1Q2013 Consolidated Results under Colombian Banking GAAP
May 20, 2013 AM EDT
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
1Q2013 Consolidated Results under Colombian Banking GAAP
May 20, 2013 / 02:00PM GMT
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Corporate Participants
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* Luis Carlos Sarmiento Gutierrez
Grupo Aval Acciones y Valores SA - CEO
* Diego Solano
Grupo Aval Acciones y Valores SA - CFO
* Carlos Perez
Grupo Aval Acciones y Valores SA - Chief Strategy Officer
* Tatiana Uribe
Grupo Aval Acciones y Valores SA - Financial Planning and IR Officer
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Conference Call Participants
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* David Santos
Compass Group - Analyst
* Boris Molina
Santander Investment - Analyst
* Diego Usmay
Onta Borsapeelis - Analyst
* Jose Restrepo
Sef Cinco - Analyst
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Presentation
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Operator [1]
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Good day, ladies and gentlemen, and welcome to the Grupo Aval First Quarter's 2013 Consolidated Results under Columbian Banking GAAP Conference Call. My name is Sandra, and I will be your operator for today's call.
At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Quarterly results included in this webcast have not been audited. However, they are prepared in accordance with the regulations of the Superintendency of Finance for financial institutions and generally accepted accounting principles for banks to operate in Columbia, also known as Columbian Banking GAAP, which differs in certain significant respects from US GAAP.
Yearly audited consolidated financial statements included in our Form 20-F reports filed to the SEC provide a description of the principal differences between Colombian Banking GAAP and US GAAP. Grupo Aval as an issuer of securities in Columbia is subject to the control of the Superintendency of Finance.
Although we are not a financial institution, we present our consolidated financial statements under Colombian Banking GAAP in this quarterly report because we believe that presentation on that basis most appropriately reflects our activities as a holding company of the group of banks and other financial institutions.
This webcast may include forward-looking statements which actual results may vary from those stated herein as a consequence of changes in general, economic and business conditions, changes in interest and currency rates, and other risk factors as evidenced in our Form 20-F available at the SEC web page. Recipients of this document are responsible for the assessment and use of the information provided herein.
Grupo Aval shall not be responsible for any decisions taken by investors in connection with this document. The content of this document is not intended to provide full disclosure on Grupo Aval or its affiliates. When applicable, in this webcast we refer to billions as thousands of millions.
With us today is Mr. Luis Carlos Sarmiento Gutierrez, Chief Executive Officer of Grupo Aval; Mr. Diego Solano, Chief Financial Officer of Grupo Aval; Mr. Carlos Perez, Chief Strategy Officer of Grupo Aval; and Tatiana Uribe, Financial Planning and Investor Relations Officer of Grupo Aval.
I will now turn the call over to Mr. Luis Carlos Sarmiento Gutierrez. Mr. Sarmiento, you begin your conference.
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Luis Carlos Sarmiento Gutierrez, Grupo Aval Acciones y Valores SA - CEO [2]
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Thank you, Sandra. Good morning. My name in fact is Luis Carlos Sarmiento, and it is my distinct pleasure to lead off today's call, in which we are proud to report our first financial results for 2013. Allow me to highlight some of our first quarter results over the next two minutes and then hand it over to my colleagues to expand on these and other figures.
Columbia continues to be an ideal place to do business and the financial industry continues to be one of the country's best performers. GDP growth for last year rounded at 4%, and leading indicators point to a somewhat higher number for this year. This number will be further boosted when the government's infrastructure projects come up to full speed later on this year.
In that context Grupo Aval achieved net income of COP505.3 billion during the first quarter of this year, a 33% increase when compared to 2012's first quarter. This net income number was supported by a 50 basis point increase in net interest margin, which moved from 6.6% during the first quarter of 2012 to 7.1% during 2013's first quarter, while net income result was also influenced by an efficiency improvement. In fact, Aval's efficiency ratio moved from 50.1% in the first quarter of 2012 to 43.8% in the first quarter of 2013.
Year-on-year, as of March 31, 2013 our assets grew by 12% to COP128.4 trillion. And I think there's a typo on that on the highlights page, but the right number will be in the presentation. It's COP128.4 trillion. And our loans grew by 14% to COP81 trillion with our Central American subsidiary showing a very robust performance, while both our Columbian and Central American non-portfolios remain healthy and adequately reserved.
