Grupo Aval Acciones y Valores S.A.
Q2 2016 Earnings Call Transcript

Published: 1 Sep 2016

[Operator:]

Good morning, ladies and gentlemen, and welcome to the Grupo Aval Second Quarter 2016 Consolidated Results under IFRS Conference Call. My name is Richard and I’ll be your operator for today’s call. [Operator Instructions] Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities in Colombia and in the United States, registered with 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 the control of the Superintendency of Finance and compliance with applicable U.S. securities regulation as a “foreign private issuer” under Rule 405 of the U.S. Securities Act of 1933. Grupo Aval is a not a financial institution and is not supervised or regulated as a financial institution in Colombia. As an issuer of securities in Colombia, Grupo Aval is required to comply with periodic reporting requirements and corporate governance; however, it is not regulated as a financial institution or as a holding company of banking subsidiaries and, thus, is not required to comply with capital adequacy regulations applicable to banks and other financial institutions. All of our banking subsidiaries, Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas, Porvenir and Corficolombiana, are subject to inspection and surveillance as financial institutions by the Superintendency of Finance. Although we are not a financial institution until December 31, 2014 we prepared the unaudited consolidated financial information included in our quarterly reports in accordance with the regulations of the Superintendency of Finance for financial institutions and generally accepted accounting principles for banks to operate in Colombia, also known as Colombian Banking GAAP because we believe that presentation on that basis most appropriately reflected our activities as a holding company of a group of banks and other financial institutions. However, in 2009 the Colombian Congress enacted Law 1314 establishing the implementation of IFRS in Colombia. As a result, since January 1, 2015 financial entities and Colombian issuers of publicly traded securities such as Grupo Aval must prepare financial statements in accordance with IFRS. IFRS as applicable under Colombian regulations differs in certain aspects from IFRS as currently issued by the IASB. The unaudited 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. Because of our recent migration to IFRS and recent implementation of IFRS accounting principles, the unaudited consolidated financial information for the first and second quarter 2016, and the comparative information for the relevant unaudited consolidated periods of 2015 presented herein, may be subject to further amendments. This report may include forward-looking statements, which actual results may vary from those stated herein as a consequence of changes in general, economic and business conditions, changes in interest and currency rates and other risks factors as evidenced in our Form 20-F available at the SEC webpage. Recipients of this document are responsible for the assessment and use of the information provided herein. Grupo Aval will not have any obligation to update the information herein and shall not be responsible for any decision taken by investors in connection with this document. The content of this document and the unaudited figures included herein are not intended to provide full disclosure on Grupo Aval or its affiliates. When applicable, in this document we refer to billions as thousands of millions. Today, the call will be conducted by Mr. Luis Carlos Sarmiento Gutiérrez, Chief Executive Officer of Grupo Aval; Mr. Diego Solano, Chief Financial Officer of Grupo Aval

[Luis Carlos Sarmiento Gutiérrez:]

