Good morning. My name is Keith, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Davivienda fourth quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question- and- answer session. I'll now turn the conference over to Rafael Borja of iAdvize Corporate Communications . Mr. Borja, please go ahead.
Thank you, Keith, and good morning, everyone. Welcome to Davivienda's fourth quarter and full year 2019 earnings conference call. Today's call is for investors and analysts only, therefore, questions from the media will not be taken. Joining us today from Bogota, Colombia are Mr. Efraín Forero Fonseca, Chief Executive Officer, and Mr. Ricardo León 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 relation section, where there is also a webcast presentation to accompany discussion during this call. If you need any assistance, please contact iAdvize in New York at 212-406-3693. 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 on 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.
Thank you, Rafael. Good morning and welcome to Davivienda's fourth quarter of 2019 earnings conference call. Before we review Davivienda's performance, I would like to comment briefly on the macroeconomic for Colombia and Central America. 2019 was a truly challenging year. According to the World Bank, the global economy grew 2.4% during the last year, the lowest rate since the financial crisis 10 years ago. The main triggers were the tension between the United States and China and the deceleration in both economies, Brexit uncertainty, as well as pressure in some Latin American countries. Within this complex environment, the Colombian economy was able to grow at 3.3% in 2019, accelerating from 2.5% in 2018. This recovery was mainly driven by consumer spending, interest rate stability, and higher investment. When analyzing the performance by sector, financial and insurance activities, public administration, commerce, and transport sectors showed the best dynamics during 2019.
We are expecting a similar GDP growth for this year. Davivienda's Confidence Index was affected during the last quarter of the year in line with the social situation presented in November. However, it started to recover in the last month of the year and is showing a positive trend as of now. The exchange rate devaluated less than 1% during the last 12 months, while revaluating around 6% during the quarter. Moving on to slide four, we can see the highlights of the macroeconomic situation in Central America. As of September 2019, economic growth continued to show a slowdown for most of the region. Although Costa Rica, El Salvador, and Honduras presented improvements in the last quarter, Panama slowed down mainly due to lower activity in transport and commerce.
Regarding inflation, the region presented a generalized price decrease as a result of economic deceleration, higher employment, and lower pressure for oil prices. Considering this situation, Costa Rica's interest rate has been cut by 250 basis points since March 2019, and Honduras rate has been cut in 25 basis points during the same period. Moving on to slide five, we would like to highlight the bank's results for the fourth quarter. Accumulated net profit for 2019 reached COP 1.48 trillion, 6.1% higher than 2018. This represented a return on average equity of 12.4% for the last 12 months in line with our last call guidance. Core net profit closed at COP 385 billion, increasing 11.7% over the third quarter and 2.7% compared to the same period of the previous year.
Consolidated gross loans grew at an annual rate of 10.9%, mainly due to the acceleration of the consumer segment in Colombia. Regarding credit quality, total PDL ratio decreased by 47 basis points in the last 12 months, closing at 3.46% due to a lower ratio in the consumer book and some write-offs made in the corporate segment in Colombia. Consolidated cost-to-income ratio closed at 46.2%, improving 25 basis points compared to the last year. This improvement is mainly explained by a higher level of income compared to spend growth. Among other relevant events, in December last year, we acquired a $335 million subordinated loan from IFC to support women-owned SMEs, social housing, and sustainable construction. This is the first loan granted by IFC in Latin America and the Caribbean under the new regulation on additional solvency of Basel III.
This greatly strengthens our capital ratio and diversifies our funding sources while contributing to sustainable development. We also issued senior bonds for COP 700 billion last February in Colombia. Turning on to slide six, I would like to share with you the advance we have made in our strategic goals. As a result of traditional and digital efforts, we were able to grow our consolidated retail banking book at a 20% rate over the year, reaching an outstanding balance of COP 52 trillion. In Colombia, we increased our market share in the consumer segment by 190 basis points over the year, we continue adapting our offer to the international operation, improving our market share in most of the countries where we operate. Regarding commercial banking, we continue to focus on reaching more SMEs by actively offering customized products and services to help them through the business cycle.
