Grupo Aval's (AVAL) Management on Q4 2015 Results - Earnings Call Transcript

| About: Grupo Aval (AVAL)

Grupo Aval Acciones Y Valores, S.A. (NYSE:AVAL)

Q4 2015 Earnings Conference Call

April 12, 2016 10:00 a.m. ET


Diego Solano - CFO

Tatiana Uribe - Financial Planning and IR Officer

Diego Rodriguez - Chief Risk Officer

Carlos Perez - Chief Strategy Officer


Carlos Macedo - Goldman Sachs

Mauricio Restrepo - BTG Pactual

Catalina Araya - JPMorgan

Nicolas Riva - Citibank

Jason Mollin - Scotiabank

Mayara Sa Riddlebaugh - Wells Fargo


Welcome to the 4Q 2015 Consolidated Results under IFRS Conference Call. My name is Bianca, and I'll be your operator for today's call. At this time, all participants are in a listen-only mode. Later we will conduct a question and answer session.

Grupo Aval is an issuer of securities in Colombia and in the United States, registered with Colombia's National Registry of Shares and Issuers, RNVE, and the United States Securities and Exchange Commission. As such, it is subject to the control of the Superintendency of Finance and Compliance with applicable U.S. securities regulation 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. Although we were not a financial institution until December 31, 2014, we prepared the consolidated financial information included in our quarterly reports in accordance with the regulations of the Superintendency of Finance for financial institutions and generally accepted accounting principles for banks to operate in Colombia, also known as Colombian Banking GAAP, because we believed that that presentation on the 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 as applicable in Colombia. IFRS as applicable under Colombian regulations differs in certain aspects for IFRS as currently issued by the IASB. Our 20-F annual report filed in 2015 with the SEC provide a description of the principal differences between Colombian Banking GAAP and U.S. GAAP, as well as the expected changes from our implementation of IFRS as applicable under Colombian regulation.

The unaudited consolidated financial information included in this webcast is presented in accordance with IFRS as currently issued by the IASB. This webcast may include forward-looking statements, which actual results may vary from those stated herein as a consequence of changes in general economic and business conditions, changes in interest and currency rates, and other risk factors are evidenced in our Form 20-F, available at the SEC's webpage.

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

Today, the call will be conducted by Mr. Diego Solano, Chief Financial Officer of Grupo Aval; and Mrs. Tatiana Uribe, Financial Planning and Investor Relations Officer of Grupo Aval; Mr. Diego Rodriguez, Chief Risk Officer; and Mr. Carlos Perez, Chief Strategy Officer.

I will now turn the call over to Mr. Diego Solano. Mr. Solano, you may begin.

Diego Solano

Thank you, Bianca, and good morning to all. Today I would like to present our consolidated fourth quarter figures for Grupo Aval under full IFRS. Even though unaudited, we expect these results to substantially reflect what we're going to present in our full year full IFRS financial statements, which will be included in our 20-F filing in the coming weeks. Part of the process of preparing our 20-F, the first one under full IFRS for both 2014 and 2015, our figures for full year 2014 will be adjusted versus the sum of the unaudited consolidated quarters under IFRS previously reported.

Earnings have not substantially changed, showing a 1.5 reduction. However, the classification of certain line items has been revised. Adjustments for the year are reflected in the fourth quarter of 2014, which will be shown to you in today's presentation. In addition, some adjustments were made to the third quarter 2015 balance sheet compared to what we have previously reported.

Now moving into the results for the year end 2015, we want to highlight the following. Net income attributable for the shareholder was COP2.04 trillion, or close to COP0.92 per share, which compares favorably versus COP1.81 trillion, or COP0.87 per share earned during 2014. It is important to remember that 2015 includes the nonrecurring impact of the equity tax, COP209 million or COP9.4 per share. In the absence of these expense, net income for the year would have been 2.25 trillion or COP101 per share.

In line with our guidance, our ROE for the year was 14.5%, and our ROA was 1.7%. Annual growth of both our balance sheet and our earnings were driven by a resilient Colombian economy, as well as the strong fundamentals and the favorable impact of the appreciation of the U.S. dollar relative to the Colombian peso and our Central American operation. In Colombian peso terms, our assets grew by 21%, and our liabilities grew by 23%. Excluding the impact of the devaluation of the peso on our Central American operation, our assets grew by 12% and our liabilities grew by 14%.

Asset growth was mainly driven by loan book growth, which increased in pesos by 23%, 14% excluding the impact of the devaluation of the Central American operation. As of the end of 2015, our deposits to loans ratio was 0.96, showing a slight deterioration versus the previous year, resulting mainly driven by the government decision to create the Cuenta Unica Nacional, and by the general tightening of the liquidity in Colombia. This ratio compares favorably versus our other Colombian peers.

The structure of our deposit continues to be strong. As of the end of 2015, our current and saving accounts were 62% of our total deposit base. Despite the deceleration [ph] of the Colombian economy, the quality of our loan portfolio remains strong, slightly improving under all metrics. Our 90 days past due loans ratio, which will be given starting with this call, was 1.4 for 2015, versus the ratio of 1.5 for 2014. Our 30 days past due loans improved 0.2% per [ph] points to 2.4% for full year 2015, and our NPLs improved 0.1% per [ph] points to 1.6 for our full year 2015.