Thank you, Richard. Good morning and thank you very much for joining our call. To start with, it is my pleasure to report that our second quarter results met our expectations. In the next few minutes, I’ll highlight a few of our results and later on in the call Diego will address these and other points in detail. But I feel that I should first address Banco de Bogotá’s deconsolidation of Corficolombiana. As you recall, last May during our first quarterly call, we shared with you our concern over the rating agency’s actions with respect to Banco de Bogotá’s capital structure. We mentioned that Moody's has Banco de Bogotá’s standalone baseline credit assessment as well as its long-term foreign-denominated subordinated debt, and furthermore that he had placed these ratings on credit review for further downgrades. Grupo Aval's own ratings had been dragged down by Banco de Bogotá’s per Moody’s policy to act on a holding company’s ratings after it takes action on one of its subsidiaries. We further explained that we had committed to present a plan of action to Moody’s during June and that our plan would hopefully prevent further downgrades by Moody’s. We did in fact present Moody’s with our plan that’s consistent in Banco de Bogotá’s ceding control of Corficolombiana to Grupo Aval, its holding company. This action entailed substantial financial and capital structure benefits for Banco de Bogotá and for Grupo Aval. It represented the opportunity to directly control Corficolombiana. We explained these benefits in detail to the market on a pro forma basis during a late June call in which some of you participated. I’m now happy to report that the deconsolidation of Corficolombiana was done successfully and that the resulting effects were very much in line and even better than forecasted. In fact, after capitalizing the $2.2 billion non-recurrent gain that Banco de Bogotá generated as a result of this transaction, its June 30, 2016 Tier 1 capital ratio will improve to 9.3% and its total solvency ratio to 14.3%. As you recall, we had estimated these numbers as 9.1% and 13.6%, respectively. Finally, although Moody’s completed its credit review without further downgrades, we expect that during a future evaluation this improvement which is no longer an estimation but rather a reality will be taken into consideration for a rating upgrade. And now, let me refer briefly to Columbia’s current macroeconomic landscape. Just as we had anticipated, in the midst of high inflation and a contractionary monetary policy, Colombia's economy has continued to slow down. In fact, our expectations are now in line with the Bloomberg consensus of analysts that place real GDP growth for 2016 at around 2.3%. We do however continue to believe in the efficacy of the Central Bank’s monetary policy and therefore we expect that inflation will be contained starting next month and that at the end of the year this pricing index will be at least 150 basis points lower than the 9% observed at the end of July. We also believe that the Central Bank will probably not have to increase its discount rate any further during this year or at most another 25 basis points. Although DTF has continued to rise, it sometimes moves unexpectedly and not in unison with the Central Bank’s discount rate. Therefore, we are making serious efforts to price our largest commercial loans off of the Central Bank’s rate or IBR. We remain confident that positive trends in inflation, current account deficit and growth will start to be seen towards the end of 2016 and that these will carry on to 2017. We are optimistic about the impact on consumer and investor confidence arising from the recently agreed upon peace treaty with FARC guerrillas and we foresee a positive impact as yet unquantifiable on the economy as a result. Finally, we continue to see sources for GDP and loan growth from the 4G infrastructure projects over the next few years. We feel that unemployment continues to be manageable at levels of 10%. The exchange rate has revalued throughout 2016 and continues to hold steady in a level that we believe is sustainable for the rest of this year between 2950 peso and 3050 pesos per dollar, especially if oil prices continued to hover between $45 and $50 per barrel. Finally, we have high hopes that the government will understand the need to pass through Congress a business-friendly tax reform and also for a mild El Niño climate occurrence. If these hopes don’t pan out, we might have to reevaluate our current economic estimations. With respect to our other major market, Central America continues to be benefited by the US economic progress and by relatively low prices of oil. As a result, our forecast for growth in this region remains unchanged at approximately 4% for 2016. Now, turning to our financial results, these are the main highlights. Diego will refer to each of these in more detail following this summary. Attributable net income for the quarter was 601.1 billion pesos or 27 pesos per share, showing a 6% increase versus the comparable second quarter 2015 result of 569 billion pesos or 26 pesos per share. Attributable net income for the fix semester of this year amounted to 1247 billion pesos, showing an increase of 12% versus the attributable net income for the fix semester of 2015 which amounted to 1112 billion pesos. Both numbers exclude the non-recurrent tax expense. Our total net loan portfolio grew by 13.3% in the last 12 months and by 1.6% in the quarter. In absence of the exchange rate movements of the period, the net loan portfolio grew by 2.4% in the quarter. Deposits grew by 11.8% in the last 12 months and by 0.1% in the quarter. Once again, in absence of the exchange rate movements of the period, the deposits grew by 0.9% in the quarter. Consequently, the ratio of deposits to net loans closed at 96% in June 30, 2016. As the Central Bank has increased its discount rate by 200 basis points this year, the DTF has kept up and has increased similarly, however in a much more volatile manner. Consequently, average yield on loans has increased by 140 basis points in the last 12 months and 41 basis points between the quarters ending in March and June 2016, closing at 11.3% for this quarter. Cost of funds, on the other hand, increased by 110 basis points in the last 12 months and 47 basis points in the quarter closing at 4.5%. Therefore, the spread between average yield on loans and average cost of funds has expanded by 30 basis points in the last 12 months. NIM on loans was 6.5% for the quarter and increased 10 basis points versus the NIM on loans 12 months back and held steady versus the same ratio during the first quarter of this year. NIM on total investments was 0.8%, steady when compared to the same ratio during the quarter of 2015, but 50 basis points less than the 1.3% observed for the first quarter of 2016. Total NIM was 5.6% in the second quarter of 2016, and increased by 30 basis versus this same number during the second quarter of 2015, mostly as a result of the decrease in the NIM on investments, total NIM for this past quarter showed a slight decrease versus the total NIM of 5.7% in the first quarter of this year. Total cost of risk during the second quarter of 2016 continued to be affected by non-recurrent provisions, mostly as a result of the Pacific Rubiales default. Cost of risk which amounted to 2.1% before recoveries of allowance for loan losses and 1.9% after recoveries of allowances for loan losses would have been 1.9% and 1.7%, respectively, in the absence of these non-recurrent provisions. We have now provisioned and written off in its entirety the Pacific Rubiales risk and expect to have steady quarters going forward as far as customs risk goes and consequently we expect the full year’s cost of risk will not exceed 1.9% before recoveries of allowances for loan losses. Our consolidated efficiency ratio, measured as cost to income, was 47.2% for the quarter, in line with our expected efficiency for this year, 100 basis points better than our efficiency for 2015 and similar to our 2014 efficiency. As of June 30, 2016, all our banks will show Tier 1 capital ratios in excess of 9.35% and as high as 10.1%. In the presentation, Banco de Bogotá is shown on an actual and pro forma basis as this Tier 1 ratio will be materialized after the bank holds its shareholder meeting on September 13, 2016, in which it will capitalize a substantial portion of its first semester 2016 earnings including a $2.2 billion non-recurrent gain from the deconsolidation of Corficolombiana. Finally, during the second quarter of 2016, our return on average assets was 1.7%, and our return on average equity was 16.3%. Including the wealth tax expense, for the full year we expect that our ROE will approximate 15%. I now pass on the presentation to Diego who will expand on the highlights that I just shared with you. Thank you and good day.

