Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) Q3 2024 Earnings Call Transcript

Grupo Aval Acciones y Valores S.A. (NYSE:AVAL) Q3 2024 Earnings Call Transcript November 14, 2024

Operator: Welcome to Grupo Aval’s Third Quarter 2024 Consolidated Results Conference Call. My name is Regina and I will 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 regulations. 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. Unconsolidated financial information of our subsidiaries and the Colombian banking system are presented in accordance with Colombian IFRS as reported to the Superintendency of Finance.

Details of the calculations of non-IFRS 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 in 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. 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 this document, we refer to billions as thousands of millions. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. With us today are Ms. Maria Lorena Gutierrez Botero, Chief Executive Officer, Mr. Diego Solano, Chief Financial Officer, Ms. Paula Duran, Corporate VP of Sustainability and Strategic Projects, Mr. Jorge Castaño, Corporate VP of Financial Assets and Efficiency, and Mr. Camilo Perez, Banco de Bogota’s Chief Economist.

I will now turn the call over to Ms. Maria Lorena Gutierrez Botero, Chief Executive Officer. Ms. Maria Lorena Gutierrez Botero, you may begin.

Maria Gutierrez Botero: Thank you. Good morning, everyone, and thank you for joining us for our third quarter 2024 conference call. I am here with Diego Solano, our CFO, Camilo Perez, Chief Economist of Banco de Bogota, Paula Duran, our Corporate VP of Sustainability and Strategic Projects. I will start by highlighting this quarter’s results. Positive trends anticipate that increased costs continue to consolidate, leading to the positive results shown in some key business metrics. Return on average equity was 9.7%, back to level comparable to the third quarter of 2022. Our banking segment is back to net income levels close to the continued net income of third and fourth quarters of 2022, driven by improvements in cost of risk, a stronger mean on investment, and cost control.

We continue to gain market share while growing at a prudent rate. Foreign needs have the highest net income for a quarter in its history. Coffee recovered from last quarter has a neutral contribution to net income. Moving to another topic, as part of the deployment of our Corporate Synergies and Efficiency Program, we have expanded ATH’s role to reflect its broader scope. ATH’s name has changed to Aval Valor Compartido, or AVC. AVC, we lacked a global centralized platform for our subsidiary business support processes, looking to unlock value for our shareholders by capturing synergies, efficiencies, and best practices. We aim to leverage knowledge and technical investment capabilities to improve our agility and time to market. To support this mandate, we strengthened AVC’s management team and raised the profile of its support.

We appointed Isabel Cristina Martinez as CEO, Jorge Ivano Dalvaro as VP of Synergies, and Andrea Arevalo as VP of Finance and Strategy. Isabel previously acted as Banco de Bogota Administrative VP, and has an astounding trajectory in banking, IT, Telecom, with a strong track record of execution in business transformation. Jorge Ivano more recently acted as NECI’s COO, and has ample experience leading IT operations and administrative areas in banking institutions in Colombia. Andrea has various management roles in strategy and finance within Grupo Aval and Banco de Bogota, and more recently acted as Tuya’s CFO. To support the execution of the strategy of AVC, we have a new board of directors as well. I am now the Chair of the Board, and this includes four top leaders, independent board members, with extensive senior level experience in relevant areas, including IT, innovation, shared services, management, and IT consulting, and ESG.

On the payments front, we are supporting the central bank’s initiative to create a real-time payment account-to-account system called BREVE. We believe that this platform will benefit customers and increase financial inclusion by increasing interoperability and providing efficient instant payments. As a step in this direction, in October, we launched TAC Aval as a feature that enables payment interoperability, enhancing the service offered by our banks. For over 30 years, BREVE Aval has offered interoperability between our banks. Now, TAC Aval is a numerical key assigned to each savings product that our clients have in our banks and dale! that enables instant payments between Aval accounts without the need for sharing personal information. In other matters, we continue in our efforts to participate in relevant public and private dialogues and events for the reactivation of the country’s economy.

This has allowed us to play an outstanding role in our sector, and we continue to convince that, aligned with our purpose of creating a sustainable condition for progress, BREVE Aval must continue actively promoting our efforts to reach maximum impact and feasibility. Now, I will invite Paula to go over our ESG achievements to read these words.

