Grupo Aval Acciones y Valores SA (AVAL) 2019 Q4 法說會逐字稿

Welcome to Grupo Aval's Fourth Quarter 2019 Consolidated Results Conference Call. My name is Hilda, and I will be your operator for today. Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities in Colombia and in the United States. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation. Grupo Aval is also subject to the inspection and supervision of the superintendency of finance as holding company of the Aval financial conglomerate.

The consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB. Details of the calculations of non-GAAP measures, such as ROAA and ROAE, among others, are explained when required in this report. This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by words such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of these and other comparable words. Actual results and events may differ materially from those anticipated herein as a consequence of changes in general, economic and business conditions, changes in interest and currency rates and other risks described from time to time in our filings with the Registro Nacional de Valores Y Emisores and the SEC. Recipients of this document are responsible for the assessment and 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 information provided in this report included any forward-looking statements and do not intend to provide any update for such material developments prior to our next earnings report. The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. When applicable, in this document, we refer to billions as thousands of millions.

(Operator Instructions) I will now turn the call over to Mr. Luis Carlos Sarmiento Gutiérrez, Chief Executive Officer. Mr. Sarmiento Gutiérrez, you may begin.

Thank you, Hilda. Good morning, and thank you all for joining our fourth quarter 2019 conference call. Although it is my pleasure to share with you our strong financial results for the year 2019 and I'm also happy to say that the first 2 months of 2020 have us on track to meet our budgets, I can't minimize the concerns that we have over what is going on globally with the COVID-19 and the oil dispute between Saudi Arabia and Russia. From our perspective because we haven't seen the full impact of this global pandemic and because we feel that there is still a lot to happen in the oil war, we believe that it is far too early and even imprudent to venture a revised prediction for Colombia's and Central America's economy, let alone a revision of our own 2020 guidance. We will, therefore, leave unchanged our 2020 guidance until we have a better grasp and more research on which to support any changes.

Today, we will address the macroeconomic performance during 2019 of those countries where we predominantly operate as well as our own financial results. We will refer to the $1 billion bond that we recently issued. And as usual, we will provide an update regarding the legal processes of Ruta del Sol. I will just take an additional moment to stress that we are putting forth all possible and necessary efforts to protect the health of our employees via home office programs, health advice and the elimination of practically all business traveling and live meetings, and we're also protecting our clients by placing at our disposal and emphasizing the use of all possible ways to digitally access their products and services.

Moving on to the macro scenario. Columbia's economy were almost 70% of our consolidated business resides, continued its path of acceleration during 2019. GDP growth during the fourth quarter was 3.4%, bringing GDP growth for the year to 3.3%, up from 2.5% in 2018. This welcome level of growth was not evidenced since before 2015. It was precisely in 2015 that the Colombian economy had to adjust to the shock from a 70% decrease in oil prices. Just as importantly, Colombia's GDP growth during 2019 happened during the broad economic slowdown that specially affected all other Latin American economies. Additionally, last time that they were measured in February, Colombia's fundamentals were still going strong and high-frequency data showed positive momentum in consumer spending and private investment. However, as approximately 40% of Colombia's total exports are represented by oil and because Ecopetrol is a very significant taxpayer, a persistent decline in oil prices will most likely widen the country's trading current account deficits, worsen next year's fiscal outlook, have an adverse effect on domestic demand and curtail growth below 3%.

Having said that, if one was to find differences between the oil shock of 2015 and the one we're living through these days, 2 are perhaps of relative importance. One, one must recall that an oil barrel was priced in excess of $110 in mid-2014. By February 2016, right before oil prices started to rebound, oil had lost $78 per barrel. This time around, the price of an oil barrel was around $55 just before Saudi Arabia and Russia refused to agree on production cuts. Simple math indicates that the 2015 scenario can't be re-lived. Two, around September of 2014, the exchange rate in Colombia hovered around COP 1,900 per dollar. By December of 2015, the peso had devalued by almost 75% to almost COP 3,300 per dollar. We see a remote chance that on this occasion, the peso will devalue another 75% towards an exchange rate of COP 6,000 per dollar in the next 12 months. Those 2 differences alone might signify that this time the economy will hardly be impacted as much as in the previous 2014 to 2016 shock. Having said that, certain industries, especially the airlines, hotels and other tourism-dependent sectors, are disproportionately getting hurt.

Coming back to the country's GDP growth in 2019, this result was mainly driven by stronger private consumption and investment from the demand side, which increased by 4.6% and 4.3%, respectively, compared to 1.2% and 1% a year earlier. The increase in private consumption was driven by: one, the stability and monetary policy; two, the increase in remittances from abroad; three, the increase in expenditure of Venezuelan migrants; and four, a growth higher than the inflation in formal employee wages.

From the supply side, GDP growth was driven by sectors such as commerce, which grew 4.9%, financial services that grew 7.9% and professional services that grew 7.7%, which -- all of these, which grew at a stronger pace than average GDP, while sectors such as construction, which decreased by 2.7% and communications that grew by 1.5%, grew at a slower pace.

The country's trade deficit continued to be the weakest component from the demand side, increasing to 3.8% in 2019 from 2.7% in 2018, driven by weaker exports, which decreased by 5.7%, as Colombia has not been able to significantly increase exports of nontraditional products. Instead, imports increased by 2.7%, driven by strong private consumption. These factors explain the widening of the current account deficit that reached 4.3% of GDP in 2019 from 3.9% in 2018.

