Grupo Aval Acciones y Valores SA (AVAL) 2018 Q1 法說會逐字稿

Welcome to Grupo Aval's First Quarter 2018 Consolidated Results Under IFRS Conference Call. My name is Hilda, and I will be your operator for today's call. (Operator Instructions) Please note that this conference is being recorded.

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 the Superintendency of Finance and compliance with applicable U.S. securities regulation as a foreign private issuer under Rule 405 of the United States 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 as a result of the enactment of Law 1870 of 2017, also known as the Law of Financial Conglomerates. Starting on 2018, Grupo Aval will be subject to the supervision and regulation of the Superintendency of Finance. Grupo Aval is 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 conflicts of interest applicable to its financial conglomerate. The unaudited consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB. Details of the calculations for 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 vary from those stated herein as consequence of changes in general, economic and business conditions; changes in interest and currency rates; and other risk factors as evidenced in our Form 20-F available at the SEC web page. Recipients of this document are responsible for the assessment and use of the information provided herein. Grupo Aval will not have any obligation to update the information herein and shall not be responsible for any decision taken by investors in connection with this document. The content of this document and the unaudited figures included herein are not intended to provide full disclosure on Grupo Aval or its affiliates. When applicable, in this document, we refer to billions as thousands of millions.

I will now turn the call over to Mr. Luis Carlos Sarmiento, CEO of Grupo Aval. You may begin.

Thank you very much, Hilda. Good morning all, and thank you very much for joining our 2018 first quarter results call.

I will start by referring to Colombia's macroeconomic results during the -- this first quarter of 2018. In summary, the quarter results mirrored, to a large extent, our expectations.

In fact, GDP growth for the quarter was 2.2%, in line with market and our own expectations and almost in line with the Central Bank's forecast of 2.3%, but below the Ministry of Finance's forecast of 2.5%. First quarter growth compared very favorably to the growth reported during the first quarter of 2017, which was 1.3%.

It must be noted, however, that the DIAN, the official entity in charge of macroeconomic statistics, changed the GDP database and specifically changed the base year from 2005 to 2015 used as the anchor year, off of which growths are measured. Consequently, revised growth were published for previous quarters. For example, first quarter 2017's growth previously reported as 1.1% was revised to 1.3%.

It is also worth noting that 2017 first quarter is a relatively low base of comparison because of specific events that took place during that quarter such as the slowdown due to the increase in value-added tax. The sectors that led growth during this quarter were financial activities, social services and commerce. Sectors that showed contractions were construction, mining and industry.

Civil works specifically showed a contraction of 6.4%. We believe that this is a result at least in part of Ruta del Sol's liquidation value not having been resolved yet in arbitration or otherwise. We are cautiously optimistic with regard to 2018's consensus growth estimate of 2.5%.

In order to achieve this estimated growth, during the next 3 quarters and in particular, during the second half of this year, the economy is going to have to perform much better than this first quarter. We expect that a market-friendly result in the upcoming presidential elections will be essential for this to happen.

On the other hand, and although the reported GDP for this quarter is better than the one reported last year, the economy has not yet shown full signs of recovery. In summary, we're still placing our bets on growth in the range of 2.3% to 2.5% for this year.

And other positive index has been inflation, which, as of April 2018 on a last 12-month basis, came in at 3.1% with [food]inflation below 1% and other product inflations at 4%. This is evidence that the Central Bank's tightened policy of 2016 and 2017 was successful when it raised rates up to 7.75%.

In contrast, the Central Bank's repo rate is currently at 4.25%, in line with its current expansionary monetary policy. Given the current and expected 2018 levels of inflation of 3.25% to 3.5% and growth of 2.3% to 2.5%, we expect that this rate will be kept constant and only change if these indices change materially.

Last known data point of current account deficit is 3.3% for end-of-period 2017, and last known point of fiscal deficit was 3.6% at the end of 2017. Both deficits should continue to improve during this year. We expect the first one to be in the low 3% area, and the fiscal deficit to meet this year's target of 3.1%.

As is now well known, the fiscal expert committee revised the existing fiscal rule targets and defined new, realistic and achievable targets for the years 2019 to 2026. We had been vocal about the necessity to do this as the economy's performance led by the global oil environment had changed dramatically since 2014.

For example, the new fiscal deficit target for 2019 of 2.4% should be achievable without presenting to congress yet another fiscal reform as soon as Colombia's new President takes office. The country's trade balance deficit has also shrunk materially and in fact, almost disappeared in part as a result of the current levels of price of oil in the U.S. $1.65 to $1.70 range and also because of a steady increase in nontraditional and other exports in the last few years.

Specifically, oil export revenues should amount to about $13 billion this year, a significant increase when compared to the $8 billion exported in 2016, but only 50% of what it was in 2014 when it reached $26 billion. A reduction in imports has also contributed to a balanced trade deficit of 0.5% at the end of 2017.

