Welcome to Davivienda's third quarter of 2024 earnings conference call. I'm Karen, and I'll be your operator for today's call. Today's presentation is for investors and analysts only. Therefore, questions from the media will not be addressed. Today, Mr. Javier Suárez, Chief Executive Officer, and Mr. Pedro Bohórquez, Vice President of Strategic Risk and Financial Planning, will join us to discuss the quarterly results that have been released. If you have not yet received a copy of the earnings report and presentation, please visit Davivienda's Investor Kit or the Financial Information section at ir.davivienda.com. All participants are in a listen-only mode at this time. Please note that this conference is being recorded. Afterward, management will be available for a question-and-answer session. Before proceeding, let me mention that any forward-looking statements are being made under the safe harbor provided by the Securities Litigation Reform Act of 1995.
Actual performance could differ materially from anticipated in any forward-looking statements due to macroeconomic conditions, market risks, and other factors beyond our control. For the Q&A session, please remember the following instructions. If you're over the phone and have a question, please press the star button and number five to access the Q&A feature. If you use a speakerphone, you may need to pick up your handset before pressing the numbers. Once again, if you have any questions and are using a phone line, please press the star button and then press number five to access the Q&A feature. For webcast participants who wish to send questions through chat, click the button with the question mark at the bottom of the webcast screen. If you have more than one question, we recommend sending a single message with all your questions and sending questions not previously answered.
I am now pleased to turn the call over to Mr. Javier Suárez, Chief Executive Officer. Mr. Suárez, the floor is yours.
Good morning and welcome to Davivienda's third quarter 2024 earnings conference call. I'm pleased to have the opportunity to address you today. Our financial results for the quarter align with our previously provided guidance. Several key factors, including decreases in cost of funding and provision expenses and our ongoing commitment to cost control, primarily fuel the positive outcomes we've achieved. We are optimistic about the trajectory we're at. Our digitalization strategy is heading in the right direction, and we have made significant progress in sustainable financing and climate risk management. These advancements are positioning us for the long term, as these capabilities will definitely be an edge to remain as leaders in the system and to increase value for our stakeholders. As we look ahead, we anticipate these positive trends will continue.
However, we acknowledge that the pace of improvement may moderate as we navigate some external variables I will cover later. Despite these challenges, we remain confident in our ability to adapt and deliver sustainable growth. On slide three, we have an overview of the macroeconomic environment in Colombia. Recent economic indicators paint a picture of cautious optimism. The Economic Activity Index exhibited an annual growth of 2.9% in July and August, primarily driven by the performance of agriculture, mining, and public services. This outcome exceeded both analysts' and our projections, leading us to revise slightly upward our GDP growth forecast for 2024 to around 2%. Inflation has notably declined, dropping from 7.18% in June to 5.81% in September, primarily due to a slowdown in food price increases.
We anticipate this downward trajectory to continue, potentially accelerated by improved weather conditions boosting food supplies, but with some risk related to an ongoing peso depreciation, which could slow this progress. In this sense, we expect inflation to close to around 5.2% this year. In response to these trends, the Central Bank has cautiously cut interest rates by 50 basis points in July and September meetings, reaching 10.25% at the quarter's end and 9.75% in October. We expect this measured approach to persist, with a further 50 basis points cut in December, bringing the year-end rate to 9.25%. We read that this prudence is related to fiscal uncertainty and concerns over exchange rate instability. Additionally, a reduced likelihood of a U.S. recession would suggest fewer Fed rate cuts, limiting room for further domestic monetary easing.
Meanwhile, deposit rates have continued downward, driven by decreasing inflation, interest rate cuts, and stable market liquidity, and the Colombian peso has depreciated against the U.S. dollar, influenced by decreasing oil prices and a rising country risk premium. Finally, we saw the confidence index slightly improving during the months of September, probably signaling consumers' optimism in light of interest rate decreases. However, this sentiment is not yet materializing into increased credit demand, as we will see in the next slide when we will see some figures of the Colombian financial system. The financial sector's total credit growth was 1.1% in the third quarter, slightly below the previous figure. This reflects a still contracting consumer credit portfolio and stable growth in commercial and housing loans.
In an effort to stimulate lending and promote economic recovery, the government and banks collaborated to launch El Pacto por el Crédito, the Pact for Credit initiative in August, which aims to increase the flow of economic resources towards strategic sectors such as mortgages and residential construction, infrastructure, manufacturing, energy transition, agriculture, and tourism through increased disbursements from credit establishments at market conditions and within each bank's risk framework. We're optimistic about the possibility of working with the government and the real sector to find solutions to existing challenges that can help us increase funding flows to the economy. The launch of this initiative and the proactive measures we and other banks took to reduce mortgage interest rates demonstrate our commitment to supporting economic recovery and promoting access to credit for businesses and individuals.
