Q2 2017 Grupo Aval Acciones y Valores SA Earnings Call

Aug 30, 2017 AM EDT
GRUPOAVAL.BG - Grupo Aval Acciones y Valores SA
Q2 2017 Grupo Aval Acciones y Valores SA Earnings Call
Aug 30, 2017 / 02:00PM GMT 

Corporate Participants
   *  Diego Fernando Solano Saravia
      Grupo Aval Acciones Y Valores S.A. - CFO
   *  Luis Carlos Sarmiento Gutierrez
      Grupo Aval Acciones Y Valores S.A. - Chairman and CEO

Conference Call Participants
   *  Frederic De Mariz
      UBS Investment Bank, Research Division - Executive Director and LatAm Analyst for Non-Bank Financials and Banks
   *  Jason Barrett Mollin
      Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services
   *  Nicolas Riva
      Citigroup Inc, Research Division - Senior Associate
   *  Cristina Isabel Manotas Polo
      Corredores Davivienda - Analyst
   *  Jose German Cristancho Herrera
      Corredores Davivienda - Analyst
   *  Natalia Corfield
      JPMorgan - Analyst

Operator   [1]
 Welcome to the second quarter 2017 consolidated results under IFRS conference call. My name is Sylvia, 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, 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 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 the unaudited consolidated financial information included in these quarterly reports in accordance with regulations of the Superintendency of Finance for financial institutions and generally accepted accounting principles for banks operating in Colombia, also known as Colombian Banking GAAP, because we believe the 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 the 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 quarter and second quarter 2017 and the second quarter of 2016 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 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 should not be responsible for any decisions taken by investors in connection with this document. The content of this document and 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 Gutierrez. Mr. Luis Carlos Sarmiento Gutierrez, you may begin.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [2]
 Good morning, Sylvia, and thank you very much. And thank you, everybody, for joining our 2017 second quarter results 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 would like to provide you with a brief update on recent developments regarding Concesionaria Ruta del Sol or CRDS.

 As you may recall, in our previous call, I informed that in order for the ANI to authorize a first payment to the financial sector in an amount equivalent to approximately 50% to 60% of the $800 million in total debt owed by CRDS, the company had to complete the liquidation and payment of at least 70% of the employees and payment of at least 70% of the past due accounts to suppliers. I also told you that we have complied with the first requirement, and we would start working hard on complying with the second.

 After numerous obstacles, I am pleased to report that we are almost there, as a percentage of suppliers paid is up to approximately 65%. Barring unforeseen circumstances, of which we've had, had a myriad since we started to work in the solution of the Ruta del Sol problem, we should be able to obtain approval from the ANI and the project technical supervisor named by the ANI to pay nearly $2 million to suppliers within the next few days in order to complete compliance of the mentioned conditions pursuant to which the ANI should authorize the first payment to the financial sector in the amount of COP 1.4 billion, approximately $467 million. That is the good news.

 Not so is what has been happening in the arbitration proceeding, where we were expecting to receive ratification of the liquidation formula established by the terms of the agreement signed with the ANI on February 22 and modified on March 27 of this year. For background, as part of the termination and liquidation agreement between the ANI and CRDS, the parties agreed to mutually submit such agreement to the arbitral tribunal as a settlement arrangement to request the tribunal to approve the formula of liquidation of the concession and to withdraw their mutual additional claims.

 A ratification of the liquidation value by an arbitral tribunal carries the same weight as a sentence of a judge, and therefore, this ratification would be enough to proceed with payment to CRDS and the banks under the terms to which I have referred in several calls and meetings with investors.

 However, on August 3, 2017, during the settlement hearing conducted before the arbitral tribunal, the ANI stated its unwillingness to abide by the formula of liquidation as agreed in the termination and liquidation agreement. Because of the ANI's reluctance to fulfill its obligations under the agreement, a hearing is expected to take place on September 1, 2017, in which the arbitral tribunal will decide on the extent of their competence and on the next steps regarding the arbitral proceeding.

 We have also mentioned on several occasions that a class action suit was also filed against Odebrecht employees, government officials, CRDS, CRDS' shareholders and others. This proceeding is currently in the evidentiary stage, in which the state court has ordered, among others, the recollection of evidence to determine the alleged violation of collective rights and interests resulting from the conduct of Odebrecht and Colombian government officials and to determine the amount of damages resulting from the foregoing.

 You might have also heard that a week ago, Mr. Jose Elias Melo, Corficolombiana's former President, was placed in preventive detention in relation to the decision of Colombia's General Attorney's Office to include him in the investigation concerning corrupt practices conducted by Odebrecht and Colombian government officials. As noted in our press release and relevant information dated August 23, we are shocked by Mr. Melo's detention and hope that he may be able to prove his innocence. Mr. Melo has not admitted to the charges.

 With respect to this news, it is worth mentioning that our investigations with respect to this matter concluded that neither Grupo Aval as an institution nor any of its current employees participated in the corrupt practices associated with Ruta del Sol 2 concession contract or approved others to illegally make payments to third parties regarding the Ruta del Sol 2 concession contract. Furthermore, Grupo Aval's corporate policies applicable to its subsidiaries strictly demand compliance with all laws and regulations in all the businesses they conduct.

 Finally, we have reaffirmed our commitment to cooperate with authorities in any matter they consider necessary or appropriate during this process.

 Secondly, with regard to Electricaribe, the most significant event that has occurred as of lately is that both the government and the financial system have agreed to work on a solution based on 2 premises: financially saving the company and eventually paying the company's debt to the financial system. For this purpose, the collective group of affected banks on the one hand and the government on the other have hired investment banks to come up with possible solutions based on the premises mentioned.

 The government further appointed the Financiera de Desarrollo Nacional, FDN, headed by Mr. Clemente del Valle, to represent the government in the pursuit of a viable formula. We are confident that the FDN will do the best job possible to comply with this appointment, and that it will work with the affected bank to find a mutually beneficial formula.

 Unfortunately, we also believe that the solution will not be put in place before a year and that the execution of the solution will take several years. This is why we have decided to constitute provisions for up to 70% of our exposure before year-end. Currently, our exposure, when considering principal plus interest, amounts to approximately COP 600 billion or the equivalent of approximately $200 million.

 As of June 30, 2017, we had reserved 30% of that exposure. We will reach 55% by September and 70% by December. This means that we will have to book additional provisions with respect to this loan for COP 150 billion during this year's third quarter and COP 90 billion during this year's last quarter. We will most probably revisit these 2 recurring items during our next call.

 I will now refer to the current macroeconomic environment. To start with, it is now clear that our expectation that the first 2 quarters of this year would continue the perceived, albeit incipient, reactivation of the economy observed in the last quarter of last year was at best optimistic. In fact, the first semester of this year instead showed only marginal growth at 1.2% and 1.3% during the first 2 quarters, significantly less than the 2.25% to 2.5% growth that we had expected.

