Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) Q1 2021 Earnings Conference Call May 20, 2021 10:00 AM ET
Luis Carlos Sarmiento Gutiérrez - Chief Executive Officer
Diego Solano Saravia - Chief Financial Officer
Conference Call Participants
Jason Mollin - Scotiabank
Judy Fernandez - JPMorgan
Brian Flores - Citi
Carlos Gomez - HSBC
Julián Ausique - Davivienda Corredores
Sebastian Gallego - Credicorp Capital
Andres Soto - Santander
Welcome to Grupo Aval's First Quarter 2021 Consolidated Results Conference Call. My name is [Hilda] and I will your operator for today’s call.
Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities in Colombia and in the United States. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation. Grupo Aval is also subject to the inspection and supervision of the Superintendency of Finance as holding company of the Aval financial conglomerate.
The consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB. Details of the calculations of non-GAAP measures such as ROAA and ROAE, among others, are explained where required in this report. This report includes forward-looking statements.
In some cases, you can identify these forward-looking statements by words such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential, or continue, or the negative of these and other comparable words. Actual results and events may differ materially from those anticipated herein as a consequence of changes in general, economic, and business conditions, changes in interest and currency rates and other risks described from time-to-time in our filings with the Registro Nacional de Valores y Emisores and the SEC.
Recipients of this document are responsible for the assessment and the use of the information provided herein. Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update or correct the information provided in this report, including any forward-looking statements, and do not intend to provide any update for such material developments prior to our next earnings report.
The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. When applicable, in this document we refer to billions as thousands of millions. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session.
I will now turn the call over to Mr. Luis Carlos Sarmiento Gutiérrez, Chief Executive Officer. Mr. Sarmiento Gutiérrez, you may begin.
Luis Carlos Sarmiento Gutiérrez
Good morning and thank you all for joining our first quarter 2021 conference call. I trust that all of you and your families are keeping healthy. This is with great pride in our company and its employees that I will share with you our strong financial results for the quarter that ended on March 31. As I usually do, I will refer to the situation of economies of the countries in which we operate. I will provide an update on the status of our clients, loan reliefs, and our digitalization program, and I will refer to the main reasons for our financial results.
Let's start with a view of the macro scenario during the quarter. To begin, I would venture to say that for the first time since the pandemic began over a year ago, the global outlook has become more favorable. In fact, the United States has set an example of efficacy in the mass production of the COVID-19 vaccine, in the inoculation of its citizens and citizens of many other parts of the world and in the distribution of the vaccine to other countries. This has without a doubt played a crucial role in the economic recovery of the USA, and has set in motion economic recoveries of many other countries and sectors.
To be sure, COVID-19 continues to claim life, especially in some emerging countries where the third wave of the virus has hit strong, as has been the case in India or Brazil. The threat is not over by any means, but hope has advanced exponentially in a short period of time. In Columbia, the year got off to a slow start associated to a second wave of contagions in January that resulted in new mobility restrictions and lockdowns.
However, economic activity picked up significantly during February and continued through March as evidenced by a strong pickup in industrial production and retail sales as quarantines were lifted. The beginning of the vaccination campaign on February 17 and the decline in the number of infections during the first few months of the year also contributed to an overall positive sentiment.
Vaccinations continue in full force at a slower pace than most of us would like, but much better than in peer countries. As a result, on a seasonally adjusted basis, during the first quarter of this year, the economy grew 2% positively surprising the market consensus that expected a contraction for the quarter. This growth converse favorably to the contractions of 15.6%, 8.2%, and 3.4% recorded during the second, third, and fourth quarters of 2020.
Examining the quarter’s performance from the supply side, 8 of the 12 sectors represented 61% of GDP expanded. The most dynamic relevant sectors were manufacturing that grew 8.4%, financial services that grew 4.8%, government services that grew 3.6% and agriculture that grew 3.4%. The remaining sectors contracted with mining falling 4.6%, construction 5.3%, utility services 1.3%, and commercial activities 0.7%.
From the demand side, total consumption increased 1.6% and investment grew 1.0%. Consumption growth was driven by a 5.1% increase in government spending and a [1% increase] in household consumption. Unfortunately, we're now dealing concurrently with a new wave of contagions albeit with much milder mobility restrictions and with social unrest, which temporarily will dampen a stronger rebound of domestic demand and overall activity.
Demonstrations were triggered by the proposal by the government of a fiscal reform, but have continued even after the government withdrew its proposal followed by the resignation of the Ministry of Finance. Active negotiations are being carried as we speak between the government and the promoters of the demonstrations. In any case, for the rest of the year, we anticipate further improvement in economic activity supported by stronger business sentiment, increased consumer spending and a favorable external backdrop.
We have cautiously improved our estimate of the country's GDP growth, and we now believe that it might be as high as 5.5% in 2021. The Central Bank recently raised its growth rate forecast to 6% from 5.2%, while market consensus has increased to close to 5%. We continue to expect the widening of the current account deficit to 3.5% of GDP by year's end, up from the 3.3% of GDP observed at the end of 2020, mostly driven by a larger trade deficit with an increase in imports driven by domestic demand somewhat attenuated by better oil prices.