Loan rates, especially for consumer and credit card loans, have significantly decreased, attributed to the decrease in the Cap Rate. The overall loan portfolio quality of the system remained stable at 3.6% in August, with improvements in consumer credit offset by a slight deterioration in the commercial portfolio and upward pressure in mortgage loans. In summary, the economic landscape presents a mix of encouraging trends and persistent challenges. While growth has exceeded expectations and inflation is declining, fiscal uncertainty and external factors pose risks. The central bank's cautious approach to interest rates and the government's efforts to stimulate credit reflect these complexities. We remain attentive to these developments as we navigate the path ahead. Moving on to Central America on slide five, economic activity in the region showed mixed results during the second quarter of 2024.
Honduras and Panama experienced accelerated growth driven by the financial sector in Honduras and construction and commerce in Panama. Conversely, although Costa Rica's economic activity decreased, its growth remained above its decade-long average, bolstered by its trade results. In El Salvador, the deceleration was largely due to a decline in the construction sector. Inflation across the region continued its downward trend in September, primarily attributed to lower fuel and food prices. Regarding monetary policy, Costa Rica further reduced its reference rate, while Honduras increased its policy rate to manage liquidity. Currency-wise, the Costa Rican colón appreciated against the U.S. dollar during the quarter, while the Honduran lempira remained relatively stable. We expect the region to grow by 3% this year and inflation to continue stabilizing in most countries. Moving on to the main results of our business on slide six.
Our loan portfolio grew by 0.8% during the quarter, supported by the commercial and mortgage segments. Growth dynamics remain modest, in line with the adjustment process of macro variables and weak credit demand. The 12-month NIM, including the results of FX and interest rate management through derivatives, was 5.64%, increasing by 9 basis points quarterly, and the 12-month cost of risk was 4.27%, decreasing by 45 basis points quarterly. Consequently, the quarter's profit was COP 109 billion, which translates into a 2.81% ROAE, improving significantly compared to the previous quarter, as we had previously anticipated. Our CET1 closed at 10.37%, comfortably above the 7% minimum required and improving during the quarter and the year. Our efficiency strategy continues to yield positive results, with operating expenses reducing their annual growth rate in an environment marked by high inflation.
On slide seven, I'd like to elaborate on the key variables explaining our margins' performance. On the liability side, we have been able to capture significant improvements in our cost of funding since 2023. Our 12-month implicit rates in Colombia have decreased by 108 basis points from their peak in December. Looking forward, we believe that there's still some room for further improvements in our cost of funding, supported by the decrease in the monetary policy rate and the gradual adjustment of our funding needs. However, there are some factors that have pressed loan income and will further delay margin expansion, such as the temporary recomposition of our portfolio towards commercial and mortgage loans, the macro conditions setting up for modest growth, and interest rates on loans decreasing rapidly across the system amidst cap rate drops and competition.
Consequently, and taking into account the central bank's conservative approach to decreasing interest rates, we anticipate a more gradual margin expansion of our 12-month NIM to close the year between 5.7% and 6%. Please bear in mind that this is an improvement compared to 2023 levels when we closed the year with a 5.48% NIM. Please move on to slide eight, where I will update you on the consumer portfolio. The consumer books underlying trends continue to be positive, with its risk profile still improving and with very low levels of early PDLs in recent disbursements. After the significant provisional efforts we've made for the consumer book, we have a third consecutive decrease in net expenses for this portfolio, and we expect this trend to continue materializing going forward.
As you can see in the top left graph, we're gradually increasing disbursements with a selective approach supported by our origination models. However, they have not increased at the pace we expected, and we continue working to find the right opportunities to grow amidst more normalized credit conditions. Moving on to slide nine, I would like to broaden into the rest of the loan book. The consumer portfolio is driving the improvement in total PDLs and cost of risk. And as anticipated, the commercial and mortgage loan segments have shown some pressure in terms of their PDLs, naturally impacted by the cycle of high interest rates. However, we've been deploying different strategies to manage the deterioration in these portfolios and increase collections.
Even though the commercial portfolio has been requiring additional provisions, which we anticipated during the year, it is highly diversified in terms of industries and operation size, with high levels of collateral. Once we account for collaterals, total coverage increases to 142%. In the case of the mortgage portfolio, even though PDLs have been pressed, the cost of risk stands below 0.5% as residual losses are very small, considering a 40% on average loan-to-value ratio. To sum up, despite the commercial and mortgage loans continuing to press total PDL, we are confident that we have the tools to continue managing the persistent challenges individuals and businesses face and to continue posting gradual improvements in total asset quality and cost of risk. We're maintaining our cost of risk guidance at 3.5%-3.8% for this year and total PDL guidance of 4%-4.5%.
