Q1 2017 Grupo Aval Acciones y Valores SA Earnings Call

May 31, 2017 AM CEST
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
Q1 2017 Grupo Aval Acciones y Valores SA Earnings Call
May 31, 2017 / 02:00PM GMT 

Corporate Participants
   *  Diego Fernando Solano Saravia
      Grupo Aval Acciones Y Valores S.A. - CFO
   *  Luis Carlos Sarmiento Gutiérrez
      Grupo Aval Acciones Y Valores S.A. - President

Conference Call Participants
   *  Carlos G. Macedo
      Goldman Sachs Group Inc., Research Division - VP
   *  Frederic De Mariz
      UBS Investment Bank, Research Division - Executive Director and LatAm Analyst for Non-Bank Financials and Banks
   *  Juan Pablo Pedraza

Operator   [1]
 Welcome to the first quarter 2017 consolidated results under IFRS conference call. My name is Hilda, and I will be your operator for today's call. (Operator Instructions) Grupo Aval Acciones y Valores S.A., Grupo Aval is an issuer of securities in 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 U.S. securities regulations as a foreign private issuer under Rule 405 of the U.S. 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, it is not required to comply with capital adequacy regulations applicable to banks and other financial institutions.

 All of our banking subsidiaries, Banco de Bogotá, Banco de Occidente, Banco Popular and 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 we prepared an unaudited consolidated financial information included in these quarterly reports in accordance with the regulations of the Superintendency of Finance for financial institutions and generally accepted accounting principles for banks who 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 this quarter of 2017 and the first and fourth quarter of 2016 may be subject to further amendment.

 This report may include forward-looking statements, which actual results may vary from those stated herein as consequence of changes in general, economic and business conditions, changes in interest and currency rates and other risk factors as evidenced in our Form 20-F available at the SEC web page. Recipients of this document are responsible for the assessment and use of the information provided herein.

 Grupo Aval 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.

 I will now turn the call over to Mr. Luis Carlos Sarmiento Gutiérrez. Mr. Sarmiento, you may begin.

 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [2]
 Thank you, Hilda. Good morning all, and thank you very much for joining our 2017 first quarter result call. Allow me to start by providing an update in reference to 2 recurring items in the agendas of our quarterly calls, Ruta del Sol and Electricaribe.

 In the first place, I will refer to Ruta del Sol. As you may recall, in our previous quarterly call, I informed you that on March 27, we signed an addendum to the February 22 agreement to terminate and liquidate the concession contract between DIAN and the Concesionaria Ruta del Sol or CRDS. The essence of the addendum was to initiate the execution of the conditions that had to be met by CRDS or DIAN to allow the first payment to the financial sector in an amount equivalent to approximately 60% of the total debt owed by the company.

 Among those conditions, the 2 most important consist in the liquidation and the payment of at least 70% of the 3,300 employees and payment of 70% of past due accounts payable to suppliers. Total financial debt amounts to $800 million, and past due accounts payable approximate $25 million. Although the processes of executing these 2 conditions have taken much longer than anticipated due to DIAN's painstaking attention to detail, I'm satisfied to report that as of yesterday, we had accomplished the liquidation of almost 77% of all employees.

 Therefore, we have met our first objective. As the company was not able to convince DIAN to allow both requirements to be met in parallel, the team will now devote all its attention to pay the past due accounts payable. Under the terms of the agreement, 3 labor days after this is accomplished, the banks will get their first payment.

 Secondly, I will refer to Electricaribe's government intervention. As you may already know, Gas Natural has sued the Colombian government over what Gas Natural believes was an illegal expropriation of their ownership in Electricaribe by the government. This is an issue that in the best of cases will take several years to be resolved. In the meantime, the company continues to operate and to bring electricity to the community it serves, albeit at not much better quality than before the intervention.

 However, the government unilaterally decided to stop any and all payments to the financial sector, a decision which, as expected, necessarily result in additional loan loss provision. In our estimation, barring an out-of-court agreement between Gas Natural and the Colombian government and/or a sale of the company by year end, the financial sector will need to have booked provisions for up to 80% of the outstanding debt. This, of course, includes provisions on the $185 million owed to Aval banks. As of March 31, provisions had been booked for only 13% of the obligations.

