Good morning. My name is Lynn, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Davivienda First 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'll now turn the conference over to Rafael Borja of iAdvise Corporate Communications. Mr. Borja, please go ahead.
Thank you. Good morning, everyone. Welcome to Davivienda's First 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 from Bogotá, Colombia are Mr. Efraín Forero Fonseca, Chief Executive Officer, and Mr. Ricardo León Otero, Chief Risk Officer. They will be discussing the results from 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 iAdvise 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. 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.
It is a pleasure to greet you all in our meeting to share the results of Banco Davivienda as of the close of March 2018. I would like to start by talking about the macroeconomic aspect, where economic activity shows a slight recovery. Colombia recorded a GDP growth of 2.2% in the first quarter of the year, compared to 1.3% in the first quarter of 2017. Financial activities and commerce contributed positively to the results, with a growth of 6.1% and 3.9%, respectively. On March 7th, Davivienda launched the PMI Index for Colombia. This indicator suggests that the manufacturing activity presented a recovery during April and May of this year, with improvements in production, new orders, and employment. The exchange rate appreciated 2.1% compared to the same period of 2017, closing with an average of COP 2,858 per dollar in the first quarter of this year.
At the close of March, oil Brent price reached COP 70 per barrel, recording an increase of 5.1% compared to 2017, generating a positive impact on export and fiscal revenue. Annual inflation closed in March within Central Bank target range at 3.14%, mainly driven by lower pressures on food and tradable goods. On the other hand, the Central Bank cut its rate to 4.5% at the end of the first quarter, accumulating a decrease of 325 basis points since December 2016. Continuing to slide four, we can see the most relevant aspect of the economic situation in Central America. Moody's improved El Salvador debt rating to B3 from Caa1. Meanwhile, GDP grew 2.3% in 2017. In Costa Rica, Fitch Ratings gave a negative outlook to their BB rating. It is important to note that the new government has established a priority need to adjust the fiscal deficit and level of indebtedness.
In Panama, the GDP growth of 2017 was 5.4%, driven mainly by the result of the Panama Canal. Finally, Honduras showed an acceleration of its GDP, reaching 4.8% in 2017. This improvement is mainly explained by the positive results in the agricultural and financial sectors. I would like to invite you to go to slide five to review the main results of the bank for the first quarter of 2018. Net income reached COP 454 billion, 39% higher than the profit registered in the same period of the previous year. On the other hand, consolidated gross loan portfolio increased 6.7%, mainly explained by the behavior of the portfolio in Colombia, which grew 7.9%. Total non-performing loans ratio closed at 3.25%, 118 basis points higher than March last year, due to the higher level of non-performing loans from the commercial and mortgage portfolios.
Regarding other relevant events, in February, we securitized COP 158 billion of mortgage portfolio. In March, shareholders decided to strengthen the bank's equity by reinvesting COP 1 trillion from previous year profits. Consequently, CET1 closed at 8.96%, 84 basis points higher than the one reported last March. It is important to highlight the increase in our solvency level since December 2016, where CET1 closed at 6.5%. Since then, we have strengthened our core equity ratio by 249 basis points. This is the result of our capital management strategies implemented through our dividend payout policy and real estate sales carried out in the past years. Nonetheless, we distributed COP 361 billion from last year's profits, which represent a 32.6% payout ratio. As of January 1st, 2018, the new IFRS 9 standard was implemented, implicating changes in the classification and measurement of financial instruments, assets, impairment, and hedge accounting.
Mr. Ricardo León will provide a more detailed explanation on the impact of this implementation. Moving to slide six, I would like to share with you an overview of our business strategy, which seeks to enhance our customers' well-being through value-added experience. We aim to consolidate ourselves as a leader in retail banking, a main player in commercial banking through a stronger presence in medium and small businesses segment, and a benchmark in wealth management, becoming the first choice of our clients to their investment and offshore needs. All of the above developed through a sustainable business strategy from the economic, social, and environmental point of view. In order to achieve our business strategy and face new market challenges, our organization is transforming itself from within to be able to offer our customer a fully digital portfolio of process channels and products.
