Grupo Aval Acciones y Valores SA (AVAL) 2017 Q4 法說會逐字稿

Welcome to the Fourth Quarter 2017 Consolidated Results Under IFRS Conference Call. My name is Sylvia, and I'll be your operator for today's call. (Operator Instructions) Grupo Aval Acciones Y Valores S.A. or Grupo Aval is an issuer of securities in Colombia and in the United States, registered with Colombia's National Registry of Shares and Issuers, Registro Nacional de Valores y Emisores, and the United States Securities and Exchange Commission, SEC. As such, it is subject to the control of 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.

All of our banking subsidiaries, Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas, Porvenir and Corficolombiana, are subject to inspection and surveillance as financial institutions by the Superintendency of Finance. Although we are not a financial institution and as a result of the enactment of Law 1870 of 2017, also known as the Law of Financial Conglomerates, starting on September 8, 2018, Grupo Aval will be subject to the supervision and regulation of the Superintendency of Finance. Grupo Aval, as the holding company of this financial conglomerate, will become responsible for the compliance with capital adequacy requirements, corporate governance

Standards, financial risk management and internal control framework and criteria for identifying, managing and revealing the conflicts of interest applicable to its financial conglomerate.

Pursuant to Law 1314 of 2009, since January 1, 2015, financial entities and Colombian issuers of publicly traded securities such as Grupo Aval must prepare financial statements in accordance with the IFRS. IFRS, as applicable under the Colombian regulations, differs in certain aspects from IFRS as currently issued by the IASB.

The unaudited consolidated financial information included in this document is presented in accordance with the IFRS as currently issued by the IASB. Details of the calculations of non-GAAP measures such as ROAA and ROAE, among others, are explained when required in this report. This report may include forward-looking statements, which actual results may differ from those stated herein as a consequence of changes in general, economic and business conditions, changes in interest and currency rates and other risks factors, as evidenced in our Form 20-F available at the SEC webpage. Recipients of this document are responsible for the assessment and use of the information provided herein. Grupo Aval will not have any obligation to update the information herein and shall not be responsible for any decision taken by investors in connection with this document. The content of this document and the unaudited figures included herein are not intended to provide full disclosure on Grupo Aval or its affiliates.

When applicable in this document, we refer to billions as thousands of millions.

Today's call from Aval will be conducted by Mr. Luis Carlos Sarmiento, President and CEO; Mr. Diego Solano, Chief Financial Officer; and Mr. Tatiana Uribe, Financial Planning and Investor Relations Officer.

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

Thank you, Sylvia. Good morning all, and thank you very much for joining our 2017 fourth quarter results call. Allow me to start by referring to Colombia's macroeconomic results during 2017.

In summary, 2017 was a somewhat disappointing year. A little over a year ago, our expectation was that after continued deceleration of growth since 2013 and growth of only 2% in 2016, 2017 would be the year in which a reversal of the trend would take place. However, the year's GDP finished at only 1.8%, albeit with a stronger second semester than the first. The sectors that contributed to the GDP growth were financial services, social services, taxes, agro industry and commerce. The sectors that mitigated growth were transportation, construction, industry and mining. The good news is that, as we said in our last call, it is probably a safe bet to declare that the worst of the economic deceleration is behind us. In essence, it now appears as though we were off by a year in terms of our prediction, and we now feel that several indicators have aligned to support a growth recovery in 2018.

For example, inflation finished the year at 4.09%, which compares favorably to the 5.75% of the year before and almost within the Central Bank's target for the first time in the last 4 years. Because of controlled inflation expectations, the Central Bank rate continued to show an expansionary trend, decreasing from a high of 7.75% in late 2016 to 4.75% as of December 31, 2017. The Central Bank made an additional 25 basis point cut in rates in January 2018 to 4.5%, where it currently stands. We believe that there is room for an additional 25 basis point cut before this first semester is over. Notably, Colombia is back in positive real interest rate territory.

The twin deficits continue to improve. On the fiscal front, the deficit met the expected level per the adjusted fiscal rule of 3.6%, which compares favorably with the 4% of 2016. The current account deficit also improved to 3.3% from 4.3% in 2016. The current account deficit improvement largely benefited from a substantial improvement in trade balance. As a fact, at the end of 2017, the trade balance deficit was a slight 0.5%. Just as important, the dependence on oil of the country's exports has declined significantly as oil exports in 2017 accounted for only 34% of total exports when compared to this same ratio in 2013, which was closer to 53%. The tendency of the twin deficits should continue to improve throughout 2018 as a consequence of an increase in nontraditional exports, a reduction in imports, a larger fiscal contribution from Ecopetrol and sustained prices of oil in the $60 to $70 range.

The last 2 years, the peso-dollar exchange rate has moved within an acceptable range of between COP 2,800 and COP 3,100 per dollar as a result of dollar inflows and outflows from movements in local capital markets portfolio positions belonging to foreign investors and, albeit not as much as 4 years ago, as a result of changes in oil prices. We expect a similar performance of the exchange rate throughout 2018. As a consequence, our views are aligned with those of the analysts' with regard to growth and inflation, which we now estimate at approximately 2.5% and 3.3% for 2018. We currently favor growth in specific areas of the economy such as transportation, construction, industry and mining.