Equity remains adequate, as evidenced by the equity to total assets ratio, which amounted to 11.6% at the end of this year's first quarter, an improvement of 10 basis points when compared to March 31, 2012. In this same respect Aval's tangible equity ratio ended the quarter strong at 9.5%, a 30 basis pickup versus March 31, 2012. Profitability ratios were also strong with return on average assets for the last 12 months of 18% and return on average assets of 2.2%.
Last but not least, on April 18th we closed on the acquisition of BBVA's Columbia's pension fund administrator, an acquisition that we announced during the last week of December 2012. With this acquisition we consolidated our leadership in pension fund asset management in Columbia.
And now I'll pass on the presentation to Diego Solano, Aval's Chief Financial Officer, who will expand on these and other important points. Thank you and goodbye.
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [3]
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Thank you, Luis Carlos. Now let me ask you to move to page four. On the top of this chart you will find the evolution of growth, the activity growth in Columbia and the rest of the world. As you can see, over the past two years Columbia has grown at a faster pace than the world average. Analysts project this will continue to do so during 2013.
And the bottom of this chart you will see activity per capital measures in nominal US dollars. As you can see, this has reached $7,900 by the end of 2012 and is expected to grow to $8,200 by the end of 2013.
Moving to the bottom part of the chart, you will see the different grades that determine our business, basically inflation, central banking [first] grade and DTF. 12-month inflation ended as of March was 1.9%. The Banco la Republica rate was down to 325 with no changes in the last meeting of the bank, and end of period DTF at 4.6% for first quarter 2013.
Average DTF for this quarter was 4.8, down from 5.3 for the same period of 2012. In general the risk perception of Columbia is low with a positive opinion of the Santos administration, increasing potential for his continuation of administration, and thus his infrastructure plans.
Moving to page five, at the top of the chart you will see the evolution of our total assets. Total assets grew 12% year-on-year, up to $128 billion. Moving to the bottom of the page, you will see the competition of our asset breakdown, loans at 63%, up from 62% in the same quarter for last year, followed by investments at 17.5%. Our foreign operation is 18% of our operations while our Columbian operation is 82% of our operations.
Moving to page six, all figures in trillion dollars for the balance sheet, assets for for the balance sheet. Our gross loans grew 14% to COP81 trillion in for first quarter 2013. At the bottom of the page you will see a breakdown of our loans with commercial loan purchase I think 56% of our loan portfolio, consumer close to 30%, financial leases 8% and mortgages 5.7%. As you can see, some of our strategic segments have grown stronger than the average of our loan portfolio with consumer loans growing at 19.4%, financial leases at 19% and mortgages at 14.7%.
Now let me move to page seven. I will start at the bottom right of the chart and move counterclockwise. What you will see at the bottom part of the chart is the ratios regarding policy of loan portfolio. Our NPLs at the end of period were 1.8 of gross loans, slightly up from 1.6 at the end of first quarter 2012. PDLs were 2.6 of gross loans at the same date.
Moving clockwise to the top right-hand of the chart, you will find charge offs as a percentage of NPLs. In the first quarter of 2013 we wrote off 58% of our NPLs. This is less than the 63% that we did during first quarter of 2012. These lower charge offs partially explain the deterioration in our quality of loan ratios.
Moving to the left, you will see our provision expense of 1.6 of average loans during 2013 first quarter, and below that our covered ratio at 1.87x and 1.25x NPLs and PDL's perspective. Allowances as a percentage of gross loans remained at 3.3%.
Now please move to page eight. At the top of the chart you will find the total funding and total deposits. Funding grew 12% year-on-year at a similar pace as average deposits, representing [santifics] percent and growing at a similar rate. The funding mix shows a slight shift or long-term bonds given the two recent bond issuance in the international markets from Grupo Aval of 10-year senior bond issued at 4.8%, and Banco over the past 10 years a subordinated bond issued at 5 and 3/8ths, both of which have been trading at a very positive rate in the secondary market.
This increase in bonds results from our decision to take advantage of the low interest rate in international market, while improving the maturity profile of our funding. Our deposits maintained a similar structure as in the past with low cost deposits such as checking and savings accounts, representing 65% of all deposits.
Moving to the bottom of the chart, you will find the ratio of deposits to net loans. This has been consistently one of the strongest characteristics of Grupo Aval with deposits funding the net loans now at 104%, slightly lower than the ratio we had for the first quarter of 2012 given the strategy regarding funds that I just described.