Although the peso-dollar rate historically correlated with oil prices has lately shown signs of higher volatility due to worldwide trends, we expect it to maintain its current range between COP 2,700 and COP 2,900 per dollar for the remainder of this year.

Social indicators such as the Gini coefficient and the multidimensional poverty level continue to improve despite the economic slowdown. The Gini coefficient has improved by 0.04% since 2014 pre oil prices, and it's currently at 0.51%, and the multidimensionally -- multidimensional poverty level improved by 4%, and it's currently at 17%. Although we still have a lot of room for improvement, these results are also encouraging.

In 2017, for the first time, the level of formality in the country surpassed the level of informality. This bodes well both for the government's effort on the fiscal front and for the financial system.

After a low point of foreign direct investment during 2015 when it only reached $11.8 billion, the results for 2016 and 2017 showed positive trends, ending at $14.5 billion. We are not in the precrisis level of $16 billion, but this is another encouraging trend.

Consumer Confidence Index continues to improve, and it has increased 18 points between 2017 and year-to-date 2018. The one indicator that has not yet shown signs of recovery is urban unemployment, which remains stubbornly at 10.7%. We believe that this is closely correlated to the very slow pace of industrial loan demand and thus, stagnant commercial activity. Urban unemployment is obviously worrisome because it represents a headwind in the path of improvement of the financial systems' consumer books cost of risk.

In conclusion, we are now confident that the economy is past its worst moment, which happened at some point during 2017 and is now gaining momentum towards a sustained recovery. This momentum should be (inaudible) by a market-friendly outcome in the upcoming presidential elections.

Regarding Central America, which represents about 30% of our business on the economic front, 2018 growth expectations are in line with our own estimates and for the region as a whole, should be roughly twice that of Colombia's. The region continues to benefit from a robust U.S. economy, with remittances remaining a strong pillar of the economy.

It is worth singling out Costa Rica's new government stated intention to undertake a fiscal reform to deal with its very high fiscal deficit. However, on the political front, we must note that Nicaragua, where we hold $2 billion in assets, has had a rough month of marchers and protesters demanding a more democratic regime. The government has already agreed to take back its proposed change to the country's pension system, which was the cause of the protests in the first place. They have also agreed to engage in peaceful discussions with the protesters to avoid further escalation of the problem. We are very watchful of the outcome of these negotiations.

Just to follow-up on a point that I touched upon during our last quarterly call, I would like to report that our digital labs are up and running and churning out minimum viable products on an average every 16 weeks for all of our banks. We are currently gathering data on the test marketing of several fully digital deposit and loan products and the results of several digitalized operations such as collections and others. This data will help us launch new versions of these MVPs and to expand the markets in which we introduce them. As soon as we have meaningful information, we will be able to share with you the potential impact of digitalization in our figures.

I had also reported on the recently passed law of conglomerates, Law 1870 of 2017. This law basically touches on these areas: definition of conglomerates, capital requirements for conglomerates, definition of related parties, maximum exposures of conglomerates to related parties, definition and guidelines for management of conflict of interest among members of a conglomerate. We have followed closely and participated to the extent that we have been allowed in the drafting of the law and the subsequent drafting of decrees to specifically define each of the laws aspects.

So far, 1 decree has been finalized and published, Decree 774 of 2018 on the first 2 aspects of the law: definition of conglomerates and capital requirements for conglomerates. I'm happy to report that Aval shows ample capital under the law due specifically to the combination of our bank's adequate capital levels and Aval's limited double leverage.

Finally, turning to Aval's financial results, I will briefly run over the main highlights and impacts of the adoption of IFRS 9 and also give you an update with respect to provisions in reference to our largest commercial problem loans, Ruta del Sol, Electricaribe and SITP.

First, beginning January 1, 2018, we begin to reflect our numbers under IFRS 9. Diego will explain in detail the impacts in a couple of minutes. But in a nutshell, we made a onetime COP 1.2 trillion adjustment to increase our loan loss reserves, which, net of deferred taxes and others, reduced our total assets by approximately COP 800 billion and our total shareholders' equity by approximately COP 730 billion and increased our deferred tax liabilities by approximately COP 100 billion. The increase in reserves improved our coverage ratios of both PDL and NPLs by approximately 20%.

For IFRS 9, going forward, we will adjust quarterly the expected losses modeled to periodically reflect new macro trends in order to estimate cost of risk. We also adopted IFRS 15, which implies that in our P&L going forward, we will show in a separate line the gross and net income from nonfinancial sector investments. The implementation of this new standard did not have an impact on our bottom line.

With regard to our financial performance for the quarter, attributable net income came in at a healthy COP 600 billion or COP 27 per share, accompanied by return on equity of 15.3% albeit after effecting the IFRS 9 adjustment mentioned previously, and return on assets of 1.6%.

Our bottom line was a result of resilient net interest margins, especially in our loan book; better although still high cost of risk; effective cost control; and adequate fee income generation. Also, we're starting to see the benefits through Corficolombiana and having started in earnest the construction of one of our 4G projects.