As a result, our SME portfolio in Colombia increased more than 15%. In Central America, our corporate book grew 8.7%. As for the wealth management division, we have been able to deliver better experience to our customers, allowing them to open and manage their investment portfolio directly from our apps and website. This progress, along with other strategies implemented in this segment, resulted in a 22% annual growth in assets under management and an increase of 90 basis points in our market share. Finally, we were included both in the Dow Jones Sustainability Index in the RobecoSAM Sustainability Yearbook, being recognized among the 35 most sustainable banks and within the top 50% sustainable companies in our industry. Our portfolio of projects with social and environmental impact reached over COP 1.3 trillion. We will continue to finance this type of project through different initiatives such as the IFC loan mentioned earlier.
Moving to slide seven, I would like to share with you our progress in Davivienda's digital transformation. Our consolidated customer base reached 11.9 million, out of which we consider 74% are digital. DaviPlata's user increased 94% over the year, allowing us to reach 6.1 million customers. Almost 7% were RappiPay customers. Regarding product evolution, we have now more than 1.1 million digital deposits, including savings and term deposits, with an outstanding balance of COP 875 billion. Our digital loans portfolio reached COP 1.9 trillion, increasing more than 100% compared to 2018. In the last two years, our digital loans have become around 8% of Colombia consumer book. On slide eight, we can observe the evolution of our channel digital transformation. Product sales grew at a 44% rate compared to 2018.
39% of sales were done through digital channels and 61% in the traditional way, while in 2017, all of our sales were generated through the traditional channel. 29% of monetary transactions were done in our digital channels, while branch transactions dropped to 16% from 21% two years ago. We have reduced the number of branches by 10% over the last three years. This means 72 branches less in line with our efficiency and digitalization strategy. Overall, we are glad to share this result with you. However, we have to continue working to be able to reach more customers in Colombia and Central America by transforming our products, our services, developing our talent, making new alliance with other ecosystems, and using more and more analytics. We want to offer frictionless, friendly, and reliable solutions to our customers and have the capability to be there to help them achieve their goals.
Now let me turn the call over to Mr. Ricardo León, our Executive Vice President of Risk, who will provide you with further details on the bank's financial results.
Thank you for the introduction, Mr. Forero. Good morning, everyone. Please move on to slide number nine, where we will analyze the evolution of assets. Total assets grew 10.4% over the year. Colombia's assets showed a normal growth of 10.4% due to higher gross loans and the effect of IFRS 16 on property, plant, and equipment. Our international subsidiaries, which account for 25% of total assets, grew 9.4% over the year in dollar terms, mainly driven by the increase in investments and gross loans. Regarding the evolution during the quarter, total assets grew 1%, impacted by a decrease in the investment portfolio, stable gross loans, and lower loan loss reserves. Moving on to slide 10, please. Consolidated gross loans grew 10.9% over the year and 0.4% over the quarter.
The mortgage portfolio reached a 10.9% growth, mainly due to leasing and social housing segments in Colombia, which grew 14% and 10% respectively. In the international operation, mortgage grew mainly in El Salvador, Panama, and Honduras. The consumer portfolio grew 8.1% during the quarter, reaching an annual growth of 29.1%, mainly explained by unsecured personal loans and credit cards in Colombia, and payrolls loans and credit cards in Central America. We have been able to achieve this performance both through our traditional sales force and digital channels. The commercial portfolio decreased by 4.7% over the quarter, explained by different loans prepayments from corporate and construction customers and some write-off in the corporate portfolio. These two effects resulted in a consolidated growth of 1.8% for the year, despite of 4.5% increase in Central America led by the construction sector.
Analyzing the performance by region, gross loans in Colombia increased around 12% compared to the last year. Our international operations increased 6.3% in COP, with El Salvador and Honduras leading the annual growth. Loan loss reserves increased 11.9% on an annual basis due to higher provisions in the consumer and corporate portfolio. As for the quarter, reserves decreased 9.4%, mainly due to the write-off explained before. By the end of 2020, we expect a loan growth of around 14%-15%. The consumer book should lead the growth with an increase between 18%-20%. Mortgage portfolio should grow a little more in the level of 11%-12%. The commercial portfolio should close with a growth of around 12%-13%. 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 3.46%, decreasing 47 basis points over the year and 35 basis points over the quarter, positively impacted by the commercial and consumer portfolios. Commercial PDL ratio showed an annual and quarter decrease of over 50 basis points, resulting from corporate write-off, including Electricaribe, and different restructuring process made over the year, both in Colombia and the international operation. Consumer PDL continues to improve, decreasing 52 basis points over the year and 21 basis points on a quarterly basis. This is explained both by our risk management measures as well as the portfolio growth dynamics. Mortgage PDL increased around 16 basis points over the year, mainly due to securitizations by COP 830 billion made in Colombia during the year and situation with specific segments in Panama. Mortgage PDL in Colombia remained stable over the quarter.
