Grupo Aval Acciones y Valores SA (AVAL) 2018 Q4 法說會逐字稿

Welcome to the Fourth 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.

Disclaimer, Grupo Aval Acciones Y Valores S.A., Grupo Aval is an issuer of securities in Colombia and in the United States registered with the 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 compliance and securities regulation in Colombia and applicable U.S. securities regulation.

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 supervision as financial institutions by the Superintendency of Finance, Grupo Aval is now also subject to the inspection and supervision of the Superintendency of Finance as a result of Law 1870 of 2017, also known as the Law of Financial Conglomerates, which came in effect on February 6, 2019.

Grupo Aval, as the holding company of its financial conglomerate, is responsible for the compliance with capital adequacy requirements, corporate governance standards, risk management and internal control and criteria for identifying, managing and revealing conflicts of interest applicable to its financial conglomerate. The consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB.

Details of the calculations of non-GAAP measures, such as ROAA and ROAE, among others, are explained when required in this report. Full year and quarterly results for 2018 are not comparable to previous periods, due to the prospective adoption in Colombia of IFRS 9 and IFRS 15 starting in January 1, 2018. This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by words such as may, will, should, expect, plans, anticipates, beliefs, estimates, predicts, potential or continue or the negative of these or other comparable words.

Actual results and events may differ materially from those anticipated herein as a consequence of changes in general, economic and business conditions, changes in interests and currency rates and other risks described from time-to-time in our filings with the Registro Nacional de Valores y Emisores and the SEC.

Recipients of these documents are responsible for the assessment and the use of the information provided herein. Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update or correct the information provided in this report, including any forward-looking statements and do not intend to provide any update for such material development prior to our next earnings report. The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. When applicable, in this document, we refer to billions as thousands of millions.

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

Thank you, Hilda. Good morning, and thank you for joining us in our Fourth Quarter and Full Year 2018 Conference Call. It is my pleasure to share with you our strongest financial results ever. Our attributable net income for 2018 was COP 2.9 trillion or COP 131 per share, showing an increase of 48.4% versus 2017's results of COP 2 trillion, or COP 88 per share and our return on average equity for 2019 rose to -- 2018, correction, rose to 17.8%.

Without further ado, I will jump right into my presentation. I intended to cover several subjects, including regulatory changes, macroeconomic results and updating the implementation and highlights of our digital strategy, a few highlights of the reasons behind our financial results, our guidance for 2019 and an update on all the legal issues surrounding the Ruta del Sol project.

Let's start with regulatory. Some of you might have noticed the disclaimer at the beginning of this call has changed somewhat versus previous calls. This is due to changes on the regulatory front. In fact, as a result of the Conglomerate's Law passed last year, Grupo Aval and its 68 financial affiliates are now an official financial conglomerate and Grupo Aval as the holding company of the conglomerate is now under the full supervision of the Superintendency of Finance as were already all our banks and our pension fund manager.

In all, the superintendents identified 13 financial conglomerates in Colombia. Holding companies of the financial conglomerates are expected to work in the following areas. First, to estimate and publish the total capital position of the conglomerate and compare it with the required level of capital, which is not materially different than the sum of the required capitals of their financial subsidiaries. This calculation needs to be ready by year-end 2019.

Our estimations conclude that currently the capital position of the above financial conglomerate amply exceeds the level required.

Second, they are expected to start reporting to the superintendents a list of all the conglomerates related parties and all the intra-conglomerate transactions. Third, limits of exposure for transactions made within the conglomerate and between the conglomerate and its related parties must be defined and managed. Fourth, corporate-wide policies and conflicts of interest must be implemented.

Finally, a risk management framework, or RMF, and in Colombia marco de gestión de riesgos must be defined in its different levels of risk, appetite and the methodologies to manage risk within the conglomerate and with third-parties must be established. Risks inherent to the conglomerate that need to be addressed in the RMF are concentration risk, risk of contingent and strategic risk.

We welcome all these requirements as we understand that they will serve to add transparency to the market. This regulatory change is particularly important for Porvenir, our pension fund manager, which will be allowed after full compliance with all corporate governance requirements to invest in debt or equity instruments of its related parties up to 8% of its total assets under management. Currently, 8% of Porvenir's assets under management amounts to approximately $3.3 billion. We applaud this new regulation, as we believe it will significantly strengthen the local capital markets and because it truly levels the playing field by standardizing the regulation of allowed investments for all the pension fund managers in the country, including those that were already investing in related parties.

As we told the market in our last 6-K, Grupo Aval is working to comply with all new requirements in a timely manner. It is important to remember that these requirements do not have the same starting date. Some are mandatory this year like the capital report, but some are mandatory after a period of transition of 18 months.

Let's move on to macro. Let's address the most relevant macroeconomic results of the Colombian and Central American economies. First, the Colombian economy, where 70% of our business resides, performed mostly as we had guided to. GDP grew in 2018 at 2.7%, almost twice what it had grown the year before, which grew at 1.4%.

Importantly, growth noticeably accelerated in the last 2 quarters and it is expected that, that momentum will carry on to 2019. More importantly, growth was largely based on internal demand. In fact, after seeing a decline in disposable income of Colombian households in 2017 partly due to the value-added tax increase included in the 2016 tax reform, 2018 was a year of recovery.

We now believe that the GDP for 2019 will grow at 3.3%. Inflation was kept under control and finished the year at 3.18%, towards the bottom of the Central Bank's target range. Our expectation is that inflation will reach 3.5%, the middle of the Central Bank's target range, in 2019.