Regarding the exchange rate, we expect a return to the 3,600 pesos per dollar level in the next few months after over shooting up to 3,800 visitors per dollar surrounding the uncertainty of a tax reform, the social protests, and more generally, the country's fiscal outlook. As of April, 12-month inflation stood at 1.95%, up from 1.51% a month earlier. In fact, the monthly inflation figure for April was 0.59% well above the market consensus of 0.34%.
The largest contribution to April's inflation came from food, non-alcoholic beverages, and housing costs. Going forward, we expect headline inflation to continue to trend up, driven by a statistical base effect by a pass-through of higher commodity prices, and by a short lived effect of price increases in transportation associated to the ongoing demonstrations.
We anticipate the 12-month inflation should reach the 3% area by year’s end. [Well anchored medium-term] expectations should give the Central Bank enough room to continue with its current expansionary monetary policy. We expect little action in terms of monetary policy at least until the fourth quarter so the repo rate is likely to remain flat for now at its current level of 1.75%.
We continue to anticipate a 200 basis points to 300 basis points improvement in the labor markets during 2021, after 557 basis points deterioration of the average total national unemployment during 2020 to 16.1%. However, during the first quarter, the second wave of infections slowed down the recovery of jobs, and as a result, national unemployment ended the quarter at 14.2%, a 155 basis points worse than the 12.6% reported 12-months earlier. However, 720 basis points lower than the peak of 20.4% recorded in May 2020.
On the fiscal front, Columbia has been no exception as the countries have had to wage battle against the pandemic with more aggressive subsidy programs, increased spending in the health system, in national vaccination program, and different stimulus programs to jumpstart the economy. As a result, after reaching a fiscal deficit of 7.8% of GDP for 2020, the government expects the fiscal deficit for 2021 to approximate 8.6% of GDP.
The [failed tax reforms] sought to collect 23 trillion pesos or 2% of GDP in order to correct the ongoing upward trend of public debt. Consequently, the government is currently working on a new draft of the tax bill with a lower tax revenue target, which should help it gain support in Congress.
Moving on to Central America, according to the IMF, the region's economy contracted 7.2% in 2020 and should recover to a positive 5.6% during 2021. As you know, Central America greatly benefits from the recovery of the U.S. economy, as certain Central American countries are materially dependent on cash remittances incoming from the United States.
After contracting a whopping 17.9% during 2020, the IMF now expects Panama to rebound to a positive 12% in 2021, as it should be favored by increased usage of the Panama Canal at International Trade Rebounds, and by an aggressive vaccination program. GDP for El Salvador and Honduras contracted 8.6% and 8% respectively during 2020. For 2021, the IMF expects GDP to grow 4.5% in Honduras and 4.2% in El Salvador, driven by stronger remittances, in line with a recovery of the U.S. economy and by a recovery in their exports.
Costa Rica’s GDP contracted 4.8% in 2020, impacted by a decrease in external demand for services, mainly tourism. The IMF expects GDP to grow 2.6% in Costa Rica during 2021. Guatemala’s GDP contracted to 1.5% in 2020. Its economy is expected to grow 4.5% during 2021 according to the IMF. As in the case of El Salvador and Honduras, remittances should be a key driver in 2021.
Finally, [Panama’s] GDP contracted 3% during 2020. The IMF now expects its GDP to grow 0.2% during 2021 as construction, transportation, and the financial sector recover, while the recovery of sectors related with tourism lag behind. Regarding the status of our loan relief programs, as of March, we had active release representing approximately 11.8% of our total consolidated loan portfolio or approximately 24.7 trillion pesos in loans.
In Colombia, payment holidays are almost over. As of March 31, active reliefs amounted to 7.9 trillion pesos or 5.9% of the Columbia loan portfolio, including 7.3 trillion in structural agreements. In Central America reliefs amounted to 16.8 trillion basis, representing 22% of the region's portfolio driven by Panama, which amounted to more than half of the region's active reliefs.
Of all loans that have concluded the relief periods in both geographies 3.7% are currently past due 90 days or more, representing 1% of our total consolidated loan portfolio. And those currently past due 30 days or more represent 1.7% of our total consolidated loan portfolio. Our cost of risk reflects our estimation of losses related to the complete unwind of these relief programs.
Let's move on to the results of our digital strategy. Our active digital clients grew almost 30% from 4 million at the end of March 2020 to approximately 5.2 million on March 31, 2021. We have continued to add digital products to offer. In fact, in the 12-months ending March 31, we increased the number of digital products offered by our banks by 45%. Our banks sold 532,000 products in the first quarter of 2021.
In addition, during the first quarter of 2021 of the total value of monetary transactions conducted through all our channels, almost 70% was transacted through our digital channels, up 54% in the first quarter of 2020. Conversely, our branch network decreased its share of monetary transactions during the quarter and now represent only 26% of total amounts transacted, down from 43% in the first quarter of 2020.
Finally, regarding our financial results, Diego will refer next in detail to our financial performance during the first quarter of 2021. However, I would highlight the following. We are encouraged, albeit cautiously by our strong financial performance during this first quarter. All-in-all, we see headwinds and tailwinds, but believe that perhaps the tailwinds are stronger than those against us.
Some of the tailwinds that we see are an improving economy, a resilient loan portfolio, and as a result, customer risk at levels better than expected a cost containment program that is yielding good results because of digital initiatives to streamline our operating processes and from a company-wide efficiency and cost reduction culture, a decided effort by Corficolombiana to keep developing into its infrastructure programs, including its toll roads, airport concessions, agro-industrial initiatives, and gas transportation and distribution businesses, while minimizing the damage due to the pandemic to its hotel business, and a faster than expected recovery of the bank's revenues from fees, which will be more evident as the year progresses.
