Business Context and Reporting Period
Company: Grupo Aval Acciones Y Valores S.A. (Colombia's largest banking group and a major Central American financial player via BAC Credomatic).
Reporting Period: Third Quarter 2018 (ended September 30, 2018).
Filing Type: Form 6-K (Report of Foreign Private Issuer).
Accounting Standards: Results are presented under IFRS. The filing notes that 2018 results are not fully comparable to prior periods due to the prospective adoption of IFRS 9 (financial instruments) and IFRS 15 (revenue from contracts with customers) effective January 1, 2018.
Key Financial Metrics
| Metric | 3Q 2018 | 2Q 2018 | 3Q 2017 |
|---|---|---|---|
| Net Income (Attributable) | Ps 782.7 billion | Ps 681.5 billion | Ps 437.9 billion |
| Earnings Per Share (EPS) | Ps 35.1 | Ps 30.6 | Ps 19.7 |
| Return on Assets (ROAA) | 2.4% | 2.0% | 1.3% |
| Return on Equity (ROAE) | 19.1% | 17.7% | 11.2% |
| Net Interest Margin (NIM) | 5.8% | 5.8% | 5.9% |
| Cost of Risk | 2.3% | 1.9% | 2.6% |
| Efficiency Ratio | 39.1% | 46.1% | 46.8% |
| Tangible Equity Ratio | 8.6% | 7.7% | 8.0% |
| Total Assets | Ps 241,487 billion | Ps 234,547 billion | Ps 228,063 billion |
| Total Loans (Net) | Ps 158,265 billion | Ps 158,306 billion | Ps 155,020 billion |
| 30-Day Past Due Loans | 4.5% | 4.4% | 4.0% |
| 90-Day Past Due Loans | 3.2% | 3.1% | 2.7% |
Material Changes vs. Prior Periods
- Profitability Surge: Net income attributable to shareholders increased 14.9% quarter-over-quarter (QoQ) and 78.7% year-over-year (YoY). Accumulated net income for the first nine months of 2018 rose 37.9% compared to the same period in 2017.
- IFRS 15 Impact: A significant portion of the 3Q18 net income (Ps 330 billion gross, Ps 125 billion attributable) was driven by the retroactive recognition of income from concession projects under IFRS 15. Excluding this, net income would have been Ps 658 billion.
- Asset Growth: Total assets grew 3.0% QoQ and 5.9% YoY. Loan growth was modest (0.9% QoQ, 2.1% YoY), driven primarily by consumer and mortgage segments, while commercial loans remained flat.
- Cost of Risk Deterioration: The cost of risk increased by 37 basis points (bps) QoQ to 2.3%. This was primarily driven by a 72 bps increase in Central America due to political instability in Nicaragua and macroeconomic conditions in Costa Rica.
- Asset Quality Divergence: Consumer portfolio quality improved (PDLs down 18 bps, NPLs down 11 bps), suggesting the credit cycle bottom has passed. Conversely, the commercial portfolio deteriorated (PDLs up 27 bps, NPLs up 23 bps) due to slow growth in Colombia and specific corporate exposures in Central America.
- Efficiency Gains: The efficiency ratio improved significantly to 39.1% (down from 46.1% in 2Q18), driven by a 0.9% decrease in total operating expenses.
Outlook, Risks, and Management Commentary
- Regulatory Changes: Under Colombia's Law of Financial Conglomerates (Law 1870 of 2017), Grupo Aval will be subject to direct supervision by the Superintendency of Finance starting February 6, 2019, requiring compliance with capital adequacy and governance standards at the holding company level.
- Macroeconomic Risks: Management highlighted political risks in Nicaragua and macroeconomic volatility in Costa Rica as key drivers of increased impairment losses in the Central American region. In Colombia, slow economic growth continues to pressure the commercial loan portfolio.
- Tax Reform: The filing discusses the proposed "Financing Law" (Ley de Financiamiento) in Colombia, which includes a reduction in corporate tax rates from 37% to 30% and changes to VAT. Management estimates a 100 bps reduction in corporate tax could add approximately Ps 1 per share.
- Infrastructure Projects: Corficolombiana (the group's merchant bank) is actively developing 4G road concessions. Construction on two projects (Pacifico 1 and Chirajara-Fundadores) is underway, with two more expected to commence in late 2018 and 2019.
- Capital Position: The Tangible Equity Ratio improved by 85 bps to 8.6%, reflecting strong capital generation. Non-controlling interest increased significantly (18.6% YoY) due to the capitalization process of Corficolombiana in August 2018.
Investor Verification Checklist
- IFRS 15 Sustainability: Verify the sustainability of the Ps 330 billion retroactive income from concession projects and its impact on future revenue recognition patterns.
- Central American Exposure: Assess the specific credit exposure to corporate clients in Nicaragua and Costa Rica given the reported 72 bps spike in the regional cost of risk.
- Commercial Loan Quality: Monitor the trend of the commercial portfolio's past due loans (PDLs) and non-performing loans (NPLs), which are deteriorating despite improvements in the consumer segment.
- Regulatory Capital: Confirm the impact of the upcoming February 2019 regulatory changes on the holding company's capital requirements and liquidity.
- Non-Controlling Interest: Review the dilution effects from Corficolombiana's capitalization and its impact on the attributable net income per share.