Q2 2016 Grupo Aval Acciones y Valores SA Earnings Call

Sep 01, 2016 AM EDT
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
Q2 2016 Grupo Aval Acciones y Valores SA Earnings Call
Sep 01, 2016 / 02:00PM GMT 

Corporate Participants
   *  Luis Carlos Sarmiento Gutierrez
      Grupo Aval Acciones y Valores S.A. - President
   *  Diego Solano
      Grupo Aval Acciones y Valores S.A. - CFO

Conference Call Participants
   *  Carlos Macedo
      Goldman Sachs - Analyst
   *  Nicolas Riva
      Citigroup - Analyst
   *  Sebastian Gallego
      Credicorp Capital - Analyst
   *  Alonso Aramburu
      BTG Pactual - Analyst
   *  Carlos Gomez
      HSBC Global Research - Analyst
   *  Mayara Sa Riddlebaugh
      Wells Fargo - Analyst

Operator   [1]
 Good morning, ladies and gentlemen, and welcome to the Grupo Aval second-quarter 2016 consolidated results under IFRS conference call. My name is Richard, and I'll be your operator for today's call. (Operator Instructions)

 Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities within Colombia and in the United States, registered with Colombia's National Registry of Shares and Issuers -- Registro Nacional de Valores y Emisores -- and the United States Securities and Exchange Commission, SEC. As such, it is subject to the control of the Superintendency of Finance and compliance with applicable US securities regulation as a foreign private issuer under Rule 405 of the US Securities Act of 1933.

 Grupo Aval is not a financial institution and is not supervised or regulated as a financial institution in Colombia. As an issuer of securities in Colombia, Grupo Aval is required to comply with periodic reporting requirements and corporate governance. However, it is not regulated as a financial institution or as a holding company of banking subsidiaries and thus is not required to comply with capital adequacy regulations applicable to banks and other financial institutions. All of our banking subsidiaries -- Banco de Bogota, Banco de Occidente, Banco Popular, Banco AV Villas, Porvenir, and Corficolombiana are subject to inspection and surveillance as financial institutions by the Superintendency of Finance.

 Although we are not a financial institution until December 31, 2014, (sic - were not a financial institution until December 31, 2015; see slide 2) we prepared the unaudited consolidated financial information included in our quarterly reports 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, because we believe that presentation on that basis most appropriately reflected our activities as a holding company of a group of banks and other financial institutions.

 However, in 2009, the Colombian Congress enacted Law 1314, establishing the implementation of IFRS in Colombia. As a result, since January 1, 2015, financial entities and Colombian issuers of publicly traded securities such as Grupo Aval must prepare financial statements in accordance with IFRS. IFRS as applicable under Colombian regulations differs in certain aspects from IFRS as currently issued by the IASB.

 The unaudited consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB. Details of the calculations of non-GAAP measures such as ROAA and ROAE, among others, are explained when required in this report.

 Because of our recent migration to IFRS and recent implementation of IFRS accounting principles, the unaudited consolidated financial information for the first- and second-quarter 2016 and the comparative information for the relevant unaudited consolidated periods of 2015 presented herein may be subject to further amendments. This report 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 webpage. Recipients of this document are responsible for the assessment and use of the information provided herein.

 Grupo Aval will not have any obligation to update the information herein and shall not be responsible for any decision taken by investors in connection with this document. The content of this document and the unaudited figures included herein are not intended to provide full disclosure on Grupo Aval or its affiliates. When applicable, in this document we refer to billions as thousands of millions.

 Today, the call will be conducted by Mr. Luis Carlos Sarmiento Gutierrez, Chief Executive Officer of Grupo Aval; Mr. Diego Solano, Chief Financial Officer of Grupo Aval; Mrs. Tatiana Uribe, Investor Relations Officer of Grupo Aval. And I will now turn the call over to Mr. Luis Carlos Sarmiento. Mr. Sarmiento, you may begin.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [2]
 Thank you, Richard. Good morning and thank you very much for joining our call. To start with, it is my pleasure to report that our second-quarter results met our expectations. In the next few minutes, I will highlight a few of our results; and later on in the call, Diego will address these and other points in detail.

 But I feel that I should first address Banco de Bogota deconsolidation of Corficolombiana. As you'll recall, last May during our first quarterly call, we shared with you our concern over the rating agencies' actions with respect to Banco de Bogota's capital structure.

 We mentioned that Moody's had downgraded Banco de Bogota's stand-alone baseline credit assessment as well as its long-term foreign-denominated subordinated debt; and furthermore, that they had placed these ratings on credit review for further downgrades. Grupo Aval's own ratings had been dragged down by Banco de Bogota's per Moody's policy to act on our holding company's ratings after it takes action on one of its subsidiaries.

 We further explained that we had committed to present a plan of action to Moody's during June, and that our plan would hopefully prevent further downgrades by Moody's. We did in fact present Moody's with our plan that consisted in Banco de Bogota's ceding control of Corficolombiana to Grupo Aval, its holding company. This action entailed substantial financial and capital structure benefits for Banco de Bogota and for Grupo Aval. It represented the opportunity to directly control Corficolombiana.