Moving on to slide 10, I would like to discuss a strategy we implemented to complement our digital offering for small businesses: the acquisition of IPECO, a leading Colombian digital payments platform. This decision aligns with our strategy for the small business segment, in which we strive to be their allies by supporting their growth and allowing them to achieve their full potential through a comprehensive suite of digital financial services, ensuring a seamless and secure payment experience. IPECO's technological capabilities, expertise in online payment processing, and deep understanding of the e-commerce sector will evolve how we serve this critical segment of our customer base. This acquisition was executed through our investment arm, Corporación Financiera de Vivienda, and we look forward to unlocking new growth opportunities through this powerful synergy. Please turn to slide 11 for an overview of DaviPlata.
As of the third quarter of 2024, DaviPlata has reached 18.3 million clients, consolidating its position as one of the leading neobanks in the region. Our core strategy remains focused on providing accessible and user-friendly financial solutions that meet everyday needs of our clients. We've worked to position DaviPlata as a trusted platform where individuals can seamlessly receive, pay, save, and even borrow funds when necessary. In line with that strategy, average deposits have increased by 20%, transactions by almost 60%, and purchases by 30% annually. Furthermore, DaviPlata is currently generating approximately COP 40 billion in income. As of September, the accumulated annual income reached COP 132 billion. In terms of credit, our ongoing improvements within the credit cycle are positioning us to increase disbursements, aligned with our origination standards and backed by our enhanced credit risk models. We remain committed to enhancing the platform.
This includes introducing new AI-based functionalities and a refreshed interface, along with technological advancements that bolster the platform's stability and resilience. Thanks to these efforts, DaviPlata's net promoter score stands above 75 points. We are very excited about DaviPlata's path and the opportunities ahead. We are confident that we will continue to lead financial inclusion while also serving a broad range of population segments. Moving on to slide 12, I would like to share some recent milestones on the ESG front. We have continuously increased our sustainable portfolio, which now stands at approximately COP 20 trillion, representing nearly 14% of our consolidated portfolio. This achievement reflects our commitment to promoting prosperity, inclusive growth, and environmental stewardship in the countries where we operate.
Furthermore, we recently published a policy that outlines our sustainable strategy and serves as a roadmap for our path forward and will guide us toward achieving the following ambitious goals: increasing our sustainable portfolio to 30% by 2030, becoming a carbon-neutral organization, and achieving net zero emissions by 2050. This policy also identifies the assets and activities we intend to promote and prioritize to contribute to the well-being of our communities and the preservation of our planet. In developing this new sustainable taxonomy, we have drawn upon reputable frameworks such as the Social Taxonomy of the European Union draft, the Social and Green Bond principles of the International Capital Market Association, the Climate Bonds Standard, and the Colombian Green Taxonomy.
These frameworks provide a clear and transparent classification of economic activities and assets considered green, as well as projects with clear and measurable social benefits, while also encouraging the adoption of sustainable business and financial practices that support the transition to a low-carbon economy. To further catalyze the flow of resources towards sustainable solutions, we subscribed an agreement with the IFC to issue a $50 million biodiversity bond to support companies and other entities that address environmental challenges by financing projects focused on biodiversity conservation and usage, agricultural development, sustainable water management, sustainable production, circular economy, and bioenergy. This bond represents the first of its kind in the Colombian capital market and the second globally. At Davivienda, we firmly believe that our commitment to prosperity, people, and the planet is achievable, relevant, and enduring.
It's not a separate objective from our business strategy, but rather an integral part of every decision we make. Let me turn the call over to Pedro to continue with the presentation.
Thank you, Javier. Good morning, everyone. Please move on to slide 13, where we'll analyze the evolution of assets. Our assets close at around COP 183 trillion, showing relative stability during the quarter. The slight loan growth was compensated by a decrease in cash and interbank deposits, given lower liquidity needs. On an annual basis, assets grew by 1%, mainly supported by Central America's performance, which grew by almost 6% in dollars during the last 12 months and now accounts for 26.5% of our operation. Please move on to slide 14.
Our loan portfolio grew by 0.8% during the quarter, mainly due to the dynamics in the commercial and mortgage books and a slightly lower contraction in the consumer segment. The commercial portfolio growth has been driven by specific well-known customers with solid balance sheets and risk profiles, while the mortgage book has exhibited improving trends, especially in the low-income housing segment, supported by government subsidies and lower interest rates. The pace at which the consumer segment is decreasing has decelerated, as we have been gradually increasing disbursements, focusing on clients with a risk profile that aligns with our credit risk appetite and origination policies.
As a result of these dynamics, we are experiencing a temporary recomposition of our loan mix, with the consumer portfolio's share reducing from a peak of 31.2% in the second quarter of 2022 to 24.7% in the third quarter of 2024, which translates into 6.5 percentage points that the commercial and mortgage books have gained. This process has impacted our margins, but we also decreased provisioning needs in the medium term. Regarding our international operation, the loan portfolio increased by 1.4% quarterly, supported by positive dynamics in the mortgage and consumer portfolios. During the last 12 months, Central America's loan book has grown by 8.3% in dollars, mainly driven by Honduras, Panama, and El Salvador. Central America's growth over the past years has been steady and healthy.
