U.S. Markets open in 7 hrs 48 mins

Edited Transcript of GRUPOAVAL.BG earnings conference call or presentation 21-Aug-19 2:00pm GMT

Q2 2019 Grupo Aval Acciones y Valores SA Earnings Call

Aug 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Grupo Aval Acciones y Valores SA earnings conference call or presentation Wednesday, August 21, 2019 at 2:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Diego Fernando Solano Saravia

Grupo Aval Acciones y Valores S.A. - CFO

* Luis Carlos Sarmiento Gutiérrez

Grupo Aval Acciones y Valores S.A. - President

================================================================================

Conference Call Participants

================================================================================

* Alonso Acuna Aramburú

Banco BTG Pactual S.A., Research Division - Strategist

* Andres Soto

Santander Investment Securities Inc., Research Division - Head of Andean Research

* Brian Flores

Citigroup Inc, Research Division - Senior Associate

* Carlos Enrique Rodríguez

Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research

* Jason Barrett Mollin

Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services

* Jorg Friedemann

Citigroup Inc, Research Division - Director

* Julian Felipe Amaya Restrepo

Corredores Davivienda S.A., Research Division - Equity Research Analyst

* Nicolas Alejandro Riva

BofA Merrill Lynch, Research Division - Research Analyst

* Sebastián Gallego

CrediCorp Capital, Research Division - Associate of Andean Banks

* Yuri R. Fernandes

JP Morgan Chase & Co, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Welcome to Grupo Aval's Second Quarter 2019 Consolidated Results Conference Call. My name is Hilda, 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, registered with the Colombia's National Registry of Shares and Issuers, Registro Nacional de Valores y Emisores and The United States' Securities and Exchange Commission, SEC. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation.

All of our banking subsidiaries, Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas, Porvenir and Corficolombiana, are subject to inspection and supervision as financial institutions by the Superintendency of Finance. Grupo Aval is now also subject to the inspection and supervision of the Superintendency of Finance as a result of Law 1870 of 2017, also known as the Law of Financial Conglomerates, which came in effect on February 6, 2019.

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

Details of the calculations of non-GAAP measures, such as ROAA and ROAE, among others, are explained when required in this report. Grupo Aval has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and adjustments arising from the new leasing rules are therefore recognized in the opening condensed consolidated statement of financial position on January 1, 2019. Consequently, quarterly results for 2019 are not fully comparable to previous periods.

IFRS 16 introduced a single on-balance sheet accounting model for lessees. As a result, Grupo Aval, as a lessee, has recognized right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. Lessor accounting remains similar to previous accounting policies. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined, or the group's incremental borrowing rate.

This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by words, such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential or continue or the negative of these and other comparable words. Actual results and events may differ materially from those anticipated herein as a consequence of changes in general economic and business conditions, changes in interest and currency rates and other risks described from time to time in our filings with the Registro Nacional de Valores y Emisores and the SEC.

Recipients of this document are responsible for the assessment and use of the information provided herein. Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update or correct the information provided in this report, including any forward-looking statements, and do not intend to provide any update for such material development prior to our next earnings report.

The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. When applicable, in this document, we refer to billions as thousands of millions.

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

--------------------------------------------------------------------------------

Luis Carlos Sarmiento Gutiérrez, Grupo Aval Acciones y Valores S.A. - President [2]

--------------------------------------------------------------------------------

Thank you, Hilda. Good morning, and thank you for joining us in our second quarter 2019 conference call. Once again, it's my pleasure to share with you our strong financial results for the quarter that ended on June 30. As in previous calls, I will cover the following subjects: An overview of our macro scenario, highlights of our results and a brief update regarding the legal processes of Ruta del Sol.

Colombia's economy, where 70% of our business resides, grew at 3% during the first half of 2019. Seasonally adjusted GDP growth during the first quarter was revised from 2.3% to 2.7%, or 3.1% unadjusted. And seasonally adjusted growth during the second quarter came in at 3.4%, or 3% unadjusted.

Notably, during the second quarter, several sectors grew faster than the average economic growth including retail, financial services, communications and professional services. Lagging sectors included construction, industry and oil and mining. These sectors are traditionally the main generators of jobs. Consequently, no growth in these sectors is in part responsible for the deterioration of our unemployment rate, which is currently averaging 10.1%. As I've mentioned before, we believe that 2 other significant factors contributing to the current unemployment level are the inflow of Venezuela migrants with legal work permits, and the consistent minimum wage increases in excess of inflation.

Our current view on growth still somewhat more conservative than the government. We believe that GDP will grow between 3% and 3.25% for the year. We further believe that unemployment will only start to improve once the construction and the industry sectors pick up momentum. Commercial loan demand uses a proxy to detect acceleration in the growth of these sectors, does not yet point in that direction.

