Grupo Aval Acciones y Valores S.A.
Q4 2019 Earnings Call Transcript

Published: 17 Mar 2020

[Operator:]

Welcome to Grupo Aval's Fourth Quarter 2019 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 information provided in this report included 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 fourth quarter 2019 conference call. Although it is my pleasure to share with you our strong financial results for the year 2019 and I'm also happy to say that the first two months of 2020 have us on track to meet our budgets, I can't minimize the concerns that we have over what is going on globally with the COVID-19 and the oil dispute between Saudi Arabia and Russia.From our perspective, because we haven't seen the full impact of this global pandemic and because we feel that there is still a lot to happen in the oil war, we believe that it is far too early and even imprudent to venture a revised prediction for Colombia's and Central America's economy, let alone a revision of our own 2020 guidance. We will, therefore, leave unchanged our 2020 guidance until we have a better grasp and more research on which to support any changes.Today, we will address the macroeconomic performance during 2019 of those countries where we predominantly operate as well as our own financial results. We will refer to the $1 billion bond that we recently issued. And as usual, we will provide an update regarding the legal processes of Ruta del Sol.I will just take an additional moment to stress that we are putting forth all possible and necessary efforts to protect the health of our employees via home office programs, health advice and the elimination of practically all business traveling and live meetings, and we're also protecting our clients by placing at our disposal and emphasizing the use of all possible ways to digitally access their products and services.Moving on to the macro scenario, Columbia's economy were almost 70% of our consolidated business resides, continued its path of acceleration during 2019. GDP growth during the fourth quarter was 3.4%, bringing GDP growth for the year to 3.3%, up from 2.5% in 2018. This welcome level of growth was not evidenced since before 2015. It was precisely in 2015 that the Colombian economy had to adjust to the shock from a 70% decrease in oil prices.Just as importantly, Colombia's GDP growth during 2019 happened during the broad economic slowdown that specially affected all other Latin American economies. Additionally, last time that they were measured in February, Colombia's fundamentals were still going strong and high-frequency data showed positive momentum in consumer spending and private investment.However, as approximately 40% of Colombia's total exports are represented by oil and because Ecopetrol is a very significant taxpayer, a persistent decline in oil prices will most likely widen the country's trading and current account deficits, worsen next year's fiscal outlook, have an adverse effect on domestic demand, and curtail growth below 3%.Having said that, if one was to find differences between the oil shock of 2015 and the one we're living through these days, two are perhaps of relative importance. One, one must recall that an oil barrel was priced in excess of $110 in mid-2014. By February 2016, right before oil prices started to rebound; oil had lost $78 per barrel. This time around, the price of an oil barrel was around $55 just before Saudi Arabia and Russia refused to agree on production cuts. Simple math indicates that the 2015 scenario can't be re-lived.Two, around September of 2014, the exchange rate in Colombia hovered around PS.1,900 per dollar. By December of 2015, the peso had devalued by almost 75% to almost PS.3,300 per dollar. We see a remote chance that on this occasion, the peso will devalue another 75% towards an exchange rate of PS.6,000 per dollar in the next 12 months.Those two differences alone might signify that this time the economy will hardly be impacted as much as in the previous 2014 to 2016 shock. Having said that, certain industries, especially the airlines, hotels and other tourism-dependent sectors, are disproportionately getting hurt.Coming back to the country's GDP growth in 2019, this result was mainly driven by stronger private consumption and investment from the demand side, which increased by 4.6% and 4.3%, respectively, compared to 1.2% and 1% a year earlier. The increase in private consumption was driven by

[Diego Fernando Solano Saravia:]