 We explained these benefits in detail to the market on a pro forma basis during our late June call, in which some of you participated. I'm now happy to report that the deconsolidation of Corficolombiana was done successfully, and that the resulting effects were very much in line and even better than forecasted.

 In fact, after capitalizing the COP2.2 billion nonrecurrent gain that Banco de Bogota generated as a result of this transaction, its June 30, 2016, Tier 1 capital ratio will improve to 9.3% and its total solvency ratio to 14.3%. As you recall, we had estimated these numbers as 9.1% and 13.6%, respectively. Finally, although Moody's completed its credit review without further downgrades, we expect that during our future evaluation, this improvement -- which is no longer an estimation, but rather a reality -- will be taken into consideration for a rating upgrade.

 And now, let me refer briefly to Colombia's current macroeconomic landscape. Just as we anticipated, in the midst of high inflation and a contractionary monetary policy, Colombia's economy has continued to slow down. In fact, our expectations are now in line with the Bloomberg consensus of analysts that place real GDP growth for 2016 at around 2.3%. We do, however, continue to believe in the efficacy of the Central Bank's monetary policy; and, therefore, we expect that inflation will be contained starting next month, and that at the end of the year this pricing index will be at least 150 basis points lower than the 9% observed at the end of July.

 We also believe that the Central Bank will probably not have to increase its discount rate any further during this year or, at most, another 25 basis points. Although DTF has continued to rise, it sometimes moves unexpectedly and not in unison with the Central Bank's discount rate. Therefore we are making serious efforts to price our largest commercial loans off of the Central Bank's rate or IBR.

 We remain confident that positive trends in inflation, current account deficit, and growth will start to be seen towards the end of 2016 and that these will carry on to 2017. We are optimistic about the impact on consumer and investor confidence arising from the recently agreed-upon peace treaty with the FARC guerrilla, and we foresee a positive impact -- as yet unquantifiable -- on the economy as a result.

 Finally, we continue to see sources for GDP and loan growth from the 4G infrastructure projects over the next few years. We feel that unemployment continues to be manageable at levels of 10%. The exchange rate has revalued throughout 2016 and continues to hold steady in a level that we believe is sustainable for the rest of this year -- between COP2,950 and COP3,050 per $1.00 -- especially if oil prices continue to hover between $45 and $50 per barrel.

 Finally, we have high hopes that the government will understand the need to pass through Congress a business-friendly tax reform and also for a mild El Nina climate occurrence. If these hopes don't pan out, we might have to reevaluate our current economic estimations.

 With respect to our other major market, Central America continues to be benefited by the US economic progress and by relatively low prices of oil. As a result, our forecast growth in this region remains unchanged at approximately 4% for 2016.

 Now, turning to Aval's financial results, these are the main highlights. Diego will refer to each of these in more detail following this summary. Attributable net income for the quarter was COP601.1 billion or COP27 per share, showing a 6% increase versus the comparable second-quarter 2015 results of COP569 billion or COP26 per share.

 Attributable net income for the first semester of this year amounted to COP1,247 billion, showing an increase of 12% versus the attributable net income for the first semester of 2015 which amounted to COP1,112 billion. Both numbers exclude the nonrecurring wealth tax expense.

 Our total net loan portfolio grew by 13.3% in the last 12 months and by 1.6% in the quarter. In absence of the exchange rate movements of the period, the net loan portfolio grew by 2.4% in the quarter.

 Deposits grew by 11.8% in the last 12 months and by 0.1% in the quarter. Once again, in absence of the exchange rate movements of the period, the deposits grew by 0.9% in the quarter.

 Consequently, the ratio of deposits to net loans closed at 96% in June 30, 2016. As the Central Bank has increased its discount rate by 200 basis points this year, the DTF has kept up and has increased similarly -- however, in a much more volatile manner. Consequently, average yield on loans has increased by 140 basis points in the last 12 months and 41 basis points between the quarters ending in March and June 2016, closing at 11.3% for this quarter.

 Cost of funds, on the other hand, increased by 110 basis points in the last 12 months and 47 basis points in the quarter, closing at 4.5%. Therefore, the spread between average yield on loans and average cost of funds has expanded by 30 basis points in the last 12 months.

 NIM on loans was 6.5% for the quarter and increased 10 basis points versus the NIM on loans 12 months back and held steady versus the same ratio during the first quarter of this year. NIM on total investments was 0.8%, steady when compared to the same ratio during the second quarter of 2015, but [50] basis points less than the 1.3% observed for the first quarter of 2016.

 Total NIM was 5.6% in the second quarter of 2016 and increased by 30 basis points versus the same number during the second quarter of 2015. Mostly as a result of the decrease in the NIM on investments, total NIM for this past quarter showed a slight decrease versus a total NIM of 5.7% in the first quarter of this year.

