2Q2013 Consolidated Results Under Colombian Banking GAAP

Sep 30, 2013 AM EDT
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
2Q2013 Consolidated Results Under Colombian Banking GAAP
Sep 30, 2013 / 03:00PM GMT 

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Corporate Participants
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   *  Luis Carlos Sarmiento Gutierrez
      Grupo Aval - CEO
   *  Diego Solano
      Grupo Aval - CFO

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Conference Call Participants
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   *  Carlos Macedo
      Goldman Sachs - Analyst
   *  Saul Martinez
      JPMorgan - Analyst
   *  Daniel Cardiola
      Lorrain Vail - Analyst
   *  Nicolas Norena
      Sercinco - Analyst
   *  Jose Bernal
      BBVA Securities - Analyst
   *  Mauricio Restrepo
      BTG Pactual - Analyst
   *  Juan Dominguez
      Credit Corp Capital - Analyst
   *  David Santos
      Compass Group - 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 Second Quarter 2013 Consolidated Results under Colombian Banking GAAP Conference Call. My name is Richard 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 regulation of the Superintendency of Finance for financial institutions and generally accepted accounting principles for banks to operate in Colombia, also known as Colombian Banking GAAP which differs in certain significant respects from US GAAP.

 Yearly audited consolidated financial statements included in our Form 20-F filed to the SEC provided a description of the principal differences between Colombian Banking GAAP and US GAAP. Grupo Aval is an issuer of securities in Colombia 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 the presentation on that basis is most appropriately reflects our activities as a holding company of a 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 rate and other risk factors, as evidenced in our Form 20-F available at the SEC Webpage.

 Recipients of this document are responsible for the assessment and use of the information provided herein. Grupo Aval shall not be responsible for any decision 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 on this Webcast, we refer to billions as thousands of millions. With us today Luis Carlos Sarmiento Gutierrez, Chief Executive Officer of Grupo Aval, Mr. Diego Solano, Chief Financial Officer of Grupo Aval, Tatiana Uribe, Financial Planning and Investor Relations Office of Grupo Aval. I will now turn the call over to Mr. Luis Carlos Sarmiento Gutierrez, you may begin.

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 Luis Carlos Sarmiento Gutierrez,  Grupo Aval - CEO   [2]
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 Thank you very much. Good morning and thank you very much for joining our call. As some of you may know, our banks and ourselves are some of the few that hold two, instead of one shareholder's meetings each year. Aval shareholder's meetings which comes after all of our bank meetings are done was held last Friday. Therefore this call is only taking place today.

 Going forward, we're going to work on getting clearance to all these calls even before we hold our shareholder's meeting as to report our results earlier every time.

 Having said that, as in our previous report, we will start with the main highlights of the quarter, we will discuss briefly the macro environment in which we operate and finally we will run through the main components of our balance sheet and the income statement.

 As most of you already know, Colombian's yield curve was not in [progress] to Chairman Bernanke's multiple statements for the past few months, therefore the yield curve spiked in the month of June resulting in one of two effects depending on the accounting strategies of the banks.

 Those that had preferred to book their fixed income securities as trading portfolios were hit severely in their P&Ls and those principally our banks that had taken the more conservative approach and booked their fixed income securities as available for sale portfolios reflected the value changes of these securities largely in their equity accounts.

 Therefore despite the difficulties associated with the hike in interest rates, Grupo Aval showed consistently high profitability during this year's second quarter. In fact our return on assets and return on equity for 2013's first semester were 2.1% and 18.1% respectively.

 Additionally our balance sheet grew 16.4% year on year with gross loans growing at 15.3%. Our net interest margin for the period was a solid 6.0%, a combination of a NIM of 7.7% for our loan portfolio and a loan NIM of 1.1% for our investment security.

 For the first half of 2013, our NIM increased slightly versus year-end 2012, growing to 6.6% for the first half of this year versus 6.5% for 2012. As we had anticipated, our results for the period showed an improvement in the quality of our loan portfolio. Our PDL to total loans decreased to 2.4% as of June 30 versus 2.6% as of March 31st.

 We also took advantage of under values in the market prices of Banco de Bogota and Banco de Occidente shares to increase our participations in those banks, Banco de Bogota from 64.44% to 66.47% and Banco de Occidente from 68.24% to 72.05%. We closed on the AFP Horizonte acquisition during mid April and therefore we had started to consolidate its results.

