Grupo Aval Acciones y Valores SA (AVAL) 2020 Q3 法說會逐字稿

Welcome to Grupo Aval's Third Quarter 2020 Consolidated Results Conference Call. My name is Sylvia, and I'll 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. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation.

Grupo Aval is also subject to inspection and supervision of the superintendency of finance as a 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 where 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 Registro Nacional de Valores y Emisores and the SEC. Recipients of this document 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 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 the 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. Luis Carlos Sarmiento Gutiérrez, you may begin.

Good morning, and thank you all for joining our third quarter 2020 conference call. I hope that all of you and your families are keeping healthy. During the third quarter, several of the countries where we operate, started to ease their mandatory quarantines and the effect on their economies was felt almost immediately more so after the sharp contraction experienced during the second quarter. Our subsidiaries are also benefited as evidenced by the pickup in banking fees and revenues from infrastructure. We are, however, months, if not years, away from returning to business as usual as economic recovery and health challenges remain ahead of us.

In today's presentation, I will cover the following: a macro review of the economy during the third quarter of 2020, a quick update of our loan relief programs, the progress of our digital efforts and the main highlights of our financial performance. I will spare you of Ruta del Sol related topics because there have been no new developments since we last spoke.

Starting with macro. After the gradual, reopening of certain sectors of the economy at the end of the previous quarter and the easing of the mandatory lockdowns since September, economic activity has reignited and has begun to slowly grow back to its pre-pandemic level. Indicators such as energy demand, Google Mobility and fuel deliveries show a further acceleration of the economy in October.

During the third quarter, the economy contracted 9% when compared with the same quarter in 2019, a substantial improvement when compared to the 15.7% decline observed during the second quarter. In fact, when compared to the previous quarter, the economy grew 8.7%. As a result, during the first 9 months of 2020, the economy has contracted 8.1%.

Examining the quarter's performance from the supply side, 3 sectors registered growth when compared to the same period during 2019. Agriculture, which represents 7% of GDP, grew 1.8%. Financial services, which represent 5.3% of GDP, grew 1.3%. And real estate activity, which represents 10% of GDP, grew 1.7%. The remaining 9 sectors analyzed contracted, although at a slower pace than in the second quarter. Among those, commercial activities fell 20.6%, manufacturing contracted 6.9%, and government services decreased 0.8%.

From the demand side, when compared to the same period in 2019, private investment fell 20.2%, household consumption decreased 9.3% and government consumption grew 1.8%, resulting in domestic demand decreasing 9.8%. We now expect GDP to contract approximately 6.5% in 2020. We're cautiously optimistic about the country's growth prospects for next year and believe that GDP growth will approximate 4% in 2021.

Although no current account deficit figures are yet available for the third quarter, it is worth mentioning that this deficit narrowed significantly during the first half of the year, closing at 3.3% of GDP as of June 2020, down from 4.3% in 2019. In short, the country's trade balance deficit has narrowed as oil exports have been aided by better oil prices, imports have decreased and remittances have surprised on the positive side. We expect that Colombia's current account deficit close 2020 at around 3.5% of GDP.

During the third quarter, volatility in the exchange rate decreased when compared to the second quarter of 2020, mainly due to a worldwide increase in demand for risk assets. Since June, the exchange rate has fluctuated in the COP 3,600 to COP 3,850 per dollar range. We expect that the exchange rate will remain inside this range during the remainder of the year and in 2021.

12-month inflation has continued its downward trajectory falling significantly from its peak of 3.86% in March to 1.75% in October. During October, inflation registered at minus 0.06%, mainly driven by negative variations in rents, food and education. We now expect that 2020's inflation will be in the range of 1.8% to 1.9% and gradually move upwards to a range of 2.8% to 3% during 2021.

Low inflation and inflation expectations have given the Central Bank additional room to continue with its expansionary monetary policy lowering the repo rate by 50 additional basis points since our last call to 1.75%, totaling a 250 basis points decrease this year.

We believe that the Central Bank has reached the end of its interest rate cutting cycle and that rates will remain stable for at least the next 2 quarters. In line with the adverse effect of the quarantines and business activity, the labor market has experienced a sharp contraction during 2020. However, the most recent payroll numbers for September show some signs of recovery.

In fact, urban unemployment, which reached a high of 24.9% in June, improved to 18.3% as of September. We believe that with the ongoing normalization in business activity, further improvement could be expected by the end of 2020. And we estimate that in 2021, unemployment figures will improve by 200 to 300 basis points.

On the fiscal front, the government's deficit targets for 2020 and 2021 were just revised as were its expectations for GDP growth. As the government expectations for GDP contraction for 2020 increased from 5.5% to 6.8%, and for 2021, decreased from 6.6% to 5%, the deficit targets are now 8.9% of GDP in 2020 and 7.6% of GDP in 2021. Consequently, the fiscal rule has been suspended until 2022.

Colombia's government has implemented 2 important economic programs to mitigate the effects of the pandemic. First, the national emergency fund forming, which amounts to 2.8% of GDP or COP 25 trillion is being used to subsidize payrolls, expand the capacity of the health care system and enlarge existing social programs to support low-income households.

In addition, through the Unidos por Colombia program as a national guarantee fund for no nationality guaranteer, the government is providing guarantees for bank loans to small businesses for up to COP 25 trillion, of which COP 14.2 trillion have already been disbursed.

We obviously remain watchful and concerned of a possible second wave of the virus and hope that no further lockdowns will be required as in some European countries.

Moving on to Central America. The IMF updated its expectation for the region's GDP and now expect a contraction of the region's economy of 5.9% in 2020 and growth of 3.6% in 2021, numbers with which we concur. A key variable will be a continued recovery in remittances. Panama and El Salvador are expected to be the most impacted contracting their GDP by 9% each in 2020, in line with the strict lockdowns implemented at the beginning of the pandemic in these countries. GDP for both countries is expected to grow 4% in 2021. The GDP for Honduras is expected to contract 6.6% in 2020, mainly impacted by lower exports and to grow 4.9% in 2021. Both Costa Rica and Nicaragua are expected to evidence a contraction of 5.5% in their GDP in 2020. GDP, however, is expected to grow 2.3% in 2021 in Costa Rica and to decrease an additional 0.5% in Nicaragua. Finally, Guatemala is expected to be the least impacted economy contracting only 2% in 2020. The Guatemalan economy is expected to grow 4% in 2021.