The latest inflation number of 3.79% for the 12 months ending in July represented the largest increment in monthly data of 12-month inflation since December 2017. This number also comes closer to the 4% cap of the Central Bank's acceptable range. However, the 2 drivers that fuel such pick up lead us to believe that inflation will correct downward and will then close to 3.5% for 2019.

The first driver that accelerated inflation was food prices, mainly due to a short-lived El Niño weather phenomenon. Secondly, inflation for July 2018 was atypically low, and thus, the base for comparison magnifies the effect of July's number on the overall measurement. Data also suggests that there's still a moderate pass-through of the recent devaluation of the currency associated with more costly inputs when converted to Colombian pesos.

Consequently, the Central Bank is sort of on a tough spot. On the one hand, it needs to make sure that inflation expectations remain controlled and that might lead it in the direction of tightening monitor policy, especially if it feels that the exchange rate is affecting internal prices in a material rate. But on the other hand, it also knows that the economy's recovery is still sluggish and as such, an early tightening cycle could be harmful. As of now we believe that the Central Bank will continue with a stable interest rate throughout the remainder of 2019. Even if inflation stays at current levels, it is difficult to envision more than 1.5 basis point hike in the remainder of the year.

Current account deficit is still an issue. Internal demand growth continues to boost the importation of goods, while devaluation of the peso has not been a clear promoter of more and diverse exports. Latest figures show that while inputs are growing close to 10% year-on-year, exports are flat. Government is pushing for a better use of the signed free-trade agreement and for strengthening of our tourism, but the reality is that our trade partners are not doing great, that international markets are not strong and that tourism, despite growing, is far from contributing significantly to shrinking the current account gap.

Finally, on the fiscal front, we still believe that this year's deficit will be in line with the fiscal rule requirement of 2.7%. Consequently, we do not see probable the government's own estimation of a 2.4% deficit for 2019.

The reason for our assertion are that, first, GDP growth will probably fall short of the government's estimation of close to 3.5% included in the medium-term fiscal plan. And secondly, the peso is weaker than anticipated, which has resulted in an increasing debt servicing pesos and the increasing income from oil revenues has not offset this debt service increase. As we have said before, a decoupling has occurred between FX and the price of oil. The exchange rate is more associated to a global deceleration and applies to quality reaction. If this situation continues, the government might be forced to cut spending even more or even to privatize a portion of its assets, an idea that has started to make some public waves.

The exchange rate is up to COP 3,400 per dollar, and it seems that this is the new norm. Several pressures are in play. The strongest driver in our view continues to be a widening trade deficit. Additionally, as of August, dollar flows into fixed income local currency portfolios had decreased by 25% as compared to 2018 from $1.2 billion to $900 million. These pressures have been somewhat mitigated by an increase in remittances, which have grown by approximately $900 million in the last year and by a 21% increase as of July in structural foreign direct investments.

Central America's growth has slightly decelerated. Although we still believe that the region's economy will grow upwards of 3% during 2019, the reality is that this growth is closely linked to the performance of the U.S. GDP. And as the U.S. economy slows down, so does Central America's. However, the macroeconomic fundamentals and the strength of our business in Central America continue to prove our strategy of sustainable results based on diversification.

To highlight a few of this quarter's numbers. Our attributable net income for the quarter was COP 813 billion or COP 36.5 per share, an increase of 19.3% versus 2018 second quarter results of COP 681.5 billion or COP 30.6 per share. And our return on average equity for the quarter rose to 18.3%. Our results were mainly driven by loan portfolio growth just shy of our 8% estimation for the year, but very profitable in nature with faster growth in our retail portfolio than in our commercial portfolio. Net interest margin of approximately 6% driven by a disciplined loan pricing strategy, controlled cost of funds and better yields from our fixed income portfolios.

Overall, cost of risk approaching 2%, resulting from an improvement in our consumer portfolio's cost of risks partially offset by a deterioration of our commercial portfolio's cost of risk. Cost of risk will increase in the remainder of the year as our bank fully provisioned our remaining exposure in Ruta del Sol.

Strong net fee income growing significantly faster than our loan portfolio due to solid banking and pension fund fees. Sustained contribution from our nonfinancial sector during the quarter, which is -- you are all aware, mainly comes from our operation Corficolombiana. Continued focus on efficiency resulting in controlled operating expenses in general, and specifically, in slow growth of personnel expenses even below the minimum wage increase. Strong balance sheet as reflected by our deposit-to-loan, liquidity, intangible equity ratios. Diego will refer to each of these points in a few minutes.