Paula Duran: Thank you, Maria Lorena. To begin with, I would like to bring your attention to some of the most recent achievements that show the way we have enhanced and moved forward with our ESG committee. In the latest Corporate Sustainability Assessment, the evaluation used to define the Dow Jones Sustainability Index Composition, we reached our highest score so far, increasing 18 points from our previous score and placing us in the 90th percentile. We improved in all of the three dimensions, environmental, social, and governance, measured by the CSA. Our sustainable goal portfolio has become stronger, reaching 17.3 trillion pesos, financing sustainable construction, sustainable mobility, SMEs, sustainable agriculture, renewable energy, among other initiatives.

In terms of governance, with the most recent appointments, female participation in the top management of our entities has increased considerably. At the group level, currently 35% of top management positions are held by women and 43% of the largest companies are led by women. This adds up to female presence in boards, which in most of our companies is higher than 30%. This is a strong signal of our commitment to attracting the best talent and promoting diversity of gender, experience, and abilities in our group. This quarter, we had an active participation in the United Nations Biodiversity Conference, COP16 that took place in Cancun, Colombia. The COP16 saw Grupo Aval playing a leading role in over 40 events and high-level dialogues. Most of our entities’ CEOs participated actively, as well as Grupo Aval’s CEO, Maria Lorena, who was the only representative of the Colombian financial sector in the Blue Zone during the Global Finance Day, organized by UNESCO.

In addition, during the COP16, we signed the Mansion House Declaration of United for Wildlife with the British Embassy committing to fight against the illegal trafficking of wildlife species. We also made strong presence in different avenues with exhibitions of our biodiversity achievements, as well as conservation and reforestation initiatives. Banco de Cidences celebrated 30 years of the Planeta Azul Award that recognizes projects that preserve and conserve the country’s water sources. Banco de Bogota expanded the reach of the Amazonía debit card, conserving mangroves in the Colombian Caribbean. Unifal Banco de Migas subsidiaries of Corte Colombiana launched an innovative energy project based on biogas captured from crude palm oil that powers more than 1,200 homes.

As for our social impact, Mitio and La Guajira celebrated a new stage of their project, delivering business solutions in affordable water, sustainable energy, and food security to more than 4,500 people. I would like to highlight the relevance of this project that is led and followed up directly by our CEO, Maria Lorena, as well as the Chairman of Grupo Aval’s Board of Directors, Mr. Ricardo Sarmiento Gutiérrez. Our aim is to benefit by mid-2025 more than 25,000 people in 81 communities. With this project, we have also inspired similar efforts from the private sector to work together with the government and communities in other regions of the country. Our entities continue social programs and commitments in every social, financial, education, management capability for small businesses and entrepreneurs, productive projects in Indigenous communities, and employment programs for senior citizens, among others.

During the quarter, we also received several recognitions on the ESG Front. Grupo Aval was included in the list of the 25 leading companies in sustainability by Forbes. We were also ranked as the second conglomerate with the best reputation in Colombia and improved rating positions in the General Reputation Survey of the country. In the Medical Leaders Ranking, Maria Lorena Gutiérrez and Ricardo Sarmiento reached also top positions. Great Place to Work recognized Banco de Asistencia as the first company in Colombia. ADL, Coyandinas, Promigat also ranked in top positions in the same ranking. In the Global Compact Awards, Corte Colombiana won in the category Fight Against Corruption for its initiative building society through corporate transparency.

Banco de Asistencia also won in the Best Business Practices category for its UNICEF credit card which contributes to communities in La Guajira. Orbenit received also recognition in the Consubsidio Exponsible Award for its contribution to the productive inclusion of senior citizens. Finally, as we move forward, we remain centered in integrating ESG principles across every aspect of our operations. We recognize sustainability not just as an obligation or commitment but as a value driver and catalyst for innovation, growth and shared value. This is the legacy we strive to build. Thank you.

Maria Gutierrez Botero: Thank you, Paula. Now, on the macro side, let me mention some relevant issues during this part. As a positive evolution, inflation continues to trend down in October to 5.41%. Some challenges, such as a near-term pressure due to climate events and a stronger dollar, will most likely impact higher reservation rates during the remainder of this year. However, we believe that the positive evolution of inflation demands a more decisive action from the central bank for faster rate cuts to reduce the effect of the higher real interest rate levels. Even though still low, economic growth continues to pick up, supporting a healthy environment for our business. Unemployment metrics remain under control, which will support internal demand dynamics.