There are however, headwinds that keep us alert. Among the most important, we are keeping a close eye on the current demonstrations of social unrest, and their possible repercussions, and on the animosity against the financial system expressed during the first few days of the marches. Although in all candor, these expressions sometimes violent against banks have subsided. We're also vigilant of the current wave of contagions and the elevated number of daily deaths, and therefore hope that the vaccination program keeps gaining speed.
And finally, we are expected to have a tax reform that will be eventually presented to Congress and especially have any specific provisions that it might contain affecting the financial system. I'm sure that these and other similar subjects will come up in future calls later this year. In the meantime, I thank you for your attention.
And now, I'll pass on the presentation to Diego, who will explain in detail our business results and provide further guidance for 2021. Thank you very much.
Diego Solano Saravia
Thank you, Luis Carlos. I will now move to our consolidated results of Grupo Aval under IFRS. Starting on Page 9, even though not yet back to historic levels, volume growth are increasingly gaining momentum. Our assets grew 4.3% over the quarter. With this result, we accumulate a 5.1% year-on-year growth. As mentioned over the last three calls, on May last year, we completed the acquisition of MSG contributing to our 12-month growth. Excluding this effect and that of FX movements of our Central American operations, total assets grew 2.8% year-on-year.
Colombian assets grew 2.7% during the quarter and 0.3% year-on-year, while Central American assets recorded a 0.3% quarterly growth in direct turns and 0.7% year-on-year growth. MFG contributed with a 10 percentage points to the annual growth of Central America. Our [quarterly depreciation] of 7.2 and a 12-month appreciation of 9.2% [did] quarterly and annual growth in pesos of Central America to 7.5% and 15.2%. The share of Central America of our book increased slightly during the quarter to 36%.
Moving to Page 10, loan growth is aggressively recovering, mainly driven by a substantial performance of high quality retail lending products and [people's update] information on loan growth in Colombia. Loans grew 3.8% over the quarter, reaching a 4.4% increase year-on-year. Excluding the acquisition of MFG and FX movements of our Central American operations, consolidated loans grew 1.4% over the quarter, the acquisition of MFG contributed with 6.3% of 12-month consolidated growth in special terms.
Colombian gross loan portfolio increased 1.7% during the quarter, driven by the strong growth of our retail portfolio and an improvement in the dynamics of our commercial portfolio. 12-month low was 1.5%. Demand for consumer loans remains strong in Colombia resulting in a 2.7% increase in the quarter, and 8.1% year-on-year. Competition remains high, particularly on payroll lending.
Payroll lending, that accounts for 60% of our Columbian consumer portfolio grew 5.7% over the quarter. Mortgages remain dynamic in Colombia expanding 2.6% over the quarter, and 10.9% year-on-year. Auto financing that accounts for 7% grew 0.6% over the quarter. In contrast, as has happened over the pandemic, credit cards and personal loans remained soft contracting systems 9% and 1% respectively during the quarter. These products account for 12% and 20% of our Colombian consumer portfolio.
Colombian corporate portfolio slightly recovered its dynamic growing 1% during this quarter, after two consecutive periods of contraction. Cumulative 12-month growth was negative at minus 2.8% with a high comparison base a year ago.
Moving to Central America, our gross loan portfolio increased 0.7% over the quarter and 21% year-on-year in dollar terms. MFG contributed 20 percentage points to a year-on-year growth. Quarterly performance resulted from a 1% growth of commercial loans and a 1.2% growth of mortgages. Consumer loans contracted by 0.2% over the quarter after a seasonally high fourth quarter. This performance was driven by a 0.9% or a 1% growth in payroll and other lending, respectively, and by a 1.4% contraction in credit cards.
We expect commercial loan growth to continue recovering as economic activity and business confidence improves throughout the year. In the retail lending plant, we expect an improvement in employment [up our outlook] will allow our banks to increase their risk appetites in products that were de-emphasized during the shock. In spite of our year-end view, we may face temporary acceleration in the speed of recovery during the second quarter associated with the reduction of the normal operation of some of our customers from April and May due to strikes and a new wave of COVID related mobility restrictions.
On Pages 11 and 12, we present several loan portfolio quality ratios. The COVID-19 credit juncture continued unwinding during the first quarter. In the first phase of the pandemic last year, we put provisions ahead of [indiscernible] in-line with our view on future deterioration, looking beyond those versions introduced by loan reliefs. The second phase actually delinquencies which we already began to provision during the first phase materialize once reliefs expire.
This unwind has evolved primarily for our banks up to date or whether we're still cautious given that upper portion of release remains on the payment holidays, particularly in Central America, and that sanitary challenges are not left behind. As of March 31, we had 4.8% of our gross loans and the payment holidays, 230 basis points lower than last quarter and [7%] under structural [payment programs] [indiscernible] basis points higher than that quarter. Together, these account [were 11.8%] of our loan portfolio.
At the same day, 6.8% of loans that have returned to active pay lease schedules regarding the past have benefited either [indiscernible] holidays were restructured that has been more than [30 days]. They represent 1.7% of gross loans. While those numbers are 3.7% and 1% for loans has been more than 90-day.