 I will now refer to the current macroeconomic environment. GDP growth of only 1.1% in the first quarter of 2017, significantly below the 2.7% growth observed during 2016's first quarter and 50 basis points below the 2016 fourth quarter growth of 1.6%, seems to indicate that the economic recovery will take longer than expected. There are several indications to support this.

 For example, during January, consumer confidence reached historic lows, perhaps suggesting that the increase in value-added taxes from 16% to 19% hit the consumer community harder than previously thought. Also, the fact that loan demand has slowed down considerably.

 There are, however, other indicators that would seem to validate our expectation of better economic performance in the not-too-distant future. For example, after an all-time low consumer confidence index during January, this index recovered, although slightly, in February and again in March. This might be the reason why retail sales improved in March. Additionally, although the increase in value-added taxes might have resulted in some spending readjustments on the part of consumers, it is also worth mentioning that households' purchasing power as a whole increased as a result of the government's minimum wage increase of 7% as compared to an inflation number that ended 2016 at 5.75% and it's already at 4.66% on a last-12-month basis as of April 2017.

 In fact, in line with receding inflation, the Central Bank started to ease monetary policy in December of last year and has continued cutting its benchmark rate throughout this year. Until May's meeting, the board has decreased the rate 100 basis points to 6.25%. We believe that other rate cuts, although at a much slower pace, will come before year end when our estimation is that the Central Bank's rate will be between 5.75% and 6% on inflation numbers for the year up 4.5%.

 Because of the speed at which the rate has been cut, the lower rates have not entirely been transferred onto the economy, especially with respect to consumer loans. When this happens, we expect that deterioration in the quality of the consumer loan portfolio will ease.

 On the other hand, lower rates are transmitted much quicker to the commercial loan portfolio. In fact, the DTF is now approximately 15 basis points under the Central Bank's rate, and the 3-month IBR rate is currently 10 basis points under DTF.

 We also continue to see fairly positive unemployment numbers. In fact, on a national basis, unemployment decreased from 10.1% in March 2016 to 9.7% in March 2017. This also bodes well for the quality of the consumer loan portfolio.

 As far as commercial activity, the dependence on imported raw materials, machinery and finished goods and services is largely influenced by the exchange rate. In turn, the exchange rate is still influenced, albeit not as much as it was before 2015, by the price of oil.

 In terms of oil prices, current forecasts expect relative stability around $50 per barrel, and with a stable prospective for the oil market, our current expectation is that the peso-dollar exchange rate should remain relatively steady between COP 2,900 and COP 3,000 per dollar. In fact, this year started with an exchange rate of COP 3,000 per dollar, which had appreciated by 4% as of March 31 and is currently at COP 2,914 per dollar and appreciation of close to 3% versus December's number.

 Aiding the recovery in commercial activity is our expectation that the first wave of 4G infrastructure projects, including 3 of the 4 4G projects that Corficolombiana was awarded will start in earnest and consequently demand credit in the second half of this year. Taking these facts into account, we expect that the pickup in growth will become evident in the second half of the year, granted a quarter or 2 later than we had originally forecasted, and that as a result, GDP growth in 2017 will move in a range of between 2% and 2.2%.

 We remain concerned with the fiscal and current account deficits, but are moderately optimistic towards the near future expectations with regard to these indices. Although the latest available current account deficit numbers for the fourth quarter of 2016 amounted to 3.2% of GDP, this number is significantly better than the deficit of 5.5% of GDP for the same period of 2015. We expect that this deficit will be further corrected, if slightly, during 2017.

 We will understand better the validity of our expectation when first quarter numbers are released. The main driver in the possible improvement of this deficit is the trade balance deficit correction, which decreased from 3.1% at December 2016 to 2.8% of GDP as of March 2017, led by an increase in prices of traditional exports such as oil, as well as the increase in exported quantities of nontraditional goods such as fruits, plastics and manufactured metals. Additionally, certain imports, including transportation equipment and oil derivatives, have decreased.