 As we have often said, a slow-moving economy always results in lesser commercial credit demand and also tends to exacerbate credit problems, such as Electricaribe, and to magnify the effect of these problems in the cost of risk ratios of our financial system.

 Additionally, 4G infrastructure construction and financing, which we consider as major importance to reactivate the economy, have been very slow to get going as the financial sector will probably wait until the resolution of the Ruta del Sol's first payment for approximately half of the $800 million outstanding debt.

 However, precisely because the last 2 quarters of last year showed mediocre growth at 1.2% and 1.6%, respectively, as compared to the first 2 quarters of 2016, which grew at approximately 2.5%, our expectation is that the last 2 quarters of this year will grow closer to 2.5% and that 2017's growth will approximate 1.8%. We expect that the last 2 quarter growth indices of 2017 will transfer on to 2018.

 Inflation, on the other hand, keeps registering better results. And as of July, on a last 12 month basis, is in the middle of the Central Bank's target of between 3% and 4%. However, taking into account that the months of August, September, October and November of last year showed negative or close to 0 inflations, we expect that those same months during 2017 will hardly continue to trend observed until now. Therefore, for the year, we are expecting inflation of approximately 4.2%.

 As a result of the good inflation numbers thus far during 2017, the Central Bank continued to implement a more expansionary monetary policy, as a result of which, it has reduced its reference rate by 200 basis points this year. Consequently, our commercial loan rates, variable in nature, have dropped; but our consumer loan rates, fixed in nature, have proven more stable. However, we have benefited from lower rates in our cost of funds.

 Because we do not expect to see a further reduction in inflation, we believe that the Central Bank will only drop its reference rate by a final additional 25 basis points to 5.25% in the remaining months of this year, and in fact this might happen as soon as during its next meeting later on this week. As always, lower Central Bank rates will eventually transfer into consumer loan rates and they should alleviate the current consumer loan portfolio quality problems.

 We are very concerned with unemployment, specifically urban unemployment, which is an indicator that had proven pretty resilient up to now. We had mentioned on repeated occasions that this indicated deterioration was our main worry as it related to the health of our consumer loan portfolios. We have now seen urban unemployment rise close to 11%, an increase of 60 basis points in the last year and 100 basis points since 2015. And we are starting to feel its effect on consumer lending PDLs and NPLs as Diego will refer to in detail during his presentation. A rising unemployment tends to accelerate consumer loan delinquencies and the booking of provisions for foreseeable loan losses.

 As oil prices have run an average $8 per barrel higher than in 2016, the country's traditional exports, specifically oil exports, have gained back momentum, and the country's trade deficit is not under so much pressure anymore. Additionally, nontraditional exports have remained steady over the last 2 years. As a result, we expect that by year-end, this deficit will approximate 3%, approximately 50 basis points better than the 2016 number.

 We continue to expect the current account deficit for 2017 will run at approximately 3.5%, a significant improvement when compared to the 2016 number. This much-needed relief in both deficits bode well for our recovering economy starting in 2018.

 With respect to our other major market, we continue to see growth in the Central American economies of approximately an average of 4%, almost 4x that of Colombia. We continue to closely monitor the qualities of our consumer portfolios in the region, where we have seen some deterioration in countries such as Panama and Costa Rica.

 Now turning to overall 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. Total gross loans grew by 2.7% in the first semester or 2.2% excluding the impact of FX movements in our Central American operation after contracting 0.7% in the first quarter, which was a growth of 0.4% excluding the impact of FX, and growing 3.4% in the second quarter or 1.8% excluding FX. We now expect to see growth in our loan portfolios for the year, excluding FX movement, of 8%.

 During the second quarter, our 30-day PDLs and NPLs deteriorated by 17 basis points and 27 basis points up to 3.8% and 2.5%, respectively, driven primarily by a deterioration in our consumer and microcredit portfolios. Consumer loan 30-day PDLs and NPLs deteriorated by 40 basis points and 37 basis points during the quarter. This worrisome deterioration, although typical of the Colombian financial system, is currently our main area of focus.

 We have tightened collection processes and are using big data analytics to better understand the creditworthiness of our customers under the current stressed economic environment. On the other hand, most of the deterioration on our commercial loan PDLs and NPLs in the last year has been driven by Electricaribe, where our exposure, as mentioned, amounts to approximately $200 million.

 As a result of the deterioration mentioned above, our consolidated cost of risk increased by almost 80 basis points during the quarter, 2.9% before recoveries and 2.7% after recoveries. Additional provisions in connection with Electricaribe accounted for 30 basis points of the increase and the general deterioration of the mentioned loan portfolios contributed with the rest. Taking into account what has already happened in the first semester and our expectation for the rest of the year, we now estimate cost of risk for 2017 of 2.45%.

 Total deposits grew by 4.3% in the first semester or 3.9% excluding the impact of FX movement in our Central American operation, as a result of growth of 2% in the first quarter or 3.1% excluding the impact of FX; and growth of 2.3% in the second quarter or 0.7% excluding the impact of FX. We expect that deposits will grow in line with loans for 2017.

 Partly as a consequence of the growth slowdown, the second quarter was one in which our consolidated equity ratios improved. Our total equity to total assets ratio improved from 10.4% in March 31, 2017, to 10.7% as of June 30, 2017, and our tangible capital ratio improved from 7.4% to 7.6%. Furthermore, as of June 30, 2017, all our banks continue to show strong Tier 1 and full solvency levels between 9.4% and 11.2%, and between 11.2% and 14.2%, respectively.

 On a more positive note, the strength in our capital position drove 2 rating agencies to change their outlook, of both Banco de Bogota and Grupo Aval's ratings from negative to stable.

 The NIM of our consolidated operation improved by 22 basis points to 6.1% during the quarter and by 52 basis points versus the same ratio as of the second quarter of 2016. Our consolidated NIM on loans expanded by 14 basis points to 7% during the quarter, and by 46 basis points versus second quarter 2016. Our consolidated NIM on total investments expanded by 72 basis points to 1.4% during the quarter and by 57 basis points versus the first quarter of 2017.

 These increases were mainly driven by a 28 basis points decrease in our average cost of funds during the second quarter 2017 and 21 basis points versus second quarter of 2016. Although we expect NIMs to decrease throughout the last 2 quarters as the lower Central Bank rates permeate the economy, we now estimate that, on average, our 2017 consolidated NIM will run between 10 and 20 basis points higher than the 2016 number.