Unfortunately, our bottom line was not accompanied by balance sheet growth during the quarter. In fact, our balance sheet grew at 2.3% year-on-year or 3.3% when excluding the FX effect of our Central American operation, supported by growth in our loan book of 4.3% in the year or 5.3% when excluding the FX effect.

During the quarter, however, our assets decreased by 1.8%, which translates into a 0.2% growth after excluding FX. We must note that the Colombia peso revalued 6.8% in the first quarter of 2018 and 3.6% in the 12 months ending March 31, 2018.

Slow growth was driven by the corporate book, which, on a consolidated basis, grew at 2.7% year-on-year or 3.4% excluding FX. Our retail book, on the other hand, continues to show a more satisfactory result, with a 6% annual growth rate in consumer loans, 7.3% after FX and 8.3% growth in mortgages or 10.7% after FX.

During the quarter, commercial loans decreased by 1.1%, a growth of 0.3% after FX. And consumer loans decreased by 1.4%, which is 1% growth after FX. We are aiming at approximately 7% loan growth during 2018, supported on our expectations for a much stronger second half of the year.

Growth in deposits continues to behave similarly to our loan portfolio, with an annual growth of 3.4% or 4.5% excluding FX movements of our Central American operations. However, during the first quarter of 2018, our consolidated deposits show a contraction of 2% with our Colombian operation of minus 1.3% and our Central American operation of minus 3.9%.

In absence of the movement of the currency in the quarter, deposits would have remained relatively stable. Our tangible equity ratio for the quarter was 7.4%, reflecting 2 impacts: on the one hand, dividends declared by Aval in its Annual Shareholders' Meeting; and, on the other hand, due to the onetime impact of the adoption of IFRS as mentioned above.

Despite a continued decrease in the Central Bank rate, our net interest margin, particularly our NIM and loans, continues to show resilience. This result is due to more competitive pricing on the consumer front, faster growth in the higher-yielding consumer book, low growth in the corporate book and effectiveness in funding costs.

Our consolidated NIM for the quarter only fell by 10 basis points versus first quarter 2017, mainly driven by a contraction in the NIM of our Central American operation due to seasonal effects plus regulatory changes. We expect to see a reduction in NIM in the next 3 quarters of about 10 to 15 basis points per quarter.

Provision expense for the quarter was COP 984 billion, and cost of risk was 2.3% net of recoveries. We now believe that cost of risk of 2.25% for the year is achievable, which includes further provisions for specific trouble loans.

During this quarter, the 3 large corporate credits previously discussed, Electricaribe, SITP and CRDS, had an impact of almost COP 100 billion or 24 basis points in cost of risk. This number compares to the almost COP 200 billion or 50 basis points impact in cost of risk during the fourth quarter of last year.

After affecting these additional provisions, the coverage ratios of these grades stand at Electricaribe, 80%; SITP, 15%; and CRDS, 13%. Fee income performed positively in the quarter, maintaining a stable fee income ratio of 26% -- in the 26% area. The rest of the year should show similar fee income performance.

Other expenses continue to reflect our efforts in cost-cutting initiatives. First quarter 2018 total expenses are 0.7% smaller than the first quarter of last year. We expect that our efforts will continue to yield positive results. As I mentioned before and as a consequence of all of the above, plus some minor movements of -- in the other income line, our net income for the quarter finished at COP 0.6 trillion. We now believe that we will achieve an ROE for the year of approximately 13.5%.

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

Thank you, Luis Carlos. Before moving into our financial results, I would like to summarize on Page 5 the impact of IFRS 9 adoption on our balance sheet presented. We recorded an additional allowance for impairments of loans of COP 1.16 trillion, of which COP 557 billion correspond to Colombia to the Colombian portfolio and COP 606 billion for Central American portfolio. The strong impact in Central America was mainly explained by a significant increase in the last identification period of certain consumer loan portfolios. This increase in allowance raised our 90-day past due loan coverage ratio of 26.6 percentage points or 155% and our allowance to gross loans from 3.5% to 4.3%.

The impact on total equity, which includes a positive impact of deferred taxes, adjustments in valuation of investments and other, was COP 732 billion. The impact on attributable equity was COP 509 billion.

I will now move to our consolidated results of Aval under IFRS starting on Page 10 with our asset evolution. As mentioned by Luis Carlos, asset growth continued to be slow in Colombia, in addition, the appreciation of the Colombian peso combined with a lower growth following the seasonal peak at year-end experienced in Central America, resulted in a 1.8% contraction during the quarter.

The impact of foreign exchange fluctuations on balance sheet growth was relevant to our growth dynamics has experienced a 6.8% depreciation of the Colombian peso during the quarter and up 3.6% during the year. Furthermore, the adoption of IFRS 9 implied an COP 825 billion reduction in assets with a 35 basis points negative effect on quarterly growth.

