Good morning. My name is Leo, and I will be your conference operator today. At this time, I would like to welcome everyone to the Davivienda third quarter 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, and good morning, everyone. Welcome to Davivienda's third quarter 2018 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 Bogotá, Colombia, are Mr. Efraín Forero Fonseca, Chief Executive Officer, and Mr. Ricardo León, Chief Risk Officer. They will be discussing the results as per the press release distributed yesterday. If you have not yet received a copy of the earnings report, please visit www.davivienda.com on the investor relations section, where there is also a webcast presentation to accompany 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, 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, everyone, and Welcome to Davivienda's third quarter 2018 earnings conference call. We would like to start with some notes on Colombia's macroeconomic situation. The economic activity index, which tracks the economic behavior of Colombia, suggests a positive evolution of the economy in the last month. Our Davivienda's PMI index suggests that manufacturing activity continued its recovery until August, while declining slightly in the last two months. However, it still indicates a positive behavior in production. Additionally, higher oil price has translated into higher export, allowing more resources into the economy. Having this in mind, we are expecting a GDP growth for this year of around 2.8%, and next year somewhere around 3.2%. Inflation is expected to increase toward 2019, but remaining within the central bank target range.
As for the reference rate, we expect stability with a possible increase of up to 50 basis points during the second half of 2019. Consequently, we are expecting an improvement in the credit cycle during the next two years. It is important to mention that all of the above depends on the potential impacts that might arise from the approval of the financing law. However, it is still very early to provide an assessment of those impacts in the economy and the bank, considering the potential change it might have through the Congress debate. Continuing to slide four, we can see the highlights of the macroeconomic situation in Central America. In El Salvador's GDP slowed down compared to first quarter due to lower growth in the construction sector. A similar situation occurred in Panama, where GDP decelerated due to labor strikes in the same sector.
In Honduras, GDP accelerated compared to the previous quarter as a result of a better dynamic in the agricultural sector. As for Costa Rica, GDP accelerated compared to the first quarter due to a recovery of construction activity. However, the MD for Costa Rica increased 44% compared to October 2017 as a consequence of uncertainty in the fiscal deficit. Meanwhile, the Colón registered a devaluation of 8.9% compared to the close of 2017. On slide five, we will highlight the bank's results for the third quarter of 2018. Accumulated net income reached COP 1.02 trillion, 10.9% higher than the same period last year. Consolidated gross loans grew at an annual rate of 8.3%, mainly due to the performance of loans in Colombia, which has increased 9% in the last 12 months.
Total non-performing loans ratio closed at 3.96%, showing an increase of 109 basis points compared to the same period of 2017. This increase is mainly due to higher risk levels observed in commercial and mortgage loans. Our net interest margin ratio increased by 31 basis points, closing at 6.53%, mainly due to lower funding costs. Consolidated efficiency closed at 46.5%, improving 82 basis points compared to the same period of 2017. Additionally, we closed the third quarter with a total solvency ratio of 12.27%, and tier one of 8.37%. Among other relevant events, we issued local bonds in Costa Rica for CRC 35 million during the quarter. Turning to slide six, I would like to share with you our progress in Davivienda's digital transformation. As of September, we closed with six million digital customers in Colombia, which represents 67% of our local clients, increasing 23% in the last year.
Digital monetary transactions increased by 24% annually. Far this year, 27% of monetary transactions have been made through our digital channels, gaining share compared to traditional ones. Regarding DaviPlata, we have reached 4.6 million customers in Colombia, and we are launching DaviPlata in El Salvador next month. The product will be completely digital and will offer remittances reception. Turning to slide seven, we would like to share with you a follow-up of our digital trends in Colombia. We are doubling the number of saving accounts opened per month and reducing the product unit cost by 80%. On the other hand, we have disbursed more than 48,000 mobile loans and more than 70 x the average amount that we used to disburse through traditional channels for this type of product. In this quarter, Amazon and Apple Music alliance were announced offering special benefits for our customers in Colombia.
We expect to continue sharing more exciting news regarding our digital transformation in the following quarters. Let me turn the call over to Mr. Ricardo León, our Executive Vice President, who will provide you with further information about the bank's financial results.
