Grupo Aval Acciones y Valores SA (AVAL) 2022 Q2 法說會逐字稿

Welcome to Grupo Aval's Second Quarter 2022 Consolidated Results Conference Call. My name is Hilda, and I'll be your operator for today's call.

Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities in Colombia and in the United States SEC. 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-IFRS measures such as ROAA and ROAE, among others, are explained when required in this report. Banco de Bogota executed a spin-off of a 75% equity stake in BAC Holding International Corp., BHI, to its shareholders and Grupo Aval subsequently spun-off its equity interest to its shareholders on March 29, 2022. Prior to the spin-off, Banco de Bogota was the direct parent of BHI.

Grupo Aval has retained an indirect stake of approximately 17.2% in BHI, representing our proportional interest in the 25% equity stake in BHI retained by Banco de Bogota. This interest in BHI is reported as discontinued operations for reporting periods prior to the spin-off, and will be reported under the share of profit of equity accounted investees, net of tax equity method line item for subsequent periods.

As a result, for comparability purposes, we have prepared and present supplemental unaudited pro forma financial information for the 6 months ended June 30, 2021, that assumes the spin-off was completed on January 1, 2021. The supplemental unaudited pro forma financial information does not purport to be indicative of our results of operations or financial position had the relevant transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date.

The pro forma financial information is unaudited and the completion of the external audit for the year ended December 31, 2022 may result in adjustments to the unaudited pro forma financial information presented herein, any such adjustments may be material.

This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by the 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 the information provided in this report, including any forward-looking statement.

And we 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 Gutierrez, Chief Executive Officer. Mr. Sarmiento Gutierrez, you may begin.

Good morning, and thank you all for joining our second quarter 2022 conference call. As always, it is my pleasure to introduce our strong financial results for the quarter that ended on June 30.

Of significance, because the spin-up of 75% of BHI was completed at the end of this year's first quarter, this quarter's results do not include net income from discontinued operations. As you may recall, during the first quarter of this year, income from discontinued operations totaled COP 1.6 trillion or COP 1.1 trillion in attributable net income.

Before Diego provides a detailed look at our numbers, I will provide an overview of Colombia's macro scenario, followed by a quick update of the status of our clients' pandemic-driven loan release, our digital efforts and a few highlights of our financial performance.

Let's start with the macroeconomic scenario. Undoubtedly, the global economy is facing sustained inflationary pressures, which have led to tighter monetary policies worldwide. And yet to be normalized supply chain, the disruption in the supply of domestic gas to Europe and fertilizers to the rest of the world because of the Russian invasion of Ukraine, China's COVID policies and consumers spending, pandemic savings have all combined to exacerbate inflation pressures.

A generalized increase in interest rates and supply issues have slowed down economies around the world. As a result, the IMF now estimates global GDP growth for 2022 of 3.2%, down from the 3.6% expected in April, mainly driven by the slowdown of growth in the 3 largest economies, the U.S.A., China and the Eurozone.

In contrast, for now, the Colombian economy continued with its post-pandemic solid rebound. In fact, as you may recall, during the first quarter, the Colombian economy grew 8.5% or 8.2% on a seasonally adjusted basis. Recent data suggests that GDP growth will exceed 11% during the second quarter when compared to the same quarter a year ago.

Growth was boosted by private consumption and due to a base effect, because the second quarter of 2021 was marred with a negative effect on GDP of social protests throughout the country. Accordingly, we have updated our estimate of Colombia's GDP growth upwards and now expected to fall between 6.25% and 6.75%, more in line with market consensus.

Regarding the labor market, the unemployment rate fell to 11.3% as of June. In fact, all the jobs lost due to the pandemic were recovered at the national level, while 90% of all urban jobs have been recovered.

The average unemployment rate during the second quarter was 11% compared to 13.2% during the first quarter and 15.1% a year earlier, enhanced by jobs in the entertainment, agriculture, transportation and commerce sectors.

We expect additional gains in payroll numbers and a further decline in the annual unemployment rate to an average in the 10.5% to 11% there, down from 15.9% in 2020 and 13.8% in 2021.

Concerning inflation, Colombia has not been the exception. Pushed by strong domestic demand, 12-month inflation continued to accelerate, reaching 10.2% in July, the highest 12-month figure over the last 22 years. Food inflation, which accounts for approximately 15% of inflation at 24.6%, continues to be one of the main drivers of the increase in consumer prices.