 Capital inflows, which amount to $4.6 billion between foreign direct investment and portfolio investment flows, continue to offset the deficit in current account. Through April, roughly half of capital inflows were from FDI, and the other half came from portfolio investment flows.

 As far as fiscal deficit, preliminary government reports suggest that foreign assets owned but previously undeclared by Colombian nationals in amounts in excess of $5 billion have been normalized or, in other words, included in the 2016 tax returns, taking advantage of the special tax rate of 13% over the value of such assets as a result of the 2014 and 2016 fiscal reforms. We expect that this as well as all the other provisions of the 2016 fiscal reform will produce a significant increase in fiscal revenues and thus, a correction in the fiscal deficit to levels closer to 3.3% or better for 2017.

 With respect to our other major market, according to IMF estimates, the Central American economy's growth is expected to increase from 3.9% in 2016 to 4% in 2017. This growth is almost 4x larger than the IMF projection for Latin America, which stands at 1.1%. The expectation is for inflation in Central America to increase from 2.1% in 2016 to 3.4% at year-end 2017, mostly as a result of the increase in oil prices. After stable monetary policy in 2016 across the region, this year we have already seen an exception to this rule.

 In April, Costa Rica's central bank increased its interest rate to 2.5% as a preemptive measure to control inflation. Despite the fact that current inflation is at 1.6%, which is below its target range of 2% to 4%, the Costa Rican central bank is concerned that inflation expectations are hovering around 4%.

 Also worth mentioning is the recent events in El Salvador, where last month, the government did not pay, upon their maturity, certain government-issued fixed-rate obligations. This technical default arose as a result of the government's assumption that the obligations would be automatically paid for with new obligations in the same amount as authorized by existing regulations. Thus, the government had not made any specific provisions in its fiscal budget to pay the obligations upon their maturity. However, earlier this year, the opposing political party got through Congress a law impeding the issuance of new paper without Congress's approval regardless of the purpose of the new obligations even if they were to be used to replace outstanding debt.

 Therefore, when the mentioned obligations came due, the Ministry of Finance had its hands tied and had to wait for Congress to specifically authorize new debt, and such authorization only came a week or 2 after the obligations came due. This cost the country a further reduction in its rating, frankly, as a result of a political rather than a financial problem. In any case, only 2.7% of our consolidated assets reside in El Salvador, and our exposure to government-issued obligations in that country amounts to $30 million.

 Finally, although remittances to Central America have, in fact, increased since Mr. Trump became President, we remain observant of any new fiscal laws or immigration regulations that might affect the flow of remittances to Central America.

 Now let's turn to [of] our financial results. I will briefly run over the main highlights, and then pass this over to Diego, who will refer in detail to our business results.

 Attributable net income for the quarter was COP 587 billion or COP 26 per share, a 25.8% higher than the first quarter 2016 result. Excluding the onetime attributable wealth tax payment, attributable net income for the quarter was COP 661 billion or COP 29 per share.

 As a result of the tax reform of 2016, this is the last quarter that corporations, including banks, pay equity tax, which on a consolidated basis amounted to COP 109.3 billion for 2017 and as in previous years, was paid entirely in the first quarter.

 Our ROAE and ROAA for the quarter were 15.4% and 1.6%, respectively. We expect that this year, return on average equity will approximately -- will approximate 14% to 14.5%, primarily due to additional provisions in reference to Electricaribe as I explained before.

 Gross loans grew by 6.8% as of March 31, 2017 when compared to March 31, 2016, and were virtually flat in the first quarter. It is obvious that the slow growth of the Colombian economy has taken a toll in consolidated loan growth, and therefore, we only expect a real pick up in growth in the second semester, which leads us to believe that growth for 2017, absent FX movements, will approximate 8% to 9%.

 Deposit growth outpaced the growth of our loans during the last 12 months and during the quarter as well. And consequently, our deposit-to-loan ratio improved to 97% as of March 31, 2017, from 95% as of December 31, 2016.

 We do continue to emphasize a strong liquidity position, particularly in Central America, where central banks are, for the most part, not lenders of last resort. As a result, our consolidated ratio of cash and cash equivalents to deposits improved from 15.4% as of December 31, 2016, to 16.7% as of March 31, 2017.