Even though these countries have also experienced macro and fiscal challenges, our operations have performed well, and the compound annual growth rate of the region's loan book for the past two years is 8% in dollars. By October of this year, we had finished the consolidation process we started in November 2023. All our Central American operations are now under Holding Davivienda Internacional, a subsidiary in Panama 100% owned by Banco Davivienda in Colombia. As we have shared, the rationale behind this process is a simpler organizational structure to facilitate the operations management. Moving on to slide 15, we present an update on our PDLs and coverage ratios. Regarding PDLs, the strategies we adopted since 2022 to improve asset quality have materialized for four consecutive quarters.
In fact, after reaching a peak of 6.97% in the fourth quarter of 2023, the consumer PDL has decreased 226 basis points, supporting a 30 basis points decrease in total PDL. As we shared in previous calls, macroeconomic conditions also strained some commercial book sectors and mortgage portfolio segments. In the case of the commercial portfolio, part of the impact comes from the SMBs, which are already showing some stabilization trends. The other part comes from isolated cases that were identified within uptime. We are comfortable with the coverage levels for the commercial portfolio, as we have been carefully anticipating provisions during these quarters, and we also count with appropriate collateral levels for the customers that have been affected more recently. As you can see on the top right graph, coverage plus collaterals stands around 144% for this segment.
Regarding the mortgage portfolio, the increasing delinquency is mainly driven by clients whose loans were disbursed at high interest rates, securitizations, and our write-off parameters change. Please take into account that given the long-term nature of this portfolio, PDLs will remain longer on the balance sheet. However, recovery levels are high, as it is 100% collateralized. When including the provision reserves we have for this portfolio, coverage increases to 126%. In the same way we've done with the consumer segment, we have adjusted our origination models, improved our collection scheme, and continued monitoring the evolution of these portfolios to reduce further deterioration. Please move on to slide 16, where we will see the evolution of the cost of risks, provision expenses, and loans by stages. In line with our guidance, provision expenses decreased by 29% during the third quarter after a 15% decrease in the previous quarter.
In fact, this quarter's cost of risk was 3%, a reduction of 126 basis points compared to the second quarter. Regarding loans by stages, we observed an increase in stage one and a decrease in stages two and three, which aligns with improvements in the overall portfolio's risk profile. Please consider that the decrease in coverages for stages two and three is mainly explained by commercial clients that have been classified on these stages but have high levels of collateral, thus not requiring an increase in provisions. Please move on to slide 17. Funding sources have behaved in line with our operations growth, which has been relatively steady during the last 12 months. Demand deposits decreased by 4.2% over the quarter, primarily due to a reduction in high-cost deposits from institutional clients.
In anticipation of expected cuts in monetary policy rates, these clients have shifted to term deposits, thereby supporting part of the 5.9% increase in CDs during the quarter. Please note that although the proportion of term deposits has continued to increase, around 70% of our term deposits in Colombia will mature within the next 12 months. Moreover, bonds decreased quarterly and annually due to maturities, and credits increased by 6.1% in the quarter as a result of obligations acquired with foreign entities. We maintain sufficient liquidity levels and are comfortable with short and long-term ratios. Please continue to slide 18, where we will see our capital structure. Our CET1 ratio increased by 25 basis points compared to the second quarter of 2024, mainly due to profits during the quarter and lower risk-weighted assets.
The decrease in risk-weighted assets is mainly explained by lower exposure to consumer credits and lower market risk value. Both the CET1 and Tier 2 ratios increased during the quarter, supported by FX depreciation, growing by 5 and 6 basis points, respectively. As a result, the total capital equity ratio closed at 14.74%, increasing quarterly and annually. We expect our capital levels to expand slightly further during the remainder of 2024, positively impacted by profits and lower operational risk-weighted assets. We are comfortable with these levels, and we believe they will be enough to continue supporting our operations growth in 2025. Please move to slide 19, where we present our margins. As seen in the bottom graphs, the overall trend of our NIM has been positive over the past quarters, as our funding structure has enabled us to observe reductions in funding costs.
In this sense, financial expenses have decreased by 4.6% quarterly and 10.8% accumulated. When looking specifically at this quarter's NIM, including the FX and derivatives strategy, we had two impacts temporarily affecting the result. First, the cyclical behavior of UBR, which is Colombia's inflation-linked unit, impacted revenue during the quarter, given inflation decreases. Second, we had a lower result on FX, given the COP appreciation during the quarter. Please continue to slide number 20. Non-financial income decreased by 1.4% during the quarter, explained mainly by the seasonality of transactional services and the increase of expenses related to franchise maintenance and payment. Other net income and expenses increased due to changes in valuation of assets received as payment. However, on an accumulated basis, non-financial income is growing by 13%.