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS. 2019 has been our best year in net income so far. Four elements drove our performance; number one, positive results in interest income, driven both by a pickup in loan growth and a strong valuation and OCI realization in our fixed income investment portfolios; second, 20 basis points decrease in cost of risk; third, strong contribution of net income from commissions and fees, particularly in pension fund management and banking fees from Central America; and fourth, a favorable impact of tax reform on our statutory tax rate.We achieved these positive results amidst a still low growth scenario of our loan portfolio. Although we were positive on growth for 2020, given the recent developments, we're cautious and guiding on performance in this highly fluid environment.The global economy is expected to lose traction due to interruptions in trade and production as well as overall lower consumption that result from COVID-19, with us expecting a moderation in economic activity in Colombia as a result of the global scenario that could be exacerbated by the impact of low oil prices.Moving to page 10, assets grew 7.4% over the year and 1.8% during the quarter. Colombian assets grew by 8.2% over the year and 3.7% during the quarter, driven by cash, fixed income investments and net loans. Central America, which weighs close to 30% of our book, saw 4.7% and 3.5% growth in dollar terms over the year and the quarter, respectively, driven as well by increasing investment portfolios and net loans.Excluding the 4.6% annual contraction of Nicaragua, total assets of Central America operations grew 5.3% in dollar terms. Finally, an annual 0.8% depreciation and quarterly appreciation of 5.8% of the Colombian peso brought annual growth up to 5.6% and led to a 2.5% quarterly contraction when translated into Colombian pesos.Moving to page 11, loans excluding repos grew at 6% over the year and 0.1% during the quarter. Although improving compared to a year earlier, commercial loans continued to drive the soft dynamics of Colombian banking system. This low performance was partially compensated by a stronger growth of the consumer portfolio, supported on a positive trend in quality, especially in Colombia.Our Colombian consumer and mortgage business continues to be dynamic, expanding 9.8% and 14.1%, respectively, for the 12 months. Quarterly growth was consistent with this performance at 3% and 3.4%, respectively.Our Colombian corporate loan portfolio, excluding repos, grew by 0.8% during the quarter and 4.3% over the year. Gross loan portfolios in Central America increased 3.7% in dollar terms over the year and 2.6% during the quarter.Nicaragua that weighs 6% of our Central American assets dampened the 12-month performance contracting 19.8%, while the rest of the region expanded at 5.4%. We gained market share in every country, except Nicaragua and Panama.On pages 12 and 13, we present several loan portfolio quality ratios. Delinquency metrics continued to improve during the quarter both in Colombia and in Central America. In the fourth quarter, we charged off the full exposure to Electricaribe in transit, one of the SITP companies, that combined amounted for PS.908 billion. In addition, Ruta del Sol impacted new PDL formation as it became past due, both on a 30 and 90-day basis, with PS.762 billion exposure. This loan was fully provisioned by year end.Despite an improvement over the last quarter, delinquencies of Central American loan portfolio increased over the year. This was primarily driven by macro in Costa Rica and sociopolitical events in Nicaragua. As IFRS 9 reflects expected credit losses, this performance had been incorporated into our cost of risk during the second half of 2018 and the first quarter of 2019.Our commercial loan portfolio showed an improvement of 31 basis points in 30 days PDLs and 10 basis points in 90 days PDLs over the quarter. We recorded a 26 basis points improvement in 30-day commercial loan PDLs and 3 basis points on 90-day PDLs in Colombia. Central America, 30-day commercial PDLs improved by 60 basis points and by 42 basis points for 90-day PDLs, driven by Guatemala and Panama.Delinquency ratios for consumer loans showed an improvement on a 30-day basis, more substantially stable on a 90-day basis over the quarter. In Colombia, the improving trend in delinquency of consumer loans persisted with 30 days PDLs falling 27 basis points to 4.9% over the year and remaining stable over the quarter. 90-day PDLs were stable at 3.1% over the year and were eight basis points higher over the quarter.In Central America, 30-day PDLs consumer loans improved 21 basis points to 4.7% over the quarter, while 90-day PDLs remained stable at 2.1%. Yearly deterioration of consumer in Central America was primarily driven by Costa Rica.Our mortgage PDLs increased during the quarter, driven by Central America. The cost of risk improved by 42 basis points during the quarter due to a 46 basis points improvement in Colombia and a 32 basis points improvement in Central America.Full year cost of risk improved by 17 basis points, driven by 23 basis points improvement in Colombia and three basis points improvement in Central America. Our PDL coverage of 90-day PDLs remained at 1.4%.On page 14, we present funding and deposit evolution. Funding dynamics were consistent with loan growth. Funding structure remained materially stable with deposits representing 76% of total funding and our deposit to net loan ratio reaching 101%. Our liquidity