Because of the current political cycle given the presidential elections, we have experienced some volatility in the economy and expect some more in the first few months of this year. This volatility has, however, started to pass as a consequence of last Sunday's congressional elections and will probably die out after the second round of the presidential election in July. Therefore, we expect that in meeting our projected growth, the second half of the year will be of greater growth than the first.

However, we are far from believing that the current state of economy or even 2018's economic projections are satisfactory. For starters, even if the projected growth of 2.5% is achieved, we should still be aiming for 4% to 4.25% going rate. We're still probably 2 to 3 years away from that. As we have said before, to achieve this better growth, we believe that 4G infrastructure projects must get under way in earnest as well as those projects' financings. We hope that the resolution of Ruta del Sol's liquidation and additional amortization of the bank's loans to this project will be the trigger to this necessary component.

Additionally, 12-month average urban unemployment, a direct barometer of the pace of the economy, deteriorated 60 basis points from 10% in 2016 to 10.6% in 2017. Given the impact that we see on consumer loans, this level is a point of concern as it represents a headwind in the path of improvement of a consumer book's cost of risk. Average urban unemployment is expected to continue to be close to the 10% area, but it should improve as internal demand and production gain momentum.

Also related to the consumer loan portfolio, household consumption contracted in the first 2 quarters of 2017 affected by the high interest rate scenario and the impact of the 3 percentage point increase in value-added taxes included in the 2016 fiscal reform. However, we believe that the household consumption will improve in 2018. In fact, we are already seeing this trend in the first months of the year through a better behavior of more recent consumer lending vintages.

As I mentioned before, last Sunday, we had congressional elections in Colombia. Additionally, ex-President Uribe's party and the left-wing party conducted primaries to decide who their presidential candidate will be in May. The result of the elections could be summarized as follows. First, more than 14 million votes were cast. Secondly, the voters in the primary for ex-President Uribe's party outnumbered the voters for the left-wing party's candidate by almost 2:1. This might be an indication of voters' sentiment during the upcoming first-round presidential election in May. A clear majority of Congress will be in the hands of the right and center-right parties, both very much pro-markets. The results have already started to ease concerns within the business community because from a legislative standpoint, it's clear that Congress will promote rather than oppose market trend regulation. We expect that no single presidential candidate will achieve at least 51% of the votes during the May presidential elections, and therefore, a second round of elections will be held in the month of July between the top 2 contenders.

Regarding Central America's economy, growth during 2017, although moderate, was still more than twice that of Colombia's. Panama, Honduras and Nicaragua were the fastest growing countries in the region with growth in the 5% area. The region continues to be benefited by a robust U.S. economy. However, Central American countries must strive to achieve agreements among themselves and within each country to support growth opportunities for the business communities. Additionally, fiscal deficits must be dealt with through comprehensive reforms and more vigilance of tax evasion. We expect similar growth for the region during 2018 with Costa Rica, which is in an election year, and Panama growing slower but El Salvador and Guatemala picking up the slack. Central America has to continue to position itself as an essential bridge between North and South America, sitting on a vast amount of natural resources and a superb labor force well trained especially in technological fields. The region must keep up and continue this or higher levels of growth in order to minimize the impact of much-needed fiscal adjustments.

Now let's move away from the economy, and instead, let's take a general look into our businesses. For a while, we as well as our competitors have been talking about the push to digitalize our operations as an essential component to face a more competitive future in which most probably only those with larger capacities to invest in technology will be able to differentiate themselves in a business that will tend to commoditize itself such as a financial business. The differentiation that digitalization affords financial institutions will be achieved primarily in 2 aspects: one, via innovative products geared towards future generations of clients more interested in online than any other type of shopping; and especially through cost optimization in all existing and new operational processes.

Towards these goals, I am proud to say that the digital transformation of Grupo Aval is well under way with the creation of 2 digital labs, which will eventually be merged into one, and the appointment of a new Chief Digital Officer, an executive recruited from Silicon Valley with a double major from MIT and an MBA from Stanford. Aval's CDO has been empowered to lead this new agenda across all of Aval's entities. Her charge is threefold: one, to align all of Aval's banks in a shared vision for a digital future; two, to capture operational and strategic synergies across our existing digital platforms; and three, to develop and scale digital best practices across the group, particularly in the areas of advanced analytics, design thinking, agile methodologies and user-centric design. Results are starting to become apparent in Banco de Bogotá, BAC and Porvenir.

In Banco de Bogotá, in just within 9 months of launching the Bogotá digital lab, the bank has already taken to market 3 products. Its first product, an omnichannel 100% digital savings account accessible via mobile, web and selected branches, has already produced meaningful results. Total account openings exceeded 15,000 in just a few months, and in branches where the solution has been deployed, digital openings represent over 50% of total openings. Moreover, the bank has accelerated its efforts to migrate consumer transactions to its mobile and web banking platforms. Today, it has over 1 million unique active clients registered in these channels, and its growth rate is over 30%. Its total number of transactions on mobile and web is increasing at a clip of over 40% per year. Banco de Bogotá is also the first bank in Colombia to offer financial services via social media, both on Twitter and Facebook, utilizing artificial intelligence and bots. To date, it has thousands of clients registered and over 200,000 interactions and transactions. While these are clearly robust figures, the opportunity to continue growing these channels certainly still exists, particularly around monetary transactions.