Consistent with our initial guidance, our cost of risk slightly increased during the year. However, this increase was lower than initially anticipated. Cost of risk was 166% for 2015, versus 158% for 2014 under IFRS.

Our net interest margin for the year was 5.51%, only eight basis points lower than the 5.59 net interest margin for full year 2014. This positive outcome in a challenging year was the result of a stable NIM on loans of 6.3% and a lower NIM on investments, 1.9% during 2015, versus 2.6% during 2014. We were able to maintain our NIM on loans despite having an increase in our cost of funds of 25 basis points, mainly driven by an increasing rate environment in Colombia, where average DTF went from 4.1% in 2014 to 4.6% in 2015.

Our efficiency ratio on a cost-to-income basis was 48% for 2015 versus 46.8% for 2014. The deterioration of this ratio was mainly explained by the devaluation of the peso. In absence of the devaluation, the cost-to-income ratio would have deteriorated only 37 basis points.

The income and income from investments performed well during 2015. Despite the negative effect of the CREE surtax included in the 2014 tax reform, our implicit tax rate for the year was 36% for 2015, which compares favorably versus 37.6% for 2014. Finally, our equity to assets ratio deteriorated slightly during 2015 from 12% in the previous year to 11%. Such deterioration was driven by the drastic devaluation of the currency.

As you probably are aware, we hedge our investment in Central America into pesos. Therefore in a devaluation scenario, the Colombian peso, our equity, and that of Banco de Bogota [ph] remain stable, while the size of our assets and liabilities increased.

Growth in loans and assets in absence of foreign exchange movements will be in the low double digits, around 10% to 12%. We expect a similar growth for our Colombian and our Central American operation. Continuing with general guidance, the quality of loans might show some additional deterioration, driven by a weaker GDP and a softer internal demand. This could negatively affect cost of risk in the 10% to 15% basis points range. This incorporates the impact of the economic cycle on consumers and SMEs. Cost of risk could increase due to one-time events in our corporate portfolio.

We expect the net interest margin on loans to increase in the current interest rate and liquidity scenario. If this scenario prevails, short-term substantial increases in yields are more likely in our corporate loans given the favorable evolution of DTF. The performance of our total net interest margin will depend on the performance of our investment portfolio. We are now more positive on this front versus our previous guidance given the reduction in the expected pace of increasing the U.S. interest rates compared to the previous market consensus. In the other hand, successfully anchoring the long-term inflation expectations by the Central Bank will be key to this result.

Regarding efficiency ratios, we continue to work to improve on this front and gained back what was lost during 2015 due to the impact of the peso depreciation, and an increasing relevance of the mix of our less-efficient Central American operation. Finally, we expect to improve our return on equity during 2016, trending towards the 15% level that we have mentioned in the past.

We'll now move to the evolution of the macroeconomic environment. On page four, we present the evolution of some macro drivers of our industry. Real GDP growth for 2015 was reported at 3.1%, slightly better than what was expected at the time of our last call. Market consensus and GDP growth as reported by Bloomberg now stands at 2.4% for 2016 and 3.1% for 2017. These figures are slightly lower than those prevailing at the time of our previous call. We share the market consensus with a slight positive bias expecting 2016 growth to be in the 2.75% average.

As discussed before, we have a positive view on the impact of a more competitive peso, as well as on the impact that the fourth-generation concessions and private-public initiatives will have on the economy as the year progresses. Downside risks will continue to come from oil prices and lower government spending. In addition, uncertainty and GDP growth also comes from the potential impact of the terms of the past two quarters.

Regarding unemployment, we have started to observe the mild deterioration that we had been expecting for some time. The last data point available for in Colombia was the February 2016 data point, the figure reported was 10% up from 9.9% reported a year earlier, the same month.

Finally, fourth quarter data on the current account deficit shows some improvement compared to the previous quarter. Nevertheless, in absolute terms this continues to be a fragile side of the Colombian economy.

Moving to page five, we present inflation and some interest rate benchmarks. Twelve-month inflation has risen substantially since our last call. Year end 2015 inflation reached 6.8%, slightly above our expectation. Inflation has continued to rise reaching 7.98% as of March, now doubling the Central Bank's upper limit of 4%.

Market expectation and inflation has continued to rise, however, we expect inflation to be lower in the latter part of the year as we experience a lower transference of the currency depreciation into the inflation and [indiscernible] during the second quarter of this year. Consistent with recent inflation data, the Central Bank has continued to raise its rates over the last month's meetings, accumulating 200 basis points since August 2015, now reaching 6.5%. We believe an additional 50 basis points increase of the Central Bank intervention rate to be likely over the next couple of years.

With inflation close to 8%, the Central Bank continues to have a negative real interest rate. As well, DTF, our benchmark rate has closely tracked the REPO rate that [ph] remaining in a negative ground. Even though we have been cautious on the possibility of DTFs spread expansion over the REPO rate, given what we've seen over the past few years, we believe that the current liquidity environment will be favorable on this front.

On page six, we present oil prices and their effect on foreign exchange. The Colombian peso/U.S. dollar exchange rate ended 2015 at 3,149 pesos per dollar, 2% weaker than three months earlier and 32% weaker than a year earlier.