For example, our SME and retail customer will find the entire banking, one in a cell phone. In order to take advantage of this digital age, we will use analytical process to convert all available data into business, delivering added-value and experience to our customers through the diverse channels and associates. As for our international operation, we continue to work in the implementation of a regional platform that allows us to reach all of our customers, delivering added-value products and services. Daviplata continues to be the main platform for financial inclusion. Nowadays, we have reached more than 4.3 million customers. We are working to be able to offer them permanent support in their different financial needs, complementing our transactional and insurer offer on a fully digital environment.
Thus, I want to highlight the opening in April of Grupo Bolívar's first innovation center, known as Domo i. The new center will enhance our innovation model with an exclusive campus, allowing us to be more effective in achieving innovation and co-creation results, improving the interaction with the startups, universities, other industries, and government. In this way, we will continue to develop successful projects for our organization and our customers, obtaining important results such as the Daviplata app, which has achieved more than 1.8 million downloads. La Llavecita Roja, where customers have transferred more than COP 3 million to social network with a special functionality on their smartphone keyboard. Thanks to this initiative, we received the 2018 Model Bank Award in the category of consumer channel innovation.
This award is granted by Celent, a research advisory and consulting firm focused on financial service technology, recognizing the best IT practices to generate successful and innovative banking solutions. As for the bank, we launched the express credit card process where we approve in a digital way more than 84,000 credit cards with a balance close to COP 70 billion, low non-performing loans, and zero fraud, among others. I am very pleased to comment that Banco Davivienda became the first one to offer on its mobile platform a fully digital, unsecured personal loan. This will allow customers to go through the application, risk analysis, approval, and disbursements via a frictionless experience within five minutes and no papers involved. This feature will be added to the actual digital offer that includes saving accounts, time deposits, and insurance.
In this way, we will continue working in our role of transforming Davivienda into a fully digital bank. Let me turn the presentation to Mr. Ricardo León, our Executive Vice President of Risk, who will discuss the adoption of IFRS 9 and explain the bank's financial results.
Thank you very much for the introduction, Mr. Forero. Good morning, everyone. It's a pleasure to share with you the results of Banco Davivienda for the first quarter of 2018. Please move on to slide number seven. Before starting to discuss the bank's financial results, I like to talk about the implementation of IFRS 9, which implicates changes to the classification and measurement of financial instruments, impairment analysis, and hedge accounting since January 1st, 2018. Main changes were originated by impairment analysis due to the immigration from incurred losses model to expected losses. Loan loss reserve increased by COP 760 billion as a result of the financial estimation, which include, among others, future cash flows, collaterals, and forward-looking economic scenarios. As a result, the level of provisions was increased just this one time in the estimated amount, affecting the other comprehensive income account in the equity.
In this account, we recorded the accumulated difference between the provisioning standard used on the local regulation and the former incurred losses model used on full IFRS. This new allowance represent 64% of the accumulated difference in models recorded in the equity. From now on, changes in the loan loss reserve on the consolidated financial statements will be charged to the P&L as usual. On the other hand, the equity account will continue to change due to the difference between the local rules and IFRS 9 standard. As a result of these modifications, the coverage ratio using only the loan loss reserve increased to 143% on January 1st, 2018. On the other hand, total reserve coverage, including the remaining model difference accumulated in the equity, remained stable at 162.3%. The changes on the equity account don't have an impact on the solvency ratio.