Payment holidays in Colombia are substantially over, down to 0.4% of gross loans. In addition, 5.5% of our gross loans were under structural payment problems, together [we were at 25.9%] of our loan portfolio. In Central America, payment holidays have extended longer accounting for 12.4% of gross loans, with Panama extending close to 90% of [its peak]. In addition, 9.7% of those loans are under structural payments programs, together these two add to 22%.
Regarding delinquency metrics, on 30 and 90 day past due loans we signed during the quarter expanding by a PDL formation similar to [pre-COVID left], the ratio of charge-offs to average nine year APLs returned to its five year average. Charge-offs between 2020 were associated with lease problems. Our announced coverage of 30 days and 90 days PDLs slightly improved during the quarter.
Regarding PDL formation, 69% was sustained by retail products with a wide performance variation across products. [Personal loans] completed 24% to PDL combination despite representing only 5% of our gross loans. Similarly, credit cards contributed 26% to PDL affirmation while accounting for 8% of our gross loans. In contrast, payroll lending and mortgages [that weigh] 16% and 12% of our [12 loans] expand 11% and 4% of PDL formation respectively.
The quality of our loan portfolio on a 30-day PDL basis improved 14 basis points to 4.25% quarter-on-quarter, and 50 basis points to 3.41% on a 90 day PDL basis. Our 30 days and 90 day PDLs are now 59 basis points and 27 basis points higher than they were a year earlier. Competition our loan portfolio in terms of stages as measured by IFRS 9 remained relatively flat over the quarter with a slight increase in Stage 2 loans.
Cost of risk, net of recoveries was 2.2%, a 129 basis points lower than the 3.5% in the previous quarter and 70 basis points higher than a year earlier, within corporate a 187 basis points, and [84 basis points] improvement in retail and commercial lending respectively over the quarter. Quarterly cost of risk improved by 124 basis points in Columbia, and by 102 basis points in Central America.
In Columbia, cost of goods for retail loans improved 196 basis points and our commercial launch loans improved 114 basis points. In Central America, the cost of risk of our retail portfolio equals 129 basis points and in commercial loans the cost of risk improved 13 basis points.
On Page 13, represent funding and deposit evolution. Funding growth during the quarter continue to reflect the high liquidity environments. As a result, our deposits to net loans remain high, slightly increasing to 110% of our cash flow positive ratio ended the quarter at 15.8%. Funding structure maintain its concentration on deposits, which account for 78% of total funding.
Deposits increased 4.8% in the quarter and 9.3% year-on-year. Columbia grew 1.6% in the quarter and Central America grew 2.8% in dollar terms. With the 12-month period, Columbia grew 1.8% and Central America 36% in dollar terms. 17 percentage points of growth in Central America are explained by MFG.
On Page 14, we represent the evolution of our total capitalization, our affiliate shareholders equity, and the capital adequacy ratio of our banks. Our total equity grew 6.6% year-on-year, while our total equity increased 4.6%, mainly driven by earnings. We will inspire 1,203 billion pesos and our [724 billion pesos were declared to our shareholders and to our minority authorities, respectively during the quarter. This resulted in a contraction of 281 billion pesos in [our attributable equity], and [245 billion pesos] in [our total mix].
This is the first quarter in which we report our solvency ratios on the base of three. As anticipated, all of our banks increased their solvency ratios as compared to those on the previous regulation. Bear in mind that [March users] are seasonally low impacted by the dividend distributions of our banks.
On Page 15, represent our yield on loans, cost of funds, spreads, and net interest margin. NIM performance during the quarter was driven by a negative NIM on Investments and a slight decrease in NIM on loans. NIM on Investments was minus 0.4% during the quarter as a result of a global steepening of yield curves and market consensus on Columbia sovereign rate. This took place [indiscernible] portfolios measured at fair value. This was partially offset by gains in FX under [indiscernible] recognized under other income.
Net interest margin on loans contracted 8 basis points to 5.8% in the quarter, mainly due to a repricing pressures in net interest income as the yield and loan decreased 28 basis points to 8.4%, while cost of funds decreased 19 basis points to 2.4%. Our conservative liquidity management profit under current environment has implied [indiscernible] net interest margin, as  yield on loans and cost of funds contracted 11 basis points to 6%.
On Page 16, represent net fees and other income. Gross fee income increased 9% year-on-year and decreased 2.3% to a relatively high fourth quarter. Quarterly fees decreased 1.3% in Colombia and 1% in dollar terms in Central America. The year-on-year basis mostly increased 3% in Colombia and decreased 2.8% in Central America. Income from the non-financial sector impacts a strong performance, the infrastructure and energy and gas sectors. The structure sector that is the largest contributor to our non-financial income, with 24% over the quarter, mainly explained by construction in progress.
The energy and gas sector income increased as compared to a year earlier due to high distribution and transportation volumes. A quarterly decrease is explained by a high mark in third quarter 2020 associated with one-time [indiscernible] operations. Finally, our hospitality business remains underpinned by low occupancy rates during the pandemic.
The bottom of the page, the year-on-year increase in other income is explained by better performance in FX and derivatives, partially offsetting the negative performance of fair value investments described in [indiscernible] discussion. In addition, this quarter benefited from OCI realization, from fair value to OCI portfolios, and some dividends received from our unconsolidated equity investments.