We continue working to improve our PDL ratio. We are expecting the following levels for the end of the year. Total portfolio between 3.3%-3.4%. Commercial portfolio around 3.8%-3.9%. Consumer portfolio between 2.1%-2.2%. The mortgage portfolio around 4%. We closed the year with cost of risk of 2.5%. We are expecting to close 2020 between 2.3%-2.4%, taking into account the growth dynamics of all portfolios. Total reserve coverage ratio closed around 151%. It is expected to remain at the same levels. As for the coverage for the main corporate cases in Colombia, we can find Electricaribe reached 100% by the end of the second quarter of the last year and was written off in December. We increased Ruta del Sol coverage ratio to 100% as we planned.
Mass Transportation System closed at around 45% coverage ratio and is expected to end the year at the same levels. Please move on to slide number 12. Funding sources grew 12.4% over the year and 1.1% quarterly, in line with the growth of our loan portfolio. Demand deposits accelerated during the quarter, reaching a growth of 13% over the year. Term deposits decreased 3.3% during the quarter due to a seasonal effect growing 11.8% on an annual basis. Bonds have an annual increase of 16%, mainly explained by local senior issuance in Colombia of around COP 1.8 trillion, as well as some issuances in Central America. During the quarter, bonds decreased 2.8%, mainly due to maturities and exchange rate effect. In terms of credits, half of the annual growth took place during the last quarter due to the Tier 2 subordinated loans mentioned before.
Our funding structure continues to be stable, with deposits representing 74% of total funding. Our loans-to-funding ratio reached 95.9%, in line with our expectations. I would like to invite you to slide number 13. Total capital adequacy ratio closed 2019 at 11.61%. This means 46 basis points higher than the previous quarter, explained in part by the new Tier 2 loan acquired with the IFC. Tier 1 remained stable over the year in spite of the higher consumer loan growth, while Tier 2 compressed around 32 basis points due to lower weight of subordinated debt. Total equity is increasing at a rate of 10.9% over the year and 2.2% over the quarter. I would like to invite you to slide number 14. Accumulated gross financial margin increased by 12.5% over the year, with loan income growing at a similar pace as the portfolio and a positive result from investments.
Out of the 13.3% growth in financial expenses, almost 200 basis points are explained by IFRS 16 implementation. As a result, the 12 months net interest margin ratio closed at 6.52%, slightly expanding over the year and contracting over the quarter. Accumulated net financial margin grew at 9.9%, impacted by growth in provision expenses, whic h was driven by a higher volume of the consumer portfolio, as well as the higher coverage for corporate cases. For the end of the year, we are expecting a NIM between 6.5%-6.6%, mainly explained by changes in the loan mix. Please continue to slide number 15. Total accumulated expenses grew 9.3% over the year. Personnel expenses grew by 7.3%, mainly due to higher incentive related to greater loan volume and employees' bonuses. Operating and other expenses increased by 10.7% due to digital expenses and additional depreciation resulting from IFRS 16 adoption.
Expenses grew 12.9% during the quarter compared to the same period of 2018. This is explained by higher personnel expenses due to sales commission, an increase in digital expenses related to marketing, alliance, and software development, and IFRS 16 implementation. As a result, the cost-to-income ratio closed at 46.2%, improving 25 basis points over the year and increasing 46 basis points over the quarter. For this year, we are expecting an increase in OpEx between 10% and 11%, driven by digital transformation expenses such as cybersecurity and technology development. In this sense, our cost-to-income ratio should close 2020 around 45%-46%. To finish the presentation, I would like to go to slide number 16, where we can analyze the bank's profits. Accumulated net profit growth at COP 1.48 trillion, 6.1% higher than the one of 2018.
