Grupo Aval Acciones y Valores S.A.
Q1 2020 Earnings Call Transcript

Published: 21 May 2020

[Operator:]

Welcome to Grupo Aval First Quarter 2020 Consolidated Results Conference Call. My name is Hilda and I will be your operator for today.Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities in Colombia and in the United States. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation. Grupo Aval is also subject to the inspection and supervision of the Superintendency of Finance as holding company of the Aval financial conglomerate. The consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB.Details of the calculations of non-GAAP measures such as ROAA and ROAE, among others, are explained when required in this report. This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by words such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential, or continue, or the negative of these and other comparable words. Actual results and events may differ materially from those anticipated herein as a consequence of changes in general, economic and business conditions, changes in interest and currency rates and other risks described from time to time in our filings with the Registro Nacional de Valores y Emisores and the SEC.Recipients of this document are responsible for the assessment and use of the information provided herein. Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update or correct 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.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:]

Thank you, Hilda. Good morning and thank you all for joining our first quarter 2020 conference call. Allow me to start by expressing my sincere hope for the wellbeing of all of you and your friends and families. The first quarter of this year can be divided in 2. January and February were months filled with optimism that pointed towards a strong performing year, a year of economic consolidation and growth.However, 2 events marred the month of March, the oil war between Russia and Saudi Arabia and the globalization of the coronavirus pandemic. These events became evident to the world in the last few weeks of March. And since, most of the countries in the world and Colombia has not been the exception, have been experiencing the pain of overwhelmed health systems, collapsed markets and economies grinding to a halt.I must say that in contrast, it appears that Colombia has fared comparatively well up to now both in COVID-19 contagions as well as in the economic downturn.Today, I would like to invest our time in the following points

[Diego Fernando Solano Saravia:]

