Good morning. My name is David, and I'll be your conference operator today. At this time, I'd like to welcome everyone to Davivienda's fourth quarter 2018 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 will now turn the conference over to Rafael Borja of i-advize Corporate Communications. Mr. Borja, please go ahead.
Thank you, David. Good morning, everyone. Welcome to Davivienda's fourth quarter and full year 2018 earnings conference call. Today's call is for investors and analysts only, therefore questions from the media will not be taken at this time. If you are a member of media and wish to direct any question to the company, please contact the company directly after the call. Joining us 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 as per the press release distributed by the company 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 212-406-3693.
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 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.
Good morning, everyone. Welcome to Davivienda's fourth quarter 2018 earnings conference call. We would like to start with some notes on Colombia's macroeconomic situation. In line with our expectations, Colombia GDP growth closed at 2.7% in 2018. For this year, we expect a moderate improvement, reaching a growth of 3.2%. Inflation closed at level of 3.2%. It is expected to remain within the central bank target range. The PMI, Purchasing Managers' Index, show a declining trend during the last part of the year. As of February, it stands slightly below 50. However, it seems to start to recover. The exchange rate devaluated almost 9% in the last quarter, mainly explained by the drop in oil prices in the same period. Average exchange rate during the year remained stable compared to 2017. Fiscal deficit continues to adjust, closing at 3.1%.
At the end of the year, Congress approved financial law, including different adjustments that would allow the government to raise around COP 6 trillion. Continuing to slide forward, we can see the highlights of the macroeconomic situation in Central America. Accumulated economic growth slowed down in Costa Rica, Honduras, and El Salvador compared to the same period of 2017, while Panama recorded an acceleration. It is important to note that the Central America region as a whole faced some difficulties in trade and commerce due to the situation in Nicaragua affecting the normal transit of goods. Inflation overall remained stable during 2018, showing a decrease in the first two months of this year. Interest rates increased 50 basis points for Costa Rica and remained stable for Honduras at the close of the year. On slide five, we will highlight the bank's results for the fourth quarter.
Accumulated net income reached almost COP 1.4 trillion, 9% higher than last year. This represents an ROE of 12.9% for the last 12 months. Consolidated gross loans grew at an annual rate of 12.3%, mainly due to the performance of loans in Colombia and the exchange rate. Davivienda consolidated itself as the second largest bank by loans in Colombia with 15% market share. This performance is explained by the positive dynamics of the mortgage and commercial portfolios. Total past due loans ratio closed at 3.93%. The increase compared to last year is mainly explained by higher risk level observed in commercial and mortgage loans. This ratio decreased three basis points in the last quarter. Our net interest margin ratio expanded by 10 basis points, closing at 6.49% due to lower funding costs. Consolidated efficiency closed at 46.5%, improving 13 basis points compared to last year.
Additionally, we closed the fourth quarter with a total capital adequacy ratio of 11.93% and a Tier 1 ratio of 7.98%. Among other relevant events, we issued local bonds in Colombia for COP 453 billion in November and COP 500 billion last month. Turning to slide six, I would like to share with you our progress in Davivienda's digital transformation. Digital customer in Colombia increased by 22% in the last year, closing at 6.5 million. This represents 70% of our local clients. Digital monetary transaction increased by 25% annually. So far this year, 26% of monetary transactions have been made through our digital channels, gaining share compared to traditional ones. Regarding DaviPlata, we closed with more than 4.7 million customers. 29% of those use the smartphone application, taking advantage of our further functionalities, such as the recently launched eCard, which allows them to access global e-commerce.
Turning to slide seven, we would like to share with you a follow-up of our digital offer. Digital sales reached 16% of total sales in Colombia. This number represents an increase of 30 times compared to the previous year. Such results are mainly due to the good performance of our mobile saving account and in secure personal loans. In last six months, we have created more than 269,000 saving accounts with a balance above COP 140 billion. We have disbursed more than 83,000 loans, reaching a balance of more than half trillion COP at the close of the year. Last December, we enabled the mobile payroll loan service in our digital channels, increasing our offer. Currently, we are working with more than 350 companies out of the 5,000 we work with through traditional channels. We expect to share some more news on these products in the following quarters.
The last few years have been challenging for the Colombian financial system. This was reflected in higher past due loans, higher cost risks, and lower ROEs. Our expectation is that 2019 will start to show some moderate improvement based on a solid strategy focused on digital transformation, risk management, cost control, and customer service. Let me turn the call over 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 eight. Assets closed at COP 110.7 trillion in December, representing an annual growth of 9.9%. This growth is mainly explained by the behavior of the gross loan portfolio and the exchange rate. The exchange rate explained 2.2% of the total growth due to the 8.9% devaluation during the year. Analyzing the performance by region, Colombia's assets grew 8.6% in annual terms, while the Central American operation reported an annual increase of 4.2% in USD and 13.5% in COP. Let's continue to slide nine, where we can see the gross loan performance by segment. Consolidated gross loans grew 12.3% in 2018, showing a very dynamic than expected at the beginning of the year.