On the digitalization front, we continue to work at digitalizing products and processes in order to become more productive, but also to access segments of the population that were unbankable to us in the past. We expect to launch DALE, our fintech, in the next couple of months. DALE is an ecosystem that will allow clients and nonclients to conduct P2P, P2C and C2P money transfers at 0 cost in one click. We share the government's goal to decrease the use of cash, and we also want to increase banking penetration. We will share with you more details of DALE in our next call.

Regarding ongoing legal matters related to Ruta del Sol, in the last few weeks, 2 proceedings have advanced. On the one hand, the arbitration tribunal ruled on August 6, and then confirmed it's really on August 16, after declining to respond to multiple requests for clarifications from all the parties involved. First, and as expected, the Ruta del Sol contract was declared null. Importantly, this part of the ruling allow the Tribunal to base its calculation of the liquidation value of the contract on Law 1882 of 2018, and had no other implication that the project was reversed to the government almost 2 years ago.

Secondly, the Tribunal ruled that on top of the payments that have been made to employees, suppliers and banks since the contract ended in February 2017, which add up to approximately COP 1.5 trillion, the government should pay an additional COP 211 billion to CRDS' creditors, among which the banking system is owed approximately COP 1.2 trillion.

We have been studying very closely, and in painful detail, the text of the 700-page ruling, and have several issues as to how the judges apply the law to reach the liquidation value number. We don't know what other parts affected by these ruling are going to do in terms of multiple legal recourses but we will consider all the avenues supported by the law.

Since the final resolution might take some time, we foresee that our banks will have to provision the current exposure to CRDS before this year ends. In our case, as of June 30, we had a net exposure of COP 380 billion, equivalent to 23 basis points of our current average loan portfolio. We estimate COP 170 billion the impact after taxes of this addition of provision expense on our own attributable to net income or about 5% of our yearly results.

The other front that showed some advances was the antitrust process at the Superintendence of Industry and Commerce, the SIC. As part of this proceeding, all the parties to this investigation had officially requested that the SIC included certain documents and call certain witnesses to support the investigation. In a recent decision, the SIC granted most of these requests. That investigation continues, and we will report of any material advances once they occur. We have no further information regarding Ruta del Sol legal proceedings.

To end, allow me to summarize our macroeconomic guidance for 2019. GDP growth between 3% and 3.25%; inflation around 3.5% with an upward bias due to the pass-through effect of the devaluation; unemployment not improving; exchange rates of around COP 3,400 per dollar for the remainder of the year; fiscal deficit on target for this year at 2.7%; next year, the government will have to face the decision of either cutting costs or disposing of some assets; on the current account front, the vulnerability will persist until we find a strong source of alternative exports or reduce imports; and growth in Central America, upwards of 3%.

Now I pass the presentation on to Diego who will explain in further detail our business results.

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [3]

--------------------------------------------------------------------------------

Thank you, Luis Carlos. I will now move to our consolidated results of Grupo Aval under IFRS and wrap up with our guidance for 2019.

As mentioned by Luis Carlos, the second quarter of 2019 was a strong quarter for Grupo Aval due to an improvement in loan dynamics during the quarter, particularly in Colombia; stronger net interest margin on loans and a solid performance of our fixed income portfolio; robust fee income during the quarter mainly attributable to pension fund management and banking fees; a sustained contribution of our nonfinancial sector; and strict cost control discipline.

Starting on Page 9. Assets grew 12.8% over the year and 2.5% during the quarter. Colombian assets increased 12.7% over the last 12 months and 3% from the quarter driven by net loans, cash and intangibles and financial assets from our concessions and right-of-use assets. In spite of an annual and quarterly contraction of 19.5% and 1.6% of Nicaraguan assets, Central America delivered 3.5% and 0.2%, 12-month and 3-month growth in dollar terms.

Moving to Page 10. Loans including repos grew 6.5% over the year and 1.3% during the quarter. Loan dynamics in Colombia continued trending positively, while growth in Central America remains underpinned by the dynamics of Nicaragua. Our Colombian corporate loan portfolio increased 0.9% over the quarter and 0.8% over the year. Commercial peso denominated loans grew 0.9%, the second consecutive positive quarter figure since first quarter 2018, following 3 consecutive paying quarters of contraction.

Strong growth of our Colombian retail portfolios continued to compensate the soft dynamics of our corporate portfolio. Colombian consumer and mortgage businesses expanded 9.9% and 16.3%, respectively, over the 12 months. Quarterly growths were 2% and 3.4%, respectively. Central American operations, excluding Nicaragua, expanded 4.4% in dollar terms for the year. Nicaragua, which weighs approximately 6% of our Central American loans contracted by 27.7%.