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS. Grupo Aval’s first quarter results were overall positive. Although the current scenario is challenging worldwide, we believe we have a strong starting point to face the upcoming challenges derived from it. Our solid return on assets relative to our peers, the positive trend in quality of our loan portfolio over the last few quarters, our liquidity position, the regional and business line diversification of our income and our historic bias towards lower risk consumer banking products in our portfolio would give us an advantage relative to other financial institutions under the current scenario. Even though we will not provide guidance on this call, I will highlight some of the effects that the current juncture can have on our key drivers.Starting on Page 13, asset growth was strong during the quarter driven by an increase in cash and fixed income investments, strong loan growth and the effect of U.S. dollar appreciation against the Colombian peso. Asset grew 24.1% over the year, and 14.9% during the quarter, with a strong increase in cash in both regions as a result of our strengthening liquidity profile and the proceeds from the 2030 U.S. dollar denominated bond issuance.Colombian assets grew 19% over the year and 10.1% during the quarter, while Central America delivered 6.4% and 2.1% growth in dollar terms over the same period. Annual and quarterly end-of-period depreciations are 27% and 24% raise annual and quarterly growth of Central America to 36% and 26% when translated into Colombian pesos. This explains as well the increase of the way of this region from 30% to 33% of our book.Moving to Page 14. Loans, excluding repos grew 19% over the year and 12% during the quarter. Growth during the quarter was strong in both geographies. And in addition, the depreciation of the Colombian peso and its effect on dollar-denominated loans further contributed to growth. Lockdowns established by the governments to mitigate the COVID pandemic were put in place during the second half of March with low impact on our overall loan portfolio growth during the quarter. Even though, we experienced a slowdown in consumer loan growth in March. This was compensated by a strong performance of our commercial loan portfolio throughout the quarter.Our Colombian gross loan portfolio grew 12% over the year and close to 6% during the quarter. This reflected a strong performance of our Colombian corporate loan portfolio, which had the best dynamics in recent quarters. Its growth excluding repos reached 8% over the quarter, and over 12% over the year. Consumer and mortgage businesses continue to be dynamic in Colombia, expanding 10.3% and 14.5%, respectively, over 12 months. Quarterly growth was consistent with this performance at 2.6% and 3.2%, respectively.Our loans portfolio in Central America increased 6.2% in dollar terms over the year and 1.3% during the quarter. Nicaragua that weighs 5.8% of our Central American assets dampened the 12-month performance contracting close to 12%, but the rest of the region expanded over 7%.Loan growth in Central America incorporated a 4.6% growth of commercial loans and a 2% contraction of our consumer loan portfolio, reflecting a seasonal credit card use and the effect of lockdowns throughout the region. We expect the lockdowns and their effects to reduce loan growth over the following quarters.And Pages 15 and 16 represents several loan portfolio quality ratios. As mentioned over this call, COVID-19 had a mild effect on first quarter 2020 results, given the late timing of its arrival to the regions in which we operate. Even though, the magnitude is still uncertain, we expect a pickup in delinquency, once the effect of lockdowns unfolds and reliefs expire.Provision expenses could increase as well, as our forward-looking macroeconomic components of expected credit losses are adjusted over the following quarters. Delinquency metrics continues to improve during the quarter, driven by our consumer loan portfolio, reflecting the positive trend that has been established over the previous quarters.Loan reliefs applied during March added to this strength. Delinquency ratios for consumer loan portfolios showed an improvement over the quarter. In Colombia, 30 days consumer PDLs improved by 56 basis points to 4.3%. While 90 days PDLs improved 5 basis points to 3.1%. In Central America, 30 days consumer PDLs improved by 87 basis points to 3.8%, while 90 days PDLs improved 23 basis points to 2.1%.Our commercial loan portfolios showed an improvement of 12 basis points to 3.5% on a 90 day PDL basis and deteriorated 16 basis points to 4.1% on a 30 day PDL basis over the quarter. In Colombia, our 90 day commercial PDLs were materially stable at 4.5% and deteriorated 33 basis points to 5.2% on a 30 days basis.Ruta del Sol, which is yet to be charged off weighed 97 basis points on these ratios. In Central America, 90 days commercial PDLs remain flat at 0.6% or 30 days PDLs deteriorated 23 basis points to 1.2%.Finally mortgage PDLs were stable on 90 days basis and improved on a 30 days basis. Partly past due loan formation incorporates FX components of Ps. 407 billion in a 30 days basis and a PS. 210 billion on a 90 day basis. Our cost of risk deteriorated 8 basis points over the quarter.For comparison purposes, I will remind you that Ruta del Sol accounted for 19 basis points of fourth quarter 2019 cost of risk. Our overall cost of risk benefited from a lower cost of risk in Central America, partially explained by the seasonal contraction of credit cards. As mentioned by Luis Carlos, provisions for Avianca were one of the initial impacts of COVID-19 on cost of risk.Consolidated exposure to the Avianca group is $185 million, equivalent to Ps. 750 billion as of March 31, 2020. And the 73% of this exposure is secured with international buildings and 20% is secured with Avianca’s headquarter buildings in Bogotá. Provision coverage exceeds a bit this point over 10% of our total exposure.Recoveries of charged-off assets were lower during the quarter as collection efforts have been negatively impacted by the lockdowns. Our PDL coverage of 90-day PDLs remain at 1.4% – or 1.4 times.Moving to Page 17, we present funding and deposit evolution. Funding growth during the quarter reflects a high liquidity strategy associated with strengthening our balance sheet under the COVID-19 environment. Part of this funding has been deployed in cash and liquid investments with a toll on NIM.Figures for the quarter also reflects our February 4, 2020 $1 billion international bond issuance, with a 10-year maturity and a 4.375% coupon. Our deposits to net loans ratio improved to 104%, while our funding structure remain materially stable, with deposits accounting for 76% of total funding.Our liquidity position measured as cash to deposits was 20%. Deposits grew close to 16% in the quarter, accumulating 24.5% over 12 months. Colombia grew at 10.6% and Central America 2.5% in dollar terms during the quarter. With the 12-month period, Colombia grew at 16% and Central America at 12.7% in dollar terms.On Page 18, we present the evolution of our total capitalization, our attributable shareholders equity and the capital adequacy ratio of our banks. During the year, our total equity grew 13.7%, but attributable equity grew 12.3%, mainly driven by our earnings. Total attributable equity fell through the quarter as dividends were declared.Total equity contracted by Ps. 318 billion, while attributable equity fell close to Ps. 378 billion. Dividends of Ps. 1.3 trillion were declared at the Aval level during the quarter, affecting attributable equity. And in addition, dividends of Ps. 784 billion were declared by our businesses to their non-controlling interests.As of first quarter 2020, the bank show appropriate Tier 1 and solvency ratios. On Page 19, we present our yield on loans, cost of funds, spread and net interest margin. Our NIM performance in the quarter was driven by our NIM on investments as our portfolios priced in the negative performance of global markets.A positive trend was experienced during April. Even though uncertainty and volatility remain high, further recovery of our investment portfolios is feasible over the remainder of the year, as [water settle] [ph] down and the expansionary global monetary policies dominate. Net interest margin on loans compressed 30 basis points during the quarter, driven by competition under dynamic environments that prevailed in the initial part of the quarter.In addition, the cost of increased liquidity explains over 10 basis points of this contraction. On Page 20, we present net fees and other income. Gross fee income for the quarter grew 9.2% when compared to first quarter 2019. Gross fees in Colombia increased by 8.2% and decreased by 1.3% in dollar terms in Central America.Growth in Colombia was driven by pension fund fees; that still reflect the pre-COVID environment. In addition, banking fees in both geographies reflect the initial impact of a lockdown and fee reliefs granted to customers during March that add to our seasonal contraction during the first quarter.The second quarter fees will reflect the full effect of the lockdowns and the impact on pension fees [for the new school] [ph] performance of its investment portfolios during March. Performance of the non-financial sector was driven by strong results in our infrastructure and gas sectors, our 2 main non-financial businesses.Our infrastructure income was strong during the quarter as construction advanced and the appreciation of dollar denominated future guaranteed payments increased margins. Energy and gas income benefited from the initiation of operations of additional gas pipelines completed by Promigas during 2019 and the high revenues from the dollar denominated components of regulated prices.Hotels, the most affected sector in which we participate is immaterial to our results, as it contributes with less than 2% of our income from the non-financial sector. Moving forward, both the infrastructure and gas sectors could fare better than the rest of the economy.Although the lockdown in Colombia initially halted construction in our 4G concessions, the government has already lifted most restrictions on this sector, allowing us to be optimistic on construction progress throughout the remainder of the year. We will have to comply with strict biosecurity measures through the duration of the pandemic.Regarding gas, Promigas derives its profits from various lines of businesses, including some that have been insensitive or counter-cyclical to the lockdown, such as gas transportation, and residential gas distribution. In addition, the industrial gas sales are picking up as the lockdown is raised in more productive sectors.Finally, on the bottom of the page, other income benefited from, 1, seasonal contribution of dividends from unconsolidated investments; 2, OCI gains and investments in debt securities were realized; and 3, sale of property, plant and equipment carried out by Banco de Occidente contributed Ps. 25 billion to gains on non-current assets held for sale; and a Ps. 40 billion positive effect on Aval’s actual income, when incorporating deferred tax savings.On Page 21, we present some efficiency ratios. Cost to income improved during the quarter to 47%, despite the drag of the contraction in net interest margin discussed before. Cost to assets continued to improve to 3.4%.Finally, on Page 22, we present our net income and profitability ratios. Total net income for first quarter 2020 was Ps. 700 billion or Ps. 31 per share. Return on average assets and return on average equity for the quarter were 1.8% and 14.2%, respectively. We are now available to address your questions.