Monetary policy was basically kept unchanged since May 2018. If internal demand and imports stay robust and GMP picks up, a monetary contraction might be in order and a hike or two might be needed to maintain the inflation within acceptable levels. Consequently, we expect that the Central Bank's average rate during 2019 will be similar to 2018 at 4.35%.

The fiscal deficit target of 3.1% was met in 2018, thanks to the adjustments made in the 2016 tax reform. The fiscal rule for 2019 calls for a maximum fiscal deficit of 2.4%, which should be achievable at the current price of oil and given a corporate gross profit of 2018 and dividend distribution during 2019 and also due to the margin of 4% tax imposed in the 2018 tax reform to the financial system and finally due to the additional tax burden resulting from the tax reform on already tax-paying individuals.

Notably, the current account deficit grew 50 basis points during 2018 to 3.8%, due in part to the end of year decline in oil prices, the hike in the devaluation that took the peso to 3,250 per dollar and the increasing demand of imported goods. If internal demand including imports continue to perform as they did in 2018, it is hard to see how this deficit will improve significantly soon.

Although the average FX rate for 2018 was mostly unaltered when compared to 2017, it did present volatility during the year, due to the fluctuations of the price of oil and to political and trade discussions between developed markets. It grows especially at year-end, when, as I mentioned before, it reached almost COP 3,250 per dollar. Since it has returned to the COP 3,100 per dollar level, where we expect it to continue throughout 2019. We therefore expect an average exchange rate for 2019 close to COP 3,150 per dollar.

Unemployment continues to be the most worrisome macro statistic. During 2019, unemployment -- sorry, during 2018, unemployment did not improve, and we believe this reflected 2 effects. On the one hand, they're also affected by several companies as they adapt to constant tax reforms and as a result of the digitalization of operations. And also the influx of Venezuelans into the formal labor force as many Venezuelans are coming into Colombia are issued automatic work permits. This expansion of the workforce might be crowding out a limited number of work spots. We expect that unemployment will improve in the medium term because of a stronger economy, but the Venezuelan impact will continue to weigh in what is possibly a new labor market reality in Colombia.

Central America grew during 2018 at Columbia's pace, despite a GDP contraction of 4% in Nicaragua due to its political crisis and a slowdown in Costa Rica, which grew only 3.3% due to reforms needed to correct its fiscal deficit.

During 2019, we expect regional growth close to 3.7% with controlled inflation and a regional fiscal deficit around 3.5%. We are watchful of the situation in Nicaragua where we have shrunk our assets and liabilities in excess of 30% since the crisis started, but continue to hold a very high liquid position, the highest of any bank in the country. We're also following closely any fiscal developments in Costa Rica.

Moving on to digital. 2018 also saw the consolidation of the 2 conglomerate digital labs into the Aval digital lab, which now combines the efforts of the 4 banks in Colombia and soon is expected to work collectively with BACs digital efforts. This is the combined platform we designed to continue leading the digital transformation of our group.

ADL is working with our agile methodologies applied to: one, improve client experience in our different channels through digital processes and client-driven products; two, develop advanced analytics that allow us to better anticipate the needs of our clients and increase the productivity of our operations and our collection efforts; three, incentivize the migration of transactions from the traditional branches to digital alternatives; and four, create ecosystems to significantly increase seamless client transactions within the group and with third parties.

I'm going to share a few salient examples of achieved results in 2018. Only in Colombia, we designed and launched 10 digital minimum viable products, which are now in full production. As a result, as of last December, Banco de Bogotá digital savings accounts represented 38% of total new accounts opened and 92% of the clients that open such accounts were new to the bank. Additionally, the bank's digital credit cards currently accounts for 37% of all credit cards issued.

Banco de Occidente digital automobile loan platform unique in the Colombian financial system as of December, represented 38% of all new car loans. The recently launched Banco Popular digital payroll loans alternative is already nearing 10% of its new payroll loans production. The banks joined forces to design a unique digital platform that combines their points reward system and unifies the conversion problems into products, travel and cash. Although the program hasn't been officially launched, it is now functional and has obtained around 20,000 new subscribers in a week. BAC Credomatic continues to deliver on their view on digital. The bank has separated itself from the rest by understanding clients' needs and delivering digital products first and faster. They have developed the great ecosystem of clients, who transact on BAC's traveling platform called Viajes Credomatic and who uses digital token main compass to move faster in the vast majority of Costa Rican toll roads, to effect contact-less payment upon exiting parking lots and will get access quicker to entertainment events and others.

Our commitment to digital continues undeterred. The key to success lies in aligning goals and objectives of digital, IT, operations, strategy and commercial. So far, that is just what we have been able to achieve.

Let's move on to some of the highlights behind the results. Our strong results were the product of multiple factors summarized as follows: During 2018, Grupo Aval banks engaged in a strategy of profitable growth, mostly in the Colombian corporate book. This was only achieved by means of extraordinary pricing discipline and the strictest credit worthiness analysis. In fact, despite 177 basis points decline in the average Central Bank rate when comparing 2018 versus 2017, our 2018 NIM on loans declined only 22 basis points and finished strong at 6.71%.

As I said before, profitable growth and not just growth. This might have led to knowingly losing some market share in some big corporate names, but it also meant a strong focus on getting back to a desired level of ROE. This strategy was combined with the continuation of our focus on retail banking, which led to increases in market share in products such as payroll loans, credit cards and mortgages. Total gross loans grew by 6.4% in the year, driven by 10.1% growth in the consumer portfolio and 15.1% growth in the mortgage portfolio. Both our Colombian and Central American operations continued their digital transformations and together with it, a cost optimization strategy. This concluded with the closing of a part of our traditional footprint, the redesign of some of our branches and significant reductions in our FTEs.