 Total cost of risk during the second quarter of 2016 continued to be affected by nonrecurrent provisions, mostly as a result of the Pacific Rubiales default. Cost of risk, which amounted to 2.1% before recoveries of our allowances for loan losses and 1.9% after recoveries of allowances for loan losses, would have been 1.9% and 1.7%, respectively, in the absence of these nonrecurrent provisions. We have now provisioned and written off in its entirety the Pacific Rubiales risk and expect to have steady quarters going forward as far as the cost of risk goes. And consequently, we expect that the full year's cost of risk will not exceed 1.9% before recoveries of allowances for loan losses.

 Our consolidated efficiency ratio, measured at cost to income, was 47.2% for the quarter, in line with our expected efficiency for this year, 100 basis points better than our efficiency for 2015, and similar to our 2014 efficiency.

 As of June 30, 2016, all of our banks will show Tier 1 capital ratios in excess of 9.35% and as high as 10.1%. In the presentation, Banco de Bogota is shown on an actual and pro forma basis, as this Tier 1 ratio will be materialized after the Bank holds its shareholder meeting on September 13, 2016, in which it will capitalize a substantial portion of its first-semester 2016 earnings, including a $2.2 billion nonrecurrent gain from the deconsolidation of Corficolombiana.

 Finally, during the second quarter of 2016, our return on average assets was 1.7%, and our return on average equity was 16.3%. Including the wealth tax expense, for the full year we expect that our ROAE will approximate 15%.

 I'll now pass on the presentation to Diego, who will expand on the highlights that I just shared with you. Thank you and good day.

 Diego Solano,  Grupo Aval Acciones y Valores S.A. - CFO   [3]
 Thank you, Luis Carlos. I will start with the evolution of the macroeconomic environment. I'll move to the PowerPoint presentation on page 5. On that page, we present the evolution of some key macro drivers of our industry.

 Real GDP growth for the second quarter of 2016 was reported earlier this week at 2%, slightly below market expectations. Market consensus on real GDP growth as reported by Bloomberg remains stable, at 2.3% for 2016 and 3% for 2017. We share this view, expecting 2016 growth to be in the 2.25% to 2.5% area and a mild improvement during 2017.

 Some of the headwinds for recovery have lost strength. The improvement in international oil prices, the progress of our construction initiation of fourth-generation concessions, a more stable Colombian peso, our lower current account deficit, lower expected inflation, and the of the current interest rate cycle will favor recovery. Downsides will come from the potential impact of the terms of the tax reform and from oil price volatility, as in the past.

 Regarding the unemployment rate, the last few months have shown the mild deterioration that we expected. The number of jobs continues to increase, though at a slower pace. The last data point that we know is that for July 2016, released yesterday. The figure reported was 9.8%, up from 8.8% reported for the same month a year earlier. Nevertheless, absolute current account figures to be fragile. Relevant progress has been made since the peak of close to 8% in September 2015.

 First quarter of this year, the current account deficit reached 5.6%. The Central Bank estimates -- points to a further improvement throughout the year, going down to 5.3% by end of year. Lower demand of imported goods, the lower factory income outflows, drove this improvement. On the financing side, the increase in direct and portfolio investment and higher remittances favored this result.

 Moving to page 6, we present inflation and some interest rate benchmarks. 12-month inflation negatively surprised the market since our last call. The truckers' strike propelled 12-month July inflation up to close to 9%. Even though this high level appears to be short-lived, it resulted in an increasing market consensus on 2016 inflation from 6.95% to 7.4% as of yesterday.

 We still expect inflation to be lower in the latter part of the year as we experience lower transference of the currency depreciation into inflation and the effect of the Central Bank recent actions feeding to the economy, as well as the impact of the truckers' strike and the climate issue on food prices fade away. We expect year-end 12-month inflation to trend downwards to the mid-7% area.

 Consistent with the recent inflation data, the Central Bank has continued to raise its rates, accumulating 325 basis points since August 2015, reaching 7.75%. The Central Bank voted six out of seven in favor of a pause in yesterday's meeting.

 This changing policy may signal the end of the rising interest rate cycle, with at most one or none additional hikes left. With inflation close to 9%, the Central Bank continues to have a negative real interest rate. The DTF, our benchmark rate, has tracked the repo rates, hovering in the 7.25% to 7.5% area over the past few weeks.

 On page 7, we present oil prices effect on foreign exchange. The Colombian peso/dollar exchange rate closed June at COP2,919, near 3% stronger than three months earlier and 12% weaker than the year earlier. Second-quarter average exchange rate was COP2,993, stronger than the previous quarter and 20% weaker than the same quarter a year earlier. Even though we [declared that in the past] a negative correlation exists between the Colombian peso/US dollar exchange rate and the performance of oil prices. During the quarter, capital flows and remittances into Colombia strengthened the Colombian peso.