Fourth quarter average exchange rate was COP362 per dollar, 4% weaker than the previous quarter and 41% weaker than the same quarter a year earlier. As repeatedly mentioned in the past, a strong negative correlation exists between international oil prices and the Colombian peso exchange rate. This correlation has been slightly lower in the past few months, and we've seen an appreciation trend over the past few weeks. The peso depreciation will help explain some of the more relevant changes seen -- when comparing 2015 results with those for 2014.

Depreciation of the currency is positive for us from an income statement standpoint as our Central American operations increased its contribution to earnings. However, depreciation is heavy on solvency as it accelerates risk weighted assets growth of our Central American operations.

On page seven, we present our chart on Central American macro drivers. As mentioned on previous calls, analysts continue to have a GDP growth forecast of close to 3% for the region in 2016. We expect this environment to be favorable for our business in this region. We expect lower oil prices to be positive as well in Central America as these countries are net oil importers.

I will now move to the results of Grupo Aval. I will start on page eight with our asset evolution. Total assets grew 21.1% during the last 12 months and 3.5% during the last quarter. In absence of the effect of the peso depreciation on Central America, these growth rates would have been 12.1% and 2.9% respectively.

Consolidated balance sheet structure was similar to that in place at the end of September 2015 and December 2014. Net loans continue to gain relevance in our balance sheet, now accounting for 65% of our assets, materially the same level as three months earlier and up from 63.5%, 12 months before. Fixed income investments have compensated this slight increase, now accounting for 11.2%, down from 12.3% three months earlier and 13.4% one year ago. Colombian assets account for close to 71% of our balance sheet. As we've mentioned in the past, the Central American assets have increased already through the last months moving from 26% to 30% mainly due to the Colombian peso depreciation.

Page nine, we present our loan portfolio evolution. Gross loans increased by 22.5% over the past 12 months. In the absence of the effect of the peso depreciation on Central America, 12 month growth would have been 13.8%. This change resulted from our Colombian book growing at 14.1% and our Central American operation growing at close to 49% 13.1% in dollar terms.

Mortgages continues to be our most dynamic portfolio, growing at 37.2% through the past year. Consumer and commercial loans grew at 24.7% and 19.5% respectively during the same period. Broken down by regions, mortgage loans grew at 30.7% in Colombia and 7.2% in dollar terms in Central America. Consumer loans grew at 13.5% in Colombia and 14.9% in dollar terms in Central America. Commercial loans grew 13.3% in Colombia and 14.8% in dollar terms in Central America.

In the fourth quarter of 2015, gross loans grew 2.5%. In absence of the effect of the peso depreciation on Central America, three months growth would have been 1.9%. This growth resulted from the Colombian operation growing at 1.2% and the Central American operation growing at 5.8%; 3.7 in dollar terms.

The structure of our gross loan portfolio continues to experience a slight shift towards a higher component of personal loans. Commercial loans account for 60.4% of our portfolio, while consumer and mortgage loans account for 29.9% and 9.5% respectively.

Colombia accounted for 71% of our loan portfolio, down from 72% three months earlier and down from 76% 12 months earlier. The increase in weight of the Central American operation has been mainly due to the appreciation of the U.S. dollar relative to the Colombian peso depreciation.

On page 10, we present several loan portfolio quality ratios. On the top left of the page, you will find the evolution of our past due loans more than 30 days and our NPLs, both as a percentage of total loans. In this quarter, our delinquency ratio when measured as 30 days past due loans to total loans, slightly improved from 2.5% to 2.4%, delinquency measured as NPLs to total loans were stable at 1.6%.

Moving to the right, annualized net provision expenses net of recoveries of charge-off assets for the quarter was 1.6% of average loans, up from 1.2% recorded three months earlier and at the same level as 12 months earlier. Year-to-date, cost of risk defined in this manner was 1.5%. This ratio would have been 1.7% in recoveries if charge-off assets were not considered, slightly better than our original guidance for the full year.

At the bottom left, you will find the annualized ratio of charge-offs as a share of average NPLs. This ratio was 0.8 times during the fourth quarter of 2015, slightly lower than the 0.9 times recorded during the previous quarter; 12 months charge-offs as a share of average NPLs was 0.8 times for both 2015 and 2014.

Finally, on the bottom right you will see several loan loss reserve coverage ratios. Our allowances are 2.6% of our total loans, and cover 1.6% of our NPLs and 1.1% time our 30 days PDLs.

On page 11, you will find further detail on the quality of our loan portfolio. On this page, you will find the evolution of our loans past due more than 30 days and our non-performing loans as a percentage of total loans. We'll also refer to the 90 days PDLs even though not included on this chart.

During this quarter, our delinquency ratio has slightly improved when measured as 30 days PDLs to total loans, from 2.5% in third quarter to 2.4% in the fourth quarter. Our 90 days PDLs to total loans remained stable at 1.4% and 1.6% fourth quarter NPLs. Our ratio is calculated as a percentage -- all of the ratios are calculated as a percentage of total loans excluding interests, accounts receivables. Broken down by type of loan, commercial loans improved from 1.8 to 1.6 when measured on the 30 days PDLs basis, 1.3 to 1.2 when measured on the 90 days PDLs basis. Finally, they improved from 1.3 to 1.2 when measured based on NPLs.

