Business Context and Reporting Period
Company: Grupo Aval Acciones y Valores S.A.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Nine months ended September 30, 2011 (unaudited) and full year ended December 31, 2010 (audited).
Business Overview: Grupo Aval is Colombia's largest banking group by total assets and most profitable by Return on Average Shareholders' Equity (ROAE). The group operates four commercial banks in Colombia (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas), a pension fund manager (Porvenir), a merchant bank (Corficolombiana), and a Central American banking group (BAC Credomatic, acquired December 2010).
Accounting Basis: Financial statements are prepared under Colombian Banking GAAP. U.S. GAAP reconciliations are provided for select periods.
Key Financial Metrics
| Metric (in U.S.$ millions) | 9 Months Ended Sept 30, 2011 | Year Ended Dec 31, 2010 |
|---|---|---|
| Total Assets | 55,322.8 | 96,309.3 |
| Total Loans & Financial Leases (Gross) | 34,324.7 | 58,623.6 |
| Total Deposits | 34,126.5 | 63,669.3 |
| Net Interest Income | 2,093.2 | 4,628.8 |
| Total Operating Income | 3,115.6 | 6,005.1 |
| Net Income Attributable to Shareholders | 458.4 | 956.9 |
| Return on Average Assets (ROAA) | 2.2% | 2.2% |
| Return on Average Equity (ROAE) | 19.2% | 22.2% |
| Efficiency Ratio | 53.3% | 46.6% |
| Non-Performing Loans (% of Total) | 1.8% | 1.9% |
Note: 2011 figures are for a nine-month period; 2010 figures are for a full year. Exchange rate used for translation: Ps 1,929.01 per U.S.$1.00 (Sept 30, 2011).
Material Changes vs. Prior Period
- Asset Growth: Total assets increased significantly from December 31, 2010 (Ps 96.3 trillion) to September 30, 2011 (Ps 106.7 trillion), driven largely by the consolidation of BAC Credomatic and organic growth.
- Loan Portfolio Expansion: Gross loans grew from Ps 58.6 trillion (Dec 2010) to Ps 66.2 trillion (Sept 2011). The foreign loan portfolio (primarily BAC Credomatic) represented approximately 16.4% of the total gross loan portfolio at September 30, 2011.
- Profitability Trends: While ROAE remained strong at 19.2% (annualized) for the nine months ended September 2011, it decreased from the 22.2% recorded for the full year 2010. The efficiency ratio increased (worsened) from 46.6% in 2010 to 53.3% in the first nine months of 2011, attributed in part to the integration costs of BAC Credomatic.
- Asset Quality: Non-performing loans improved slightly to 1.8% of total loans at September 30, 2011, down from 1.9% at December 31, 2010. The allowance for loan losses covered 188.6% of non-performing loans.
Guidance, Outlook, and Risks
Management Commentary & Strategy:
- BAC Credomatic Integration: Management aims to improve BAC Credomatic's efficiency ratio (58.0% at Sept 2011) to match Colombian operations (53.3%) by implementing group best practices. The acquisition provides a leading position in Central American credit card issuance and merchant acquiring.
- Market Penetration: The company plans to further penetrate the Colombian market, which has low banking penetration rates, and expand non-interest income through bancassurance and credit card fees.
- Capitalization: The group maintains strong capital adequacy. The aggregate solvency ratio of Colombian banks was 12.9% at September 30, 2011, well above the 9.0% regulatory minimum.
Risks and Contingencies:
- Foreign Exchange Risk: Significant exposure to fluctuations between the Colombian peso and the U.S. dollar, particularly regarding the U.S.$1.3 billion of dollar-denominated debt incurred to finance the BAC Credomatic acquisition.
- Regulatory & Political Risk: Operations are heavily dependent on Colombian and Central American economic and political stability. Risks include changes in tax laws, interest rate caps, and consumer protection regulations (e.g., Law 1328 of 2009).
- Asset Quality: Potential for increased non-performing loans due to economic downturns, particularly affecting the consumer and SME segments which comprise a large portion of the portfolio.
- Concentration Risk: The group is controlled by Mr. Luis Carlos Sarmiento Angulo, who beneficially owns 93.5% of common shares, creating potential conflicts of interest.
Key Facts for Investor Verification
- Accounting Standards: Verify the reconciliation between Colombian Banking GAAP and U.S. GAAP, as significant differences exist in the treatment of goodwill, asset revaluation, and pension fund accounting.
- BAC Credomatic Performance: Monitor the standalone performance of BAC Credomatic, specifically its efficiency ratio and credit quality, as it represents a new and distinct risk profile compared to the Colombian operations.
- Debt Servicing: Assess the impact of the U.S. dollar-denominated debt on the balance sheet and income statement given the volatility of the Colombian peso exchange rate.
- Regulatory Compliance: Review ongoing investigations by the Superintendency of Industry and Commerce regarding credit card interchange fees and merchant discounts, which could impact fee income.
- Capital Structure: Note the significant non-controlling interest (approx. 2.5 billion U.S. dollars at Sept 2011) and the impact of minority interests on net income attributable to Grupo Aval shareholders.