 Over the past few days, the US dollar has strengthened against other currencies following Ms. Yellen's recent positive comments on the US economy. In addition, oil-producing countries' currencies have weakened as oil prices have slightly corrected downwards following the inventory data and the OPEC members' comments. The main drivers for the Colombian peso/US dollar exchange rate in the near future are expected to be the year-end monetary policy in the US and the oil supply/demand balance as we get closer to 2017.

 On page 8, we represent our chart on Central America macroeconomic drivers. Our view on Central America continues to be positive. 2015 to 2018 GDP growth forecast for the region is 4.3% per IMF estimates. Monetary policy is expansionary. A positive correlation to the US economy will favor the region.

 I will now move to the results of Grupo Aval, starting on page 9 with our asset evolution. Balance sheet and P&L accounts that -- defined in this report reflect the presentation standard used on our 20-F. Total assets grew at 11.2% during the last 12 months and presented a slight increase of 0.4% during the last quarter. In absence of the effect on the Colombian peso fluctuations on Central America, assets would have grown 7.8% and 1.2%, respectively.

 Broken down by region, over the past 12 months our Colombian assets grew at 8.5%, while the Central American assets grew at 5.1% in dollar terms, an 18% growth in peso terms. Over the quarter, our Colombian assets grew at 1.1%, while our Central American assets grew at 1.1% as well in dollar terms, a 1.7% contraction in peso terms.

 Our consolidated balance sheet structure was centered to that in place at the end of June 2015 and March 2016, with a slight increase in the weight of our loans and leases in total assets. Our net loans account for 66% of our assets, up from 64.8% 12 months earlier and 65.2% three months earlier. Lower weight of fixed income investments, resulting from adjusting our portfolios to an increasing interest rate environment, has compensated this increase. Fixed income investments now account for 11.1% of assets, down from 13.2% one year ago.

 Colombian assets account for close to 72% of our balance sheet, 58 basis points higher than three months ago. Central American assets have increased their weight over the past 12 months in real terms, 26% to 28%. Both changes -- both the annual and the quarterly change -- are mainly due to the Colombian peso fluctuation.

 On page 10 we present our portfolio -- our loan portfolio evolution. Gross loans increased by 13.1% over the last 12 months. In absence of the effect of the peso depreciation in Central America, 12 months growth would have been 9.7%. This change resulted from our Colombian book growing at 9.4%, in Central America at 24.1%, or 10.5% in dollar terms.

 Mortgages continue to be our most dynamic portfolio, growing at 23.2% over the last 12 months. The consumer and commercial loans grew 17% and 9.7%, respectively, during the same period. Broken down by region, mortgage loans grew 26.6% in Colombia and 7.8% in dollar terms in Central America. Consumer loans grew 12.7% in Colombia and 13.1% in US dollar terms and Central America. Commercial loans grew 7% in Colombia and 9.7% in dollar terms in Central America.

 During the second quarter of 2016, gross loans increased 1.4%. In absence of the effect of the peso appreciation on Central America, three months' growth would have been 2.2%. This growth resulted from Colombian operations growing at 2.1% and the Central American at 2.3% in dollar terms. This is a 0.4% decrease in peso terms.

 The structure of our gross loan portfolio remains stable when compared to the previous quarter. Commercial loans account for 60% of our portfolio, while consumer and mortgages account for 30% and 9.5%, respectively.

 Loans to individuals, which includes consumer mortgage and micro credit loans were at 1.8%, 12 percentage points higher than a year earlier. Colombia accounted for 73% of our loan portfolio, up from 72% at three months earlier and down from 75% 12 months earlier. The increase in weight of our Central American operation has been mainly due to the Colombian peso fluctuation.

 We expect 2016 loan growth to be [shored up] 10% to corporate loans growing at 7% to 8% and loans to individuals growing between 12% and 14%. Growth in Colombia and growth in Central America in dollar terms will be [similar].

 On page 11 we present several loan portfolio quality ratios. On the top left of the page, you will find the evolution of our loans past due more than 30 days and our nonperforming loans, both as a percentage of total loans excluding interest account receivables.

 During this quarter, our delinquency ratio measured as 30 days past due loans to total loans, deteriorated by 5 basis points, from 2.7% to 2.8%. Delinquency measured as NPLs to total loans improved by 6 basis points, from 1.8% to 1.7% during the second quarter. Moving to the right, annualized net provision expenses, net of recoveries of charged-off assets for the quarter, was 1.9% of average loans -- the same as three months earlier and up from 1.6% recorded 12 months earlier.

 Provision expenses for Pacific had a relevant impact on our cost of risk, contributing to expense COP80 billion and COP63 billion during the first and second quarter, respectively. Excluding these events, the cost of risk net of charged-off assets for both quarters would have been 1.7%.

 On the bottom left, you will find the annualized ratio of charge-offs to average NPLs. This ratio was 1.1 times during the second quarter of 2016. Excluding the Pacific related charge-offs, the ratio would have remained stable at 0.9 times.