Regarding our debtor relief programs, as of September 30, we had granted debt relief to approximately 35% of our consolidated loan portfolio or approximately COP 73 trillion. Approximately half of these reliefs were granted in Colombia and the other half in Central America. As of the same date, about half of total reliefs granted were still active, approximately COP 35 trillion or 17% of our total consolidated loan portfolio. Active reliefs are also split 50-50 between our Colombian and Central American operations. Active reliefs in Colombia represent 14% of our Colombian portfolio, while in Central America, they represent 23% of the region's portfolio. Of all loans that have concluded their relief periods, as a percentage of our total consolidated loan portfolio, 1.3% are currently past due 30 days or more.

Regarding our digital strategy, up to now, we have primarily focused on transforming our core products into digital solutions. In fact, we now offer more than 30 digital products through our banks. By all indications, the current juncture has accelerated digital adoption. Digital sales grew 50% in the last 9 months compared to the same period of 2019. In addition, the migration process of monetary transactions from brick-and-mortar to digital channels has accelerated.

The following figures exemplified what we have achieved. In Colombia, 71% of monies transacted during the third quarter were conducted through our digital channels compared to 56% a quarter earlier. On the other hand, during this same period, 25% of monies transacted were conducted through our branch network down from 41% in the previous quarter.

Monetary transactions done through our branch network represented 13% of total monetary transactions in the third quarter, down from 30% year-over-year. In Central America, BAC has enabled hundreds of new service request options in both web and most recently, mobile channels. In just the first month of implementation, service requests via the mobile banking platform represented more than 1/3 of all digital requests. Monetary transactions in self-service channels have reached an all-time high, increasing 40% year-over-year.

With respect to remotely assisted service, this quarter BAC processed 22% of more service requests than last quarter via WhatsApp. In fact, for the first time, digital inbound interactions surpassed telephone calls. WhatsApp now represents more than 1/3 of all inbound interactions and close to 70% of the digital inbound interactions.

And now referring to our financial results. Our net income results for the quarter showed a marked improvement when compared to the previous quarter, mainly driven by a strong contribution of our fixed income portfolios and recovery in fee income, and higher income from our nonfinancial businesses, especially from our toll roads and Promigas. Cost of risk during the quarter slightly decreased, although we expect to continue to show high cost of risk in the next few quarters. Although Diego will refer in detail to our financial performance, these are a few highlights for the quarter.

Aided by the acquisition of multi banks -- Multibank, Aval's consolidated assets have grown 21.9% year-on-year to COP 334 trillion. Consolidated gross loans have grown 17.2% year-on-year to $210 trillion and consolidated deposits by 24.7% year-on-year to COP 217 trillion. We're currently targeting loan growth of 9.5% to 10% during 2021.

As I mentioned before, the ratio of 30 days past due loans now reflect the end of about 50% of our debtor relief programs. Consequently, as of September 30, this ratio increased from 4.1% at the end of June to 5.2% in the third quarter. As expected, most of the increase in 30 days past due loans was concentrated in the consumer loan portfolio, whose 30-day past due indicator increased by 180 basis points. Cost of risk during the quarter slightly decreased to 2.9% from 3.1% in the second quarter and up from 2.5% in the third quarter of 2019. Cost of risk for the 9 months was 2.8% compared to 2.2% during the 9-month period of last year. During the quarter, we increased to 35% the coverage of our total exposure to Avianca, up from 20% a quarter earlier. As we have mentioned in previous calls, we expect cost of risk to end 2020 at approximately 3%.

We now estimate that cost of risk will decrease to about 2.5% during 2021. NIM on loans remained unchanged at 5.9% during the quarter, mostly as a result of significantly better cost of funds. We expect that NIM on loans will remain fairly constant at this level during the remainder of 2020 and 2021. Total NIM during the third quarter of 2020 decreased by 21 basis points versus total NIM during the second quarter, mainly driven by a 110 basis point decrease in NIM on investments. Total NIM for first 9 months was 5.1%, a decrease of almost 60 basis points versus total NIM during the first 9 months of 2019. Driven by recovery in banking fees, gross fee income increased by 14% when compared to the second quarter but still remain shy from pre-COVID levels, showing a 4.8% decrease when compared to the third quarter of 2019.

Other operating income increased significantly by almost 45% versus the previous quarter and almost 50% when compared to the third quarter of 2019, driven by gains on sales of fixed income investments.

Income from our nonfinancial sector operations grew 207% when compared to the second quarter and by 11% versus the third quarter of 2019, mainly due to a significant increase in revenues from infrastructure as construction has recovered its expected pace and by an increase in income from the oil and gas sector related to higher gas demand from the industrial segment.

For the 9-month period, income from this sector remains approximately 2% below that from the same period of last year. Operating expenses increased by only 0.1% in the quarter, even though this was the first quarter with the full impact of the Multibank acquisition. Our cost-to-income ratio improved from 51.3% in the second quarter to 44%, and our cost to assets ratio improved from 3.2% in the second quarter to 3.1%. We will keep working on cost containment and currently estimate growth of operating expenses for 2021 at a maximum of 4%.

Our funding and liquidity positions continue strong, as evidenced by the deposits to net loans ratio of 1.07x and a cash to deposits ratio of 18%. As a result of the aforementioned, net income for the quarter was COP 691 billion or COP 31 per share, and return on average equity was 13.6%. Return on average assets and return on average equity for the 9 months were 1.4% and 11.4%, respectively. We expect to finish 2020 with a return on average assets -- on average equity slightly higher than 10%, rising to about 13% during 2021.