On [Page 15], we present some efficiency ratios. All of our banks [are not our business] units continue to implementing cost contention and reduction initiatives during the quarter and capturing benefits from the de-compensation of core processes. Other expenses were materially unchanged with a slight increase of 0.2% year-on-year despite the acquisition of MFG and essential operations.
Excluding these effects our expense contracted 3.9% year-on-year. Our expenses decreased 8.8% over the quarter. As a result, cost to assets improved to 3.1%, down from 3.4% a year earlier. Cost to income improved to 44.7%, down from 37.1% a year earlier.
Columbian other expenses decreased by 2.1% year-on-year and 10.3% over the quarter. Central American expenses contracted 4.2% over the quarter and increased 2.7% year-on-year in dollar terms. Excluding MFG, Central American other expenses fell 6.4% year-on-year in dollar terms. Consolidated quarterly personnel expenses decreased 1.5% over the quarter and year-on-year. When excluding the effect of MFG and the effects of [indiscernible] consolidated personnel expenses decreased by 5.2% year-on-year.
Over the year, personal expenses [were 2.8%] in Colombia and 2.9% in dollar terms in Central America. Excluding MFG personal expenses were 10.6% year-on-year in dollar terms in Central America. Quarterly general and administrative expenses were 1.7% year-on-year and [12.1%] over the quarter. Year-on-year G&A expenses reduction, which – a [4.1%] decrease when excluding the effects of MFG and its expectations with reductions of 1.8% in Colombia, and 7.5% in dollar terms in Central America.
Finally, on Page 18 represent our net income and profitability ratios. Our attributable net income for first quarter of 2020 was 792 billion pesos or 35.5 pesos per share. This result was 24.7% and 13.1% higher than a quarter in a year earlier respectively. Return on average equity and return on average assets were 15.4% and 1.8% respectively.
I will summarize our guidance for 2021. We expect loan growth to be in the 9% to 10% guidance. Cost of goods to be between 2.3% and 2.4%. This to grow in-line with our loan portfolio. Expenses growth would be in the [4.5% area]. Return on average equity to be in the 13.5% area.
We are now available to address your questions.
Thank you. [Operator Instructions] We have a question from Jason Mollin from Scotiabank. Please go ahead.
Thank you. Hello, everyone. You mentioned, I mean, there's lots of uncertainty in the region in Colombia specifically, but everywhere it seems these days. One question I haven't asked in a while is about what you typically refer to, and I think the market does is the double leverage at the group level. And the debt at the group level is serviced with; I believe the majority interest income on loans with subsidiaries in cash and cash equivalents. So, I just wanted to start, we started to pick up tiny, tiny dip in the quarter and a little bit more year-on-year, if you can talk about that strategy. From our perspective, we like the return it gives to the shareholders as long as things go okay. So, I just wanted to hear about your views on that strategy. Any change, should we expect the move up to reverse itself? You feel comfortable here? And other comments on this would be helpful. Thank you.
Luis Carlos Sarmiento Gutiérrez
All right, Jason. Let me take the first part of your question, and Diego will take the double leverage part of it. As far as the debt at the holding company, we have kept the debt down to two strategies, if you will. And on the pesos side, we've kept the debt constant for the last maybe three years or so. And that debt in pesos is composed of some peso denominated bonds and on some bank financing. And because we distributed in cash dividends, in equal amount to the cash dividends that we receive at Grupo Aval then there hasn't been any necessity to increase the peso denominated debt.
As far as dollar denominated debt, we have two bond issues outstanding, each one for a billion dollars. The first one is coming due in 2022. And we, our intention is to pay that one. And then the second one is coming due in the year 2030. Both issues are, as I said, they add up to about $2 billion, and the monies that we received as a result of those two bond issues we have [un lend] them to our own entities.
Those of our entities, subsidiaries of our [indiscernible] subsidiaries, of subsidiaries of Grupo Aval that one, can't get financing in the capital markets because of their sizes; or two, if they could get financing it would be more expensive that the financing that Aval could borrow the money for or a three that they – the size of the financing they need is not material enough to issue a bond in the capital markets.
So, what we do is, we take that financing in Aval and then we [un lend] it to those entities at rates that are equal or superior to the ones that we borrow at in Aval. Therefore creating a positive spread, and guaranteeing that Aval will always have the liquidity to pay the coupons. And then when the bonds come due, we make sure that those entities, in turn, have the ability to pay down the loans that they receive from Aval. In order for Aval to have the liquidity when the bonds come due, which is, for example, what we're going to do with a 2022 maturity.
By that time, we will have received the billion dollars, and we will pay that one down, and then our total debt will drop by a billion dollars early next year. I think it's February when it comes to – no, sorry, that was the first one, September, September is when it comes due next year. So that's the strategy at the Aval level and that's what we've shared with our bondholders.
And so as you can see, we keep just to summarize, and to finish, in terms of pesos, we pay cash dividends equal to the cash dividends that we receive, so that we never have a cash shortage in pesos. And in terms of dollars, the dollars that we take in, we lend to our own entities and then collect them so that we can pay down our own debt. That's as far as the debt strategy and then about double leverage, Diego will give you an idea.
Diego Solano Saravia
Regarding a double leverage Jason, what we've been doing over time, has been basically maintaining our double leverage table. What increased our double leverage last year was the issuance by Central America and the acquisition by Grupo Aval Limited and a Q1 bond that is dollar denominated. That [indiscernible] slightly up our double leverage asset point and the projection based on organic growth or organic generation of equity for net income was that we should be seeing that number falling down in time.
