Q2 2014 Grupo Aval Acciones y Valores SA Earnings Call

Aug 29, 2014 AM EDT
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
Q2 2014 Grupo Aval Acciones y Valores SA Earnings Call
Aug 29, 2014 / 04:30PM GMT 

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

Conference Call Participants
   *  Juan Dominguez
      Credicorp Capital - Analyst
   *  Cristian Hernandez
      Ultrabursatiles - Analyst

Operator   [1]
 Good day, ladies and gentlemen, and welcome to the Second Quarter 2014 Consolidated Results under Colombian Banking GAAP Conference Call. My name is Lorraine, and I will be your operator for today's call.

 (Operator Instructions). We have filed a registration statement on Form F-1 with the U.S. Securities and Exchange Commission relating to an offering of preferred shares in the form of American depositary shares. We are in a quiet period and as a result do not intend to discuss any details of the offering in this presentation. This presentation does not constitute an offer or a solicitation to participate in an offering of securities for sale in any jurisdiction including the United States.

 (Operator Instructions).

 Quarterly results included in the 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 Colombia also known as Colombian Banking GAAP, which differs in certain significant respects from the U.S. GAAP. Yearly audited consolidated financial statements included in our Form 20-F filed with the SEC provided a description of the principal differences between Colombian Banking GAAP and U.S. GAAP.

 Grupo Aval, as an issuer of securities in Colombia, is subject to the control of the superintendency of Finance. Although we are not a financial institution, we represent 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 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 consequence of changes in general, economic and business condition, changes in interest and currency rates, and other risk factors as evidenced in our Form 20-F available at the SEC webpage. Recipients of these documents are responsible for the assessment and use of the information provided herein.

 Grupo Aval shall not be responsible for any decisions taken by the 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 the billions of 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; 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 may begin.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores - CEO   [2]
 Thank you, Lorraine. Thank you very much.

 Good morning, ladies and gentlemen, and thank you very much for joining our call. We will proceed with our presentation of this year's second quarter results as usual. However, as Lorraine mentioned, we have filed a Form F-1 registration statement with the U.S. Securities and Exchange Commission relating to an offering of preferred shares in the form of American depositary shares. Therefore, we are in a quiet period and as a result cannot discuss any details of the offering in this presentation. In fact, this conference call is not related to any such potential securities offer.

 Furthermore, we are legally constrained and therefore not allowed to provide you with any forward-looking information during the call. Having said that, allow me to take a few minutes of your time to kick off the presentation with the main highlights of the second quarter of this year. Then I will pass on the presentation to Diego Solano, our Chief Financial Officer, who will proceed with a brief update of the Colombian macro environment. And after he will focus on the main items of our financial results for the quarter ended June 30, 2014.

 To start with and referring to the economy as we forecasted in our previous call, the country has continued to grow at a healthy base while the central bank has further tightened monetary policy by raising its reference rate an additional 75 basis points during the quarter, completing 100 basis points for the year. The DTF, Colombia's prime rate equivalent and the rate at which approximately 85% of our local commercial loan portfolio is priced of is only now starting to react upwards as it usually lacks raises of the central bank rate.

 We experienced healthy growth in our balance sheet during the 12 months ending June 30th, while growth for the quarter was affected by our result to defend the spread between our lending and funding rates in our commercial loan portfolio and by a slowdown in credit demand. In fact, our consolidated assets grew by approximately 17% year-on-year while our consolidated gross loans grew by approximately 19% in the 12 months ending June 30, 2014.

 Both our Colombian assets and Colombian loan portfolio growths outpaced the growth of our Central American assets and loan portfolios mostly as a result of internal decisions to de-emphasize some lending categories of the acquired banks. The quality of our loan portfolios measured as 30 days past due loans to total loans improved to 2.6% during the quarter, driven by an improvement of our Central American loan portfolios while our Colombian loan portfolios quality remained unchanged.

 Our consolidated deposits grew by approximately 19% during the year ending June 30th. The mix of our deposits remains weighted towards checking and savings accounts, which represent approximately 67% of our deposit base. Our tangible capital ratio increased by 110 basis points to 9.1% when compared to June 30, 2013 and by 30 basis points during the quarter.

 Our net interest margin remained relatively unchanged at 5.8%, stable when compared to the previous four quarters while our net investments margin increased by 20 basis points to 2.2% in the quarter and by 110 basis points when compared to a year ago.

 Foreign exchange gains returned to normal levels at COP120 billion as there were no non-recurrent issues similar to those that affected this line during the first quarter. We did have a COP22 billion non-recurrent charge reflected in our income from non-financial sector subsidiaries that Diego will explain in more detail.