Due to these modifications, some metrics and ratios will be affected. Reporting, for example, will be lower as a result of loans in stage 3, which will not accumulate interest on the provisioned portion of the loans. Additional variations presented through the quarter will be explained in a few slides. I would like to move to slide number eight. I will refer to the bank's assets, which closed at COP 98.9 trillion as of March 2018. This represents a growth of 4% on a yearly basis and is mainly explained by the gross loan portfolio, which increased 6.7%. Loan loss reserves reached COP 3.2 trillion, 68% more than the previous year, as a result of higher risk levels and the increase in provisions due to IFRS 9. Analyzing the performance by region, Colombia's assets grew 5.4% in annual terms.
The assets from Central American operation recorded a 3% annual growth in USD. Please move to slide nine. Here you can see the behavior of our gross portfolio and its different segments. At the close of March, loans denominated in pesos represent 75% of the total portfolio. While loans denominated in USD represent the remaining 25%. The consolidated gross portfolio increased 6.7% in annual terms and remained stable compared to the previous quarter. Discounting the effect of exchange rate, the gross portfolio grew 7.5% in the last year and 1.6% during the quarter. In Colombia, the loan portfolio increased 8.5%, mainly due to the mortgage portfolio and commercial segment. Loans from the international operation grew 3.5% in USD. The most important increase comes from the mortgage portfolio recording an annual growth of 13.9%, mainly supported by the leasing segment.
The consumer portfolio showed a growth of 6.1% compared to the same period of 2017, driven by the results obtained in unsecured personal loans and payrolls. The commercial portfolio grew 4% annually as a result of the recent dynamics of the Colombian economy. We're expecting the second half of the year to have a better performance in general terms. We're expecting an annual growth of our total loan portfolio close to 8.8%, lead by growth of the mortgage portfolio, around 10%, and between 7%-8% in the commercial and consumer portfolios. Moving on to slide 10, you can see the performance of the portfolio in terms of risk. 90-days NPL ratio closed at 3.25% for the total loan portfolio. By the end of this year, we expected this ratio to close between 3%-3.2%.
This deterioration compared to 2017 is the result of the last effects of the current economic cycle. We expect an additional deterioration during the first part of the year, with an improvement toward the second half of the year. The deterioration of the commercial portfolio is explained by the greater risk presented in some particular clients, as well as the generalized deterioration of the Colombian portfolio. For the end of the year, we expect this ratio to close between 3.2% and 3.4%. Turning to the consumer portfolio, we observe this ratio deteriorated 16 basis points. We estimate a ratio between 2.6% and 2.7% by the end of the year. Finally, the 120-days NPL ratio for the mortgage portfolio closed at 2.7% due to the higher risk presented in some regions of the country, as well as the unemployment increase.
Additional 12 basis points of deterioration are explained by the mortgage securitization carried out during the year. For this portfolio, we're expecting the 90-days NPL ratio to close around 3.5%, and 2.7% for the 120 days ratio, in line with the current levels. Total reserve coverage decreased from 162% at the close of 2017 to 148% at the close of March, mainly due to the increase of NPL ratio as we discussed before. Now, I'd like to refer to slide 11, where we find the evolution of funding sources, which represented, on a yearly basis, a growth of 5.6% and a reduction of 1.2% during the quarter, closing at COP 84 trillion. Net loans to funding sources ratio reached 89.5% as a result of a decrease in demand deposits, in line with our strategy of reducing the cost of funding.
On the other hand, term deposits grew 13.5% on a yearly basis, mainly explained by the operation in Colombia, where we are taking some advantage of the lower rate cycle. Our international subsidiaries presented an annual growth in USD of 2.2%. Please go to slide number 12. In terms of capital ratios, I'm glad to mention that Davivienda closed with a T1 of 8.96%, 450 basis points above the minimum required. As a consequence, our total solvency ratio reached 13.08%. These higher levels are the result of the decisions that Mr. Forero mentioned before. For the end of this year, our guidance is to close with a solvency ratio around 12% and a T1 around 8.3%. On the other hand, the equity of the bank had an annual growth of 4.7%.