position continues to be strong with cash to deposit ratios -- ratio at 17%.Deposits grew 0.8% in the quarter, accumulating 6.8% over the 12 months. Colombia grew at 1.3% in Colombia peso terms and Central America at 5.9% in dollar terms during the quarter. For the 12-month period, Central America grew at 10.2% in dollar terms, while Colombia grew at 4.8% in peso terms.On page 15, we present the evolution of our total capitalization, our attributable shareholders' equity and capital adequacy ratio of our banks. During the year, our total equity grew by 12.8%, while attributable equity grew at 11.6%, mainly driven by our earnings and our OCI growth related to valuation of our investment portfolio. Total equity and attributable equity grew 3.0% and 2.8%, respectively, over the quarter.As of December 2019, our banks show appropriate Tier 1 and total solvency ratios. On February 2020, we reported, for the first time, the Grupo Aval conglomerate Adequacy capital to the Superintendency of finance, showing an excess over minimum adequacy capital.On page 16, we present our yield on loans, cost of funds, spread, and net interest margin. Our yearly net interest margin increased 3 basis points to 5.7% during 2019, mainly driven by higher net interest margin on investments that was partially offset by a higher net interest margin on loans. Quarterly net interest margin slightly decreased as a result of lower net interest margin on investments and a stable net interest margin on loans.As anticipated, pricing in Colombia continued to be aggressive during the last quarter due to the improvement in consumer loan quality and better outlook in the corporate portfolio resulting from a stronger GDP. This led to a 20 basis points compression in quarterly net interest margin on loans in Colombia and was partially offset by a higher net interest margin on loans in Central America as some of the higher-yielding countries move faster in our portfolio. We continue to expect some pressure on net interest margin on loans as growth increases the share of newly priced loans in our mix.On page 17, we present net fees and other income. Gross fee income for 2019 grew 11.6% when compared to 2018, with gross fees in Colombia increasing 8.2% in pesos and by 5% in Central America in dollar terms.Growth in Colombia was driven by a particularly strong performance in pension fund management fees. The year 2020, 2018 was a strong year in other income from operations due to property, plant and equipment optimization in Banco de Bogotá and Banco Popular.Also, the nonfinancial sector registered during 2018 a particularly high income explained by the initiation of construction of 2 of our toll road concessions. The decreasing income from these transactions was partially offset by an increase in OCI realization from investments in debt securities, equity method and dividends in 2019.Our infrastructure income decreased by 12.8% during 2019, mainly driven by income related to the initiation of construction of Covioriente and Pacifico 1 concessions during 2018. In addition, work-in-process during 2019 was lower than during 2018 due to variations in weather conditions that slowed progress when building bridges and tunnels and some of the roads. Our gas and energy sector maintained its strong contribution and our agro business returned to a positive contribution to the nonfinancial sector income during 2019.On Page 18, we present some efficiency ratios. Personnel and SG&A expenses grew 6.1% with 1.7% increase in Colombia and 2.4% in Central America in dollar terms during 2019. Personnel increased 5.4%, driven by a depreciation of peso on our Central American operation. In fact, personnel expense remained flat in Colombia and grew 2.0% in dollar terms in Central America.G&A expenses increased 3.0% in 2019 compared to a year earlier. This figure was 8.6% for Colombia and 4.9% for Central America in dollar terms when adding IFRS 16 related depreciation and amortization to administrative expenses.G&A includes an extraordinary non-income tax expense in order to raise the fiscal cost of certain fixed assets, which amounted to 1.9% growth in the Colombian operation. However, this was offset by a positive effect and income tax recovery that resulted in a net positive effect of $57.6 billion in net income.Depreciation and amortization expense increased by 67% mainly due to the adoption of IFRS 16 during 2019, which changed the accounting methodology of leases now accounting the right of use under depreciation and amortization.Finally, other expenses increased by 44% in 2019 compared to 2018, mainly explained by provisions of further need for expenses related to pension clients transfer from the private to the public pension fund system.Finally, on page 19, we present our net income and profitability ratios. Attributable net income for 2019 was PS.3,034 billion or PS.136 per share, PS.5.5 higher than 2018 accumulated results. Attributable net income for the quarter was PS.715 billion or PS.32 per share.The non-recurring events that affected our net income during 2019 were the specific provision expenses booked in relation to Ruta del Sol and SITP that added PS.328 billion on our cost of risk, with a post-tax attributable net income negative effect of PS.162 billion. Other non-recurring events had a PS.25 billion negative effect on attributable net income. Our return on average assets and our return on average equity for the year were 2% and 16.4%, 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 Gabriel Nóbrega from Citibank.

