Good morning. My name is David, and I'll be your conference operator today. At this time, I would like to welcome everyone to Davivienda's first quarter 2019 earnings conference call. 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 i-advize Corporate Communications. Mr. Borja, please go ahead.
Thank you. Good morning, everyone. Welcome to Davivienda's first quarter 2019 earnings conference call. Today's call is for investors and analysts only. Questions from the media will not be taken. If you're a member of the media and wish to direct any questions to the company, please contact the company directly after the call. 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 i-advize in New York at 212-406-3691.
I would like to remind you that any forward-looking statements made today by Davivienda's management are subject to various conditions and may differ materially. These conditions are outlined in the last page of the company's press release in the disclaimer. 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, everyone. Welcome to Davivienda's first quarter 2019 earnings conference call. We would like to start with some notes on Colombia's macroeconomic situation. During the first quarter, Colombian economy accelerated to 2.8% from 2.7% last quarter and 2% compared to same period last year. There were improvements in oil mining, commerce, and financial activities. For this year, we expect a moderate improvement, reaching a growth of around 3.2%. During the last 12 months, the exchange rate has devaluated 14%, mainly due to the international uncertainty. Continuing to slide 4, we can see the highlights of the macroeconomic situation in Central America. We are especially monitoring the political and economic situation of Costa Rica. The local government approved a fiscal reform by the end of last year, which represents a relief of the country's fiscal situation.
We expect the economy to show an improvement due to all the adjustments applied by the authorities. In general terms, Central America growth and inflation were in line with our expectations. We are expecting similar trends and better macroeconomics environment for this year. On slide five, we will highlight the bank's results for the first quarter. Net profit reached COP 393 billion, 5% higher than last quarter. This represents an ROE of 12.2% for the last 12 months. Consolidated gross loans grew at an annual rate of 13.2%, mainly due to the outperformance of loans in Colombia and the exchange rate devaluation. Total past due loans ratio decreased by six basis points, closing at 3.87%, explained by better credit allocation and lower past due loan formation.
Finally, we closed the first quarter with a total capital adequacy ratio of 12.12% and a Tier 1 ratio of 8.72%, increasing 74 basis points due to the capitalization approved last March. Turning to slide six, I would like to share some insights about our digital strategy and the way we plan to develop the transformation in the following year. As you may know, our transformation began several years ago when we realized the change that the digital world was going to introduce in the financial business. We are using this digital transformation to consolidate ourselves as a leader in retail banking, a top player in commercial banking through a strong presence in the medium and small business, and a benchmark in wealth management business.
In order to achieve our goals, we are transforming ourselves from within to be able to offer our customer a fully digital portfolio of processes, channels, and products. We are transforming the way we work, aiming to be more agile in this new era and attracting and retaining top digital talent. We are creating new ecosystems with allies in order to offer simple, reliable, and user-friendly experience adapting better to the customer needs so they can spend more of their time living their lives rather than banking. We are transforming Davivienda into a data-driven organization where we will use analytics, machine learning, and artificial intelligence to convert all available data into business delivering more added value experience.
In the whole process, we are investing around COP 300 million between 2019 and 2021 in digital and technological initiatives. This transformation will expand our customer base and will enable us to serve our customers better, as well as reduce our costs and improve our own margins. One of our most recent initiatives is the opening of our first digital interaction space in alliance with Claro Colombia, which in addition to offering paperless banking products and services, it also integrates to the business and commercial mall ecosystem to offer added value experience to these center visitors. Turning to slide seven, I would like to share some figures of our progress in this process. Nowadays, 70% of our local customers use our digital channels on a frequent basis. Digital customers in Colombia increased by 24% during the year, closing at 6.8 million.
Digital sales now represent 27% of total sales in Colombia, compared to 1% last year. Such results are mainly due to the performance of our unsecured personal and mobile loans, where we have disbursed more than COP 1 trillion since May last year, our mobile savings account, and other services we offer through our website and smartphone application. We are launching new products and services faster than ever and expect to share more news in the near future. Moving on to slide eight, I am pleased to share with you our new strategic alliance with Rappi, the first Colombian unicorn startup. Rappi is a mega high-growth consumer tech startup app looking to be the everything store of Latin America. In addition, they have a payment platform called RappiPay. As you already know, DaviPlata is the main mobile platform for financial services in Colombia, with more than five million customers.
With this alliance, DaviPlata and RappiPay will create a new digital payment model that will transform payments in Colombia by having a bank managing Rappi's monetary transactions, allowing customers to easily pay, buy, save, and transfer money. On the other hand, retailers will benefit by improving substantially their sales potential. This new alliance opens the door to future banking payment systems in Colombia and will boost e-commerce as well as QR payment consolidation in a reliable, secure, cheaper, and friendly way. Through this initiative, we are showing that banks and fintechs can work together to generate reliable added-value offers to simplify people's lives. 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. Before starting to discuss the bank's financial results, I would like to mention the implementation of IFRS 16, which introduced a new accounting model for leases since January 1st, 2019. As a result, Davivienda recognized write-off used assets and generated lease liabilities representing its obligation to make lease payments. The main impact on the financial condition statement was an increase of around COP 1.1 trillion in assets and liabilities. For the P&L, the impact was the reclassification of lease expenses from operating to depreciation expenses of around COP 36 billion and higher financial expenses of COP 18 billion due to the new liabilities. Those effects were mainly offset by a total decrease in lease expenses of COP 46 billion. Assets closed at COP 111.8 trillion in March, representing an annual growth of 13%.