Employment continued to deteriorate in 2019, and they averaged 10.5% for the year, up from 9.7% in 2018. The average unemployment rate in the 13 metropolitan areas rose from 10.8% in 2018 to 11.2% in 2019. Lack of enough job creation and the impact of the migration of millions of Venezuelans to this country seem to be the main causes for the resiliency in unemployment. It must be noted, however, that during January of this year, average unemployment in the 13 principal cities in the country saw improvement as it dropped year-on-year by 80 basis points, from 13.7% to 12.9%, the lowest there has been for the month of January in the last 5 years.

Annual inflation rose to 3.8% by the end of 2019 from 3.2% in 2018. Inflation started the year on a downward path, reaching 3% in February of 2019. However, in the second and third quarters, inflation increased mainly driven by pressures on food prices, which increased by 5.2% in 2019 versus 2.4% in 2018. We expect that for the most part, the transitory shocks that affected food prices in 2019 will dissipate in 2020. Additionally, the consumption basket, upon which inflation numbers are built, was recently redefined to decrease the share of tradable goods and increase the share of services. This implies that consumer prices are now less prone to fluctuations in the exchange rate. If inflation stays under 4% in 2020, we see no need for a change in monetary policy. However, the economic backlash from the dual shocks mentioned before, might result in a significant rise in consumer prices. Consequently, and although we do not expect to see inflation rise as much as it did in 2015, the Central Bank might be forced to restate its policy in the upcoming weeks, as we have already seen in the U.S.A. and other countries.

The country's fiscal deficit was reduced from 3.1% in 2018 to 2.5% in 2019, even lower than the 2.7% limit established by the fiscal rule for the year. This positive behavior was driven by strong tax collections and higher-than-expected dividends paid by Ecopetrol. As mentioned in our previous calls, meeting 2020's target of 2.3% will be challenging without relying on one-off revenues. Additionally, current pressures from the recent oil price environment might significantly decrease Ecopetrol's profitability, and with it, its ability to pay taxes and dividends, which will in turn pose additional challenges to this year's fiscal rule target.

During 2019, the exchange rate was highly volatile, ranging between COP 3,072 and COP 3,522 per dollar. Although devaluation of the peso between December of 2018 and December of 2019 was only 0.8%, on average, the exchange rate depreciated 11% during the year, as a result of 2 very different trends. First, in the first months of the year, there was a strengthening of the peso against the dollar, mainly associated with the recovery of the price of oil, and in contrast, starting in the month of May, the dollar strengthened globally, driven by the scaling of the trade war between the United States and China. At year-end 2019, an exchange rate of approximately COP 3,400 per dollar seemed to be the new norm. However, the current shock to the economy has already driven it closer to COP 4,100 per dollar. It's tough to imagine that it will yield in the upcoming weeks.

Moving on to Central America. During 2019, the region's GDP grew 2.7%, less than it had grown in 2018 when it grew at 3.1%, associated to the worldwide economic growth slowdown. It should be noted that growth was better in the second half of the year at 3% than in the first half at 2.6%. Within the region, as of September 2019, date for which information by country is available: Guatemala was the best performer, with GDP growth of 3.6%; followed by Panama, with 2.9%; Honduras and El Salvador with 2.4%; Costa Rica at 1.7%; and Nicaragua at minus 5%. 2020 should see somewhat better growth derived from the operation of a new copper mine, Cobre Panamá and other infrastructure projects in Panama, a better performance from agriculture in Honduras, and the first year of a new government in El Salvador. The implementation of the 2019 fiscal reform in Costa Rica will remove the fiscal uncertainty that the country lived under last year. In Nicaragua, the economy is expected to moderately recover in 2020, but still contract around 1%. We, therefore, expect that regional growth for 2020 will be around 3%.

Moving on to financial highlights. Although Diego will refer in detail to our financial performance, these are a few highlights. In general, our results for 2019 were driven by: one, a better performance of the Colombian economy; two, better loan portfolio quality, which resulted in lower cost of risk; three, strong returns in our fixed income and equity portfolios; four, solid performance in commissions and fees; five, successful continuation of our digitalization and cost optimization efforts; and sixth, solid contribution from our nonfinancial entities. As a result, 2019 marked the first year in our history that our net income exceeded COP 3 trillion. In fact, Aval's total net income amounted to COP 3.03 trillion or COP 136 per share, an increase of 4.2% versus 2018. Consequently, the return on average equity for the year was 16.4%.

Nonrecurrent expenses for the year affected the bottom line by approximately COP 190 billion, mainly driven by provision expenses booked in relation to CRDS and SITP. For illustration purposes only, recurrent net income between 2018 and 2019 grew by more than 11%. By December, we had fully provisioned all the problem commercial loans that we had been talking about for the last 3 years. We also wrote off all loans to Electricaribe. At December, Aval's tangible capital ratio had risen to 9.2%. Consolidated assets grew by 7.4%, and consolidated loans grew by 6%, driven by an 8% increase in consumer loans, a 9% increase in mortgage loans and a 4% increase in the commercial loan portfolio.