On Pages 11 and 12, we present several loan portfolio quality ratios. 30 days PDLs showed a slight deterioration during the quarter. Slow growth continues to affect PDL ratios in commercial loan portfolios in Colombia. We recorded an 18 basis points increase in 30-day commercial PDLs and 27 basis points in 90-day PDLs in the quarter in Colombia. In Central America, 30 days and 90 days commercial PDLs remained relatively stable, both during the quarter, and 30 days PDL increasing 7 basis points; and 90 days PDLs, stable.

We continue to delay the burden of the 3 corporate cases coverage for Ruta del Sol closed June at 47%. We expect to provision the remainder of Ruta del Sol during the rest of the year.

Our coverage for SITP companies stands at 40% during the quarter.

A slight increase in delinquency ratio of our consumer loan portfolio was driven by Central America. In Colombia, the improving trend in delinquency of consumer loans persisted with 30 days PDLs falling 9 basis points during the quarter to 5%, accumulating a reduction of close to 1 percentile point since the peak in first quarter 2018. 90 days PDLs remained stable at 3%, relative to first quarter 2019 and were 51 basis points lower than the year earlier. In Central America, 30 days PDLs consumer loans increased 34 basis points to 4.8% while 90 days PDLs increased 11 basis points to 2%, both compared to a year earlier. Our PDL for mortgages increased during the quarter driven by Central America. Despite of that, the quality of our mortgage portfolio continues to be substantially better than the market average.

Cost of risk was 2.2% with a quarterly increase of 20 basis points driven by Colombian commercial loans with stability in Central America and an improvement in the Colombian consumer portfolio. PDL coverage for 90 days PDLs was 1.53x.

On Page 13, we present funding and deposits evolution. Funding dynamics were consistent with the strengthening of our balance sheet as we position ourselves for upcoming growth. Funding structure remained materially stable with deposits representing 75% of our total funding and our deposits-to-net loans ratio reaching 1%. Our liquidity position continues to be strong with our cash-to-deposit ratios at 18.0%. Deposits increased 1.7% in the quarter and 9.2% over the last 12 months. Colombia increased 1.2% and Central America grew 1.8% in dollar terms, respectively, during the quarter. For the 12-month period, Colombia grew at 7.4%, while Central America grew at 3.9% in dollar terms.

On Page 14, we present the evolution of our total capitalization, our attributable shareholders' equity and the capital adequacy ratio of our banks. Our total attributable equity increased through the quarter in line with net income. Total equity increased by COP 1.6 trillion, while our attributable equity increased by COP 926 billion. As of second quarter 2019, our banks show a profit in Tier 1 and total solvency ratios to enable adequate growth.

On Page 15, we present our yield on loans, cost of funds, spreads and net interest margin. Our net interest margin increased 14 basis points, mainly driven by a stronger net interest margin on loans in Central America. Our net interest margin and investments continues to be solid. As anticipated, pricing on consumer loans in Colombia became more aggressive during the quarter due to improvements in quality. We continue to expect some pressure on net interest margin and consumer loans as growth increases the share of newly priced loans in our mix.

On Page 16, we present net fees and other income. Gross fee income dynamics was particularly strong during the quarter. Pension funds management fees posted strong results coming from fees charged on return basis. Gross fees increased 8.7% in Colombia and 1.4% in dollar terms in Central America compared to second quarter 2018. Our nonfinancial sector continues to deliver strong results and remain relatively stable over the quarter with better results from our energy and gas sector, and a slight decline in income from infrastructure explained by slower progress in construction due to weather conditions.

Our other operating income was substantially at the same level as during the previous quarter. Seasonal decrease in dividend income was offset by a COP 41 billion income from Banco de Bogotá's onetime change of 5-year benefit plans for nonunionized employees with a COP 24 billion effect on Aval's attributable income.

On Page 17, we present some efficiency ratios. Year-to-date, other expenses grew 5.7% relative to a year earlier. Total other expenses grew 0.7% in Colombia and 2.4% in Central America in dollar terms during this period. Year-to-date personnel expenses increased 4.1%. Year-to-date, administrative expenses increased 0.5%. And when adding IFRS 16 related depreciation and administration to administrative expenses, the figure was 7.0%. Improvement in year-to-date efficiency measured as cost-to-income resulted from tightening expenses, a higher net interest margin and a higher income from our nonfinancial sector.

Finally, on Page 18, we present our net income and profitability ratios. Our total net income for second quarter 2019 was COP 813 billion or COP 36 per share. Return on average assets and return on average equity for the quarter were 2.1% and 18.3%, respectively.

Before moving into questions and answers, I will now summarize our general guidance and financial performance. We expect loan growth to be in the 8% area in 2019. We expect our cost of risk net of recoveries to be in the 2.3% area in 2019, incorporating fully provisioning of Ruta del Sol by year-end. We expect full year net interest margin to be in the 5.7% area. Finally, we expect the return on average equity to be in the 15% area during the year.