 As you know, we were already market leaders in the pension fun management industry through AFP Porvenir and therefore, we see clearer opportunities for economies and further profitability when we merge both operations hopefully by year end.

 Other relevant M&A events included signing agreements to buy Grupo Financiero Reformador in Guatemala for $411 million and BBVA Panama for $490 million. We expect that both acquisitions will close before December 31st and both banks to be merged with a local BAC Credomatic Bank in each country sometime next year.

 We see significant growth win in cost economies in Reformador and highly complimentary operations in both banks with those we already own in Guatemala and Panama.

 Finally, we announced, I've announced many pension to capitalize Banco de Bogota for a minimum of $500 million before year-end and we continue to explore a possible capitalization of Grupo Aval. And with this, I thank you for your attention, and I'd like to pass on this presentation to our CFO Diego Solano.

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 Diego Solano,  Grupo Aval - CFO   [3]
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 Thanks, Luis Carlos. Moving to page 4, we're starting at page 4. I'm going to refer you to the top of the chart. At the top of the chart, you will see the performance of Colombian GDP versus the performance of the rest of the world.

 As can be seen here, the Colombian economy is expected to over perform the world average. We were positively surprised in recent days by the announcement of a second quarter growth of 4.2%. That effects the expected growth for this year of around 4%.

 The analysts are pointing out to our 2014 even before. Moving to the bottom of the page, the chart presents the revolutionary inflation, central bank interest rate and DTF, inflation continues to be low at 2.2%. The central bank interest rate is down to 3.5% and stable at that level for several meetings already and DTF is at an average of 4%.

 Starting the exchange rate, the exchange rate moved up to 19.9 during this quarter. This means a 5.3 depreciation of the peso during the period.

 Now moving to the next page, page number 5, at the top, you will find the evolution of our assets. Assets are up to COP138 trillion. This means close to 8% growth compared to the last quarter and around 16% compared to the same period last year.

 Moving to the bottom of the chart, you can notice that our mix of asset continues to be stable as it's been over the past years with loans above around 60% in our Colombian operation representing 82% of total assets.

 Moving to page 6, at the top of the page, you will find gross loans. Gross loans are up to COP85 trillion. This means a 5.4% growth during the quarter and 15.4% during the past 12 months. Moving to the bottom, there is the breakdown of our loan portfolio.

 As you can see, the areas which had the highest growth for our banks were mortgages growing at 22% and consumer lending growing at close to 18%. Our strategy continues to really recovering the space in the products where we have been operating below our narrow market share such as mortgages and credit cards.

 Moving to page 7, this quarter as announced Mr. Sarmiento has shown a positive evolution of the quality of our loan portfolio as can be seen at the top left of the chart. Our PDLs 30 day plus ranked at 2.4%, that's percentage of total loans while our PDLs are at 1.7%. This improvement of the quality of loans as pointed out over the past call are part of a trend that we see rising in the Colombian environment.

 Moving to the right top of the page, our loan provision expense to average loans is marginally higher during this period driven by consumer lending. At the bottom left, you can see our charge off stable compared to first quarter of this year and at the right result of improvement in the quality of loans as coverage of our loan portfolio continues to improve.

 Moving to page 8 at the top of the page, you will see the breakdown of the PDLs per category, what can be seen here are the facts behind our previous statement. Consumer lending has stabilized around 4.4% while the rest of the segments have improved their rate.

 The bottom of the page, there's an evolution of our PDL starting from the initial balance sheet, our PDLs adding new PDLs, subtracting charge offs to get to final PDLs. I will point you to new PDLs in the second quarter of 2013, this number COP160 billion is down from first quarter and down from the second quarter of last year. This shows improvement not only in the quality of our loan portfolio but also, it shows how most of our provision expense and loans comes from growth in loans rather than from deterioration of the portfolio.

 On page 9, at the left you will see our total funding, at the right, you will see our total deposits. Deposits represent 76% of total funding and the structure of deposits continues to be stable with savings and checking's accounts over 65%. Consistent with the past, long-term are fully funded with deposits Deposits to net loans are up to 108% compared to 104% in the last quarter and the same quarter of last year.