 The NIM of our consolidated operation improved by 40 basis points during the first quarter of this year when compared to the same period last year, reaching 5.9%, mostly as a result of flat yields in our consolidated loan portfolio, which in turn resulted from decreasing yields on our bank's loan portfolios in line with the Central Bank rate movement, offset by a sharp increase in our nonfinancial sector loans driven by the entry into service of Promigas's natural gas liquefaction facility whose associated concession contract is accounted for as a financial lease. The effect of this nonfinancial sector earning asset will be felt throughout this year when compared to last.

 In conjunction with this effect, our cost of funds was significantly lower and our NIM on investments were significantly higher. We expect an average total NIM for 2017 of approximately 5.7%, assuming the Central Bank cuts rates a further 50 basis point and as lower rates are transmitted to the consumer loan portfolios.

 The quality of our loan portfolios suffered as 30-days PDLs and NPLs deteriorated by 60 basis points and 20 basis points, respectively, during the quarter, primarily driven by our exposure to Electricaribe. We also saw 40 basis points deterioration in consumer loan PDLs, driven by the current low economic cycle and the still high, yet decreasing, interest rate scenario.

 Our cost of risk was 2.1% before recoveries and 1.9% after recovery of provisions, an improvement versus the last quarter of 2016 of 20 basis points and 10 basis points, respectively. This number will be negatively affected in the next few months as the Electricaribe provision is increased. Because of this, we expect that cost of risk, net of recoveries, for the year will run somewhere between 2% and 2.1%.

 Gross fee income has grown satisfactorily, somewhat above the growth in our total loan portfolio and more in line with the growth in our consumer loan portfolio. We expect this trend to continue throughout this year. We will continue to focus on efficiency, and our current aspiration is to keep this ratio at the same level as 2016.

 As of March 31, 2017, all our banks continue to show strong Tier 1 and full solvency levels between 9.2% and 11.3% and between 11.3% and 13.9%, respectively. With the expected growth for 2017, these levels of capital efficiency should provide to be more than -- should prove to be more than adequate.

 Finally, as of this year, we have switched from 2 shareholder meetings per year to only 1, in line with industry practices. Consequently, on the March 2017 shareholders' meetings, we declared dividends for a 12-month period rather than a 6-month period. Therefore, our consolidated attributable equity temporarily decreased during the quarter.

 I 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 Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [3]
 Thank you, Luis Carlos. I will begin with the consolidated results of Grupo Aval under IFRS, starting on Page 10 with our asset evolution.

 Total assets increased by 5.7% during the last 12 months and by 1.4% during the last quarter. In absence of the effect of the Colombian peso fluctuations on Central America, assets would have grown 6.9% and 2.5%, respectively. Asset growth was driven by an increasing liquidity reflected in the cash and cash equivalents, and the fixed income securities growth.

 Broken down by regions, over the past 12 months, our Colombian assets grew at 5.8% while our Central American assets grew at 9.2% in dollar terms, a 5% increase when translated into Colombian pesos. For the first quarter of 2017, our Colombian assets increased by 2.5% while our Central American assets grew at 2.3% in dollar terms, a 1.7% decrease when translated into Colombian pesos.

 Consolidated balance sheet structure as of March 2017 was similar to that in place at the end of March 2016 and of December 2016, with our net loans accounting for 66% of our assets as of March 31, 2017, up from 65.2% 12 months before and down from 67.3% on the previous quarter.

 Fixed income investments accounted for 10% of our total assets as of March 31, 2017, down from 11.5% as of a year before and down from 10% on the previous quarter. Colombian assets accounted for 71.9% of our balance sheet as of March, slightly down from 72% as of a year before, and up from 71% compared to the last quarter. Our Central American operation accounted for the remaining 28.1%. This makes us being relatively stable during the last 12 months.

 On Page 11, we present our loan portfolio evolution. Gross loans increased by 6.8% during the last 12 months. In absence of the effect of the Colombian peso appreciation on our Central American operation, 12-month growth would have been 8%.