And with that, I'll be glad to pass the presentation on to Diego, who will explain in detail our business results. Thank you very much.

Thank you, Luis Carlos. I will now move to our consolidated results of Grupo Aval under IFRS. Grupo Aval's third quarter results reflect the positive impacts of the economic recovery as lockdowns ended hosting nonfinancial sector and fee income performance. In addition, falling interest rates allowed our banks to improve their trading income and realized OCI gains on fixed income. However, cost of risk remained high and asset quality regarding to evidence anticipated deterioration that results from release expiring as well as the negative impact of the economic cycle on our customers' payment behavior.

Starting on Page 8. Our quarterly asset growth was 0.3%, our 12-month growth reached 21.9%. As mentioned in our last call, the MFG acquisition was closed last May. Including the acquisition of MFG and FX movements of our Central American operations total assets grew 11% over 12 months. Our Colombian assets decreased 0.6% during the quarter and grew 12.5% year-on-year. Our Central American assets recorded a 1% quarterly decrease in dollar terms and a 28.5% year-on-year growth. MFG contributed with 20.4% of the year-on-year growth. Depreciation of 11.2% for 12 months and a 2.9% for 3 months take our annual and quarterly growth in pesos of Central America to 42.8% and 1.9%, respectively. The rate of Central America increased slightly during the quarter to 36% of our book.

Moving to Page 9. Our loan book grew slightly over the quarter, reflecting an improvement in dynamics of the retail lending in Colombia while incorporating the charge-off of (inaudible).

Central American operation maintained treated underwriting thresholds with loans contracting in dollar terms and growing 2.3% when translated into Colombian pesos. Loans increased 0.4% over the quarter, reaching a 17.2% growth year-on-year.

The acquisition of MFG added COP 13.1 trillion or $3.4 billion our year-on-year loan portfolio growth and explains 7.3 percentage points of 12-month consolidated growth in peso terms.

Colombian gross loan portfolio increased 7.9% over the year and contracted 0.7% during the quarter. This quarter's performance reflected a recovery of our Colombian consumer portfolio dynamics, a reduction in our commercial portfolio and the write-off of (inaudible).

Demand for consumer loans improved in Colombia resulting in a 2.1% growth in the quarter and 6.5% year-on-year. Partly growth was driven by secured products and was reported an improvement in economic activity as the increased effectiveness of our sales network as the sanitary restrictions and lockdowns for projects for the SOV lifted.

Payroll lending that accounts for 57% of our Colombian consumer portfolio grew 4.3%, and auto financing that accounts for 7%, grew 0.3%. And auto secured retail products, mortgages remained dynamic in Colombia, expanding 3% over the quarter and 12.2% year-on-year.

In contrast, credit cards contracted 2% and personal loans, 0.7%. These products account for 14% and 22% of our Colombian consumer portfolio, respectively. On the other hand, Colombian corporate loan portfolio increased by 2.5% over the quarter, or growing 8.2% over 12 months when excluding repos.

Corporate lending retrenched to $2.1 trillion over the quarter mainly in large corporates as they repaid working capital loans disbursed as a safeguard during the first set of lockdowns back in March. Also affecting our growth, we opted to pass on some large corporate institutional loans that might have been expired for the market as competition intensifies this quarter. Finally, we (inaudible) charged off for COP 840 million As contract retinol for COP 824 billion that accounted for 99 basis points of quarterly decrease in commercial loans.

Moving to Central America. Our gross loan portfolio contracted 0.6% over the quarter and grew 23.2% year-on-year in dollar terms. Excluding the impact of the acquisition of MFG, Central America grew 2.6% year-on-year. Quarterly performance resulted from a 1% and 0.6% contractions of commercial and consumer loans, reflectively. Mortgages increased by 0.3% over the quarter. Performance in Central America's commercial loans reflected similar drivers as in Colombia. Consumer loans were mainly driven by a 0.7% contraction in credit cards and a 2.6% decrease in personnel installment loans we expect that commercial loans growth will continue to be affected by the pricing competition and the leverage of large corporates focused on high-quality institutional and corporate customers. On the other hand, we expect that retail loans will continue to recover as employment outlook improves, and households slowly regain confidence in a scenario with no further countrywide lockdowns.

On Pages 10 and 11, we present several loan portfolio quality ratios. As anticipated, delinquency metrics deteriorated through the quarter, evidencing the effect of loan release expiring and a portion of them transitioning into 30- and 90-day PDLs. As of September, 17% of our loan portfolio had active release. Active release were 14% in Colombia and 32% in Central America.

Our loan portfolio deteriorated by 111 basis points to 5.62% on 30 days basis and by 21 basis points to 3.21% on a 90-day basis over the quarter. Our 30 days PDLs is now 61 basis points period to that recorded a year earlier and our 90 PDL ratio is still 5 basis points better.

Taking these figures down by portfolio. The commercial loan portfolio deteriorated 61 basis points to 4.7% on a 30-day basis over the quarter and by 13 basis points to 3.7% on a 90-day basis. In Colombia, commercial PDLs deteriorated 61 basis points to 5.9% on a 30-day basis and remained stable on a 90-day basis at 4.7%. The (inaudible) which was charged off had a 95 basis points positive effect on these ratios. Central America, 38 PDLs deteriorated 74 basis points to 2.1%, while 98 commercial PDLs deteriorated 55 basis points to 1.6%.

Moving to our consumer portfolio. This portfolio deteriorated 188 basis points to 5.7% on a 30-day basis over the quarter and 43 basis points to 2.4% on a 90-day PDL basis.

In Colombia, 30-Day PDLs deteriorated 152 basis points to 5.8%, while 90-day consumer PDLs deteriorated 7 basis points to 2.7%. In Central America, 30-day PDLs deteriorated 245 basis points to 5.5%, while 90-day consumer PDLs deteriorated by 100 basis points to 1.9%.