Mortgage and consumer portfolio continue with the similar trends to previous periods, although the commercial portfolio experienced a faster growth during the last quarter due to the performance of the corporate segment. As we mentioned before, almost 2% of the loan growth is explained by the behavior of the exchange rate. Analyzing the performance by region, gross loans in Colombia increased above 11% compared to the last year. Our international operation increased above 6% in USD, with Honduras and Costa Rica leading this growth. For 2018, we expect a loan growth between 9%-10%. The consumer book should lead the growth with an increase between 12%-13%, while the commercial and mortgage portfolios should increase between 8%-9%. Please move on to slide 10, where we can see the performance of loans in terms of risk.
90 days past due loans ratio closed at 3.93% for the total portfolio, decreasing 3 basis points compared to last quarter. Commercial PDL ratio reached 4.6%, mainly explained by the specific corporate cases that we have mentioned in previous calls. These cases represent almost 200 basis points of this ratio. Compared to the previous quarter, we saw an improvement of 11 basis points, mainly explained by lower growth of new PDLs in Colombia. Consumer PDL ratio performed well during the year due to our risk management policies, increasing 8 basis points during this period. Finally, the 90-days mortgage PDL ratio closed at 3.92%, while the 120-days mortgage PDL ratio reached 3.03%. The increase in this ratio comes from self-employed customers in the leasing and social housing. In general terms, we expect to have a gradual improvement in PDLs during 2019 as a consequence of better macro dynamics in Colombia.
We expect to close the year in the following levels. Total portfolio between 3.8%-3.9%. Commercial portfolio around 4.5%. Mortgage portfolio around 3.9%, and consumer portfolio around 2.5%. We close the year with a cost of risk of 2.36%, lower than the original estimation as a result of some situation that we expected in 2018 that might take place during 2019, and a good performance in loan recoveries. Total reserve coverage ratio reached a level above 124%, and we're expecting to close 2019 with a coverage ratio around 140%. Please move on to slide number 11. Funding sources grew 7.4% on a yearly basis and 4% compared to the last quarter. Loans to funding ratio reached 97.2%, increasing compared to 2017. Part of this situation is explained by the faster loan growth that we experienced during the last quarter.
We have issued bonds for almost COP 1 trillion in the local market in the last three months and continue to improve our funding strategies so that we can close the year with a level around 95%-96%. Please proceed to slide number 12. As of the close of the year, we reached a total capital adequacy ratio of 11.93%. Tier 1 ratio reached 7.98%, well above the minimum required, and 44 basis points higher than 2017. For the end of the year, we expect to have a capital adequacy ratio above 11% and a Tier 1 ratio around 8.3%. I would like to proceed to slide number 13. Accumulated net financial margin increased by 10.2% compared to 2017, mainly due to lower funding costs reported throughout the year. Twelve months net interest margin ratio expanded 10 basis points, closing at 6.49%.
For the end of the year, we are expecting a mean between 6.5%-6.6%. Accumulated gross provision expenses presented an annual growth of 10%, in line with our expectations. However, recoveries presented a good performance during this year with a growth of 46% due to effective loan recovery strategies, which resulted in a 5% growth of net provision expenses. For 2019, we expect a cost of risk between 2.4%-2.5%. This number includes additional provision expenses to cover part of the risk of specific cases which were not necessarily in 2018. Please continue to slide number 14. Accumulated operating expenses increased 7%, mainly due to extraordinary personal expenses, as I explained in the second quarter. Excluding the extraordinary personal bonus, operating expenses grew 6.1%. Consolidated efficiency ratio closed at 46.5%, showing an improvement of 13 basis points compared to the previous year.
For this year, we're expecting an increase in operating expenses between 10%-11%, mainly due to digital transformation expenses, where we are planning to invest between COP 50 million-COP 70 million this year. Organic growth should be around 5%. For 2019, efficiency ratio should close around 46%-47%. To finish the presentation, I would like to go to slide number 15, where we can analyze the bank's profit. Accumulated net income closed at almost COP 1.4 trillion, 9% higher than the one recorded during the same period last year. This growth is explained due to the higher net financial margin, cost control, and higher operating income over the year. Our return on average equity for the last 12 months reached 12.9%, while the return on average assets was 1.4%. Net income for 2019 should be around COP 1.5 trillion.
Our ROE forecast for this year will be around 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 that you may remove yourself from the question queue at any time by pressing the pound key. Once again, if you'd like to ask a question today, please press the star and one keys now. We'll take our first question from Gabriel Nóbrega with Citi. Please go ahead. Your line is open.
Hi, everyone, thank you for the opportunity to ask questions. Could you please remind us where you have reached in terms of coverage for the specific corporate cases of Electricaribe, SITP, and RDS? Other than that, could you maybe tell us what you're expecting to reach in terms of coverage for these companies through the end of the year? Thank you.