A third front to highlight is its implementation of advanced analytics and machine learning models to optimize the utilization of data around specific use cases. A couple of the models it has successfully put to work include optimizing consumer lending collections and reducing customer churn by anticipating pain points. These models have already generated a positive ROI by increasing provision recoveries and increasing the bank's net customer base.

Finally and, perhaps, most importantly, the digital effort in Banco de Bogotá has been 100% self-funded. In other words, it has not required a single peso in additional expense to our budget but rather functioned as a reallocation of resources across the bank and is an auto-financed initiative. In other words, it's been accretive to improving our efficiency ratio and will continue to be so going forward.

In BAC, mobile banking transactions grew by over 60% in 2017, and digital sales grew by over 17%. In Central America, 1/3 of our clients is digital, a higher share than in Colombia, and 2 out of every 3 transactions are being done through digital channels. Besides, BAC is redesigning over 30% of their banking processes to make life easier for their clients by significantly improving their cycle time by, for instance, eliminating redundant requirements and simplifying formats.

Porvenir is also leading the digital transformation in its industry as more than 90% of service requirements made by their affiliates and more than 15% of pension requirements were successfully done digitally.

We have also set a goal to keep our costs controlled through the migration of transactions from our branches to our digital channels. In that respect, last year, we reduced the percentage of monetary transactions done through branches from 34% to 30%. We also increased the number of mobile transactions by 157% in Colombia and 60% in Central America, where we have more than 200 million transactions done through mobile. And we have converted into digital clients 1 of every 4 individual active clients in Colombia and 1 of every 3 in Central America. As a consequence of the above, we have been able to reduce our physical branch network for the first time in the last decade, mainly in our Colombian operation. Although the number of branches closed is not huge, just only close to 20 branches that we've closed, we do value the trend. We are strong believers in digitalization as another avenue of creating value in the near future for our group, and therefore, we will put a lot of emphasis on it.

I believe that this is also -- that it is also worthwhile singling out the achievements of Porvenir, our pension fund manager in Colombia, which continues to consolidate itself as the #1 player in the market with over 10 million affiliates and over COP 129 trillion of AUMs as of the year-end 2017.

Before we address our financial results, allow me to provide a brief update in reference to our largest commercial problem loans: Ruta del Sol, Electricaribe and SITP. Regarding Concesionaria Ruta del Sol 2, or CRDS, on December 22 of last year, DIAN authorized the first payment to the creditor banks. This payment, although a cause for optimism, fell short of the expectations of the financial system. In fact, the payment for COP 800 billion fell way short of the total exposure of COP 2,400 billion. The payment was furthermore applied, as previously agreed with the government, first to accrued and unpaid interest and secondly to principal. In that respect, principal outstanding was reduced to COP 1,900 billion, of which roughly COP 900 billion correspond to loans with Aval banks. DIAN's authorization for payment was a result of a judicial order issued by the Cundinamarca State Court, which specifically ordered DIAN to pay all good-standing creditors of CRDS. The creditor banks have since filed a complaint (inaudible) in court asking that DIAN be ordered to pay or establish a schedule of payments for the rest of the money owed. Meanwhile, in a painstakingly slow procedure, the arbitration tribunal has not yet rendered a ruling with respect to the nullity of the concession contract and/or the way to liquidate it if it's declared null. We are following closely all proceedings, and we'll report when we have a clearer vision of things to come. In the meantime, we booked provisions for 12.5% of our credit outstanding as of December 31, 2017.

With regard to Electricaribe, we continue to make provisions in the last quarter of 2017, bringing the accumulated percentage to 70% of our loan exposure, which approximates COP 600 billion. Our plan is to continue increasing this number to 80% as of the end of 2018's first quarter. On a more positive note, although we cannot confirm it, it might be that Electricaribe has generated interest from one or more electric utility operators who have expressed a preliminary desire to operate it and to make the company financially viable. If this ever materializes, new oxygen might be given to the company's financial obligations. It would be premature to assume that a resolution to this problem loan is in sight and speculative to guess the extent to which the creditor banks would have to refinance the loans, but this news is probably the only cause for optimism since this problem began over a year ago.

Regarding SITP, Bogotá's mass transportation system, an essential element to getting this problem resolved is the willingness of the City of Bogotá to renegotiate terms with the bus owners and operators. Until recently, it wasn't clear that the mayor was willing to undertake this challenge. As a result, we started to book provisions against our COP 500 billion exposure, and as of December 31, 2017, we had booked provisions for 13% of the loans outstanding. The good news here is that incipient talks have commenced between the mayor's office and the SITP operators. Although it is also premature in this case to speculate as to the end result of those talks, it is more than we could have reported as of last quarter. We will continue to assess the situation, and we will report back to the market when we see positive developments. Barring positive news, we are projecting additional provisions of up to 50% of our exposure in the next few months.