The mortgage PDLs deteriorated 124 basis points on a 30-day basis to 5.7% and 15 basis point or 90-day basis. Our provision expenses remained high during the quarter, reflecting offsetting trends between an improving macroeconomic outlook in Colombia and a softer one in Central America, as well as a deterioration of asset quality measured by stages under IFRS 9.

Contractions in riskier portfolios in our corporate loans favored our quarterly cost of risk. Cost of risk improved by 18 basis points over the quarter, 6 basis points of which are explained by better recoveries of charged-off assets. Cost of risk of commercial loans improved 82 basis points, while that of retail loans deteriorated 63 basis points. Cost of risk in Colombia improved 60 basis points and deteriorated 57 basis points in Central America. The increase in cost of risk in Central America resulted from a pickup in cost of risk for retail loans, partially explained by a recovery in dynamics of credit cards. Our third quarter cost of risk incorporates a 0.7% contraction in credit cards that favorably compares to a 4.6% contraction recorded during the second quarter. In addition, Central American cost of risk reflects an earlier expiration of release, particularly in Costa Rica and Guatemala.

Meanwhile, in Colombia, cost of risk for retail loans was lower during the quarter, mainly due to an improving macro scenario and an increase in recoveries of charged-off retail loans.

Our banks continued to assess their loans according to risk level in order to evaluate expected credit losses and determine impairment charges. This resulted in an increase in Stage 2 exposures and in individual assessed commercial loans under Stage 3.

As we mentioned in previous calls, consolidated exposure to the Avianca Group is approximately $188 million, equivalent to COP 727 billion as of September 30, 2020. 73% of this exposure is secured with international billings and 20% is secured with Avianca's headquarter buildings in Bogotá. Coverage for Avianca reached 35% as of end of September. Avianca rolled into 90-day PDLs in third quarter.

Recoveries of charged-off assets improved during the quarter as collection efforts regained traction with lockdown receding. We expect that our provision expenses would increase in the fourth quarter as we incorporate our deterioration in Central America macro expectations, growth related provisions are booked and reliefs continue expiring and a portion of Stage 2 loans transition to Stage 3. Finally, our PDL coverage of 98 PDLs slightly increased to 1.5 points.

On Page 12, we present funding and deposit evolution. Funding growth during the quarter continued to reflect a conservative liquidity profile to face the risk associated with the pandemic. As a result, our deposit to loans ratio increased to 107%, while our cash to deposits ended the quarter at 18%. Funding structure shifted slightly towards deposits now accounting for 77% of total funding. Deposits increased 2.3% during the quarter and 24.7% year-on-year. Colombia grew 0.7% during the quarter. Central America grew 1.9% in dollar terms during the quarter. The 12-month period, Colombia grew at 12.7% and Central America at 34.9% in dollar terms with 18.9% explained by MFG.

On Page 13, we present the evolution of our total capitalization, our total shareholders' equity and the capital adequacy ratio of our banks. Total equity grew 9.5% year-on-year, while our total equity increased 7.8%, mainly driven by our earnings. Quarterly growths were at 3.7% and 4.4%, respectively.

As of third quarter 2020, our banks show appropriate Q1 and total solvency ratios. Quarterly increase in Q1 where Banco Popular is may be explained by the risk-weighted asset contraction. Banco de Bogotá solvency remained flat. We expect that the transition to Basel III the solvency ratios of Occidente, Popular and Villas will increase a few percentage points, while Bogota should remain at a similar level to the current ratio.

On Page 14, we present our yield on loans, cost of funds, spread and net interest margin. Our net interest margin performance during the quarter was driven by a stable NIM and loans and the lower NIM on investments. NIM on loans remained stable during the quarter, mainly due to an aggressive strategy to incorporate the Central Bank dynamics that yielded a 31 basis point reduction in cost of funds. In addition, our second quarter included COP 74 billion reduction in interest income or 14 basis points reduction in net interest margin and loans associated with the [recapitulation] of our increase in present values of loans due to the terms under which reliefs were granted. We expect that competitive pressure on pricing of loans, particularly that for the highest quality risk will persist as the macro outlook increase. However, when compared to 2020, 2021 is expected to benefit from lower rates paid by our banks as they fully incorporate the Central Bank intervention rate cuts observed this year. Net interest margin and investments will continue to depend on growing liquidity and geopolitical events for the last quarter of the year.

On Page 15, we present net fees and other income. Gross fee income for the quarter impacts the increasing activity due to end of lockdowns and the temporary waivers on transactional and other fees. Pension fund fees were positively affected by an increase in performance-related fees, our mandatory pension funds and assets under management fees, charge and severance funds.

Quarterly gross fees increased 14.3% in Colombia and 16.8% in dollar terms in Central America. We expect to see further recovery in this front as economic activity continues to improve over the following quarters. A performance of the nonfinancial sector reflects the recovery of infrastructure and gas sectors, our 2 main non-financial businesses.

Small restrictions and infrastructure sector in Colombia were lifted earlier -- early in the third quarter, construction progress picked up to pre-COVID levels. The energy and gas sectors -- sector was positively impacted by a recovery of the demand for industrial gas.

Finally, on the bottom of the page, higher other income for the third quarter is mainly explained by strong results in OCI realization and high income on FX and generative from Central America driven by the depreciation of the (inaudible) over the quarter.

On Page 16, we present some efficiency ratios. All of our business units continued implementing cost contention and reduction initiatives during the quarter. As a result, cost to assets improved to 3.1%, down from 3.2% in the previous quarter and 3.9% a year earlier. Cost to income improved during the quarter to 44%, reflecting a recovery of fees and income for the nonfinancial sector as well as a strong other income as described before.