Expenses decreased by 3% in the quarter, supported by FX impact and due to a base effect of the second quarter of 2024, when we had a one-off expense related to employees' collective agreement. In general, we see a payoff from our efficiency strategy. On an accumulated basis, our expenses grew by 3% on nominal terms, and when discounting the one-off of the second quarter, accumulated expenses will grow by 1.7%. Please note that although expenses are under control, efficiency ratios stand above historical levels, as our margin has been pressed and our operation size has temporarily shrunk. Please move on to slide 21 to analyze the bank's result. In line with what we have guided, this quarter's results returned to positive territory and closed at COP 109 billion, representing a quarterly annualized return on average equity of 2.81%.
After the challenging cycle we have been through, the bottom line has started to reflect all the strategies we have implemented over the past two years to improve profitability. To finish the presentation, please move on to slide 22, where we'll share our expectations for the end of this year. We maintain our guidance from the last quarter regarding gross loan growth, which is expected to increase around 5%-7%. However, given the macro and demand conditions we've shared with you, the consumer portfolio growth has been adjusted downward to a range of -8% to -6% due to a lower space of disbursements that we projected in previous quarters. This contraction is offset by the upward revision of the commercial portfolio growth to 11%-13% and mortgages between 8%-10%.
Regarding asset quality, we maintain our expectations of further improvement to close with total PDL levels between 4% and 4.5% by the end of the year. Given the loan portfolio's recomposition and a slower than expected reduction in the monetary policy rate, we are expecting a more limited improvement of our NIM, with a 5.7%-6% range for this year. Regarding cost of risk, we maintain guidance between 3.5% and 3.8%. We're also maintaining our expectations for non-financial income in APEX, which are expected to grow by 8%-10% and by 3%-6%, respectively, this year. As a result of the adjustment of NIM expectations, we expect return on average equity to be between 0% and 2% by the end of the year. Finally, we expect our CET1 to close between 10.3% and 10.8%. Thank you. With this, we can move on to the Q&A session.
Thank you very much. With that, we will begin the question and answer session. We will first take the questions from the phone call and then read the webcast questions. If you're over the phone line and have a question, please press the star button and number five to access the Q&A feature. If you use a speakerphone, you may need to pick up your handset before pressing the numbers. Once again, if you have a question, please press the star button and then press number five to access the Q&A feature. For webcast participants who wish to send questions through chat, click the button with the question mark at the bottom of the webcast screen. If you have more than one question, we recommend sending a single message with all your questions and sending questions that haven't been previously answered. Right now, we're standing by for questions.
We'll go through the instructions once again. If you're over the phone line and have a question, please press the star button and press number five to access the Q&A feature. If you use a speakerphone, you may need to pick up your handset before pressing the numbers. Remember, please press the star button and then press number five to access the Q&A feature. We have our first question coming from Mr. Nicolas Riva from Bank of America. Mr. Riva, the floor is yours.
Thank you very much for holding the call and for the chance to ask questions, so this week, there's been some newspaper articles mentioning that Davivienda would potentially be interested in bidding for or acquiring Scotiabank in Colombia. So my question is, are there any comments that you want to make on this topic?
And then related to this, given the size of Scotiabank in Colombia, the sixth largest bank in the country and about $700 million in equity, I guess the question is, are there any minimum capital levels, any minimum capital ratios that you would like to keep after a hypothetical transaction? And yeah, that was my question. Thanks.
Nicholas, good morning, and thank you for your question. Somehow, I had the feeling that this question was coming, so thank you for putting it upfront. We've always, for the last 25 years, we've always been looking for opportunities. We have our team that is actually looking for inorganic opportunities as a day-to-day job. We've seen hundreds of opportunities, and that's a team that permanently does that.
You may recall that when we issued our capital increase by the beginning of this year within the March results call, we mentioned that we wanted to be in a position to take advantage of opportunities that may come, including both organic and inorganic, and that's what we've been doing. So as of now, we're working on opportunities both internally and also on the M&A side, but we don't comment on opportunities that haven't been finalized. So I guess what I could say is we are following through with what we mentioned in the March call, which was we will be looking for opportunities, and that makes sense from a strategic perspective. And regarding your second question, we have a very clear view in terms of any opportunity that we may pursue, either organic or inorganic, has to be consistent with our standards on the capital side.
Of course, on liquidity and capital, those are our main drivers in terms of any transaction that may arise. So whatever we do in terms of transactions, we will be very careful on maintaining levels similar to the levels that we have currently on our books. We don't have any comments, any specific comments on any transactions because we only comment when there are businesses that have been closed, and this is not the case at the time. But I can give you the reassurance that in any possible transaction going forward, we will be very careful with maintaining solvency ratios that are consistent with the past levels that we've seen within our operation.
Thank you very much for that response.