Particularly when you look at the first quarter given that this  is dollar denominated and our equity is peso denominated you have a slight increase in double leverage. So that's the explanation. But from the strategic standpoint, we continue seeing exactly what we saw in the past. And basically it says that we should be seeing that number trending down as the retained earnings increase our equity. I just want to reiterate on what Luis Carlos mentioned before, this from the our ability to pay the bonds – the way we pay our bonds that are dollar denominated is based on dollar denominated interest earning assets.
What we do is, we have a Grupo Aval limited level, we have these two bonds that Luis Carlos mentioned. And most of that is backed by dollar denominated assets that are mainly either deposits or loans from our own entity. At this point, we actually have a positive carrier for it's not only from the principal standpoint, but also from the interest service side that a Grupo Aval somehow is self sufficient. Therefore, up to date, since we began issuing bonds in 2012, there has been no need to send a single peso from Columbia to Grupo Aval limited based on the dividends that we received to be able to service our bonds.
Thank you. Our next question comes from Judy Fernandez from JPMorgan.
Thank you, Luis Carlos, Diego. I have a first question regarding asset quality; I guess you likely revised the cost of risk guidance, right? Like this was about 2.5. Now you are saying 2.3, 2.4, the results they were very good in the fist Q, regarding asset quality, but my question is, how should we think about this because we still see a lot of uncertainty in Colombia. Those protests that 20% plus of loans in Central America is being rescued, so, is 2.3, 2.4, like not much higher than previous levels for this crisis, like what could be the negative surprises here like maybe I don't know like mass transportation companies like some big corporations hitting the [tape], my question is basically, you know, like how confident you are with those levels? And if we could not see a negative surprise? That's the first one. And my second question is regarding the S&P downgrade. It's pretty clear like the effects the rate impact, but should we expect any kind of more direct impact for the company or it's mostly indirect macro related effects for Grupo Aval? Thank you.
Diego Solano Saravia
Okay. Well I will start with your last question first. There has already been a decision from S&P, basically, to maintain [indiscernible] rating stable, and that would be the direct effect that you might worry about. So, short answer is, we will have macro indirect effects because the direct effects have already geared us up this time. Then, regarding a cost of risk, I think the way to think about cost of risk at this point is, we had already guided in for cost of risk that was to a period and what a standard cost of risk for Aval would be. Aval should be running a 2% or lower cost of risk under normal circumstances or whether [indiscernible] guidance, we already had a lot of these possible down site that you might have seen materializing.
However, what we're seeing from the macro standpoint is the [indiscernible] project we had this year and actually a milder, but also positive surprise on how we closed 2020 are giving us a better environment in which to face this kind of potential downgrades than what we had included in our expectations when we guided at the very beginning. So yes, you're absolutely right. We're facing these headwinds that actually we started mentioning some of those in introductory words. But we're starting from a higher ground to face those as what we were thinking in the past. That's the reason why we're improving our view on cost of risk.
Thank you. Our next question comes from Brian Flores from Citi.
Hi, thank you for the opportunity to ask questions. Some follow ups on asset quality, particularly regarding charge-offs, because we have seen them increasing as a percentage of gross loans. So, could you elaborate a bit on where particular segments are these focused on? And should we expect these days to continue? That is my first question. And my second one is, if you could remind us of your coverage of Avianca and if it has somehow evolved over the last quarters? Thank you.
Diego Solano Saravia
Okay. Avianca remains, as was said in our last call. Avianca is slightly above [$188 million]. And we provision that at 45%, that's the coverage. The reason why that coverage seems reasonable is around 73%. Those loans are backed by receivables, international receivables, and the 20% remaining or most of the remaining parts that is 20% is backed by the headquarters buildings in Bogota. So that's the reason why we believe that's the right number and that should be representative of where we stay at.
Regarding charge-offs, yes, relative to the numbers you saw last year, these numbers are higher. However, if you strip out this quarter and take a five year average, you'll come up 2.75 times. And that's the number that we have been running over the past five years. And that includes last year that was actually a loan number. But I think perhaps is why was that a low number and the reason is, we've really, mechanically loans never get past due. Therefore charge-offs get delayed as the numbers that are actually up the cycle are those that we saw last year. 75.8 is the kind of numbers you should expect.
Thank you. Our next question comes from Carlos Gomez from HSBC.
Yes. Thank you very much. You may have already commented on that. I missed the early part of the call. What are your prospects in terms of your tax rate and was possible tax reform can come out from the current discussion? And then longer term, we notice how Central America becomes a bigger and bigger portion of your business, is now actually bigger than the domestic part of Banco de Bogotá. So, I was wondering if in the long run, does it make sense for the Central American business to continue to be up Bogotá or could you put it directly at the Aval holding company level, and that might actually improve the ratios for Bogotá? Thank you.
Diego Solano Saravia
Regarding tax rates, the way to think about it is we have a blended rate between what we have in Colombia that includes actually, at this point, a surcharge to taxes plus what we get from Central America, and that number is somewhere between 28% and 30% when you get that [indiscernible] number, Moving forward, at this point it is very tough to forecast what to look into and basically, we're facing three different scenarios. And I'm sorry, perhaps to be so quantitative here. But there's a scenario that was the base case in the past and it was reduction of our tax rates.