Moving to page nine, at the top of the table you will find the attributable shareholder equity, as well as total capitalization for Grupo Aval, this including minority interest. Our attributable shareholders' equity increased 12.6% to COP9.2 trillion. Total equity including minority interest grew at a similar pace up to close to [$15 trillion]. Our leverage decreased, as you can see on the right table, with total equity as a percentage of assets at the end of the period at 11.6%, tangible capital ratio ending at 9.5%.
Moving to the bottom of the page, what you will find here are the consolidated [quasi] ratios for each one of our banks. As you can see, all of our banks continued to perform strongly. Regarding the new regulations that will be effective in August, all of our banks are set to comply with it.
Now let me move you to page 10. On the top of the page you will see and some of the yields of our key sections of our balance sheet. And in the bottom you can see the spread between this and for cost of funding.
You can see that average yield on loans has moved down to 11.7% down from 11.8% as of first quarter 2012, in line with what has been happening with the general rate environment in Columbia. DTF fell 67 basis points in the same period to from 522 down to 455 as of March of this year.
Ten-year bonds fell 41% from 528 down to 487. And this has driven, as you might already be aware, and substantial gains in the fixed income portfolios of the Columbian banks.
Yields on loans were 11.7% for first quarter 2013 versus 11.8% for the same period of 2012. Yield on investments was 8.6%, as I said, driven by falling rates in long term treasury, Columbian treasury bonds. Our cost then of fund was down to 3.7 from 3.8 for first quarter 2012. And we're about to report that we were able to increase the spread between loans and deposits for close to 10 basis points, which was different from what happened to our peers.
Our net interest margin in first quarter 2013 was 7.1, up from 6.6, driven by the good performance in our loan portfolio, as well as the good performance in our investment portfolio.
Now let me move you to page 11. At the top of the chart you will see our fees, which have increased 9% up to COP620 billion. The commissions from banking service represents 51%, credit cards 12%, fiduciary activities 7% and pension, and severance funds and fees 18%. As you might be aware, we completed the already [sold] acquisition during this quarter, which will further improve the growth of our fee income.
Now moving to the bottom of the page, you will see our other operating income. Other operating income was 71% up to COP412 billion, of which all of the categories grew at a substantial pace. The strongest category that grew was dividend income, which grew from COP63 billion to COP181 billion, driven particularly by higher dividends from some of the (inaudible) which we increased our ownership during the period. Income from consolidated non-financial companies such as [Estilar toll road] concessions grew 10% versus first quarter 2012.
Now moving to page 12, you will find our efficiency ratios, as Mr. Sarmiento mentioned a minute ago. We've been able to improve both on a cost to income basis and a cost to asset basis down to 43.8% on a cost to income basis and to 4% as a cost to asset base.
Now finally on page 13 you will see our net income of COP505 billion, up 32.9% from 380 for the first quarter 2012, with an EPS of COP27.2 per share. Our ROE was 2.7, 2.2 for the last 12 months, finishing on March 31, 2013. And our ROE was 22%, 18.2% for the last 12 months and that in the same date.
This completes our presentation. I will now open it for questions.
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Questions and Answers
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Operator [1]
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Thank you. We will now begin the question-and-answer session. (Operator Instructions). Your first question is from David Santos from Compass Group. Please go ahead.
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David Santos, Compass Group - Analyst [2]
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Yes. First of all, congratulations on the results. And the second I have a question and it is that, how would you know -- and with the breakdown on the net interest margins, which part of the net -- of that 7.1 can be attributable to loans. And which part can be an attributable to portfolio?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [3]
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I don't know, David, if I understood your question correctly. What I can refer you is to the way our margins performed. Our margins increased on both dimensions. We had a high yield, as I mentioned, on our investment portfolio due to the appreciation of this market due to the falling rate, but our loan portfolio did as well, as we mentioned close to 10 basis points over the whole portfolio. And I don't know if that takes care of your question or you were referring to something else.
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David Santos, Compass Group - Analyst [4]
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No. That's what I meant. I just wanted to understand which part of the 7.1 can be explained by the -- you or by the loans, net interest margin and which part can be explained by the portfolio, but what you answered is it answers my question.
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [5]
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Okay. Anyway, interest and loans grew at 13.2% while interest and investments increased this group close to 49%.
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David Santos, Compass Group - Analyst [6]
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Perfect. Thank you very much.
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [7]
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Okay.
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Operator [8]
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(Operator Instructions). And the next question is from Boris Molina from Santander. Please go ahead.