Rent and home utilities inflation, which accounts for approximately 33% of inflation at 6.1%, is another big influencer in the inflation number. Inflation expectations continue rising with a market consensus forecast of 9.1% for 2022.

We anticipate that 12-month inflation could reach 9.5% by year's end. In this context, we believe the Central Bank is close to reaching the end of its tightening cycle in 2022. The repo rate is currently at 9% after a 150 basis points hike during the last meeting in July and real interest rates are finally positive after a couple of years.

If inflation behaves as expected, we don't rule out the possibility of one additional hike of 100 basis points in September, which should bring the year-end rate to 10%.

Regarding the exchange rate, during the second quarter, the dollar appreciated as much as COP 879 or 23%, but has recently depreciated to around COP 4,310 per $1, which equates to a devaluation of the peso during 2022 of approximately 8%.

In general, we expect the peso to respond to Colombia's trade deficit, which is very dependent on the price of oil and with the prospects of a tighter monetary policy in the U.S. and an eventual outflow of capital from Colombia towards hard currency economies. However, for now, we expect the stability of the peso at the COP 4,200 per $1 area.

On the fiscal front, the government now expects a deficit of 5.6% of GDP in 2022, an improvement versus the 7.1% recorded in 2021 and the 6.5% initially forecasted, reflecting the strong economic rebound, the positive effect of higher oil prices and very positive tax revenues.

In fact, tax revenue in June grew 35.5% compared to June 2021. This improved fiscal scenario could contribute to a lower ratio of net public debt to GDP, up 56.5% by year-end, down from 61% at the end of 2021.

On August 8, Colombia's new government presented a new tax bill to Congress, which we are just starting to analyze, but whose well-known objective is to increase tax revenues by as much as COP 55 trillion to expand social programs and reduce public debt. Several other reforms have been announced, including environmental, energy, pension and health reforms.

Moving on, as of June, active debt reliefs in Colombia amounted to approximately 4% of the total consolidated loan portfolio and the active debt reliefs in Multibank, Banco de Bogota's local bank in Panama amounted to approximately 3% of Aval's consolidated loan portfolio.

Of all loans that have concluded the relief periods, less than 1% of past-due 90 days or more and 1.3% are past due 30 days or more.

I'll move on to digital. These are some noteworthy numbers regarding our strategy. First, Aval's bank's active digital clients remained at approximately 4 million at the end of June. Additionally, clients of our digital wallet DALE has started to grow significantly and totaled approximately 0.5 million by the end of June.

Our banks sold over 1 million digital products in the first half of the year, an increase of 59% versus the first half in 2021. Our total digital share continues around 60%. Digital adoption of our mobile banking apps and personal banking platforms reached 59%. We expect to have a 65% digital adoption by year-end.

Disbursements through our first mobility -- sorry, through our first mobility ecosystem initiative, Caroya, increased by 3x in the quarter. Additionally, the amount of qualified credit leads for our banks through Caroya increased 25% during the quarter. And the leads to disbursements conversion rate doubled over the quarter.

In June, we launched our insurance digital ecosystem in alliance with the global insurance companies MAPFRE and Allianz. Campaigns conducted through Mathilde ads, our programmatic ad platform, have improved our bank's client targeting and materially reduced our digital acquisition costs.

Finally, we're proud to announce that for a second year in a row, Banco de Bogota was recognized as the best innovative digital lab by Global Finance.

To finish, in a minute, Diego will refer in detail to our financial performance during the second quarter of 2022. However, I would highlight the following. The second quarter marked the first entire quarter without BHI, BAC Holding International, under our wings.

BHI continues to do very well, and I'm sure shareholders are thrilled with its performance. In the meantime, our Colombian banks and our nonfinancial sector subsidiaries registered a remarkable quarter when compared to previous quarters adjusted to strip out the contribution from BHI.

In fact, on a comparable basis, Aval delivered a quarter with 7% higher in attributable net income than the first quarter of 2022 with notably better credit quality and cost of risk. Additionally, operating cost control continues to be very high in our priority list as well as the execution for our digital, innovation and payment strategies.

As expected, in this rising-rate scenario, loans interest margins continue to expand in our 2 largest banks, which in turn are those with loan portfolios mostly composed of commercial loans. While loans interest margins tend to contract in banks with loan portfolios with mostly fixed rate consumer loans.

