Grupo Aval Acciones Y Valores S.A. current report, Q1 FY2018

Business Context and Reporting Period

Company: Grupo Aval Acciones Y Valores S.A. (Colombia's largest banking group, with significant operations in Central America via BAC Credomatic).

Filing Type: Form 6-K (Report of Foreign Private Issuer).

Reporting Period: Fourth Quarter (4Q) and Full Year (FY) 2017. Results reported in Colombian Pesos (Ps) billions under IFRS.

Regulatory Note: As of September 2018, the group will be subject to supervision as a financial conglomerate under Colombia's Law 1870 of 2017.

Key Financial Metrics (FY 2017 vs. FY 2016)

Metric FY 2017 FY 2016 Change
Net Income (Attributable) Ps 1,962.4 billion Ps 2,139.9 billion -8.3%
Earnings Per Share (EPS) Ps 88.1 Ps 96.0 -8.2%
Return on Equity (ROAE) 12.5% 14.3% -180 bps
Return on Assets (ROAA) 1.4% 1.6% -20 bps
Net Interest Margin (NIM) 5.9% 5.6% +30 bps
Cost of Risk 2.5% 1.9% +60 bps
Efficiency Ratio 46.5% 47.3% -80 bps
Total Assets Ps 236,538.5 billion Ps 224,073.7 billion +5.6%
Gross Loans (excl. interbank) Ps 159,093.7 billion Ps 151,590.6 billion +4.9%
Deposits Ps 154,885.2 billion Ps 143,887.1 billion +7.6%
Deposit/Net Loan Ratio 96.3% 95.4% +0.9%

Material Changes and Performance Drivers

  • Profitability Decline: Full-year net income dropped 8.3% primarily due to a significant increase in the cost of risk (provisions), which offset gains in Net Interest Margin (NIM) and fee income.
  • Loan Portfolio Growth: Consumer loans (including mortgages) grew 8.0% year-over-year, while corporate loans grew 2.9%. Growth was constrained by a slow economy and stricter lending parameters.
  • Asset Quality Deterioration: The 30-day past due loan ratio increased to 3.9% (from 3.0% in 4Q16), and the 90-day past due ratio rose to 2.8% (from 2.0%).
  • Specific Credit Impacts: Approximately 50% of the deterioration in the cost of risk ratio was driven by specific corporate credits: Electricaribe, SITP, and Concesionaria Ruta del Sol (CRDS).
  • Fee Income: Fee income grew proportionately more than the balance sheet, contributing to a solid non-interest income performance.
  • Cost Control: The efficiency ratio improved to 46.5% due to cost-controlling strategies.

Guidance, Outlook, and Risks

2018 Guidance

  • Loan Growth: Targeted at 7% - 9%.
  • Cost of Risk: Expected to remain similar to 2017 levels (impacted by IFRS 9 adoption).
  • NIM: Projected to decrease by 30-40 basis points to the 5.6% area.
  • ROAE: Targeted between 12.5% and 13.0%.
  • Deposit/Loan Ratio: Target of 0.95x.

Macroeconomic Outlook

  • Colombia: GDP growth expected at 2.25% - 2.50% (vs. 1.8% in 2017). Inflation expected around 3.5%. Central Bank rate cycle expected to stabilize with a maximum of one additional cut to 4.25%.
  • Central America: GDP growth expected to outpace Colombia; inflation between 2% and 5%.

Risks and Contingencies

  • Political Volatility: First half of 2018 may be impacted by Colombian presidential elections.
  • Specific Exposure: Management noted that 90-day past due loans are not expected to show material deterioration, excluding potential impacts from the CRDS exposure (approx. USD 310 million).
  • Regulatory Change: New supervision requirements for financial conglomerates effective September 2018.

Investor Verification Checklist

  • Specific Credit Provisions: Verify the status and recovery potential of the Electricaribe, SITP, and CRDS exposures, which drove 50% of the cost of risk increase.
  • IFRS 9 Impact: Assess how the transition to IFRS 9 (expected in 2018) will further impact provisioning and reported earnings compared to the current IFRS baseline.
  • Central America FX Sensitivity: Review the impact of exchange rate fluctuations on the consolidated results, as Central American operations represent ~29% of assets.
  • Cost of Risk Trajectory: Monitor if the cost of risk stabilizes at 2.5% or continues to rise given the economic slowdown and specific corporate defaults.
  • Capital Adequacy: Confirm that the Tangible Equity Ratio (7.9%) remains sufficient under the new Financial Conglomerate Law requirements starting September 2018.