 Finally, on the bottom right, we present several loan impairment allowance coverage ratios. Our allowances are 2.7% of our total loans and cover 1.6% of our NPLs and 1 times our 30-days past-due loans. We expect full-year 2016 gross cost of risk to be in the 185% to 190% area, incorporating 10 basis points impact from Pacific. Recovery of charged-off assets would reduce this figure by 15 to 20 basis points.

 On page 12, you will find further detail on the quality of our loan portfolio. On this page you find the evolution of our loans past-due more than 30 days and our nonperforming loans as a percentage of total loans. We will also refer to 90 days past-due loans, even though not included on this chart.

 During this quarter, our delinquency ratios slightly deteriorated when measured as 30 days PDLs to total loans by 5 basis points from 2.7% in the first quarter to 2.8% during the second quarter.

 During the quarter, our 90 days PDLs to total loans improved by 7 basis points to 1.5%, and our NPLs to total loans improved by 6 basis points to 1.7%. All ratios are calculated as a percentage of total loans excluding interest account receivables.

 Broken down by type of loan on a quarterly basis, commercial loans slightly deteriorated by 7 basis points to 2.1% when measured as 30 days PDLs but improved 11 basis points to 1.3% when measured as 90 days PDLs, and 11 basis points to 1.3% when measured based on NPLs. Consumer loans remained stable at 4.1% when measured as 30 days PDLs, at 1.9% when measured as 90-days PDLs and, 2.7% when measured based on NPLs. Mortgage loans improved their quality from 2.9% to 2.7% when measured as 30-days PDLs from 1.2% to 1.1% when measured based on NPLs.

 Funding and deposit evolution are presented on page 13. Total funding grew 12% over the last 12 months and 0.6% during the last quarter. In absence of the effect of the Colombian peso exchange rate fluctuation in Central America, 12 months' and three months' growth would have been 8.6% and 1.4%, respectively.

 Broken down by region, Colombia funding grew at 10.4% over the last 12 months and 1.5% during the quarter. Central America funding grew at 4.1% in US dollar terms or 17% in Colombian peso terms over the last 12 months. For the second quarter of 2016, Central America in funding grew at 0.8% in dollar terms. This is a 1.9% decrease in Colombian peso terms.

 Deposits increased at 11.8% during the last 12 months and 0.1% during the last quarter. In absence of the effect of the peso depreciation and Central America, 12 months and three months growth would have been 8.5% and 0.9%, respectively. Broken down by region, Colombia accounted for 73.4% of total deposits. Colombian deposits grew 9.2% over the last 12 months and 0.9% during the quarter.

 Central American deposits grew 19.6% in Colombian peso terms or 6.5% in US dollar terms over the last 12 months. For the quarter, Central American deposits increased by 0.6% in dollar terms, 2.2% decrease in peso terms.

 Our funding and deposit structure had minor changes during the quarter. Deposits accounted for 75.2% of our total funding. At the end of period, our deposits covered 96% of our total net loans.

 On page 14, we present the evolution of our total capitalization of attributable shareholders equity and the capital [at the equity ratios] of our Banks. Our total equity, defined as attributable equity plus minority interest, was COP23.8 trillion as of the end of the second quarter of 2016. This implies a 7.1% increase over the last 12 months and a 3.9% during the last quarter.

 Attributable equity accounted for 63.4% of total equity as of June 2016. Total equity was COP15.1 trillion as of the end of June. This implies a 6.8% growth during the last 12 months and a 4.9% growth during the quarter.

 On this chart, we also show the consolidated solvencies of our banks. Solvencies at the end of period were 13% for Banco de Bogota; 12.4% for Banco de Occidente; 9.7% for Banco Popular; and 11.2% for Bank Porvenir.

 The reconsolidation of Corficolombiana was completed and accounted for during June. This process generated COP2.2 trillion in income according to IFRS 10. This income contributed to secondary capital at 50% as at the end of period. We plan to fully (technical difficulty) this amount in our shareholders meeting during mid-September. This results in a 2.5 percentage points increase in primary capitalization and a 1.3 percentage point increase in total solvency.

 On page 15, we present our net interest margin. Our net interest margin expanded to 5.6% from 5.3% recorded during the same quarter a year earlier. This increase was driven by an expansion in net interest margin and loans and a higher share of loans over the average interest-earning assets.

 Compared to the previous quarter, total net interest margin experienced a slight contraction of 0.1 percentage points, driven by lower net interest margin on investment. The net interest margin on loans was 6.5% during the second quarter of 2016, up from 6.4% a year earlier and at the same level as the previous quarter. Net interest margin on investments was 0.8%, down from 0.9% a year earlier and down from 1.3% a quarter earlier.

 Our quarterly net interest income, including net trading income from investments held for trading through the profit and loss, grew 16.7% from COP2 trillion in the second quarter of 2015 to COP2.4 trillion in the second quarter of 2016. Net interest income had a 1% decrease compared to the previous quarter. We expect a 10 to 15 basis point expansion in net interest margin on loans as the repricing of loans catches up with the repricing's funding, given the expected end of the monetary [cycle].