 Our gross fee income grew by 1.3% in the quarter when compared to the first quarter of 2017. This growth was supported on a strong performance of our banking fees, which are 73% of total fees, which increased 3.4% in the quarter. Given the good results that we have seen so far, especially in our Central American operation and in our pension fund manager, we now expect that fee income growth will surpass the growth in our deposit and loan portfolios by approximately 100 basis points during 2017.

 Our other operating income for the period was COP 493.1 billion for the quarter versus COP 533.1 billion in the previous quarter. This result was mainly affected by the performance of Corficolombiana's investments in the infrastructure sector, delays in the 4G infrastructure concessions and by the effect of the general slowdown of the economy and the performance of other nonfinancial sectors, in which Corficolombiana holds equity positions.

 As we have said in the past, we remain firm believers in the 4G infrastructure program and in the benefit that 4G construction and financing will have for the economy and for the banking sector. Corficolombiana will be largely benefited as well. Therefore, we are working feverishly to get going on 3 of the 4 projects awarded to Corficolombiana. Our conviction of the benefits is such that we will put forth our own financing capacity behind these projects if need be.

 Our consolidated efficiency ratio, measured as cost to income, was 46.9% in the second quarter of 2017 versus 45.9% during the first quarter of 2017 and 47.2% during the second quarter of 2017. This quarter deterioration is partially explained by seasonality of the expense. We are convinced that an integral, well-executed digitalization strategy is paramount to improve the client's experience on the one hand; and just as importantly, to streamline costs.

 We have launched an effort in our largest bank as well as in our Central American operation, and we expect to see clear results by the first quarter of next year. We will launch digitalization strategies in the rest of our banks during the next quarter and expect to see concrete results in the second quarter of next year.

 Attributable net income for the quarter was COP 470.8 billion or COP 21 per share compared to COP 587 billion in the first quarter of 2017. As mentioned before, the result for the quarter was negatively affected by a 42% increase in provision expenses, 1/3 of which is explained by provisions associated with Electricaribe, which amounted to about COP 108 billion; also by greater provisions required in our consumer portfolio and our SME portfolio; by the economy slowdown bearing on the nonfinancial sector industries in which we participate through Corficolombiana; and finally, by the delay of the initiation of 4G in general and Corficolombiana's project in particular. As a result, our ROE for the quarter was 12.4%. For this year, however, we now expect an ROE closer to 13%.

 With that, I pass on the presentation to Diego, who'll expand on the highlights that I just shared with you. Thank you, and you all have a good day.

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [3]
 Thank you, Luis Carlos. I will now move to our consolidated results of Grupo Aval under IFRS starting on Page 9 with our asset evolution. As mentioned by Luis Carlos, consistent with the low GDP growth that has been prevailing during the first half of the year, this has been a low growth quarter.

 Total assets increased by 1.6% during the last quarter and 7% over the last 12 months. In absence of the effect of the Colombian peso fluctuation in Central America, assets were stable during the quarter and grew 5.7% during the last 12 months. Asset dynamics, excluding FX during the quarter, resulted from an increase of 1.8 or COP 2.7 trillion growth in gross loans offset by decrease -- a decrease of 8.2% or COP 2.1 trillion in cash and 6.4% or COP 1.5 trillion in fixed income portfolio. Other assets increased by 2.8%.

 Broken down by regions, our Colombian assets remained stable while our Central American assets grew at 0.2% in dollar terms, a 5.9 increase when translated into Colombian pesos. This happened over the quarter. As mentioned before, reductions in cash positions, particularly in Banco de Bogota, determine the growth dynamics of our assets in Colombia. Colombian assets grew by 4.5% over the last 12 months, while our Central American assets grew by 8.1% in dollar terms, 13% increase when translated into Colombian pesos.

 Consolidated balance sheet structure continued shifting towards net loans. Net loans account for 68.1% of our assets as of June 30, 2017, up from 66.6% on the previous quarter and 66% 12 months before.

 Fixed income investments, particularly funded net -- partially funded net loan growth over the quarter accounting for 9.3% of total assets as of June 30, 2017, down from 10% a quarter earlier. Colombian assets accounted for 70.7% of our balance sheet as of June 2017, down from 71.9% 3 months earlier and 72.2% as of June 2016. Central American operation accounted for the remaining 29.3%. The quarterly increase in the weight of our Central American operation is attributable to the depreciation of currency and more dynamic growth in Central America.

 On Page 10, we present our loan portfolio evolution. As mentioned in the past, loan growth is totally linked to GDP growth. Low economic growth has underpinned the recent loan growth of our Colombian operation. Loan growth of our consumer portfolio has been stronger than that of our commercial book.

 Gross loans increased by 8.9% during the last 12 months. In absence of the effect of the peso depreciation on our Central American operation, 12-month growth would have been 7.6%. The last 12 months, our Colombian book grew at 6.8% and our Central American book grew by 9.4% in dollar terms or 14.4% when translated into pesos. Consumer, mortgage and commercial loans grew at 12%, 13.5% and 6.7%, respectively, during the same period.

 Broken down by region, mortgage loans grew at 16.4% in Colombia and 6.9% in dollar terms in Central America. Consumer loans grew at 10.2% in Colombia and 10.5% in dollar terms in Central America. Commercial loans grew at 4.8% in Colombia and 9.8% in dollar terms in Central America.

 During the second quarter of 2017, gross loans increased by 3.4%. In absence of the effect of the peso appreciation of our Central American operation, 3-month growth would have been 1.8%. This increase resulted from the Colombian operation growing at 1.9% and the Central American operation increasing 1.5% in dollar terms, 7.3% in Colombian peso terms. Even though still soft, this growth incorporates an incipient improvement in loan dynamics.

 The structure of our gross loan portfolio remained substantially stable when compared to the previous quarter. Commercial loans account for 58.8% of our portfolio while consumer and mortgage loans account for 31.1% and 9.9%, respectively. Loans to individuals, which include consumer mortgage and microcredit loans, were 1.2 percentage points higher than 12 months earlier or 0.1 percentage points higher than the last quarter.

 Colombia accounted for 71% of our loan portfolio, materially the same level as 3 months and 12 months before. The variation in weight of our Central American operation has been mainly due to the Colombian peso fluctuations. We expect 2017 loan growth in absence of FX movements to be in the 8% area.

 On Page 11, we present several loan portfolio quality ratios. During this quarter, we continued to experience some deterioration in the quality of our loan portfolio and an increase in our cost of risk. This performance is mainly explained by deterioration of the consumer loan portfolio in Colombia consistent with the softer urban labor market and sluggish GDP growth, an increase in the consumer delinquencies in Central America, in particular, in Costa Rica and Panama. And in addition, as anticipated on our last call, our cost of risk was influenced by Electricaribe.