 Our non-interfering liabilities represent 14% of our deposits adding longer checking accounts, they add up to 24%. Moving to page 10, you will see our capitalization. Our capitalization was affected by two main events. Number one, poor performance of the fixed income portfolio consistent with the worldwide events as described by Mr. Sarmiento and the second referring to tangible equity acquisitions completed during this period.

 At the top left, you will find the evolution of our total equity plus minority interest which has grown at 5.4% over the past 12 months, slightly lower than in the first quarter of 2013. A total shareholder at the right grew at 4.4% and referring you to the bottom of this section of the chart, you will see ratios of tangible capital ratio. You will see the effect of the recent acquisitions on tangible equity ratio here.

 Goodwill generated by the acquisitions of 2% of Banco de Bogota, over 3.8% of Banco de Occidente and 100% of Horizonte BBVA, Horizonte pension funds generated COP838 billion in goodwill equivalent roughly to $435 million.

 To the bottom of the chart, you will find the capital equity of our banks. As of June, our bank solvency ratios were 14.5%, or Banco de Bolgota, 10.24% for Banco de Occidente, 12% for Banco Popular and 13.7% for Banco ROE.

 Moving to page 11, at the top of the page, you will see the evolution of our net interest margin. Net interest margin for this half was 6.6% from 6.5% for the same period last year and for the quarter was 6% in spite of the poor performance of the investment portfolio.

 As mentioned in the introduction, the performance of our investment portfolio shows the strength of our balance sheet and our conservative strategy on our booking of fixed income investment.

 Net interest margin for investment was 1.1%, 7.7% for loans because the funds was down to 3.3% for the quarter. Moving to page 12, at the top of the page you will find our net fees. Net fees were up to COP716 billion. The main contributors to fees are commissions from banking services representing 46% of the income and pension plan management contributing with close to 26%.

 Affecting positively, performance of fees was in the introduction of Banco de Occidente to our consolidated financials as mentioned earlier. The bottom of the page, you will find other operating income that was COP318 billion for this period. You can notice seasonality regarding dividend income which was higher during the first quarter of the year, then during this period.

 Other income inside operating income of COP126 billion was influenced by sale of investments which was particularly low in the previous period.

 Moving to page 13, you will find at the left, our operating expense divided by operating income and on the right operating expense divided by average assets. The results driving our performance during this quarter were mainly affected by on the denominator, the lower income from investments and on the numerator, higher cost given the horizontal acquisition.

 Operating expense to operating income ramped at 53% while operating expense to average assets was 4.3% for the quarter.

 And finally moving to page 14, the last page in the report, our income for this period was COP330 billion. Our ROAA was 1.6% during the quarter, 2.2% for the six months, the first half of this year. ROAE was 14.3% for the quarter and ROAE for the first half of 2013 was 18.1%.

 We can now open it to 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). Our first question online comes from Mr. Carlos Macedo from Goldman Sachs, please go ahead.

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 Carlos Macedo,  Goldman Sachs - Analyst   [2]
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 Hi, good morning, gentlemen. Congratulations on the results. A couple of questions, first, if you could comment a bit on the impact of the 5% variation on the currency in your results particularly with respect to loan growth given the presence of BAC there.

 The second question is also in part, related to that. Your expenses increased significantly in the quarter as also your fee revenues, if you could comment specifically how the incorporation do you think affected that? And more so, also how the dollar affected both those things, thank you.

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 Diego Solano,  Grupo Aval - CFO   [3]
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 Okay, regarding your first question the impact of 5% in our results was twofold, mostly coming from BAC as you well pointed out. Loan growth in Central America has been growth in dollar terms, but was affected as well by the depreciation of the peso.

 On the other hand, the increase in exchange rate affected as well our -- we are coming from the BAC acquisition increase COP83 billion, this is above $40 million. Growth of our foreign operation can be seen in the more extensive report that we made public on Friday.

 The growth that we had in Central America of the second quarter compared to the first quarter of this year was 8.2%. This means that growth coming from growth in dollar terms was around 3% during the period. The growth of our domestic loans was around 5% for the quarter.

 Regarding your question including Horizonte, the way acquisitions are accounted for in Colombia, these have an implication on fees and expenses as well. In Colombia, given that we are in the middle of an accounting period, the way you need to be accounted for is you add line by line the balance sheet and the P&L of the acquired company and then you need to subtract in other expenses being some that is not attributable to the new owners.