In fact, total personnel and G&A expenses for the year grew at 4.1%, which compares to assets growing close to 10%. During 2018, we fully deployed this strategy to start construction of Corficolombiana's 4G infrastructure projects. In fact, by year-end we have started 3 of the 4 projects and expect to start the fourth one in 2019. Each road will take approximately 5 to 6 years to build.

Additionally, we saw very strong results from Promigas, our gas transportation and distribution subsidiary. As a result, Corficolombiana's net income represented 21% of our attributable net income or approximately COP 28 per share. We took advantage of the existing fiscal rules and thus Banco de Bogotá and Banco Popular affected sales of some of their nonproductive assets, which resulted in a contribution of COP 254 billion to a loss attributable to net income.

Given the 2018 tax reforms impact on our net deferred tax liability position and other fiscal optimization strategies, we were able to recover some tax expenses previously booked. In fact, collectively our subsidiaries booked deferred tax recoveries, which positively impacted attributable net income in COP 62 billion. Thanks to increases in market shares, improvements in efficiency and some tax optimization strategy, BACs performed very well during 2018 contributing with approximately COP 38 per share of our attributable net income.

Finally and probably one of the most important facts concerning our results, when aggregating, our nonrecurrent revenues and nonrecurrent expenses, the net nonrecurrent income during 2018 amounted to COP 16 billion, or COP 0.7 per share. Allow me to give you some guidance.

Before giving you an update on certain matters about CRDS and its legal processes, let me give you an update on our guidance based on what we're seeing in the markets where we operate. During 2019, we are expecting the following from our businesses: first, loan growth between 8% and 10%; a NIM of 5.7%, a slight increase versus 2018, given the rate of stability; cost of risk should decline to about 2.2%. We expect a more pronounced improvement in cost of risk in the Colombian loan portfolio, but this will be partially offset by higher provisions as a result of IFRS 9 estimations in Nicaragua and Costa Rica, given their macro performance. PDLs and NPLs should improve to end of period 2017 levels. Bear in mind, Electricaribe which is now fully provisioned, is still on our books, affecting these ratios by about 40 basis points.

Cash expenses, like personnel and GA -- and G&A will increase by approximately 5%. G&A is expected to increase more than that due to the amortization of IT investments. When compared to 2018, we expect a slightly better cost to average assets ratio in 2019 of about 3.4%. The implicit tax rate will reflect the 4% tax surcharge applied exclusively to the financial institutions as a result of the 2018 tax reform. Needless to say, this will also affect our estimated net income for 2019. However, as a result, the return on average equity for 2019 should be close to 15.8% based on a one-digit growth rate in net income and a sizable increase in our average equity.

Moving on to legal. Allow me to provide an update on matters related to CRDS. First, just as a reminder, as of December 31, 2018, Episol has written off 100% of its equity investment in CRDS. The last impairment of approximately $30 million, equivalent to about 30% of the investment value, was booked last year. Second, after a second partial payment was made by the government on January 10, this year, our credit exposure to CRDS decreased to $225 million approximately. Our current coverage of this outstanding debt is 45%. Third, about legal matters and the consulting with internal and external counsel, I'd like to share with you the following information: First, regarding the investigation of the Superintendents of Industry and Commerce, SIC. As I mentioned last year in our third quarter conference call on September 14, 2018, the Colombian Antitrust Authority, the SIC, announced its decision to present charges for violations of the Columbian legal regime of free economic competition associated to Ruta del Sol Sector 2 against Odebrecht and several members of its management, CRDS, Grupo Aval and 2 members of its management, including myself, Corficolombiana and 2 members of its management, Episol, an employee of the World Bank through the IFC and Jose Elias Melo, Former President of Corficolombiana.

Corficolombiana and Episol were charged with 2 counts and Grupo Aval, Diego Solano and myself were charged with one violation. All of us contested the SIC's accusations last October, laying out the initial legal basis of defense as well as submitting and requesting documental and testimonial evidence. We're not aware of any subsequent development. Additionally, we cannot predict how long this proceeding will last. Even though we believe that the legal basis and evidence supporting our defense are sound, if we are not successful, our companies may face the payment of fines for up to the equivalent of approximately $24.5 million per charge, and each of our employees may be responsible for fines of up to the equivalent of approximately $490,000.

Therefore, if the maximum statutory fines were to be imposed, it would impact Avals attributable net income by approximately COP 220 billion or 1.2% of the company's attributable equity as of December 31, 2018.

Second, regarding the class action in the Tribunal Administrativo de Cundinamarca or TAC as you may recall, this action was filed by Procuraduría General early in 2017. As I mentioned in our second quarter conference call, Episol had presented closing arguments and was awaiting to hear the TAC's ruling. On December 16, 2018, the TAC produced a first instance ruling in which it found CRDS and its shareholders, including Episol and other individuals and entities not related to Aval or its affiliates, jointly and [severally] liable for damages caused to collective interests. The TAC further estimated these damages originally in approximately COP 805 billion and then corrected its estimate down to COP 716 billion.

In addition to tax ruling would result in the debarment of the defendants from Colombian Government contracts for a term of 10 years, as well as a prohibition of holding public offices. Episol as well as other defendants filed an appeal against this decision. The appeal was granted by the TAC, which further suspended the effect of its ruling until the appeal is heard by the consejo estatal, Colombian Supreme Court under administrative matters and until this court reaches a final decision.