 Starting at 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 including interest account receivables. During this quarter, our delinquency ratio measured as 30-day PDLs to total loans, increased by 17 basis points to 3.8%. Delinquency, measured as NPLs to total loans, deteriorated by 27 basis points from 2.2% in the first quarter of 2017 to 2.5% for the second quarter of 2017.

 Moving to the right. Annualized net provision expenses net of recoveries of charged-off assets for the quarter were 2.7% of average loans, deteriorating from 1.9% 3 months earlier and 12 months earlier. The Electricaribe impairment for the period accounted for 30 basis points of the quarter cost of risk.

 Impairment of our consumer portfolio accounted for 32 basis points of incremental cost for risk during the quarter, of which, 20 are explained by Colombia and 12 by Central America. Incremental costs of risk for the consumer portfolio is mainly driven by the higher impairment of the credit card portfolio in both regions and in personal and automobile loans in Colombia.

 The bottom left, you will find the annualized ratio of charge-offs as a share of average NPLs. This ratio was 0.7x during the second quarter of 2017.

 Finally on the bottom right, you will see several loan loss reserve coverage ratios. Our allowances were 3.1% of total loans and cover 1.3% of our NPLs and 0.8% of our 30-day PDLs. We expect our cost of risk net of recoveries to be in the 2.4% to 2.5% area in 2017.

 On Page 10 (sic) [12], you will find further detail on the quality of our loan portfolio. On this page, you'll find evolution of our loans past due more than 30 days and our NPLs as a percentage of total loans, both ratios calculated including interest account receivables. As mentioned on the previous page, our overall end-of-period delinquency ratio, measured as 30 days PDLs to total loans, increased by 17 basis points to 3.8%. Deterioration was driven mainly by the consumer portfolios during the quarter. The right delinquency, measured as NPLs to total loans, deteriorated by 27 basis points to 2.5%.

 Broken down by type of loan quarter-on-quarter. Commercial loans experienced a 5 basis points deterioration to 3% when measured as 30-day PDLs and by -- and a 23 basis points deterioration to 2.5% when measured as NPLs. Consumer loans experienced a 40 basis deterioration to 5.2% when measured as 30-day PDLs. Colombia deteriorated 47 basis points to 5.6%, while Central America deteriorated 31 basis points to 4.3%. Delinquency measured as NPLs to total loans deteriorated 37 basis points to 2.7%. Mortgage loans slightly deteriorated from 3.4% to 3.5% when measured as 30-day PDLs, and from 1.7% to 1.9% when measured based on NPLs.

 The bottom of the page we present PDL evolution. Consumer loans were the main driver of PDL formation during this quarter, consistent with a soft economic performance, adding COP 750 billion in new PDLs, 94% -- COP 94 billion more than a quarter earlier. Consumer PDL formation in Colombia added COP 492 billion, while the Central American consumer PDL formation added COP 257 billion in new PDLs. Electricaribe affected the previous quarter with close to COP 0.5 trillion in PDL formation.

 On Page 13, we present funding [and time] deposit evolution. There were no substantial changes in funding and deposit structure during this quarter. This quarter reflects the overall economic growth in Colombia. Total funding grew by 7.5% over the last 12 months and by 1.9 during the last quarter. In absence of the effect of the Colombian peso exchange rate fluctuations in Central America, 12 months and 3-month growth would have been 6.2% and 0.4%, respectively.

 Broken down by geography, Colombia funding grew at -- by 5.4% over the last 12 months and increased 5.6% during the quarter. Central American funding grew 8.3% in dollar terms or 13.2% in Colombian peso terms over the last 12 months; and decreased 0.3% in dollar terms, 5.4% increase in Colombian peso terms over the last quarter. Deposits increased at 9.6% over the last 12 months and 2.3% during the last quarter. In absence of the effect of the peso depreciation in Central America, 12 months and 3 months growth would have been 8.3% and 0.7%, respectively.

 Broken down by geography, Colombia accounted for 71.6% of total deposits. Colombian deposits grew by 6.9% over the last 12 months and 0.5% during the quarter. Central American deposits grew 11.9% in dollar terms or 16.9% in Colombia peso terms over the last 12 months; and increased 1.3% in dollar terms and 7.1% increase in Colombian peso terms during the quarter.

 Our funding structure has shifted slightly towards deposits during the year. Our deposits now account for 76.6% of total funding, up from 75.2% a year earlier and 76.4% 3 months earlier. Our deposits cover 96% of net loans.

 As mentioned earlier, a decrease in cash mainly from the Colombian operation led to a decrease in our cash to deposit ratio back to 15.3%, the same as the year before. We expect deposit growth to be at a similar pace as that of loans.

 On Page 14, 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 24.7 trillion as of the end of the second quarter of 2017. This implies a 4% increase over the last 12 months and a 4.3% increase during the last quarter.

 Attributable equity accounted for 62.8% of the total equity as of June 2017 and was COP 15.5 trillion as of the end of June 2017, increasing 2.9% during the last 12 months and 4.3% during the last quarter. On this chart, we also show the consolidated solvency of our banks. All of them show a profit Tier 1 and total solvency ratios. Tier 1 as of end of period range from 9.4% to 11.2%. Solvency ratio at the end of the period were 14.2% for Banco de Bogota, 12.7% for Banco de Occidente, 11.2% for Banco Popular and 12.4% for Banco AV Villas.

 Starting on Page 15, we present the evolution of net interest margin. On top of the page, we present the evolution of our average interest-earning assets. Our financial sector entities explain close to 99% of interest-earning assets. Our Promigas operation contributes to the interest-earning assets from the nonfinancial sector. These assets are mainly items under IFRS that are considered financial leases provided by the company.

 On the bottom of the page, we present the evolution of our average interest-bearing liabilities. 5% of those are held on the balance sheet of our nonfinancial sector entities and our holding company. In general terms, this financing has a longer maturity and carries a higher interest rate than those of our financial operation. The share of our liabilities has remained relatively stable over the last 5 quarters. However, we expect it to grow over the coming years due to the impact the financing to be taken by the upcoming quarter generation concession infrastructure projects.

 On Page 16, we present our yield on loans, cost of funds and spreads. Our yield on loans, in particular that of the Colombian commercial portfolio, reflects the fluctuations of the Central Bank intervention rate. Colombian corporate loan portfolio, which accounts for 47% of our total gross loans, is over 90% floating rate and reprices for the 2-month lag on average after the changes of the Central Bank intervention rate.

 The yield on consumer loans has been less sensitive to the Central Bank rate reductions, given that the substantial part of this portfolio has a fixed rate and that the market has been less aggressive in bidding down the prices of these loans, consistent with the higher delinquency ratios experienced over the past few quarters in this segment.