 On page 16, we present net fees and other income. Fee income is presented on the top of the page. Gross fee income grew by 18% compared to the same period a year earlier and decreased by 0.3% to that received during the first quarter of 2016, mainly explained by the Colombian peso fluctuation. When excluding the effect of FX movements, fees grew by 10.8% and 3.2%, respectively, compared to those periods.

 Broken down by geography, Colombia accounted for 61% of total gross fees. Domestic fees grew at [7.10%] over the last 12 months and 3.8% during the quarter. Central American quarterly fees grew by 15.8% in dollar terms -- this is 38.8% increase in Colombian peso terms -- over the last 12 months.

 During the quarter, Central American fees increased by 2.2% in dollar terms, 6.1% decrease in Colombian peso terms. At the bottom of the page, we present other income. Other income for the quarter was COP770 billion.

 On page 17, we present efficiency. On this page, we show our operating expenses as a share of total income and of average assets. Our efficiencies slightly deteriorated during the period. Efficiency measured as operating expense divided by average assets showed a [deterioration] from 3.4% in the first quarter of 2016 to 3.5% in the second quarter of 2016. In Colombia this ratio deteriorated by 21 basis points to 2.9%; in Central America the ratio improved by 6 basis points to 4.8% in peso terms.

 Efficiency measured as operating expense divided by total income was 47.2% during the quarter, up from 44.1% recorded during the previous quarter. In Colombia, this ratio deteriorated from a particularly favorable 38.5% during the first quarter to 43.5% during this quarter. In Central America, this ratio improved from 55.4% to 54.8% in peso terms. These quarterly cost-to-income results are in line with our full-year expectation of 47% or 100 basis points improvement versus 2015.

 On page 18, we present our net income and profitability ratios. Attributable net income for the quarter was COP601 billion or COP27 per share. Year to date, attributable net income net of the effect of the COP179 billion of attributable equity tax was COP1,246 -- 12% higher than that for the same period a year earlier. Return on average assets and return on average equity for this quarter were 1.7% and 16.3%, respectively.

 Before we move to the Q&A, I want to recap our guidance for 2016. Growth in loans in absence of FX movements will be shored up 10%. We expect similar growth for our Colombian and our Central American operations.

 The quality of loans is expected to remain stable at current levels. For us, cost of risk will be between 185% and 1.9%. Net of recoveries, this ratio will be 15 to 20 basis points lower. These figures incorporate 10 basis points impact of Pacific.

 We expect the net interest margin on loans to increase 10 to 15 basis points as the repricing of loans catch up with the repricing of funding. We expect total net interest margin to be in the 5.7% to 5.8% area. This result will depend on the performance of our investment portfolio.

 Regarding efficiency ratios, we expect this year for full year to end at 47%, gaining back 100 basis points of what was lost during 2015. Finally, as previously guided, we expect our ROE to be close to 15%.

 I now open it to questions.

Questions and Answers
Operator   [1]
 (Operator Instructions) Carlos Macedo, Goldman Sachs.

 Carlos Macedo,  Goldman Sachs - Analyst   [2]
 One question, really on margins. We saw in the quarter the margin -- you know, the net interest margin was down, and you attributed that a lot to the investment margin that was down as well. When we look at the sequential growth in NII and even the year-over-year growth, you see a significant growth in the cost of deposits -- and that's understandable, given how far rates have moved. You don't really see a comparable increase in the yields from loans.

 How do you expect that to behave going forward? I mean, first, what happened during the quarter -- you had 15% expansion in the cost of deposits and loan NII. Loan interest income was up only about 5%. Is your balance sheet more sensitive? Are your liabilities more sensitive to rates than your assets? How should we think about that?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [3]
 Carlos, actually our balance sheet is asset sensitive. The reason for that is that we fund our operation with a substantial amount of checking accounts and retail saving accounts. Those accounts are not sensitive to the changes that we experience. Therefore, we end up with asset-sensitive balance sheet.

 This is a combination of a couple of situations. One, the repricing of funding happens much faster than the repricing of the lending type. Our portfolio has different kinds of performance. The corporate portfolio reprices with DTF, and it reprices pretty fast.

 But just to follow the sequence, what you will find happening in Colombia -- it happens around the world -- is you get a central bank interest increase; that is followed several weeks after by -- there's a benchmark rate, in our case, DTF, catching up. And then you have our portfolios that are based on -- are floated on DTF, repricing at different points in time basically over a three-month horizon.

 Such an environment, repricing of loans still has a lag to the repricing of funding. Given that we've been in a process -- a nonstop interest rate hike cycle, by the time our loans are repricing, funds are also repricing faster. Therefore, we pointed out during the speech the relevance of the past in the monetary policy. What happens at that point is that our loans continue to reprice, but our liabilities cease to reprice. Therefore, there's a slight lag there.