Net profit for the quarter increased by 11.7% over September due to stable financial expenses, lower provision expenses, and a decrease in taxes. Our return on average equity for the last 12 months reached 12.4%, while the return on average assets was 1.27%. Given the latest updates on the financial law, our effective tax rate forecast for this year is expected to be around 23%-25%, including the surtax of 4% for 2020. Our ROE for this year should be around 12.5%-13.5%. 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.
At this time, if you'd like to ask a question, please press the star and one on your touch-tone phone. You can remove yourself from the queue by pressing the pound key. Once again, star and one on your touch-tone phone for your questions. We'll pause to allow any questions to queue. We'll take our first question from Mayara Riddlebaugh with Wells Fargo. Please go ahead.
Hi, good morning. Congratulations on the results and thank you for taking my question.
Mayara, can you check your mute function on your phone?
Hello, can you hear me now?
Yes, please go ahead.
All right, thank you. Thank you for taking my question, and congratulations on the results. If I heard it correctly, you were expecting growth of around 12% for the corporate portfolio in 2020. What I was wondering, how do you expect to achieve this growth level coming out of a year where this portfolio grew less than 2%? My second question was just if you can break down your growth expectations for the loan portfolio between Colombia and Central America. Thank you.
Okay. One second. Gentlemen?
Just give me a second, please.
Thank you.
Okay. Mayara, thank you for your question. I will answer the second question, the loan expectation in Colombia and Central America. For the total loan portfolio, we are expecting to grow around 14%-15% in 2020. Related to commercial portfolio, we think that we can grow around 12%-13%. In a few minutes, Mr. Carrillo will explain that figure. In consumer, we think that we can grow around 18%-20%, where in the last year, we grew around 29%, and we have been developing different analytical strategies to increase the level of wallet that we have in our customers in an important process to acquire more customer and to deepen the wallet that we have with our customers. Related to, excuse me, the growth expected for Central America will be 9% in dollars.
Okay. In knowledge, the total amount, okay. Yeah. Maybe Álvaro.
This is Álvaro Carrillo. About the growth of the corporate portfolio, we're expecting a bigger growth than last year. Last year, we have some important payments, not only for Davivienda, but for all the banks in Colombia. This year, we're expecting that our clients will need more credit because they are in a year of world growth in the economy. We are expecting a growth of 3.5% in the economy and an inflation rate about 3.5%. This will increase the demand of credit of our more important clients, around 7%-8%. We're expecting a growth in medium and small business that began last year, growing about 15%, and we are expecting a growth similar for this year. We expect a growth, consolidated, around 12%-13%.
Thank you very much. Just if you can clarify where you stand now in terms of provisions for the transportation system operators?
The level of provision for transportation system closed the last year in 45%. We think that we will remain this level of coverage for 2020.
All right, thank you very much.
We'll take our next question from Piedad Alessandri with Credicorp. Please go ahead.
Hi, thanks for allowing the questions. You mentioned you had situations with a specific segment in Panama. I would like if you could give us a bit more detail on those situations. If you have seen any, I don't know if I could say troublesome or more worrying segments in Colombia for the following year.
We don't expect any special situation for any segments in Panama. We expect to have loan loss reserves similar to what we have in 2019.
In terms of Colombia, we are improving the level of risk in our portfolios. Actually, we think that in corporate business and commercial portfolio, we will be decreasing the PDL ratio, and the same thing happened in retail business. Until now, we don't see any specific concern related to our portfolio.
Thank you very much. You had other income guidance. I couldn't listen to it. If you could repeat, please.
Related to operating income, we expect to increase our operating income around 6%-8% this year.
Okay. Thank you very much. Expenses?
Expenses will be growing around 10%-11% because the digital transformation requires a lot of investment.
Okay. Thank you very much.
As a reminder, it is star and one for your questions today. That is star and one. We can go next to Carlos Gomez with HSBC. Please go ahead.