 Our average consolidated yield on loans of the second quarter was 11.6%, increasing 23 basis points compared to the same period of 2016 and decreasing 15 basis points as compared to the first quarter of 2017. Yield on commercial loans fell by 31 basis points quarter-on-quarter driven by a 38 basis points reduction in the yield of our Colombian commercial portfolio. The yield of our consumer portfolio increased 10 basis points driven by a 25 basis points increase in our Central American consumer portfolio.

 On average, cost of funds for our consolidated operation was 4.3% for the second quarter of 2017, 21 basis points lower than the 4.5% recorded a year earlier and 28 basis points below the 4.6% recorded during the first quarter of 2017. This results from a 38 basis points improvement in the cost of funds in Colombia during the quarter and stability in Central America.

 Isolating the effect of a nonfinancial sector funding, the cost of funds for financial sector of 4.2% decreased 17 basis points when compared to a year earlier and 25 basis points when compared to a quarter earlier. The cost of funds for the nonfinancial sector and holding company, net of eliminations it was 6.1%, decreasing by 101 basis points and 78 basis points over these periods. The sharp decline is mainly attributable to the nonfinancial sectors' liability interest rate sensitivity, through inflation and DTF.

 Finally, on this page our consolidated spreads increased by 13 basis points over the last quarter to 7.2%, and increased by 44 basis points compared to the same quarter a year earlier.

 On Page 17, we present our net interest margin for the financial sector and Grupo Aval's consolidated operations. The net interest margin of our consolidated operations including net trading income from the investments held for trading through profit and loss expanded 22 basis points during the first quarter from 5.9% to 6.1%. This increase resulted from a substantial expansion in the net interest margin and investments and a favorable performance of our net interest margin on loans. Consolidated net interest margin increased 52 basis points compared to a year earlier.

 NIM for financial sector expanded by 46 basis points to 6.3% versus the 5.8% recorded a year earlier. Total net interest margin was 18 basis points wider than that of the previous quarter, driven by a substantially stronger net interest margin on investments.

 Quarterly net interest income was COP 2.8 trillion during the second quarter of 2017, a 16.9% increase compared to the same quarter a year earlier and 5.5% higher than the previous quarter. We expect full year 2017 net interest margin to be slightly higher than the 5.6% recorded for 2016. This is driven by a higher than expected net interest margin for the first half and builds on a margin compression during the second half as the Central Bank rates adjustments are incorporated into our loan portfolio.

 On Page 18, we present net fees and other income. Gross fee income grew by 8.9% compared to the same period a year earlier and 1.3% to the previous quarter. Fees grew by 10% and 1.4%, respectively, compared to those periods when excluding the effect of the FX movements on Central America.

 Broken down by geography, Colombia accounted for 61% of total gross fees. Domestic fees grew by 9.3% compared to the same quarter 12 months earlier. Both Central Americans fees grew at 11% in dollar terms and 8.2% increase in Colombian peso terms over the same period.

 The bottom of the page represent other income. Other income from -- for the quarter was COP 493 billion. This result was affected by a lower contribution of the nonfinancial sector, nonconsolidated equity investments and other income when compared to the previous quarters included on this chart. The lower result of the nonfinancial sector was mainly due to a lower contribution of our infrastructure sector. In particular, the delay in the initiation and ramp-up of our new toll road concessions has delayed income that should've replaced the phasing out of older concession, such as Coviandes.

 In addition, the rest of our portfolio, which includes hotels, agroindustry, have been negatively affected by the slow economic cycle. Lower income from the nonconsolidated equity investment reflects the seasonality of dividends received, in particular, the 32 billion dividend from Empresa de Energia de Bogota received during the first quarter.

 Finally, other operating income for the second quarter of 2016 was particularly high given a strong performance in FX. In addition, that quarter included tax returns of COP 60 billion, Ruta del Sol for COP 30 billion and other income.

 Moving to Page 19. We present some efficiency ratios. Our efficiency ratio, measured as operating expenses to total income, of 46.9% during the quarter, improved from 47.2% recorded 12 months earlier and deteriorated from 45.9% recorded during the previous quarter. Improvement compared to a year ago -- or to the previous year results from the better performance of our Central American operation on this front.

 In Central America, this ratio improved to 51.8% during the quarter, down from 54.8% a year earlier and ended at 53.4% during the first quarter of 2017. In Colombia, this ratio deteriorated to 44.5% during this quarter, up from 43.5% a year earlier and 42.4% during the first quarter of 2017.

 Our efficiency, measured as operating expense to average assets, of 3.5%, remained unchanged compared to the second quarter 2016 and increased from 3.4% in the first quarter of 2017. Central American -- Central America reported 4.4% during this quarter, including 35 basis points from 4.8% recorded during the second quarter of 2016, and remain substantially at the same level as the previous quarter.

 Colombia reported 3.1% during this quarter, up from 2.9% for both the first quarter of 2017 and the same quarter of 2016. We expect 2017 efficiency, measured on a cost-to-income base, to be similar to 2016's. This result builds on compensating for headwinds for salary adjustments covered by union agreements that were well in excess of inflation.

 Finally on Page 20, we present our net income and profitability ratios. Attributable net income for the quarter was COP 471 billion or COP 21 per share. Return on average assets and return on average equity for the quarter were 1.3% and 12.4%, respectively.

 Before moving to Q&A, I will now summarize our general guidance for 2017. We expect loan growth to be in the 8% area during 2017. Fee income is expected to grow at a slightly faster pace than loan volume. We expect 2017 cost of risk net of recoveries to be in the 2.4% to 2.5% area. We expect full year 2017 net interest margin to be slightly higher than that for 2016.

 Regarding efficiency ratio, we expect them to be similar to 2016's. We expect 2017 marginal tax rate to be in the 34% area. Finally, we expect our 2017 ROE to be in the 12.5% to 13% area. This incorporates the higher expectation of cost of risk than previously anticipated.

 I will now open it to questions.

Questions and Answers
Operator   [1]
 (Operator Instructions) And our first question comes from Nicolas Riva from Citi.

 Nicolas Riva,  Citigroup Inc, Research Division - Senior Associate   [2]
 Two questions from me. The first one is more general, on the economy. We know that economic growth has been disappointing this year. I wanted you to discuss a bit more the expectations for economic growth for 2018. Really, what should be the drivers of the expected pickup in economic growth? If it's basically lower interest rates, if it's lower corporate income taxes for more investments? And what should be the drivers for that pickup in kind of growth next year?

 And the second question on margins, which I think was one of the positive highlights this quarter. I was positively surprised by what happened there. We saw an expansion of 20 basis points quarter-on-quarter, 50 basis points year-on-year. Given that interest rates have been decreasing this year in Colombia, what really explained the wider net interest margins in the second quarter, if it was more -- on a less competitive scenario from their banks? And what's the outlook for margins for next year?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [3]
 Thanks for your questions, Nicolas. Let me address the first question about economic growth. We are expecting, as I said, that the last 2 quarters of this year will grow better than -- much better than the first 2 quarters, and that those last 2 quarters will keep their momentum into next year, into 2018. Consequently, I think next year, we should see growth closer to 2.25%, 2.3% and maybe as high as 2.4%.