[Operator:]

Thank you. We will now begin the question-and-answer session. [Operator Instructions] We have a question from Andres Soto from Santander.

[Andres Soto:]

Good morning, Luis Carlos, Diego. Thank you for the presentation. I understand the challenges of making macro-predictions at this point. However, I was curious about your comment about the expected increase in cost of risk of 35%, which implies a cost of risk of 3% for 2020. So I would like to understand first, if this is what you are seeing at this point. And second, what will be the GDP assumption that underpins this estimate? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

Hi, Andres. Well, let me start with the cost of risk. This is the first estimate. And what we’ve done is, as I’ve said, we’ve gone through all our commercial loan portfolio and we’ve classified the portfolio as we always do into the sectors that it’s loaned to. Then we’ve taken the sectors and we’ve classified those into which will be more affected by the current juncture.And then, thirdly, we’ve taken the companies to which we’ve loaned money within those sectors, to see which of them are stronger or better equipped to handle what’s going to happen to their sectors. As you can imagine, there are – right now, there are at least 9 variables in play. But we’ve done that and we’re in the process of trying to come up with a firm number of cost of risk.In terms of the consumer loan portfolio, there are also various variables at play, most importantly, unemployment, obviously. But the unemployment is really hard to measure, because we don’t know what it’s going to look like in a couple of months. So, it’s – again, it’s very tough to predict, but we’ve gone ahead and make initial predictions. And with that – with those and I have to caveat everything that I’m saying, because there are so many variables at play, we have come up to, yes, as you say, a cost of risk of about 2.9% for the year.But it’s hard to say that that’s a firm number, but it’s the number that we have at this point. Additional, with regards to the GDP assumption, well, again, what we do is we follow – we have our own economists, obviously. And we follow everybody else’s predictions. And today, they oscillate between 0% and a contraction of 7%. And, not to sound very negotiating, if you will, but we feel that it’s going to be somewhere around between 2.5% and 3%, maybe closer to a 3% contraction.But again, we will have a better – I think a better number as we move on through this quarter. For now, that seems to be where we stand. And we’ll see how we come out at the end of this quarter, especially, we’ll see what happens when all the re-financings come to an end, which will happen in the next 2 or 3 months. And then, we’ll see what the credit quality looks like, when people are confronted with having to pay the loans that they haven’t been paying for the last 3 or 4 months.