 Over this period, our Colombian book grew at 7.1%, and our Central American book grew at 10.4% in dollar terms, or 6.2% when translated into pesos. Consumer, mortgage and commercial loans grew at 11%, 9.6% and 4.3%, respectively, during the same period.

 Broken down by region, mortgage loans grew at 17.9% in Colombia and 8.8% in dollar terms in Central America. Consumer loans grew 12.5% in Colombia and a similar figure in U.S. dollar terms in Central America.

 Commercial loans grew 4.2% in Colombia and 9.3% in dollar terms in Central America. The growth from our -- of our commercial book in Colombia was driven by the slow growth of the economy during the first quarter of this year. For the first quarter of 2017, gross loans slightly decreased by 0.7%. In absence of the effect of the Colombian peso appreciation on our Central American operation, 3 months' growth would have been 0.4%. This decrease resulted from Colombia -- the Colombian operation growing at 0.4% and the Central American operation increasing at 3.3% in Colombian peso terms or an increase of 0.6% in dollar terms.

 The structure of our gross loan portfolio remained stable when compared to the previous quarter. Our commercial loans account for 58.9% of our portfolio while our consumer and mortgage loans account for 31.1% and 9.7%, respectively. Loans to individuals, which include consumer mortgage and microcredit loans, were 1.4 percentage points higher than the 12 -- than 12 months earlier and 0.2 percentage points higher than the last quarter.

 Colombia accounted for 72% of our loan portfolio, materially the same level compared to 3 months earlier and 12 months before. The variation in weight of the Central American operation has been mainly due to a Colombian peso fluctuation. We expect 2017 loan growth in absence of FX movements to be in the 8% to 9% area.

 On Page 12, we present several loan portfolio quality ratios. On the top left of the page, you'll find the evolution of our loan past due -- our loans past due more than 30 days and our nonperforming loans, both as a percentage of total loans, including interest account receivables. During this quarter, our delinquency ratio, measured as 30 days PDLs to loans, increased by 57 basis points to 3.5%. Delinquency measured as NPLs to total loans deteriorated by 27 basis points from 2% in the last quarter of 2016, 2.2% as for the first quarter of 2017.

 Electricaribe was the main driver of this soft performance, accounting for 33 basis points of the increase in our 30-days PDLs and for 26 basis points of the increase in our NPL ratio during the quarter. The soft economic performance implied additional deterioration of quality of the consumer and corporate portfolios. We expect NPLs to increase to 2.4% to 2.5% range, as the ratio fully incorporates the impact of Electricaribe later during this year.

 Moving to the right, annualized net provision expense net of recoveries of charged-off assets for the quarter were 2.1% of average loans, improving from 2.3% 3 months earlier and slightly deteriorating from the 2% recorded 12 months before. As previously mentioned, the situation of Electricaribe deteriorated during the quarter. Given the uncertainties surrounding its evolution, we have increased our expectation of provisions from our -- for our exposure to the company.

 We expect our gross cost of risk to increase from the current levels to the 2.2% to 2.3% area for the full year, or 2% to 2.1% when considering recoveries. At the bottom left, you'll find the annualized ratio of charged-offs as a share of average NPLs. This ratio was 0.8x during the first quarter of 2017.

 Finally, on the bottom right, you will see several loan loss reserve coverage ratios. Our allowances were 2.9% of our total loans and cover 1.3% times -- 1.3x our nonperforming loans and 0.8x our 30-days PDLs. Covered [sic] [coverage] ratios should improve as we record the provision expense previously described.

 On Page 13, you will find further details 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 NPLs as a percentage of total loans. As previously mentioned, our overall end-of-period delinquency ratios, measured as 30-days PDLs to total loans, increased by 57 basis points to 3.6%. During the quarter, our NPLs to total loans deteriorated by 27 basis points to 2.2%, both ratios calculated as percent -- as a percent of total loans, including interest account receivables.

 Broken down by type of loan on a quarterly basis. Commercial loans experienced an 82 basis points deterioration to 2.9 when measured as 30-days PDLs and a 45 basis points deterioration to 2.2 when measured as NPLs. Electricaribe accounted for 56 and 44 basis points of the increase of our commercial 30 days PDLs and our NPL ratio, respectively.