 The drivers for that, on the one hand, I do insist that all these infrastructure doldrums will be dealt with before the end of this year. I see all the Colombian financial system, at least the larger banks, waiting to get involved again in 4G infrastructure, but obviously holding out until the government solves this problem that we're having with the ANI and their reluctance to honor the agreement that they have signed with us with respect to getting paid; not only the first payment to the banking system, which I believe that's going to happen fairly soon, but the remaining payments to get the bank fully paid. And logically, I think, the rest of the banking system is waiting to see what happens with that. And I think 4G will have a big impact.

 I also think that as the lower rates permeate the economy, we'll see better consumer demand and we'll see better quality on the consumer loan portfolio. And I also finally think that once we start getting the full effect of the 2016 fiscal reform on corporate tax rates and doing away with the equity tax, I think that we'll see corporations coming back to the game and putting through their expansion plans and obtaining financing to do so. So it will come from various fronts. To summarize, 4G, better consumer demand and better corporate profitability.

 So having said all that, I think, as I said, 2018 should better -- should be a better year. We will have, obviously, as we move on this last 2 quarters of 2017, we'll have a much, much better indication of what happens next year.

 And just to finalize, we now have about 40 political candidates wanting to be President. And I think that, that will filter pretty soon as coalitions start to become clearer. And when that happens, I think that, that also tends to take away some of the anxiety of the economy. And when you put all that together, again, and to finalize, we should have a better 2018.

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [4]
 Nicolas, and moving to your second question on margins, perhaps what we're seeing here is a result of diversification. We are indeed seeing interest rates on loans falling, particularly on corporate loans. They have fallen around 40 basis points when you compare it quarter-on-quarter. There is some repricing still to happen, given that there's a lag of around a couple months between the Central Bank adjusting rates and us being able to -- or rather than us floating rates to reprice. On the other hand, the funding side also has a lag, slightly shorter than the lag that we have seen on the corporate loans. On the other hand, the Central American prices have been slightly going up, that has helped.

 And in Colombia on the consumer front, something that appears to be happening is pricing has started to better incorporate the deterioration of the consumer portfolio that we've seen. You might have -- if you've been following the news in Colombia, there's been a lot of pressure from the government asking the banks to adjust rates down. That is actually happening on the corporate level, but on the consumer side, given that the cost of risk has gone up, there's less room for that to happen.

 The way that translates into prices is there is not a very aggressive competition between the banks to beat down the prices and to steal clients away. That is actually the mechanics of a lot of that pricing happens. The explanation for that is, it seems that most of the banks in the system are seeing something similar to what we have seen, regardless if that has already shown up in their numbers.

 Moving into next year that I believe that was the end of your question, what we expect to see, it depends very much on what happens with inflation and what happens with the Central Bank. On that front, what we believe should be happening is there is little room for additional reductions during this year. There could be another quarter, let's say, but nothing as substantial as what has happened before. For next year, it very much depends on the success in getting inflation in shape. We believe that's going to happen. Perhaps not as rosy as some of the analysts are pointing out to. We believe more of an inflation in the 3.5% area, that would imply a Central Bank rate somewhere around 4.5% by year-end.

 And accompanying that, there should be some additional adjustment in margins. If you are to compare full year 2018 to full year 2017, you have to bear in mind that we have had a particularly strong first half, that implies that next year compared to this year could have -- this is very early to tell, but it could be somewhere around a 20 basis points difference with what happens this year. And this is a very preliminary estimate and depends very much on what we see by the end of the year.

Operator   [5]
 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   [6]
 I have actually a follow-up on the previous questions on the growth in Colombia. You mentioned that there was a bit of a concern on the consumer side, obviously, that might be related to the VAT. However, we saw that most of the growth, the higher part of the growth in Colombia came from credit cards and consumer lending. So I wanted to get your thoughts in terms of what kind of deceleration you would be expecting in consumer lending. Are you concerned with that portfolio? Are you changing anything to control the NPL?

 And also on this question about the growth, the potential growth in Colombia. If the slow economy continues for another few quarters, are you concerned that maybe the tax cuts that were announced a few months ago could be revised? Or maybe we could have another fiscal reform down the road? So that's for Colombia.

 And then just a final -- a second question or second set of questions. On Central America, could you just quickly comment in terms of trends that you're expecting for the next few quarters, especially what kind of ROEs would you be expecting in the subregion?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [7]
 All right, let me try to answer your first question, and then Diego can help me out if I leave anything out. Yes, consumer grew more in relative terms, but in absolute terms, it really didn't grow all that much. But in terms of what concerns us and what could happen, yes, I think the first quarter, we saw an effect from the increasing value-added taxes. And I think that, that affected more consumer confidence than consumer ability to repay their loans. I think that, that has been put in the back of their minds, but I do see, as I said, unemployment, especially urban unemployment, going up. When you look at the country's total unemployment rate, they don't look alarming. But if you look specifically at urban unemployment and let's be honest, most consumer lending happens in cities, not in the rural areas as much. So obviously that is of concern to me.

 The other thing that on the contrary works well for this is that, as Diego was saying, the Central Bank decrease in rates has not been transferred that much to the consumer loan portfolio rates. And when you combine a bit of a higher unemployment -- or not a bit, higher unemployment with high consumer rates, then, obviously, that doesn't bode very well for the health of your portfolios. I think that as we move on, we'll start to see relief on the consumer side because of that. What else was it?

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [8]
 Change in strategy and the effect of a slow economy eventually on taxes.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [9]
 Okay. Yes, well, in strategy and that's our strategy change and our strategy, what we have done is we are paying -- well, first thing that we always do, it takes a little bit of time to gear up. But the one thing that we're doing is we're strengthening collections and we're doing a group-wide revision of our collection policies. As always, we tend to look at all of our banks of the 4 commercial banks here in the banking group in Central America. We tend to look who's doing better under the distressed or stressed, at least, economic environment and we try to emulate that in the rest of our banks. I think that we're starting to see some good consequences of that and I expect to see more.

 We're also, as part of this digitalization strategy that it's important to us that we've been working with consultants for the last few months, and that we finally put together an executable digital strategy that has started to be executed by Banco de Bogota and [BAC], and we'll keep going with the other banks. As part of that digital strategy, we're streamlining our processes around collections and that should help, and we're also streamlining some of the credit granting processes, and that should help. So we're trying to do better what we always do, and we're paying a lot of attention.