Historically, the consejo estatal has taken between 2 and 7 years to rule on appeals. We believe that we have a strong basis to get the tax ruling overturned by the consejo estatal. However, if the ruling is confirmed, these damages will have to be paid by all defendants to the Ministry of Transportation. Because Grupo Aval holds the Corficolombiana and indirect 38% economic interest in Episol, in the event that Episol would have to pay the entire fine without contribution by the other defendant, the impact to Grupo Aval's attributable net income might be as high as approximately COP 273 billion or 1.5% of the attributable equity of Grupo Aval as of December 31, 2018.

Third, the arbitration tribunal. After several months of inactivity, just recently this tribunal resumed its duties with a new presiding judge. Its first decision was to appoint a Duff & Phelps subsidiary for its partners [Estrella Sociale et al] to render an expert opinion on technical and financial issues regarding CRDS, which should serve as the basis to establish the liquidation value of the Ruta del Sol 2 contract. The liquidation value of the contract will determine the payment of CRDS' obligations with the financial system, which currently stands at approximately COP 1.2 trillion in principle. It is expected that this tribunal will rule on or before August 20, 2019.

Fourth, as we discussed in previous calls, Mr. Jose Elias Melo's trial commenced on January 21, 2019. As of now, all the evidence has been presented to the judge. Attorneys for the defense and the prosecution are expected to provide their closing arguments starting March 20, and the judge is expected to rule in early April. Finally, we have been informed by the U.S. Department of Justice, DOJ, and the Securities and Exchange Commission, SEC, of investigations related to the Ruta del Sol 2 project. Grupo Aval is cooperating with the investigations. However, at this stage, it is not possible to predict the outcome of these investigations or the eventual impact on Grupo Aval.

In summary, 2018 was a year of contrasts. On the one hand, we were very satisfied with our results and more so because our expectation is that with recovering economies in the countries where we operate, albeit with some exceptions, we trust the recurring nature of our performance. On the other hand, we've had to invest many work hours to defend and protect Grupo Aval's interest in the different legal scenarios, which are the only scenarios where the Ruta del Sol fate will be decided. We certainly hope to continue delivering good news on all fronts.

I'll now leave you with Diego Solano, and thank you for your attention.

Thank you, Luis Carlos. I will now move over to the consolidated results of Grupo Aval under IFRS. As mentioned by Luis Carlos, 2018 was our best year in net income so far. Five elements drove our performance. One, a strong contribution of our nonfinancial activities reflecting construction [advances at] new toll road concessions in Corficolombiana. Second, positive results from our continuing cost control efforts. Third, an improvement in the quality of our consumer portfolio, particularly in Colombia. Fourth, sale of PP&E that were reflected in our income. And finally, a positive impact of the tax reform on our deferred taxes, which is a positive results amidst a no-loan growth scenario. However, we expect the economic trends in Colombia to continue improving and commercial loan activity to pick up.

Moving onto Page 9. Assets grew 9.8% over the year and 7.5% during the quarter. Colombian assets grew by 8.9% over the year and 5.4% during the quarter, respectively, driven by cash, net loans and intangible and financial assets from our concessions. Central America, which weighs close to 30% of our book saw a 2.7% and 3.3% growth in dollar terms, driven by the increase in cash and net loans in spite of the annual and quarterly contractions of 19.6% and 7.8% in Nicaragua assets and almost 9% depreciation for the Colombian peso concentrated in the quarter brought annual growth up to 11.9% when expressed in Colombian pesos.

Moving to Page 10. Loans excluding repos grew at 6.4% over the year and 4.6% during the quarter. As discussed throughout the year, commercial loans drove the sub growth dynamics in Colombia. We will continue to focus on the profitable growth during 2019 as we did during 2018. This strategy seems to capitalize on the expected pickup in growth momentum as the Colombian economy continues improving its fundamentals. This growth dynamics were partially compensated by a stronger performance of the consumer portfolio supported and a positive trend of its quality. Colombian consumer and mortgage business continued to be dynamic, expanding 9.2% and 18.8%, respectively, with 12 months. Quarterly growth was consistent with this performance.

Colombian corporate loan portfolio grew by 0.5% during the quarter and contracted 0.9% over the year. Central America grew 4.6% in dollar terms over the year and 2.3% during the quarter, Nicaragua which weighs around 6% of our Central American assets, drove 12-month performance contracting 17.2%, while the rest of the region expanded at 6.6%. We expect 2019 consolidated loan growth in absence of FX movements to be in the 8% to 10% area during 2019.

On Pages 11 and 12, we present several loan portfolio quality ratios. The influencing metrics continue to improve during the quarter, both in Colombia and Central America. In the fourth quarter, we continued reducing the burden of 3 corporate cases, Electricaribe provision and pending write off, year-end coverage of Ruta del Sol went up to 31% and this number was increased as of today given the approximately $100 million payment received during January that reduced the outstanding balance to $225 million with a 45% coverage. Our coverage for SITP companies reached 36% on average and up to 90% for those companies with worst outlooks.

Consumer portfolios improved both in Colombia and Central America. In Colombia, the improving trend in delinquency of consumer loans persisted with 30 days PDLs falling 37 basis points during the quarter to 5.1%, cumulating a reduction of 85 basis points since its peak in first quarter 2018. Similarly, 90 days PDLs fell 26 basis points during the quarter to 3.1% cumulating 42 basis points drops since peaking in second quarter 2018.

In Central America, delinquency of consumer loans continued trending down over the quarter with 30-day PDLs improving 24 basis points to 4.3% and 9 basis points under 90-day PDL basis to 1.8%. Further improvements in this front are subject to the stabilization of the political environment in Nicaragua and the strengthening of the macro environment in Costa Rica. There was no further deterioration of our commercial loan portfolios in both geographies.