 The other element to take into account is: given the cycle, we've been keen on deposit growth. If you compare our results to other players, we are making sure that we are getting our deposits, perhaps in a more aggressive way. We believe that it's absolutely key for growth in the future, or looking into the short-term horizon, to be able to source potential loans with the appropriate maturities as well as available funds.

 If we had given up our deposit-to-loan relationship, we would have been able to retain or to defend our cost of funds more. In addition, this is -- to try to put some events to what I just said -- I mentioned that we are working on generating a longer maturity on our funding side. And evidence of that is the bonds recently issued by Banco de Bogota; in addition, the loans that we gave them last year, as well; plus other local capital market operations that they've been floating.

 Therefore, we are increasing the maturity; hence the cost of [funds on our portfolio]. We're getting prepared to disperse the fourth-generation confession loans that should start to be seen later this year.

 Carlos Macedo,  Goldman Sachs - Analyst   [4]
 Okay, so just to make it clear, what you're saying is that the rate hikes might have pause; they might go up a little bit more, but eventually, probably next year, you're going to start seeing rate cuts as inflation starts to recede. What you're saying is that the inverse of what's happening now should happen next year, then, with your margins staying more resilient in the first part of the cut cycle as your liabilities reprice quicker than your loans. Would that be accurate?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [5]
 Yes, I believe so. Trying to summarize what we expect to see is further expansion on our loans, as I mentioned before. I can't go -- just to make a precision on the numbers that you stated at the beginning -- our average cost of funds has increased by 110 basis points, while our average yield on loans has increased by 140. This is a 30 basis points expansion over the last 12 months.

 In addition, we expect to see a further expansion in the 15 to 20 basis points area. So we would end up with a full expansion of around or close to [0.5 percentage point].

Operator   [6]
 Nicolas Riva, Citi.

 Nicolas Riva,  Citigroup - Analyst   [7]
 My question is in loan loss provisions. So they increased to 2.1% of loans this quarter. You explained that this was related to provisions for Pacific Rubiales. I remember in the last conference call, you had guided for 1.7% of loans for this year. That number, the 1.7% looking into next year -- is that a reasonable number to assume for next year? The 1.7%? Thank you.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [8]
 Nicolas, you're right; we had guided to a lower number. We actually reviewed our guidance in this call as slightly up to reflect what has happened.

 It is not only the Pacific event what we're basing this adjustment on, but also reflecting some deterioration in the consumer portfolio that you could expect with what we've seen in employment. Moving into next year, even though we are cautious on giving guidance on next year until we get more clarity throughout this quarter, our expectation is, however, that we should see improvement in the [site]. We believe we might have peaked already what we were to see.

 We, as market consensus, believe that there could be around 100 basis points of further growth, GDP growth, next year. And I went through the laundry list of some of the positives to this result.

 To summarize, yes, you're right. We are expecting to see some improvement. I would be careful on telling you we are returning to this 1.7%, but it would be a fair estimate at this point.

Operator   [9]
 Sebastian Gallego, Creditcorp.

 Sebastian Gallego,  Credicorp Capital - Analyst   [10]
 I want to ask regarding on the effective tax rate: what can we expect for this year? And moving forward, can you provide a little bit more color on what could we expect in terms of effective tax rate, given the operations that you're doing between Banco de Bogota and Leasing Panama? Thank you.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [11]
 Sebastian, I believe what you are pointing to was effective tax rate. Am I right?

 Sebastian Gallego,  Credicorp Capital - Analyst   [12]

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [13]
 Okay. The way to think about our theoretical tax rate is you have to bear in mind that around 30% of our operation happens in Central America. And in that region we have a tax rate of around, let's say, 25% to 28%. The remaining is what happens in Colombia.

 Therefore when you blend our Central American operation with our Colombian operation, the theoretical tax rate should be somewhere between 36% and 37%. The variations around this number depend on tax specifications, such as how tax returns are affected by depreciation and other specifications. But the theoretical tax should be somewhere around that number.

 Up to this point, our effective tax rate has been around 35% in what has been happening throughout the year. There could be some increase during the second quarter. This is business as usual. However, there's something that we are still working on, and it is the potential impact of merging Banco de Bogota with Leasing Bogota Panama. That has a positive impact due to bringing the amortization of goodwill into Colombia. But we are still in the process of making calculations on that. So once we have something clear there, as in the past when we decided to the consolidate Corficolombiana, we will be more precise on what we expect.

Operator   [14]
 Alonso Aramburu, BTG Pactual.

 Alonso Aramburu,  BTG Pactual - Analyst   [15]
 Just a follow-up on the margin question initially. Is it your assumption that Central Bank will pause for the rest of the year on your 10 to 15 basis point increase on the NIM?