Other general but impactful considerations going forward in 2018 are, first, the regulation of the Law of Conglomerates that was passed last year is under way, and we have kept in close touch with the Superintendency of Finance ministry to understand firsthand its implications. As of now, we have seen drafts of regulations surrounding minimum capital positions for a financial holding company. And based on the latest drafts, we are very comfortable with the implications of regulation on Aval's capital. We are expecting to have final draft before the end of this quarter.

We have also seen a first draft of the proposed schedule of implementation of Basel III in Colombia. We believe that Basel III will be phased in over a 6-year period, commencing sometime in 2018 or 2019. As far as we know, Basel III will bring with it a reduction in risk-weighted assets, a relief in the way our banks take into account their investments in other financial entities that they do not control such as Corficolombiana, a different treatment of the OCI account, a larger minimum required Tier 1 ratio and a requirement to fully deduct goodwill from Tier 1 capital. We will communicate to the market our projections as soon as a definitive document is made available to us.

On January 1, we adopted IFRS 9, and therefore, starting with the first quarter of this year, our results will reflect the adoption of this accounting standard. The project included the definition of a unified framework for the development of statistical models for each of the loan products. As a result of the project, we established the increased loan loss reserves required by IFRS 9, which were accounted against retained earnings upon its adoption. We did not experience a material impact on our capital ratios because of this adoption. And although our cost of risk going forward will be somewhat affected by IFRS 9, we do not expect these impacts to be material.

Finally, turning to Aval's financial results. I will briefly run over the main highlights and then pass this over to Diego, who'll refer in detail to our business results. In summary, our results for the year were mixed. We had a year of slow growth in the balance sheet with close to 5% year-on-year growth in our gross loan portfolio. This result was a combination of 3% growth in our Colombia book and an 8% in our Central America book. Low growth was driven by the corporate book, which, on a consolidated basis, grew at 2.9%. Our retail book, on the other hand, showed stronger growth of 7.4% in consumer loans and 10% in mortgages. Growth in deposits was positive on a relative basis and helped us close the year with a deposit-to-net loan ratio of 0.96x versus 0.95x in 2016. As growth was low, our tangible capital ratio remained stable in the year and finished at 7.9%. Despite a decrease in the Central Bank rate, NIM for the year improved to 5.9%, with a NIM on loans of 6.9% and a NIM on investments of 0.7%. This NIM expansion was a result of less margin on loans booked at lower yields, a lag in repricing of the corporate book and less pricing competition within the Colombian system as all of the banks were affected by the credit cycle and its impact on cost of risk.

Provision expense and cost of risk severely impacted our results. Average cost of risk for the year finished at 2.5%, with specific portfolio exposures further detailed in this conference call, contributing with about 30 to 40 basis points of such ratio. The remaining part of the deterioration of this ratio, which, in 2016, had averaged 1.9%, was driven by a deterioration in the Colombian consumer portfolio, a reflection of deteriorating households' economic condition and slight deterioration in our Central American business.

Fee income, on the other hand, performed positively in the year, growing, as expected, at a better rate than the loan portfolio. This performance was based on strong fiduciary pension and banking fees. The latter is stronger in Central America than in Colombia.

Operating expenses were controlled with a year-on-year growth of less than 4%. As a consequence, our consolidated results show an improvement in our cost-to-income ratio of 50 basis points from 47.3% in 2016 to 46.8% in 2017.

Other income line item that shows our treasury operation plus the results of our nonfinancial entities and nonconsolidated entities declined for the year. This decline was driven by negative results in some of Corficolombiana's investments and by the absence of some nonrecurrent valuation gains recorded in 2016.

As a consequence of all of the above and despite a 37% year-on-year increase in provision expense, our net income for the year finished at COP 1.96 billion or COP 88 per share, almost unchanged when compared to 2016. ROAA for the year was 1.4%, and ROAE for the year was in line with our guidance at 12.5%. It is important to once again highlight the fact that extraordinary provisions related to the 3 problem loans, to which I referred above, accounted for more than COP 10 in earnings per share and robbed the company of more than 100 basis points of ROAE.

With this, I pass the presentation on to Diego, who will expand on these highlights that I just shared with you. Thank you, and good day.

Thank you, Luis Carlos. I will now move to our consolidated results of Grupo Aval under IFRS starting on Page 9 with our asset evolution.

As mentioned by Luis Carlos, some early signs of recovery have been observed lately. Asset growth during the quarter was slightly stronger than that observed throughout the previous periods. Low asset growth during 2017 as well as a slight recovery in pace during this quarter are consistent with GDP dynamics. Total assets increased by 3.7% during this quarter and 5.6% over the last 12 months. The impact of foreign exchange fluctuations and balance sheet growth was not relevant to determine operational growth for this period as the year-end Colombian peso to U.S. dollar exchange rate was only 0.6% stronger than the year earlier and 1.6% weaker than 3 months before.