Colombia reported 14 basis points improvement in 30 days PDLs and started seeing increase in 90-day PDLs during the quarter. Central America, deterioration in payments in some corporate clients in the region last quarter has stabilized. Commercial 30 days and 90 days PDLs improved slightly. We expect that a combination of improvement in new PDL formation trends and a pickup in growth dynamics will lead commercial PDL ratios to trend downwards. On quarterly cost -- our quarterly cost of risk increased 78 basis points, mainly due to 113 basis points uptick in Colombia, partially offset by a 6 basis points improvement in Central America. Cost of risk for the 3 corporate cases that we have discussed over the past calls Electricaribe, SITP and Ruta del Sol explained this increase.

The increase in cost of risk combined with an improvement in the quality of our portfolio is altering stronger PDL coverage of 1.6x 90 days PDLs. For the year, cost of risk fell 13 basis points from 2.5% to 2.4% in Colombia, improvement reached 28 basis points from 2.7% to 2.4%. In Central America, cost of risk increased 27 basis points from 2.1% to 2.4%, mainly explained by consumer loans. The 3 cases we have been following had a similar burden during 2018 as in the previous year, increasing our cost of risk 37 basis points in our consolidated operation and 53 basis points in Colombia. We continue to see an improvement in new PDL formation, especially in our Colombian operation. Relative to the previous quarter, our new PDL formation in Colombia improved 25% to COP 492 billion on a 30-day basis and 8% to COP 605 billion on a 90-day basis. Our overall, PDL formation improved 13% on a 30-day basis and 3% on a 90-day basis. We expect 2019 cost of risk, net of recoveries to be in the 2.2% area and 90-day PDL levels or fall to or below 2017 end of year levels. On Page 13, we present funding and deposit evolution. Funding dynamics were consistent with loan growth. Our funding structure remained materially stable with deposits representing 76% of total funding and our deposits-to-net loans ratio reaching 97%.

Our liquidity position was slightly higher than normal with cash deposits ratio at 17%. Deposits grew 7.3% in the quarter, reflecting year-end seasonality, accumulating 6.1% over 12 months. Colombia grew at 5.3% in Colombia peso terms and Central America 2.5% in dollar terms, represent -- respectively during the quarter. Over the 12-month period, Central America grew at 4.8% in dollar terms, while Colombia grew at 2.9% in peso terms. We expect deposits to continue growing at a similar pace for our loan portfolio during 2019.

On Page 14, we present the evolution of our total capitalization, our attributable to shareholders equity and the capital equity ratio of our banks. During the year, our total equity grew 14.2%, while our total equity grew 9.2%, mainly driven by our earnings. Total equity and attributable equity grew 5.9% and 5.3%, respectively, over the quarter. As of fourth quarter 2018, our banks show appropriate Tier 1 and total solvency ratios that enable a high point growth up to the end of the transition period through Basel III. We will be transitioning to Basel III throughout 2019, officially reporting our solvency under this standard in our report for first quarter 2020.

As for our tendency -- our finance will release details on regulation during the following months. As mentioned in the past, we expect a substantial improvement of Banco Popular AV Villas el Occidente solvency ratios due to reduction in risk weighting other assets under Basel III and an excess of requirement at Banco de Bogotá.

On Page 15 and 16, we present our yield on loans, cost of funds, spread and net interest margin. The Central Bank intervention rate movement drove the evolution of the yield on loans and cost of funds dynamics. The year-end Central Bank rate fell 50 basis points from 4.75% to 4.25% as of December 31, 2018, while the annual average rate fell by 177 basis points from 6.1% to 4.4% in 2018.

Our net interest margins were up 25 basis points in 2018 compared to 2017, mainly driven by the contractioning of our corporate floating rate loan portfolio.

Moving forward, we expect the expansion of the NIM on our corporate loan portfolio as the Central Bank starts to raise its rates throughout the year. With regard to the consumer portfolio, we could see increasing pricing competition as improvement in quality of consumer loans consolidates and a more dynamic growth increases the share of newly priced loans in our mix. We expect our full year 2019 NIM to remain stable in the 5.7% area for 2019.

On Page 17, we present net fees and other income. Substantially better performance of the infrastructure sector boosted income from the nonfinancial sector during this quarter and during 2018. This positive performance reflects a significant increase of our new total road concession for construction activity and it's a growth recognition under IFRS 15.

The Corriente concession formally initiated construction phase during the quarter. We expect our infrastructure business to continue contributing to our overall performance during this and the following years as the [Correo Andina, Correo Pacifico, Correo Lente] concessions advance their construction activity. We expect the [Correo Mar] concession to begin its construction phase towards the end of this year.

The gas and energy sector maintained its strong contribution to the nonfinancial sector. Agribusiness improved its performance relative to last year, primarily due to a negative impact of the liquidation of the company during 2017. The other sectors reflect mainly the increase in personnel expense, inventory -- these are leases to carry out third-party and intergroup outsourcing and BPO services. Also on this Page, gross fee income dynamics were consistent with seasonal effects the fourth quarter of 2018 and balance sheet performance for the year. Gross fees in Colombia increased by 3.7% in pesos and in Central America, 6.3% in dollar terms in 2018 as compared to 2017.

Other operating income for the quarter includes profits worth COP 373 billion, of those, COP 254 billion attributable after taxes from the sale of property, plant and equipment at Banco Bogota and Banco Popular. The remaining items of our income showed no major variation over the year or the quarter.

On Page 18, we present some efficiency ratios. Cost control efficiencies have delivered positive results. Personnel and administrative expenses increased 4.1% during the year. Personnel expenses increased 5.6%, driven by a 3.3% increase in salaries and employment benefits and the payment associated with the optimization processes -- projects that reduced close to 2.6% of our headcount.