Over the quarter, our Colombian assets increased 0.1% while our Central American assets grew 0.5% in dollar terms, a 6.4% contraction when translated into Colombian pesos. The adoption of IFRS 9 had a 23 basis points and 63 basis points negative effect on quarterly growth for each region.

Over the 12-month period ended on March 31, our Colombian assets increased by 21 -- 2.1%, while our Central American assets grew 6.7% in dollar terms, 2.8% when translated into Colombian pesos.

Gross loan growth was the main driver of asset dynamics, increasing 4.3% over the last year and contracting 1.3% during the quarter. Fixed income investments grew 2.8% during the last quarter concurrent to our quarterly results.

The option of IFRS 9 slightly affected our consolidated balance sheet structure by reducing the weight of net loans and leases on our asset base.

Finally, our Colombian operation increased its share of assets by 138 basis points to 71.7%, in line with strong appreciation of the exchange rate.

On Page 11, we present the evolution of our loan portfolio. Gross loans contracted by 1.3% in the quarter in peso terms and grew 4.3% over the last 12 months. The performance during the quarter resulted from a 0.8% growth of our Colombian book, and a 0.4% growth in dollar terms of our Central American book, a 6.4% contraction when translated into pesos.

In Colombia, growth remains underpinned by the still modest GDP dynamics. We expect growth to pick up as the microenvironment improves and the presidential election cycle is over. In addition, the recent adjustment to the fiscal rule targets comes as a relief to concerns around for a new tax reform that could dampen the recovery rate of the economy.

As mentioned in our recent calls, Colombian nongrowth results from a soft loan demand on our corporate customers and tightening of consumer and SME underwriting policies. Our banks have emphasized growth in products and segments with lower risk profiles and secured consumer lending, in which we have grown less than the market and suffered more during this cycle.

Our Colombian consumer and mortgage business continued to lead the growth of our Colombian operation, expanding 1.4% and 3.5%, respectively, during the quarter and 7.4% and 1 -- and 18.1%, respectively, over the last year.

Colombian corporate loan portfolio has experienced the lowest growth during the cycle, expanding 0.3% in the quarter and 2% over the year. Central America continues to be more dynamic than Colombia, growing 7.7% and 0.4% in dollar terms over 12- and 3-month period, respectively. This is a 3.8% growth and a 6.4% contraction when translated into Colombian peso for the same periods. This performance is explained by seasonal effects, tightening of underwriting policies and FX volatility.

Seasonality has a strong influence in loan growth for this region during the first quarter of the year when compared to the previous quarter of the year due to a high seasonal usage of credit cards at year-end. Furthermore, a tightening of our credit policies and high-risk profile, segments and products has influenced growth.

Finally, the 6.8% depreciation of the Colombian peso experienced during the period hindered the contribution of Central America to overall growth in Colombian pesos.

Broken down by type of loan, annual growth in Central America were 5.4%, 3.2% and 1.7% for commercial, consumer and mortgage loans, respectively. Excluding FX, these growth were 9.4%, 7.1% and 5.5%, respectively.

Colombian operation accounted for 72% of our gross loan book. We expect in 2018 loan growth in absence of FX movements to be in the 6% to 8% area.

On Pages 12 and 13, we present several loan portfolio quality ratios. We continue to see some signals that hints that the worst of the Colombian credit cycle could be close to an end. Even though 30-day PDL deteriorated in the quarter, some positive trends in asset quality should be highlighted.

For example, new 90 days PDL formation per quarter in a row. Cost of risk showed signals of stabilization and stronger debt coverage ratios. All these assets point in this direction.

As mentioned during our last call, cash (inaudible) due as 30 days PDLs formation continues to be high, and urban unemployment continues to be at a peak compared to previous periods. Quarterly cost of risk net of recoveries of charge-off assets improved by 34 basis points to 2.3%, of which 3 corporate cases, Electricaribe, Ruta del Sol and SITP accounted for 25 basis points of cost of risk reduction.

These corporative cases explained 24 basis points during this quarter, down from 49 basis points a quarter earlier.

With regard to Electricaribe, our exposure at end of first quarter 2018 was $232 million, of which we had provisioned 80%, contributing 21 basis points to cost of risk during the quarter. Given the current outlook, we paused increasing provisions for Electricaribe. Additional provisions, if any, will depend on new developments in the restructuring process.

In Ruta del Sol, our exposure was $342 million, of which we had provision close to 13%. Further provisions will defend on the definitive liquidation value of the concession that results from the ongoing arbitration proceeding.

Regarding SITP companies, our exposure was $180 million, of which we had provision close to 15%. We expect to increase our coverage in an additional 15 percentage points.

Cost of risk in Colombia and Central America decreased from 2.9% to 2.5% and 2% to 1.8%, respectively, over the quarter. Cost of risk in Colombia, when excluding Electricaribe, Ruta del Sol and SITP, was stable for the third quarter in a row at 2.2%. We expect 2018 cost of risk, net of recoveries, to be in the 2.25% to 2.5% average.