Thank you for the introduction, Mr. Forero. Good morning, everyone. I would like to invite to slide number eight, please. Assets closed at COP 104.5 trillion in September, representing an annual growth of 6.1%. This growth is mainly explained by the growth of loan portfolio. Analyzing the performance by region, Colombia's assets grew 6.9% in annual terms, while the Central American operation reported an annual increase of 1% in dollar terms. Let's continue to slide nine. In this slide, we can see the performance of gross loans by segment. Consolidated gross loans grew 8.3% in annual terms. Mortgages continue to have a good dynamic with a growth of 15% during the last year, supported by leasing and middle-income housing in Colombia. Most of this behavior is explained by loan applications received last year at the national housing event that we promote.
Typically, this type of loan takes an average of one year to mature, which means we still see the effect of those applications. The consumer portfolio showed a growth of 5.5% compared to the same period last year, driven by the results obtained in payables and unsecured personal loans. Commercial loans grew 6.8% in the last year, mainly due to the dynamics in corporate, SMEs, and the construction segment in Colombia. Analyzing the performance by region, gross loans in Colombia increased 9% compared to last year. We consolidated ourselves as the second largest player in the country, with a market share of around 15%. Our international operation increased by 4.2% in dollars, with Honduras and Costa Rica leading this growth. Having this in mind, we expect a growth of 9%-10% for the consolidated portfolio by the end of the year, and slightly higher levels for 2019.
Moving on to slide 10, we can see the performance of loans in terms of risk. 90-day NPL ratio closed at 3.96% for the total portfolio. Commercial NPL ratio reached 4.7%, mainly due to some deterioration of finance in the transport sector. Consumer NPL ratio has performed well as a result of our risk management policies. Finally, the 90-day mortgage NPL ratio closed at 3.89%, while the 120-day mortgage NPL ratio reached 2.96%. This deterioration is explained by some customers in Colombia, as we have explained in the previous calls. We are perceiving the improvement in NPL ratios will take a little bit longer than we were expecting. However, we believe we are passing through the highest point of the current credit cycle. Given the current situation, we expect to close the year with the following NPLs ratios. Total portfolio, 4%-4.1%. Commercial loans between 4.7%-4.8%.
Mortgage loans around 4.1%. Finally, consumer loan around 2.5%. For next year, we expect an improvement of around 15-30 basis points in the different segments. It's important to mention that we continue adjusting policies with the aim of improving our NPL levels, as evidenced in the consumer segment. In the corporate segment, we increased the level of analysis and required higher quality of collaterals. We also reviewed the risk appetite in some sectors of the economy. In mortgage and consumer, we have adjusted the origination policy in the segment in which we have seen the highest deterioration and made some adjustments in the collection process. We expect a better performance and lower NPLs in the next two years, in line with better macro conditions. Total reserve coverage reached a level of 124% as a consequence of the higher risk observed in the past quarters.
Please move on to slide number 11. Funding sources grew 6.9% on a yearly basis and 1.8% compared to the last quarter. Our strategy has focused on keeping the funding cost as low as possible. For this, we have acquired some loans with multilateral banks and international agencies, and we have extended the term of liability to take advantage of current rates. Loans-to-funding ratio reached 96.3%. Please now go to slide number 12. As of September, we closed with a total solvency ratio of 12.7%. Tier 1 ratio reached 8.37%, well above the minimum required. For the end of the year, we consider that the total solvency ratio will be around 12% and a tier one ratio of about 8.3%. I would like to proceed to slide number 13. Accumulated net financial margin increased 9.2% compared to the same period last year.
12 months net interest margin ratio expanded 31 basis points, closing at 6.53%, mainly due to the lower funding cost reported through the year. For the end of the year, we are expecting a NIM between 6.5%-6.6%. Accumulated provision expenses were 6.6% higher than the ones recorded in 2017. This represents a cost of risk of 2.48% for the last 12 months. For the close of this year, we expect a cost of risk between 2.6%-2.7%. For the next year, we forecast a cost of risk between 2.3%-2.5%. Please continue to slide number 14. Accumulated operating expenses increased 7.5%, mainly due to extraordinary personal expenses, as we explained last quarter. If we exclude the extraordinary personal bonus, operating expenses grew 6.2%. Consolidated efficiency ratio closed at 46.5%, showing an improvement compared to the previous year.