 Consumer loans experienced a 37 basis points deterioration when measured as 30-days PDLs and remained stable at 2.3% when measured as NPLs. Mortgage loans decreased their quality from 3.1% to 3.4% when measured as 30-days PDLs and remained stable at 1.7% when measured as NPLs. Electricaribe was responsible for COP 0.5 trillion of new PDLs during this quarter.

 On Page 14, we present funding and deposit evolution. Total funding grew 6.1% over the last 12 months and by 1.5% in the last quarter. In absence of the effect of the Colombian peso exchange rate fluctuation in Central America, 12 months and 3 months growth would have been 7.2% and 2.6%, respectively.

 Broken down by geography. Colombia, a -- Colombian funding grew 6.3% over the last 12 months and increased by 2.5% during the quarter. Central American funding grew 9.6 in dollar terms or 5.4 in Colombian peso terms for the last 12 months. First quarter of 2017 Central American funding grew by 2.6% in dollar terms or 1.4% decrease in Colombian peso terms over the last quarter.

 Deposits increased at 7.2 during the last 12 months and 2% during the last quarter. In absence of the effect of the peso appreciation on Central America, 12 months and 3 months growth would have been 8.3 and 3.1, respectively.

 Broken down by geography. Colombia accounted for 72.8% of deposits. Colombian deposits grew 7.3% over the last 12 months and 2.8% during the last quarter. Central American deposits grew by 11.1% in dollar terms or 6.8% in Colombian peso terms over the last 12 months and increased 3.9% in dollar terms, a 0.1% decrease in Colombian peso terms over the quarter.

 Our funding and deposit structure slightly strengthened during the quarter. Our deposits accounted for 76.4% of our total funding at the end of period, up from 75.6% a year earlier and 76% during the last quarter. Our deposit cover 97% of our net loans.

 On Page 15, we present the evolution of our total capitalization, our attributable shareholders equity and the capital adequacy ratio of our banks. Our total equity, defined as attributable equity plus minority interest, was COP 23.7 trillion as of the end of the first quarter of 2017. This implies a 3.6% increase over the last 12 months and a 3.8% decrease during the last quarter.

 Having declared dividends in March 2017 explains the increase versus the previous quarter. As mentioned by Luis Carlos, starting this year we switched to a single shareholders' meeting per year, at Aval and at the level of most of our subsidiaries.

 Attributable equity accounted for 62.8% of total equity as of March 2017 and was COP 14.9 trillion as of the end of March 2017, increasing 3.5 during the last 12 months and decreasing 4.6 during the last quarter.

 At the bottom of the chart, we show the consolidated solvencies for our banks. One of them show strong Q1 insolvency ratio. Tier 1 end-of-period ratios range from 9.2% to 11.3%. The solvency ratio at the end of period were 13.9 for Banco de Bogotá, 12.9 for Banco de Occidente, 11.3 for Banco Popular and 12.4 for Banco AV Villas.

 Moving to Page 16, we present the evolution of our net interest margin. In the past we have mentioned that numbers are influenced by our structure that includes, in addition to our financial institutions, the impact of our investments in the nonfinancial companies and of our holding company.

 On the top of the page, we present the evolution of our average interest-earning assets. Our financial sector entities hold over 98.8% of interest-earning assets. As mentioned during our last call, our Promigas operation contributes to the interest-earning assets from the financial sector. These assets are mainly items that under IFRS are considered financial leases provided by the company. The main item that is accounted in this manner is the liquefied natural gas recalcification plant that entered into long-term capacity contracts with thermoelectric generation plants. This plant has recorded -- was recorded on our balance sheet late last year. This is the first quarter where the contribution of these assets to our income loans is relevant.

 At the bottom of the page, we represent the evolution of our average interest-bearing liabilities. 4.9% of those are held on the balance sheets of our nonfinancial sector entities in our holding company. In general terms, these financing has a longer maturity and carries a higher interest rate than the funding used by our financial operation. The share of our liabilities has remained relatively stable over the past 5 quarters. However, we expect it to grow over the coming years due to the impact of financial closings in upcoming fourth-generation infrastructure projects.