My interpretation from what you are saying is that you are participating in a process because you're saying, I mean, multiple times you said that the transaction has not been closed, that it hasn't been closed. So my assumption, I assume that you are participating in this. And then in that case, because you mentioned the equity raise in the first quarter, I believe that equity raise was, from memory, roughly like $160 million-$170 million. The target right now is Scotiabank Colombia. They have in equity roughly $700 million, so it would be a significant acquisition. How would you, I mean, do you think you would need to raise additional capital in that case to finance this transaction?
I value your interpretation of my comments, but I will stick to my comments.
I'm not commenting on any transaction that has not been finalized because, as I mentioned before, we are always in the process of looking for opportunities. I'm not making any specific comments on any specific transactions. But in general, what I can tell you is that in any moment that we've done any transactions in the past or in the future, we will be careful. We've been very careful, and we will be very careful in terms of maintaining capital levels consistent with the levels that we currently have.
Okay.
Thanks very much for that. Thank you. Thank you very much. With that, we'll move on to our second question coming from Mr. Brian Flores from Citibank. Mr. Flores, the floor is yours.
Can you just guide us through the main drivers here that made you revise these guidance?
And if you think also that maybe we can expect a better 2025 given the also positive trends we're seeing in your risk appetite, particularly mortgages. So just, of course, thinking maybe we see an adjustment in 2024, but do you think we can dream of a better 2025? That is my first question. I'll ask my second one afterwards. Thank you.
Yeah. But on the credit risk side and margins, which are, of course, related, on credit risk, you saw during the presentation that the performance of the consumer portfolio is actually improving significantly. And it's improving for reasons that I mentioned in previous calls. One is the fact that the vintages that were more problematic are vintages that are now two years old or maybe more than that.
So they are actually going through a P&L, and the participation of those vintages within the consumer portfolio is getting smaller and smaller as time goes by. So the impact of the non-performing loans of those vintages is getting smaller. And on the other hand, those vintages are being replaced with new loans that are performing very well, as was mentioned during the slides presentations. The PDLs that we're seeing for vintages from last year and this year are actually way below our appetite. So what we see is that we have an opportunity to start growing carefully. Of course, we believe that the environment is an environment in which you have to be careful. But the models, the improvement in our underwriting models, our policies, our processes, our fraud algorithms, many of the tools that we're using to grow on the consumer side are working very well.
So we believe there's opportunity to start growing again, which is something that we also mentioned during the presentation. If you look at the numbers, the third quarter, you see the second and third quarter of this year, you see a clear trend of consumer loans growing. So in terms of credit risk, we believe that we have still an opportunity to keep improving. And as Pedro mentioned in the guidance, we are seeing a credit, a cost of risk amount that is coming down, and we expect that to continue for next year. As that happens, we will be able to be a little bit more aggressive on the consumer side, and the mix of the portfolio will start trending back to a higher percentage on the consumer side, improving our NIM.
So I guess the fact that the credit cycle is going in the right direction helps us not only on the credit side, but also on the NIM side because of the mix that we are expecting on the portfolio going forward. In terms of NIM, we've been affected compared to our guidance, we've been affected by three factors mainly. One of them is the cap rate that has been decreasing at a faster rate because of changes in the way the cap is calculated. The second one is the mix of the portfolio. Temporarily, it has shrunk the consumer portfolio, and the share of the mortgage and commercial books has been growing with lower rates. And the third is the contraction of the book. As those trends turn around, we're expecting an improvement for the margin going forward.
The other factor is the central bank rate that has been decreasing at a slower pace as compared to what we were expecting. We are seeing a consolidation on the decrease of inflation. So we're expecting the central bank to continue lowering interest rates and eventually move in a more aggressive way, and that would definitely help us on our margins. So I believe both margins and credit risk will turn in the right direction in the following quarters.
No, perfect. Super clear. Just wanted also maybe to explore, we saw a proposal, right, the unit of regulatory projection, the URF, right, in Spanish, with a proposal, right, to change some of the dynamics of the payment systems in Colombia. Do you think, one, that this could impact positively digitalization? And then second, what is your take, right?
Because we know maybe on the fees side, we could have some impact for some players, so just maybe how are you thinking about this impact and your exchange with the regulator? Any insights here could be very helpful. Thank you.
The payment space is probably one of the most interesting, exciting spaces because it's changing so rapidly, so many things are happening in this space, not only due to regulation from the Minister of Finance, but also the central bank introducing this system for transfers, for P2P transfers, but also because of the dynamics of the market. You see the players in Colombia, both financial institutions like Davivienda, as well as the platforms that provide payment services and all the other players. It's a very, very active space, and that has already had an impact on the business model for the payment industry. Let me give you an example.