 What this means is during the period for this quarter, we had externally high the income or I would say unseasonably high the income and expenses as well. What happen is the expenses and the income has been spread out throughout both headquarters which means that both indices, both the expenses related indices and the income indices will be slightly over.

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 Carlos Macedo,  Goldman Sachs - Analyst   [4]
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 Can you quantify particularly for both of them? So if we exclude the affect of the consolidation of the Horizonte and both the fee income line and the expense line, could you quantify how much on the margin they would have increased instead of what they actually ended up increasing?

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 Diego Solano,  Grupo Aval - CFO   [5]
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 Regarding margin, there is no effect given that the fee income is below the margin line. The other figures you're asking I don't have them in handy. If you allow me to, we will calculate that through and if we're able to get that ready before we end, I'm going to get back to you on that.

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Operator   [6]
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 Thank you. Our next question on line comes from Mr. Saul Martinez from JPMorgan. Please go ahead.

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 Saul Martinez,  JPMorgan - Analyst   [7]
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 Hi and good morning, gentlemen, a couple of questions as well. First, you guys explored this a little bit I think Diego in your prepared remarks, but just to understand the divergence between your loan loss provisioning in your underlying asset quality metrics, the provisions obviously grew pretty substantially 11% sequentially, 63% year on year, yet your -- the underlying credit quality metrics whether it be the headline NPL ratio or more importantly new formation of NPLs were quite good.

 Can you just -- is that just simply from the growth of the portfolio? It seems like a pretty substantial divergence there. And in that context, what do you think you're -- how should we think about the cost of risk or your loan loss provisions to average loans going forward?

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 Diego Solano,  Grupo Aval - CFO   [8]
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 Okay. Two things. One, we're limited to make a forward-looking statements, that we have in [F1] that is still a follow up with the SEC therefore I can't be specific on a metric that we're expecting moving forward.

 However, going to your questions, loan loss provisions, I think that the way to think about it is, if you move to page 8 of our presentation, the bottom of the page, explain pretty well, what is going on.

 When you look at the bottom of the page, you can see that regardless having a much larger portfolio during second quarter 2013 compared to second quarter 2012. The new PDL from this portfolio are lower than what they were during that quarter. And substantially lower than what they were during the first quarter.

 What that means is, part of what is going on in our expense provision is, we have increased our provisions given what happened with the portfolios in Columbia over the past, let's say three to four quarters. We have increased our expense particularly in the first quarter of this year and also during the second quarter of this year.

 However, the later provisions are coming more from growth than from changes in portfolio structure. There's something also that affects the Aval banks about what could affect the rest of the banking system in Columbia. As I mentioned, we do not feel that we have our fair share of certain products in the market, particularly credit cards and in consumer and mortgages as a category.

 Inside consumer lending, what we have been observing is, there has been a change in the mix between consumers that justifies a slight increase in our provision in expenses. Different from that, what we are seeing is a good performance in growth of economy as a whole. Provision expense ties to new PDLs very much linked to a GDP growth. The positive surprise of GDP of 4.2, that's what we have been seeing at a micro level in our banks and improvement in the long portfolio.

 To be able to reach the analyst target of around 4% for the year, we expect to see stronger quarters throughout the year. There might be some influence of the recent strike that the -- agriculture strike that hit Columbia as a whole during the second half of year. We expect to see better performance. Therefore, we expect as well to see a better performance of the quality of our loan portfolio.

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Operator   [9]
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 Thank you. Our next question online comes from Mr. [Daniel Cardiola] from Lorrain Vial. Please go ahead.

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 Daniel Cardiola,  Lorrain Vail - Analyst   [10]
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 Hi, good morning everyone. And thanks for the conf-call. Basically, I have two quick questions. The one is, I saw you increase your equity stake in Banco de Bogota and Occidente during this quarter. And I wanted to know if you could please share with us farther details on who were the parts involved in such action and if it was a related person's action, and the terms are the same. That's my first question. And the second one --

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 Diego Solano,  Grupo Aval - CFO   [11]
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 The last part of your question was if it was -- has anything to do with related part transaction, and you said --

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 Daniel Cardiola,  Lorrain Vail - Analyst   [12]
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 Exactly, exactly. And what were the terms of the transactions?