The 14% exchange rate devaluation in the last 12 months explains 3% of the total growth. Analyzing the performance by region, Colombia's assets grew above 10% in annual terms, while the Central American operations recorded an annual increase of 6% in U.S. dollars and 21% in COP. Let's continue to slide 10, please. Here we can see the evolution of the gross loans portfolio. Consolidated gross loans grew 13.2% in the last 12 months. Discounting the exchange rate effect, gross loan portfolio grew 10.5% on a yearly basis. In Colombia, gross loan portfolio grew 11%, led by mortgage and commercial portfolios. Our international operation grew above 6% in U.S. dollars, with El Salvador and Honduras leading this growth. We're expecting a total loan growth of around 9%-10% for this year.
The consumer book should lead the growth with an increase between 11%-12%, mainly driven by the digital initiative in Colombia, followed by the mortgage portfolio with an increase of 9%-10%, and commercial loans between 8%-9%. Please move on to slide 11. In this slide, we want to review the performance of loans in terms of risk. 90 days PDL ratio dropped at a level of 3.8%. Consumer and mortgage PDL ratios improved versus the last quarter due to the better credit allocation. Commercial PDL ratio reached 4.76%, posing a slight increase due to further deterioration in corporate and SMEs segments. In general terms, we expect to have a gradual improvement in PDL levels towards 2019 and 2020.
For the end of the year, we are expecting the following levels: total portfolio between 3.6%-3.7%, commercial portfolio around 4.3%-4.4%, consumer portfolio between 2.4%-2.5%, and mortgage portfolio between 3.7%-3.8%. We closed the quarter with a cost of risk of 2.47% as a result of provisions to increase the coverage level for some corporate clients in Colombia. Cost of risk for 2019 should close between 2.4%-2.5%. Please move on to slide number 12. Funding sources grew 12% on a yearly basis and 3% compared to the last quarter. Gross loans to funding sources ratio reached 95%, showing an improvement compared to the last quarter, mainly explained by the issuance of bonds in our local and international operations, and the increase of demand deposits during the last quarter. I would like to invite to slide number 13, please.
Last March, shareholder meeting authorized the capitalization of 68% of the last year profits, allowing us to close the quarter with a total capital adequacy ratio of 12.12%. CET1 ratio increased 74 basis points during the quarter, closing at 8.72%. IFRS 16 implementation decreased capital ratios in 14 basis points. I would like to proceed to slide number 14, please. Net financial margin increased by 10.4% quarter-over-quarter and 6.2% year-over-year. These results were mainly driven by higher financial income and lower funding costs reported throughout the year. As a result, 12-month net interest margin ratio expanded seven basis points, closing at 6.56%. IFRS 16 adoption had a negative impact of three basis points on this ratio. For the end of the year, we are expecting an in between 6.5% and 6.6%. Net provision expenses reached COP 582 billion, increasing 13.4% compared to the previous quarter.
The increase of 25% compared to the first quarter of 2018 is explained by the level of provision required last year due to IFRS 9 implementation. Please continue to slide number 15. Total expenses decreased by 5.6% quarter-over-quarter, mainly explained by IFRS 16 implementation, which reduced the operating expenses as explained before, and higher expenses by the end of last year. Compared to the same quarter last year, total expenses grew 10%, mainly explained by inflation adjustments, minimum wage increase, higher variable personal remuneration, and IFRS 16 implementation. Consolidated efficiency ratio closed at 46.5%, remaining stable versus last quarter. Efficiency ratio should close the year around 46%-47%. To finish the presentation, I would like to go to slide number 16, where we can analyze the bank's profit.
Net profit closed at COP 393 billion, quarter-over-quarter increased by 5%, and year-over-year decreased by 13%. On a yearly basis, performance is explained by the first quarter of 2018, which was unusually high as a result of the adoption of IFRS 9, when we reclassified reserve from the other comprehensive income to loan loss reserve, resulting in lower provision expenses in the P&L. Our return on average equity for the last 12 months reached 12.2%, while the return on average assets was 1.3%. For the year, we expect an ROE between 12%-13%. In general, these are the results we have prepared for you today. Thank you for your attention. At this time, we can move on to the question and answer session. Thank you.