Compared to December 2017, equity decreased 5.3% as a result of the implementation of IFRS 9 and dividends distribution. I'd like to refer now to slide number 13. Net financial margin expanded 21.2% on a year-over-year basis and 17.6% quarter-over-quarter. These results were mainly driven by higher financial income and lower financial expenses presented throughout the year. The 12-month net interest margin showed an expansion of 13 basis points, closing at 6.51%. For the end of the year, we are expecting an in between 6.5%-6.6%. Provision expenses decreased compared to the previous periods, in part explained by IFRS 9 standards. For a portion of the portfolio, we estimated the lifetime provision when migrating to the expected losses model, and all the difference between the previous model and the new one was included in the adjustment to loan loss reserve made on January 1st.
As we mentioned before, we increased the loan loss reserve on the first phase of implementing, affecting the other comprehensive income, allowing us to require lower expenses during this quarter. For the following quarters, we will continuously review which new requirements arise and proceed to constitute the corresponding provisions. In that sense, we expect our cost of risk to be higher throughout the year due to the new expected loss model, as well as some additional deterioration closing between 2.7%-2.8% by December 2018. I would like to move to slide number 14. Consolidated efficiency closed at 46.3%, showing an improvement compared to the previous periods, mainly driven by a decrease of 9.3% of operating expenses quarter-over-quarter, in line with our cost reduction strategy.
For the year, we are expecting an increase in operating expenses between 7%-8% and the efficiency ratio to be around 45.5%-46%. To finish the presentation, I would like to go to slide number 15 to analyze the bottom line results. Davivienda reported a net income of COP 454 billion, 39% higher compared to the same quarter last year, as a consequence of higher net financial margin and lower provision expenses. Our ROE for the 12 last months reached to 13.5%, and the return on average assets for the same period was 1.4%. Our ROE forecast for this year will be around 11%-12%, mainly explained by the higher cost of risk for 2018. In general, these are the bank's main results we've prepared for you today. Thank you for your attention.
At this time, we can move on to the question and answer session. Thank you very much.
At this time, if you'd like to ask a question, please press the star and one on your touch tone telephone. You may withdraw yourself from the question queue at any time by pressing the pound key. Once again, it is star and one on your touch tone phone if you'd like to ask a question. Our first question comes from Felipe Icari with Itaú BBA. Please go ahead. Your line is open.
Hi. Good morning, thank you for taking my questions. I have two questions. The first one is regarding the reallocation of the COP 3.8 trillion portfolio for investment at fair value. It changed from impact in the P&L to changes in OCI. Could you please clarify and, if possible, quantify what are the impacts in P&L from this change? The second one is regarding cost of risk. It dropped considerably in the first quarter, to 2.4%, and you just commented that you expect cost of risk to be around 2.7% and 2.8% for 2018. What about in the medium term? Do you expect cost of risk to remain at this 2.7%, 2.8% level? Thank you.
Felipe, thank you for your question. Related to the allocation of COP 3.8 billion in the trading portfolio, the income of the portfolio, that is the result of supply IFRS 9, that classification. The income of the portfolio that is registered on the other comprehensive income was of a minimum COP 36 billion for the previous quarter. In the end, it is not possible to estimate the impact of such situation for the rest of the year, since it depends on the market value of assets. However, we can tell you that the new definition will provide higher stability to the P&L, since it will recognize exclusively the accumulated interest whereas the change in the valuation will go to the other comprehensive income. Related to the cost of risk, actually we closed with a cost of risk at 2.49% as of March 2018.
We expected a higher cost of risk for the year between 25 basis points to 50 basis points due to the lagged impact of the deterioration of the economy in general and in the Colombian economy and our portfolio, as well as the particular cases that we discussed in the previous minutes, as well as the impact of IFRS 9 implementation. Out of the current cost of risk, obviously we have in a particular customer, additional deterioration during the year, and we have to increase the level of provision in particular cases. That is the explanation to consider that our cost of risk will be around 2.7% to 2.8%.
Okay, thank you.