The 2019 net interest margin was 5.7% versus 5.67% in 2018, as a result of a 6.4% NIM on loans and a 2.3% NIM on investment. 30- and 90-day past due loans were increased by the inclusion of COP 762 billion in PDLs as a result of the CRDS loans becoming due and unpaid during the year. However, these indicators ended the year at 4.36% and 3.26%, respectively, only 10 and 19 basis points higher than in 2018. Allowances for 90-day PDLs reached 140% at year-end.

Cost of risk for 2019 was 2.2% versus 2.4% a year earlier. Importantly, cost of risk for the fourth quarter was 2.1% compared to 2.5% in the previous quarter and 3.1% in the fourth quarter of 2018. Due mainly to strong banking and pension fund fees, net fee income for the year increased by approximately 13%, or 15% in the fourth quarter versus the same quarter in 2018 and 10% versus the third quarter of 2019. Although income from Corficolombiana's nonfinancial sector investments declined, due mostly to the nonrecurring income from these investments during 2018, Corficolombiana continued to contribute with its strong results during 2019, especially derived from its investments in toll road concessions. Personnel, including severance costs and SG&A expenses grew by 6.1% during the year, but only 2% when excluding FX. Finally, complementing our balance sheet's strong funding and liquidity position, the deposits-to-loans ratio finished 2019 at 1.01x and the cash to deposits ratio at approximately 17.2%.

Moving on to the progress we made during 2019 in our digital efforts. These are a few highlights. Our consolidated digital clients increased to 3.5 million. We now offer 22 100% digital products through our banks, up from 15 at 2018. We now use advanced analytics in 31 of the most important operating process in our banks, up from 14 in 2018. Our digital sales increased from 230,000 in 2018 to 940,000 during 2019. We continued to increase penetration of digital sales as a percentage of total sales and are now up to 35%, while 60% of total banking transactions are now digital in nature. Our digital strategy is based on 3 objectives. First and foremost, we have been and will continue to digitalize all possible existing products and operations of our banks and pension fund manager. The execution of this first objective allows us to be more efficient and to offer a better service by improving customer journeys. However, we realized that this same effort is being undertaken by other banks around the world and by the top banks in Colombia. Accomplishing this objective is a bank's ticket-to-play for the future, and therefore, we are currently focusing most of our digitalization effort on this first objective.

The second objective to develop is new digital business models. This is the creation of new products and services, such as DALE, a 100% digital platform, which we launched a few weeks ago. Accomplishing this objective should allow us to serve new segments and markets which we couldn't previously serve mainly due to cost. Although these platforms should make clients out of people who have not wanted to work with traditional banks; younger generations more inclined to maintain exclusively digital relations with our banks and people who have not been sought out by banks, and therefore, are still to become bank clients. Third and final objective is to generate or participate in ecosystems. Accomplishing this objective entails offering our digital financial products and services as a complement and a way to generate added value to ecosystems through which other nonbanking products and services are offered.

Moving on to legal. Regarding ongoing legal matters related to Ruta del Sol, I will briefly share with you an update on the most relevant developments. The main development is related to the Tribunal Administrativo de Cundinamarca or TAC. As you may recall, on December 2018, a class action suit was ruled in first instance, against CRDS; its shareholders, including Episol; and other individuals and entities not related to Aval or its affiliates, jointly and separately, to pay damages to the nation for approximately COP 715 billion. An appeal was filed on February 2019, and consequently, the first instance ruling was suspended until the appeal is decided by a higher court, the Consejo de Estado. However, on October 24, 2019, the Consejo de Estado, which has not yet ruled on the appeal, modified the suspensive effect of the appeal. Changing the effect could be construed to mean that the fine must be paid and other components of the ruling will take effect, even before the appeal has been decided. All the parties involved submitted legal requests to get that decision overturned. On February 14, 2020, the Consejo de Estado ruled in relation to the effects of the appeal, stating that the decision of the first instance ruling will only become effective in the case that the appeal is lost. Consequently, the first instance ruling will continue on standby until the appeal is decided by the Consejo de Estado.

In the antitrust investigation conducted by the Superintendency of Industry and Commerce, in the next months or so, an Informe Motivado should be presented to the superintendent. This is a document prepared by the antitrust area within the SEC, recommending a course of action in reference to the investigation, including confirming the charges, imposing fines and/or discharging one or all the defendants.

Finally, on January 28, we issued a senior bond in the international capital market for a total value of $1 billion, with a tenor of 10 years and a coupon of 4.375%. Demand for the notes, which reached 3x the amount issued, came from more than 200 investors from the United States, Europe, Asia and Latin America. The bonds were issued by Grupo Aval Limited, a subsidiary of Grupo Aval, guaranteed by Grupo Aval in accordance with Rule 144A and Reg S issued under the Securities Act of 1933 of the United States of America. In line with the use of proceeds included in the offering memorandum, part of the net proceeds, approximately half, will be used to wholly subscribe a Basel III-compliant AT1 at BAC Credomatic. The rest of the proceeds will be kept in highly liquid short-term investments and/or loan to some of our operating subsidiaries.

And with that, I'll pass it on to Diego, who will now explain in detail our business results.

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS.

2019 has been our best year in net income so far. Four elements drove our performance: number one, positive results in interest income, driven both by a pick up in loan growth and a strong valuation and OCI realization in our fixed income investment portfolios; second, 20 basis points decrease in cost of risk; third, strong contribution of net income from commissions and fees, particularly in pension fund management and banking fees from Central America; and fourth, a favorable impact of tax reform on our statutory tax rate. We achieved these positive results amidst a still low growth scenario of our loan portfolio. Although we were positive on growth for 2020, given the recent developments, we're cautious and guiding on performance in this highly fluid environment. The global economy is expected to lose traction due to interruptions in trade and production as well as overall lower consumption that result from COVID-19, with us expecting a moderation in economic activity in Colombia as a result of the global scenario that could be exacerbated by the impact of low oil prices.