I would say the probability of that has substantially fallen. Then something that looks relatively feasible than it is to maintain the same kinds of levels that actually increase – implies a 4 percentage point increase to what we should be paying, and that's to remain at the current level. And then there is a downside scenario where we not only lose what we were expected to gain in this process, but also get further test. So, the only thing I can say at this point is that it is unlikely that taxes will fall as they would do, perhaps the most probable scenario at this point is that taxes should remain at the same level. And then there's also downsides that I can't quantify [indiscernible] at this point of increasing sales.
Luis Carlos Sarmiento Gutiérrez
I got to say, though, that conversation with government representatives have all resulted in the government stating that they won't agree to an increase to be included in the tax reform that eventually they'll pass by Congress of an increase of taxes over and above those that were already paying in the financial system. But so at least we have that guarantee “we'll see what happens when it goes through Congress”. And regarding your second observation, it's a very good observation. And obviously, it's one that we also keep a very close eye on in regarding the size of BAC relative to the size of Banco de Bogotá. And so yes, we agree with you. We have to be very watchful of that and then decide what to do with that.
Thank you. Our next question comes from Julián Ausique from Davivienda Corredores.
Hi, everyone. And thank you for having us for the question session. I will like to know if you can give us more color about the situation that is coming right now in Colombia, and if you have seen any impact, particularly in Banco de Occidente due to the exposition that this bank has today by the [indiscernible] budget? And if I don't know if you already mentioned because I had some connection problem, but the reduction in provision in quarterly terms was due to the restoration or the new model of expected losses like the macroeconomic outlook in each geography? Thank you.
Diego Solano Saravia
Let me take the cost of risk question first and then I’ll pass it to Luis Carlos for the situation question. No, absolutely not. The reason why the numbers fell is because actually we're seeing our numbers improve. And we mentioned that, actually, in the [indiscernible], as you said, regarding the reduction, or the expiration of a release in Colombia, we brought a release down to around 0.4% of our portfolio, and a substantial portion of those that have gone away haven't gone into a restructuring. So the numbers for Columbia are already telling us a lot of how the story will look like.
We mentioned that during the call that perhaps the difference of what we might be seeing compared to other players in the market is that there's a huge variation in PL formation depending on the product you're looking into. When you look at installment loans or a less degree credit cards, you could be seeing five to six times the Pl formation rates that you see in a payroll lending.
Given that payroll lending is a close to two-thirds of our Colombian portfolio and we benefit from having those that are running at around one-fifth, one-sixth of what you might be seeing in our portfolios. So, that's actually the reason why you see those numbers coming down. It is something else that we mentioned just to reiterate is the reason why we are not more bullish on what cost of risk looks like is that we still have [Technical Difficulty]
Please stand by, we're experiencing technical difficulties. Please stand by. We will resume shortly. Thank you for your patience. Mr. Sarmiento, you may resume.
Diego Solano Saravia
Okay. Could you help us where we dropped out? We were going to the answer on the question regarding why cost of risk was lower during the fourth quarter. Just to summarize, what we mentioned was there has been a substantial difference across products in the NPL, UPL formation. And we're seeing PDL UPL formation going back to numbers similar to pre-pandemic. And the reason for that is that very substantial portion, around two-thirds of our Columbian portfolio is payroll lending and payroll lending is generating around 20% of PDL formation in proportion to what you're getting off from more risky products such as installment loans, and credit cards.
So that's in summary, that the reason why we're seeing that, and we said we're not over optimistic at this point, given that there are still some reliefs that need to expire, particularly in Central America and in Central America in fact.
Luis Carlos Sarmiento Gutiérrez
Regarding your first observation, concerning the demonstrations at – in Valle del Cauca region, you're right, as you yourself have noticed, I'm sure the financial system was hit hardest in Cali specifically and were vandalism was probably the most during the beginning of the of the social unrest demonstrations, but it has fortunately subsided, number one. Secondly, all the banks were hit hard. It so happens that one of our banks Banco de Occidente, as you mentioned is headquarter in a Cali and as such, the headquarter building was also hit, the vandalism was perpetrated at the lobby level, but, you know, that's all material damages. And it's all fortunately covered by insurance.
Regarding the exposure of that bank to the Valle del Cauca debtors, one has to remember that the Banco de Occidente as the other bank of ours region, sorry, our National Bank and it's such it's exposure, its own exposure to the Valle del Cauca region is really not significant or materially larger than the exposure of all the other banks to the region. So, the difference really of Banco de Occidente with the other banks is that it's headquartered in Cali, but it's exposure is not really that much bigger to the Valle del Cauca region and as such, its portfolio will only be affected as much as portfolio of all the other financial system banks to the Valle del Cauca region, we expect we hope that will be the case.
Thank you. Our next question comes from Sebastian Gallego from Credicorp Capital.