[Diego Fernando Solano Saravia:]

If I may add to what Luis Carlos mentioned, as he described, this has been much more of a bottom-up approach rather than a top-down GDP-based approach. And the reason why it has become apparent that that’s perhaps the best way to operate is not all of our businesses, meaning different regions are exposed to the same GDP dynamics.And in addition, the product elasticity to GDP varies substantially. Just to give you some color, and why we mentioned throughout the call that we believe our structure does help us to weather what is happening currently, when you look at our consumer portfolio, have around 45% of that in payroll loans. And if you zoom in to those in Colombia, only around 12% of those are a payroll loans given out to the private sector.Therefore, if you break down the rest of that, around half of the remainder is based on retirees that are insensitive to what’s going on. And the other half is government employees who are less sensitive to what is going to happen with unemployment into the future. So that’s only to give you some color on why even though GDP is key, the structure of different portfolios will react differently to what’s going to happen.

[Operator:]

Thank you. Our next question comes from Adriana De Lozada from Scotiabank.

[Adriana De Lozada:]

Good morning and thank you very much for a very detailed presentation. I guess a follow-up to the provisions question, on the 35% year-on-year increase. Can you give us a little bit of color on the breakdown? I know you mentioned that you looked – when you looked at companies, you segregated into the different sectors when it comes to consumer. I mean, maybe you can explain a little bit more how you looked at that.But if you can just give us a sense of where do you see deterioration by segment coming? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

Thanks for your question, Adriana. I don’t think we are, at this point, prepared to share that with you, because it’s not firm. And, so, I think the moment that we have it all figured out, we’ll be more than happy to share it with you. But right now, we would just be speculating. So I think that for now we will have to live with the fact that we will have an increase in cost of risk. But I don’t want to go as far as saying what the different cost of risks are going to look like between consumer and commercial, and then within commercial how much cost of risk we’ll get from each sector.We do know and, obviously, everybody knows that entertainment, tourism and airlines will be drastically affected. We, our exposure, as we’ve said, to the airline industry consists of the Avianca loan and will – and we will keep provisioning that loan.Obviously, we’ll make different provisions, through the different types of loans that we made to Avianca, the unsecured loans we probably want to provision 100% by year end. And then the real estate loan is adequately guaranteed and covered. And then the loan through – secured by credit card receivables, we will have to figure out exactly how much provisions to make.For now, I think I would – and I’m sorry, I’m not addressing your question entirely. But for now, I think I’ll leave it at that. And the moment that we have better – ourselves a better grip on it, we’ll share it with all of you.

[Operator:]

Thank you. The next question comes from Gabriel Nóbrega from Citi.

[Gabriel da Nóbrega:]

Hi, everyone. Good morning and thank you for the opportunity to ask questions. I’m still going to ask a question about provisions, mainly because you’re already guiding for maybe [3.4%] [ph], even though this is not going to be – this is a moving target as you already have explained. But being that, you were starting to give grace periods and also you already mentioned that it could still take maybe 3, 4 months until we see the true nature of the asset quality and delinquency measures.How are you looking at the peak of provision? Do you think it could still happen this year or maybe we could have a spillover effect into 2021? And now, for my second question, I’d actually like to talk a bit about capital.Looking at the Tier 1 capital of your subsidiaries, we see that they’re relatively well controlled with the exception of Banco Popular, which is at around 8%. I understand that with the adoption of Basel III, then weightings of the risk weighted assets will actually decrease, so this helps them prop up in capital levels.However, with a very challenging year, which will probably threaten the organic generation of capital, do you expect to maybe have to capitalize one of your subsidiaries? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

Okay. Let me see, regarding your first question, again, in provisions, it’s not that much more we can say. But I will say one thing, it’s been very advantageous to us to have not done automatically of the re-financings that we did. And the reason that it’s been advantageous is because, one, what we have seen is those clients that have called, we’re tried to obtain and in most cases have obtained information regarding why they request the re-financings.Secondly, we have – we now know which – or at least for now, do not require re-financings. And then, it’s probably one of the reasons that when you look at the percentage of our total loan portfolio that has been refinanced in one way or another, it amounts to 25%, while the rest of the financial system here amounts to 37.5%.So we have a bit of control over what’s happening. But I emphasized a bit, because that’s what we know for now. Regarding whether it should peak in 2020 or 2021, it’s very tough to say. I would say that it should peak during 2020. But I think that there are different opinions with regards to that. I’ve heard people saying that 2021 will be much worse than this year, but then I read the IMF’s explanation as to why they think that on the contrary, 2021 is going to be a rebound year.And at this point, I tend to agree more with the IMF. Regarding capital, well, I think that you answered the question that you asked. And it’s true, yes. The banks look adequately capitalized. Banco Popular, it looks a little bit less capitalized, but Banco Popular will be one of the most benefited by moving to Basel III. The movement into Basel III will not only decrease, as you all know, the weights of our risk assets, but it will also add components to regulatory capital.So we will be benefited both on the numerator and the denominator of the equation. The 3 banks – and that is regardless of this year’s results, the 3 of the 4 banks, Occidente, Popular and Villas, will be greatly benefited by switching to Basel III. And then, Banco de Bogotá, at this point, we’re still under negotiations. We’re certain for the treatment of certain components of capital, and with the Superintendence, we hope that by next month or so we will know exactly where we stand.But I think that Banco de Bogotá, as we’ve said in the past, what might happen after everything is said and done is that their capital ratio will remain as it is after switching to Basel III. I think it’s important and also to address your question, do we foresee the need to capitalize any of our banks right now? And the answer is no, absolutely not. We do not foresee having to capitalize any of our banks at this point.