Over the 12-month period ended on December 31, our Colombian assets increased 4.6%, while our Central American assets grew 8% when translated into Colombian pesos. Over the quarter, our Colombian assets increased 2.5%, while our Central American assets grew 6.8% when translated into pesos. Loan growth was the main driver of asset dynamics, increasing 4.9% during 2017 and 2.4% during the quarter. In addition, fixed income investments grew 6.2% during the last quarter, contributing to our quarter results. Consolidated balance sheet structure remained substantially stable, and our Colombian operation slightly increased its share of assets by 85 basis points to 70%.

On Page 10, we present the evolution of our loan portfolio. This quarter delivered a better loan growth than previously recorded throughout the year. Even though the improvement was across the board, consumer and mortgage lending in Colombia and Central America were the strongest contributors. As mentioned in our recent calls, the slow economic cycle in Colombia has driven the modest loan growth experienced throughout this year. Loan growth resulted from a soft loan demand in Colombia corporate customers and the tightening of consumer and SME underwriting policies starting at the end of 2016 to incorporate our view on the economic cycle. This tightening resulted in a better quality of retail portfolio relative to other larger market players.

Our banks have emphasized growth in products and segments with lower risk profiles. On the retail front, we have prioritized payroll loans and cross-selling of personal loans and credit cards to existing clients. Mortgages continue to be a source of growth in Colombia given our still low market share. Unsecured consumer lending, in which we have grown less than the market, has suffered more during this cycle. As discussed, loan growth accelerated during the quarter and accounted for close to 40% of our annual growth. Gross loans increased 4.9% during the last 12 months and 2.4% during the quarter in peso terms. Even though still low relative to historic performance, our Colombian loan portfolio started to grow at a faster pace than that observed during the previous quarters. Colombian loans grew 4% over the 12-month period and 1.4% during the quarter. Colombian consumer and mortgage business continues to lead the growth of our Colombian operation, expanding 2.1% and 6.1%, respectively, during the quarter and 7.7% and 17.4%, respectively, over 2017. Colombian corporate loan portfolio posted a 0.6% expansion during the quarter and 1.4% over 2017. This performance is still shy from the sustainable growth. A delay in investment decisions, in part explained by the election cycle and the political uncertainty, has prolonged the slow cycle in corporate loan demand that began 24 months ago.

Central America continues to be more dynamic than Colombia, growing 7.3% when translated into Colombian pesos over the 12-month period and 4.9% during the quarter. Most of the growth for the quarter came from Costa Rica, which grew at 5.3%; Guatemala, which grew at 4.1%; and Panama, which grew 2.2%. Broken down by type of loan, annual growth in Central America were 8.8%, 6.8% and 5.3% for commercial, consumer and mortgage loans. The structure of our gross loan portfolio continues to shift slightly towards loans to individuals, in line with our strategy, reaching 42% at year-end. Colombian operations accounted for 71% of gross loan book. We expect 2018 loan growth, in absence of FX movements, to be in the 7% to 9% area.

On Pages 11 and 12, we present several loan portfolio quality ratios. Results hint that the worst of the Colombian credit cycle could be close to an end for Aval. Positive trends in asset qualities such as lower PDL formation, cost of risk showing signals of stabilization and slightly stronger debt coverage ratios point in that direction. Caution is still due as consumer PDL formation continues to be high. Full year cost of risk, net of recoveries of charged-off assets, deteriorated by 61 basis points to 2.5%, of which the 3 corporate cases described by Luis Carlos, Electricaribe, Ruta del Sol and SITP, accounted for 34 basis points or more than half of that increase. The remaining deterioration is mainly attributable to higher cost of risk in consumer credit card, 13 basis points increase; personal loans, 10 basis points increase; and other commercial loans, which generated 4 basis points increase in this ratio.

With regard to Electricaribe, our exposure at year-end 2017 was $210 million, of which we had provision close to 70%, contributing 25 basis points to cost of risk during the year. We expect coverage to increase to 80% in the first quarter of 2018. In absence of new developments in the restructuring process, the remainder $16 million of this exposure could be provisioned throughout 2018.

In Ruta del Sol, our exposure at year-end 2017 was $310 million after receiving pending interest and $100 million in amortization of principal. At year-end, close to 13% had been provisioned with a 7 basis points impact to 2017 cost of risk. Further provisions will depend on the definitive liquidation value of the concession.

Regarding the SITP companies, our exposure at year-end 2017 was $165 million, of which we had provision close to 13%, contributing 3 basis points to cost of risk during the year. Given current available information, an additional 30 basis points of coverage could be required during 2018.

The impact of these 3 exposures accounted for 49 basis points of the quarter's annualized cost of risk. Cost of risk in Colombia and Central America increased from 1.9% to 2.7% and 1.9% to 2.1%, respectively, during 2017.

Finally, as mentioned by Luis Carlos, Aval adopted IFRS 9 as of January 1, 2018. Even though preliminary, our current estimates point to an additional COP 1.2 trillion in allowance for impairment of loans and receivables. As a result, loan loss reserve coverage ratios would increase by slightly more than 20%. In addition, this adjustment will have a deferred tax effect and is subject to minority interest, reducing the expected negative impact on the total equity to COP 0.6 trillion. We expect IFRS 9 to require slightly higher provision expenses than IAS 39 as in a stable environment, provisions associated with portfolio growth will be higher. We expect our cost of risk for 2018 to be similar to that for 2017.