Hi, good morning. Thanks for the presentation. I have three questions today. The first one, you provided the new numbers on capital ahead of the Basel III implementation. And I'm just wondering if you feel comfortable with the current position of onset one ratio on Banco de Bogotá particularly? It seems that it might be lower than other banks. And when you compared to a potential minimum requirement of 7%, and or a little bit higher, if you add some management buffer, it seems a little bit tight, particularly when compared to peers and when compared to other banks of Aval. So, I'm just wondering how comfortable you are with the actual CET1 ratio of Banco de Bogotá despite the improvement? The second question is on probably on growth and appetite, as you describe your strategy is focused on payroll and auto lending, but we have seen some better numbers on credit cards and the commercial portfolio on a quarterly basis. Do you have a high risk appetite as of now, both in Colombia and Central America? And the third question is probably an unusual one. But given the current trends in Colombia and the social tensions, I have to ask, or I would like to ask also, if, if you, Mr. Luis Carlos are currently active on the ongoing negotiations, helping the government or whether you are meeting with even with some other people just to get consensus on what we need to do as a country and putting together actual solutions as a country? Thank you very much.
Diego Solano Saravia
So, let me take the first couple questions regarding a core equity Tier 1. Yes, we feel comfortable with the performance and something that is actually helping the bank is that the return of equity of the bank is outperforming the return of equity of most of the system and substantially some of the larger banks. Therefore, it's getting an advantage in being able to generate – internally generate capital. In addition, from the quality standpoint, the bank did a very good job last year provisioning what we thought it could go sour from the pandemia. So, we see a less downside in capital consumption in that sense moving forward.
You're right, numbers are relative to others. We feel comfortable in absolute values. Perhaps the question for banks is why much higher number it might be required. Regarding our appetite, what our banks are actually doing is slowly migrating into a higher risk kind of products. You know that Aval has traditionally been a laggard running, jumping into changes however, we do look at numbers and numbers, as you said, even though they are evolving positively, there is still some down risk in some of the riskier products.
So, we've been shyer than others coming into the products. And we are in addition, being quite careful on pricing and loans. That is not as important for the consumer side, but on the corporate side, we're making sure that we're getting the right prices. So, part of what you might be seeing is not a risk aversion of not being ready to go into some of the corporate segments, but just that it's not cutting what are minimum expected returns for loans could look like. Having said so, even though we discussed many of the downsides of the economy were positive on how we see recovery trending throughout the year and that will fool us into being much more aggressive into these kind of products.
Luis Carlos Sarmiento Gutiérrez
And regarding your third question, which had to do with my own involvement in the ongoing negotiations, you actually made me think of something that my mom always says, which is never to waste an opportunity to say nothing. And so, so no, I try to be as helpful as I can, whenever I'm asked to participate or to contribute or to opine, if I'm not asked, I do not participate, and obviously, I keep a very, very apolitical posture on everything that happens. I spend enough time managing this big company. So, I don't really have a lot of time to do other things.
And then thirdly, we try to express our thoughts through [indiscernible], which is the association that combines all the bank views. And so, I think that that's the extent that I can answer that that question, but thanks, thanks for the question anyhow.
Thank you. [Operator Instructions] The next question comes from Andres Soto from Santander.
Good morning, everybody and thank you for this presentation. I would like to break bigger brains regarding Colombia’s macro and political challenges, also considering that the country will hold elections in 2022. [Indiscernible] SMP was probably as surprise, as most people expected, whether it be the personnel to downgrade. In this context, it now looks even more challenging the path for Columbia to retain these things in each investment grade rating. Considering these views to believe that the government should pursue an increased taxation as a way of rebalancing or should rather prioritize growth to achieve these rebalancing over the medium-term?
Luis Carlos Sarmiento Gutiérrez
Yeah, that's a great observation. You know, we're getting into territories where I don't really think it's – we can contribute so much in a call like this. But yeah, you're right. It was sort of surprising to see S&P downgrade, maybe that surprise was, as you say, not that S&P downgraded, but is that it was the first one to downgrade. We'll see how Fitch and Moody's feel about it. As you have seen, if you've seen the markets today, they're not really showing too much volatility. And it probably had to do with the downgrade was sort of factored into what's been happening the last couple of weeks.
And to your specific point, yeah, I sort of tend to agree. I think it takes off the pressure on the government, because there's been so much anticipation in the last few weeks, in the last month regarding the downgrade that now that it happened, maybe it's time to regroup and not to force through a tax reform, that won't be at its best. The tax reform that the government is trying to put together, which is, one that it's concentrated by everybody. You know, that's a tough way to try to come up with a tax bill.
So, hopefully, the government is sitting down right now as we speak, and thinking about the convenience of forcing tax reform through whose suppose objective was to avoid the downgrading. Downgrading already happened, markets seemed to have factored it in already. So, yeah, maybe it's not the time to try to force things, something that won't be at its best.
Diego Solano Saravia
Perhaps something to bear in mind is when you add a fiscal deficit for last year, with this year, you're talking of around 16% of GDP. In that time, under normal circumstances, that should have been around 4% or 5% of GDP. So, we do have 10% of GDP bill to pay at some point in time. So it might – it doesn't need to be something that solves the problem overnight. It might be something that takes much more time to be adjusted, but we actually have, as basically the rest of the world has around 10% of GDP to pay the bill for.
Thank you. And at this moment, we show no further questions. I would like to return the call to Mr. Sarmiento for closing remarks.
Luis Carlos Sarmiento Gutiérrez
Well, thank you [Hilda] and thanks, everybody, for being on the call. Thanks for your good questions, once again. And all that I can promise is we will keep on working on trying to bring forth the results. And hopefully, we'll keep on trucking, and we'll see you in the next call. Until then, as always, anything we can share with you we will. And thank you [Hilda] and thank you everybody in the call.
Thank you. This concludes today's conference. We thank you for participating. You may now disconnect.