Obviously, cost of funds continues to rise both for our banks and for our nonfinancial subsidiaries. We remain very vigilant of the effect that continued rising interest rates could have in the ability of our customers, especially customers with variable rate loans to pay their obligations. For now, we are satisfied with what we're seeing.

Finally, our pension fund manager has seen its insurance premium costs rise due to the pandemic increase in mortality and its fixed rate portfolios have also suffered the volatility derived from higher interest rates.

As we highlighted, the economy continues to move in the right direction, but inflation has not started to subside. Therefore, we expect that monetary policy will continue to tighten until it makes a dent on inflation.

Importantly, on the foreign front, we have yet to see the final global consequences of the fast approach in European winter without a solution to the domestic gas debacle and the full restoration of the global supply chain.

Locally, we will await and analyze closely all the announced reforms and the consequences over our businesses. I believe that future quarterly calls will contain chapters focusing on quantifying those effects. But ultimately, we continue to strongly believe in this country's resilience.

I thank you for your attention. And now, I'll pass on the presentation to Diego, who will explain in detail our financial results. Thank you very much.

Thank you, Luis Carlos. Before I start, I want to mention that on this call, we are presenting the gains from loss of control of subsidiaries related to a spin-off of 75% of BHI as discontinued operations, improving the comparability of our continued operations.

On our first quarterly call, we had identified them as other income. We are aware that this changes previously reported metrics for efficiency and fee income ratios.

Beginning on Page 6, on a comparable basis, assets grew 13.9% over the year and 5.7% during the quarter. Over the quarter, our mix shifted toward cash reflecting the position that we have already built to prepare to pay the COP 1 billion bond on September 26 of this year. Over the year, our unconsolidated equity investments increased their share of assets, reflecting that after the spin-off, Banco de Bogota's equity interest in BHI is accounted for as an investment in associates.

Moving to Page 7, we present the evolution of our loans on a comparable basis. Gross loans grew 12.8% over the year and 5.2% during the quarter. Quarterly growth rate was strong, both in commercial and retail lending. Commercial loans continued to gain traction, reaching 5.4% growth over the quarter and 11% over 12 months. Midsized companies and SMEs explained part of this performance.

Demand for consumer loans continues to be high, resulting in a growth of 4.8% during the quarter and up 14.7% over 12 months. The improvement in GDP growth, employment and overall macro environment has allowed us to increase our underwriting of personal loans and credit cards.

Payroll loans still constitute most of our consumer loan portfolio with 59% of the total, followed by personal loans and credit cards with 20.5% and 11.5%, respectively. Our loans represent close to 9% of our consumer book. Payroll loans continued to drive our growth, increasing 3.8% quarter-on-quarter and 13.6% year-on-year.

Personal loans, credit cards and automobile loans grew 7.2%, 5.8% and 5.1% over the quarter, taking annual growth to 19.8%, 12.9% and 14.6%, respectively.

Finally, mortgages remained dynamic, expanding 5.8% over the quarter and 18% year-on-year. Even though headwinds for monetary policy can be expected to reduce the pace of the system, we have a positive view on growth moving forward. GDP and household and government demand will support this performance. In addition, the improvement in employment will further benefit retail lending momentum.

On Pages 8 and 9, we present several loan portfolio quality ratios on comparable basis. The quality of our loan portfolios continued the improvement trend both measured as composition by stages and through PDL metrics.

Cost of risk fell substantially relative to a year and quarter earlier. Composition of our loan portfolio classified by stages continued improving as well as the coverage ratios for each stage. Stage 1 loans now represent 84.3% of our gross loans, improving from 80.7% and 82.6%; 12 and 3 months earlier.

Stage 3 loans are back to prepandemic levels. The retail portfolio is already slightly below pre-pandemic levels, while commercial loans are approaching the 2019 levels. The portion of Stage 2 loans is still affected by the outstanding balances of active reliefs.

Freight risk overlays put in place during the pandemic still drive the higher level of Stage 2 loans. We expect this portion of our book to continue improving towards Stage 1 as we advance into the second half of the year and continue reducing the balance of active reliefs and removing overlays.

Regarding delinquencies, 90-day PDLs fell to 3.33%, a 94 basis points improvement over 12 months and 20 basis points improvement over 3 months. 30-day PDLs fell to 4.38% and 115 basis points improvement over 12 months and 27 basis points improvement over 3 months. Both metrics stand over 50 basis points below pre-pandemic levels on a comparable basis.

Cost of risk net of recoveries was 1.4%, including a 57 basis points quarterly improvement in commercial loans to 0.49% and a 2 basis points increase in retail to 2.6%.