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 Diego Solano,  Grupo Aval - CFO   [13]
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 The terms. Okay.

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 Daniel Cardiola,  Lorrain Vail - Analyst   [14]
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 Yes.

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 Diego Solano,  Grupo Aval - CFO   [15]
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 And your second question?

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 Daniel Cardiola,  Lorrain Vail - Analyst   [16]
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 Okay. And my second question is regarding the Central America operations. I wanted to know what measures are you putting in place to actually improve the efficiency ratio of the recently acquired operations in Central America.

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 Diego Solano,  Grupo Aval - CFO   [17]
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 Okay. Very good question. Regarding your first question, all these transactions, the transactions of Banco de Bogota and Banco de Occidente were done through the market, they were not agreed with related party transactions. We did all those at market prices and actually the volume's created those stock, substantially also went to other investors in the market. Therefore, it was not a related party transaction.

 You might be asking this question because we also made public to the market that Corficolombiana would sell part of its stake in Banco de Occidente. They did so and they did it to the market. We do not have access to know where they sold it to. And it's not connected to the transactions that we did when we bought Banco de Occidente. Banco de Bogota, we only operated from the market and most of the volume we estimate comes from middle and smaller investors.

 Regarding our Central American operation, this is a very broad question because there's part of work being done at BAC that has been done consistently over the past couple years since we're running the operation. And there's work to be done with the new transactions.

 Regarding the BAC operation, what we've been doing is to two-fold. One is, the bank has substantially grown. That can be evidence in that the weight -- our income from that operation has been growing since the acquisition. And because we have been introducing segments or for strengthening segments for BAC, was not as strong as were in Columbia. Particularly, the corporate segment, we have grown substantially since we acquired it.

 As you might know, the corporate segment operates at a much lower efficiency ratio. A better, more positive in the sense of the qualification of the efficiency ratio, but not lower numbers. Therefore, when you mix the former operation with our corporate operation. Numbers improve.

 The second leg of our strategy around BAC comes with a control of cost, cost control has been key given the growth that we have been experiencing at BAC. We've been able to grow our costs substantially below what we've been growing our assets.

 Then moving to the new acquisitions, the new acquisitions, we expect to close somewhere around December this year. And those acquisitions are of different kinds. The acquisition of Guatemala, we expect to see a very relevant synergies with the operation given the structure of the two banks.

 The BBVA operation is a different operation. It is already a very efficient operation. And there is -- benefits will come more from being -- adding up the segments that they have with those we have. In Panama, our BAC operation is mainly consumer, credit card related loans, while the BBVA operation is very much a corporate operation.

 So, to make it short, we will get improvement in efficiency ratios in BAC continuing to do what we've been doing over the past two years. In Panama, we will get efficiency improvement given volume that will be generated by the synergies amongst the businesses. And then in Guatemala, will a combination of growing the bank and also there's an opportunity for efficiency, plain efficiency from the costs standpoint.

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 Daniel Cardiola,  Lorrain Vail - Analyst   [18]
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 Thank you very much.

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Operator   [19]
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 Thank you. Our next question online comes from Mr. [Nicolas Norena] from [Sercinco]. Please go ahead.

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 Nicolas Norena,  Sercinco - Analyst   [20]
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 Good morning to everyone and thank you for holding this conference call. I want to ask two things. The first one is, which is your target for the deposits over net loans relation. Are you trying to get deposits cheaper now and lower the relation towards next year, or is the strategy to keep it in levels around the 108%. And the second one is about your strategy of expansion in the pension fund segments. Are you looking for opportunities abroad or are you just looking for the merger of Horizonte and Porvenir as for 2013?

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 Diego Solano,  Grupo Aval - CFO   [21]
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 Okay. First two questions I think are related on the third. It's a different one regarding deposits to net loans. It has been a tradition at Grupo Aval. It is an effort that we ask our banks to do on daily basis, we're very proud to have been able to retain this kind of [reach].

 Part of what you can see in the improvement of the ratio of deposits to loans of a 108 compared to a 104 has been that we have been keen and being very careful with the growth of our loan portfolio. Not only from the quality of loan portfolio perspective, but also from the profitability standpoint.

 I pointed out that our net interest margin and loans have been very stable throughout the six quarters that were are showing here. This is not the way that other players in the market have fared. The reason being that we are very careful in evaluating the profitability of our loans in order to work on that trend.