On Page 13, you will find further details on the quality of our loan portfolio. As mentioned in previous page, new 90-day PDL formation hints to positive developments over the next 2 quarters. New 90-day PDL formation was the lowest in 5 quarters. In spite of this improvement in the new PDL formation, our delinquency ratio deteriorated 11 basis points to 2.86% given our charge-off policies.

30 days PDL to total loans deteriorated to 4.25%, explained by the poor growth dynamics, and PDL seasonality contributed to this performance.

On Page 14, we present funding and deposit evolution. Our funding structure remains stable, with deposits representing 77% of total funding. In addition, our capital ratio was 60%. Our deposits to net loan ratio was 97%. We maintain our strong liquidity position with cash to deposit ratio of over 14%. The structure of our funding has enabled us to capture the benefits of the Central Bank credit reductions in Colombia in cost of funds.

Turning to growth. Deposit growth grew 3.4% over the last 12 months and contracted 2% through the quarter. Our 12-month growth, excluding the impact of FX movements in Central America, was 4.5%.

By region, Colombia accounted for 73% of loan funding and 72% of total deposits. Deposits in Colombia grew 2.1% over the last 12 months and decreased 1.3% in the quarter, consistent with our asset dynamics.

Loan funding grew 2.1% over the last 12 months and decreased by 0.2% during the quarter. Central American deposits grew 11% in dollar terms for the 12 months and 3% during the quarter, a 7.1% increase and 3.9% contraction in Colombian peso terms, respectively.

Loan funding grew 6.8% in dollar terms over the 12 months and increased 1.2% over the last quarter, 2.9% increase and 5.7% in Colombian peso terms. We expect deposits to grow at a similar pace as loans during 2018.

On Page 15, we present the evolution of our total capitalization, our attributable shareholders' equity and the capital adequacy ratio of our banks. Our total and attributable equity fell during this quarter as dividends were declared and IFRS 9 was adopted during this period. Home equity contracted by COP 1.8 trillion, while our attributable equity fell close to COP 1.4 trillion. Dividends of COP 1.06 trillion were declared at Aval during the quarter, affecting our attributable equity.

As mentioned earlier, the adoption of IFRS 9 had COP 132 billion impact on our total equity and COP 509 billion of our attributable equity as of January 1, 2018. These figures mainly result of an increasing allowance for impairment and the associated deferred taxes. 29 basis points of the decrease in tangible capital ratios for the period was due to such new accounting standards. All of our banks show a profit in Q1 in solvency ratios. Consolidated Q1 ratios at the end of period ranged between 8.5% for Banco Popular and 11% for Banco AV Villas.

Total solvency ranged between 10.1% for Banco Popular and 13.1% for Banco de Occidente. During this period, most of the banks increased their Tier 1 ratio as a result of valuation of their legal reserves being constituted as part of the earnings distribution process during the Shareholders' Meeting.

As mentioned in our last call, the regulator has indicated that it plans to announce adjustments later this year to current solvency metrics, taking further convergence to Basel III. We'll share more detail of our understanding of the changes and their impact on our banks -- solvency ratio once clarity exist on these new regulation and the timeline for its implementation.

Based on our last solvency ratios and current available information as mentioned by Luis Carlos, we expect all of our banks to comply with initial solvency regulation and to be able to adjust over time to increase in [quarters.]

On Page 16, we present our yield on loans, cost of funds and spreads. Yield on loans and cost of funds dynamics were driven by the Central Bank intervention rate evolution. The end of period, Central Bank rate fell 25 basis points to 4.5% as of March 31, 2017, while the average rate fell 41 basis points from 5% in fourth quarter 2017 to 4.6% during this last quarter.

Central Bank ordered an additional 25 basis points cut during its end-of-April meeting. In the quarter, yield on commercial loans fell 28 basis points to 8.1% driven by 30 basis points reduction and the yield of our Colombian commercial portfolio to 8.6% and 21 basis points reduction in our Central American portfolio.

Our average cost of funds fell 24 basis points to 3.8% compared to a quarter earlier as deposits have rapidly incorporated the decline in interest rate scenario and as lower pressure from loan growth have allowed us to reduce the rates paid, in particular to large corporate and government entities.

The 24 basis points decrease in cost of funds resulted from improvements of 29 basis points in Colombia and 10 basis points in Central America during the quarter. An 8 basis points contraction in spreads between loans and cost of funds resulted from the movements described before.

We expect pressure on spreads to continue as our yields on loans fully incorporate the Central Bank rate cuts and a more dynamic economy brings higher growths and more competitive pressure and improvement in quality of consumer loans.

On Page 17, we present our NIM for the financial sector and Aval's consolidated operation. Our net interest income for the quarter was COP 2.7 trillion, showing a 4.2% increase when compared to the first quarter of 2017 and a 0.9% decrease when compared to the previous quarter.