 Efficiency remained largely unchanged at 50.8% when compared to the first quarter while improving by 250 basis points when compared to June 30 of last year. As a result of what I have just mentioned, our attributable net income for the quarter was COP469 billion, 42% higher than the attributable net income during the second quarter of 2013 and 34% higher than the attributable net income for the first quarter of 2014. I must mention that our first quarter attributable net income was impacted by a COP84 billion non-recurrent foreign exchange loss.

 Finally, our annualized return on average equity for the second quarter of 2014 was 15.4%.

 And with that, I'll pass on the presentation to Diego Solano who will describe in detail our results for the quarter.

 Thank you very much, ladies and gentlemen.

 Diego Solano,  Grupo Aval Acciones y Valores - CFO   [3]
 Thank you, Luis Carlos. I will start on page 4.

 The Colombian economy continues to outgrow the world average. Analysts' expectations on Colombia's GDP have remained stable during this quarter with 2014 at 4.6% and 2015 at a similar pace. Inflation continued to pick up during this year reaching a 12-month cumulative inflation of 2.8% with analyst expectations for year-end in the mid 3% area.

 As mentioned in our last call after having maintained its intervention rates table at 3-1/4. The central bank begun a series of increases that took its rate by end of the second quarter to 4% and to %4-1/4 after late July's meeting. Today is a meeting of the central bank and we're waiting for the outcome of this meeting. Analysts are pointing to milder increases during the remainder of the year leading to slightly higher year-end rates.

 DTFs have historically tracked the central bank intervention rate with a few months lag. Even though this pattern has not materialized yet, analysts' projections point to the DTF continuing with its recent upward trend.

 Finally, on the bottom of the page, exchange rates at period end are present. The volatility to which we referred in our past call was one of the highest observed in recent years. As discussed in our previous call, this volatility negatively affected our result for that period generating a one-time foreign exchange loss of COP84 billion. As a result of our stop-loss actions taken during that quarter, our FX exposure during the second quarter was substantially reduced.

 Moving to page 5, total assets increased close to 17% over the 12-month period ending on June 2014. Total assets grew 1.2% during the quarter as a result of Colombian assets growing at 2.6% and the Central American assets contracting a 3.5% when translated into pesos. This contraction in Central America is mostly due to exchange rate exposure. The growth rate in dollar terms is 0.8%.

 As mentioned on our last call, we completed the acquisitions in Panama and Guatemala on late December 2013. Adjustment policies implied lower than normal growth in the region. And I will get deeper into this subject further on in this presentation when I touch on the loan portfolio.

 Our consolidated balance sheet structure remains substantially stable compared to that existing a quarter before with loans accounting for over 60% of assets and investments accounting for over 17% of [Alejos]. Colombian assets account to close to 79% of our balance sheet.

 Moving to page 6, gross loans are presented on this page. A gross loan increase was 18.5% with the past 12-month period ending on June 2014. Gross loans grew at 1.3% during the quarter with Colombia growing at 2.5% and Central America contracting at 3.5% when translated to pesos equivalent to a 0.8% growth in U.S. dollar terms.

 As mentioned, in the previous chart, growth in Central America was temporarily lower than normal given the minor adjustments in risk management policies to take the new operations to the Aval standards. As a recent development, our loan growth in Central America picked up during July.

 Mortgages and commercial lending were the highest growing portfolios for the 12-month period ended on June 30th, growing at 40% and 19%, respectively, while consumer have the strongest dynamic during the first quarter of 2014 growing at 1.8%. The structure of our loan portfolio remains substantially the same as was a quarter before with loans to Company defined as commercial loans plus financial leases accounting for over 64% of our loans, loans to individuals defined as consumer loans plus mortgages plus microcredit loans accounting for close to 36% of our total loans. Colombia accounted for 80% of our loan portfolio.

 On the top left of page 7, you will find the evolution of our loans past due more than 30 days and of our non-performing loans. During this quarter, our delinquency ratios improved when measured as 30 days past due loans to total loans and was substantially the same when measured as NPLs to total loans. Delinquency ratios at the end of June 2014 were still slightly higher than those 12 months earlier.

 As mentioned in our last call, our delinquency ratios in Central America had been affected on March 2014 by issues associated to IT integration of the new acquisitions which prevented some payments to be timely collected and accounted for. These issues were addressed and substantially resolved during the second quarter of this year.

 Delinquency measured as 30 days past due loans to total loans was 2.6% at period end improving from 2.7% recorded 3 months earlier. 30 days PDLs ratio of Colombia was 2.6% for both first and the second quarters of 2013. In Central America, this ratio was 2.6% at the end of period improving from 3.1% in the previous quarter mainly because of the reason I just described before.

 Delinquency measured as non-performing loans to total loans was 1.9% at period end while Colombia was 1.9% slightly higher than 1.8% recorded at the end of March. NPLs in Central America were 1.8% improving from 2.2% 3 months earlier.