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Boris Molina, Santander Investment - Analyst [9]
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Yes. Good morning. Good morning, Mr. Sarmiento, Diego and Tatiana. Thank you for hosting this call. I had a couple of questions. The first one is if you could give us some color on the outlook for the remainder of the year of growth in your loan portfolio related to Columbia or in your (inaudible) sources, but the overall growth rate in the loan book would we expect.
And secondly, when we look at margins in Columbia we have been following the spread between the DTF and the benchmark rate has been widening so far. And I don't know if you expect this spread to decline and provide some relief on your funding cost of how do we expect margins to go forward for the remainder of the year.
Obviously in the first quarter there was a potentially nonrecurring gain in your securities portfolio. Do you have an indication of what the margin in the first quarter would be, excluding the nonrecurring gains from your securities?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [10]
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Okay. Let me take it by one by one. Regarding growth of our loan portfolio, what we are looking into is to grow at similar rates to what we did last year. And so part of our strategy in that type of with your question in growth and spread has been as accepted tradition of Grupo Aval. We're very careful with value creation of the transactions we enter into. We've been careful of entering into loans where we believe and spreads are not the appropriate spreads for the kind of risk we've been taking.
That has and negatively in the short term our market share. However, what it has done is protected our balance sheet. And that's the reason why at this point we've been able to grow the spread and our loan portfolio while most of our competitors have contracted it.
Regarding a spread decline, our view is different from yours. What we have been seeing over the past six months is part of the excess liquidity that is in running in the Columbian. The market has been going away. And in addition looking forward into the Santos infrastructure, can we expect demand on loans to continue increasing? This will be progress of growth in spreads, as well as what many of the analysts have pointed to that is that increasing the central bank rate.
Regarding the recurrence or non-recurrence of our gains on the fixed income portfolio, what I can point out is that there is a negative correlation between yield, and loans and yield and the investment portfolio. Here's where the loan portfolio grows slower and interest rates contract, are here where the (inaudible) portfolio has a particularly high performance.
We actually see the overall performance of our banks as recurrence. And its components would be and lower than a stable ratio yield and loans, and a higher than stable ratio yield on our investment portfolio. Overall the -- our results would be recurring.
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Boris Molina, Santander Investment - Analyst [11]
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So you would expect markets to remain at this same level, so potentially higher first quarter levels throughout the year?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [12]
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Overall we are now in a different cycle of rates. What we see is the central bank already halted decreasing rates. This points out to information at this point the central bank might have on performance of the economy for the second quarter and moving into the rest of the year. And a growth in the economy are the actual drivers of this kind of performance.
So in that context banks such as ours were a low cost funding. It is a very relevant portion of our funding benefit.
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Boris Molina, Santander Investment - Analyst [13]
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Okay, wonderful, excellent. Thank you. And one question, do you have an indication of what the capital ratios would be for the banks in the Group under the new methodology once it gets into place and all? Do you have any indication how much?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [14]
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We haven't made those public, so I'm going to refrain from making those public at this point. However, what I can tell you is all of our banks are expected to comply with sufficient leisure to those rates. We took all the action that we believe should be taken all over already over the first quarter of this year. As you might be aware, we issued subordinated debt, some of our banks, Banco de Bogota and Banco Occidente particularly. In addition we capitalized some of the reserves that we had in some of our banks, preparing to perform under the new regulation.
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Boris Molina, Santander Investment - Analyst [15]
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Wonderful. Thank you. Now one last question, if I may, I don't want to take too much of some of this time, but could you please and comment a little bit of what has been driving the increase in number of nominal ratios, and how do you see the vintages from some asset quality coming? Could we expect asset quality to continue to deteriorate in the following quarters, or where do you see it stabilizing?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [16]
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That's a very good question. We've been looking at our vintages for over a year, and watching on performance in what we've seen happening to some of our peers. We take a care of a credit risk very carefully. And that's part of what we do on a daily basis.
So bottom line to your question, we see that the slight increase in -- is a race of regarding quality of loan portfolios to be a temporary situation. Something to bear in mind when you look at Grupo Aval as well, is that we have diversification effect from our Central American operation, which we've been moving from an operation mainly concentrated or a substantially concentrated and consumer lending and mortgages to increase the weight of corporate banking. This is an area where we are very well prepared and have been contributing to improve those ratios.
In addition to Central American operations that we have it's concentrated in some of the strongest countries with the highest potential for growth and improvement under those ratios. So when you look at Grupo Aval you should bear in mind that in addition to the good performance in the Columbian environment we have this effect that is adding up to our numbers and that makes this performance sustainable looking forward.
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Boris Molina, Santander Investment - Analyst [17]
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Thank you very much.
