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: Second Quarter 2018 (Ended June 30, 2018)
Accounting Standards: IFRS (International Financial Reporting Standards)
Context: Grupo Aval is Colombia's largest banking group and a major player in Central America. The reporting period reflects the prospective adoption of IFRS 9 and IFRS 15 effective January 1, 2018, which impacts comparability with prior periods regarding impairment losses and interest income recognition, though net income was not materially affected by the transition.
Key Financial Metrics
| Metric (Ps Billions) | 2Q 2018 | 1Q 2018 | 2Q 2017 |
|---|---|---|---|
| Net Income (Attributable to Parent) | 681.5 | 597.7 | 470.8 |
| Earnings Per Share (Ps) | 30.6 | 26.8 | 21.1 |
| Net Interest Income | 2,611.6 | 2,663.4 | 2,636.4 |
| Net Non-Interest Income | 1,912.2 | 1,743.6 | 1,764.9 |
| Total Assets | 234,547.4 | 232,279.0 | 230,788.5 |
| Total Loans & Receivables (Net) | 158,305.7 | 156,099.6 | 157,100.3 |
| Total Deposits | 151,958.1 | 151,771.6 | 150,117.8 |
| Total Liabilities | 209,277.4 | 208,171.3 | 206,066.8 |
| Equity (Attributable to Parent) | 15,830.5 | 14,944.9 | 15,523.4 |
Key Ratios
- Return on Average Assets (ROAA): 2.0% (vs. 1.6% in 1Q18)
- Return on Average Equity (ROAE): 17.7% (vs. 15.3% in 1Q18)
- Net Interest Margin (NIM): 5.6% (Stable vs. 1Q18)
- Efficiency Ratio: 47.0% (vs. 46.6% in 1Q18)
- Tangible Equity Ratio: 7.7% (vs. 7.4% in 1Q18)
- Cost of Risk (Net): 1.7% (Improved from 2.2% in 1Q18)
- 30 Days Past Due Loans (PDL): 4.2% of total loans
- 90 Days Past Due Loans (PDL): 2.9% of total loans
Material Changes vs. Prior Periods
- Profitability Surge: Net income attributable to shareholders increased 44.8% year-over-year (vs. 2Q17) and 14.0% quarter-over-quarter (vs. 1Q18). This was driven by a 35.7% reduction in net impairment losses and a 102.5% increase in net income from the non-financial sector.
- Asset Growth: Total assets grew 1.6% year-over-year and 1.0% quarter-over-quarter. Gross loans increased 2.8% year-over-year, driven primarily by mortgage and consumer loans, while commercial loans remained flat (0.1% growth) due to a strategic focus on profitability over volume.
- Asset Quality: The cost of risk improved significantly to 1.7% (down from 2.7% in 2Q17), attributed to better credit quality and slower loan growth requiring fewer initial provisions. However, 90-day past due loans increased slightly to 2.9%.
- Non-Interest Income: Net income from sales of goods and services (non-financial sector) more than doubled year-over-year to Ps 259.0 billion, reflecting strong performance in Corficolombiana's energy and infrastructure businesses.
Outlook, Risks, and Management Commentary
- Strategic Focus: Management emphasized an active strategy to focus on profitable growth, which has impacted the commercial loan portfolio balance. The group expects an improvement in 90-day past due loans going forward due to better roll rates.
- Capital Position: The group maintains a stronger capital position with a Tangible Equity Ratio of 7.7%. The holding company and its subsidiary, Grupo Aval Limited, reported a combined double leverage of 1.16x.
- Regulatory Environment: Starting in 2018, Grupo Aval is subject to supervision as a financial conglomerate under Colombia's Law 1870, requiring compliance with capital adequacy and risk management standards at the holding level.
- Macroeconomic Risks: The filing notes that results are subject to changes in general economic conditions, interest rates, and currency rates. The Colombian economy is experiencing slow growth, which continues to impact loan portfolio quality.
- IFRS 9 Impact: While net income was not affected by the adoption of IFRS 9, the standard requires netting out Stage 3 interest income against provisions. Provisions booked against interest income for Stage 3 loans amounted to Ps 250 billion for the first half of 2018.
Investor Verification Checklist
- IFRS 9 Adjustments: Verify the specific impact of IFRS 9 on impairment loss calculations and the netting of Stage 3 interest income to ensure accurate year-over-year comparisons.
- Non-Financial Sector Performance: Confirm the sustainability of the 102.5% growth in non-financial sector income, specifically within Corficolombiana's energy and infrastructure divisions.
- Asset Quality Trends: Monitor the 90-day past due loan ratio (currently 2.9%) and the coverage ratio (1.5x) to assess if the expected improvement in roll rates materializes.
- Commercial Loan Strategy: Evaluate the long-term implications of the flat commercial loan growth (0.1% YoY) on future revenue streams versus the reported efficiency gains.
- Debt Service Coverage: Review the holding company's debt service coverage ratio (Core Earnings / Interest Expense at 5.1x) and net debt levels (Ps 2,765.4 billion net indebtedness) to assess liquidity risks at the parent level.