 Moving to the right, provision expenses to average loans for the quarter were 1.4%, slightly higher than the 1.3% recorded 3 months earlier and down from 1.7% recorded at year end. Provision expenses to average loans during the quarter were 1.4% both for Colombia and for Central America.

 At the bottom left, you will find the annualized ratios of charge-offs as a share of average NPLs. This ratio was 0.75 times during the second quarter of 2014, slightly higher than the 0.64 times observed during the second quarter of 2013.

 Cumulative annualized ratio of charge-offs for the first half of 2014 was 0.64 times. Average NPLs slightly higher than the 0.61 times recorded for the same period of 2013.

 Finally, on the bottom right, you will see several loan loss coverage ratios. Our allowances cover 1.67 times our NPLs and 1.2 times our PDLs.

 On the top of page 4, you will find further detail on the evolution of our loans 30 days past due broken down by portfolio. This ratio was 2.6% as of the end of June 2014 improving from 2.7% recorded 3 months earlier. This result was driven by a slight improvement in the consumer and mortgage loan portfolios where past due loans to total loans go from 4.4% to 4.3% and from 4.0% to 2.9%, respectively. The latter was explained mainly by improvement in our Central American operation.

 The improvement in this portfolio was partially offset by a slight duration in our delinquency ratio of financial leases from 3.2% to 3.4%. 30 days past due loans evolution in billion of pesos is presented in the lower part of the page. Our 30 days PDLs were COP2.6 trillion as of June 2014, down from COP2.7 trillion 3 months earlier.

 New PDLs added COP258 billion to the evolution of PDLs during this quarter, substantially lower than those added during the first quarter of the year. Charge-offs in the second quarter of 2014 were COP359 billion.

 Funding is presented on page 9. Total funding grew 16% during the 12-month period ending on June and 1.2% during the quarter. Deposits grew 18.5% during the 12-month period ending on June and 1.6% during the 3-month period ending on the same date.

 During the quarter, Colombian deposits grew at 3.1% while our Central American deposits contracted 4.3% when translated into pesos. Deposits denominated in dollar terms were flat in Central America during the quarter.

 Our funding and deposit structure remained substantially stable during the quarter. Our funding structure continues to be one of our core strengths. In particular, our deposits fully fund our loans with deposits covering 108% of loans. Our checking accounts represent 23% of our deposits.

 Moving to page 10, our total equity defined as attributable equity plus minority interest grew 3% during the quarter and 32% compared to a year earlier. Attributable equity as a share of total equity remained stable compared to 3 months earlier at 65%. Attributable equity grew at 3.7% during the quarter and 40% compared to a year earlier.

 The high 12-month growth was influenced by the COP2.4 trillion equity issue in the Colombian market, which was executed during the last quarter of 2013 and the first quarter of 2014.

 On the bottom of the page, we present the solvency ratio for our 4 Colombian banks. As you can see, there are no substantial changes compared to those recorded as of the end of March.

 On page 11, we present our net interest margin. Our net interest margin for the period was 5.8%. Our net interest income grew 13% compared to the same period 1 year earlier, increasing from COP1.64 trillion to COP1.86 trillion. The net interest income was substantially at the same level as that for the first quarter.

 Net interest margin on loans fell to 6.9% during the quarter. Even though the central bank increased its intervention rate, 75 basis points throughout the quarter, loans have not priced accordingly yet as DTF has not picked up this increase. However, given the rates paid on deposits to large corporate and government clients, we price up faster during these kind of central bank rate cycles. Our net interest margin on loans was slightly pressured down.

 As a recent development, DTF has increased 15 basis points since June 2014. DTF for this week is, in fact, the highest in 14 months. It is as well 28 basis points higher than the lowest point recorded in April 2013. Net interest margin on investments rose to 2.2%.

 Moving to page 12, our fee income is presented on the top of the page. Net fee income grew 3.5% compared to that of the previous quarter and 9.7% compared to the same period a year earlier. The main fee lines growing during the quarter were pension plan management, warehouse services and commissions from banking services growing 10.6%, 5.8%, and 4.4%, respectively.

 On the bottom of the page, we present our other operating income. Our other operating income was COP235 billion during the quarter down from COP256 billion in the previous quarter. This decrease resulted from a combined effect of lower dividends given that these are concentrated during the first and third quarters of the year, lower income from non-financial sector, and a better performance in foreign exchange result as previously discussed.

 As we discussed in last call, our results were affected during the first quarter by foreign exchange losses related to open U.S. dollar Colombian peso exposure at Aval, which generated substantially losses for COP84 billion. This exposure was closed as part of our stop-loss procedure in the latter part of the quarter.