 On Page 17, we present our yield on loans, cost of fund and spreads. The average consolidated yield in loans for the first quarter increased 79 basis points compared to the same period of 2016 and remained unchanged at 11.7% compared to the fourth quarter of 2016.

 Average yield on loans for the financial sector increased by 76 basis points relative to the same quarter of 2016 and decreased by 24 basis points relative to last quarter. The evolution of the yield on loans of our financial sector is influenced by the Central Bank intervention rate.

 The average cost of funds for our consolidated operation was 4.6% for the first quarter of 2017 compared to 4.1% a year earlier and 5% in the fourth quarter of 2016. Cost of funds for the financial sector increased by 56 basis points when compared to a year earlier and decreased by 34 basis points when compared to a quarter earlier.

 Our consolidated spreads increased by 38 basis points over the last quarter to 7.1% and by 25 basis points compared to the same quarter a year earlier. As for the financial sector entities, the spread between yield on loans and cost of funds increased by 10 basis points over the quarter and 19 basis points to 7.2% compared to a year earlier.

 Page 18, we present our NIMs, our net interest margins for the financial sector and Grupo Aval's consolidated operations. Our net interest margin, including net trading income from the investments held for trading, to profit and loss of our consolidated operation, expanded during the first quarter 36 basis points from 5.5% to 5.9%. This increase resulted from an expansion on both our NIM on loans and our NIM on investments. Consolidated NIM increased 39 -- by 39 basis points compared to a quarter earlier.

 Net interest margin for the financial sector expanded to 6.1% versus 5.9% recorded a quarter earlier. Compared to the previous quarter, total NIM had a 20 basis points expansion driven by the recovery of NIM on investments.

 On a quarterly basis, net interest income grew 9.6% from COP 2.4 trillion in the first quarter of 2016 to COP 2.6 trillion during the first quarter of 2017. It increased by 9.4% versus the last quarter of 2016.

 We expanded our net interest margin on loans to contract as the year progress, correlated with the Central Bank intervention rate. We expect full year net interest margin to be in the 5.7 area and NIM on loans to be in the 6.6% to 6.7% range.

 On Page 19, we present net fees and other income. We present fee income on the top of the page. Gross fee income grew by 7.2% compared to the same period a year earlier and decreased by 0.2% compared to the previous quarter. When excluding the effect of FX movements on our Central American operation, fees grew by 12% and 1.1%, respectively.

 Pension and severance fund management had a strong performance among the fee-generating activities. Broken down by geography, Colombia accounted for 63% of total gross fees. Domestic fees grew 15.2% over the last 4 quarters while Central American fees grew by 6.9% in dollar terms, a 4.1% decrease in Colombian peso terms over the same period.

 The bottom of the page represent other income. Other income for the quarter was COP 533 billion. This quarter have no contribution from [new tals] while previous quarters included sales and valuation of the investments.

 On Page 20, we present some efficiency ratios. Our efficiency ratio, measured as operating expenses to total income, was 45.9% during the quarter, down from 52.2% recorded during the previous quarter and up from 44.1% recorded 12 months earlier.

 In Colombia, this ratio improved from 49.8% during the last quarter of 2016 to 42.4% during this quarter. Central America, this ratio improved from 56.5% during the last quarter of 2016 to 53.4% during this quarter.

 Our efficiency, measured as operating expense to average assets, increased from 3.8% during the last quarter of 2016 to 3.4% in -- during the first quarter of 2017 and remain unchanged compared to the first quarter of 2016.

 In Colombia, this ratio improved from 3.1% during the last quarter of 2016 to 3% for this quarter. In Central America, the ratio improved 74 basis points to 4.4 in Colombian peso terms. We expect 2017 efficiency ratio, measured as cost to income, to be stable compared to 2016 at 47%. This results from compensating headwinds from salary adjustments due to union agreements that were well in excess of inflation and other factors. We expect full year operation expenses to grow close to 9%.

 Finally, on Page 21, we present our net income and profitability ratios. Attributable net income for the quarter was COP 587 billion or COP 26 per share. This includes COP 73.7 billion or COP 3.3 per share attributable effect of the wealth tax. Return on average assets and return on average equity for the quarter were 1.6% and 15.4%, respectively. When excluding the wealth tax payment recorded during the quarter, such numbers would have been 1.8 and 17.3 as of March 2017.