 This has allowed us to continue growing our deposits. We're working on maintaining or being sure that we're not dependent on wholesale funding, and on the other hand, it has shown positive on the quality of our loan portfolio.

 Going to your third question on the strategy regarding pension funds. I would say that at this point, we are focusing on the integration of Horizonte Pension Fund. As announced, we're already working towards merging the two operations. This is an operation, an industry where economies of scale are very relevant. And expect to get those ones we're able to merge the pension funds.

 Regarding pension funds abroad, I would say that that's not something we're looking into at this point. If there was anything that we would be looking into, we would announce to a market. What I can tell you is the rationale behind of our acquisitions has been very consistent over the past 15 years. We buy operations that add on our operations that very clearly generate value and our equity for current shareholders. In order to evaluate any of those opportunities, those criteria will hold as well.

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 Nicolas Norena,  Sercinco - Analyst   [22]
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 Thank you.

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Operator   [23]
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 Our next question online comes from Mr. Jose Bernal from BBVA Securities, please go ahead.

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 Jose Bernal,  BBVA Securities - Analyst   [24]
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 High, good morning. Congratulation on the results. My question is also a kind of follow up of this pension fund strategy. And I just want to know how much does the group expect to increase the pension plan management as percentage of the say, income. Do you have any number -- specific?

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 Diego Solano,  Grupo Aval - CFO   [25]
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 They're the same. As I said, I can't be specific on forward-looking statement, but what I can tell you is, in pension, this has been very important to us and will continue to be important for us, given that the pension system is going very well in Columbia. We're still in the accumulation phase of pensions. And we continue to work very hard there as can be seen in the results of our pension fund.

 Regarding contribution to net income from pensions, we do expect to see an increase given that we expect to capture synergies from the transaction synergies that we haven't been able to incorporate. Actually, at this point, we're getting the negative effect that I described when I answered Carlos' question regarding how expenses affected us during the second quarter of this year. And also, given there's some non-recurring expenses we dated to any acquisition. So, we expect to see that as a performance of fees relating in pensions.

 On the other hand, we believe that we do not perform as good as we would like to in the broader fee income. We have been working on that for several years already. The rationale behind regaining our fair share of cards in Columbia and working in the effectiveness of how we're able to bring fees into our P&L are things that we're very concerned to getting results on.

 So, to make -- to summarize and try to get back to your question, the weight of the pension fees -- the total fees will depend on those two variables. What will happen in the short-term with the fees from pension fund and growth of that business, and on the other hand we're able to do with the rest of the operation.

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 Jose Bernal,  BBVA Securities - Analyst   [26]
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 Thank you.

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Operator   [27]
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 Our next question online comes from Mr. Mauricio Restrepo from BTG Pactual. Please go ahead.

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 Mauricio Restrepo,  BTG Pactual - Analyst   [28]
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 Hi guys, thanks for the call. I have two questions. The first one is regarding the strategy of Banco Popular. Can you tell us why the bank is not going at the same pace of the system and the other banks of Aval?

 And the second one, is how will be the capital earning adequacy of the banks under the new regulations. And you maybe, need some more capital for the other banks.

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 Diego Solano,  Grupo Aval - CFO   [29]
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 Okay. Regarding your first question on Banco Popular. Banco Popular has been a bank which has been the leader in payroll loans. Payroll loans is a very high quality business, therefore very competitive. When you're a bank such as Popular which has an outstandingly high market share, you're victim of the attack of other in coming bank.

 So part of what you can see in Banco Popular is in the past, they have decided to stick to the portfolio, the payroll loans and they've been attacked by others in that business. Having said so, as you well point out, we have noticed that Banco Popular is not growing as strong as we wish at Aval and has been working from our strategy side in developing a program to improve, as I mentioned.

 As you point out, we're not satisfied with the growth of the bank during this period. However, when you look at the way our banks work. Our banks generate a natural diversification amongst them. If we were to add up all the banks, part of what Banco Popular has lost in the payroll lending business has been captured by other of our banks.

 So adding up the whole Aval, you can see the results that I've mentioned before, and the evolution of our loan portfolio, that is strong compared to the market considering the quality of portfolio.