Consumer loans were stable at 3.8 when measured on a 30 days NPLs basis, and slightly deteriorated from 1.8 to 1.9 when measured as 90 days PDLs and from 2.5 to 2.6 when measured based on NPLs.

Funding and deposit evolution are presented on page 12. Total funding grew 23.5% over the last 12 months, and 3.7 during the last quarter. In absence of the effect of the peso depreciation in Central America 12 months and three months gross would have been 14.3 and 3.1 respectively. Broken down by geography, Colombia funding grew 17.9% over the last 12 months and 2.6 during the last quarter. Central America funding grew at [technical difficulty] in Colombia peso terms or 6.4% in dollar terms over the last 12 months. In the fourth quarter of 2015, Central American funding grew at 6.5% in Colombian peso terms and 4.4 in dollar terms.

Deposits increased at 19.8 during the 12 months -- in the last 12 months and 5.3 during the last quarter. In absence of the effect of the peso depreciation in Central America 12 months and three months gross was 11.3 and 4.7 respectively. Broken down by geography, Colombia accounts, as mentioned [technical difficulty] 71% up total deposits. Colombian deposits grew 12.6% over the last 12 months and 4.8 during the last quarter. As mentioned on the last call, a temporary system like liquidity squeeze affected our end of September ratio, which improved in the system over the last quarter of 2015.

Central American deposits grew 42.4 in Colombian peso terms or 8.2 in dollar terms over the last 12 months. For the first quarter, Central American deposits grew 6.6 in peso terms and 4.5 in dollar terms.

Our funding and deposit structure slightly strengthened during the quarter. Deposits accounts for 74.2 of our total funding and at end of period up from 73 three months earlier, our CASA ratio was 61.6, slightly higher than the 61.2 three months earlier, and our deposits cover 96% of our net loans, up from 94, three months earlier.

On page 13, we present the evolution of our total capitalization, our attributable shareholders equity, and the capital adequacy ratios of our banks. Our total equity defined as attributable equity plus minority interests was COP22.9 trillion as of the end of 2015. This implies a 7.3 increase over the last 12 months and 5.9 during the last quarter.

Attributable equity accounted for 63% of total equity as of December 2015. Attributable equity was COP14.4 trillion at the end of 2015. This implies 5.1 growth during the last 12 months, and 6% growth during the last quarter. Equity growth mainly resulted from net income during the quarter.

On this chart, we also show the consolidated solvency of our banks. Solvency at the end of period was 10.7 for Banco De Bogota, 11 % for Banco De Occidente, 11.2 for Banco Popular, and 10.9 for Banco AV Villas. Banco De Bogota's increase in solvency was mainly due to half a billion dollars subordinated loans granted by Grupo Aval, which contributed to its secondary capital.

As I had mentioned in our past calls, we accelerated growth of the Central American risk weighted assets, resulting in -- as depreciation continues to affect the Banco De Occidente [ph] solvency ratio.

On page 14, we present our net interest margins. As mentioned in our last call, net interest margin for third quarter was softer than previous quarters. This performance resulted from a combination of a poor performance of the fixed income portfolio and the pressure on the net interest marginal loans resulting from an accelerated increase in our cost of funds resulting from the changing Central Bank rate policy.

Net interest margin was strong. It had a strong recovery during the fourth quarter; 2015 reaching 5.7%, up from 5.3% recorded during the previous quarter. It was mainly driven by an increase in net interest margin and investments. Net interest margin on fixed income investments was 2.3, up from 0.6% a quarter earlier. The net interest margin on loans remains stable at 6.3 in spite of the continued pressure on the funding cost resulting from an increase in the central bank rates.

Year-to-date net interest margin was 5.5%, with NIM on loans at 6.3%, and NIM on investments at 1.9%. Quarterly net interest income grew 25.9%, compared to 2014 results, reaching from COP1.89 trillion, to COP2.38 trillion in [technical difficulty].

Page 15, we present net fees and other income. Fee income is presented on the top of the page. Gross fee income grew 13.2 compared to the same period a year earlier, and 7.5 [technical difficulty] during the third quarter of 2015. And on that page we present other income. Other income increased by 28.7% from -- compared to the previous quarter. This increase was mainly driven by a recovery in income from foreign exchange and a higher income from the non-financial section there.

On page 16, we present efficiency. This page, we present our operation expense as a share of total income and as a share of average assets. Efficiency measured as operating expenses divided by average assets was stable at 3.5% during the quarter. Colombia, this ratio remained at 3.1%, while in Central America we saw a slight improvement from 4.6% to 4.5%. Year-to-date, this ratio was 3.4% for Aval, with Colombia at 3.1 and Central America at 4.3, in Colombia peso terms.

Efficiency as operating expense to total income was 46.7 during the quarter, better than the 50.7 recorded during the previous quarter. Colombia's ratio improved from 48.4 during the third quarter to 43.8 mainly due to NIM expansion. In Central America this ratio improved from 55.5% to 52.6%. Whole year 2015 -- for full-year 2015, this ratio was 48% compared to 46.8% during 2014. Colombia slightly deteriorated from 44.5% in 2014, to 45.1% in 2015. Central America was substantially at the same level, moving from 54.2 to 54.6 for the same years. Efficiency ratios during 2015 resulted mainly from an increasing weight of our less efficient Central American operations.