Total administrative expenses increased 2.9% in 2018 as compared to a year earlier, below what inflation increased. This progress -- the progress of our digital efforts and cost control initiatives throughout our subsidiaries have been the key drivers of this improvement. Initiatives behind these results include reformatting and closure of branches, business process optimization, migration of transactions to digital channels and ATM network optimization.

As a result, our efficiency measured as operating expenses to advertisers remained stable at 3.5% for 2018, in spite of a low asset growth experienced throughout during the year. Colombia and Central America reported stable ratios at 3.2% and 4.4%, respectively, for both 2017 and 2018. Our efficiency ratio measured as operating expenses to total income showed an improvement of 238 basis points to 43.1% compared to the previous year.

Cost control initiatives and the increase in income from the nonfinancial sector described earlier, positively affected our efficiency ratio measured based on income. Colombia reported an improving ratio from 43.9% to 39.6%, Central America reported an improvement as well from 52% to 51% for the full year. We're expecting the improvement in our cost to assets ratio to bring it down to 3.4% during 2019.

Finally, on Page 19, we present our net income and profitability ratios. Attributable net income for 2018 was COP 2,913 billion or COP 131 per share, COP 43 increase versus 2017 accumulated results. Attributable net income for the quarter was COP 850 billion or COP 38 per share. The nonrecurring events that affected our net income during the year were Banco Bogota and Banco Popular affected sales of nonproductive assets, which contributed COP 254 billion of attributable net income. All of our equities booked deferred tax recoveries as a result of 2018 fiscal reform is positively impacted attributable net income in COP 62 billion. Banco Occidente and Banco Popular booked extraordinary compensation expenses totaling approximately COP 30 billion at attributable net income level.

And finally, specific provision expenses booked in relation to Electricaribe, Rota del sol and SITP added COP 600 billion to our cost of risk, with a post tax attributable net income impact of COP 270 billion. Our return on average assets and our return on average equity for the year were 2.2% and 17.8%, respectively.

Before we move into questions and answers, I will now summarize the general guidance for 2019. We expect growth to be in the 8% to 10% area in 2019. We expect full year net interest margin to be in the 5.7% area. We expect our cost of risk, net of recoveries be in the 2.2% area and 90 basis points to fall to or below year-end year 2017 levels. Regarding efficiency ratios, we expect cost to assets to improve to 3.4%. We expect our tax rate to rise by around 200 basis points as last year included the benefits of adjustments in deferred taxes treated by the text reform. Finally, we expect return on average equity to be in the 15.75% area in 2019, incorporating the effect of a 4% temporary tax surcharge through the financial business. We are now available to address your questions.

(Operator Instructions) We have a question from Gabriel Nóbrega from Citi.

During this quarter, we actually saw that you achieved 100% for Electricaribe and 45% for CRDS. I couldn't actually hear what you reached for the mass transportation company. If you could please mention them again. And also on this point, since you have already achieved 100% coverage of Electricaribe, are you actually planning to remove this completely from your books? And if not, why not? And I'll make the second question afterwards.

Regarding SITP, I gave you both an average and the highest coverage. The average was 36%, and it is very relevant to bear in mind that there is very different kinds of companies within the SITP -- is that we have SITPs in the industry. There are some companies that have tougher situations. One of them we've provisioned up to 90%. That's our company that is widespread throughout the financial system. We have a small percentage of that. There is another company that we have close to 50%. And finally, a company that has a much better profile that is very likely to recover, we have a 13%. When you take all those and combine those, you end up with the 36% coverage. Regarding Electricaribe, that's something we're looking into and it's likely that throughout this year, we're going to write that loan loss.

The next question comes from Jason Mollin from Scotiabank.

Can you talk about, first, the loan growth expectation of 8% to 10% you're looking for that you discussed for your 2019 guidance? Specifically, how do you see that coming from Colombia versus Central America and also looking at the segments like consumer mortgage and commercial? And my second question is related to about income from its infrastructure businesses, which you mentioned and showed that it grew significantly in the fourth quarter due to starting some of the 4G projects. Can you talk about the expectation for 2019, given new projects coming on board? And if this is a level that we should see going forward that we saw in the fourth quarter?

Okay. On first one regarding loan growth, we expect both regions to grow at a similar pace. Within Colombia, we continue to see the retail side to be much more dynamic. The corporate side is something that we've been waiting for recovery throughout the year, but expect to see soon to materialize. We've started to see some of the early part of the pipeline building up, and would be very happy to be able to turn this into numbers that we can quote later. Regarding the impact of infrastructure, it's worth to understand the numbers, first of all. This is a kind of projects that take 5 to 6 years to be built. Construction starts to accelerate as we make progress. Last year was the first year for a couple of those and very early beginning of another one. So we expect to see these numbers to continue being at least what we saw last year. And as construction accelerates, this number could start to build up. We expect to see that sustained over a few years as the construction will lap. Something that needs to be added to that to prevent confusion when we run the numbers is you'll have to bear in mind that these numbers, it need to be -- you need to subtract the tax from these numbers and then bring them up to the higher level, where we have around a 38% interest in Corficolombiana. So we're getting at the higher level around 25% of what is happening down in the nonfinancial sector for these companies.

Next question comes from Nicolas Riva from Bank of America.