On Page 12, you will find further details on the quality of our loan portfolio. As mentioned on the previous page, new PDL formation hints to positive developments over the next few quarters. New 30-day PDL formation was the lowest of the year, almost 30% below that for the previous quarter and less than half of that in the peak during the first quarter of the year. Even though caution is still required given the still high PDL formation in consumer, we have begun to observe some positive signals in our more recent loan vintages. 30-day PDLs to total loans improved during the quarter by 8 basis points to 3.9, driven mainly by the improvement in the commercial portfolio in both regions and stability in the quality of our consumer loan portfolio. Delinquency measured as 90 days PDLs to total loans deteriorated by 4 basis points to 2.75%. We expect lower new PDL formation during full year 2018, compounded with a more dynamic loan growth, to have a positive impact on our PDL ratios.

On Page 13, we present funding and deposit evolution. Funding structure shifted towards deposits that now represent slightly more than 77% of total funding at year-end. In addition, our CASA ratio stood over 59% of our deposits. We maintained strong liquidity positions with cash-to-deposit ratios of over 14%. The repricing structure of our funding has enabled us to capture the benefits of the Central Bank rate reductions, as we'll show later in this presentation. Deposits grew faster than loans, 307 basis points more during the quarter, 269 basis points throughout the year. Deposits-to-net loan ratio increased to 96%.

By region, Colombia accounted for 72% of total funding and 71% of total deposits. Deposits in Colombia grew 6.2% over the last 12 months and 4.7% during the quarter, while total funding grew 4.9% over the last 12 months and by 2.5% during the quarter. Central American deposits grew 11.3% in Colombian peso terms over the last 12 months and 7.2% increase in Colombian peso terms during the quarter. Total funding grew 7.7% in Colombia peso terms over the 12 months and 7.2% over the last quarter. We expect deposits to grow at a similar pace for our loan portfolio during 2018.

On Page 14, we present the evolution of our total capitalization, our attributable shareholders' equity and the capital adequacy ratio of our banks. Earnings generated, net of dividends paid, explain most of the 4.9% and 4.4% annual growth in total equity and attributable equity. All of our banks show appropriate Tier 1 and total solvency ratio. Consolidated Tier 1 ratio at the end of period ranged between 8.8% for Banco Bogotá to 10.9% for AV Villas. Total solvency ratio ranged between 10.5% for Banco Popular to 13.5% for Banco de Bogotá. The regulator has indicated that it plans to announce by end of June of this year adjustments to the current solvency metrics, taking further convergence to Basel III. Based on our initial conversation and the regulators' presentation, we understand that this convergence would take place over a 6-year period and will include issues such as higher equity requirements in the form of AT1 instruments and conservation and SIFI buffers; full deduction of goodwill from Tier 1, including that booked pre August 2012; and a relief in aspects where Colombian regulation is more stringent than international standards such as risk-weighting of certain assets, the treatment of unconsolidated investments in financial subsidiaries and selective capital credit of OCI account. We'll share more detail of our understanding of the changes and their impact on our bank solvency ratio once further clarity exists on this new regulation and the time line for its implementation. Based on our current solvency ratio and current available -- currently available information, we expect all of our banks to comply with initial solvency regulation and to be able to adjust over time to increases in requirements.

Starting on Page 15, we present the evolution of net interest margin. Financial sector activities contribute with almost all of our interest-earning assets. Financial sector entities accounted for close to 99% of our interest-earning assets. Promigas operations contributes most of the interest-earning asset from the nonfinancial sector. Funding associated with nonfinancial activities and holdco account for 5.1% of total funding and 7.7% of total interest expense of 2017. The higher cost of funds is due to longer maturities and higher-risk premiums of these activities.

On Page 16, we present our yield on loans, cost of funds and spreads. Yield on loan and cost of fund dynamics was determined by the Central Bank intervention rate evolution. The yield -- Central Bank rate fell 275 basis points from 7.5% to 4.75% as of December 31, 2017, while the average rate fell 98 basis points from 7.1% in 2016 to 6.1% in 2017. Our total yield on loans fell 3 basis points to 11.4% for 2017, resulting from a 40 basis points decrease in yield on commercial loans of our Colombian banks and a 5% -- 5 basis points decrease in Central American commercial loans. This was offset in part by an 8 basis points and 14 basis points increase in the yields of consumer and mortgage loans. Our yield on commercial loans grew less than the Central Bank intervention rate, but the full impact of adjustment has not been fully incorporated into our floating corporate loans yet and, as we said, higher pricing on new loans for certain segments. Yield on consumer loans, which are mainly fixed, increased given the introduction of higher-risk premiums on new loans, lower competitive pressure and low growth rates. During the quarter, yield on commercial loans fell 33 basis points to 8.4%, driven by a 46 basis points reduction in the yield of our Colombian commercial portfolio, and to 8.9%, partly compensated by an increase of 21 basis points in our Central American commercial portfolio. Our funding mix allows -- allowed us to capture a proportionally larger portion of the Central Bank rate decrease than what was priced into loans. Our average cost of funds fell 33 basis points to 4.2% compared to a year earlier as deposits have rapidly incorporated the decline in interest rate scenario as well as lower pressures from loan growth as that has allowed us to reduce rates paid, in particular, to large corporate and government entities. The 33 basis points decrease in cost of funds resulted from a 47 basis points improvement in Colombia during the year and stability in Central America. For the quarter, the average cost of funds was 4%, 9 basis points lower than a quarter earlier. A 31 basis points expansion in spread between loans and cost of funds resulted from the relatively stable yield on loans and the reduction in cost of funds described before. We believe that this favorable behavior of our spread on loans is mainly due to temporary repricing gaps and incorporation of a high-risk premium on certain loans. We expect this environment to unwind as our yield on loans fully incorporates the Central Bank rate cuts and a more dynamic economy brings higher growth, more competitive pressure and improvement of consumer loans.