Finally, on page 17, we present our net income and profitability ratios. Attributable net income for the quarter was COP693 billion or COP31.1 per share. Cumulative attributable net income for 2015 was COP2041 billion or COP91.6 per share. In the absence of the equity tax our cumulative net income for 2015 would have been COP2250 billion or COP101 per share. Return on average assets and return on average equity for this quarter were 2.1 and 19.8 respectively. Return on average assets and return on average equity for 2015 were 1.7% and 14.5% respectively.

With these, I complete the presentation and open us now for questions.

Question-and-Answer Session


Thank you, sir. We will now begin the question-and-answer session. [Operator Instructions] Carlos Macedo, please go ahead, sir.

Carlos Macedo

Good morning everyone. Thanks for taking questions. First question, I mean, since 2015 is done and we're already almost half way into 2016, if you could give us some guidance as to what to expect this year in terms of loan growth, asset quality, margins, et cetera, just so that we can have an idea of really what the forecast, given the volatility that we've seen all over the place this year.

Second question, going back to Banco de Bogota, I understand you're probably going to capitalize some of the retained earnings at some point early in the year and that would increase the common equity Tier 1 ratio, but it is quite low, and you mentioned that it is because of Central America. Is there a solution there? I mean, if the peso continues to devalue that would put even more pressure there. Has the Central Bank said anything about or pressured you in any way to address that situation? I mean, what is the direction that that will go going forward? Thank you.

Diego Solano

Okay. Regarding your first question, we [ph] covered some of that at the beginning of the presentation, but to give you some more color on what our view on growth and quality and margins are, regarding loan growth, I mentioned we expect to grow in the low double digits, this means 10% to 12%. The rationale for this kind of growth that if you might have been in our previous calls and remember that we gave a similar guidance for 2015, we expect it to grow somewhere around 13% during 2015. We were positively surprised by a higher growth, given stripping away the effect of FX on our operation.

However, we see a different cycle this year. 2016, even though might end up with a similar GDP growth than the kind of growth that we had during 2015, something close to 3% or short of 3%. The composition of that growth will be quite different. During 2015, we saw GDP growth coming lower, because in simple words, a piece of the Colombian economy was stripped away when oil prices fell. Therefore it wasn't an economy-wide effect what generated a slower growth, but something that was very much fenced inside oil. Given that oil is not employment-intensive, this didn't really flow into the rest of demand. Actually, employment figures improved during 2015. However, we believe there is no free ride. There is a second derivative, and it is -- once these companies do not pay taxes or royalties to the central government and the regional governments spending for us.

In addition, there's been a shift in liquidity. We used to live in an environment where the emerging markets' liquidity basically was overriding what the Central Bank was doing in each one of these countries. At least those countries, as Colombia, which have freely open financial markets. Therefore, banks were willing to lend out substantial amounts of money without feeling any pressure on deposit prices and margins.

Moving into this year, liquidity has gone back to normal. Also, from the supply side, banks have already begun to be much more careful, and risk-adjusted pricing has come back to the way loans are being given out. All in all, what we expect to see is slower growth than what we saw last year. It's going to be growth in the low double digits. Something similar in Colombia and Central America was already growing in the lower teens. And trying to move into asset quality, as I mentioned before, this is a year where it's more about lower consumer demand than an industry [indiscernible] as the oil industry generating less GDP. Therefore, we expect to see the retail side. Retail, meaning consumer and SMEs being affected, and then there could be some one-time events from industry-sensitive customers.

Finally, on margins, we've started to see the Central Bank react as we would have liked to see much earlier during 2015 with a sequence of interest hikes. And combined with the different liquidity scenario we've been starting to see or we started to see during the last quarter of 2015 a better transference of the monetary policy of the Central Bank into the banking system. What this translates into is the DTF has gone up. Therefore, banks which have large corporate portfolios have benefited from a DTF that has reacted pretty quick to what happens with the Central Bank. As these banks have checking and savings accounts, we start to see those margins opening.

Story for consumer products is quite different. It depends on a product-by-product base. Products which are given out at a fixed rate take much more time to re-price. You can get up to, let's say, three years to re-price these kind of portfolios, while credit cards and the revolving lines do re-price at a much faster pace. Therefore, the reason we have a positive bias on margins and loans and net interest margin on loans is that we have a higher component in our portfolio of consumer lending, and a substantial portion of that portfolio is loaded [ph] on DTF. Therefore, roughly half of our portfolio re-prices on a DTF re-pricing as well.

Now, moving to your second topic, the capitalization ratios of Banco de Bogota, this is something that we've mentioned in the past as a pretty sensitive area that we've been looking into. I can't really give you an action plan at this point, but we're looking into it not only capitalizing or increasing the amount of earnings being capitalized. That's one of the potential initiatives that can be acted upon. We've actually started to pay out a lower payout ratio, even though in peso terms our dividends have been either stable or growing, but in fact we are long back and much more of our earnings that we did before.