Thank you. Our next question comes from Gabriel Nobrega with UBS. Please go ahead. Your line is open.
Hi, everyone. Thank you for the call. I saw in your presentation that you lowered your guidance for your loan growth and your portfolio. I was just wondering, due to weaker economy, have you changed any other metrics and could you share them with us. I'll make a second question after that. Thank you.
Okay. Related to the growth that we're expecting in our loan portfolio, our forecast for annual growth is around 8%-9%. In the mortgage portfolio, we think that the growth will be around 10%, while the commercial and consumer portfolio should grow between 7%-8% for the year. We are expecting at the end, in the second half of the year, the economy will be recovered a little bit, but the real recovery that we are expecting is in 2019.
Also, I think, what is your guidance for the NPL ratio this year?
Let me check some figures. Okay. The NPL ratio, at the end of the year, we expect the ratio to close between 3%-3.2% in our total trade portfolio. Total loan portfolio.
Okay. If I could just make a follow-up. We saw that in the quarter, your NPL ratios deteriorated, and I just wanted to know if you have quantified how much of the deterioration was due to select corporate exposures. Thank you.
Okay. As of March, our total NPL ratio reached 3.25%. Particular cases on commercial loans represented 61 basis points of the ratio. If we exclude those particular cases, NPL ratio for the total portfolio will be around 2.65%.
All right. That's very clear. Thank you.
Thank you. As a reminder, if you would like to ask a question, please press the star 1 on your touch tone telephone. We'll take our next question from Natalia Corfield with J.P. Morgan. Please go ahead. Your line is open.
Hi, thank you very much. I have a follow-up question on asset quality and a question on NII. On asset quality on the specific cases, can you mention how much you have already covered or for instance, Ruta del Sol, also Electricaribe and the mass transportation companies in Bogotá. With regards to NII, part of the increase in NII in this quarter, a big portion of it was related to the revenues from mortgages. How sustainable this is gonna be throughout the year? Those are my questions.
Okay. Thank you. First, the asset quality question. In total, our exposure to the three main cases adds to COP 1.7 trillion and has a coverage around 50% on the IFRS. In terms of the question about the income of the loan portfolio. During the final exercise of IFRS 9, we identify Close to COP 1.2 trillion of loan portfolio with a low probability of recovery. For these cases, we estimate interest just over the balance of the credit net of provisions. For this reason, we will have a lower portfolio income close to COP 160 million to 2018. This represents about 10, 15 basis points of net interest margin.
Just as a follow-up. The coverage that you have for the specific corporate cases, I don't think I got it. Do you mind repeating for me?
Yes. The three main cases has COP 1.7 trillion, has a coverage around 50% on the IFRS. In some cases, as an energy company, maybe the coverage is 80%. The other companies have a figure below 20%-25%. On average, we are in 50%-55% of coverage.
Thank you. It appears we have no further questions at this time. I'll turn the program back over to our speaker for any additional or closing remarks.
Thank you very much for everyone for joining us today. We see that the cycle in the economy is changing for most of the countries which we are in, and we foresee a better behavior of the growth of the economy in general terms. In that sense, we believe that we are going to be able to take advantage of that opportunity and to grow, as we mentioned, in our general strategy in all our different areas. It is very remarkable for us to be now working very hard in this innovation and digital strategy that allow us to present these initiatives today to our customers. That is the first stage, first step for going to the objective of becoming a digital bank, that we have the ability to join with different alliance and to give our customers added value in our relation.
We believe that this allow Davivienda to be the first bank that is offering this type of services to the customer in this framework of time, since we now are going to be able to offer all of these services in our apps in less than five minutes to attend our different customers. We are working very hard. We are doing a lot of investments. We are working in innovation so that we might have a better efficiency. Some type of result we already see in our balance sheet, but we believe that this is going to become much more important. Thank you very much.
This does conclude today's conference. You may disconnect the line at any time, and have a wonderful day.