 We are totally at a high level of discomfort with the current rates of cost of risks. But when we reached traditionally these high levels of discomfort, we tend to do things to get things in line, and we hope this won't be the exception. With regards to the tax reform, I wish I could say that there is no doubt in my mind that the 2016 tax reform will be implemented in full and that we'll be a happy family after that happens. But then again, historical evidence in Colombia points to the contrary. We, I think, have had a tax reform every 2 years for the last 50 years or so. So it's hard to say whether the new President that is elected by 2018, it will be hard for a new President to run on a new tax reform, that's for sure. So we'll probably have all the candidates saying that there won't be a new tax reform, but we've heard that before as well. Your point is very valid. The hole in fiscal revenues that will be created by a lower corporate tax rate and by doing away the equity tax has to be compensated with something. I think that the good news is that with these lower rates and with a stable dollar and with a stable oil price and with the current account and the trade balance deficit sort of getting aligned and getting better, we might get better corporate results because we might get the commercial side of the economy, the business side of the economy going again. And if that happens, well then, they should produce better income before taxes and at any tax rate, they will have better results and better tax collections. I have said in the past -- and by the way, so to finish that, then if we have better income before taxes with the new tax rates, we might compensate for the whole. But that's yet to be seen. We'll see how the economy keeps going in the next few quarters. One thing that I have said, I said probably in New York 2 or 3 months ago and I still believe in that, is that we're going to have to sit down and take a hard look at the fiscal rule under which we live, which is a self-imposed constraint that I honestly don't think makes a lot of sense. I think that at some point, we're going to have to revise what is our comfort level in terms of a fiscal deficit. And I don't see a reason to self-impose that we have to bring it down to 1%, and that gives the country an ability to borrow. This country is very, very creditworthy. And if we can borrow, then we can compensate the hole. And if we compensate the hole, we can live with the 2016 fiscal reform. I don't know if my words just fall on deaf ears, but I'll keep insisting. I think that we have to take a hard look at that. And so basically, just to summarize with your question regarding the 2016 fiscal reform, well, a bunch of things have to fall in line. If they do, we're okay. If they don't, we'll be having this conversation again in the next 2 quarters, I'm sure.

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [10]
 Your final question was on Central America, Central America has been running at around a 15% ROE. Central America is a quite different story, than Colombia, even though we have also seen some delinquency picking up there, there has been a number of positives also happening. Our operation, particularly, have been very keen on improving efficiency, so part of what has been able to allow them to compensate the negative that they've seen on provision expenses has been a much tighter cost platform. They also have a faster pace of growth than what we're seeing. And in general, there is a number of items in different lines of the P&L that have compensated for what has happened. To try to wrap it to your question, we expect Central America to continue performing well. There's a couple countries, as always, that we're putting some attention on. You saw some volatility up in El Salvador earlier this year. That is something that has been there and should remain in time. We've seen some discussions in Costa Rica also about a fiscal deficit that have been there. We are watchful of what the implications of fiscal deficit looks like. And then Panama might be running at a lower growth rate. However, it's a country that continues to be quite healthy. All in all, we have to deal with these differences amongst countries, but we continue seeing the region and particularly our operation in the region to be able to sustain this kind of ROEs.

Operator   [11]
 Our next question comes from Jason Mollin from Scotiabank.

 Jason Barrett Mollin,  Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services   [12]
 My question is related to kind of the run rate of profitability, return on equity. Clearly, the 12.5% to 13% that you're talking about for this year reflects this very high cost of risk related to -- partially related to Electricaribe, as well as the not-so-positive environment for the earnings related to Corficolombiana. So if we kind of maybe start with Electricaribe. If -- as I understand your statements that 1/3 of the provisions, the increase in provisions in this quarter were related to an increase in provisions related to this exposure. So is that -- if provisions increased over -- just over COP 300 billion quarter-on-quarter, is that -- is basically, 1/3 of that or COP 100 billion related, if we want to try and isolate the ROE excluding that, would that be the right calculation? And secondly, maybe just normalizing, adding on to that, just thinking about this doesn't seem like a normalized situation for Corficolombiana at all on the infrastructure side of things. Where should we think about the return on equity kind of excluding -- and there's always something happens, right? But just kind of in a more normalized or long-term perspective, how do you think about profitability for Grupo Aval?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [13]
 That's a great question. It's one question that we ask ourselves every day. Let me try to answer because you hit exactly on the right points. On the one hand, much of the profitability of Aval and just about every profitable company in Colombia comes from the tax rate. So if you want to know a run rate with big, full 2016 fiscal reform in place, with Corficolombiana back to normal levels, with the country growing at 3.5% and with these specific credit problems behind us, I think our run rate should be 16%. I think our ROE, the ROE that we aspire to is 16% and I think we have the elements to get there. However, there is a lot of if's, if you heard me correctly, there's a lot of if's. Electricaribe will be put behind us eventually next year. I mean, one way or another, we get the problem solved or we fully provision the exposure. Infrastructure, as I said, has to get going. But I've also said that if the financial system is not willing or able to finance infrastructure in the 4G government program, we have an obligation, which we will comply with, to get the 4G concessions that were awarded to Corficolombiana, going. And right now, we have the legal lending limits and we have the willingness because we see the huge benefits for Corficolombiana and the group to finance ourselves, our own programs, and we will get that going. And that will replace, as you mentioned, and replace and exceed the decrease in profitability at the Corficolombiana level that has come regarding infrastructure on 2 fronts. On the one hand, because it lost the concessionary Ruta del Sol concession, which obviously did away with the profits that it was receiving from that, and secondly, because some of its own concessions, old concessions are dwindling down like Bogota, Villavicencio, the original concession and others. So that's another if. We will get that going and we will get Corficolombiana back to its adequate levels. We will get this problem with Electricaribe behind us and the economy will rebound. And with all that in mind, I think that, again, that's our aspiration, and we see a way to get to it. I don't know if you have any...

 Diego Fernando Solano Saravia,  Grupo Aval Acciones Y Valores S.A. - CFO   [14]
 I think those are points and actually the full tax reform would have been in place this year would have been running with an ROE that should be in excess of 100 basis points above the kind of numbers that we're looking into. So that gives you a starting base that adds to the different actions and things that should happen that Luis Carlos pointed out.

Operator   [15]
 Our next question comes from Cristina Manotas from Davivienda.

 Cristina Isabel Manotas Polo,  Corredores Davivienda - Analyst   [16]
 I just have one question. I would like to know what explain the annual growth of 85% on Corficolombiana's gross loan, and which type of loan is (inaudible).