The net interest margin of our consolidated operation, including net trading income from investments held for trading to profit and loss for the quarter, contracted 13 basis points from 5.9% to 5.8%.

Our NIM, excluding net trading income from investments held for trading profit and loss, increased 7% from 5.8% to 5.9%. These figures incorporated downward trends in our cost of funds and our yield on loans described on the previous chart. In addition, as a result, net interest margin and investments negatively contributed to each result. Our consolidated net interest margin on loans for the first quarter decreased 7 basis points to 6.9% compared to a quarter earlier while the net interest margin on investments decreased by 19 basis points to 0.3%. The 2 -- the poor performance of net interest margin and investments is mainly attributable to trading activities in Central American operation that posted a COP 6 billion loss compared to a COP 19 billion gain a quarter earlier.

Nonfinancial activities had a negative impact of 18 basis points to our overall NIM. We expect our NIM -- our total NIM to contract 30 basis points during 2018, resulting from pricing of the reduction in Central Bank rates into consumer loans and a higher share of loans filed under a lower interest rate environment and during our mix.

On Page 18, we present net fees and other income. Gross fee income remains stable compared to a quarter earlier and grew 2.4% over the last 12 months. Excluding the effect of FX movements on our Central American operation, growth would have been 1.8% in the quarter and 3.2% over the last 12 months.

Quarterly growth resulted from a strong seasonal performance of our Colombian pension and severance fund management business and soft performance of bonded warehouse services and our trust and portfolio management activities. In addition, Central America -- Central American results for this quarter compared negatively to the seasonally high fees recorded during the last quarter of each year.

Broken down by geography, Colombia accounted for 61% of total gross fees for 2017. Domestic fees increased by 6.5% compared to a quarter earlier while Central American fees decreased 4.7 in dollar terms and 8.8% decrease in Colombian peso terms due to seasonality during the fourth quarter. We expect fee income to continue growing at a slightly higher rate than our balance sheet in 2018.

The right on the page, you can find our nonfinancial sector broken down by segment. Contribution increased 19.6% compared to a year earlier to the strong performance from energy and gas and infrastructure companies. Compared to a previous quarter, the nonfinancial sector decreased 30% due to a lower contribution of infrastructure companies.

To the bottom of the page, we present other operating income. Other operating income for the quarter was COP 375 billion, materially unchanged from a year earlier and lower than a quarter earlier. Operating income for this quarter includes a loss on sale of impaired fixed income investments that was fully offset by recovery of impairments of investments. These impairments of fixed income investments were reported during 2016.

On Page 19, we present some efficiency ratios. Cost of fund initiatives continued to deliver positive results. Personnel and administrative expenses decreased 3.6% during the quarter and 0.9% when compared to a year earlier. Adjusting from the wealth tax accrued during last year, 12-month growth would have been 4.3%.

Cost control in Central America continues to be a key contributor to positive results. Our efficiency ratio, measured as operating expense to total income improved 34 basis points to 45.9% compared to the previous quarter and 10 basis points versus the first quarter 2017.

Central America and Colombia reported ratios of 52.5% and 42.9%, respectively, for the first quarter 2018. Our efficiency, measured as operating expenses to average assets of 3.4% for the first quarter, remains stable compared to a year earlier and improved 3.6% compared to a quarter earlier.

Central America and Colombia reported ratios of 4.3% and 3.1%, respectively, during the quarter. Regarding efficiency, we foresee to continue growing our costs lower pace than our assets, expecting a 5 to 10 basis points improvement in our cost to assets base for the full year 2018.

Finally, on Page 20, we present our net income and capital adequacy ratios. Total net income for the first quarter 2018 was COP 598 billion or COP 27 per, share showing an increase of 28.1% versus the previous quarter. Our return on average assets was 1.6%, and our return on average equity was 15.3%.

Before we move into questions and answers, I would -- I will now summarize our general guidance for 2018. We expect 2018 loan growth to be in the 6% to 8% target. Deposit growth will be fairly similar to that of loans. We expect 2018 cost of risk, net of recoveries to be in the 2.25% to 2.5% area. We expect full year 2018 net interest margin to be 30 basis points stronger than that of 2017. We expect fee income to grow at a slightly faster pace than loan volume. Regarding efficiency ratios, we expect to improve 5 to 10 basis points on our cost to asset basis. We expect no material changes on our marginal tax rate. Finally, we expect 2018 return on assets to be in the 13% to 13.5% area.

We are now available to address your questions.

(Operator Instructions) And our first question comes from Jason Mollin from Scotiabank.

You mentioned the financial conglomerate law and implementation of a consolidated regulatory capital, and that the group would have adequate capital levels. If you can provide some details on how that will work, but what the capital would look like under these new guidelines.