Some obstacles for a strong recovery of Colombia remain and require big changes in fiscal and public policy and prompt government execution. Investment remains below historical levels, while private-public partnership programs have not made progress over the past couple of years. The country’s fiscal accounts remain under pressure, even after a first spending cut program and the recently announced second wave of a spending cut of 33 trillion pesos. Camilo will forward comment on this and will share our view on the economy. Camilo.

Camilo Perez: Thank you, Maria Lorena. Good morning to all attendees. The Colombian economy registered annual growth of 1.9% in the year to date to August amid a recovery in household consumption, a resilient export sector, and some signs of improvement in investment. In 2024, Colombia’s purchasing power has benefited from lower interest rates, real wage gains due to falling inflation, the resilience of the labor market, and higher income from remittances, government monetary transfers, and financial returns. The improvement in domestic demand has supported activities such as entertainment services, commerce, lodging, food services, and transportation. The arrival of more tourists has also helped growth. Higher agricultural production due to improved weather conditions and lower fertilizer prices has not only fulfilled domestic consumption, but has also helped sales abroad, where coffee has positioned itself as one of the most dynamic sectors in exports.

In construction, housing sales bottom up, and progress is evident in some infrastructure projects other than roads. However, the recovery of the sector is still temporary. With this scenario, we maintain the growth projection for 2024 around 1.75%, with a consensus of analysts slightly above this level. For us, the adjustment of public spending to honor the fiscal rules is the main downside risk. It should be remembered that economic growth in the first half of the year was 1.5%, but excluding public administration, it would have been just 0.8%. Unemployment has behaved better than most feared, as sector activity has reshuffled hiring towards services, and the government contributed to job creation, at least in the first half of the year. More recently, expenditure cuts have taken a toll on public hiring.

National unemployment fell to 9.8% in September, its lowest level in two years. This inflation process deepened at the beginning of the fourth quarter, and the annual increase in prices went from 7.2% in June to 5.4% in October, the latter being the lowest level since the end of 2021. While inflation in goods reached a new low, services remained elevated due to high indexation. For the remainder of 2024 and much of 2025, we anticipate an extension of the downward trend in inflation, albeit at a lesser pace than that seen recently, ending 2024 around 5.4%. On the external front, the country reached in the second quarter the lowest current account deficit in the last 15 years, standing at 1.6% of GDP. However, for the second half of 2024, the recovery of domestic demand, especially private consumption, would increase imports and deteriorate the external deficit.

In fact, the positive numbers of imports, mainly in consumer goods and raw materials, already confirmed the situation. However, the arrival of dollars from remittances, coffee, and non-traditional exports, as well as from tourism, would partially offset the outflow from imports. With this, Colombia would have its second year with low financing needs in dollars, a situation that would be reversed by 2025 with a more dynamic economy. Passing on to the fiscal stance, the situation has become more challenging. On the one hand, tax collection would again surprise the government’s estimates on the downside, making a deeper cut unnecessary to honor the fiscal rule in 2024. In fact, local media has been reporting on an expenditure cut of around 33 trillion pesos, which together with an under-execution of the budget could help comply with the fiscal rule.

On the other hand, Congress did not approve the government’s budget for the following year. If approved by decree as it stands, there is a high probability of underfunding, as the tax reform going through Congress has a low probability of passing. Finally, the reform to the general participation system compromised the sustainability of public finances in the medium term. In fact, the Autonomous Committee of the fiscal rule highlighted that the proposal is not consistent with the compliance of the rule in the coming years. The higher country risk premium partly explains the recent devaluation of the exchange rate, which has surpassed the barrier of 4,500 pesos per dollar. From the international front, the good results of the United States economy and the victory of Donald Trump generate expectations of higher inflation and a shallower reduction in interest rates, supporting a stronger dollar.

There is also a risk of diplomatic backlash as Colombia’s government could clash with that of the United States on topics such as drugs and security. Putting together, this explains the cautionary approach of Banco de la República in its process of interest rate cuts. In September and October, despite some expectations of deeper cuts, the rate adjustments continued in multiple of 50 basis points to 9.75%. For 2024, we project a return rate of 9.25%. To sum it up, growth and employment and inflation have fared better than expected, while the fiscal situation has become the biggest challenge for the country, limiting the space for a more ample monetary policy. For 2025, we expect growth to improve to 2.6%, while inflation will keep on trending downward to 3.6%.

And the central bank could reduce its policy rate further to around 6%. Uncertainty on the political front and important relations could hinder the economic recovery. That sums up our economic news. Thank you. Back to you, Maria Lorena.