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [17]
 Yes, Corficolombiana. When you look at Corficolombiana, and I want to make sure that I understand your question, Corficolombiana does consolidate some loans that are financial and others that are nonfinancial. The side that is financial comes from a small leasing company that they have in their belly and the most relevant piece is the nonfinancial side that comes from Promigas. Promigas, as we have mentioned in our past calls, has some contracts with some other customers that are accounted for under IFRS as leasing contracts. Particularly, there is something called the spec at TAT that is offloading unit of gas in the Colombian coast that has contracts that generates this kind of accounting. So what you're seeing is particularly growth in that side of business.

Operator   [18]
 Our final question comes from German Cristancho from Davivienda.

 Jose German Cristancho Herrera,  Corredores Davivienda - Analyst   [19]
 I would like to know more about the digitalization strategy. And I don't know if you could give us some details, maybe some about the impact on profitability ratios, what do you expect on the efficiency ratio. How will be the delivery of this strategy? And also, do you expect branches closing, reduction of labor force? And in general terms, all the digitalization strategy, please?

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [20]
 It's a great strategy, I'll tell you that. We've been working very close with our consultants to put together -- it's a multifaceted strategy, as you can imagine, with so many banks. And also as you can imagine, as we put together our digital strategies, we need to make sure that we are not executing many double efforts so that when one of our banks gets a digital strategy and anything like kind of a new product or in collection processes or et cetera and anything that you can imagine, we've got to make sure that we use that to apply in the other banks and not to do it again as that wouldn't be cost effective. Obviously, as with all digital strategies, the main fronts are achieving a better customer experience, and that is done through streamlining processes with customers to, for example, open account, and I'll give you an idea. We now have a new product that we launched some weeks ago through Banco de Bogota, where our clients can now open their accounts in 5 minutes or less through an iPad sort of environment, and that is turning out to be very good. We've also done some streamlining in collections, as I said. And so it's too early to tell you exactly what goals we have because we are revising them every day ourselves. But we have very ambitious goals. And obviously, we're also very ambitious as to how much our investment will be, but we're revising that as well. And then finally, yes, we have seen some efficiencies. We have seen already opportunity of some personnel reduction, which we already put in place first phase in Banco de Bogota. And we were able to liberate some resources there. And obviously we'll see the results of that starting next year once we've amortized the cost of the layouts. So we'll give more details in the near future, and then I'm sure you will see through your own bank intelligence all that we're doing. And hopefully, we'll be as successful as I think we can be. But we'll talk more about it as we move on and as we get things accomplished.

Operator   [21]
 Our next question comes from Natalia Corfield from JPMorgan.

 Natalia Corfield,  JPMorgan - Analyst   [22]
 It's actually with regards to Ruta del Sol. I think I probably didn't get everything that was said during the call. But I understand that the first payment of 50% to 60% of the total loans, it's probably going to come soon because the suppliers and employees, they are reaching that threshold of 70% and then the banks will be able to get their portion. Nevertheless, you mentioned that there was a problem with regards -- with the decision of the tribunal and there's going to be a hearing on September 1. So I'm trying to understand if this can delay the payment of the 50%, 60% of the loan that you were expecting to receive. And also if you have, like, what happens to the 40%, if you have any idea of when the remaining portion could be received by the banks.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [23]
 Look, let me see if I understood. There are basically 2 questions. Number one is how we're doing on the 70 percentages of employees and suppliers and whether if we get those done, the first payment will be made, is one question that I understood. And then secondly, what should happen going forward in arbitration and how that -- what repercussions should that have on the remaining payments, right? That's more or less, okay. On the 70 percentages, as I said, number one, employees are done. Suppliers are very close. We're only about $2 million away from getting it done. It's a very, very painstaking process because the concessionary CRDS has to produce the bills, which then are analyzed by an expert hired by the ANI, which then are -- then the experts' conclusions are analyzed by the ANI, then the ANI takes around -- they've taken on average 43 days per bill. We've sort of brought it down to about 30 days and then they give their authorization to the fiduciary who finally authorizes the payments. So we're finally sort of close to getting it done. Now your question specifically is, because of what happened in arbitration where the ANI did not comply with their obligation to present the termination agreement as a settlement between the parts, should that affect the first payment? And the answer is categorically, no, it should not affect it. The first payment is not affected by it because the agreement is in place, it's signed. And so it's a commitment and the agreement specifically says that with the two 70 percentages, the first payment will be made. What had to be ratified specifically by the arbitration tribunal is the full value of liquidation formula. And basically, that says we have to agree on what total liquidation value is going to be. But there's no doubt in anybody's mind, and that is why the first payment will be made that the full liquidation value will amply exceed the first payment. Therefore the first payment will be made as soon as we get that over and done with. With regards to the remaining payments, basically, as we said, banks are owed about $800 million, they'll get, say, call it $500 million in this first payment. They'll still be owed about $300 million and that has to be paid. Then what we had agreed to was that the banks would be paid between now and the year 2021, and that's what is in the agreement. And that was supposed to be ratified by arbitration and by the tribunal. When the ANI didn't show up and did not present the agreement as settlement, then what is happening is that the arbitration tribunal is saying, okay then we'll go ahead and proceed with our own competence to decide on how the agreement has to be looked. And one of the things that they're going to decide is whether they like the agreement that we had signed, and they might still ratify it, not as settlement, but as a pronunciation of the tribunal. So we hope -- and the problem with that is not necessarily that they will have to run the whole process. That's okay, we are very confident that the agreement is good enough. We're confident that the liquidation formula is good enough because it is the liquidation formula that was included in the contract, the concession contract to start with. So we're confident that these arbitrars from the tribunal from the arbitration tribunal will eventually ratify the agreement. Once they do, we'll have -- we'll be 100% confident that the banks will be paid in full. But then, it's got to run its course and unfortunately, this can take 3, 4, 5, 6 months, whether if we had done it in settlement, it would have been just one sitting with the judges and we would have been done. Now we got to wait for it to run its course. But, as I said, we have pretty solid background to make sure that -- and reasoning to make sure that what's in the agreement will eventually prevail, and it will be finally approved. To summarize, we are very confident that the banks will be paid in full. We're very confident that they will be paid in the next -- that the first payment will be received shortly and that the remaining payments will be received in the next 3 years. And we just got to let it run its course through the tribunal now.

Operator   [24]
 We have no further questions at this time. I'd like to turn the call back to Mr. Luis Carlos Sarmiento.

 Luis Carlos Sarmiento Gutierrez,  Grupo Aval Acciones Y Valores S.A. - Chairman and CEO   [25]
 All right. I think that wraps it up, Sylvia. Thank you very much, and thank you all for listening in. And as always, we remain at your service should you have any additional questions that we can share with you the responses, and then we will see each other in the next quarter for our next quarter call. And thanks again.

Operator   [26]
 Thank you. Ladies and gentlemen, that concludes today's conference. Thank you for participating. You may now disconnect.

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