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [18]
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Okay. Thank you, Boris. Thank you for your questions.
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Operator [19]
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Thank you. And the next question is from [Diego Usmay] from [Onta Borsapeelis]. Please go ahead.
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Diego Usmay, Onta Borsapeelis - Analyst [20]
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Good morning. Thanks for the conference and as well for the presentation. This information organized as you did is really is helpful for us. My question is regarding to the micro credit growth in the growth lines growth, and because we have seen a growth around 0.9%. And the growth in the other banks even in the system of micro credit segment has shown an important and dynamic.
And my question is and respect to if you have any strategy in this segment? Or did you have any specific outlook for its growth? And do you have any expectations or do you a strategy in the micro credit segment is do you expect some kind of deteriorating in the index of quality and other health indicators of the lines?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [21]
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And, Diego, the micro credit is 0.4% of our loan portfolio. It's not substantial in our overall performance. However, and what we have been working on for many years already in our banks is to find lower costs to serve approaches to get down the ladder to be able to profit [owly] and serve these kind of segments.
You are absolutely right. This is a segment you have to be very careful on how to serve it to generate long-term value for shareholders. The way we look at it, even though it is unsubstantial in our balance sheet, is we seek to serve better our customers in our mass market and down that ladder.
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Diego Usmay, Onta Borsapeelis - Analyst [22]
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Okay. Thank you.
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Operator [23]
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(Operator Instructions). And the next question is from [Jose Restrepo] from [Sef Cinco]. Please go ahead.
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Jose Restrepo, Sef Cinco - Analyst [24]
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Okay. Good morning, congratulations on the results. And I am seeing that you are improving your IR department and I congratulate you for that. I have two questions.
One is you can provide us some color about the Central American operation in loan growth, ROEs, net income that you are starting from that region. And the second one is I'm seeing the consolidated results, but I want to know if I am seeing here so the Corficolombiana, or how can I see that?
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [25]
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Okay. For -- let me start with the first one regarding the back operation. We are very proud of our back operation and major activity in our public disclosure when we acquired back under US GAAP was generating $150 million, the last year operated by [GE]. This was in 2010.
Last year we grew up to $265 million. It's a very substantial growth driven by intrinsic of the bank. This brings down the multiple at which we acquired in the back operations compared to last year's earnings of 7.2%, and barely over 9% for the first year we operated the bank. At current market multiples considering recent transactions, this implies that we have already more than multiplied by two is the value of that operation.
In addition, the Central American macroeconomic cycle is lagging the Columbian cycle and is performing and very well, particularly in those countries in which we are concentrated, such as Costa Rica and other high performing countries. This points out to a continuous growth in this region, in addition to the very high potential that we see in increasing penetration in corporate banking and improving our presence in some of the countries where our participation, our market share is below what we believe it should be.
The region as a whole is showing stability in its margins and improvements in its quality of loan portfolio. All of these turn out to be very positive on our consolidated results. As I mentioned, the back operation is close to 20% of our operation. It is not determinate of how we perform, but it is a substantial add on to our Columbian performance.
Regarding Corficolombiana,, and the way we think about Corficolombiana, is and you think of the consolidated balance sheet of Corficolombiana and that is the way you should think about it. We have five main businesses.
The first business is investment in equities. The second business is our treasury operation. It's investment in fixed income. Then we have a fiduciary business run by and still Corficolombiana, a leasing business, and finally an investment banking fee-based business.
When you look at the income you are trying to find the investments in fixed in equities that is a core business of Corficolombiana. In our financial statements you should look into places. Corficolombiana has its portfolio broken down into those companies, which is consolidates, and those companies that it does not consolidate and are held and accounted for as equity investments.
The investments that we do consolidate you will find spread out through our balance sheet given that it's a consolidation. However, when you look in its P&L you should be looking at a number of lines. One line is interest income. The other line is and other operating income. And finally, for those companies that we consolidate you should be looking at income from non-financial sector. That's where you will find the income of those companies.
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Jose Restrepo, Sef Cinco - Analyst [26]
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Okay. Thank you very much.
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Operator [27]
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(Operator Instructions). And at this time there are no further questions.
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Diego Solano, Grupo Aval Acciones y Valores SA - CFO [28]
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If there is no further questions, we thank you very much and hope to see you in our next call.
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Operator [29]
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Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.
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Luis Carlos Sarmiento Gutierrez, Grupo Aval Acciones y Valores SA - CEO [30]
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Thank you.
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