[Gabriel Nóbrega:]

Hi everyone. Good morning and thank you for the opportunity to ask questions. I'd actually like to ask a question. Looking at all of this uncertainty we are going through, these are very volatile times as well, I would just like to maybe understand what are the first immediate strategies that the bank has been implementing to sort of guide through these very uncertain times?And then I also have another question on your asset quality. You say in your press release that you fully wrote off Electricaribe and transit which represents more than 2% of your loans. However, your NPL ratio for the commercial line, they only decreased by nine bps. So, is there something here that has deteriorated more than you were expecting? Also, is there may be a segment you were looking to more closely in the midst of all this uncertainty as well? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

All right. Thank you, Gabriel. I'll take your first question. And regarding what the banks are doing right now with all the dual shocks that we are living through, that everybody is living through, the banks are concentrated basic -- concentrating on three aspects predominantly

[Diego Fernando Solano Saravia:]

Regarding your second question on NPLs, you're absolutely right. There is something that did affect the numbers and it is that at the same time that Electricaribe and Tranzit were leaving our book because they were written off. Ruta del Sol entered the book. This loan was actually fully provisioned but hasn't been written off as of year-end. When this loan gets written off, you're going to get exactly the numbers that you're looking into.

[Operator:]

Thank you. Our next question comes from Andres Soto from Santander.

[Andres Soto:]

Good morning. Thank you for the presentation. My question is related to current market volatility. Obviously, there are multiple uncertainties at this point. But considering recent movements in FX and Colombian rates, it will be great if you can provide some color on the potential short-term impact, not only in your banking business but also on the results in your pension management and infrastructure segments?

[Luis Carlos Sarmiento Gutiérrez:]

Sure, Andres. Yes, as you say -- well, first of all, it's tough to say where the FX might end up to -- might end up, whether it might even come back or it stay at PS.4,100 or even keep rising. But as you say, obviously, the impacts derived from FX are several. If you look at our pension fund, our pension funds -- well, some of the investments of the pension funds are dollar-related investments and those will -- obviously, they tend to increase in value.But on the other hand, most of the dollar investments of the pension funds are covered with derivatives. And that, obviously, when the exchange starts rising, that needs more liquidity to cover the derivatives, the hole that comes about when the exchange rate rises. And obviously, that has the pension fund using up some of the liquidity that we had set aside. So, we see that.Not only FX, obviously, that -- while you might have even a positive effect of uncovered FX exposure in the value of the pension funds, obviously, that's been offset by the drop in the prices in the stock market. And obviously, the prices of shares have dropped and with it the value of those investments in pesos in the local and foreign markets.With regards to our operation -- to our banking operations, well, obviously, you also have different effects because you translate the balance sheets and the income statements of our foreign to us of our Central American operation. Then you see on the one hand, you see better contribution in pesos from the dollar result of our Central American operation.But on the other hand, you also see since we made that investment in dollars and that investment is covered by half financial coverage by dollar-denominated bonds and then half by deliveries [ph] in the book of Banco de Bogotá, then you also see an effect on liquidity of the bank as the bank has to cover some of those deliveries.Also, there is obviously a foreign exchange account in the OCI of the equity of the bank that moves as the FX increases. So, there are -- as I said, it's tough to put it all in a nutshell. There's probably with every peso that moves probably eight or nine accounts move, and what we're doing is, we're staying on top of them and making sure that we understand where each peso is going.And we are obviously also in constant conversations with the Superintendence of Finance to make sure that the regulations that they pass are -- give the market and give the bank flexibility as to their coverage strategies so that we can change our strategies, if need be.

[Operator:]

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

[Adriana De Lozada:]

Good morning and congratulations on your results. At the beginning of the presentation, you mentioned that you do not expect the current oil price war shock to be -- to have such a big impact as 2015 and you also discussed the spike in inflation then. So, maybe you can remind us what inflation you consider in your 2020 guidance? And if you can give us a few words about consumer loan evolution and cost of risk this year? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

In 2015, if you recall, by September 2015, on a 12-month basis, inflation had risen to 9.2%. So, when I said that I didn't expect the -- this dual shock to take inflation to levels similar to those observed in 2015, what I was referring to was that I don't foresee inflation doubling or tripling as a consequence of what's going on.