Other expenses remained flat both over the quarter and year-on-year despite the acquisition of MFG and FX fluctuations. Excluding these effects, other expenses contracted 0.5% in the quarter and 8.2% year-on-year. Quarterly, Colombian other expenses decreased by 3.5% in the quarter and 9.1% year-on-year. Central American expenses increased 8.1% over the quarter and 2% year-on-year in dollar terms now incorporating a full quarter of MFG up to 1-month in the second quarter. Excluding MFG, Central American other expenses grew 4% over the quarter and decreased 6.9% year-on-year in dollar terms. Partly growth in Central America was influenced by an $80 million increase in severance payments. Our consolidated quarterly personnel expenses increased 4.5% in the quarter and 7.1% year-on-year. Over the quarter, personnel expenses increased 3.7% in Colombia and 8.5% in dollar terms in Central America, now including a full quarter of MFG. Personnel expenses grew 1.8% without the effect of MFG, including the severance payments mentioned before. When exclude the effect of MFG and FX flotations, personnel expenses increased 2.8% over the quarter and decreased 2.2% year-on-year. Quarterly general and administrative expenses increased 2.9% over the quarter and decreased 6.8% year-on-year. (inaudible) reached 12.8% decrease when excluding the effect of MFG and FX fluctuations.

Finally, on Page 17, we present our net income and profitability ratios. Attributable net income for third quarter 2020 was COP 691 billion or COP 31 per share. Year-to-date, attributable net income reached COP 1.7 trillion or COP 77 per share. Return on average assets and return on average equity for the quarter were 1.5% and 13.6%, respectively. Year-to-date return on average assets and return on average equity reached 1.4% and 11.4%, respectively.

Finally, even though a high level of uncertainty persists, I will summarize our expectations for 2020 and 2021.

We expect loan growth to be in the 17% area in 2020 and the 9.5% to 10% area next year. Our net interest margin should remain fairly stable at 5.9% for both years. Return on equity for this year should be close to 10% and improved to 12.5% to 13% in 2021. We will have a 2020 cost of risk in the 3% area, improving next year to close to 2.5%. Fees should grow a couple of percentage points faster than our loan portfolio. And finally, we will have a 2020 expense growth in the 4% area, as we have this year. We'll now open it for your questions.

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

My question is on the level of provisioning. And provisioning is high relative to past levels, and you talk about a cost of risk potentially around 3% this year, declining to 2.5% next year. I mean, one question is how are we -- how should we feel about the level being sufficient that you have now, especially relative to some of your peers are making higher provision if you want to measure it as a percentage of NPLs, which is complicated at this point because of the rescheduling it's hard to look at that ration in my view? Also as a percentage of net interest income or as a percentage of total loans, how can you given investors assurance that the provisioning levels you have now are sufficient?

I would try to summarize some of things we've said in the past that have become a pattern throughout this cycle. And it says we have a different structure of our loan portfolio where we are a overweighted in some of the safest products and underweighted in some of the products and segments that are riskier. Particularly, we have a higher portion of payroll loans to government employees and retirees, and we have as well a smaller portion of unsecured consumer lending as well as we are underweighted in the SME segment. So part of what you're seeing at this point is the way our portfolio is evolving and the way that different portfolios have behaved. We are not covering this in the call, but when you look at a micro level there is a wide variation in the (inaudible) of provisions needed for the different products and segments that I mentioned before.

Then in -- as you might have seen, there is an implied slight pickup in provisioning during the fourth quarter to be able to get to the 3%, and what we are doing at this point is particularly raising some of the provisions that we have in Central America as well as there is a process of Stage 2 loans migrating into Stage 3 that should also imply additional provisions. And finally, something that we've mentioned in the past that is changing already is the speed at which we are growing. Part of the lower provisions that we had in the past was a basically shrinking our riskier portfolios particularly the credit card portfolios. During the second quarter, the order of magnitude we shrunk was around 5%, then this quarter it was around 1% the quarter we're reporting, but moving into the fourth quarter, we've begun to see additional growth and as employment is improving a willingness to start lending more is there. So you've seen that part of what has been happening has been a recoveries particularly linked to some of these portfolios that we are shrinking. So what I can tell you is that at this point obviously it's not over. You can see that our guidance for this year is still at 3%, and the guidance for next year is half way of where we should be running this year. So it's going down to around 2.5%. That implies that we might have a few additional quarters with higher levels of provisioning that is migrating into something more at the kind of levels that we used to run for.

The next question comes from Gabriel Nóbrega from Citi Group.

And I actually have 2 questions. The first of them is on asset quality. We have noticed that you wrote off of (inaudible) this quarter, but we still saw your 90 days NPL ratio increasing. So I wanted to understand if 20 bps increase in the quarter is mainly due to Avianca. And then as for my second question, it's actually on the NIM. You were guiding that the NIMs are going to remain stable through the end of the year and also in 2021. But as your Stage 3 loan portfolio starts increasing, we have to remember that on these loans, we also don't accrue interest rates. And then there's also another important part here that your banks are going to start repricing their loans for the lower interest rate environment. And so I just wanted to maybe take the brain and understand where are you trying to maybe work harder to be able to maintain some net interest margin?

Okay. So let me try to answer your question on the asset quality. And if I didn't get your question right, please correct me. What is going on now is that we've begun to get after the relief. Therefore, the calendar starts speaking first for the 30-day past due loans and then migrates to higher 98-day PDLS. Historically, a kind of a transition that we've had from 30-day past due loans to 90-day past due loans could be somewhere around 60% to 70% or something of that order of magnitude. So there is a -- it's a matter of time for some of these to migrate into the 90-day past due category, and that's the reason why we've also guided into higher provisions in the fourth quarter.

Regarding where things should end, we are fairly comfortable that at this point, we have more visibility and the absence of new countrywide lockdowns, we should be evolving as I described previously.

Now moving into your question on net interest margin, there is a number of courses happening here. We had a big hit from repricing of our loans in advance to repricing of our deposits in the past.

That we've already been able to catch up, and there is some room for additional reduction in cost of funds that will continue helping us.

On the other hand, we had, I would say, a temporary effect of relief that we're reducing our net interest margin as we had conditions that in net present value, we're reducing the value of those loans, and we had to pass that through our interest income.

