's still too early to give guidance, specific guidance on what we'll see for the next year. We expect that to come with the quarter call for the third quarter. In terms of risk for next year, we still see credit risk as the main focus in terms of risks.
We expect that to, to be better because of the vintages that will be already have, have developed their losses during this year, and because of the quality of the new loans that we are originating. At the same time, you have to take into account that, that the economy is growing at a very low rate and that, that puts some pressure on credit risk. Yet we still believe that, that the year will, will be much better in, in that in that sense. So in terms of other, other factors such as margins, efficiency, non-interest income, we're actually expecting a much better 2024 in terms of efficiency. There are many opportunities that we'll be capturing this year.
We are actually capturing some of them this year and will be capturing next year. So we're very optimistic in terms of the operations of the bank for, for next year.
Thank you very much. Our next question from the webcast comes from Mariel Abreu from T. Rowe. Can you comment what specific buckets of the portfolio products behave worse than expected?
Thank you, Mariel, for your question. Mostly, the worst performance of the portfolio was in unsecured personal loans. The specific profiles that we already mentioned, low-income segment of the markets and some other segments with the profile, the risk profile was, was, was a little higher than what we were expecting. Those are the profiles that are actually with the new, new underwriting standards are, are being somehow being left out of our new loan disbursement, but mostly was on secured personal loans.
Thank you very much. We'll move on now to the next question coming from the webcast. This question comes from Angie Rojas, from Casa de Bolsa. What is or are the plans to control to increase in provisions for the next quarters? As we mentioned, we believe we have... Oh, I'm sorry. That's the first question and the only question: What are the plans to control the increase in provisions for the next quarters?
Yeah, we've, we've, as discussed during the presentation, we've already gone through most of the provisioning of the vintages that are difficult vintages. Close to two-thirds of them have already been absorbed, but we expect that to be 25% for the remainder of the year. Provisions are, you control provisions through collection practices, mostly because those loans have already been disbursed, and you have to keep monitoring their behavior. We're also working on monitoring them with our models. The forecast that we're presenting is a forecast that is based on models that we've been fine-tuning based on much better information that we've been gathering for those customers.
In terms of control, the increase of provisions, basically, we lowered the disbursement rate, and the new loan portfolio is not growing because of the new policy that I mentioned before. That's one of the ways we expect provisions to come down is actually because new loans have much better quality, and the size of the portfolio in terms of new loans is smaller. So those two factors, as compares to what we had for last year, make us believe that provisions will be lower during the following quarters. The other, the other actions are actions that we're taking on collections.
On collections, we're being very active on looking for solutions for our customers, looking for ways for our customers to be able to handle tightening in their economic conditions and get a win-win situation in which we provide some relief for customers that need it, and at the same time, we protect the quality of the portfolio in the way that we can with these type of customers.
Thank you very much. Our next question comes from Andrea Atuesta from Bancolombia. When would you expect to return to double-digit profitability levels? The second question is: Do you have some guidance for loan portfolio growth for 2024?
Andrea, thank you for your question. In terms of double-digit profitability, we answered that in the previous question. It's, we expect 2024 to be a year in which we will return to double-digit profitability levels. Of course, that's depending on many of the assumptions that we mentioned before, our view at this time is that we should be on ROEs of two digits for next year. In terms of growth for the portfolio of 2024, it's still too early, we expect that to be single-digit growth, probably in the high end of the single-digit range. That's our expectation for next year. Thank you, Andrea, for your question.
Thank you very much. Our next question comes from Camila Restrepo from Bancolombia. Her question is about having a little detail about the growth of investment income. The growth Y-o-Y is too big, and she would like to know why. Thank you.
Thank you, Camila. This is Daniel Cortés, EVP of Treasury and Wealth Management. Basically, the answer to your question is the last year was extremely low for our investment income. Basically, if you can recall, last year at this time, or the first semester, we were having an important increase in the interest rates of our loan portfolio, of our TES portfolio, and those created a negative or very low returns. During the last two years, this income has accounted about around 11.9% of the net financial margin. This year, this semester has been a better than expected one. Thank you.
Thank you very much. It seems that there are no further questions at this moment. With that, we will conclude today's session, but before that, I would like to turn the floor back over to Mr. Suárez for closing remarks. Mr. Suárez, the floor is yours.
Thank you. I, I want to thank all of you for participating in, in our call. This year's results, of course, will be lower than we, what we initially forecasted, but in the meantime, we keep working diligently to improve our practices and capitalize on the lessons of this process to do better going forward. Although this situation temporarily affect the bank profits, and we're aware of that, we're very conscious, what actually comes out of this is a better bank. It's a bank that has enhanced models, better processes, and ability to withstand scenarios as the one we're facing. So we, we believe it's, it's actually giving us the, the opportunity to look at the, at the coming years, with, with optimism.
It has been a challenging period that underscores the bank's resilience, the adaptability and strength, which also reflects on our capital levels. We continue to be among the highest in the Colombian financial systems in terms of CET1 ratios, and that's something that give us the ability to focus on handling the credit situation at this time, but also, at the same time, looking into the future. We continue actively working on building an exciting future through an interesting pilot of initiatives to reach more people and segments of the population, aiming to unlock the Davivienda's potential and value. We're optimistic about the positive evolution of our performance towards 2024, as we mentioned before, with the specific answers to the questions.
We will also keep improving our practices on different fronts to take our business to the next level, while remaining leaders in innovation. We believe that innovation is, is a force that is driving change in Davivienda and will actually make us a better bank and the, and the value proposition for our customers, but also on the, on the risk management of our portfolios, there's been a lot that we've improved during these, these last few months that will be put also in, in place and will help us be much better bank with better results for, for next year. Thank you very much for, for being here with us in the call, and we expect to see you for the call for the third quarter of, of the year. Thank you very much.
Thank you very much. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.