We now are available for your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) We have a question from Andres Soto from Santander.

--------------------------------------------------------------------------------

Andres Soto, Santander Investment Securities Inc., Research Division - Head of Andean Research [2]

--------------------------------------------------------------------------------

I would like to understand better your views on asset quality. Obviously, Nicaragua's macro environment and Colombia's slowing growth doesn't help. But I would like to understand, going forward, what are you seeing in terms of asset quality performance? When are you expecting this to peak? And in this context, what are your views on cost of risk over the medium term after the full coverage of the corporate cases this year?

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [3]

--------------------------------------------------------------------------------

Okay. Andres, regarding asset quality, I think you need to break it down in pieces. We have 2 different forces. One in Central America, as we mentioned, and the other in Colombia is consumer and corporate. And I'll go slightly back in history just to show how the cycles are working to refer to Colombia. Colombia, what we saw was a consumer cycle starting earlier than the corporate cycle. Therefore, the consumer cycle has already peaked and is already recovering for the past 2 quarters. We expect that performance to continue. And the reason, in spite of our view on unemployment, is that the customers that we serve are mainly concentrated in segments that are not yet affected by that kind of effect. So we could -- we expect to continue to see that positive performance as has been demonstrated, not only in our numbers, but in the system as a whole.

Regarding the corporate cycle, the corporate cycle began with a lag of a few quarters to the consumer cycle. And even though it hasn't peaked yet, we haven't highlighted it in the call because it's not yet absolutely positive news, but we have started to see a slower deterioration in corporate loans. But that points to the numbers end up consolidating, and that we could be 1 or 2 quarters away from peaking in the, I would say, the statistical part of the corporate portfolio. This should be flattening pretty soon, and we will be very happy to be able to give you much better news in our next call.

Then, finally, the large corporate cases that do affect how our numbers look like. We are in the process of cleaning those up. We already got that done for Nicaragua a few quarters ago. And as we mentioned, we expect to see that happening during -- for Ruta del Sol, during the remainder of the year. On the SITP front, we believe that we are properly provisioned, so we do not expect a lot of changes there. So wrapping up, we are quite positive on how cost of risk should evolve. As always, we'll prefer to be able to talk about this with numbers that have already been delivered, but our sentiment is positive.

Regarding Central America, you pointed out Nicaragua, you're right on that. And then the region, as a whole, we've mentioned in the past, has had ups and downs, but we are positive on how that region is evolving as well. We mentioned in the past all other countries different from Nicaragua, but we believe that the things that needed to happen there were already delivered and the market is already picking up.

So for -- your last question was on our view on cost of risk. We believe our cost of risk should break 2% once those things are delivered. So for next year, even though we do not want to give guidance on that at this point, we do expect to see the trends continue. As I mentioned, we should be there in the range that should have broken 2%. So I believe, with that, I wrap up your question.

--------------------------------------------------------------------------------

Operator [4]

--------------------------------------------------------------------------------

The next question comes from Jason Mollin from Scotiabank.

--------------------------------------------------------------------------------

Jason Barrett Mollin, Scotiabank Global Banking and Markets, Research Division - MD of LatAm Financial Services [5]

--------------------------------------------------------------------------------

My first question is on the outlook for return on equity that you cited at around 16%. You closed this quarter with 18%. The first quarter, around 17%. You did mention that you're going to -- the impact of the Ruta del Sol provisioning and what that represents. So it seems like the second half of the year, I mean, even including the Ruta del Sol, that you're looking for much softer returns. If you can comment a little bit on the drivers there because it seems like there are some upsides to beat that expectation.

And my second question is just on the outlook for long-term rates. You mentioned the dynamics of inflation and the policy rate in Colombia. But if we look at the Colombian 10-year, we're definitely at the lows in the last 5 years. Just wanted to see your view on how that's impacting your view on returns for new investments should your cost of equity be a bit lower in this construct, or do you think this is just a short-term phenomena in Colombia or globally.

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [6]

--------------------------------------------------------------------------------

Well, I think regarding the outlook for return on equity, you're right. I believe we are looking perhaps on the same side. And the reason to do that is one, as you mentioned, Ruta del Sol. Ruta del Sol is actually quite impactful on our numbers. Then something to bear in mind is the way that which we are generating earnings, therefore, equity, so there's also a denominator effect there. And finally, during this quarter, we had many things that went right, so there could be some things that might be change in the future. For example, the interest rate environment has favored us in fixed income so there's some space or changes there. So at this point, we're looking to the 16% area. That is an improvement compared to what we set last time. And we're also dependent on what's happening with the global environment, particularly its effect on fixed income.