And finally, more structural it is during this month, we've been prioritizing, growing in very high quality loans. Therefore, when you see our loans that are sort of flattish during this quarter, what you have is a combination of shrinking on riskier loans and moving our portfolio to higher-quality loans. In that process, obviously, we've had to reprice. Something that I do have to mention that -- or reiterate that we've said before is we've had to pass on some loans that we believe the market has mispriced and that has implied 2 things. On one hand, that we have grown at a modest level. On the other hand, is that we've been able to defend our net interest margin. So there will be some transition there where we'll be migrating into some loans that we had basically be incentivized during this month. We have already the full benefit of a year where we'll be running substantially lower costs of risks, combined with the negative things that you said before. So that's why we come up with a net interest margin that is stable.

And something that, in addition to what happens with loans that you need to bear in mind is even though the past 2 quarters have been very positive and net interest margin on loans, the second quarter was a very bad quarter there. So when you add up the full year, the full year will end up somewhere around a 1% net interest margin. Therefore, when migrating to next year, we will not have a relative deterioration there.

A very complete answer. Just one thing I would add is that I think you asked why the 90-day past due loans had increased by, I think, 20 bps, and it is, as you assumed Avianca. That's mostly it.

Our next question comes from Yuri Fernandes from JPMorgan.

So very quickly here on the cost of risk. So if I got correctly, cost of risk should be around 3% by year-end, so this basically imply that for the first Q, we should see the cost of risk around 3.5%, 3.6%, as you said, Page 3 and also Central America, right? So that's the first question I have. My second question is regarding our second wave. We are seeing some countries getting more concerned on that, like the hospitality utilization moving higher in Brazil and we discussed this in Europe and in the U.S. What about Colombia? What is the outlook here for COVID? And do you think like if a vaccine is approved globally, Colombia will be able to get the vaccine quickly? Because when we talk to some investors, there is a concern that maybe for the developed world like U.S. and Europe, we could see a vaccine being quickly deployed.

But about other not developed countries, that's not clear. So my concern here is that talking to anyone could also imply second wave, further lockdown, so just pick your brain here to help understand how are you seeing the outlook for Colombia?

Okay. Yuri, regarding your numbers on cost of risk, you're right. That's what is implied for fourth quarter. And the second one, I'm sorry not to be able to answer your question, but I think we're not qualified to opine on the health side. We see differences in the initial cycle of what happened in Europe compared to what happened in Colombia.

But at this point, it's a combination of what we hear from public policy, where public policy is trying to defend employment and activity. And then on the health side, I really am unqualified to answer your question.

We're obviously looking with a lot of optimism at the results of the COVID vaccine tests and hopeful that the smaller countries, the developing countries will have access to the vaccines almost as fast as the developed countries, and that might be the answer to not having to go through additional lockdowns and stuff like that.

At least, not countrywide lockdowns.

At least not countrywide, exactly.

Our next question comes from [Juan Barrios] from (inaudible) .

So I also have some question regarding the provision and the risk of the loan book. So the first one is, if I understood well, what just Diego mentioned, this implies a 3.5% cost of risk in the fourth quarter, right? So this would mean the highest provision expenses should be in the first quarter. So the question -- if that is correct, the question is, why the provision was not done before? Because if I understand IFRS 9, you should anticipate the provisions with those macro assumptions and maybe GDP assumptions and stuff like that. So that's the first thing.

And maybe linked to that, I understand that you give -- you have given your GDP assumptions for the next 12 months so you're expecting 2.2%. And it's not really easy to compare it with the other banks that are only giving for 2020 GDP numbers. So what GDP assumptions have you used for 2020 in order to estimate the provision expenses of the -- according to IFRS 9 -- sorry, to expected losses? And yes, that's the main thing.

Let me try to take it piece by piece. Regarding provisioning and timing, I mentioned there's several forces happening here. Some of those forces are things that are only started to be known now and some things that even though have not materialized, we are starting to see that, that could be the way they evolve. So cost of risk here will have a combination of several things. One, that is the least is what happens with the macro outlook. The macro outlook is one of the components of what goes into IFRS 9, but not the full component.

And you have to bear in mind that it's actually forward-looking. So at this point, when we end the fourth quarter, we're actually looking into 12 months forward that are the full 2021, and that's where you're talking of around 4% GDP growth.

So we'd say one of the other pieces that needs to fall in place in your calculation. And that is -- this year will be, I would say, horrible in Colombian standards. Most of that has already happened. Therefore, it doesn't build into IFRS 9.

Then regarding why hadn't we provisioned before?

I would say because the performance that we're looking into indicated that, that was the adequate level of provisioning. And I actually queued into where it will come from. And part of what I said is it's coming from Central America, where the initial forecasts from most analysts were much better than what we're currently looking as a consensus.

So that comes into why our numbers look that way. Then I also mentioned some things that are, I would say, good quality provisioning and it does provisions linked to moving from contracting some of our portfolios to start growing them. So mathematically, that also implies that change.

And regarding this quarter, perhaps what we didn't emphasize during the call, but when you look at the numbers that we provided, there is basically a flat gross provision expense that is improving with recoveries and also with some of the provisions not related to loans, particularly provisions based and culture risk of some fixed income portfolios that are not present during this quarter. Therefore, when you look at provisions, this quarter comes with some slightly slower rate of provisioning, however, at a gross level, it is flat compared to the second quarter.

He wanted to know about our GDP productions.

I think I mentioned that by end of this year, our GDP projections for next year would be in the 4% level. That's what we're looking at into, and that's what's going to build into the IFRS numbers of year-end, right?

6.5 contraction this year, exactly in Colombia.

Our next question comes from Andres Soto from Santander.

I have a few questions. The first one related to expenses. If I heard correctly, higher expenses in Colombia declined 9% on annual basis. I would like to understand what is -- what were the measures that you guys implemented in order to achieve such an important result?

The second question is regarding your guidance for loan growth next year. Trying to understand how that's breaking down between countries, in general, between Colombia and Central America and also in between segments.

And finally, when I look at, I mean, numbers, looking into 2022. I assume that for 2022, you guys will be having a cost of risk already below the level you had in 2019.