[Operator:]

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

[Nicolas Riva:]

Yeah, thanks very much for taking my questions, Luis Carlos and Diego. I have got 3 topics, in which I wanted to hear your thoughts. The first one on Multibank, can you tell us why you revised down the acquisition price to 0.85 times book, if it was related to the crisis triggered by COVID-19? And also, if you can remind us, I believe that the transaction was already funded with the issuance of the $1 billion in the senior bond the 2030 by Aval and some excess capital of [Banco de Multi] [ph] but if you can confirm if the transaction has already been fully funded?The second one on the Avianca exposure you already gave the numbers, is all of these exposure through Banco de Bogotá. And also, what I basically wrote down was $185 million gross exposure, net exposure of the loan reserves of $160 million. But if you can say one more time, how much of that is secured by the credit card receivables by the building owned by Avianca and how much is the working capital loans unsecured?And finally on asset quality in the press release – in the earnings report, you mentioned that the improvement in the NPL ratio of a bit more than 10 basis points quarter-on-quarter was helped by the fact that the regulator allows you or mandate that the restructured loans, because of COVID-19 continue to be part of performing loans. And can you tell us what percentage of your loan book has been restructured as a result of the crisis driven by COVID-19? Or if I should use that number that you’ve given the relief program, I think, it’s 26% that you say of your loan book in Colombia? Thank you very much.

[Luis Carlos Sarmiento Gutiérrez:]

Sure, Nicolas. I’ll be happy to answer. With regards to Multibank, yeah, I think the reduction in price is just the reflection of what has happened in the world. For comparison, if you take the decrease in market cap, for example, banks like JP Morgan and like Wells Fargo, our own Banco de Crédito del Perú, Itau, et cetera. What you’ll see is that they, on average, at least for the time – for the period of time that we considered when we were renegotiating the price have dropped in market capitalization of about 35%.We were able to negotiate down the price about 40%. So yeah, it’s just basically a reflection on what was going on. I think the controlling shareholders realized that really the situation changed dramatically from October of last year, and they were still willing to sell and we were still willing to buy. So that’s how we came about to that number. Obviously, our projections of the bank’s results changed also, I mean, this year’s results of the bank will not be what we had originally forecasted or estimated when we put forth the original price. So I think we had a fair price back in October, and I think we have a fair price now.With regards to Avianca, to answer your questions, no, it’s not all Banco de Bogotá. The loans are distributed between Banco de Bogotá, BAC, and Banco de Occidente in terms of the amount, most of the loan is through Banco de Bogotá about $8.25 million was loaned through Banco de Occidente, and BAC has about a $30 million loan. So it’s about – if you wanted to more or less – it’s about $147 million in directly through Banco de Bogotá about $30 million through BAC, and about $8.25 million through or $8 million through Banco de Occidente for a of $185 million.Then to remind you of the way those loans are guaranteed about 73%, and then we look it up 73% of the total loans are secured by dollar denominated credit card receivables about 20% by the company’s headquarters in Bogotá, the building that everybody knows, most people know here. It’s a very good building. And then the rest is about 8% is unsecured. And so that’s the way that company has been provisioned, and that’s the way those loans are allocated between different securities or different guarantees.In terms of asset quality, yeah, what happened was that when it became evident that all banks were putting forth refinancing plans for their customers, the Superintendence issued to what they called circulars, and I think one of them is 7, and the other one is 14, if my memory doesn’t fail me. And basically what it – with those regulations set was that refinancings need not be accounted for as deteriorated loans. But on the country, they were giving up free pass, if you will. I would imagine for the time that the quarantine last.In other words, once the quarantine is over, and the refinancings come to an end, which will be, as I said before, in months, not years, especially what refers to the grace period that were granted, then that game is off and that doesn’t pay will basically becomes a deteriorated loan. So we’ll know what happens in not too many months from now. That’s why I was also saying that that it had been, I think, hopefully a little bit to our advantage to not have granted all the refinancings automatically, but rather we had customers call us. That didn’t mean that that we denied refinancings, because we did not.We refinanced any loan to anybody who requested one, but at least we got a little bit of information as to

[Diego Fernando Solano Saravia:]

You had also asked on the funding of Multibank and I can confirm you as, as was announced, we are days away from closing that transaction and it is a fully funded deck.

[Operator:]

Thank you. The next question comes from Judy Fernandez from JPMorgan.