I'm tying that with your question on long-term rates. What's happening with long-term rates is not a Colombian-specific event. If you look around the world, first half becomes quite flat, therefore, there is some room for changes there. I'm not an expert in global fixed income, but I would say that the risks that you might see around the world could also affect Colombia. So the shape of the curve is something that I will say is idiosyncratic to Colombia, that's something that we are also being affected by what's happening in the rest of the world.

--------------------------------------------------------------------------------

Operator [7]

--------------------------------------------------------------------------------

Our next question comes from Jorg Friedemann from Citibank.

--------------------------------------------------------------------------------

Jorg Friedemann, Citigroup Inc, Research Division - Director [8]

--------------------------------------------------------------------------------

Just an additional clarification or explanation in terms of the Ruta del Sol exposure. If I got it right, your pending exposure to the project, this amounts to COP 380 billion. And if I got it right, you have fixed provision COP 170 billion, just wondering if these numbers are correct. And if I am right also, looking into what you guided for the year in terms of cost of risk, you told us 2.3%. Looking into what was happening in the first half, it will be, implicitly, that you could have cost of risk between 2.4% to 2.5% in the second half, is that right?

And the second question, if you could give us a bit more color about what should be the effective tax rate for the year. I noted that last year got an increase in the second half, just wondering if this is expected to happen again or not.

--------------------------------------------------------------------------------

Luis Carlos Sarmiento Gutiérrez, Grupo Aval Acciones y Valores S.A. - President [9]

--------------------------------------------------------------------------------

All right. Jorg, let me take the first question and Diego will take the other ones. On Ruta del Sol, our net exposure today is about COP 380 billion, exactly as you said. That is because we've provisioned already about 47% of the gross exposure. Then -- so our banks will have to provision COP 380 billion between now and the end of the year, and they've started to do so. The effect in Aval's and the holding company's owned attributable net income of that additional provision is COP 170 billion, and that's what I was referring to. And that's about, as we said, about 5% of our total income for the year.

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [10]

--------------------------------------------------------------------------------

Regarding your question on taxes and cost of risks, what we're building, and let me tie this to my first answer. What we're building into why not 2.4% but 2.3%, that is what I believe you said, is we're incorporating Ruta del Sol and we're also projecting how our consumer portfolio, particularly, should continue improving and taking away some of the deteriorations that we saw over this quarter. So it does reflect around 2.5% cost of risk for the second quarter, that is quite high -- the second half, I'm sorry, which is quite high for what we believe cost of risk for Aval should be, but with some improvement compared to what we're seeing now.

Finally, on taxes, what is incorporated in our guidance is something in the order of magnitude of 30% for effective tax rate. And as I've mentioned in the past, that is a blended of 70% Colombia and 30% in Central America with lower tax rates in Central America.

--------------------------------------------------------------------------------

Operator [11]

--------------------------------------------------------------------------------

The next question comes from Yuri Fernandes from JPMorgan.

--------------------------------------------------------------------------------

Yuri R. Fernandes, JP Morgan Chase & Co, Research Division - Analyst [12]

--------------------------------------------------------------------------------

I had a question on the pension fund fee. It was a very strong quarter, and I just would like to know more details on what is driving the growth in that line.

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [13]

--------------------------------------------------------------------------------

Okay. On the pension funds, I mentioned that we are generating high fees, as I say, a portion of the funds that we manage that are related to returns obtained in the portfolios. Some of the fees, particularly those for the compulsory pension plans where people are not adding funds to their pension fund, are compensated to us based on returns. Other pension funds are also managed in that way. In addition, we have some part of what the seasonality of how AFPs are obtained, affecting us positively.

--------------------------------------------------------------------------------

Operator [14]

--------------------------------------------------------------------------------

Our next question comes from Sebastián Gallego from CrediCorp Capital.

--------------------------------------------------------------------------------

Sebastián Gallego, CrediCorp Capital, Research Division - Associate of Andean Banks [15]

--------------------------------------------------------------------------------

I have 3 questions. The first one, you talked about the cycle on the commercial and the consumer segment in Colombia, but I guess, you didn't talk about the mortgage cycle. We have seen some upward pressure, particularly on the 90-day NPL ratio on the mortgage segment. Could you comment on that, and what's the outlook for the mortgage portfolio?

Second question, probably a follow-up or a new question on Ruta del Sol 2. Given the ruling on Ruta del Sol 2, what's the long-term outlook of Corficolombiana in terms of appetite for new infrastructure projects?

And the third question is regarding DALE. I know you mentioned that you would probably comment a bit more in the upcoming conference call, but can you provide the bit more detail on what are you intending to do and how is that comparable to other peers or what other products from peers?