We do believe that these does help, but this doesn't really solve the full puzzle. Therefore, we are actively working at Banco [indiscernible] level to look at initiatives that could improve our solvency, either via improving our equity side or optimizing our risk-weighted side. Regarding pressure from volatility of the currency, we can't really make a forecast of foreign exchange. However, we do believe that a lot of the volatility or the magnitude of volatility that we had last year is somehow gone. We can't guide you into appreciation of the Colombian peso, however we see some analysts pointing to reasons why that could happen, either in the medium term or even eventually due to technical reasons in the shorter term.

These could be a plus for the solvency of Banco de Bogota, but we are not counting on that to get the equation solved. Given that we are working on this on our next call, we should be able to give you a more precise guidance.


And from BTG Pactual, we have Mauricio Restrepo. Please go ahead, sir.

Mauricio Restrepo

Hi, thanks for the call. Maybe a follow-up on the bank's strategy, I wanted to know how do you see your four banks growing, specifically Banco de Bogota, where growth [indiscernible] on the fourth quarter, and if this has to be with the lower Tier 1 ratio, and probably you are going to move the growth that you were seeing on that bank to [indiscernible] or what you can comment on that? Thank you.

Diego Solano

Yes. Regarding the growth of our banks, I'll start from your second question. Actually, the reason why we are looking keenly on the solvency of Banco de Bogota [ph] is because we do not want to have to forgo any growth in loans. We are very positive on Colombia medium and long-term. Therefore, we believe that there is a substantial opportunity for loan growth in the country. Given that strong positioning of Banco de Bogota we're not willing to give away any growth from Banco de Bogota as we could potentially capture.

Now, moving into the banks, growth this year will be a combination of segmentation, and also of balance sheet structure. And now I'm going broader than Grupo Aval. I'm going into the system as a whole. Liquidity will be key, for example, the relationship between -- or access to deposits and to funding will be a factor that might differentiate what some banks can do in the system, and what others cant due to pressure on their net interest margin. Given the strong starting base from where Grupo Aval can approach the market, we see some competitive advantage coming from this front.

Now, moving into our banks, different segments have had different dynamics. We have seen the consumer lending dynamics to be stronger during the first quarter, and the beginning of the year, and the corporate loan growth slightly slower. But as the year progresses we expect to see things to shift. A shift will come on the consumer side from eventually deterioration in employment and other taxes of this kind. And therefore our willingness, and how strict our scoring models look. Therefore it will be supply-driven, what's going to happen on the consumer front if unemployment continues to show some slight deterioration.

On the other hand, on the corporate side, there's a number of positive things happening. One, well there usually is –- infrastructure projects have begun to get to their financial closes, and demand for loans will come from that flank. But perhaps the most relevant event is we've already begun to see some of our customers which have benefited from a more competitive peso, demanding loans. At this point this has been much more on the working capital side, but at some point it should also be on the working capital -- on the CapEx side to build additional capacity. The latter hasn't really happened in a substantial way, but we have already started to see hints of that happening. Carlos…

Carlos Perez

Well, maybe adding to what Diego just mentioned, regarding market share in the first quarter in the retail side, we're increasing our market share basically in all the curves [ph], including mortgages. On the commercial side we're flat. We are maintaining our share. And on the deposit side, we're doing fine in current accounts and savings. And we're losing a little bit in term deposits though. That's [indiscernible] what's happened.


From JPMorgan, we have Catalina Araya. Please go ahead.

Catalina Araya

Thank you, Diego for taking my questions. You mentioned earlier that you expect some improvements in efficiency. So I just want to know if you can share your expectations in terms of cost growth, and also what strategies are you taking to improve or reduce expense growth. And then my second question related to the cost of risk, how do you see it evolving given some –- the duration in unemployment and the consumer segment. So how should we think about cost of risk?

Diego Solano

Okay, cost growth has been relevant for us throughout the history of Grupo Aval. It's particularly relevant in these kind of cycles. What we are seeing as -- so try to summarize. Net interest margin expanding, like increasing cost of risk, pressure on the cost side or the per-unit cost item that we've had have 7% increasing the minimum wages. And we also have some increase in the costs that are dollar-denominated, such as technology. We have other factors also coming in, but given that we were going to have pressure on the cost of risk side and slower growth, it's absolutely key to try to reduce the number of units to save in some manner that are being spent.

We see opportunities in this slower-growth environment to be much tighter. And cost growth, we've asked our banks. Even thought their budgets points to a given cost growth to revise those numbers, and adjust them down where possible. The other hand, we have the Central American operation, where a substantial or a huge potential for efficiency beyond exists. When you look into that operation, that operation has lower productivity standards from the sales side than what we have in Colombia, and is growing at a quite fast pace. Therefore it's a proper environment to try to restrict cost growth, and allow the bank to grow. We've been able to reduce the growth initially expected in our payrolls -- in the size of our headcounts rather than payrolls. And continue to look at in that front.

Then, the dollar side has been more positive this year than what before. We've actually had some appreciation there. Even though we can't count on this for the full year nor base our performance of these kind of externalities. We see it as a better environment to deal with that.

In addition to headcount, we've come to an exercise of prioritizing projects. This is happening not only in Central America, but also in Colombia. Some of our banks have already reduced the pace at which some of the projects were being done, and we've moved into a discipline where things that have been projects are reviewed before being spent against.