On the acquiring side, the acquiring side is a business that has been commoditized and the traditional acquiring business. So we see trends in which you have to have value-added proposals to small merchants, to specific types of merchants. And if you don't do that, then your fees will start coming down, and that's what we've seen in many of those businesses. On the P2P side, we're used to having zero-cost P2P transactions for many years. Another example is we've had DaviPlata for more than 13 years in which P2Ps are at zero cost. So this is a space in which we're used to participate actively, proactively, being disruptors in this space. And most of the impacts of lowering cost of transactions have already been put in place by the major financial institutions. So I don't see that as changing the landscape for us in terms of fees.
In the coming months, there will be new possibilities for the market to have transactions, and although there might be some reduction in fees on some specific lines of businesses, which, as I mentioned, they have already been put in place, what I see is opportunities, opportunities for growth in terms of volume and to go against cash that is still king in Colombia, and the fact that we can bring some of that cash into the system and increase the deposit volumes is also helpful, so what I see is opportunities. It's a changing landscape, and I believe that we're very well positioned to take advantage of it.
Super clear. Thank you.
Thank you very much. With that, we'll move on to our third question coming from Mr. Carlos Gomez from HSBC. Mr. Gomez, the floor is yours.
Good morning, and thank you for taking my questions.
First of all, congratulations for coming back into profit. You're obviously on the recovery path. So I wanted to ask two questions. One is, how long this recovery in respect to take? Is this a one-year process, two-year process, longer? And second, the destination. What level of profitability, given what you know about the Colombian economy today, of interest rates, of your own business, where do you think that you can end up in terms of profitability, whether it is in 2026 or 2027, or when you think that earnings are going to normalize? Thank you.
Carlos, thank you for your question. And yes, we're excited of going back to profitability, and we believe that there's a trend that it's a consistent trend. It's not going to be a short-term adjustment. It's going to take some time.
We believe that next year, we're not giving guidance as of today for next year. In general, the high view of what we're expecting for next year would be ROAE in the mid to high single digits for next year, which is still not our long-term expectation for profitability. We see 2026 as a year in which we would be getting closer to those levels of profitabilities on a range from 10%-15% ROAE, but that's something that we're expecting for 2026. It won't be happening next year because we see still a trend in which even though cost of risk is coming down, it'll take some time. Margins also take some time to improve the way we want them. I would say it's mid to high single digits for ROAE for next year.
In terms of 2026 and beyond, 10%-15% ROE, should we understand that you think that it is still possible given where the interest rate cap is now, where the expected level of interest rate is going to be, where the taxation is today? Are those 10%-15% ROEs still achievable for a company like yours?
I think so. Yeah, I think so. And we have to adjust to these levels. In terms of operating expenses, for example, what we're seeing is an improvement in our operations, in efficiency, based on all that we've been investing on the digital platforms. We're seeing that trend actually functioning well. Our operating expenses are not growing this year. And that's with an inflation that began the year at more than 10%. So we're finding ways to consistently lower the cost of serving our customers.
The fact that our digital platforms can handle almost 100% of the services that our retail customers need is an opportunity that we still have to take advantage in terms of lowering the cost to customers. So I guess when you take into account the fact that margins will be recovering, the cost of risk is coming down. Even with margins that have a cap rate, we will be able to attain these margins. We will have to keep working very hard on improving our model in terms of efficiency, but I think it's perfectly doable. You have to take into account that the cap rate has been here for a long time. It's not a new thing. We had very high interest rates the last couple of years, but before the pandemic, we had levels of interest that are consistent with the level that we have now.
So it's not an environment that we're not used to.
Thank you. Thank you so much.
Thank you, Carlos.
Thank you very much. With that, we'll move on to Mr. Andres Soto from Banco Santander. Mr. Soto, the floor is yours.
Good morning, and thank you for the presentation. My first question is regarding corporate structure. You mentioned that now the Central American operations are under the Panama subsidiary, and we recently heard in Colombia that they are changing the corporate structure to have a holding company that, among other things, is going to be able to buy back shares. Is this something that you guys may consider? And just to clarify, when we look at your Colombia or your consolidated core equity Tier 1, that reflects the effect of the consolidation of the Central American operation.
Is there any opportunity for capital optimization that's consolidating those operations out of Colombia?
Thank you, Andres, for your question. Yes, the project of the Central American holding has been around for three years, and we finally are actually this month. This month of November is the month in which we're actually consolidating all of our operations under this holding. I guess the key word here is flexibility. We want to have a flexible structure in which we can take advantage of different opportunities. Let me give you an example. Nowadays, when we get dividends from any of our Central American operations, we can reassign that capital into other operations. In the previous structure, we had to bring those funds to Colombia via dividends, and then with tax implications, and then moving them back was also difficult. So there's flexibility in that sense.
It's flexibility in the sense that we can issue capital markets instruments, either bonds or eventually equity at the level of a holding company for the region without getting involved in the Colombian operation. So in general terms, it gives us a lot of flexibility. In the short term, of course, we're not considering any buyback of stocks because of the fact that we believe that there are growth opportunities and the level of capital that we have is not consistent with buying back stocks. But we believe that having the flexibility to move around capital and bring partners to specific parts of our business is a much better way to unlock value that might be captured when you have a single structure in which a bank in Colombia is the holding company for the complete organization.