Sure, Jason. Basically, what decree calls for is for conglomerates to estimate their own capital -- their own technical capital and to then convert also that technical -- that estimated technical capital with what the minimum required technical capital would be. I should probably start by saying that we are exceeding the minimum technical capital required under the law by about COP 8 billion or COP 8 trillion in million, million pesos. So we are, under the law, very adequately capitalized. The way to estimate the technical capital in our case is by combining the consolidated technical capitals of our affiliates and adding to that the separate financial statement technical capital of Aval. So in a sense, what the law says is that you combine technical capitals of your banks and combined to that, your own technical capital. And what it does is that by doing so, it makes you take into account the double leverage that you have at the holding company level. So basically, the logical line in that for the first time, it is saying okay, let's examine how your affiliates are doing. And obviously, the affiliates have to be doing well because they have to -- they been regulated forever, and they have to pass local regulations. But to that, they're saying okay, let's see how the capital at the holding company level is affecting the whole capital for the conglomerate. And so if, for example, a holding company was -- had a very, very high index of double leverage, then that would affect the combined technical capital. In our case, that's really not the case because our double leverage is less than a 120%. So that in all in all, when we combine all of the capital that I mentioned, we come out doing very, very well under the new law. The other thing that is beneficial is that, obviously, the law concentrates on what of your capital is available to absorb losses, and in that respect, then it doesn't differentiate in -- between -- with attributable equity from minority interest equity. So that, that also complements our ability to comply with the law and to show a lot of access.

The next question comes from Frederic De Mariz from UBS.

A follow-up on the asset quality. Can you just remind us what you are expecting for the cost of risk for this year? I couldn't hear what you mentioned at the end of the call. But more generally speaking, I wanted to hear what are your thoughts about the asset quality in 2 lines, at the very beginning of the call, you mentioned that inflation is getting lower but you're also seeing high unemployment. So what are you seeing in terms of NPLs for consumers? Are you concerned about the prospects for consumer NPLs for this year? And then on the corporate side, you mentioned some very specific numbers for the 3 big exposures: CRDS, public transportation and Electricaribe. Should we expect an increase on those coverage ratios? Or should we maybe expect a reduction or reversal of provisions maybe in CRDS or maybe in some of the other lines? So we know CRDS is taking longer than expected, but just wanted to hear from you what should we expect in the coverage ratios for those lines?

Okay. Regarding asset quality for the year, what we guided in to was 2.25% to 2.5% -- cost of risk, I'm sorry. Moving to your question on the consumer front, you're right. We are still cautious on guidance here. And the reason for that is there's a series of events that needs to happen and it's a sequence, that happens around and around in time. You need to see GDP picking up. After that, a slight lag you see unemployment improvement and finally, you see the credit quality of consumers reverting. At this point, we started to see early signals of the economy picking up. We're quite positive on that. Yet the magnitude is much high. Unemployment is still at a high level though on the positive note, it has ceased to deteriorate compared to what was happening before but hasn't yet turned around, particularly urban unemployment. As a consequence, even though consumer loans have mixed signals, when you look at vintages that meaning that we see improvement in vintages of certain products, in certain of our banks. We still see some vintages that are not (inaudible) yet. In that sense, even though we expect to see some improvement later during the cycle, we haven't filled that yet into a significant change in our cost of risk. Now moving to (inaudible) exposures, taking them one by one, the public transportation is still -- we demand additional provisions there. We're basically thinking of an additional 15 percentage points of coverage, taking it up to 30% coverage. It is linked to the kind of customers that we have there. Then we talked in general of the SITP. These are a group of companies, and different companies have different profiles. So you can't fully compare from bank to bank when you look at those kind of coverages. At this point, even though there are conversations with the city major that would be positive on how that evolves, we still see some deterioration to come before things get better. Regarding Electricaribe, we were already up to 80% coverage. And that is a situation that is improving faster than the previous one. That's the reason why we have decided to pause, at least for some time, in additional provisions there. I wouldn't like to jump ahead of ourselves. But there could be positive news given a number of events do happen. At this point, we're just pausing our provisions. And last, Ruta del Sol, it's only been like a month since our last call. So there hasn't been a lot of news there. But we're waiting for a valuation for the liquidation to come from the arbitration process. We are not expecting that to happen before at least the first round of elections because it does have an impact of politics. So that's something -- I'm sorry not to be able to give you additional color there. But at this point, we are not foreseeing additional provisions because it is our belief that the liquidation will be enough for what we already have provisioned, but we have to review that after liquidation comes from the arbitration.

The next question comes from Yuri Fernandes from JPMorgan.

I had a question on your ROE guidance. I'm not sure if I heard well, but you like to revise it up to 13% to 13.5%. My question is that your ROE in the first quarter and even if you looked at it, okay it was (inaudible) by the IFRS limitations. It's still tracking above that at 15%. So are you seeing like some pressures in the coming quarters you don't expect to keep this level of ROE for the rest of the year? That's my question.