All in all, we believe that this is a year where we should be able to recover what was lost last year. This will imply a strict commitment, a very strict commitment to cost control, and then longer terms just to be review our view for several years to come, mobile banking is increasing to be relevant, and then our integration from the operational side continues silently, but steadily to allow us to get some efficiencies, to try to make it quantitative what our target is to be able to recover what was lost in 2015.

Now, regarding cost of risk -- in cost of risk, we expect to see moving up around 10 to 15 basis points plus unexpecteds, therefore it could be something between 10 to 20 basis points, let's say, to give you a range to try to include those. We expect to see this coming more from the retail side, and this rather than the numbers we're pointing to this magnitude of an increase in cost of risk comes from the analytics that we've done and how we see a consumer demand and disposable income has been pressed during the year. We have Diego Rodriguez, our CRO here, who might also add something to the cost of risk and the delinquency part.

Diego Rodriguez

Yes, good morning. What we also have seen is that the Colombian -- thinking of the commercial banking sector, they have faced the brunt of the devaluation during 2015, and sectors such as, say, it depends on imports, such as textiles, car sales have already adjusted -- we've seen those companies have adjusted their business to maintain the profitability, and to -- we have not seen major deterioration in that sense.

What we do expect to see in 2016 is that the benefits of devaluation maybe come to materialize. We've seen the textile sector companies substituting imports and starting to produce. So you know, we don't foresee any major deterioration of the loan portfolio in 2016, because we think our commercial banking clients have already faced the brunt of the devaluation and now they've begun to do benefit from expects [ph]. And we've also identified those sectors such as oil, such as coal, those commodities which have been in -- the prices have been going down. We have identified which may be the company that are more exposed, say, for example, in terms of oil we really needed a Colombian oil company. We do have an exposure to Pacific Rubiales that's already -- they're fully identified, and we've already begun to provision -- budget into the banks, the cost of that duration in terms of coal which is also you know, Colombia is a big exporter, but our exposure to coal is very low. We do have very large lines of credits to companies like Glencore, BHP Billiton, Dormont, they are not being utilized and we have them on watch, so that if any unforeseen optimizations come up, our senior management will be on top of that. So in essence, we have our loan portfolio pretty much identified, vis-à-vis, and -- but we don't expect any surprises during 2016.


And from Citibank, we have Nicolas Riva. Please go ahead, sir.

Nicolas Riva

Yes. Thanks Diego for taking my question. So I wanted to ask you -- I saw that your loan loss provisions increased in the fourth quarter, despite the [indiscernible] ratio being flat quarter-on-quarter; I wanted to ask you if you included any amount of loan loss provisions for the construction company, Conalvias, in the fourth quarter? And also if your guidance of an increase to 10 to 15 basis points in the cost of risk this year includes any additional loan loss provisions for Conalvias this year?

And then my second question is on Central America, if you can disclose the ROE that you made in Central America in 2015 and also the guidance for the ROE in Central America this year. Thanks.

Diego Solano

Yes. Regarding Conalvias, we had a very small exposure to Conalvias. I will let Diego add to that, but it is included in our guidance, the Conalvias provisions. Some of that happened last year and a small piece this year. Diego, I know you want to add on the magnitude.

Diego Rodriguez

Yes. Our exposure to Conalvias to all other companies is about COP110,000 billion compared to total exposure of over COP700,000 billion. We have a provision of around 15% last year, and there is a budget to provision probably another up 30%-40%. On the positive side, we're very close to get in an agreement with the company and it's not -- we had initially expected to be a more serious situation. It's not going to be that. We need some arrangements to pay part of the loans with assets and to refinance what's remaining -- we see operationally the operation actually much better than we expected before. So on Conalvias, we've identified it with the provisions, but we don't expect any surprises there either.

Diego Solano

Yes. The exposure was always only around $40 million. So it's unsubstantial compared to the size of our portfolio. Now, moving to your question on Central America; Central America ratios are quite strong. The return on assets on Central America for the quarter was up close to 2%, and from 12 months was something short of that, something around 1.8% to 1.9%. And I have the precise number here, but that's basically the range where we moved.

Regarding return on equity, it's kind of tricky because in the past few years we haven't paid cash dividends out of Central America, but we've seen retaining a substantial amount -- or creating a substantial amount of equity. With that, our return in Central America should be somewhere in the mid-teens area -- short of the mid-teens, something around 14% approximately. If we have been taking out dividends, the return on equity in Central America would be in the high-teens area.

Tatiana Uribe

Yes, just to add to Diego, our ratio of -- our accounting ratio of equity swap is about 13%. So we still support 15%. So, as Diego is pointing out, rather than targeting the ROE, we should focus on the ROA of that, and this year we expect at least to maintain the ratios that we had for [technical difficulty].


[Indiscernible] we have Maria [indiscernible]. Please go ahead. Hi, Maria, you maybe on mute, so please unmute yourself.

Diego Solano

I think we lost her.


From Scotiabank, we have Jason Mollin. Please go ahead, sir.

Jason Mollin

Hello, everyone. Thanks for the opportunity to ask the question. On your NIM, your NIM on loans was stable quarter-on-quarter. We saw -- yet we saw the net fixed income margin increase a 170 basis points at a 2.3% in the quarter from 0.6, and you showed that the yield, the average yield on fixed income investments increased a 190 basis points quarter-on-quarter. Can you talk about the breakdown of your fixed income investment portfolio, and what explained this increase in yields and if this is a new -- a more sustainable level or we should go back to where your -- the yields you were generating before?