My first question on Ruta del Sol, and you provided a lot of color, but just to clarify, the equity exposure to Ruta del Sol was fully impaired as of the fourth quarter. That's what I understand. And that the number was about $35 million for Corficolombiana. Second, what is the current debt exposure that you have at Ruta del Sol? I had heard that some of the banks received their second payment, which, I believe, should be paid quite soon to Aval. And third, the legal exposure. You said there is an investigation antitrust in Colombia and the potential fine is up to $25 million for Aval. On the SEC, I understand there is no update. And was there a third legal investigation that you mentioned as well? So that's my first question on Ruta del Sol. And second, Basel III. You said you're going to be transitioning to Basel III this year and report pro forma numbers for Basel III, I guess, for the banking subsidiaries first quarter 2020. You said for Popular, Occidente and Villas, the capital ratios should be higher because the lower density of risk-weighted assets. In the case of Banco de Bogotá, you would expect the reaction of goodwill to offset that and capital ratios to be more or less unchanged?

Okay. Thanks for your question. Well, let's start -- I'll start with the easy one, and that's the Basel III question. Yes. As you say, what is evident to us now is that the regulatory capital on Banco de Occidente, Popular and Villas will significantly rise with Basel III as their risk-weighted assets will significantly drop. So you have that. And then in Banco de Bogotá, yes, exactly as you say. Goodwill will be deducted, risk-weighted assets will decrease. And so for now, what we see is that, it will probably remain pretty much the same. And -- but obviously, we will know a bit much more as one last decrease publish, and we expect that to happen in the next following weeks, and then we'll probably come out to the market with our pro forma Basel III numbers for all of our banks in -- at the end of March, so in our March call.

And let me see if I get a couple of your questions and then maybe Diego can help me because I forgot all your questions, but with Ruta del Sol, you asked about our exposure and we have about a 45% coverage on COP 700,000 million exposure. I feel that, that's adequate for now. We have to see what comes out of the arbitration tribunal, because as a result of the ruling on the arbitration tribunal, which as I say might happen -- has to happen before August 20, to be more explicit, then we'll know exactly what the liquidation value of the contract is and the liquidation value of the contract will take us to know exactly how much will be paid to the banks. Obviously, our expectation is that 100% will be paid, but I can't really predict that. That's one of the reasons that arbitration tribunal just recently hired yet another expert to come out with a number. We'll obviously keep you informed as we know more.

I think you also asked about our equity investment and Corficolombiana had the Episol's Ruta del sol investment the -- at about $100 million and it impaired it in 3 years, 2016, '17, '18 at about a 1/3 each year. So yes, last impairment was [effected] last year for about $35 million, and so it's been written off.

And I think you also asked something about some of the litigations, and I think your question was what other things are going on and just let me see. There are -- there is a bunch of things going on. There's the SIC. And as we mentioned, that's been appealed and it's with the Colombian Supreme Court for Administrative Matters. The ruling of that TAC -- sorry, the ruling of the SIC -- no, I'm sorry. I could -- just a couple of things. The SIC -- it has been appealed to the SIC, and we have to see what they come back with. Until they come back and the procedure the way it works is they'll come back with an answer to our appeal to the SIC. Obviously, you're appealing to the same person who produced the ruling. So the expectation is that this will linger on for a while and it will probably end up in the same Supreme Court for Administrative Matters. So we're waiting there. That's going to take a while. I can't predict exactly how long. We have, obviously, the TAC, which is the class action that was filed against the companies and that has been suspended. That ruling has been suspended until the same Supreme Court for Administrative Matters decide and that should take a while too. And as I said, again impossible to predict, but those guys take sometimes 7 to 10 years to issue a ruling. Until that happens, all the effect of the tax ruling was suspended. We have the arbitration tribunal that I referred to, and that is important just to know how much the banks are going to be paid. Nothing much more will come out of that probably. And Mr. Melo's trial, we're really not involved, except that, obviously, we're very interested to see what happens, what ruling comes out of that court of that trial. That should happen very quickly in the first week of April. We're certainly hopeful that everything will come out all right. And then obviously there is the U.S. investigations of DOJ and the SEC, and not much we can really comment on that except that there are some investigations.

The next question comes from Andres Soto from Santander.

I would like to zoom in, in your guidance for cost of risk. Based on your 2018 numbers, total cost of risk was 2.4%, but 0.4% was related to extraordinary cases. Given the extra -- additional effort that you did in the fourth quarter, it seems to me that extraordinary cases should not be a significant source of pressure in 2019, but you're still guiding for deterioration in cost of risk from the 2% to 2.2%. Can you please elaborate that a little bit on what is driving the -- this assumption?

Yes. You're right. With your question, we had a combination of 2 different things. We have these 3 cases, which should fall in their impact on our numbers, but then we have Central America, which has deteriorated slightly. Deteriorated means the way the model is -- works, starts to accelerate some of the provisions in some of these countries. So when you see the numbers for the quarter, you'll see improvement in our consumer loans. You don't see a deterioration in our corporate loans. However, when you translate PDLs into cost of risk the way IFRS 9 works is that it brings some volatility to numbers. So our guidance is actually building up some of that, that we've seen these acceleration, not provisions, particularly in Central America with something smoother on the 3 large cases front.

The next question comes from Yuri Fernandes from JPMorgan.

I have 2 questions. The first one is on competition. How do you feel about losing market share like, Corre Vienda now became, I guess, the second bank by loans and can be your then Banco de Bogotá? And my message here, I think, you have been saying that the bank has been looking for being more profitable, improving the margins, but do you want it fire back? Like, can we see a tougher competitive environment for Colombian banks on these market share trends? That's the first one. And the second one is regarding all those legal investigations. If you can provide kind of a combined maximum impact? Because when you discuss like the loan exposure, you have like $200 million and half of that, this kind of provision. So it's net $100 million exposure for you. You had the transaction that if you make like the adjustment of the 38.2% stake you had on Corficolombiana, it's additional $100 million. [There's just] investigations, a lot of moving parts because are several investigation of different companies, but it's about a $50 million to $100 million exposure combining all the things then. And the message is, I don't know like, maybe you hear, is that it seems a bit exaggerated, the market capitalization you lost in all this crisis. So I just want to hear like your views on what you see as the combined impact of all those moving parts. And if you agree with the view that maybe what is pricing seems to way above what can be the outcome on those fines.