Moving to Page 10. Assets grew 7.4% over the year and 1.8% during the quarter. Colombian assets grew by 8.2% over the year and 3.7% during the quarter, driven by cash, fixed income investments and net loans. Central America, which weighs close to 30% of our book, saw 4.7% and 3.5% growth in dollar terms over the year and the quarter, respectively, driven as well by increasing investment portfolios and net loans. Excluding the 4.6% annual contraction of Nicaragua, total assets of Central America operations grew 5.3% in dollar terms. Finally, an annual 0.8% depreciation and quarterly appreciation of 5.8% of the Colombian peso brought annual growth up to 5.6% and led to a 2.5% quarterly contraction when translated into Colombian pesos.

Moving to Page 11. Loans excluding repos grew at 6% over the year and 0.1% during the quarter. Although improving compared to a year earlier, commercial loans continued to drive the soft dynamics of Colombian banking system. This low performance was partially compensated by a stronger growth of the consumer portfolio, supported on a positive trend in quality, especially in Colombia. Our Colombian consumer and mortgage business continues to be dynamic, expanding 9.8% and 14.1%, respectively, for the 12 months. Quarterly growth was consistent with this performance at 3% and 3.4%, respectively. Our Colombian corporate loan portfolio, excluding repos, grew by 0.8% during the quarter and 4.3% over the year. Gross loan portfolios in Central America increased 3.7% in dollar terms over the year and 2.6% during the quarter. Nicaragua that weighs 6% of our Central American assets dampened the 12-month performance contracting 19.8%, while the rest of the region expanded at 5.4%. We gained market share in every country, except Nicaragua and Panama.

On Pages 12 and 13, we present several loan portfolio quality ratios. Delinquency metrics continued to improve during the quarter both in Colombia and in Central America. In the fourth quarter, we charged off the full exposure to Electricaribe in transit, one of the SITP companies, that combined amounted for COP 908 billion. In addition, Ruta del Sol impacted new PDL formation as it became past due, both on a 30- and 90-day basis, with COP 762 billion exposure. This loan was fully provisioned by year-end.

Despite an improvement over the last quarter, delinquencies of Central American loan portfolio increased over the year. This was primarily driven by macro in Costa Rica and sociopolitical events in Nicaragua. As IFRS 9 reflects expected credit losses, this performance had been incorporated into our cost of risk during the second half of 2018 and the first quarter of 2019. Our commercial loan portfolio showed an improvement of 31 basis points in 30 days PDLs and 10 basis points in 90 days PDLs over the quarter. We recorded a 26 basis points improvement in 30-day commercial loan PDLs and 3 basis points on 90-day PDLs in Colombia. Central America, 30-day commercial PDLs improved by 60 basis points and by 42 basis points for 90-day PDLs, driven by Guatemala and Panama.

Delinquency ratios for consumer loans showed an improvement on a 30-day basis, more substantially stable on a 90-day basis over the quarter. In Colombia, the improving trend in delinquency of consumer loans persisted with 30 days PDLs falling 27 basis points to 4.9% over the year and remaining stable over the quarter. 90-day PDLs were stable at 3.1% over the year and were 8 basis points higher over the quarter. In Central America, 30-day PDLs consumer loans improved 21 basis points to 4.7% over the quarter, while 90-day PDLs remained stable at 2.1%. Yearly deterioration of consumer in Central America was primarily driven by Costa Rica.

Our mortgage PDLs increased during the quarter, driven by Central America. The cost of risk improved by 42 basis points during the quarter due to a 46 basis points improvement in Colombia and a 32 basis points improvement in Central America. Full year cost of risk improved by 17 basis points, driven by 23 basis points improvement in Colombia and 3 basis points improvement in Central America. Our PDL coverage of 90-day PDLs remained at 1.4%.

On Page 14, we present funding and deposit evolution. Funding dynamics were consistent with loan growth. Funding structure remained materially stable with deposits representing 76% of total funding and our deposit to net loan ratio reaching 101%. Our liquidity position continues to be strong with cash to deposit ratios -- ratio at 17%. Deposits grew 0.8% in the quarter, accumulating 6.8% over the 12 months. Colombia grew at 1.3% in Colombia peso terms and Central America at 5.9% in dollar terms during the quarter. For the 12-month period, Central America grew at 10.2% in dollar terms, while Colombia grew at 4.8% in peso terms.

On Page 15, we present the evolution of our total capitalization, our attributable shareholders' equity and capital adequacy ratio of our banks. During the year, our total equity grew by 12.8%, while attributable equity grew at 11.6%, mainly driven by our earnings and our OCI growth related to valuation of our investment portfolio. Total equity and attributable equity grew 3.0% and 2.8%, respectively, over the quarter.

As of December 2019, our banks show appropriate Tier 1 and total solvency ratios. On February 2020, we reported, for the first time, the Grupo Aval conglomerate adequacy capital to the superintendency of finance, showing an excess over minimum adequacy capital.