At this time, if you'd like to ask a question, please press the star and one keys on your telephone keypad. Keep in mind, you may remove yourself from the question queue at any time by pressing the pound key. Once again, to ask a question, please press the star and one keys on your touchtone telephone keypad. We will take our first question from Thiago Batista with Itaú. Please go ahead. Your line is open.
Hi, everyone. Good morning. Congratulations on your alliance with Rappi. On this subject, I would like to hear from you what is the potential cross-sell that you see in this structure? How do you plan to offer loans in this platform? If you could also break down how many new clients would Davivienda be able to access through Rappi. Thank you.
Thank you, Thiago. Well, we are really very optimistic about the results of this alliance. We are expecting to have about 2 million new customers for Davivienda through RappiPay Davivienda in the coming 18 months. We will be offering customers different type of services, and actually, we are offering saving accounts, and on the other hand, for individuals, we have debit cards. We will be offering very soon nano credit, and also we will be offering credit card and other type of loan services. At the same time, we are offering to all the different retailers saving accounts with a lot of different benefits. Very soon, we will be offering them as well with the loans that are going to be analyzed with the information that we have within the platform, that give us the information about the behavior of their sales.
We will be working very hard because we see that this is only the beginning. We are expecting to grow and to do many different things because we see as well that Rappi is becoming, every day, a more stronger super app. Any customer will be willing to enter to the app and be in the bank.
All right. Clear. Appreciate it.
Thank you very much.
Take our next question from Andres Soto with Santander. Please go ahead. Your line is open.
Thank you for the presentation. I would like to understand better the performance of your fee income this quarter. I see that fee expense is growing significantly. I would like to understand if this is going to continue over the next few quarters, and the flattest performance in terms of the income that you posted in the first quarter is what we should expect for the full year. Thank you.
Hello, Andres. Thank you for your question. Quarter's net income remained stable over the year. Consolidated income grew around 8%. This was due to higher income related to handling fees, insurance fees, among others. However, our fee expenses increased around 26% as a result of the expansion in our network of commerces, and by diversified expenses related to franchise use. In addition, in this year, the withholding tax increased from 15% to 20%. That are the main issues that explain this behavior. We are implementing different strategies related to transaction and negotiating with the franchise to improve our result in this item. Thank you.
Thank you, Ricardo.
Next question comes from the line of Alonso Aramburu with BTG. Please go ahead. Your line is open.
Yes, hi. Good morning. Thank you for the call. Just following up on the previous question, what is your guidance then, or do you have any guidance on what net fee income can grow for the year? Also, can you comment on your expenses, which, if you exclude the IFRS 16, they grew double digits. What do you expect in terms of growth of expenses for this year?
Thank you, Alonso, for your question. We are expecting this year to increase the operational income something around 6%. As a result of some process that we are changing and negotiating with the franchises and to define new products to increase the fees that are in this item.
Great. Regarding just your operating expenses, what should we expect for this year?
In operating expenses, we think that we can increase the operating expenses around 11%, because in this year we have a lot of investment related to the digital transformation. It's more explained by that strategy.
Great. Thank you.
As a reminder, if you'd like to ask a question today, please press the star and one keys on your telephone keypad. We'll take our next question from the line of Natalia Corfield with J.P. Morgan. Please go ahead. Your line is open.
Hi, thank you for the question. First, I'd like to have an update on the mega corporate case, the level of provisions that you have for them. Secondly, if you could comment on the possibility of tariff changes in Colombia, that would be appreciated as well. Thank you.
Natalia, thank you for your question. As of March 2019, our coverage for Electricaribe closed at 100% of the capital. When we define capital plus interest and another interest, we closed the total coverage in 75%, and we are expecting to finish this year in 100%, including capital and interest. Mass Transportation System is about 48%. The Ruta del Sol is in a figure close to 30%. As I said now, by the end of the year, the level for Electricaribe will be in 100%, in Mass Transportation System, around 50%-55%. Ruta del Sol we expect it to remain at the same level. That are the general coverage ratio for the main corporate cases.
Thank you. What about the second question?
Okay. Thank you, Natalia, for your question. In first quarter, the interest tax rate increased because in December we have adjust in effective tax rate because according to a Financing Law or tax reform, the long-term tax rate changed from 30% to 30%. In this quarter, we don't have this adjustment for this condition. The tax rate is almost 27%.
If I could ask a third question. Do you have exposure to Avianca?
Our exposure in Avianca is not a significant exposure. It's below the 0.4% of our total loan commercial portfolio. It's really low, and I've concentrated in facilities in short-term.
Okay. Thank you very much.
Thank you.
Once again, if you would like to ask a question, please press the star and one keys on your telephone keypad. We can pause for a moment to allow further questions to queue. No further questions on the line at this time. I would like to turn the floor back to Mr. Forero for any closing remarks.
Thank you very much for everyone for being with us today. We are very pleased that we can share with you all these results. As you might see, we really are very excited about our commitments and our interest to get our goals according to our strategic plan that we have been sharing with us every three months. Thank you very much for your company.
This does conclude today's conference call, and you may now disconnect.