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [16]

--------------------------------------------------------------------------------

Let me take the first question and pass it to Luis Carlos regarding the mortgage performance. I think you have to bear in mind that our number is a very positive number compared to market average. We could be around 60% of where market average delinquencies stand. We have seen some deterioration there, but I would say it's part of the process of getting a young portfolio to mature. In addition, there were some particular glitches in some of our banks that were already solved a couple of months ago, where we were able to identify some pockets of mortgages that were not performing as we desire, but that's an issue that has already been dealt with. And regarding the environment as with the rest of the market, I can't really comment much more than what I've said for our portfolio.

--------------------------------------------------------------------------------

Luis Carlos Sarmiento Gutiérrez, Grupo Aval Acciones y Valores S.A. - President [17]

--------------------------------------------------------------------------------

Thank you, gentlemen. Regarding the other 2 questions. On one hand, you asked about Corficolombiana's long-term outlook for infrastructure and -- well, we start with that. As you know, Corficolombiana's already building 3 of 4, 4G projects that it acquired some years ago. Those 4 projects have different advances. And starting with one of them is already up to, like, 51% progress and then the other ones are oscillating between 16% and 23%. So that -- those numbers give you an idea that we still have a long ways to go before we finish those. So obviously, our appetite is still very strong because we have to, on one hand, finish those, we still have maybe 4 or 5 years to go. There's a fourth 4G project that we haven't even started that we're still waiting on environmental licenses, and so that one still will have its own 5 or 6 years to go.

And then besides that, Corficolombiana is still the largest toll road operator in the country. So that should give you an idea how much of an appetite we have for that. And then as new projects come up, we'll look at them. We'll look at them, but -- I would say our plate is pretty full at this point with infrastructure.

And then regarding DALE, DALE is different than anybody else's offer, first of all, because DALE is a company in itself. It's called a [set pay], and a set pay here is different from all the other companies because of -- to start with, a set pay is under the direct supervision of the Superintendence of Finance, and a set pay can take in deposit. Secondly, nobody will really have the offer that we will offer through our set pay DALE. We will cover ways of doing business that nobody else can because of the licenses that are afforded to us via the set pay . We will have, as I said, not only P2P that everybody offers, but we will have P2C and C2P transactions. And then we'll have some other features that we will soon announce, and I think they'll be interesting to the public, in general. At the end, what we really want to do is deepen our banking penetration and really, as we said, to take out of the market some of the cash transaction that are now being performed. If we can get those 2 things, I think we'll be very happy with our results.

--------------------------------------------------------------------------------

Operator [18]

--------------------------------------------------------------------------------

Our next question comes from Alonso Aramburú from BTG.

--------------------------------------------------------------------------------

Alonso Acuna Aramburú, Banco BTG Pactual S.A., Research Division - Strategist [19]

--------------------------------------------------------------------------------

I have 2 questions. One, a follow-up on Corficolombiana, which has been contributing nicely to earnings. Given the progress you've mentioned in the 3 projects, how should we expect earnings contribution from Corficolombiana to continue in the coming quarters? And second, can you give us the cost of risk, excluding the provisions that were down for Ruta del Sol and SITP this quarter?

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [20]

--------------------------------------------------------------------------------

Regarding Corficolombiana, we expect Corficolombiana to continue contributing as it has done over the past quarters or a few years. We've mentioned in the past that the construction period have -- toll roads takes around 4 to 5 years. So during that period of time with different levels of strength, we should be advancing and generating contribution from Corficolombiana.

The contribution at this point at the Aval level could have been around COP 140 billion. Regarding provisions different from what we've mentioned in the past, there hasn't been any material provisions during the second quarter. I believe you are referring to Ruta del Sol and SITP. None of those were really material for the second quarter results.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Nicolas Alejandro Riva, BofA Merrill Lynch, Research Division - Research Analyst [22]

--------------------------------------------------------------------------------

Just one more question on Ruta del Sol. I understand that you said that the exposure was a scenario would be COP 170 million at the Grupo Aval level and in of capital minorities. One question, in that scenario, are you assuming that the banks get paid 0? Just to understand there's going to be a third payment, which is going to be COP 211 billion and about half of that should go to Group Aval if you are assuming that case, then the banks are not going to get paid in the last payment.

--------------------------------------------------------------------------------

Luis Carlos Sarmiento Gutiérrez, Grupo Aval Acciones y Valores S.A. - President [23]

--------------------------------------------------------------------------------

Correct. We are assuming that we'll provision 100% of the loans, and that the COP 211 billion that the arbitration tribunal talked about will be tangled up in suits and counter lawsuits until the end of this year.

--------------------------------------------------------------------------------

Operator [24]

--------------------------------------------------------------------------------

The next question comes from Carlos Rodríguez from Ultraserfinco.