Finally, the ratio of charge-offs to average 90-day PDLs was 0.54x for the quarter, stable relative to a quarter earlier.

On Page 10, we present funding and deposit evolution on a comparable basis. Funding growth during the quarter was in line with that of our loans with stable deposits to net loans ratio at 100%. Deposits, which account for 70% of our funding, increased 4.8% during the quarter and 7.9% year-on-year, driven by growth in current deposits favoring the stability of our funding.

On Page 11, we present the evolution of our total attributable equity and the capital adequacy ratio of our banks as reported. Our total equity grew 1.9% over the quarter, while our attributable equity increased 1.2%. Lower valuations of fixed income investments held at fair value to OCI in an increasing rate of environment dampened the contribution of net income.

Annual decrease in our equity reflects the spin-off of 35% of BHI in March 2022. The solvency ratios slightly fell in some of our banks despite positive results and net income, incorporating the increase in risk-weighted assets resulting from loan growth and the lower valuations of our investment portfolios through OCI.

On Page 12, we present our yield on loans, cost of funds, spread and NIM on a comparable basis. Our overall NIM fell 50 basis points to 3.64% during the quarter, driven by a negative NIM on investments. A stable NIM on loans in our banking segments, combined with a higher funding cost of our nonfinancial activity resulted in NIM on loans of 4.91%, contracting 19 basis points during the quarter.

NIM on loans performance incorporates benefits and monetary policy on our commercial lending activity that we priced strongly. On the other hand, our consumer loans that have longer re-pricing periods take longer to benefits from these environments.

Given that our banking book is heavier on commercial lending, this environment favors the NIM on loans of our combined banking segments despite differences across banks. In addition, the interest expense associated with funding our nonfinancial activity pressed our NIM on loans. It's worth anticipating that this increase in cost of funding is compensated by a stronger performance of the nonfinancial sector presented on the following page that benefits from inflation.

NIM on investments was negative 1.25% during the quarter, impacted by the performance of mark-to-market fixed income in a rising rate environment. NIM on investment includes the performance of investments held by Porvenir need under mandatory stabilization reserves.

On Page 13, we present net fees and other income on a comparable basis. Gross fee income increased 1.9% year-on-year and fell 8.3% quarter-on-quarter. Net fee income decreased 4.6% year-on-year and 1.8% quarter-on-quarter. Pension fees decreased due to lower performance base fees and higher insurance premiums associated with the increase in mortality rates during the pandemic.

Income from the nonfinancial sector, in particular, that for infrastructure was strong given that the financial assets from our concession agreements benefit from higher inflation and depreciation of the Colombian peso.

Regarding other operating income at the bottom of the page, the elements drove the changes relative to previous quarters. Starting this quarter, income from nonconsolidated investments through the equity method incorporates the full impact of 25% equity stake in BHI, which contributed COP 150 billion to this line item.

During first quarter 2022 seasonal dividends were reported in this line item. Second, derivatives and foreign exchange gains or losses include the performance of FX hedges on the nonfinancial sector.

And finally, first quarter 2022 other income from operations included a onetime COP 137 billion in income from fair value associated with the remaining 25% of BHI.

On Page 14, we present some efficiency ratios on a comparable basis. Cost to assets remained flat over the quarter at 2.6% and improved relative to a year earlier. Our cost to income increased to 41.1%, driven by the compression of NIM previously described as well as the seasonality of dividends.

Expenses grew 6.9% year-on-year, well below inflation metrics driven by personnel expenses that grew 3.8%, while administrative expenses grew 11.9%.

Finally, on Page 15, we present our net income and profitability ratios as reported. Attributable net income for the quarter was COP 675 billion or COP 29.7 per share. Our return on average assets and return on average equity for the quarter were 2.1% and 16.6%, respectively.

Before we move into Q&A, I will now summarize our general guidance for 2022. We expect loan growth to be in the 15% to 16% range with commercial loans growing in the 14.5% to 15% range and retail loans in the 15.5% to 16.5% range.

We expect our cost of risk net of recoveries to be of 1.5% average. We expect full year NIM to be in the 4% higher with NIM on loans between 5% and 5.25%. We expect cost to assets to be in the 2.6% average. We expect our fee income ratio to be in the 19% to 20% range. We expect our nonfinancial sector to be 20% higher than that of 2021.

Finally, we expect our full year reported return on average equity to be in the 19% to 20% range.