Maria Gutierrez Botero: Thank you, Camilo. Our financial system has remained solid while facing the challenges coming from the current context. We believe that the consumer credit cycle has already entered the recovery phase. However, loan growth is still in negative ground in real terms and margins are still under pressure due to the shy action from the central bank and regulatory pressures such as changes in interest rate caps and high liquidity and solvency requirements. Nonetheless, Colombia’s financial system has delivered on its commitment to the country’s economic recovery. As part of this effort, banks committed in August to the Pacto por el Crédito. This aims to divert 55 trillion pesos as competitive rates to clients in six prioritized sectors.

As of September, banks have already disbursed 10.6 trillion pesos as part of this program. In addition, to promote housing construction, banks lowered mortgage rates earlier this year. The spread between new credits and the central bank rate is now at its lowest level in history at around 2%. This has already resulted in a rebound in new credits. Finally, banks have efficiently transferred the central bank rate cuts to corporate and consumer clients. Let me go over the highlights of our financial results. Loan disbursements increased in the system during this quarter, even though loan and deposit growth continues to be soft. In this context, we continue to outgrow our peers and increase our market share. Over the quarter, our bank’s combined gross loans grew 0.7%, reaching a 25.2% market share by September of this year.

Cost of risk and asset quality improved relative to the previous quarter, and operating expenses remain under control. Regarding asset quality, cost of risk and delinquency for consumer loans and mortgages continue improving. A strong result in near loan investments resulting from positive market conditions helped profitability over the quarter. Finally, NIM on loans continue to be prepped by a conservative monetary policy, interest rate caps affecting consumer loans, and our concentration in higher quality segments and products. As a result, net income to our shareholders was $415 billion pesos, and return on average equity was 9.7%, the best result for our third quarter in three years. Now, I would like to pass the call to Diego, who will give the details for our results.

Diego Solano: Thank you, Maria Lorena. I will start on pages 8 and 9 with a few charts regarding the growth rate and quality of our loan portfolio relative to the rest of the Colombian banking system. For comparability reasons, these are unconsolidated figures under Colombian IFRS as published by the Superintendency of Finance. On page 8, we continue to outgrow our competitors in all loan categories. This yielded, by end of August, year-on-year market share gains of 65 basis points in total loans, 65 basis points in commercial, a 138 basis points in consumer loans, and a 100 basis points in mortgages. Banco de Bogota’s exit from the microcredit slightly shifted our market share in total loans. We are starting to see an increase in disbursements across all categories in the banking system as rates have come down and credit risk has decreased.

As mentioned by Camilo, leverage for households has continued receding. Early total loans disbursements for the period end of August increased 18% over three months and 23% over the year, up from 5% and 13% contraction a quarter earlier. The most notable recovery was in consumer loans where disbursements grew 18% over the quarter and 28% year-on-year, reaching 19 trillion pesos. Even though a strong rebound, this is still three-fourths of what was disbursed eight quarters earlier. On page 9, the quality of consumer loans continued improving in the Colombian banking system while commercial loans and mortgages slightly deteriorated. Our banks continue to exhibit a better loan portfolio quality than the system in all main categories. I will now move to the consolidated results of Grupo Aval under IFRS.

Starting on page 10, assets grew 1.3% over the quarter to 321 trillion pesos, accumulating 7.3% increase year-on-year. Gross loans, our main assets, reached 195 trillion pesos, growing 0.7% during the quarter and 4.3% year-on-year. Commercial loans and mortgages continued driving our year-on-year growth while consumer loans resumed quarter-on-quarter growth following two consecutive quarters of contraction. Commercial loans expanded 5% year-on-year and 0.1% over the quarter. Consumer loan growth, even though still at a soft 0.8% year-on-year, grew 0.9% during the quarter. With payroll loans and auto loans growing 1.4% and 2.1% respectively during the quarter, personal loans growing for the first time in three quarters at 0.8%, credit cards continuing to contract at 1.8% during the quarter, and finally, mortgages growing 4.8% over the quarter and 13.7% year-on-year.

We anticipate loan growth rates to pick up in 2025 due to the normalization of monetary policies, stronger GDP growth, and improvements in consumer loan quality. We expect to continue outpacing the banking system’s loan growth. On page 11, we present funding and deposits evolution. Loan funding increased 1.2% during the quarter, accumulating 7.3% year-on-year. Deposits account for 73.4% of our funding, growing 8.7% year-on-year, and decreasing 1.2% quarter-on-quarter. Our deposit-to-net loans ratio closed at 106%. On page 12, we present the evolution of our total capitalization, our attributable shareholders’ equity, and the capital adequacy ratio of our banks. Our total equity grew 3.5% over the quarter and 6.6% year-on-year, while our attributable equity increased 4% over the quarter and 6.1% year-on-year.