[Diego Fernando Solano Saravia:]

If I understood right your question about inflation, it was incorporated into our previous guidance. The number was 3.5%. And then what cost of risk evolution did we expect before this shock, we're expecting to see a 20 basis points improvement from 2.2% to 2.0%. That was what was incorporated in our guidance.And as Mr. Carlos mentioned, at this point, we will refrain from giving you guidance because we see a panicked herd effect at this point. And many of these key variables might change, not only in magnitude but directionally.Discussion on interest rates has many possible scenarios. Some of those could imply interest rates falling, therefore, our fixed income investments, not only recovering but actually gaining value. And the exchange rate side, I think it's anybody's bet what can happen at this point. We're just bystanders to what is happening between the Arabia and the Soviet Union at this point or Russia.

[Operator:]

Thank you. Our next question comes from Nicolas Riva from Bank of America. Mr. Riva your line is open.

[Nicolas Riva:]

Yes, I was on mute. Sorry. Thanks for the chance to ask questions. And I had -- I wanted to ask on three topics, if I may. The first one, on some of your credit exposures, you mentioned some subs, which, of course, are going to be hit by all of this, if I had to understand, like oil and gas, tourism and hotels.If you can maybe talk us about your exposure to oil and gas companies, how much it is of your loan portfolio, if it's basically exposure to Ecopetrol or some oil and gas exploration production companies? You are thinking of increasing loan or reserve for these in the first quarter. And the same thing also for airlines, and if airlines have reached out to you to get lines of credit or additional liquidity? So, that will be my first question on exposure to oil and gas and airlines.The second one, on these corporate clients that you talked about in the press release and you mentioned in the call, just to make sure I got it right, so you have already fully provisioned Ruta del Sol, Electricaribe, Tranzit and also some -- any other mass transportation companies, which have already been fully provisioned. And also -- so that's one thing.And then in terms of which of these have been completely written off from the balance sheet or we shouldn't see any impact on NPLs on the balance sheet, that would be Electricaribe and Tranzit, but Ruta del Sol, I understand, has not been written off.And then the third topic, if I may, on Multibank, if you can provide us with a number on the transaction? I would assume that all of what happened doesn't change. I mean, you're still going to go through with the transaction. I remember the pricing was a bit more than $700 million. And you can give us an update on when BAC Credomatic is going to issue this AT1 bond? And when do you expect to get approvals or all of this stuff to be done? Thanks.

[Diego Fernando Solano Saravia:]

Well, regarding the credit side, you're asking on exposures, we are pretty diversified in our portfolio. From the sectors that you went through, oil and gas might be the larger one, and at this point, it is around 1.2% of our loan portfolio. And a very substantial portion of that is the gas pipelines that we're exposed to. Therefore, we are less subject to the impact of prices of oil. Then the tourism side, it is around 0.5% of our loan portfolio.And finally, airlines that is, I assume you're referring to Avianca, we continue to have exactly the same that we've disclosed in the past. We're exposed to a syndicated loan from TACA that is guaranteed by receivables. That's around $150 million that is in the bank -- the books of Bogotá Bank and Banco de Occidente.And then in Colombia, most of our loans that is around PS.96 billion, this is pesos, is guaranteed by the building that they have on your way into the city from the airport. So, that is regarding these exposures. As Mr. Carlos mentioned, we are -- we have triggered all of our risk management procedures to go through all sectors that are exposed to the kind of risk factors that are at this point, volatile, such as oil. We're also looking into exchange rate in GDP-growth dependent businesses.Then on the corporate clients, I think it's exactly as we described, except for SITP, we fully provisioned and wrote off Tranzit and the other two companies that we're exposed to. We believe we have them rightly provisioned, and we have a good view on the prospect of recovery, given that they were able to restructure their agreement with the local government. Electricaribe, as you said, was written off last year. Ruta del Sol was fully provisioned and will be written off at some point during this year.

[Luis Carlos Sarmiento Gutiérrez:]

And regarding Multibank, yes, we're subject to a contract and we're going through every single aspect of that contract which has obviously a lot of precedent conditions that are being met by the purchasers, ourselves, and by the sellers. And there's also a drop-dead date for the contract that we're trying to obviously get to before it happens and -- but things seem to be in line to get the deal done.There will be some price changes based on the very deep due diligence that we've undergone since we signed the purchase agreement. That might change the price a little bit; actually reduce the price a little bit. But other than that, as I said, both the sellers and ourselves are trying to comply with all the conditions precedent that were included in the selling and purchase agreement.

[Operator:]

Thank you. Our next question comes from Yuri Fernandes from JPMorgan.

