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, 2019 (Interim)
Filing Date: January 17, 2020
Business Overview: Grupo Aval is a Colombian financial holding company and the parent of the Aval Financial Conglomerate. Its operations include four major Colombian banks (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas), a merchant bank (Corficolombiana), and a pension fund administrator (Porvenir). The group also operates in Central America through Banco de Bogotá's subsidiaries.
Key Financial Metrics
Note: Figures are presented in U.S. dollars (millions) for convenience, translated at Ps 3,477.45 per U.S.$1.00. Original reporting currency is Colombian Pesos (Ps).
| Metric | 9 Months Ended Sep 30, 2019 | 9 Months Ended Sep 30, 2018 |
|---|---|---|
| Total Assets | $78,749.5 | $76,983.6 (Derived from Ps 259,675.2) |
| Net Interest Income | $2,412.7 | $2,333.5 |
| Net Income (Consolidated) | $1,173.9 | $1,019.1 |
| Net Income Attributable to Owners | $666.9 | $593.0 |
| Net Impairment Loss on Financial Assets | ($814.7) | ($723.1) |
| Total Customer Deposits | $50,050.5 | $47,264.6 |
| Total Loans (Gross) | $52,748.0 (Derived from Ps 183,385.1) | $50,865.0 (Derived from Ps 176,881.8) |
| Return on Average Assets (ROAA) | 2.1% | 2.0% |
| Return on Average Equity (ROAE) | 17.0% | 17.2% |
| Net Interest Margin | 5.6% | 5.8% |
| Efficiency Ratio | 46.0% | 46.3% |
| Tangible Equity Ratio | 8.9% | 8.4% |
Material Changes vs. Prior Period
- Profitability Growth: Net income attributable to owners increased by 12.5% (Ps 257.3 billion) to Ps 2,319.3 billion, driven by a 202.5% surge in net trading income and a 11.8% increase in net commission and fee income.
- Loan Portfolio Expansion: The total loan portfolio grew approximately 11% year-over-year. Commercial loans increased 8.1%, consumer loans 13.0%, and mortgage loans 18.4%.
- Impairment Deterioration: Net impairment loss on financial assets increased by 12.7% (Ps 318.3 billion). This was primarily driven by higher provisions for commercial loans, specifically related to the "Concesionaria Ruta del Sol" project, where the coverage ratio increased significantly.
- Cost of Risk: The consolidated cost of risk deteriorated by 12 basis points to 2.5%.
- Non-Financial Performance: Gross profit from sales of goods and services (primarily Corficolombiana's infrastructure projects) increased by 27.7%.
- Accounting Changes: The adoption of IFRS 16 (Leases) in 2019 reclassified rent expenses to depreciation and amortization, impacting the presentation of operating expenses.
Guidance, Outlook, and Risks
- Outlook: Management expects continued acceleration in the Colombian economy (GDP growth accelerated to 3.2% in the first nine months of 2019). The group is focusing on digital transformation and cost optimization.
- Legal Contingencies (Ruta del Sol):
- SIC Investigation: The Superintendency of Industry and Commerce (SIC) is investigating alleged competition violations regarding the Ruta del Sol Sector 2 project. A maximum potential penalty could impact net income by Ps 221.3 billion.
- Class Action: A first-instance ruling ordered the payment of Ps 715.7 billion in damages and a 10-year debarment. This ruling is under appeal by the Consejo de Estado, and the suspensive effect was lifted in October 2019.
- Arbitration: The Arbitration Tribunal declared the concession contract null and void, determining a liquidation value of Ps 211.3 billion payable to creditors. Grupo Aval has recorded provisions for 86.2% of its exposure to this entity.
- US Investigations: The DOJ and SEC have opened investigations related to the Ruta del Sol II project; Grupo Aval is cooperating.
- Acquisition: On October 31, 2019, Leasing Bogotá (subsidiary of Banco de Bogotá) agreed to acquire 99.1% of Multi Financial Group (MFG) in Panama for $728.0 million. The transaction is expected to close in Q2 2020.
- Key Risks: Credit risk (increased defaults), exchange rate volatility (Colombian peso depreciation), regulatory changes, and the outcome of the Ruta del Sol legal proceedings.
Investor Verification Checklist
- Ruta del Sol Exposure: Verify the adequacy of the 86.2% provision on the Ps 738.4 billion loan exposure to Concesionaria Ruta del Sol and the potential impact of the Ps 715.7 billion class action ruling if the appeal fails.
- Impairment Trends: Monitor the trajectory of the cost of risk, particularly in the commercial loan segment, given the specific impact of the Ruta del Sol provisions.
- IFRS 16 Impact: Review the long-term impact of IFRS 16 adoption on reported operating expenses and EBITDA, as rent expenses are now capitalized and depreciated.
- Central American Operations: Assess the performance of the Central American portfolio (approx. 49% of Banco de Bogotá's assets) and the impact of local currency fluctuations against the Colombian peso.
- Acquisition Integration: Track the regulatory approval timeline and integration costs for the Multi Financial Group (Panama) acquisition.