During the quarter, Banco de Villas issued a 150 billion pesos Tier 2 subordinated bonds that added around a 130 basis points to its solvency. On page 13, we present our yield on loans, cost of funds, spreads, and NIMs. Total NIM increased 47 basis points quarter-on-quarter and 3.9% year-on-year, driven by an improvement in NIM on investments to 2.8% during the quarter. Our consolidated NIM on loans was 7 basis points lower at 4.2%. NIM on retail loans, predominantly priced at fixed rates, expanded 22 basis points to 5.3%, while NIM on commercial loans, predominantly floated over IVR, fell 28 basis points to 3.4%. Regarding our banking segment, its NIM on loans contracted 6 basis points quarter-on-quarter to 4.9%, still far below historic levels.

This incorporates our NIM on retail loans that expanded 28 basis points to 6%, and NIM on commercial loans that fell 30 basis points to 4.1%. The total NIM of our banking segment expanded 35 basis points to 4.6%, driven by the same trends impacting our consolidated NIM. NIM on loans expansion has continued to be elusive due to high funding costs resulting from a shy central bank intervention rate reduction pace and regulatory pressures such as changes in interest rate caps, formulas that forced additional reductions in products such as credit cards and personal loans. In addition, loan spreads on new loans have been lowered given the concentration of growth in higher-quality, lower-rate assets. We expect that the central bank will have room to accelerate its pace in rate cuts during 2025, given the positive evolution of inflation and the current high-forward-looking real interest rate level.

This scenario supports our view of NIM expansion over the following quarters. On pages 14-16, we present several loan portfolio quality ratios. Starting on page 15, 30-day PDLs decreased 3 basis points to 5.8%, while 90-day PDLs increased 5 basis points to 4.3%. Consumer loans and mortgages PDL formation improved both on a 30-day and 90-day basis. The evolution of asset quality points to the end of the consumer loans credit cycle with PDL ratios and PDL formation peaking during Q1 2024 across all products. PDL formation for credit cards and personal loans was the lowest in seven quarters. In line with our expectation, commercial loans deteriorated over the quarter. As will be presented in a couple pages, this behavior partially offsetted the favorable effect and cost of risk of improvement in consumer loans quality.

Finally, the annualized ratio of charge-offs to average 90-day PDLs was 0.67 times. On page 15, the share of our portfolio classified as stage 1 portfolio remained stable over the quarter, driven by a better performance in consumer loans and mortgages that was offset by commercial loans. Coverage measured as allowances for stages 2 and 3 as a percentage of stages 2 and 3 loans slightly fell during the quarter to 36.5%, with coverage for consumer and commercial loans at 44.6% and 34.9% respectively. On page 16, as anticipated, the cost of risk improved during the quarter. We expect cost of risk to hover around the 2% area for the following quarters, yielding a more favorable local macro scenario. Cost of risk net of consumer loans improved a 125 basis points to 4.3%.

This is the first quarter yielding a positive risk-adjusted NIM on loans for consumer loans in six quarters. Cost of risk net for commercial loans was 0.9%. On page 17, we present net fees and other income. Gross fee income grew 4.7% year-on-year and decreased 0.5% quarter-on-quarter. Net fee income increased 2.6% and decreased 2.1% respectively during these periods. Gross pension and severance fees grew 15.7% year-on-year and 0.8% quarter-on-quarter due to higher mandatory pension fund management fees. Gross banking fees decreased 0.3% year-on-year and 2.8% quarter-on-quarter due to lower transactional volume and a system-wide decrease in active outstanding credit cards. Income from the non-financial sector contracted 18% year-on-year and 15.8% during the quarter.

As mentioned in past calls, our year-on-year performance has been driven by some concessions that are transitioning from the construction to the operation phase. Finally, on the bottom of the page, the quarterly performance and other operating income was similar to that for previous quarters with a higher contribution of net gain on sales of investment and OTI realization and a weaker result in derivatives and FX. On page 18, we present some efficiency ratios. Efficiency metrics reflect our operational efficiency initiatives. Total operating expenses decreased 2.3% quarter-on-quarter and increased 3.1% year-on-year. General and administrative expenses decreased 10.8% quarter-on-quarter and 0.9% year-on-year with operating taxes and deposit insurance accounting for 37%.

