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: Third Quarter 2017 (Ended September 30, 2017)
Accounting Basis: International Financial Reporting Standards (IFRS)
Business Overview: Colombia's largest banking group and a leading financial group in Central America. The holding company is not regulated as a financial institution, but its subsidiaries (including Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas, Porvenir, and Corficolombiana) are subject to supervision by the Superintendency of Finance.
Key Financial Metrics
| Metric (Ps. Billions) | 3Q 2017 | 2Q 2017 | 3Q 2016 |
|---|---|---|---|
| Net Income (Attributable to Parent) | 437.9 | 470.8 | 613.9 |
| Net Interest Income | 2,676.1 | 2,636.4 | 2,324.4 |
| Net Fee Income | 1,148.8 | 1,134.3 | 1,055.6 |
| Impairment Loss (Net) | 1,027.3 | 1,054.6 | 631.9 |
| Total Assets | 228,063.1 | 230,788.5 | 216,371.4 |
| Total Loans (Net) | 155,019.9 | 157,100.3 | 143,291.8 |
| Total Deposits | 146,886.5 | 150,117.8 | 136,157.3 |
| Total Equity | 25,181.6 | 24,721.7 | 23,779.8 |
Key Ratios
- Return on Assets (ROAA): 1.3% (vs. 1.3% in 2Q17)
- Return on Equity (ROAE): 11.2% (vs. 12.4% in 2Q17)
- Net Interest Margin (NIM): 5.9% (vs. 6.1% in 2Q17)
- Cost of Risk (Net of Recoveries): 2.6% (vs. 2.7% in 2Q17)
- Efficiency Ratio: 46.8% (vs. 46.9% in 2Q17)
- 30-Day Past Due Loans (PDL): 4.0% (vs. 3.8% in 2Q17)
- 90-Day Non-Performing Loans (NPL): 2.7% (vs. 2.5% in 2Q17)
- Tangible Capital Ratio: 8.0% (vs. 7.6% in 2Q17)
Material Changes vs. Prior Period
- Profitability Decline: Net income attributable to shareholders decreased 7.0% quarter-over-quarter (QoQ) to Ps 437.9 billion and 28.7% year-over-year (YoY). This was primarily driven by higher impairment losses and a higher effective tax rate (40.3% vs. 35.6% in 2Q17).
- Asset Growth Deceleration: Total assets decreased 1.2% QoQ, while total loans declined 0.2% QoQ (excluding FX, loans grew 0.9%). This reflects a strategy to control portfolio quality amidst a slowing Colombian economy.
- Deposit Contraction: Total deposits declined 2.2% QoQ, aligning with the broader economic slowdown.
- Asset Quality Deterioration: 30-day PDL and 90-day NPL ratios deteriorated by approximately 20 basis points QoQ to 4.0% and 2.7%, respectively. However, the consumer portfolio quality improved by 10 basis points.
- Margin Pressure: NIM declined 15 basis points to 5.9% due to a steep declining interest rate environment, though NIM on loans remained stable at 7.0%.
Guidance, Outlook, and Risks
Management Commentary and Outlook
- Economic Recovery: Management notes signs of recovery in the Colombian economy, with GDP growth reaching 2% in 3Q17. Full-year 2017 GDP growth is estimated at 1.70%, with 2018 projected near 2.50%.
- Cost of Risk: Management expects the cost of risk to decline in 2018, which should support a stronger ROE despite continued declining interest rates.
- Central America: The Central American operation (30% of business) continues to perform strongly with loan book growth exceeding Colombian portfolios and sustained ROE.
- Infrastructure Projects: Corficolombiana's performance remains lackluster due to delays in infrastructure projects, specifically the Ruta del Sol liquidation. A legislative modification was recently approved, and the first payment to creditors is expected in December 2017.
Risks and Contingencies
- Specific Credit Exposures: Significant provisions were taken for problem clients Electricaribe (Ps 150 billion provision in 3Q17) and SITP. Management expects the impact of Electricaribe provisions to be materially resolved by early 2018.
- Macroeconomic Sensitivity: Results are sensitive to Colombian GDP growth, inflation, and the COP/USD exchange rate.
- Regulatory/Legal: Uncertainty regarding legal grounds for infrastructure project valuations (Ruta del Sol) has impacted results, though recent legislative changes aim to resolve this.
Investor Verification Checklist
- Electricaribe Exposure: Verify the remaining exposure and provisioning status for Electricaribe and SITP to confirm the timeline for "materially done" provisions.
- Asset Quality Trends: Monitor the 30-day PDL and 90-day NPL ratios closely, as they deteriorated QoQ despite management's focus on quality control.
- Central American Performance: Validate the continued strength of the BAC Credomatic operation as a diversification hedge against Colombian economic slowdown.
- Infrastructure Resolution: Track the approval of the first payment to Ruta del Sol creditors in December 2017 and its impact on Corficolombiana's earnings.
- Interest Rate Environment: Assess the impact of continued declining interest rates on Net Interest Margin (NIM) and the ability to offset this with cost of risk reductions.