Hello, good morning. I have two questions. First, on asset quality, you mentioned this, but could you clarify again the level of coverage for specific loans? You said you are at 100% and already written off for Electricaribe. I didn't get Ruta del Sol, and you said 25% for the mass transport companies. If you could clarify that. Second, on capital, you are now at 7.99% for Tier 1. Where would you expect to finish the year? Could you give us an update about the implementation of Basel III? Thank you.
Gentlemen, is there a response?
Sorry. Related to the asset quality, the level of coverage for Ruta del Sol is 100% at the end of 2018, and we don't need to do any effort to increase that level. In terms of Mass Transportation System, we close the year with 45% in terms of coverage level, and we think that we will keep that this level of coverage will be around 45% this year. We don't need to increase the level of coverage for this segment. Related to capital, actually, Q1 closed 7.99%. We think that we will finish 2020 in a similar level, because remember that in each March or April, we capitalize a figure close to 70% of the profit. That capitalization increased our T1, and considering the growth, we will finish in a similar level.
If I could follow up on the asset quality. You have Ruta del Sol at 100 and Electricaribe already written off. Do you expect any additional recoveries on either of those two credits?
No. In our forecast, we are not expecting any recovery related to these businesses.
Thank you. I interrupted you. I think you were going to say about Basel III something.
Okay. Related to Basel III, I would like to explain a little bit more. In the last September, the superintendents and the authority issued a new capital acquisition regulation where define new risk weight assets for different kind of assets. Our net impact in the solvency ratio is positive. We will increase a figure close to 150 basis point to 170 basis point with the new regulation. We will increase our solvency ratio in that figures, 150%-180%, including personal risk. We have a room for our forecast in terms of loan portfolio growth.
Again, to clarify, your Tier 1 ratio with the new risk weighting would be 150-175 basis points higher. Does this include any possible deductions that the new rules will come, or this is just strictly for the risk weighting?
Including the whole impact, the Tier 1 will increase around 150%-170%, 180%. Okay? Basis points with the new regulation, 150 -170 basis points Tier 1. That is the total impact with the new regulation. However, remember that the new regulation will start in 2021.
That's very clear. Thank you so much.
Okay.
Once again, it's star and one on your touch-tone phone for any further questions today. We do have a question from Alonso Aramburú with BTG. Please go ahead.
Hi, good morning, and thank you for the call. I was wondering if you can give us a breakdown of the ROE you expect between Colombia and international, and what are your expectations in international of when you can get to a double-digit ROE, which is something you had expected in the past? Thank you.
Thank you for the question. Our forecast for ROE by the end of 2020 is to close a level between 12.5%-13.5%. In Colombia, the ROE that we are expecting is to be around 13%-13.5%, and in Central America to be around 8%, 8.5% in dollars.
Okay. Central America, I think, closed the year around six to seven, right? You do expect an improvement in Central America as well.
We do expect an improvement in Central America. The increase in our equity is around 11%, we have to take into account the charge for the coverage that we have for colón to US dollar in Costa Rica, which is important for us. That was around $14 million for last year. We have the other leg of that coverage on our equity. If we take that into account, we'll be around 9% in Central America for last year. We expect to have something around that for 2020.
Okay. Just to clarify, in Colombia, you said 15%, 15% ?
No, no. 13%. In Colombia-
13%
we are waiting 13%-13.5%. 13% in Colombia. The total ROE is to be 12.5%-13.5%.
Okay. Get it. Just, when you look at the ROE consolidated, the ROE of the bank has been fairly stable for three years now, 2017, 2018, and 2019. I believe you've commented in the past that you want to get to levels of 14% or 15% ROE. Your guidance for this year is again, roughly around 12.5% to 13%. When do you expect to get to those levels of 14%+ ROE? Is that a 2021 maybe figure or 2022?
In medium-term, our guideline is to be around ROE between 14%-16%. Okay? That will be for 2021-2022.
Okay. Thank you very much.
It appears we have no further questions. I'll return the floor to Mr. Forero for closing remarks.
Thank you very much for everyone for being with us today. We are pleased for what we got in 2019, and we are working very hard to keep on working in the transformation of the bank into a new bank, a bank that is able to give customer with value added solutions and to improve our ability and our efficiency to be more flexible. We expect to be able to develop our strategy successfully in this year. Thank you very much for being with us today.
This will conclude today's program. Thanks for your participation. You may now disconnect.