 Income from non-financial sector was negatively affected by a low result in Epiandes, followed concessionary consolidated under Corficolombiana. Epiandes' performance included a reconciliation of accounts with ANI, the national infrastructure agency. This adjustment was due to a mistake made by ANI in 2009 account settlement with Epiandes. During this year, this settlement was reviewed and as a result a one-time negative charge of COP22 billion had to be accounted for at Epiandes.

 On the top of page 13, we present our operating expenses as a share of operating income and as a share of average assets. Our efficiency improved under both metrics compared to 12 months earlier. Our efficiency measured as operating expenses to operating income was 50.8%, substantially at the same level as the previous quarter. Our efficiency measured as operating expenses to average assets was 3.6% continuing the improvement trend that has been observed historically.

 On the bottom of the page, you will find a contribution of net non-operating income. Net non-operating income includes income from the sale of property, plant and equipment and foreclosed assets as well as the recovery of all provisions.

 Finally, on page 14, we present the net income and profitability ratios. In addition to the issues previously covered, the effective tax rate improved compared to that for the previous quarter. Net income for the quarter was COP469 billion or COP23 per share. Return on average assets and return on average equity for this quarter were 1.6% and 15.4%, respectively.

 Before moving to questions, I would like to remind you that we have filed a registration statement on the Form F-1 with the U.S. Securities and Exchange Commission and are therefore restricted from answering questions implying forward-looking information or any details regarding an eventual offering.

 Bearing that in mind, I will now open it for questions.

Questions and Answers
Operator   [1]
 Thank you. We will now begin the question-and-answer session. We ask that you please limit yourself to 1 question. (Operator Instructions)

 And our first question comes from Juan Dominguez from Credicorp Capital. Please go ahead.

 Juan Dominguez,  Credicorp Capital - Analyst   [2]
 Good morning and thanks for hosting this call. I have a question regarding the exposure to ForEx. It's pretty easy to measure the effect on balance sheet of the changes of the volatility of the Colombian peso in the consolidation, but I wonder if you can give us some color on how much of the net interest income comes from the loans in Central America. Thank you.

 Diego Solano,  Grupo Aval Acciones y Valores - CFO   [3]
 Juan, I want to ensure that I understand your question. You're asking how much of our income comes from Central America or how much of our exposure of our FX exposure comes from Central America.

 Juan Dominguez,  Credicorp Capital - Analyst   [4]
 No, how much of your income comes from Central America?

 Diego Solano,  Grupo Aval Acciones y Valores - CFO   [5]
 We have around 20% of our net income coming from Central America. This number has been influenced by 2 facts -- 1, to be precise 17% comes from Central America. This income has been increasing its share mainly due to improvement in income from the existent operation.

 During this year, we have received a mild effect from the recent acquisitions. These acquisitions, at this point, are not contradicting in a significant manner given that we are going through a process of increasing our expenses due to restructuring costs.

 As a data point, when we acquired back in 2010 from GE, GE was making $150 million on that operation. Last year we made around $300 million. Therefore, the way in which our Central America is contributing to our operation has increased slightly since that acquisition.

Operator   [6]
 Thank you. And our next question comes from Cristian Hernandez from Ultrabursatiles. Please go ahead.

 Cristian Hernandez,  Ultrabursatiles - Analyst   [7]
 Thank you, guys. Congratulations on the results. I've got 2 questions. First, could you please elaborate a little more on the Epiandes situation? I've seen the conflict with ANI. because I couldn't actually understand what happened there. And also, I would like to know why did you guys had a little bit more charge-off during the quarter, actually the higher number you've posted in the past two years. Thank you.

 Diego Solano,  Grupo Aval Acciones y Valores - CFO   [8]
 Okay. Regarding Epiandes, what happened there was in 2009 there were a number of discussions with ANI, part of what happened at that point was that there were some changes in the concept that the recent theme that what ANI was looking was to reduce some of the terms of its old conflicts.

 At that point, we were recognized some additional income given that we gave away part of the extension of those concessions.

 The model that ANI was running at that time had a mistake which was detected recently. Therefore, in the reliquidation of that settlement we came across with an amount in favor of ANI of COP22 billion.

 Regarding your second question, what I want to point out is that even though this quarter had a higher than recent charge-offs, the first quarter had a particular low charge-off. That's why in my presentation I pointed out that charge-offs when you take the full first half are substantially at the same level as they were a year before.

 Cristian Hernandez,  Ultrabursatiles - Analyst   [9]
 Right. Thank you so -- Okay. Thank you.

Operator   [10]
 Thank you. And I would now like to turn the call back to Grupo Aval for closing remarks.

 Diego Solano,  Grupo Aval Acciones y Valores - CFO   [11]
 Thank you very much for attending this call. We hope to see you in our next call. And once again, thank you for your attendance. Bye.

Operator   [12]
 Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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