That's very clear.
But just to be specific, on the 10.4% core equity Tier 1, there is still impact from the consolidation of Central America, or that impact is already eliminated out of that number?
No, no. On the consolidated financial statements, there's no impact at all from the Central American consolidation. That's on the separated financial statements which are under the Colombian GAAP. But on the consolidated, the numbers that you are following, there's no impact on this transaction because within the consolidation process, it's eliminated. So it makes no difference at all.
That's good. When I look at the evaluation, Davivienda is trading at less than 0.6 times price-to-book value. And when you think about capital deployment alternatives and you consider the possibility of doing M&A, would it be the most accretive transaction for you to buy back shares instead of buying another bank?
And if you think about buying it, do you guys consider that the bar is extremely low and any potential transaction could be diluted to shareholders?
Well, we are very aware of the multiple that our shares are trading at. And of course, in any transaction, of course, we have to look for value generated for our shareholders in terms of the elements being brought to any transaction. And that's a rule that we've been following in all the transactions that we've gone through, and it's a rule that we believe that we have to keep going forward. Whatever we do with our capital, we'll always be consistent with finding the best value for our shareholders. In terms of buybacks, that's something that is not allowed by Colombian regulation.
The financial institutions are not allowed to do that, which is one of the reasons why a different structure is also helpful. But as of now, we don't have plans to buy back shares because the capital levels that we have are consistent with growth. And of course, either organic or inorganic growth has to be consistent with the valuations that we have on our shares. Of course, we will be careful going forward both organically and inorganically on making sure that we make our decisions consistent with value accretion for our shareholders.
Perfect. Thank you all.
Thank you, Andres.
Thanks a lot. We will now move on to the webcast questions. Our first question comes from Mr. Juan Camilo Dauder from Bancolombia. His question says, "How do you expect the bank to perform in terms of NIM in the following quarters?
Do you expect the bank to be more asset or liability sensitive?" Thank you.
Thank you, Juan Camilo, for your question. The bank has, over the last couple of years, we've experienced a compression of our margin because of the liability-sensitive nature of the bank. That has been changing. That has been changing because of some restructuring on our portfolios by hedging strategies that have been put in place that actually make us less liability sensitive. So in a scenario in which interest rates were going up again, we would be less liability sensitive. But still, going forward, we expect NIM to improve based on the fact that the central bank will still be bringing the interest rate down. And we still see an opportunity because the repricing of our funding is very heavily concentrated in the short term.
So what we'll see is probably what we're expecting is an improvement in our NIM during the following quarter because of that. Of course, we're seeing trends on the asset side, as I mentioned before, on the Cap Rate and the consumer loans. But the overall scenario implies for us an improvement in the NIM for the following quarters.
Thank you very much. Our second question comes from Mr. Juan Nicolás Pardo from Bancolombia. The question says, "Does the new operational risk assessment model for Colombian operations already in place? And if so, how much is the impact on solvency and metrics?" Thank you.
Thank you, Juan Nicolás, for your question. It's in place on the separate financial statements, but it's not in place for the consolidated. The numbers that Pedro presented previously in terms of solvency do not include those numbers as of the third quarter.
We're expecting it to be included by year-end. And if that happens, it could be around 30-40 basis points of improvement.
Thank you very much. As of now, we have no further questions either through our phone line or our webcast chat. So with that, there are no further questions, and I want to turn the floor over to Mr. Javier Suárez for any closing remarks. Mr. Suárez, the floor is yours.
Well, thank you for attending our conference call. We're excited to see the numbers improving. And as I mentioned before, the trend is a consistent trend looking forward. And that trend is not only based on the financials and the numbers, but also what we're seeing internally on our roadmap in terms of digital capabilities for our platforms. This year has been a year in which we've been transitioning from legacy platforms to new digital platforms.
We've been focusing on making sure that the transition is a transition that gives our customers the opportunity to experience consistent platforms that are with good performance and with good stability. That has been the focus of this year, and we are finishing the year with good numbers in terms of stability and consistency of our platforms, which leave us open the opportunity to improve in our capabilities, our digital capabilities with new functionalities for next year that will be very exciting for our customers. We believe that we are in very good shape. The fact that the numbers are beginning to support our strategy and the fact that our teams are very committed to moving forward with the digital strategy makes us very excited about what is coming in the following quarters.
We're also excited to be very consistent on our sustainability strategy, how our strategy is sustainable, how we're working to make sure that everything is aligned, and we expect to provide you with better results in the following quarters and with expectations, with the guidance also for year 2025. Thank you very much for attending the call, and we look forward to listening to you in the following quarters. Thank you very much, and thank you, ladies and gentlemen. This concludes today's conference call. Thank you for participating. You may now disconnect from the call.