If I get your question right, you're asking what the implication of guidance is, it's building in as you mentioned, changes in value of our equity. It's a shy change in our expected earnings per share what we have guided. We are positive on some of the aspects of what's happening here. We're looking into perhaps a slightly slower cycle with a lower impact on net interest margin reduction, a slight upside on our cost of risk, but during that time, it's not helping us as much as expected because you might have noticed we also (inaudible) down 1 percentage point of our growth, we end up in singular numbers to what we had before.

Yes, I -- just to add to that and to complement the answer by saying that obviously, this first quarter, ROE was aided by the fact that our equity was reduced as a result of IFRS 9, and we don't expect that to continue happening in the next 3 quarters. On the contrary, the next 3 quarters, we'll be accumulating equity as one. We won't have IFRS 9 onetime shots, and then secondly, we won't distribute more dividend. So in a sense, those 2 events really make equity reduce during the first quarter, and that obviously brings ROE up. In the next 3 quarters, as Diego said, we will expect one growth of only 7%; secondly, continued decrease in our net interest margin numbers as our loan pricing absorbs the effects of lower Central Bank rates. And with all that combined, so you'll have revenues coming in progressively, but equity probably growing faster than that. So you'll -- that's what makes us believe that, that 15% will not be sustainable. And that by the end of the year, we will be closer to 13.5%.

The next question comes from Sebastián Gallego from CrediCorp Capital.

I have 2 questions. The first one, can you elaborate a bit more on the strategy on Villas and Popular? We're observing double-digit growth rate compared to single-digit growth rate in other banks. If you can elaborate on that, particularly taking into account that Popular's Tier 1 ratio stands at 8.5, well below the other banks. The second question is related probably a follow-up on asset quality, and I'm particularly looking at the mortgage portfolio, the PDLs and the NPLs. Can you comment on your expectations for this particular segment going forward?

Okay. As far as strategies, yes, obviously, consumer banks are growing faster than commercial banks. And by that, I mean, banks that have portfolios that are more oriented towards consumer lending such as Villas, and Popular are growing more steadily. Secondly, Popular specifically is one of our very nice stories as it has been streamlining its processes of lending. And that has helped it out in loan generation also in cost control and others. So in Popular, you'll see good things from Popular for the rest of the year. And in Villas, it's the same thing. It's bank that is more geared towards consumer lending. The other 2 banks that are more prone to commercial lending are seeing the slowdown that we continue to see in the industry and in the commercial lending. With regards to Popular, equity, obviously, one of the reason that it decreased in the first quarter has to do with their dividend generation. And we expect that as we'll see a continuous increase, which we're seeing month after month in their earning ability -- in their earnings generation ability. You -- and obviously, not more dividend distributed through the year, you'll see the effect of their equity coming up. And it will more, in our estimation, more than compensate any growth from their asset -- from their loan book. So we feel at this point, that we just got to push them instead of hold them back. And they, with the loan growth that they have projected and the earnings generations that they have projected, they will have more than adequate equity going forward for the rest of the year as far as your first question, and then secondly, Diego.

And perhaps adding to what Luis Carlos mentioned Tier 1 for Banco Popular, you might have noticed that Banco Popular is the only bank that we still have 2 annual shareholders meetings. The reason we're having done that has been to be able to take care of the points you're mentioning. Regarding asset quality for mortgages, yes, we have looked into what is happening there. Points to mention, the quality of our loan portfolio is still significantly better than what the market average looks like. We are -- we basically expected to see some deterioration there as part of the cycle and have no concerns in the sense of the way we have built our portfolio. So yes, your point is true. We've looked at some deterioration of mortgages in line with the overall deterioration of the economy. But numbers in absolute terms are positive, and the shape of our portfolio is also more resilient than what the market average looks like.

Our next question comes from (inaudible) from Ultraserfinco.

My only question is, understanding that IFRS 9 does not have an impact in net income, could you still walk me through the effects of this implementation in the top lines of the P&L? And specifically on the impairment loss, what do you expect to be the effect on impairment loss for the coming quarters? And what's the impact of IFRS 9 in relation to the cost of risk during this quarter?

Well, implementation of IFRS 9, we're still cautious on giving guidance on what to see there. But at this point, we have had, let's say, a positive surprise, it hasn't come up with a higher cost of risk compared to the previous accounting pace. The reason for that is that IFRS 9 anticipates the cycle more than what we have in the past. In that sense, a part of what we saw, we saw very significant adjustment to our coverage of around 20% additional coverage whilst building in what's the cycle was to be seen. In that sense, at this point, even though IFRS 9, we had said might bring additional provisions, it hasn't been a fact as at least of first quarter.

At this moment, we have no further questions. I would like to turn the call over to Mr. Sarmiento for final remarks.

Thanks a lot, Hilda, and thanks for everybody who attended the call. We hope to talk to you again in mid-August with our second quarter results. By then obviously, the new President will have already taken office. And hopefully, by then, the arbitration tribunal of Ruta del Sol will have made a decision and hopefully, it'll go our way as we expect. With that, I think in closing, again, thank you very much, and then we'll see you next time, and thanks, Hilda.

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