--------------------------------------------------------------------------------

Carlos Enrique Rodríguez, Ultraserfinco S.A. Comisionista de Bolsa, Research Division - Director of Equity Research [25]

--------------------------------------------------------------------------------

Regarding the consumer loan and especially, credit cards, we have seen this positive growth. I got a question of what has driven this growth, and how much far can you push that growth? And if you can comment on the strategy, if it has been current customers increasing loans or buying loans from other banks and adding new customers.

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [26]

--------------------------------------------------------------------------------

Yes. Okay. What we have seen is that the reason for growth in consumer has been a combination of many things. Number one, improvement in the quality of the portfolio, it has enabled us to increase our appetite to grow in that area. Second, something that we've been talking about in the last few conferences is the results of our digital effort, which have simplified the process of onboarding customers. In that sense, it's not only existing customers but also a substantial portion of customers that we wouldn't have had access in the past with the kind of strategy that we were deploying.

So it's a combination of the many things. Number one, some recovery in the economy, some improvements in consumer confidence, a much better delivery from our side on onboarding new customers plus a better environment on the quality side that enables us to bring more customers in. So what we're seeing is a very substantial potential to continue growing in consumer if the environment in which we're working continues to be so.

--------------------------------------------------------------------------------

Operator [27]

--------------------------------------------------------------------------------

The next question comes Julian Amaya from Davivienda Corredores.

--------------------------------------------------------------------------------

Julian Felipe Amaya Restrepo, Corredores Davivienda S.A., Research Division - Equity Research Analyst [28]

--------------------------------------------------------------------------------

Some of my questions have already been answered but, however, I would also like to know what are your strategies about Central America regarding some future acceleration from the U.S. economy.

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [29]

--------------------------------------------------------------------------------

Well, regarding Central America, the way to think about Central America is not as a single country. Central America depends on the dynamics of different countries. We have had a black spot that has been the performance of Nicaragua that has generated some difficulties, but the rest of the region, even though some of the countries have had their own issues, is performing pretty well. Then we have a something very positive for the region in terms that it's a net importer of oil, so what is happening now should continue to help them.

--------------------------------------------------------------------------------

Luis Carlos Sarmiento Gutiérrez, Grupo Aval Acciones y Valores S.A. - President [30]

--------------------------------------------------------------------------------

Yes. And you can't forget that Central America's our strongest business in the merchant acquiring and credit card issuance. So the whole region does sort of depend on prices of oil, and oil -- and also because Central American is a big oil importer. And on the other hand, Central America is a huge receiver of remittances from the States. So it tends to happen when the U.S. economy weakens, remittances tend to drop, and obviously, that affects the economy. But as Diego was saying, obviously, its economy has its own life, and the lives of all but Nicaragua's are doing okay. So at the end, I don't think we have to really change our strategy. We are looking, obviously, at -- always looking at growth both organic and inorganic. And we'll see if things continue the way they are. As I said, Central America as a region will grow in excess of 3% and that's defined the whole group's strategy.

--------------------------------------------------------------------------------

Operator [31]

--------------------------------------------------------------------------------

Our next question comes from Brian Flores from Citi.

--------------------------------------------------------------------------------

Brian Flores, Citigroup Inc, Research Division - Senior Associate [32]

--------------------------------------------------------------------------------

Just a question on your net interest margin guidance for 2019. If you could expand on the driver behind?

--------------------------------------------------------------------------------

Diego Fernando Solano Saravia, Grupo Aval Acciones y Valores S.A. - CFO [33]

--------------------------------------------------------------------------------

Well, we have -- as I mentioned, the net interest margin was helped by what was happening in Central America. Central America has had some expansion, net interest margin in some of the countries. In addition, something that has been helping us has been the net interest margin of our consumer portfolio. I mentioned we've had some pressure there on rates, but on the other hand, the cost -- our cost of fund is not increasing. That regarding NIM unknowns. Then something to add to get the overall net interest margin is within delivering returns around 2.5% already for a couple of quarters on the fixed income side, and that is also helping us to achieve these kind of numbers.

--------------------------------------------------------------------------------

Operator [34]

--------------------------------------------------------------------------------

We have no further questions at this time. Thank you, ladies and gentlemen. I will now return the call to Mr. Sarmiento for closing remarks.

--------------------------------------------------------------------------------

Luis Carlos Sarmiento Gutiérrez, Grupo Aval Acciones y Valores S.A. - President [35]

--------------------------------------------------------------------------------

Thank you, Hilda, and thank you all for attending our second quarter call. And we hope to see you again, soon, in the third quarter call. And as always, we expect to keep delivering, and thank you very much, see you next time.

--------------------------------------------------------------------------------

Operator [36]

--------------------------------------------------------------------------------

This concludes today's conference. Thank you for participating, you may now disconnect.