And with that, the ROE that you should be getting is in the area of 15%. I would like to confirm if that's the number. And more importantly, if this is what we believe is the potential ROE for Grupo Aval? Or is there any potential for additional increase in this number? I was kind of surprised when I asked this question to one of your competitors in terms of potential ROE long-term for Colombian banks. That competitors said that they believe that the potential for ROE of Colombian banks have diminished as a consequence of a more difficult competitive environment and lower rates overall. So I would like to confirm that's the view that you guys have in your side.

I think there's a lot of questions there. I'm going to try to go through them briefly. Expenses, I think something that you mentioned we should have highlighted before, it is -- we have a very positive year-on-year comparison when we take the third quarter because during the third quarter of last year, we had some benefits of a tax program that ended up generating benefits from the expense side. However, for the sake of completeness, when you OpEx take year-to-date to try to strip those things out, we're contracting something short of 1% is what's happening. So that gives you a better idea, and there was some seasonality there, particularly last year, and I think that's a relevant point that you brought up there.

Then regarding segment and country growth, what we expect to see is Central America growing something slightly on the lower side of the range that we mentioned, something in the order of 9%, 9.5% in dollar terms. And Colombia should be growing faster. What will be happening with Colombia is, basically, we had shut down during this year or the second half of this year the corporate growth therefore, as that growth is coming back, what we're looking into for Colombia is something more in the 10% area.

So it's basically taking the range with Central America growing at the lower side. And Colombia growing at the higher side of that spectrum. Inside Colombia, what we should start to see is corporate loans recovering some of the room that they had let go and have been letting go throughout the second half of the year.

Then moving into cost of risk for 2019, I have to go back into history and when you're looking at our numbers, our numbers had these 3 large cases that we have been tracking over many of our calls that basically we got done with last year. So if you think of what we were looking into was this year asset of COVID, we should have been around 2% -- 2% implying that we were already done with Electricaribe, Ruta del Sol and SITP. So the kind of recovery that we're looking into is halfway of what we should have been this year. This year, we're going up to 3%. And next year, we're recovering half of that room concentrated in the latter part of the year.

And finally, ROE potential. We can't agree with our peers there. What -- the way we look into those numbers is it very much depends on the ROE potential for each one of the institutions. And that's linked to the kind of portfolio that one of them has. At least in our case, we think that we can aspire to much higher levels than perhaps some of our peers have said.

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

I have 2 questions. On the first one, I apologize if you already mentioned this. I joined the call a bit late. It's on the relief program. You mentioned the increase in the 20 bps in the NPL ratio this quarter was mainly driven by some clients exiting the relief program. I was wondering what's the percentage of loans which are still on your -- in your relief program as of the end of the quarter? And how many of the regional clients have already exited that program? And also, what's the plan for the remaining portion of clients which are still in the relief program, if the idea would be to restructure these loans? And then a second question. At the end of your original remarks, you provided guidance for ROE for next year. I believe you said 12.5% to 13%. If I just look at the third quarter, you already made an ROE above that in the third quarter, almost -- close to 14% this quarter.

And I would imagine that things from here should -- improve from here, assuming that there are more lockdowns in Colombia. The reason for this guidance, which looks a bit conservative for next year, is that basically related to cost of risk that you probably expect to still remain high based on this migration of loans to Stage 3? Or is there anything else going on as well?

Okay. So regarding the relief programs, the number that we mentioned in the call was, as of the end of September, we had around 17% of our loan portfolio relieved. This number is more of an order of magnitude at end of October. The numbers that we had estimated would be around 15%. So we're seeing, I would say, a return to normal that is happening at that sort of a pace.

If you are thinking of what percentage of the reliefs have expired, I would say that around half of those have expired. So when you look at the numbers of the relief that we gave out, there's a portion of that, that went back to pay and have already amortized. There is a portion that are paying again. And then within the reliefs, there's a combination of some of the other reliefs there and some of the more structural ones being given out that will remain for some time after we are done with this cycle.

Then regarding the ROE, perhaps to break down what happened this quarter and why we are guiding to a [shier] quarter next year -- next -- for the fourth quarter. This quarter included the realization of OCI gains on our fixed income portfolio that should add up to roughly, I would say, COP 130 billion, COP 140 billion in attributable earnings for Grupo Aval. So that impact gave us a particularly strong quarter that when we strip that out and then we tip up slightly our provision expenses, we come up with the numbers that we guided into.

Then I think your deeper question is what's going to happen next year. And next year, yes, you're right. I would say that at this point, we can't be extremely aggressive with the rate of recovery, and that's why we're standing in these kind of numbers.

Our next question comes from Sebastian Gallego from CrediCorp Capital.

I have a couple of questions -- or several questions, the first one. It's just a follow-up on probably the most relevant question my colleagues have asked about provision expenses. I understand your explanation about a more defensive portfolio. But still, you have a lower coverage, higher PDLs and higher reliefs compared to peers. Why do you remain so confident that cost of risk should be at 2.5% next year? Second question is regarding ROE. You mentioned that you don't agree with peers, and it depends on the institution. So I would like to know what will be the outlook for ROE next year when excluding the nonfinancial sector?

And finally, my last question would be at the holding level. We have seen some deterioration on net debt to core earnings, net debt to cash dividends and double leverage as well. Can you provide an outlook on those measures? And if you're comfortable or the levels you feel comfortable at this point?

Okay. Regarding your question of provision expenses, something that you have to keep an eye on is number one, the relative movement of what the coverage ratios look like. Coverage ratios are not the same for each one of the products. And then perhaps with the risk of reiterating, the kind of provision that you need for payroll loan is widely different from the kind of provisions that you need for an unsecured consumer loan. So the kind of numbers that we come up are built up from the bottom of what happens with the one of those segments and products. And as I mentioned, when we look at our numbers, numbers vary very widely there.