 Before moving to questions and answers, I will now summarize our general guidance on 2017. We expect loan growth in absence of the FX effects to be in the 8% to 9% range during 2017. We expect 2017 cost of risk to be 10 to 20 basis points higher than 2016, given a 24 basis point [heaten] impact of Electricaribe. This is 2% to 2.1% cost of risk net of recoveries. We expect the full year 2017 NIM on loans to be similar to that of 2016, resulting from a stronger first half and a lower second half. The reduction in Central Bank rates is priced into our corporate loan portfolio. Net interest margin on loans is expected to be in the 6.6% to 6.7%, and our total NIM to be in the 5.7% area. We expect efficiency ratios to be stable in the 47% area on a cost-to-income basis. Taxes are expected to be in the 36% area given the positive results during the first quarter. Finally, we expect 2017 return on equity to be in the 14% to 14.5% area, incorporating the negative effect of Electricaribe.

 With this, I open up to questions.

Questions and Answers
Operator   [1]
 (Operator Instructions) We have a question from Carlos Macedo from Goldman Sachs.

 Carlos G. Macedo,  Goldman Sachs Group Inc., Research Division - VP   [2]
 One question on the Electricaribe. First, did -- was there -- were there any provisions for it in the first quarter? And I think is -- just as a follow-on, the math that I did to your saying, you said that around 80%, 85% would have to be provision, and you have provisioned 13 over the next 3 quarters. Would it imply something like $40 million in provisions per quarter? Is that a good kind of estimate for that? Or should we expect a different number?

 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [3]
 Thanks, Carlos. Yes, we had made provisions of up to about 13% as of the end of last year. This first quarter didn't require any substantial additional provisions, and -- so you're right. We need 67% on $185 million at most, but we want to be conservative with the numbers. So that's about 67% of $185 million till the end of this year. And in accordance with the Superintendency, what the Superintendency has said for now is to book, I believe, up to 55% of provisions between May and August and then the rest between August and December, and I think what our banks are doing is just doing it in equal amounts per month from here and on to December. So that's the way we're going to provision it, but your numbers are right.

Operator   [4]
 Our next question comes from Frederic De Mariz from UBS.

 Frederic De Mariz,  UBS Investment Bank, Research Division - Executive Director and LatAm Analyst for Non-Bank Financials and Banks   [5]
 Can you just remind us your guidance for margins and what you expect in terms of trends for the funding costs, and on the asset side, if you could just repeat that part, please.

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [6]
 Okay. Regarding margins, we expect our net interest margin to be in the 5.7% area, and our NIM on loans to be in the 6.6% to 6.7% area.

 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [7]
 Full year average.

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [8]
 Full year, yes. This is full year average.

Operator   [9]
 And our next question comes from Juan Pablo Pedraza from Corredores Davivienda.

 Juan Pablo Pedraza,    [10]
 My question is regarding if there will be more potential cases that cause a greater commercial loan portfolio deterioration during the year; for example, regarding the exposure to the integrated transportation system.

 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [11]
 Yes. Well, that's the other area that we've been following closely. As we mentioned in our last call, our exposure there is of around $150 million. The profile of the customers that we have there are relatively stronger than what the average of the system looks like. Over half of our exposure there is to a group that is led by an industrial group in Colombia called Fanalca, which has a quite strong provision, and we have also exposure to other transportation companies that also participate in the other TransMilenio projects that have been quite healthy. So yes, we do have an exposure there. Our profile is quite better than what the average looks like, but that's the other area we're looking into.

Operator   [12]
 We show no further questions at this time. I would like to turn the call over to Mr. Sarmiento for final remarks.

 Luis Carlos Sarmiento Gutiérrez,  Grupo Aval Acciones Y Valores S.A. - President   [13]
 Thank you very much, Hilda, and thank you all for attending the call. We hope to see you next quarter, and in the meantime, our phones are always open. So thank you very much, and have a great day.

Operator   [14]
 Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

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