On Page 17, we present our NIM for the financial sector and Grupo Aval's consolidated operation. The performance of our net interest margin was driven by the favorable performance of our cost of funds and the resilience of our yield on loans described on the previous chart. Our full year net interest income was COP 10.5 trillion, showing 14.9% increase when compared to 2017. Our quarter net interest income was COP 2.8 trillion. The NIM of our consolidated operation, including net trading income from investments held for trading through profit and loss, for 2017 expanded 34 basis points from 5.6% to 5.9% and was relatively stable during the quarter. Our NIM, including -- excluding net trading income from investments held for trading through profit and loss, for the year increased 42 basis points from 5.4% to 5.8%. Consolidated NIM on loans for 2017 increased 37 basis points to 6.9% compared to full year 2016 and remained stable during the quarter. This resulted from the spread dynamics described on the previous chart. As previously said on the call, we believe this favorable behavior to be due to temporary repricing gaps that should unwind as the Central Banks fully incorporate -- are fully incorporated into the prices and the economic dynamics continues to pick up during this year.

Our NIM on investment increased by 4 basis points to 0.67% in 2017. During the quarter, our NIM on investments improved 17 basis points to 0.4% given the downward shift in the yield curve. Our nonfinancial activities had a negative impact of 22 basis points on our NIM. We expect our total NIM to contract 30 to 40 basis points during 2018, resulting from pricing into consumer loans, the reduction in the Central Bank rates and a higher share of loans priced under the lower interest rate environment to enter our mix.

On Page 18, we present net fees and other income. Gross fee income for the full year 2017 grew 6.6%, faster than the growth for assets and loans. This performance resulted from a 12.5% increase in pension and severance fund management fees, a 13.1% increase in trust and portfolio management fees and a 5.6% increase in banking fees. We expect fee income to continue growing at a slightly higher rate than our balance sheet during 2018.

Broken by geography, Colombia accounted for 60% of total gross fees for 2017. Domestic fees grew 8.1% compared to 2016, while Central American fees grew 7.9% in dollar terms for 2017. The bottom of the page, we present other operating income. Other operating income for the year was COP 2.3 trillion. This is COP 730 billion lower than a year earlier. Some events mentioned on our previous calls such as the sale of our share of CIFIN to TransUnion, the valuation of Credibanco as a result of changing it from a not-for-profit to a limited liability company and higher tax recoveries in 2016 explained close to 2/3 of this decrease in operating income. The remainder of this decrease was explained by lower dynamics in 2017 and a positive effect of El Niño phenomenon on our gas business during 2016. In addition, lower exchange gains during 2017 affected this number.

On Page 19, we present some efficiency ratio. Cost control initiatives have delivered positive results. Personnel and administrative expenses increased 3.1% during the year. This result compares favorably to our 5.7% inflation in Colombia for 2016, which set the pace for 2017 wage and price increases. Cost control in Central America continued to be a key contributor to the positive results. Our efficiency ratio measured as operating expense to total income of 46.5% during 2017 was 76 basis points better than the 47.3% recorded for 2016. This ratio improved in Central America to 52%, down from 55% in 2016, and slightly increased to 43.9% in Colombia. Our efficiency measured as operating expense to average assets of 3.5% remained unchanged for both years. Central America and Colombia reported ratios of 4.4% and 3.2%, respectively, for 2017. Regarding efficiency ratios, we expect to improve 10 basis points on a cost-to-asset basis in 2017 to 3.4%.

Finally, on Page 20, we present our net income and profitability ratios. Attributable net income for 2017 was COP 1,962,000,000,000 or COP 88 per share. Attributable net income for the quarter was COP 467,000,000,000 or COP 21 per share. In spite of an improvement in NIM fees and efficiency, our cost of risk negatively affected our profitability. Return on average assets and return on average equity for the year were 1.4% and 12.5%, respectively.

Before we move into questions and answers, I will now summarize our general guidance for 2018. We expect 2018 loan growth to be in the 7% to 9% area. Deposit growth will be fairly similar to that for loan growth. We expect 2018 cost of risk, net of recoveries, to be in the 2.5% area, including the impact of the adoption of IFRS 9. We expect full year 2018 NIM to be 32 basis points lower than that for 2017. We expect fee income to grow at a slightly faster pace than loan volume. Regarding efficiency ratios, we expect to improve 10 basis points on our cost-to-asset basis. We expect no material change in our material -- in our marginal tax rate. Finally, we expect our 2018 ROAE to be in the 12.5% to 13% area.

