Business context and reporting period
Grupo Aval Acciones y Valores S.A. filed an annual Form 20-F for the fiscal year ended December 31, 2019, with audited consolidated financial statements prepared under IFRS. It is a Colombian financial holding company whose businesses include four Colombian banks, BAC Credomatic in Central America, merchant bank Corficolombiana, and pension and severance administrator Porvenir. The filing provides annual results, not a separate fourth-quarter income statement.
Amounts below are in Colombian pesos (Ps) billions unless stated otherwise. The filing’s U.S. dollar translations generally use Ps 3,277.14 per U.S. dollar at year-end 2019.
Financial results and position
| Metric | FY2019 / Dec. 31, 2019 | Prior comparable period |
|---|---|---|
| Operating income before net impairment losses, calculated from reported income lines | Ps 21,378.1 | Ps 20,502.5 in 2018; up about 4.3% |
| Net interest income | Ps 11,285.5 | Ps 10,871.8 in 2018; up 3.8% |
| Net income | Ps 5,365.5 | Ps 5,184.6 in 2018; up 3.5% |
| Net income attributable to owners of the parent | Ps 3,034.4 | Ps 2,912.7 in 2018; up 4.2% |
| Total assets | Ps 278,832.6 | Ps 259,675.2; up 7.4% |
| Net loans | Ps 173,942.3 | Ps 168,685.7; up 3.1% |
| Customer deposits | Ps 175,491.4 | Ps 164,359.5; up 6.8% |
| Cash and cash equivalents | Ps 30,117.2 | Ps 28,401.3 |
| Total liabilities / total equity | Ps 245,484.3 / Ps 33,348.3 | Ps 230,120.8 / Ps 29,554.3 |
Net interest margin was 5.6%, down from 5.7%. Return on average assets was 2.0% versus 2.2%, return on average equity was 16.4% versus 17.8%, and the efficiency ratio rose to 47.6% from 45.7%. The period-end equity-to-assets ratio was 12.0%, up from 11.4%; the tangible equity ratio was 9.2%, up from 8.4%.
Net impairment loss on financial assets was Ps 3,755.1, 1.1% lower year over year, while loan impairment expense itself increased 1.1% to Ps 4,194.0; higher recoveries of charged-off assets partly offset that expense. Cost of risk was 2.4%, down from 2.6%, but charge-offs increased to 2.7% of average gross loans from 2.0%. Loans more than 30 days past due rose to 4.4% of gross loans from 4.3%; loans more than 90 days past due rose to 3.3% from 3.1%. Stage 2 and Stage 3 loans together declined to 10.0% of gross loans from 10.6%.
Customer deposits represented 71.3% of consolidated liabilities. Management reported a 100.9% deposits-to-net-loans ratio, versus 97.4%, and cash equal to 17.2% of deposits. The filing does not provide a clear consolidated cash-flow total in the supplied text. Grupo Aval reported U.S.$3.9 billion (Ps 12.7 trillion) of consolidated long-term debt denominated in U.S. dollars at year-end; bonds issued were Ps 21,918.3 and borrowings from banks and others were Ps 19,803.3.
Material changes versus 2018
- Net income growth was supported by higher commissions and fees (+12.7%), net interest income (+3.8%), and trading income (+30.8%); higher other expenses (+8.5%) and lower gross profit from sales of goods and services (-10.2%) partly offset gains.
- Net interest margin compressed amid competitive loan pricing, particularly in consumer lending. Management said improving retail vintages and lower cost of risk partly offset margin pressure.
- IFRS 16 was adopted on January 1, 2019 using the modified retrospective method; 2018 comparatives were not restated. The adoption increased reported depreciation and amortization and lease liabilities, while reducing rent expense included in administrative expenses.
- Assets grew faster than net loans, while customer deposits continued to grow. The Colombian economy grew 3.3% in 2019, according to the filing, compared with 2.5% in 2018.
Outlook, risks, contingencies and unusual items
The filing gives no quantitative company earnings or revenue guidance. Management’s forward-looking discussion emphasizes digitalization, efficiency, profitable growth, and potential expansion in Colombia and Central America. It reported launching the digital platform dale! in February 2020 and entering an agreement to acquire 99.1% of Multi Financial Group, the holding company for Multibank in Panama, for U.S.$728 million, subject to conditions and regulatory approvals. Grupo Aval issued U.S.$1 billion of 4.375% senior notes due 2030 in February 2020.
The filing, dated April 24, 2020, describes COVID-19 as a significant and highly uncertain subsequent development. Quarantines, customer relief measures, reduced activity, unemployment and market volatility could affect loan growth, asset quality, fees, trading results and expenses. Management said the full impact could not yet be estimated. The Colombian Central Bank cut its policy rate by 50 basis points to 3.75% on March 27, 2020; governments and central banks also introduced relief and liquidity measures.
Material legal exposure includes Ruta del Sol Sector 2. Episol, a Corficolombiana subsidiary with a 33% interest in the concessionaire, was included in a December 2018 first-instance class-action ruling that imposed joint and several liability and ordered defendants to pay Ps 715.6 billion, with a 10-year debarment from state contracting and public office. The ruling was appealed and was not final. Grupo Aval said it had not accrued for the related SIC proceeding or the class action; the outcomes of DOJ and SEC investigations were not predictable. The concessionaire investment was carried at zero, and the banks’ Ps 762.0 billion exposure to it was provisioned at 100% at year-end. The filing also reports Ps 414.6 billion of combined exposure to Bogotá transit-system companies, provisioned at 25.4%; Electricaribe and Tranzit exposures were charged off during the fourth quarter of 2019.
Other risks highlighted include Colombian and Central American economic, political, tax and regulatory conditions; currency and interest-rate movements; credit and liquidity risk; sovereign-security exposure; cyber and operational risks; and the transition away from LIBOR. At year-end, Ps 20,887.5 of assets and Ps 4,650.1 of liabilities used LIBOR as a benchmark, with many contracts lacking adequate fallback provisions.
Grupo Aval declared annual dividends of Ps 60,000 per 1,000 common and preferred shares for 2019; the reported dividend payout ratio was 44.1%. Dividends are subject to Colombian law and depend on subsidiary distributions and regulatory capital conditions.
Important facts for investors to verify
- Review the audited IFRS statements and notes, especially cash flows, IFRS 16 effects, impairment assumptions, and the distinction between parent-attributable and total net income.
- Track credit quality beyond headline cost of risk: charge-offs rose, past-due ratios worsened modestly, and the filing notes significant exposures and restructuring activity.
- Monitor final outcomes and possible accruals for the Ruta del Sol class action, SIC proceeding, and DOJ/SEC investigations; the first-instance ruling was appealed.
- Assess the COVID-19 impact on loan performance, relief programs, funding and liquidity, and the subsequent-period results; the filing provides no quantified company forecast.
- Verify completion, purchase price, approvals and integration of the Multi Financial Group acquisition, and monitor U.S. dollar debt and LIBOR-linked exposures.
- Consider the holding-company structure, controlling shareholder’s voting control, non-voting preferred shares, dividend dependence on subsidiaries, and currency conversion risks for ADS holders.