On Page 16, we present our yield on loans, cost of funds, spread and net interest margin. Our yearly net interest margin increased 3 basis points to 5.7% during 2019, mainly driven by higher net interest margin on investments that was partially offset by a higher net interest margin on loans. Quarterly net interest margin slightly decreased as a result of lower net interest margin on investments and a stable net interest margin on loans. As anticipated, pricing in Colombia continued to be aggressive during the last quarter due to the improvement in consumer loan quality and better outlook in the corporate portfolio resulting from a stronger GDP. This led to a 20 basis points compression in quarterly net interest margin on loans in Colombia and was partially offset by a higher net interest margin on loans in Central America as some of the higher-yielding countries move faster in our portfolio. We continue to expect some pressure on net interest margin on loans as growth increases the share of newly priced loans in our mix.

On Page 17, we present net fees and other income. Gross fee income for 2019 grew 11.6% when compared to 2018, with gross fees in Colombia increasing 8.2% in pesos and by 5% in Central America in dollar terms. Growth in Colombia was driven by a particularly strong performance in pension fund management fees. The year 2020, 2018 was a strong year in other income from operations due to property, plant and equipment optimization in Banco de Bogotá and Banco Popular. Also, the nonfinancial sector registered during 2018 a particularly high income explained by the initiation of construction of 2 of our toll road concessions. The decreasing income from these transactions was partially offset by an increase in OCI realization from investments in debt securities, equity method and dividends in 2019.

Our infrastructure income decreased by 12.8% during 2019, mainly driven by income related to the initiation of construction of Covioriente and Pacifico 1 concessions during 2018. In addition, work-in-process during 2019 was lower than during 2018 due to variations in weather conditions that slowed progress when building bridges and tunnels and some of the roads. Our gas and energy sector maintained its strong contribution and our agro business returned to a positive contribution to the nonfinancial sector income during 2019.

On Page 18, we present some efficiency ratios. Personnel and SG&A expenses grew 6.1% with 1.7% increase in Colombia and 2.4% in Central America in dollar terms during 2019. Personnel increased 5.4%, driven by a depreciation of peso on our Central American operation. In fact, personnel expense remained flat in Colombia and grew 2.0% in dollar terms in Central America. G&A expenses increased 3.0% in 2019 compared to a year earlier. This figure was 8.6% for Colombia and 4.9% for Central America in dollar terms when adding IFRS 16 related depreciation and amortization to administrative expenses. G&A includes an extraordinary nonincome tax expense in order to raise the fiscal cost of certain fixed assets, which amounted to 1.9% growth in the Colombian operation. However, this was offset by a positive effect and income tax recovery that resulted in a net positive effect of $57.6 billion in net income. Depreciation and amortization expense increased by 67% mainly due to the adoption of IFRS 16 during 2019, which changed the accounting methodology of leases now accounting the right of use under depreciation and amortization. Finally, other expenses increased by 44% in 2019 compared to 2018, mainly explained by provisions of further need for expenses related to pension clients transfer from the private to the public pension fund system.

Finally, on Page 19, we present our net income and profitability ratios. Attributable net income for 2019 was COP 3,034 billion or COP 136 per share, COP 5.5 higher than 2018 accumulated results. Attributable net income for the quarter was COP 715 billion or COP 32 per share. The nonrecurring events that affected our net income during 2019 were the specific provision expenses booked in relation to Ruta del Sol and SITP that added COP 328 billion on our cost of risk, with a post-tax attributable net income negative effect of COP 162 billion. Other nonrecurring events had a COP 25 billion negative effect on attributable net income. Our return on average assets and our return on average equity for the year were 2% and 16.4%, respectively.

We are now available to address your questions.

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

I'd actually like to ask a question. Looking at all of this uncertainty we are going through, these are very volatile times as well, I would just like to maybe understand what are the first immediate strategies that the bank has been implementing to sort of guide through these very uncertain times? And then I also have another question on your asset quality. You say in your press release that you fully wrote off Electricaribe and transit which represents more than 2% of your loans. However, your NPL ratio for the commercial line, they only decreased by 9 bps. So is there something here that has deteriorated more than you were expecting? Also, is there maybe a segment you were looking to more closely in the midst of all this uncertainty as well?

All right. Thank you, Gabriel. I'll take your first question. And regarding what the banks are doing right now with all the dual shocks that we are living through, that everybody is living through, the banks are concentrated basic -- concentrating on 3 aspects predominantly: on the employees, on clients and on the operations of -- the continued operations of the bank. As far as employees, what we're doing is, we are keeping out of the office every employee that we possibly can. We've enabled a lot of home office working. We've even established shifts for employees to come at different times than rush hours and the peak hours, so they don't have to use mass transportation with -- at peak hours. And obviously, we're keeping ourselves very, very aware of what's going on with the health of all of our employees. For now, I mean, I'm happy to say that there's only been 1 case reported of all of our hundred-plus thousand employees. And that is a person that traveled to Spain, and on the way back, never made it to the bank but showed symptoms and is now in quarantine. As far as our clients, as I said before, we are being very proactive in offering them and encouraging them to use all digital aspects of our platforms. And we have seen a dramatic decrease in client usage of our branch networks. So it seems that it's working. In terms of the operations of the banks, obviously, what we're doing in each bank is going through a deep analysis of all the clients, of all the -- especially the credit clients that we have to make sure that we anticipate any loan problems, and we're being proactive in contacting those clients and making sure that they have the proper circumstances under which they can still look after the credits. And obviously, there are industries that we know are been hit harder than others, any tourism-related industry is been hit with the latest announcements of countries canceling flights to other countries. Obviously, the airlines are getting very much impacted. And also independent workers, those that don't have a steady stream of cash coming in but rather depend on daily or monthly performance are obviously seeing their businesses decrease. So we are on top of that. We haven't seen and it's one of the reasons that we don't change our guidance, we haven't seen any real impact in delinquencies or in nonpayments or in cash withdrawals or in decreasing deposits. So basically, what we're doing is, we're trying to be proactive and to predict anything that might be coming that way, and as I said, to act before it actually happens.