[Yuri Fernandes:]

Thank you, gentlemen. I would like to make a follow-up regarding the asset quality topics. I got like the mass transportation; you had some renegotiations with the local government. But if there is a major curfew or if people that use less the public transportation systems, how big is your exposure? Like how big could you be able to increase their provisions to this sector? Because I do believe that in addition to the airlines, tourism and gas, there are other sensible sectors that were like in a very bad shape that could be not in a very good position nowadays.And regarding margins, I understood your concern on inflation, but with the Fed cutting rates, like most emerging markets cutting rates, should not us expect like the Banco de la República to cut rates in Colombia as well and see some pressure in margins for 2020? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

Okay Yuri. Regarding asset quality, as we mentioned before, we're actually at the point of reviewing what are the sectors that would be sensitive to what has been going on. Two weeks ago, I would say there wouldn't be something that we would be highlighting at this point. We are at this -- this time, we're just reviewing what will be happening.Obviously, those that will be affected most are those that are affected by the shutdown of the economy, commerce and so on. The exchange side, we are reviewing and the oil price -- well, it's very direct, the impact that we have there.Regarding margins, that is one of the main reasons why at this point, we are refraining from giving guidance. And it is -- we have different scenarios. One scenario is Colombia follows what most of the countries are doing and we go into substantial interest rate cuts. And that's why I mentioned we've got to even move into positive ground on income from fixed income investments.On the other hand, we've had a depreciation of PS.4,000 -- up to PS.4,000 or PS.4,100, whatever the number is, as of this call, and that does have some impact on inflation. There's many numbers out there. There's numbers ranging between 50 basis points and 150 basis points of pressure on inflation. And it very much depends on how the Central Bank reacts. But this -- at this point, this is binary. It's not something that we can project, but there's two different scenarios that could lead us in opposite directions.

[Operator:]

Thank you. Our next question comes from Carlos Rodriguez from Ultraserfinco. Mr. Rodríguez, if you can get closer to the phone. We're not able to hear you. Seems to be having audio issues. We will move to the next question.It comes from Sebastián Gallego from CrediCorp Capital.

[Sebastián Gallego:]

Hi good morning. Can you hear me clear?

[Luis Carlos Sarmiento Gutiérrez:]

Yes, we do.

[Sebastián Gallego:]

All right. Thank you. Thank you for the presentation and yes, congratulation as well on results on 2019. Just three additional questions. The first one on a follow-up regarding Multibank. The question is, are you thinking about different strategies to actually pay the transaction in case it goes on? In previous calls, you mentioned that internal funds were going to be used. But I'm just wondering, given the current conditions and volatile environment, if there are any considerations to be made regarding additional funds to be needed?Second question, I know it's a very volatile environment, but -- and things might change, as you have been mentioning through the call, but can you provide some color on what are your thoughts regarding what banks will do, particularly on the consumer and commercial segments here in Colombia, particularly taking into account all the competition that you mentioned and we have been observing particularly in the consumer segment?And lastly, if you can provide an opinion on what the Central Bank here in Colombia should do under the current environment, whether to cut rates or other measures? Are you guys or will you guys be willing to propose to the Central Bank under current scenario? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

All right. Thanks for the questions. Let's start with Multibank. Multibank is already funded, if you will. We, say, of a purchase price of about $700 million, the BAC has already allocated and set aside about $200 million in dividends from actually excess capital debt that it has. And the remaining or $500 million, we already have on hand at Aval via the bond that we issued last month for the $1 billion, and half of that we can use to complement the $200 million that BAC already has set aside, as I said, for the total of $700 million.So, no, at this point, we're really not considering different strategies to pay the transaction. The money is already on hand. And regarding -- and I'll jump to the third question and then Diego can take the second one regarding consumer and commercial segments.But on the question, as to what the Central Bank should do, I think that if I venture an answer, they might get mad at me, but I think that basically what we have to wait is to see the Central Bank has always been and I'm a big admirer of the Central Bank because I believe they are very accurate when they impose monetary policy.I think, themselves, what they're waiting to see is not to succumb to a drop in rate just because of what might happen but they are waiting to see how inflation might and will be affected by everything that is going on. And they'll probably react to it more than try to prevent it. But we'll see, actually, we'll see. If inflation starts rising very fast, they will have to tighten monetary policy; that will obviously put a damper on growth. But their mandate, their constitutional mandate, is to protect the country against inflation, not to power growth.However, as you know, governments will put a lot of pressure; the executive arm will put a lot of pressure on getting the Central Bank to either maintain or decrease rates. So, you have the two opposite sides pulling in different directions. So, I think it's better to just wait and see what happens. And obviously, in the meantime, we'll be preparing ourselves for either scenario.