We're now available to answer your questions.

(Operator Instructions) Our first question comes from Sebastián Gallego from CrediCorp Capital.

I have 2 questions. Can you comment on the current situation in Costa Rica given the high fiscal deficit, depreciation of the exchange rate? And what's your strategy within this operation? Second question is regarding capital, particularly on Banco de Bogotá. This is the first time since the fourth quarter 2015 that Tier 1 ratio falls below 9%. Could you comment on that and why is that?

Okay. Let me take the first one. And do you want to take the second one?

Yes.

Okay. Regarding the first one, which is Costa Rica, we are, as you said, say, following very closely the presidential elections this year, on the one hand. Secondly, we are very much following the very high fiscal deficit the country is running. And obviously, because of the 2 preceding items, then devaluation has started to kick in, in the country. We have -- as a strategy, we have slowed down a little bit our growth. Secondly, we continue to hedge entirely our equity, which protects us against devaluation, so we have not suffered the consequences. And thirdly, we have, as we did here in Colombia the beginning of last year, we have strengthened our underwriting parameters to make sure that the country's situation will not filter through in our results. As I said in my presentation, that's all combined why we expect that Costa Rica will not grow as much as it did during 2017. But instead, that lack of growth will be picked up by El Salvador and Guatemala, which are doing and expected to do better this year. So to summarize, we are fully conscious of what you're mentioning. We're following it very, very closely. We do feel, however, that Costa Rica has the means and the wherewithal to get out of this situation. It just needs a stronger will to correct its fiscal deficit, and it needs to do so, firstly, with a pretty strong and stringent fiscal reform. I think that all the candidates right now are aware of that and that we'll probably see that as part of the first decisions they take once they come into power. The country, though, remains healthy and remains a strong country with, as I mentioned also, very strong working force. And all the other -- and the bank itself, our bank itself in Costa Rica is really doing well, with the exception of -- last year, it did show a bit of an increase in cost of risk, motivated by all that we've talked about, which has since been recovering and is looking better this year. So all in all, I would say that we're watching it closely. We're aware of it. We have taken some measures, but we feel comfortable with the bank itself.

Regarding your second question, Sebastián, there's 2 main reasons why this number was reduced during the quarter. The main one was we moved from biannual shareholders getting to an annual period for dividend to be declared. Therefore, we had to consume higher reserves in this process. The other element that affected this number and affected the number throughout the system was there was a change in the way that market risk -- value at risk is accounted for in risk-weighted assets. This generated around a 20 basis points consumption of solvency.

We ought to say, though, that Banco de Bogotá is expecting its Tier 1 ratios at the end of this quarter to be way over 9% -- and, well, way over, I mean above 9.25% as of March 31, so some of that number that you noticed will be remedied.

Our next question comes from Rodrigo Sanchez from Ultraserfinco.

I also have 2 questions. The first one is, which type of loans do you expect to be the fastest and the slowest growing in 2018? And my other question is, what impact could it represent in the liquidation of Pizano considering that Grupo Aval is the largest shareholder of the company? Are you expecting to recover anything from the liquidation? Or are you expecting to make any provisions from this company, in particular?

Okay. I'll take the second one, Pizano, and then (inaudible). Regarding Pizano, yes, as you said, it's a company that is partly owned by Corficolombiana. If you remember how our structure works, Aval -- the effect of Corficolombiana -- if anything happened in Corficolombiana, the effect of that in Aval is about 44%, and then you have to remember that Corficolombiana owns around 50% of Pizano. Therefore, whatever happens with the liquidation of Pizano will have an impact of about 20% in Aval. Having said that, the impact that we're expecting of the liquidation of Pizano in dollar terms is of about $25 million. In that respect, the impact of that liquidation on Aval's balance sheet should be of about $5 million. And as you know, $5 million is of our total income of about $650 million. It's really not material, fortunately.

Regarding your other question on loan growth, we expect to see consumer to continue to grow strongly as well as mortgages. And then what will change throughout the year or what we expect to see changing throughout the year is the cycle on corporate loans. Corporate loans have had a very slow growth over the past 2 years already. Initially, given the discussions of tax reform, then last year, around volatility and the low economic cycle and lately, due to the discussion on elections, these events are starting to fade, and at least the one regarding elections has a due date that is soon to come. We believe there is a substantial amount of pipeline -- of investment in companies that hasn't been delivered yet. Therefore, we should expect to see a pickup in the pace of corporate loans, and that might be the main change throughout the year.

We have no further questions at this time. I'd like to turn the call over back to Mr. Luis Carlos Sarmiento for final remarks.

Sylvia, thank you very much, and thank you very much for all in attendance. We are, as always, working hard. We'll be -- we'll communicate with the market as soon as new developments are obtained regarding all the issues that we talked about. And we'll see you back in -- for our first quarter 2018 results. Thank you very much, and you have a good -- great day.

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