Cost to assets for the quarter was 2.6%, improving 12 basis points quarter-on-quarter and 9 basis points year-on-year. Quarterly cost to income improved to 58.7%. Finally, on page 19, we present our net income and profitability ratios. Our total net income for the quarter was 416 billion pesos or 17.5 pesos per share. Our return on average assets and return on average equity for the quarter were 0.9% and 9.7% respectively. Before passing the call back to Maria Lorena, I will now summarize our general guidance for 2024 and our initial view on 2025. For 2024, we expect loan growth between 6.5% and 7% with commercial loans growing between 7.5% and 8% and retail loans growing between 5% and 6%. NIM in the 3.6% area with NIM on loans in the 4.35% area.

NIM of our banking segment in the 4.4% area with NIM on loans in the 5.1% area. Cost of risk net of recoveries in the 2.2% area. Cost to assets in the 2.7% area. Income from the non-financial sector of 80% of that for 2023 and the income ratio between 20% and 25%. Finally, we expect our 2024 ROE to be in the 6.25% area. Moving to our initial view for 2025, we expect loan growth in the 10% area with commercial loans growing at 9% and retail loans growing at 11%. NIM in the 4.4% area with NIM on loans in the 4.75% area. NIM of our banking segment in the 5% area with NIM on loans in the 5.5% area. Cost of risk net of recoveries in the 2.15% area. Cost to assets in the 2.8% area. Income from the non-financial sector of 80% of that for 2024. At the income ratio in the 20% area.

And finally, we expect 2025 ROE to be in the 11% area.

Maria Gutierrez Botero: Okay, thank you, Diego. Before moving into questions and answers, I would like to share some thoughts of Colombia and Grupo Aval in the upcoming years. Even though the economic context has been challenging over the last couple of years, our recovery trend continues to consolidate. In 2025, we expect GDP growth to return to levels exceeding 2.5%. We view a more predictable and a lower inflation that is expected to fall within the central bank’s target range, allowing for a lower interest rate environment to consolidate. This will favor investment as well as businesses and consumer confidence and will support the end of the consumer credit and interest rate cycle. In this context, we expect to return to double-digit profitability and benefit from stronger growth in real-term services.

Our increased profitability will be driven by an improvement of risk-adjusted needs on loans, lower cost of funding of our non-financial business, commercial and operation effectiveness, and higher net income relating to an increase in origination and transactional activities. So, we are now open for questions.

Operator: Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from the line of Brian Flores with Citi. Please go ahead.

Q&A Session

Brian Flores: Hi, Team. Thank you for the presentation on the earnings. I just wanted to ask you a bit on mortgages. Because you’re gaining market share, it seems that the market is a bit complicated in terms of the lean points still. So, I just wanted to think about your strategy for 2025. Should we continue to see you gaining share in this market? Do you think the market will improve and that will fuel your growth? Just to have maybe a better vision here. And also, if I can, a second, just very quick. Just to confirm, you’re seeing ROE trends going to 11%. Just thinking if this is more coming from NIM, which I think it could be the case, or a betterment in terms of cost of risk. Many thanks.

Diego Solano: Okay, Brian. For your two questions regarding mortgages. Yes, we do expect to outpace the system. The reason for that is we are widely underweighted in mortgages compared to our peers. Therefore, we are having a chance to better pick what our customers are. We’re standing at around 15% with our, let’s call it, natural share somewhere above one-fourth of the market. So, yes, we do expect to continue seeing that trend into the future. Then regarding the ROE trend, you basically touched on the point. When you look at our numbers, our numbers have improvement in cost of risk. We have cost control and we have two headwinds that we need to overcome. Number one, the system is growing at a low rate and we do expect the market to help us in the process.

Plus, we do expect to continue outpacing the system, gaining some market share. The other part of the equation is the central bank is yet due to reduce over 300 basis points its rate that will benefit very strongly our portfolios that had contracted previously in the cycle. Therefore, the key driver of recovery will be a combination of those two, going back to real growth rates in Colombia and then expansion and NIM on loans as mentioned by Maria Lorena. We do expect ROE to improve throughout the year. This implies, obviously, going back to numbers closer to what our long-term ROE rate should be by the end of the quarter or and into 2026.

Brian Flores: Perfect.

Operator: Our next question will come from the line of Daniel Mora with Credicorp Capital. Please go ahead.