[Judy Fernandez:]

Thank you, Luis Carlos and Diego. Thank you for the very good and comprehensive presentation. I have 2 questions. The first one is regarding revenues, if you can elaborate a little bit more on what you expect for fee impact. And also on NII, we are going to see lower rates in Colombia, as Luis Carlos mentioned something close to 2% by year end. But I would also like to explore a little bit, if the grace periods you were giving, should impact somehow NII. I understand it will not, because you’re still accruing interest you are going to charge the end of the loan, but just double checking.And also, because I saw you are giving some promotions, some kind of discount to interest rates, especially on the credit cards about of have – of what the interest rate used to be. So just checking if you like NII and fees should be much weaker. We should see like a big decrease on those lines and what is the message there?And my second question is regarding the nonfinancial sector, it has been a very strong line across Colombia, the infrastructure project. But my concern here is if given the social distance, the account deceleration, we could see lower revenue recognition from that front. Thank you.

[Diego Fernando Solano Saravia:]

Okay. So regarding – I’m going to take the net interest income a question, and then Luis Carlos will take the nonfinancial side. On the net interest income side, there is a few things working here

[Luis Carlos Sarmiento Gutiérrez:]

Okay. And regarding the nonfinancial sector, well, let’s examine really quickly what elements compose a nonfinancial sector. We have the hotel business and obviously we are expecting a lot of affection regarding the – a lot of negative to the hotel business as they are affected by this pandemic. As of now, of the 37 or so hotels, 27 are closed. And the [Hotela des dela] [ph], which is the owner of the hotels is now, at this point, it’s losing about $2 million per month. We have plans to take it to breakeven. But there will be no contribution from hotels in 2020. I must say that the contribution from the hotel business wasn’t all that great to the final to the end result of Corficolombiana.We have the agribusiness and that’s basically soybean and rubber. And that is those sectors are open for business. And so those have not been affected. In fact, they’ve been somewhat aided by – in some cases by world prices, for example, rice, which is an important component, the price of rice has increased. And secondly there is – consumption has actually gone up. Thirdly, we have energy.And in energy, as you know, we have 2 different investments on the one hand in Promigas, the gas transportation and distribution company and we saw some decrease in gas consumption on the industrial side as plants closed down for the time of the quarantine, we expect that to come right back up when those plants are turned on again. And we’ve seen increase in the residential consumption as people are spending much more time at home.We expect that residential consumption will probably drop a bit when the quarantine is over and we’ll see the industrial consumption going on. And then there’s infrastructure. Infrastructure, obviously, was one of our main concerns. But we’re happy to say that that’s one of the sectors that the government has chosen to reactivate, and in fact, has already been reactivated and we hope to get back to normal operation in our infrastructure in the construction of the roads as quickly as a month from now.Tolls, on the other hand, which are a component of the ways that we are remunerated for pain, those roads will drop and will remain low for some time. But we have to remember that that the 4G projects that were constructing it with the exception of one half guaranteed toll road collections, not on a monthly basis, but every certain number of years. Any toll roads – any tolls that are not collected are remunerated by the government.So in terms of the nonfinancial sector, we will see for next couple of months until things go back to normal. We’ll see a decrease, but I don’t – but still the numbers of Corficolombiana for the year really do not look all that bad. I think that that we’ll come out of it, okay, as long as the reactivation of all the sectors continue according to the plan that the government as opposed. So that’s the – that’ll be the nonfinancial sector.

[Operator:]

Thank you. Our next question comes from [Lemir Sala from Bhering. Mr. Sala] [ph], your line is open. Go ahead with your question.

[Unidentified Analyst:]

Thank you very much. Yeah, thank you for taking my question. I’ve got 3 questions. The first one is on asset quality. I think when you look at your gross loan book on – could you please give us a breakdown in terms of upstream, midstream and downstream. And I think your global peers, they have roughly 80% of the collateral value. I just want to understand why Grupo Aval has gone in that sphere. And also with respect, I mean to Promigas, I’m just wondering, how much Promigas comes for that in total energy exposure, because it’s quite chunky.The second question is with regards to consumer business. Could you please give us, I mean, the securitization level in that sphere? And also the LTV on personal loans and perhaps the PPI on credit cards? And the other question I’ve got is also with respect, I mean, to the capital level. The capital – I mean capital level looks different now. In terms of risk weighted assets, I mean for energy sector, where do you think like, I mean, these will line towards the end of the year. Do you think, I mean, it’s probably going to go down?And final question on infrastructure, which I think is also another chunky part of your loan book in the commercial side. I think, I mean, it doesn’t wind from the answer, which the gentleman has ahead of me. How do you think like, I mean, the government can activate this sector when there are no toll collections that have been collected for the next, probably two months, economy is closed, and unemployment is at 12%. And probably unemployment might go up towards, you mean, the [22,000] [ph] level, which was 20%. And I mean the inefficient capacity for the Colombian government to balance to manage its own balance sheet. I mean, that sector, to my knowledge seems to be dented for quite some long time. So if you could get elaborate on that as well? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

