Business Context and Reporting Period
Company: Grupo Aval Acciones Y Valores S.A. (NYSE: AVAL)
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: First Quarter 2020 (Ended March 31, 2020)
Context: Colombia's largest banking group and a major financial conglomerate in Central America. The quarter was characterized by strong growth in January and February followed by an abrupt economic deceleration in March due to the global pandemic and oil price war. GDP growth for the quarter was 0.4% (seasonally adjusted), and the Colombian peso devalued by 23.7%.
Key Financial Metrics
| Metric | 1Q 2020 | 4Q 2019 | 1Q 2019 |
|---|---|---|---|
| Net Income (Attributable to Parent) | Ps 700.2 billion | Ps 715.1 billion | Ps 762.9 billion |
| Earnings Per Share (EPS) | Ps 31.4 | Ps 32.1 | Ps 34.2 |
| Total Assets | Ps 320,427.8 billion | Ps 278,832.6 billion | Ps 258,263.0 billion |
| Gross Loans (Excl. Interbank) | Ps 200,668.0 billion | Ps 179,409.2 billion | Ps 168,446.4 billion |
| Customer Deposits | Ps 203,221.5 billion | Ps 175,491.4 billion | Ps 163,255.1 billion |
| Net Interest Margin (Total) | 4.78% | 5.63% | 5.71% |
| Cost of Risk (Net) | 2.2% | 2.1% | 2.0% |
| Efficiency Ratio | 47.1% | 52.1% | 44.7% |
| ROAE | 14.2% | 14.6% | 17.4% |
| ROAA | 1.8% | 1.9% | 2.1% |
| Cash & Equivalents | Ps 40,136.8 billion | Ps 30,117.2 billion | Ps 26,918.5 billion |
Material Changes vs. Prior Periods
- Profitability Decline: Net income attributable to shareholders decreased 8.2% year-over-year and 2.1% quarter-over-quarter. This was driven by a sharp drop in Net Interest Margin (NIM) and increased impairment losses.
- Margin Compression: Total NIM fell to 4.78% from 5.63% in 4Q19. The decline was primarily driven by a 364 basis point drop in NIM on investments, while NIM on loans remained relatively stable at 6.1%.
- Asset Growth: Consolidated assets grew 24.1% year-over-year and 14.9% quarter-over-year, significantly aided by currency devaluation effects on Central American operations. Gross loans grew 19.1% year-over-year.
- Loan Quality: The 90+ days Past Due Loans (PDL) ratio improved slightly to 3.1% (from 3.3% in 4Q19), aided by regulatory changes allowing refinanced pandemic loans to be classified as current. However, the Cost of Risk increased to 2.2% due to provisions for exposure to Avianca.
- Non-Interest Income: Gross profit from sales of goods and services (non-financial sector) surged 54.7% quarter-over-quarter, driven by toll road concessions and Promigas. Conversely, foreign exchange losses totaled Ps 1,147.8 billion, offsetting gains in net trading income.
Outlook, Risks, and Management Commentary
- Pandemic Response: Management has deployed strategies to safeguard employee health and alleviate debt payments for clients. Digital channels saw significant growth (24% monthly growth in mobile banking transactions).
- Liquidity Position: The group maintains strong liquidity with a Cash/Deposits ratio of 19.8% (up from 17.2%) and a Deposits/Net Loans ratio of 1.04x. Full compliance with the Net Stable Funding Ratio is reported.
- Recent Developments: On May 11, 2020, the company amended the purchase agreement for Multi Financial Group (MFG), a Panamanian bank. The closing date was extended to late May 2020, and the purchase price was reduced by 39% (from 1.3x to 0.85x equity) due to unmet conditions precedent.
- Risks: Key risks include the economic impact of the pandemic, currency volatility (devaluation), and credit deterioration in affected sectors. The filing includes standard forward-looking statement disclaimers regarding potential deviations from anticipated results.
Investor Verification Checklist
- FX Impact: Verify the extent to which asset and loan growth is driven by the 23.7% devaluation of the Colombian peso versus organic growth, particularly in Central American operations.
- Investment Portfolio Yield: Investigate the specific drivers of the 364 bps drop in NIM on investments, which significantly impacted overall profitability.
- Avianca Exposure: Assess the specific provisioning amounts related to the airline Avianca and the potential for further credit deterioration in the travel and tourism sectors.
- MFG Acquisition Terms: Review the revised terms of the Multi Financial Group acquisition, specifically the 39% price reduction and the implications for future consolidation.
- Foreign Exchange Volatility: Monitor the impact of the Ps 1,147.8 billion foreign exchange loss on future earnings, given the group's significant international exposure.