Well, hello, Gabriel. Thank you for your question. As of December of 2018, our coverage ratio to this particular energy company grows at 65%, around 65%, in terms of provision. Remember that in the capital reserve, we have the other portion of coverage that is around Moody's ratio, around 75%. In mass transportation systems, the total coverage is around 45%. However, the high-risk companies have a coverage close to 72%. By the end of the year, we think that we will reach level of 100% for Electricaribe, 50% for mass transportation system. In the cases, where we identify high risk or the company that has high risk, we are expecting a coverage ratio around 100% at the end of the year.
All right. That's very clear. Thank you. As for my second question, looking at your long-term strategy and being that you are going to invest around COP 50 million-COP 70 million this year into digital enhancements, I wanted to hear from you, not for 2019, but maybe beyond that, once you actually start gaining efficiency from these investments, where could we see your own cost-to-income ratio reaching, and also, how could this play out into the bank's sustainable ROE? Thank you.
Okay. We are very focused on our digital transformation process. As we mentioned before, we expect to invest about COP 70 million in the year 2018. Maybe it's going to be around COP 110 million for the coming 2020. We expect to be able to improve the margin, our efficiency ratio, in 100 basis points, between 100 basis points and 150 basis points.
All right. That's very clear. Thank you.
We'll take our next question from Alonso Aramburu with BTG. Please go ahead. Your line is open.
Hi. Good morning, and thank you for the call. I wanted to follow up on the cost of risk expectations for 2019. It seems that you have a similar level of expectations on what you posted in 2018. If you exclude some of these specific corporate clients, what would be your cost of risk? Would that also be stable, or would that come down in 2019 versus 2018? My second question is regarding your ROE expectations. Can you give us a breakdown of what ROE you expect in Colombia versus the international operations?
Okay. Thank you for your question. Around the cost of risk, we are expecting a cost of risk for this year between 2.4%-2.5%, similar to the last year. We are expecting to have this level of provision explained by the structure of our portfolio because we are expecting a growth around 12%-13% in consumer portfolio. At the same time, the growth that we're expecting in mortgage and commercial portfolio, around 8%-9%. This structure requires a little bit more provision, because the retail portfolio is a little bit higher in general terms. On the other side, we have a set of risks, the high risk that we presented in previous call, companies or entities like the mass transportation system or Electricaribe, have the level of provisioning is around 70% for the high-risk company.
This year we have to finish to complete the 100% of provision. That explains the cost of risk. Your additional question is related to ROE. The ROE that we are expecting for this year in our consolidated figure, is a level between 12%-13%. You are looking the ROE for Colombia and Central America operation. In Colombia, we are expecting ROE close to 13%, and in Central America country, we are expecting ROE close to 10% in USD.
Thank you for that. Just to follow up on your first answer, you would say that the level of provisioning that you would need to for the mass transportation system and Electricaribe, is it going to be similar in 2019 versus 2018, or it's going to be smaller this year?
The level of coverage of our loan portfolio will be around 2.4%. Last year was 2.36%. It's similar, however, the explanation is by the structure of the portfolio because we have been growing a little bit more in retail portfolio than in commercial portfolio.
Okay. Thank you.
In the specific case that you request, in the energy company, at the end of the year, it will 100%. Okay? The risk cases, particular cases that have high risk, represent between 50 to 70 basis points of this cost of risk.
Okay.
Okay?
Thank you very much.
Just a reminder, if you'd like to ask a question, please press the star and one keys on your telephone keypad. We'll take our next question from Natalia Corfield with J.P. Morgan. Please go ahead, your line is open.
Thank you for the call and for taking my question. Just as a follow-up in the coverage that you just mentioned. I missed the number that you said for Concesionaria Ruta del Sol, so if you could repeat that, I would appreciate. Also, these numbers that you're giving us, are they in IFRS or are they in Colombian GAAP? Depending on your answer, I have another question.
Okay. In this case, the coverage is around 30%, 28%, 29%. Today, for this year, we have a stable view about the Ruta del Sol. Remember, in the last January, we will receive a very important payment of this credit, close to COP 100,000 million. The payment of Ruta del Sol was COP 100,000 million. Right now we have the same level of coverage, 28%. We are expecting to maintain this number on the IFRS.
This is the IFRS number?
Yes, that's right.
Do you have this coverage in Colombian GAAP?
Similar. It's similar.
It's similar.
It's similar in Colombian GAAP. That's right.
Okay. All right. Thank you.
Once again, if you'd like to ask a question, please press the star and one keys on your telephone keypad. We will pause for a moment to allow further questions to queue. No further questions on the line at this time. I'll turn the floor back over to Mr. Forero for any closing remarks.
Okay. Thank you very much for everyone for being with us today. We are satisfied about the results that the bank has in the year 2018. We really made a commitment to follow with our strategy to make possible that Davivienda become this digital bank that is enabled to give customer with much better services, and at the same time, to become a more efficient bank. Thank you very much.
This concludes today's program. You may now disconnect.