Regarding your second question on NPLs, you're absolutely right. There is something that did affect the numbers and it is that at the same time that Electricaribe and Tranzit were leaving our book because they were written off. Ruta del Sol entered the book. This loan was actually fully provisioned but hasn't been written off as of year-end. When this loan gets written off, you're going to get exactly the numbers that you're looking into.

Our next question comes from Andres Soto from Santander.

My question is related to current market volatility. Obviously, there are multiple uncertainties at this point. But considering recent movements in FX and Colombian rates, it will be great if you can provide some color on the potential short-term impact, not only in your banking business but also on the results in your pension management and infrastructure segments?

Sure, Andres. Yes, as you say -- well, first of all, it's tough to say where the FX might end up to -- might end up, whether it might even come back or it stay at COP 4,100 or even keep rising. But as you say, obviously, the impacts derived from FX are several. If you look at our pension fund, our pension funds -- well, some of the investments of the pension funds are dollar-related investments, and those will -- obviously, they tend to increase in value. But on the other hand, most of the dollar investments of the pension funds are covered with derivatives. And that, obviously, when the exchange starts rising, that needs more liquidity to cover the derivatives, the hole that comes about when the exchange rate rises. And obviously, that has the pension fund using up some of the liquidity that we had set aside. So we see that. Not only FX, obviously, that -- while you might have even a positive effect of uncovered FX exposure in the value of the pension funds, obviously, that's been offset by the drop in the prices in the stock market. And obviously, the prices of shares have dropped and with it the value of those investments in pesos in the local and foreign markets.

With regards to our operation -- to our banking operations, well, obviously, you also have different effects because you translate the balance sheets and the income statements of our foreign to us of our Central American operation. Then you see on the one hand, you see better contribution in pesos from the dollar result of our Central American operation. But on the other hand, you also see since we made that investment in dollars and that investment is covered by half financial coverage by dollar-denominated bonds and then half by derivates in the book of Banco de Bogotá, then you also see an effect on liquidity of the bank as the bank has to cover some of those derivates. Also, there is obviously a foreign exchange account in the OCI of the equity of the bank that moves as the FX increases. So there are -- as I said, it's tough to put it all in a nutshell. There's probably with every peso that moves probably 8 or 9 accounts move, and what we're doing is, we're staying on top of them and making sure that we understand where each peso is going. And we are obviously also in constant conversations with the Superintendency of Finance to make sure that the regulations that they pass are -- give the market and give the banks flexibility as to their coverage strategies so that we can change our strategies, if need be.

Our next question comes from Adriana De Lozada from Scotiabank.

Congratulations on your results. At the beginning of the presentation, you mentioned that you do not expect the current oil price war shock to be -- to have such a big impact as 2015 and you also discussed the spike in inflation then. So maybe you can remind us what inflation you consider in your 2020 guidance? And if you can give us a few words about consumer loan evolution and cost of risk this year?

In 2015, if you recall, by September 2015, on a 12-month basis, inflation had risen to 9.2%. So when I said that I didn't expect the -- this dual shock to take inflation to levels similar to those observed in 2015 -- I was referring to was that I don't foresee inflation doubling or tripling as a consequence of what's going on.

If I understood right your question about inflation, it was incorporated into our previous guidance. The number was 3.5%. And then what cost of risk evolution did we expect before this shock, we're expecting to see a 20 basis points improvement from 2.2% to 2.0%. That was what was incorporated in our guidance. And as Mr. Carlos mentioned, at this point, we will refrain from giving you guidance because we see a panicked herd effect at this point. And many of these key variables might change, not only in magnitude but directionally. Discussion on interest rates has many possible scenarios. Some of those could imply interest rates falling, therefore, our fixed income investments, not only recovering but actually gaining value. And the exchange rate side, I think it's anybody's bet what can happen at this point. We're just bystanders to what is happening between the Arabia and the Soviet Union at this point or Russia.

Our next question comes from Nicolas Riva from Bank of America.

And I had -- I wanted to ask on 3 topics, if I may. The first one, on some of your credit exposures, you mentioned some subs, which, of course, are going to be hit by all of this, if I had to understand, like oil and gas, tourism and hotels. If you can maybe talk us about your exposure to oil and gas companies, how much it is of your loan portfolio, if it's basically exposure to Ecopetrol or some oil and gas exploration production companies? You are thinking of increasing loan or reserve for these in the first quarter. And the same thing also for airlines, and if airlines have reached out to you to get lines of credit or additional liquidity? So that will be my first question on exposure to oil and gas and airlines.