Daniel Mora: Hi, good morning and thank you for the presentation. I have three questions from our side. I would like to understand the first one. We have struck a clear downward trend in the consumer segment, but the commercial segment continues deteriorating. Why is the commercial segment taking longer than expected when compared to the consumer one? And I would like to understand if there is a particular sector showing even a more challenging scenario and when do you expect to see an improvement in this segment? That will be my first question. The second one is regarding NIM. I would like to understand if you can provide a further color regarding the NIM with and without the trading income. What was the strategy taken during this quarter that showed a strong improvement in the NIM of investment and should we consider this to be a one-off or can we expect a better performance going forward?

And the last one in this question is can you repeat the guidance of the NIM for 2024 and 2025? Thank you so much. And the last one is regarding the loan program with the government. Can you repeat how much you have disbursed under this program and what are the conditions of these loans? Do they have a guarantee attached or a subsidy of interest rates? Thank you so much.

Diego Solano: Well, regarding your first question on the cycle, the reason why you see commercial skill lagging and the reason why we have guided into that kind of behavior is that what you usually see in the cycle is that the consumer cycle anticipates what happens with the commercial cycle. You know that households start to suffer and with some lag, companies see the impact of their sales dropping and margins starting to feel pressure. Therefore, what is happening was expected and is what you usually see and it is commercial cycle goes after the consumer cycle. Regarding your question on sectors, you have to realize that Grupo Aval had one quarter of the market. Therefore, we are exposed to all sectors. And in all parts of the cycle, even the boom parts of the cycle, we do have sectors that we have to look into that are affected by the macro conditions.

Therefore, obviously, we have gone over several years already looking into different sectors that are sensitive either to increasing inflation, increasing rates, changes in exchange rates, and you can go down the list. Therefore, we do have all the time different sectors we’re looking into. So, I’m not going to stop in any of those to point them out as a special sector. I would say at this point, we’re not anticipating any large single event coming on. So, this is more how the economy is reacting, what gets reflected into our numbers. Then, regarding your question on NIM on trading income, that’s a tricky one because this depends on how interest rates are falling down. So, I think you have to look beyond the cycle and look into the averages of how numbers behave.

Part of the offset in our numbers, obviously, is what happens in the FX and derivatives line. What you can see into our numbers is you usually have some sort of offset in those numbers. The quarters where we have good results in NIM on investments are quarters where we have poor results. And FX and derivatives, given the hedging activity around our trading portfolio. Then, between the guidance and NIM, I’ll start with the NIM for the banking sector that is more comparable to banks that do not have the non-financial sector. What we’re seeing for this year, 2024, is total NIM for the banking segment in the 4.4% area with NIM on loans in the 5.1% area. For 2025, that same numbers are for the banking segment. Total NIM in the 5% area, so 60 basis points for the improvement.

And NIM on loans in the 5.5% area, 40 basis points improvement, yet below what historic averages look like. Our guidance for total NIM that includes the interest expenses from our non-financial sector that pulls the numbers down. Total NIM for this year in the 3.6% area and NIM on loans in the 4.35% area. For next year, 4.4% for total NIM and NIM on loans 4.75%.

Maria Gutierrez Botero: I can answer. Regarding the Pacto por el Crédito, all the financial sector, our commitment in the financial sector was 55 trillion pesos in 18 months. So, after one month, the results that the Superintendencia Financiera Colombiana published about the results of this Pacto por el Crédito, we disbursed 10.6 trillion pesos, especially in industry, renewable energy, housing, tourism, and the only sector that is not according to our goals nor is what the government call a popular economy. So, we have to find a way that we can go to find the demand for this credit in the country.

Daniel Mora: Perfect. Thank you so much. Just one last question regarding the 10.6 trillion that you already disbursed. What are the conditions of these loans? Do they have a guarantee attached or there is a subsidy to the interest rates or are they under normal conditions?

Maria Gutierrez Botero: As you know, as Diego and I mentioned, the housing credit, we have special conditions because lower rates. With the renewable energy, we have some guarantees and we are working for a good business and a popular economy with some entities in the government like FINDETE, FINAGRO, and Fondo Nacional de Garantía. This is the way we are working with Pacto por el Crédito.

Operator: Our next question will come from the line of Marlon Medina with J.P. Morgan. Please go ahead.