All right. Let me – and Diego might be able to help me. And I’m very sorry to say this, but I really didn’t catch some of your questions, but I will probably try to refer to some of these and please forgive me if the ones that I answer, I’m not answering exactly what your question was. Regarding capital, I mean, let’s start with one of these. Regarding Promigas, we talked about as a percentage of our total exposure, Promigas is really not – does not represent a material amount of our total loan exposure, our banks really have just about no loans to Promigas. So we are not exposed in that sense to Promigas. Obviously, Corficolombiana results are without a doubt aided by Promigas results.In that respect, as you might recall Corficolombiana owns about 50% of Promigas and about 30% something – 38%, I believe, of Corficolombiana’s results flow up to Aval. So as you can see Promigas, at the end of the day, it does not constitute a very significant portion of our results at the Aval level.Having said that, Promigas’ results net income are somewhere between $200 million and $300 million of net income a year, this year it’s not projected to be very different. It has decreased a little bit, but not to a point that it’s worrisome because, obviously, it’s an essential service. And Promigas is compensated on a take or pay basis to transport a lot of its gas it will be affected in the final mile into distribution. But even so, as I said, distribution to consumers have increased and distribution to the industrials have decreased, but that I think will be reversed once the quarantine is over. So now exactly if you were referring to Promigas’ exposure as an investment or as a loan, I hope that I’ve answered both.And in terms of capital levels, if I understood your question correctly, you referred to risk weighted assets and what the energy sector represent that in the risk weighted assets. Again, if you are referring to our investments in the energy sector, those do not count towards risk weighted assets when regulatory capital is calculated. But however, if you were referring to the investments that we have in the energy sector, and I think your term was that, it was quite chunky.Yeah, we have an important investments in both Empresa de Energía de Bogotá, the electrical utility in Bogotá and then in Promigas. And those are on the one hand, good investments on the second hand they are pretty profitable in this year, they were not really expected to be very different, although we have seen a contraction, and I think we mentioned about 11% year-on-year on energy consumption, that will have an effect.But then again, they are not all that significant. They’re not all that important, especially the unprecedented here with Bogotá to the final result of Corficolombiana, Promigas is, but I refer to it already. In terms and I think this is the other question that I thought I understood in terms of infrastructure. I think, one, again, as a percentage of our total loan book, infrastructure is not, and construction is about 5% of our total loan book. So, though, as you can see, it’s not all that significant, but it’s 5% of our total loan book. That can be I think you addressed tolls.And I think you were wondering how the non-collection of tolls would affect the concessions. And how would 12% of unemployment, how tolls would figure going forward? I think the answer is twofold. Again, if we’re talking about infrastructure as or loans to construction and not as an investment then it’s not very significant. As an investment, it is obviously very significant. And it’s very important to Corficolombiana.However, during the construction period that our roads are under right now, 3 of the 4 toll roads are under construction. The fourth road has yet to start, because there’s been a myriad of environmental license problems, so that hadn’t started before the pandemic and hasn’t started and will not start during a pandemic. But the other 3 roads are being built.The way that the 4G contracts work with the government, every number of years, there is an adjustment with the government that’s called the DRs. And basically, what happens is that the real toll road collections are compared to the toll road collections agreed to with the government. And if there’s a deficit, the government will compensate the constructor.If it so happens that, as you say, for 3 months or 4 months, and even for little bit longer than that, toll roads drop – the toll roads – tolls are not being collected right now. And that’s going to be the case, for say, in all-in-all about 4 months. And then, toll roads will be started to be collected again. But again, most probably, because of everything you said, there will be a decrease in toll road collections.That means that in the first adjustment that we get from the government, the adjustment or the revenue to the concessionaires from toll roads will be higher than expected. And the government will have to find a way to honor the contract. And that would – it just means that the liquidity from toll roads will take a little bit longer to arrive at the concessions than originally expected.I don’t know if you got the other ones…

[Diego Fernando Solano Saravia:]

I think you were asking on the structure of our loan portfolio. I’m not sure I understood right, what you meant by upstream and downstream. But just to remind you and how the structure of our loan portfolio looks like, we have around – 60% of our book is corporate, then the remainder is consumer and mortgages.The consumer is slightly more than 30% and mortgages is the remainder. If you zoom in to consumer, payrolls are around 45% of our book, 10% vehicles, 30% credit cards, and it’s only around 15% where we have installment loans that are unsecured credit lending. So, just a very small portion of our exposure is to those kind of loans that might be the most sensitive throughout the cycle. But I’m not sure I did address your understanding of what upstream and downstream was.