The second one, on these corporate clients that you talked about in the press release and you mentioned in the call, just to make sure I got it right, so you have already fully provisioned Ruta del Sol, Electricaribe, Tranzit and also some -- any other mass transportation companies, which have already been fully provisioned. And also -- so that's one thing. And then in terms of which of these have been completely written off from the balance sheet or we shouldn't see any impact on NPLs on the balance sheet, that would be Electricaribe and Tranzit, but Ruta del Sol, I understand, has not been written off.

And then the third topic, if I may, on Multibank, if you can provide us with a number on the transaction? I would assume that all of what happened doesn't change. I mean, you're still going to go through with the transaction. I remember the pricing was a bit more than $700 million. And you can give us an update on when BAC Credomatic is going to issue this AT1 bond? And when do you expect to get approvals or all of this stuff to be done?

Well, regarding the credit side, you're asking on exposures, we are pretty diversified in our portfolio. From the sectors that you went through, oil and gas might be the larger one, and at this point, it is around 1.2% of our loan portfolio. And a very substantial portion of that is the gas pipelines that we're exposed to. Therefore, we are less subject to the impact of prices of oil. Then the tourism side, it is around 0.5% of our loan portfolio. And finally, airlines that is, I assume you're referring to Avianca, we continue to have exactly the same that we've disclosed in the past. We're exposed to a syndicated loan from TACA that is guaranteed by receivables. That's around $150 million that is in the bank -- the books of Bogotá bank and Banco de Occidente. And then in Colombia, most of our loans that is around COP 96 billion, this is pesos, is guaranteed by the building that they have on your way into the city from the airport. So that is regarding these exposures. As Mr. Carlos mentioned, we are -- we have triggered all of our risk management procedures to go through all sectors that are exposed to the kind of risk factors that are at this point, volatile, such as oil. We're also looking into exchange rate in GDP-growth dependent businesses.

Then on the corporate clients, I think it's exactly as we described, except for SITP, we fully provisioned and wrote off Tranzit and the other 2 companies that we're exposed to. We believe we have them rightly provisioned, and we have a good view on the prospect of recovery, given that they were able to restructure their agreement with the local government. Electricaribe, as you said, was written off last year. Ruta del Sol was fully provisioned and will be written off at some point during this year.

And regarding Multibank, yes, we're subject to a contract and we're going through every single aspect of that contract which has obviously a lot of precedent conditions that are being met by the purchasers, ourselves, and by the sellers. And there's also a drop-dead date for the contract that we're trying to obviously get to before it happens and -- but things seem to be in line to get the deal done. There will be some price changes based on the very deep due diligence that we've undergone since we signed the purchase agreement. That might change the price a little bit, actually reduce the price a little bit. But other than that, as I said, both the sellers and ourselves are trying to comply with all the conditions precedent that were included in the selling and purchase agreement.

Our next question comes from Yuri Fernandes from JPMorgan.

I would like to make a follow-up regarding the asset quality topics. I got like the mass transportation, you had some renegotiations with the local government. But if there is a major curfew or if people that use less the public transportation systems, how big is your exposure? Like how big could you be able to increase their provisions to this sector? Because I do believe that in addition to the airlines, tourism and gas, there are other sensible sectors that were like in a very bad shape that could be not in a very good position nowadays. And regarding margins, I understood your concern on inflation, but with the Fed cutting rates, like most emerging markets cutting rates, should not us expect like the Banco de la República to cut rates in Colombia as well and see some pressure in margins for 2020?

Okay, Yuri. Regarding asset quality, as we mentioned before, we're actually at the point of reviewing what are the sectors that would be sensitive to what has been going on. Two weeks ago, I would say there wouldn't be something that we would be highlighting at this point. We are at this -- this time, we're just reviewing what will be happening. Obviously, those that will be affected most are those that are affected by the shutdown of the economy, commerce and so on. The exchange side, we are reviewing and the oil price -- well, it's very direct, the impact that we have there. Regarding margins, that is one of the main reasons why at this point, we are refraining from giving guidance. And it is -- we have different scenarios. One scenario is Colombia follows what most of the countries are doing and we go into substantial interest rate cuts. And that's why I mentioned we've got to even move into positive ground on income from fixed income investments. On the other hand, we've had a depreciation of COP 4,000 -- up to COP 4,000 or COP 4,100, whatever the number is, as of this call, and that does have some impact on inflation. There's many numbers out there. There's numbers ranging between 50 basis points and 150 basis points of pressure on inflation. And it very much depends on how the Central Bank reacts. But this -- at this point, this is binary. It's not something that we can project, but there's 2 different scenarios that could lead us in opposite directions.

Our next question comes from Carlos Rodríguez from Ultraserfinco.

(technical difficulty)

Mr. Rodríguez, if you can get closer to the phone. We're not able to hear you.

He seems to be having audio issues. We will move to the next question.

It comes from Sebastián Gallego from CrediCorp Capital.

Can you hear me there?

Yes, we do.

All right. And yes, congratulation as well on results on 2019. Just 3 additional questions. The first one on a follow-up regarding Multibank. The question is, are you thinking about different strategies to actually pay the transaction in case it goes on? In previous calls, you mentioned that internal funds were going to be used. But I'm just wondering, given the current conditions and volatile environment, if there are any considerations to be made regarding additional funds to be needed? Second question, I know it's a very volatile environment, but -- and things might change, as you have been mentioning through the call, but can you provide some color on what are your thoughts regarding what banks will do, particularly on the consumer and commercial segments here in Colombia, particularly taking into account all the competition that you mentioned and we have been observing particularly in the consumer segment? And lastly, if you can provide an opinion on what the Central Bank here in Colombia should do under the current environment, whether to cut rates or other measures? Are you guys or will you guys be willing to propose to the Central Bank under current scenario?