 Regarding your second question and capitalization, all of our banks started to report capitalization or will be reporting their [August] capitalization under new regulation. The bank that has the strongest negative effect under consolidated solvency level, not on the un-consolidated, but maybe on the consolidated solvency ratio, is Banco de Bogota.

 The reason for that is perhaps one other, the strongest changes in the new regulation is the way in which minority interests are accounted for. Given that Banco de Bogota is who consolidates Porvenir and Corficolombiana within Aval, what we had was a negative effect on Banco de Bogota that had a counter party, a positive effect or has a counter party, a positive effect at Banco de Occidente and Banco Popular.

 The kind of levels that you will see, on consolidated basis, if you want to take [June] of Banco de Bogota it would be around 10% capitalization ratio. Regarding Horizonte, Horizonte would see a different performance. It would go up from around Occidente and -- I'm sorry. Occidente would go up from around 10% to 13%.

 Banco Popular would be flat around 12%, those rough numbers, and reason why it's not a positive is because it also was affected by the way that the pension plans are accounted for. And given that this is a bank that is a very old bank and would choose to be owned by the government before mid '90s. It does have a particularly high pension liability. So this pension liability gets to offset the positive that we get from the way Corficolombiana is accounted for.

 And then Villas could be around 11% to 12% would be the numbers from the top of my head. You asked another question regarding what we expect to see on capitalization is, as you might have noticed, the capitalization ratio for Banco de Bogota is the lowest of our banks. And that's the reason why we announced to the market that we were ready to capitalize Banco de Bogota with at least half a billion dollars in the short-term.

 We're actually working on that and I believe Banco de Bogota will have to make [public] to the market, how this capitalization will work when the time comes. At the Aval level, we're also considering options of that sort for Aval as a whole as with the steps given to the market and information that have gone out to the market.

 But, there's nothing specific I can mention at this point, even from -- we are working on that as we've done in the past. We have insured that our banks are strong, that Aval is strong, that, we're able to defend our investment rate, and we have support from some of our largest shareholders in this process.

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 Mauricio Restrepo,  BTG Pactual - Analyst   [30]
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 Thank you.

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 Diego Solano,  Grupo Aval - CFO   [31]
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 Okay.

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Operator   [32]
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 Our next question online comes from Mr. Juan Dominguez from Credit Corp Capital. Please go ahead.

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 Juan Dominguez,  Credit Corp Capital - Analyst   [33]
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 Good morning and thanks for hosting this call. Most of my questions have been already answered. I have one remaining. I wonder if you can give us some guidance on how is the behavior of the collections of the consumer loan portfolio.

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 Diego Solano,  Grupo Aval - CFO   [34]
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 Well, the collections of the consumer portfolio, I'm going to answer this directionally because as I mentioned before, I can't give you a specific guidance there. But we've seen improvement in that dimension, improvement in stabilization in the ratios. We have been seeing some deterioration in the past. This cycle seems to have ended. And what we expect to see with the economy picking up is an improvement there.

 So it's an area that we're watching out too. We've taken actions in the past. Around these actions were taken over a six-month goal. Such as in not growing as strongly as we would be able to do from the market in perspective. Making more stringent our approval process. So what we expect to see is the results of having taken those actions already, several quarters ago.

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 Juan Dominguez,  Credit Corp Capital - Analyst   [35]
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 And are you changing your lending standards or would you expect them to remain the same?

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 Diego Solano,  Grupo Aval - CFO   [36]
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 We already took action there. We already had made up our approval process more stringent several quarters ago. So it's not an action. A new action that we're taking but what we expect to see are the results of the new [vintages] that were issued over past quarters. The first is information coming out is positive, although it's too early to be able to do something more specific than this.

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 Juan Dominguez,  Credit Corp Capital - Analyst   [37]
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 Okay. Thank you.

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Operator   [38]
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 Our next question online comes from Mr. David Santos from Compass Group. Please go ahead.

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 David Santos,  Compass Group - Analyst   [39]
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 Yes, thank you. My question has already been answered. Thank you very much.

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 Diego Solano,  Grupo Aval - CFO   [40]
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 Okay.

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Operator   [41]
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 (Operator Instructions). And I see we have no further questions.

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 Luis Carlos Sarmiento Gutierrez,  Grupo Aval - CEO   [42]
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 Okay. So, thank you very much for attending this call and we'll look forward to talk to you again. Good-bye.

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Operator   [43]
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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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