 And related to that, this quarter in your deposits we saw checking accounts decline about 8% quarter on quarter and time deposits increase close to 4%. And I guess that's in line with your comment that you're being more aggressive on capturing deposits. Are you factoring that into your cost of funding for the second half of the year? Is this a trend that we should expect to continue?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [16]
 Answer for both, yes. We believe this pause could be permanent. We believe that there might be at most and additional interest-rate increase. We need to see more information coming out from the Central Bank, however. A six-to-one vote and pause is a relevant signal that this could be the end of the cycle.

 And we do expect to see inflation moving back down to the 7.5% area. Therefore, more arguments why this could be the last pause.

 In factoring our changes in mix to net interest margin expectations, yes, they are already factored in. And to tell you what's happening there -- as part of what we've been working on -- is strengthening some of the funding structures of some of our banks, particularly Banco Popular, where you'll find this kind of change.

 The other area where we're working on is on increasing deposits from our retail branch.

Operator   [17]
 Carlos Gomez, HSBC.

 Carlos Gomez,  HSBC Global Research - Analyst   [18]
 Two brief questions. First, on the capital side, you show us the capital ratio for each of your individual banks, and we see a particular decline in Banco de Bogota. I believe it is to 6.8% in the quarter. So I would like to understand exactly how the capital moves there.

 And second, could you clarify again on the tax rate -- you mentioned 36%, 37%. That is for the Colombian part of the business, or for the Company as a whole? Thank you.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [19]
 The tax is for the Company as a whole. If you do the blended numbers of around 40% for Colombia and around 25%, 28% for Central America, you will end up with those numbers.

 Regarding the capital side, you referred to the presentation; we included two columns for Banco de Bogota -- one as reported for June, and the other a pro forma column once we capitalize the gains from the consolidation of Corficolombiana.

 The way it mechanically works is in our previous shareholders meeting, we declared how much of our earnings we were to retain in the next shareholders meeting -- that we were to capitalize in the next meeting. That was 50% in the case of Banco de Bogota.

 Therefore, given that these earnings were generated in [us] a semester before we moved into -- before we had our shareholders meeting where we capitalized those earnings, this is treated as general earnings. Therefore, it only accounts for -- it only contributes at 50% of that value to secondary capital. Once we have a shareholders meeting and we capitalize those earnings, they move into Tier 1 at 100%. That's the reason why you see at the 6% that when you move to the right, it becomes a 9%. And these earnings haven't yet become Tier 1 capitalization.

 The reason why you temporarily see those numbers falling is that we do get a negative effect when we reconsolidate Corficolombiana the way minority interest had contributed in the past to its capitalization. So that's why you see a number that is temporarily low, but this number should move up within this month.

Operator   [20]
 Mayara Sa Riddlebaugh, Wells Fargo.

 Mayara Sa Riddlebaugh,  Wells Fargo - Analyst   [21]
 My question is also on the solvency ratios, but related to Popular. There was almost a 200 basis point decline on the solvency ratio quarter over quarter. I was wondering if you could explain that, give us a little bit more detail on that -- on what happened, and if that's the level that we should see going forward.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [22]
 It's a combination of two reasons. One organic -- it's the Bank that is growing the most.

 And then also, in the process of deconsolidating Corficolombiana, there's a change in the way the minority interest is treated. What we have been looking into Popular, as we've been looking into the rest of our banks, is that -- in the past we haven't used secondary capitalization as much as we could, and we're studying what we could do on that front.

Operator   [23]
 Thank you. We have no further questions at this time. I'd like to turn the call over to Mr. Sarmiento for closing remarks.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones y Valores S.A. - President   [24]
 Thank you very much. Richard. I think that -- basically, very good questions. I hope we were able to provide answers. If not, we'll be happy to take any questions off-line to the extent that we can answer them. And nothing else -- just to say thank you very much for attending our call, and we'll see you next quarter. And thank you, Richard.

Operator   [25]
 Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

PRELIMINARY TRANSCRIPT: "Preliminary Transcript" indicates that the 
Transcript has been published in near real-time by an experienced 
professional transcriber.  While the Preliminary Transcript is highly 
accurate, it has not been edited to ensure the entire transcription 
represents a verbatim report of the call.

EDITED TRANSCRIPT: "Edited Transcript" indicates that a team of professional 
editors have listened to the event a second time to confirm that the 
content of the call has been transcribed accurately and in full.

Thomson Reuters reserves the right to make changes to documents, content, or other 
information on this web site without obligation to notify any person of 
such changes.

In the conference calls upon which Event Transcripts are based, companies 
may make projections or other forward-looking statements regarding a variety 
of items. Such forward-looking statements are based upon current 
expectations and involve risks and uncertainties. Actual results may differ 
materially from those stated in any forward-looking statement based on a 
number of important factors and risks, which are more specifically 
identified in the companies' most recent SEC filings. Although the companies 
may indicate and believe that the assumptions underlying the forward-looking 
statements are reasonable, any of the assumptions could prove inaccurate or 
incorrect and, therefore, there can be no assurance that the results 
contemplated in the forward-looking statements will be realized.

Copyright 2018 Thomson Reuters. All Rights Reserved.