All right. Thanks for the questions. Let's start with Multibank. Multibank is already funded, if you will. We, say, of a purchase price of about $700 million, the BAC has already allocated and set aside about $200 million in dividends from actually excess capital debt that it has. And the remaining or $500 million, we already have on hand at Aval via the bond that we issued last month for the $1 billion, and half of that we can use to complement the $200 million that BAC already has set aside, as I said, for the total of $700 million. So no, at this point, we're really not considering different strategies to pay the transaction. The money is already on hand. And regarding -- and I'll jump to the third question and then Diego can take the second one regarding consumer and commercial segments. But on the question, as to what the Central Bank should do, I think that if I venture an answer, they might get mad at me, but I think that basically what we have to wait is to see the Central Bank has always been and I'm a big admirer of the Central Bank because I believe they are very accurate when they impose monetary policy. I think, themselves, what they're waiting to see is not to succumb to a drop in rate just because of what might happen but they are waiting to see how inflation might and will be affected by everything that is going on. And they'll probably react to it more than try to prevent it. But we'll see, actually, we'll see. If inflation starts rising very fast, they will have to tighten monetary policy; that will obviously put a damper on growth. But their mandate, their constitutional mandate, is to protect the country against inflation, not to power growth. However, as you know, governments will put a lot of pressure; the executive arm will put a lot of pressure on getting the Central Bank to either maintain or decrease rates. So you have the 2 opposite sides pulling in different directions. So I think it's better to just wait and see what happens. And obviously, in the meantime, we'll be preparing ourselves for either scenario.

Regarding your question on color and what the banks will do in these volatile environment, I would say that the main thought here is Grupo Aval's banks have been in the country for a very, very long time. We've lived through many cycles, positive and negative cycles. We are a very substantial portion of the banking system around 1/4 of the system. I would say in that context, you have to bear in mind that our business is risk management. Therefore, at this point, we're being very careful on what kind of risks we are underwriting. However, we are present in Colombia, and we are actually supporters of what is happening in Colombia. Therefore, we will continue actively lending as we've done over many cycles. I would say at this point regarding to what our strategy was before, this couple of weeks, we had mentioned that we had seen the commercial sector starting to get forced, force that was driven by consumer demand. Therefore, it was the kind of growth you want to see, and we're ready to increase our activity in that segment.

On the consumer side, we had already seen much of the recovery that we are looking into. And the quality of the portfolio continue to improve, therefore, client-by-client, product-by-product, we have been determining where our growth would be concentrated.

Our next question comes from Julian Felipe from Corredores Davivienda.

Congratulations for the results for the fourth quarter. And my question is very specific about what is the impact that you might look about in terms of the funding costs due to the current situation?

I would say, at this point, it very much depends on Central Bank policy. Obviously, one of the areas that we triggered as areas of alert was not only credit risk but also market risk. And we're actually looking into what the Central Bank does and making sure that we are monitoring what is happening with liquidity, therefore, with prices.

And we have a question from Diego Torres from MCC-Itaú.

Regarding the 2013 newly issued bond, could you just go mention the use of proceeds? And on the other hand, could you also mention how you are planning to refinance or pay down the 2022 notes?

Okay. Let's start with the $1 billion bond that we just issued. That bond will be used about -- as I said, about $500 million will be used to subscribe in an AT1 that BAC Credomatic will issue. With that -- with the proceeds of the bond that BAC issues, it will complement it with another $200 million. And with that, they'll have the money to pay for Multibank. The remaining $500 million will be used in the same way that we've been using moneys that we obtain from global bonds that we issued. And that is we use that money to unlend to our own affiliates, entities, subsidiaries that either don't have access to the capital market, or they do, but at rates even higher than those that we can obtain when we issue bonds. So we do a bit of arbitrage there. We pay the rates that the market charges us, and then we unlend the money at higher rates to our own subsidiaries. We do that at tenors of -- that are shorter than the tenors of our bonds so that we get the money back from our subsidiaries before we have to pay the bonds. And that brings us to the $1 billion that we have outstanding that mature in 2022. Those -- that $1 billion, right now, we have about $700-or-so million of those lend to our own institutions in the conditions that I just mentioned. They are lent at higher rates than the ones that, that bond is costing us. And secondly, the loans that we made will come due before 2022. So with the liquidity that we have because about $200 million or so or $300 million or so are very liquid and available. And between that and the loans that will be paid down by our entities, we'll have $1 billion to pay the 2022 bond when it comes due.

Ladies and gentlemen, I will now return the call to Mr. Sarmiento for closing remarks.

All right. Thank you, Hilda. Well, first, I wanted to thank you all for your attention. And for the sakes of all, let's hope that the COVID-19 pandemic is soon brought under control and that the world superpowers find a way to manage -- work national resources in a way that is conducive to economic growth and not towards its detriment. In the meantime, we will make sure to keep you posted if there are significant developments in any of the fronts that we covered today in our presentation. If not, we hope to continue meeting your expectations. And we'll see you next time.

This concludes today's conference. We thank you for participating. You may now disconnect.