Marlon Medina: Thank you. I’ll follow up on the loan growth outlook and I would like to ask first, I think you mentioned in the chat that I didn’t get the number, so if you can repeat the breakdown of loan growth between commercial and consumer. And number two, the competitive environment and as you mentioned, we want to keep up growing the system, but how is competition in your view reacting? Thank you.

Maria Gutierrez Botero: Marlon, perhaps the main change that we’re already seeing is a pickup in growth for consumer. There are many reasons for that from the supply and demand side. From the demand side, rates have fallen substantially and we’re looking into over 300 basis points reaction next year. So, from the demand side, you do see that. Then, unemployment hasn’t deteriorated, setting a different way the employment market continues to be healthy. And finally, from the supply side, we’ve already begun to see an improvement in quality that allows us to be more determined in lending in those segments. In certain products that we have shied away for some time. Therefore, it’s a good mixture from the demand and supply side to see that increase.

One of the drivers that is coming into the theme here is we are returning to see much better growth, real terms growth for most consumer products. I know you had a last question. Our competitive landscape. The Colombian market is very competitive. We’ve mentioned that as well. For example, we are concentrated in dispersing in the higher quality, low rate segments. Therefore, we see a lot of competition there because the market does behave in that manner. We have very strong competitors that we respect in not only the larger players, but also other players in certain products. So, that’s the dynamics of the Colombian market. We are ready to be part of that and we are ready to be part of what generates competition in the system.

Marlon Medina: Perfect. Very clear. Thank you. And just can you repeat the loan growth you’re expecting for commercial and consumer specifically?

Maria Gutierrez Botero: Yeah. Loan growth for this year for commercial would be 7.5% to 8% with retail growing at 5% to 6%. Retail including consumer and mortgages. And then for next year, we’re looking into commercial at 9%. That is a slight pickup compared to this year, but retail growing at 11%. That is very substantial compared to this year. So, overall, this year would be between 6.5% to 7% and next year in 10%.

Operator: [Operator Instructions] Our next question will come from the line of Julian Ausique with Davivienda. Please go ahead.

Julian Ausique: Hi, everyone. Thank you for having my question. First of all, I would like to, I don’t know if you already talked about that, I mentioned in the call. But I don’t know if you mentioned something about the ordinary bond that you are trying to issue for 400,000 million pesos. And if you can give us a little bit color of the uses of that and what is the purpose to acquire shares of some subordinated financial entities. Just to have a little bit of color of that. The other question is related Porvenir and Corficol and Corte Colombiana. I don’t know if you can tell us a little bit about the operation, what you’re expecting for 2025, and what was the main positive impact of those companies in the results of Grupo Aval during this quarter?

And finally, just to know what are the expectations, like in the long term in terms of ROE? You mentioned that the provision for 2025 is 11%. I don’t know if you are looking for a higher ROE for the next years or that is the long-term ROE that you are trying to get. Thank you.

Diego Solano: Okay. So let me start at the top bottom. Regarding ROE, we expect our ROE long-term, medium-term, to return back to more than 15%. That’s where we believe we should be heading by the end of next year and into the following year. Regarding Porvenir and Corficol, Porvenir has been a very relevant operation throughout this year. We expect it to continue to add to Grupo Aval. Obviously, there’s many scenarios there. Business as usual, there’s no any change with the pension reform where the numbers will be similar to what we’ve seen in the past, and then if the reform falls as expected, we might see a pickup in net income for the following years, but perhaps a lower growth longer term. Regarding Corte Colombiana. Corte Colombiana, you’ve heard our last calls.

We’ve been guiding into a reduction in income from the non-financial sector over time, and the reason that we have given is we’ve seen our projects moving from the construction to the operations phase. Once we have information to disclose on the new projects that we are trying to build, the pipeline that we’re building, you will get that information, but that’s where we’re focused at this point. Short term, Corte Colombiana will strongly benefit from a lower interest rate given that their projects have a relevant portion of impact of interest rate expense, and as interest goes down, you’ll see Corte Colombiana picking back up. Then regarding our local bond, it’s a small bond. It’s a bond that should be, let’s say, somewhere around $70 million, where one of the main uses is we have a year end during this week, and in a few weeks, we have some bonds coming due that’s short of $40 million, and we want to continue being present in the market.

Therefore, that’s the reason why we’re going back to the market.

Operator: There are no further questions at this time. Miss Maria Lorena Gutierrez Botero. I turn the call back over to you.

Maria Gutierrez Botero: Thank you very much for being with us in this call, and see you in the next call. Have a good day.

Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for joining. You may now disconnect.