[Diego Fernando Solano Saravia:]

Regarding your question on color and what the banks will do in these volatile environment, I would say that the main thought here is Grupo Aval's banks have been in the country for a very, very long time. We've lived through many cycles, positive and negative cycles. We are a very substantial portion of the banking system around a quarter of the system.I would say in that context, you have to bear in mind that our business is risk management. Therefore, at this point, we're being very careful on what kind of risks we are underwriting. However, we are present in Colombia, and we are actually supporters of what is happening in Colombia. Therefore, we will continue actively lending as we've done over many cycles.I would say at this point regarding to what our strategy was before, this couple of weeks, we had mentioned that we had seen the commercial sector starting to get forced, force that was driven by consumer demand. Therefore, it was the kind of growth you want to see, and we're ready to increase our activity in that segment.On the consumer side, we had already seen much of the recovery that we are looking into. And the quality of the portfolio continue to improve, therefore, client-by-client, product-by-product, we have been determining where our growth would be concentrated.

[Operator:]

Thank you. Our next question comes from Julian Felipe from Corredores Davivienda.

[Julian Amaya:]

Good morning. Thanks for having us and congratulations for the results for the fourth quarter. And my question is very specific about what is the impact that you might look about in terms of the funding costs due to the current situation? Thank you.

[Diego Fernando Solano Saravia:]

I would say, at this point, it very much depends on Central Bank policy. Obviously, one of the areas that we triggered as areas of alert was not only credit risk but also market risk. And we're actually looking into what the Central Bank does and making sure that we are monitoring what is happening with liquidity, therefore, with prices.

[Operator:]

Thank you. And we have a question from Diego Torres from MCC-Itaú.

[Diego Torres:]

Good morning. Thank you for taking the question. Regarding the 2013 newly issued bond, could you just go mention the use of proceeds? And on the other hand, could you also mention how you are planning to refinance or pay down the 2022 notes? Thank you.

[Luis Carlos Sarmiento Gutiérrez:]

Okay. Let's start with the $1 billion bond that we just issued. That bond will be used about -- as I said, about $500 million will be used to subscribe in an AT1 that BAC Credomatic will issue. With that -- with the proceeds of the bond that BAC issues, it will complement it with another $200 million. And with that, they'll have the money to pay for Multibank.The remaining $500 million will be used in the same way that we've been using moneys that we obtain from global bonds that we issued. And that is we use that money to un-lend to our own affiliates, entities, subsidiaries that either don't have access to the capital market, or they do, but at rates even higher than those that we can obtain when we issue bonds. So, we do a bit of arbitrage there. We pay the rates that the market charges us, and then we un-lend the money at higher rates to our own subsidiaries.We do that at tenors of -- that are shorter than the tenors of our bonds so that we get the money back from our subsidiaries before we have to pay the bonds. And that brings us to the $1 billion that we have outstanding that mature in 2022. Those -- that $1 billion, right now, we have about $700 million or so of those lend to our own institutions in the conditions that I just mentioned. They are lent at higher rates than the ones that, that bond is costing us. And secondly, the loans that we made will come due before 2022.So, with the liquidity that we have because about $200 million or so or $300 million or so are very liquid and available. And between that and the loans that will be paid down by our entities, we'll have the $1 billion to pay the 2022 bond when it comes due.

[Operator:]

Thank you. Ladies and gentlemen, I will now return the call to Mr. Sarmiento for closing remarks.

[Luis Carlos Sarmiento Gutiérrez:]

All right. Thank you, Hilda. Well, first, I wanted to thank you all for your attention. And for the sake of all, let's hope that the COVID-19 pandemic is soon brought under control and that the world superpowers find a way to manage, work national resources in a way that is conducive to economic growth and not towards its detriment.In the meantime, we will make sure to keep you posted if there are significant developments in any of the fronts that we cover today in our presentation. If not, we hope to continue meeting your expectations, and we'll see you next time.

[Operator:]

This concludes today's conference. We thank you for participating. You may now disconnect.