Diego Solano

Well, Jason, something that we've mentioned was that third quarter of last year is actually the outlier. The guidance that we had given with some negative bias on the overall interest rate environment was that full year net interest margin and fixed income would have been something between 1.5% and 2%. We ended up with index range for the full year, and that was a combination of quite bad quarter -- quite bad third quarter, and in fourth quarter we had some recovery, but that didn't last, but it wasn't really an extraordinary quarter.

If we're to think what were to expect net interest margin and investments to be, this number should be within that range for this year, it should continue to be somewhere between 1.5% to 2%, and it will depend mainly on two things. One, the fixed income market has been hurt somehow by a higher long-term inflation expectation in Colombia. The Central Bank has lost at this point some credibility, being able to return into the 2% to 4% range seems unlikely at least in the near-future, meaning this year, and at least part of next year. Therefore, building that into fixed income is a negative.

On the other side, on the other hand, what will also affect the performance of the Colombian fixed income market as will affect the performance of all fixed income markets and emerging markets will be what happens with the U.S. dollar interest rates. We have a more negative view several months ago. We actually thought that the NIM on investments could be in the low-ones, if the U.S. rates started to increase as was expected, let's say, three months ago. With a milder or a slower increase in interest rates in the U.S. going back into something in the lines of 1.5% to 2% should be expected.


From Wells Fargo, we have Mayara Sa Riddlebaugh. Please go ahead.

Mayara Sa Riddlebaugh

Hi. Thank you. You mentioned on the non-deposit to non-loan ratio, the negative impact from the Cuenta Unica Nacional. Can you give us an idea of the magnitude of the impact in your deposits, and which one of your banks was mostly affected?

Diego Solano

Okay. I am sorry not to be able to give you a number, because I am not familiar with the amount that has moved into Cuenta Unica Nacional. However, what we are seeing is most of the impact of that shift in the structural market is already reflected in the liquidity structure over the past few months. We saw a very strong impact during September. It was a combination of the Cuenta Unica that what it does is a -- it forces government entities to take their money to certain accounts and not throughout their whole system. A rough order of magnitude just not to be -- too loose on my answer will be something short of -- something around $1.5 billion to $2 billion could be the order of magnitude of what was shifted due to the Cuenta Unica Nacional, but this is a very rough number.

Anyway, what we have seen over the past months is more stability in liquidity. So it seems, even though it's early to know how things will end up evolving, but it seems that the impact was a one-time effect. It was like a step effect, and now we are moving in a different equilibrium. What actual bank such as ours is that we have the largest branch network in the country, so you are basically back to basics; when you're doing banking being able to secure retail deposits and being able to do that is reported by a branch network becomes relevant. A year ago, where liquidity appear to be infinite because of the amount of liquidity flowing into emerging markets, it became cheaper to have a guy sitting by a phone in a treasury desk and being able to raise huge amounts of money without having to go to the network.

So we believe that part of the reason why we've been able to fair better than some of our peers on the deposit to loan side is because we had never given away the relevance of being able to secure retail deposits and use our branches to do that.


From [indiscernible], please go ahead.

Unidentified Analyst

Hello. Thank you. Maybe earlier you didn't hear me, but my question is regarding both the solvency ratio, what are your short-term plans for facing the situation and taking to account that some of the rating companies downgraded the company's ratings? Thank you.

Diego Solano

Maria, I think I already addressed that question. We are in the process of reviewing what are we going to do and what the targets are. Therefore at this time I will not be able to answer that. What we mentioned was this will be something that we will deal with on our next call. In this process, we're also talking to the rating agencies probably because of the rating agency reports particularly to Moody's. And we're going through explaining the different complexities of our accounting to get the rating agencies to better understand that -- to give you a flavor of that.

Part of what has affected our numbers has been that if under IFRS some accounts that were not reported as intangibles are now reported as intangibles. A couple of examples of that are pretty substantial, because they had up around $2.8 billion as a whole -- COP2 billion, I'm sorry; as a whole, close to a billion dollars, is -- for road constructions, and gas pipelines constructions that used to be accounted for as deferred assets in the past or ordinary assets are now moved into intangibles. An additional complexity on that is that happens at Corficolombiana subsidiary level, and we have a very large minority interest in those intangibles. Our minority interests in those intangibles could be around 80% value of those intangibles. This is just an example of the kind of discussions that we're having with the rating agencies to give them a flavor to better understand our numbers as compared to those of other banks.

On the other hand, we do recognize this as something that we not only have to put our eye on, but also act up on, and that's why I mentioned before, we're carefully studying what we should do there. And once we make a decision, we will be able to convey it to the rating agencies and the market as a whole, and put ourselves and trying to deliver on whatever we plan to do.

Sorry to give you a very long answer to a question I had already answered before, but I think it's a relevant point.


This concludes the question-and-answer session for today. I will turn the call back over to Mr. Diego Solano for closing remarks.

Diego Solano

Well, thank you very much for attending our call, and looking forward to see you on our next call.


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

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