Just to give you some more flavor. You're looking into payroll lending, and you're comparing a portfolio that is government and employees and retirees, the kind of provisions that we've had to spend are widely different from those when you have payrolls for the private sector. So this is very much of a micro discussion rather than a macro discussion. And I would invite you to look at historic comparison between what we have and what our peers have and then look from that point in time on how things should be evolving. So that's the reason why we feel comfortable with what we've said there.

Then regarding our ROE, it's something that we have mentioned in the past, it's not only the nonfinancial, it is diversification of our full book. It is what we have coming from Porvenir that behaves well as -- as well as nonfinancial has been behaving positively.

Then Central America is not equal throughout the countries and throughout the banks. Our performance from our Central American operation has been quite positive and the countries in which we are operating are also behaving better. So when you have to think of ROE, I wouldn't strip out any one of the components.

We'd emphasize that we've had a portfolio that is a diversified portfolio. Perhaps one might contribute better one year and then the following year, the other one should turn around.

And then regarding the holding level, you're giving us a very good question, particularly for those of you guys on the call that are from the fixed income side. And it is when you look at the way that we repay our dollar-denominated bonds, it is basically with dollar-denominated assets that we hold inside Grupo Aval Limited. So Grupo Aval Limited is a combination of interest-yielding investments. Those investments are mainly deposits or loans to our own entities. And then we have dollar-denominated liabilities that, at this point, are yielding a positive carry.

So that's the way that we repay those funds. If you're looking into dividends, that's a discussion that comes on next year, but that in no way affects the way that we are serving the principal and interest of our bands.

Our next question comes from Carlos Gomez from HSBC.

Two specific questions. One is the level of activity that you are seeing into this fourth quarter, both in Colombia and in Central America. In some countries, we have started to see activity falter after the recovery. We wanted to know how you are seeing your own numbers internally?

(inaudible) your question was the level of GDP.

Level of activity original action, activity -- activities. Sorry, if it was not clear.

Okay. Yes. Well, you're right. The levels of activity are something that varies widely in the regions that we operate. We've already mentioned a lot of Colombia. Then if we are kind of assuming to Central America, the kind of behavior we're seeing there, is this year and things will vary next year. Honduras and Salvador are the stronger performers. They are growing roughly, I would say, this year will be a 6% growth. Then you have second tier that would be Panama, Costa Rica, Mate Mana growing at around 3.5. And then you have Nicaragua that is contracting roughly as well 3.5.

Then moving into next year, where we see most of the growth coming from is what demand in Panama that we're estimating should be growing north of 10%. Then we have next year that with be Costa Rica, Honduras and Salvador, that should be closer to 8%. And Nicaragua should be somewhere between flat and slightly positive.

So yes, we're looking into different kinds of growth when we compare the countries in which we operate.

Our next question comes from Pia Alessandri from Credicorp Capital.

I had a question regarding the addition to the BAC program. And if you could give us a bit more details on that? Then I wanted to ask, when do you expect to have the peak NPLs for the bank? And finally, what is your exposure to real estate in Central America, specifically in Panama?

Okay. The last one, I will give you a qualitative answer, and it is where are perhaps the lowest in the market there in relation to the size. I can't give you a number, but that's been a business that we've shied away from the very beginning. And as we bought banks, we've reduced those portfolios.

Then your question on the more structural loans in Colombia, we are in the process of migrating some of our loans there. We are smaller than what our peers have done at this point but we are indeed starting to use that much more. Percentage-wise, we could be somewhere around 1% or 2% of our portfolio that has gone into the past.

And I'm missing one. Regarding the pickup of NPLs that you said there, at this point, we are watchful on how things should evolve, and we should expect to see NPLs to go up during the fourth quarter and to remain relatively high during the first half of next year. Then numbers should start to come back into much more normal figures. So I'm sorry not to give you a precise quarter 4 to see that. But I would say, during the next 3 quarters, we could be seeing still high numbers as they get digested. That cycle will end up thinking with what is happening with provisions where we've begun to provision in advance to some of that deterioration.

Our next question comes from Julian Ausique from Davivienda Corredores.

I have a really specific question about the Panama operation because in conversation with your peers, the outlook in these countries is a little bit worse than others? And so I would like to know what is your expectation in Panama specifically? And what is your expectation in provisions because some of the relief plans will end in December or in January?

Yes. You're right, Panama has been hit strongly if you're looking into GDP growth expectations for this year, let's say, an order of magnitude the region could be contracting around, let's say, 6% but Panama should be contracting around 10%.

The reason for that happening is that the quarantines in Panama have been much more stringent than throughout the region. However, when you look into next year, next year, the regional GDP growth could be somewhere at the 3.5% area with Panama growing at around 5%. And so I would say it's a combination of how much they got hurt this year compared to what is going to happen next year, where perhaps they will be one of the countries with Honduras that might be growing the fastest in the region.

And the reason why we might be seeing a different story than others as one of your colleagues asked before is because we've been away from some businesses that have been particularly risky in Panama, particularly mortgage lending was something that we took out our portfolio, some of the exporters we also took away from our portfolio when we acquired the banks in the past.

Okay. And I know that you already mentioned, but I couldn't get it because I have some connection problems. What is the reason that the efficiency rate in Colombia was too low? I heard something about access, but I couldn't get it well. I don't know if you can repeat, please.

Yes. I would say it hasn't been low this year. It was particularly low during the third quarter of last year. That's why we use that question to give some information on year-to-date performance.

Do you mean good or bad?

Yes. Yes, that's a clarification question. When you mean low, you mean a negative ratio or you mean a loan figure.

Our final question comes from Brian Flores from Citibank.

Just a quick follow-up on Avianca. Could you repeat the level of coverage that, that position has, particularly.

35.

We have no further questions. I will now turn the call over to Mr. Sarmiento for closing remarks.

Thanks again, guys, and great questions. As always, we're happy to take more of them, if you wish, on a one-to-one basis, and you can contact the team through Diego. And in the meantime, we expect to keep it up and hopefully have you all back in our next quarterly call. I want to thank you again. I'll see you next time.

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