[Luis Carlos Sarmiento Gutiérrez:]

I would propose something, if you will. Why don’t you send us an e-mail with your questions and because I am pretty sure we just answered the longest question with the longest answer. And I’m not sure that we answered the – right, the question that you ask, but if you ask me, you send us an e-mail. We’ll be more than happy to address all your points. And if you should have our e-mails, and if not, they’re at our website.So we can we can do it that way, and so we don’t really spend too much time or invest too much time in this answer.

[Operator:]

Thank you. The next question comes from Carlos Gomez from HSBC.

[Carlos Gomez-Lopez:]

Hello, good morning. Two questions for me. First, on the acquisition, in the reduction in price, could you repeat the numbers? If I understood correctly, you have reduced the price to 85%. That comes out to about $490 million. And again, if I understand correctly, that includes both the ordinary and the preferred shares. Is that correct?

[Luis Carlos Sarmiento Gutiérrez:]

No, it’s not. We had – the original price was $732 million, and we’ve reduced it to $449 million. And $449 million is our offer to buy 100% of the common shares.

[Carlos Gomez-Lopez:]

Okay, so will you be paying? You will not paying the [business] [ph], because they’re in the market [personnel] [ph].

[Luis Carlos Sarmiento Gutiérrez:]

The preferred shares, you mean? No, the preferred shares are basically a liability to the bank and they have an interest expense that they pay, which at this point doesn’t really seem all that bad. And there are different periods. Every 3 months, you can redeem the preferred shares, and we’ll wait to see what the liquidity situation of the bank is. And depending on the liquidity situation, we’ll be redeeming the preferred shares going forward.

[Operator:]

Thank you. Our next question comes from Johanna Castro from Itaú BBA.

[Johanna Castro:]

Hi, good morning, Luis Carlos. Thank you, Luis Carlos and Diego, for the time. I have a question just to clarify some of the comments that you mentioned at the beginning of the call and just to understand how you are working your affected losses more. I understood that you’re taking a bottom-up approach, instead of a top-down approach in that. That doesn’t mean that you’re not including a fully – an adjustment of the GDP in the probability of repo. And you’re working more on the [LGD] [ph] part on the exposure to repo, or just to clarify, how are you working with them all of these days? And that will be my first question.And my second question is on the part that you mentioned about Basel III, and approach also. I had understood that in the Colombian operations, we had kind of a buffer, and because we had counter-cyclical provisions. But taking into account that the Superintendency of Finance approved the use of some of those counter-cyclical provisions, do you think that the system is going to have the same buffer as before for applying Basel III?

[Diego Fernando Solano Saravia:]

Johanna, let me try to address your question. Basically, the challenge that not only us, but all the financial institutions are facing under IFRS 9 is that if you run statistics – statistics, all those that you mentioned are very much a backward looking. Even though there is a forward-looking component, a lot of the numbers, a lot of those ratios are derived from historic behaviors.And first quarter was particularly challenging, because if you did it just slightly by the book, you would end up with a very positive scenario, because numbers had been improving for a long time. Therefore, all the ratios had been moving in a positive direction. And then, as Luis Carlos mentioned, if you run any sort of model and you run it with 0% growth and if you run it with 7% contraction, you’re absolutely all over the place.So we had to detach somehow from statistics. And that’s why we said at this point, we do expect that in the future, when things become clear, we can do it more mechanically on the statistical side. But at this point this was much more trying to tell the wheat from the weed, going customer by customer, understanding their business and understanding where they might end up. So this wasn’t running a model, if we had run the model, the model might have pointed to a reversion of provisions, for example.And then feeding it with forecasts was very much who do you want to believe and how subjective do you want to be? So we would end up, as you might say, exactly wrong rather than approximately right. That’s why we went through these mechanics. And then, on the Basel III, a lot of what you’re mentioning doesn’t really affect how the numbers end up coming out, and what the Superintendency allowed was temporarily to use some of these buffers.But, if you think under a full IFRS, that is how consolidated numbers are run, this number is not an input for the equation. If you run our unconsolidated figures, you end up with some numbers, but actually, we pay much more attention on consolidated figures, where the use of this counter-cyclical buffer is not one of the elements.

[Luis Carlos Sarmiento Gutiérrez:]

And in any case, as soon as we have numbers, an estimate or some guidance to share with the market regarding how everybody will look after Basel III, we will definitely share it with everybody.

[Operator:]

Thank you. The next question comes from Carlos Rodriguez from Ultraserfinco.

[Carlos Enrique Rodríguez:]

Good morning, everyone. And thank you for the conference call and also thank you for the information that you have made so far. I have 2 questions. The first one, if you could share with us the amount, I mean, taking an average month in terms of cash inflows from repayment of loans and interest.And what was the percentage you receive in terms of cash during April and also…[Call Ends Abruptly]