For this year, we are expecting an increase in operating expenses between 6%-7%. Efficiency ratio should close around 46%. 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 COP 1.02 trillion, 10.9% 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 asset was 1.4%. Our ROE forecast for this year will be around 11.5%-12.5%.
For the next year, we expect an ROE between 13%-14%. 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 would like to ask a question, please press star one on your touchtone telephone. That is star one now on your touchtone telephone. One moment while we queue for questions. Once again, that is star one to ask a question. It appears that we have no questions at this time. Once again-
Okay
If you would like to ask a question, please press star one. We do have a question from Andres Soto of Santander Investment Securities. Your line is open.
Hi. Good morning. Thank you for the presentation. I would like to have a little bit more detail on your long-term targets on your digital strategy. You have achieved some impressive figures in terms of account openings and digital transactions. I would like to understand what is the profitability of this segment, and what can you achieve in terms of efficiency or growth over the medium term. Thank you.
If we are talking about our long-term strategy in the transformation of the bank going to a digital institution, we have to consider that we're going to work to be able to have a bank that has all the different products offered to our customer, both in retail banking as well as medium and small businesses, through digital channels and through mobile channels possible. We are actually starting that process, and we are going to go to a process in this quarter and next quarter, in which we expect to be able to offer our customer with the loans for car loans, mortgages, credit cards, in the same way that we are actually offering them.
Our numbers are growing a lot, we expect to be able to grow in those new products as well as we have done in this initial launch that we made in May of this year. In terms of the numbers, I would like to ask Ricardo, how we compare the efficiency between the products that we had before and the products that we have now offering to our customers.
Okay. Andres, thank you. I will talk about the financial forecast for the next year. I would like to summarize our guidance for the next year. For the loan portfolio, we're expecting a 9%-10% growth, led by growth of 9%-10% on mortgage portfolio, between 9.5%-10.5% in consumer portfolio, and around 8.5%-9.5% in commercial portfolio. Related to NPL ratio, by the end of 2019, we're expecting that this ratio will be close around 3.8%-4%. For the commercial portfolio, maybe it will be around 4.6%, and mortgage portfolio between 3.7%-4%, and the consumer portfolio, the figure is 2.3%-2.5%. In terms of efficiency, we are forecasting an efficiency ratio close to 45%-46% at the end of 2019.
In terms of the ROE that we are expecting for 2019, we think that it's possible to be around 13%-14%.
If we are talking especially, particularly about the efficiency, we have an improvement of about 80% in our business in credit. The cost of credit, of the origination of credit, as well as all the process with our customers, is reduced by 80% in this product that we have already launched. In the long term, we are working very hard in this strategy to be able to be around 40%-42% in terms of efficiency ratio for the bank. If we work hard, maybe we will be able to do that by the year 2020. However, for coming year, we expect to have this 45% because we need to make a lot of investments, and we need to keep sometimes both type of the network or the infrastructure that we have for both type of process in the bank.
Thank you. Thanks a lot for all those details. Let's take advantage of these comments that Ricardo made on the guidance to discuss a little bit about your expense growth outlook. This year was particular due to the special bonus that you paid to your employees. I would like to understand if this creates a high base that make us expect expenses not to grow that much in 2019, or given these investments in digital transformation that you are making, we shouldn't expect a significant improvement there. Besides efficiency, just focusing on the pure growth of expenses in 2019.
There is our main target in this ratio, in efficiency ratio, is to be around 44%-46% in the next three to four years. We are currently implementing different strategies to improve our efficiency, as Mr. Forero comment, in this year and in the next three years, including the digital transformation, of course, other specific plans in efficiency in operation process. In terms of the growth of the expenses, we think that the expenditure will be growing around 6%-7% in 2019. Okay? Remember that the employees collective agreement this year increased something like 120 basis points the expenditures. If we exclude that employees collective agreement, the operating expenses will have a growth of 6.2%. Our forecast for the year is to be around 6%-7% in terms of growth.