Well, let's see if I got it right. Starting with your last question, I totally agree with you. I think the market has totally exaggerated the potential input. I think you summarize them pretty well. And it's the same thing that we do here on a daily basis. So yes, all that I can say is we'll just keep on pushing. We have to trust our expectations and our guidance and even though there are some, yes, as you say, lingering [fronts] there with the fines that we talked about. And bear in mind that one of those fines, really about 25 different parties, are supposed to pay for them, but we are assuming that the worst can to happen and it is that we will be the only responsible party to pay the fine and even so, as you say, once again, you summarize the numbers and yes, I think the market is exaggerating, but it's the market. We're obviously just bystanders and we'll keep doing so, but again, I think the -- our results will speak for themselves.

And regarding market share and competition. It always hurts to lose market share. I am not going to lie to anybody about it. It hurts me, especially I am a big pusher for market share, but what I had noticed in the last few years was that competition regarding the big corporate names and obviously when we're talking about the big corporate names, we're talking of big -- about big corporate loans. So every time you lose one of those loans to competition, it makes a dent. We are working as hard as we can on the next levels of the market, what we call enterprise loans rather than corporate loans, and we're doing very well on those. We are -- we've been growing those and we've been pricing them very, very according to the risk we see in those names and that's why we were able to keep our loans NIM with a reduction of only 22 basis points, while the central bank's rate decreased by about 180 basis points and that is because we were able to price accordingly. We're also gaining market share as we are in those enterprise loans. We are also gaining market share in the consumer loans, and we feel good about those as well and we feel about -- very good about loan production and consumer lending because of our digital platforms. But yes, the big corporate loans, we have lost. We have lost to our competitors because of rates. Basically, because of rates. We priced higher, and we believe that as the liquidity of the market starts to be [sought] up, we hope that everybody will come to their senses. And when that happens, I think, that we'll in a good position. Until that happens, obviously, we'll keep risk adjusting our prices. And at some point, I think, the market will sort of come to a head and the market rates will be the same for everybody. Until then, we'll keep chugging on our strategy and once again, it will hurt, but it won't be forever. Liquidity gets sucked up in the market and when that happens everybody's into the same position. It will probably be at that point with a bit more liquidity than anybody else, and we'll be able to place it at the rates that we see are the right rates.

Next question comes from Sebastián Gallego from CrediCorp Capital.

I have 3 questions. The first one on asset quality, particularly on mortgage. We saw that this is the only segment where we didn't see improvements quarter-over-quarter. Can you provide a bit more color on what's the outlook on the mortgage segment regarding asset quality? Second question is can you provide a bit more color on the structure optimization from Banco Bogotá and Banco Popular that led to extraordinary income during the quarter? And finally, I know you mentioned your strategy on the retail portfolio and you were describing -- deciding the commercial portfolio, but can you provide a bit on guidance on what's the actual loan growth that you expect for the commercial portfolio?

Well, on the mortgages, what we're seeing is that the vintages are performing pretty well. Something to bear in mind is we've been growing faster than the rest of the market. And in addition, our delinquency ratios were much lower than what the rest of the market are. So it's part of the natural aging of the portfolio that we've been building up producing there, and we continue to have better numbers than the rest of the market. Regarding the property, plant and equipment optimization, what we did was basically get up to where a lot of our competitors had already gone years before. We had a lot of extra property plant and equipment. And as you've seen in this process of digitalization, we've been able to start freeing up some of these assets and we'll continue to see that happening. So it was a good chance to take that and realize that, that valuation that hasn't gone on our books, supported by the productivity that was brought by digitalization. And your last question on growth, we expect to see the corporate loan portfolio to start to move to the 8% area and that's what we're seeing at this point.

The next and last question comes from Rodrigo Torres from Valora Analytik.

(foreign language)

If you want, I'm going to translate your questions for the benefit of everybody. The first question was, what was the gross value of Electricaribe? This was over COP 700 billion initially, and we have fully provisioned that. Your second question was regarding, what is the scheme that the government is setting forth to get a new operator for Electricariba and how that new operator will probably not have to pay financial sectors debt. Well, first of all, I cannot stress how disappointed we are in the way the government has handled this whole Eletricaribe case. And unfortunately, I have to agree with you. What we've heard, and obviously, I really can't comment because that's been the government's decision, but what we've heard is that in fact, as you say, the new operator will not have to deal with the debt of the company that it will inherit. I -- to say the least, that sets out such a terrible precedent and especially the way that Electricaribe was stripped from Gas Natural, but all that I can say is that's one of the reasons that it took us all to, and I think, probably the whole financial system, but definitely us made the decision to provision it to 100% and as Diego said earlier, we'll probably go ahead and write-off the loan from our books this year and we'll definitely try not to have a short memory on what might happen with other utilities companies when this sort of situation arises.

Thank you. Now, I will turn the call over to Mr. Sarmiento for closing remarks.

Well, once again, I want to thank you all for joining us today, and we, as I said, we're excited with our financial results. We're excited with everything that happened in 2018. We're excited with what we see happening in 2019, and obviously, we'll keep fighting as we have to get through all the other issues. We hope to keep delivering good news, and we'll see you again in our next call. Thank you very much for your attention.

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