We are now open to questions.

(Operator Instructions) We have a question from Juan Recalde from Scotiabank.

I have 2 questions. One on net interest income expectations and you took on one on delinquencies. So in terms of net interest income, we saw the NII decrease in spend by higher interest expenses. So I was wondering how should we expect this to evolve for the rest of the year and when can we see NII increasing again?

And the second question related to delinquencies. So we saw an improvement in the NPL rate this quarter. So I wanted to know how do, you expect this to continue evolving for the rest of the year and at what level do you think that the NPL rate you're going to start at?

Okay. Regarding NIM expectations, there are several forces here in play. To break it down in pieces, if you were to think around our business lines, the NIM from our banking segments should be stable and probably have an upside as we're able to re-price our loans.

Then, if you look at the nonfinancial side, the nonfinancial side of the business only has the expense side of NIM. Therefore, it's not able to translate it through the line of NIM, but rather get the benefit through the income from nonfinancial sector.

So when you bring together those lines, the overall NIM on loans might have a slightly negative bias with the banking segments neutral or positive and then a negative effect from the cost of funds of the nonfinancial sector.

The other piece in place that is very much market dependent is what happens on the NIM on investments that has been the heaviest or the most negative effect on our NIM over the past few quarters. We expect some improvement there, even though that side of the world is under pressure.

Part of that has already been evidenced throughout this quarter during the couple of months we've been running this quarter where we see the government bonds in Colombia starting to have some periodic recoveries that should start to establish a new trend.

So overall, for the rest of the year, we should see less pressure from NIM on investments and something similar from NIM on loans. Then regarding delinquencies, you have to bear in mind that Colombia has a strong GDP growth that has been surprising positively over time.

And that's the reason why our guidance for the year is of 1.5% for cost of risk. What that implies is some sort of pressure building during the remainder of the year with the higher rates coming from the Central Bank.

But then if you bear in mind how our book looks like, our book is much more protected than some of our peers to these changes, given that it's very much concentrated in payroll lending on the consumer side and the profile of the corporate side could be something similar to the rest of the system.

So you should see more of the same of what we've seen is that NIM's improvement relative to other years that should round up the year at around 1.5% of cost of risk, net of recoveries.

(Operator Instructions) The next question comes from Julian Ausique from Davivienda Corredores.

I would like to ask you, first of all, if you can give us more detail about the decrease in pension fees. What was the -- why the pension fees had this performance during the quarter.

And I also would like to ask you about the net stable funding ratio in all your banks. How is it performing, it's already above the regulation levels? Or if you have some pressure seen in any of your banks?

And regarding this question, I would like to know if the NIM will have some pressure. You already mentioned that, you expected that it is better performed during the next quarters. But if the net stable funding ratio has some pressure, you will have some pressure in the cost of funding?

Okay. Let me start. You have 2 questions regarding what is called GFIN in Colombia. And perhaps something you need to be aware of is the recent as 4th of August last week; the Superintendency came out with changes in regulation that will release some of the pressure that we had seen from GFIN over the past few months.

In that sense, we are not expecting a pressure to build up from GFIN, but rather more positive outlook for the next few quarters and what we've had increased somehow in the numbers we gave you before. So there might be a relief throughout the system. The cost of funds is being pressed not because of our banks needs for GFIN, but from the overall leading banks requiring additional funding and pressing the cost over the system. So we expect to see some relief there that should favor our numbers.

To your question about regulation, yes, absolutely, we're about regulation at this point. And we're not foreseeing pressure on that front.

And then finally, you mentioned decreasing pension fees. And as I went through when I was going through the presentation, there's been 2 quarters affecting us. One piece of our fees is performance related. That means that if the market is not doing well and the funds that we have to invest in are not doing well that presses down our fee component. And the other piece is our fees are net of insurances. And given that there's -- been changes in mortality throughout the world over the past couple of years that has increased some of the premiums that we have to pay.

(Operator Instructions) At this moment, we have no further questions. Now I give the word back to Mr. Sarmiento for his final remarks.

Thank you so much, Hilda, and thank you all for attending our second quarter call. Very interesting times. Next time, for sure, we'll probably be talking about all the reforms that are being passed and have been presented to Congress. Congress is starting with the tax reform. But for now, we're just doing that and analyzing and I'm sure be subject of future conversations.

We expect to continue yielding the results and the numbers and we'll see you in the next one. Thank you so much.

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