Perfect. That's very clear. Thank you very much.
Thank you, Andres.
Once again, if you would like to ask a question, please press star one on your touch tone telephone. We'll move next to Neha Agarwala of HSBC.
Hi. Congratulations on the results. I have a couple of questions. We continue to see stress on asset quality this quarter. Could you explain more why we're seeing this stress, and what do you expect for the coming year? We expect it to reach an inflection point by the end of this year. Any color on that would be very helpful. My second question is, what do you see as the impact of the tax reform, which is being discussed right now? What is the expectation for next year and for 2020, and where do you think that is going? The third question is on the investigation around the Odebrecht and the Ruta del Sol. Would you have any impact from that investigation? Lastly, on IFRS 9, we saw some changes made by Bancolombia, and also little by Aval this quarter from IFRS 9.
Should we expect any such changes from you from IFRS 9? Thank you so much.
Okay. Thank you for your questions. The first question related to the NPL. Actually, the total NPL ratio has been at 11 basis points compared to the previous quarter due to some specific business related to massive transportation, as we comment during this conference. However, we are expecting for at the end of the year, the ratio that we're expecting at the end of 2018 is to be around 4.1%. For commercial portfolio, we expect a ratio close to 4.7%-4.8%. For 2019, we're expecting that the ratio will be between 3.8%-4%, improving between 15- 50 basis points for the total loan portfolio. Okay. The question is related to.
Well, related with the tax reform that we are having now in Congress, in general terms, it is really very soon to know what is going to happen with the tax reform, what is finally being approved. We will know that at the end of the year. We have made some analysis so far. In general terms, we have an impact of 120 basis points in our tax rate if we apply everything that they have in that project. However, it is clear that we have to discuss in Congress many different things, and we believe that finally we will have a tax reform that allow government to get access to the funds that they require, as well as they correct some aspect that are very important to correct in our tax structure in Colombia.
Sorry, could you mention the impact again, please?
120 basis points in our
In the effective tax rate.
In our tax rate.
Okay.
Related with the Odebrecht, we have nothing new here. We have our assets related with Ruta del Sol, we don't have anything new related with that investigation. The new government is trying to find ways in which we can work together to see how the road can be made and the banks can be paid because, as you know, there are not funds in the patrimony to pay the banks. We'll have to wait to see what happens there. Related to the.
Sorry, could you please remind me what is your coverage ratio for Ruta del Sol as well as for Electricaribe and the mass transportation system?
Okay, thank you. In the case of Electricaribe, in October, we completed 100% of charges to protect this loan. In September, the figure is 82, but in October is 100% of coverage. Of the mass transportation portfolio, we are on average 35%, and at the end of the year will be around 40%-45%. Right now we have the company with high risk with a coverage close to 60%-65%, and other companies with medium or low risk around 25%-27%. The target for the end of the year is to be in the total portfolio of mass transportation, it should be around 40%.
Okay. Ruta del Sol?
11%.
11%.
11% is our coverage.
Your target for the end of the year?
15%.
15%?
Yes.
Thank you.
Related to the impact from IFRS 9?
Yeah
We have determined that in this year, the link has been tallying in 15 basis points. For the next year, we have a comparable figure. We don't identify any additional impact for 2018.
Okay. On Basel III, your expectation is still about 200-250 basis points positive impact.
Yes. We are estimating how will be the implication of the regulation that the authorities issued the last August. We are expecting an additional solvency ratio in around 200-250 basis points. Our solvency ratio will increase in that number.
Okay. Thank you so much. Very clear.
Once again, press star one if you would like to ask a question. One moment while we queue. It appears that we have no further questions at this time. I'd be happy to return the call to Mr. Efraín Forero for any concluding remarks.
Thank you very much, everyone, for being with us today. It's been a critical year here in the country. However, we feel our future in Colombia much better. We are in the process of approving these new regulations, new laws, and new government. What we see is Colombia's economy and people is going to be much better in the coming year, in the near future. In that sense, we feel that we can keep on thinking that the bank is going to be able to do much better, even through the difficulties. Thank you very much.
This does conclude today's Davivienda third quarter earnings conference call. You may now disconnect your lines, and everyone, have a great day.