[Diego Fernando Solano Saravia:]

Thank you, Luis Carlos. I will start with the evolution of the macroeconomic environment. I’ll move to the PowerPoint presentation on page 5. On that page, we present the evolution of some key macro drivers of our industry. Real GDP growth for the second quarter of 2016 was reported earlier this week at 2%, slightly below market expectations. Market consensus on real GDP growth as reported by Bloomberg remains stable at 2.3% for 2016 and 3% for 2017. We share this view expecting 2016 growth to be in the 2.25% to 2.5% area and a mild improvement during 2017. Some of the headwinds for recovery have lost strength. Improvement in international oil prices, the progress [indiscernible] fourth generation concessions, more stable Columbian peso, lower current account deficit, lower expected inflation and the end of the current interest rate cycle will favor recovery. Downsides will come from the potential impact of the terms of the tax reform and from oil price volatility as in the past. Regarding the unemployment rate, the last two months have shown the mild deterioration that we expected. Number of jobs continues to increase, though at a slower pace. The last data point I will level is that for July 2016 released yesterday. The figure reported was 9.8%, up from 8.8% reported for the same month a year earlier. Nevertheless, absolute current account figures continue to be fragile, relevant progress has been made since the peak of close to 8% in September 2015. First quarter of this year the current account deficit reached 5.6%. The Central Bank estimates points a further improvement throughout the year, going down to 5.3% by end of year. Lower demand of imported goods, the lower factory income outflows drove this improvement. On the financing side, the increase in direct and portfolio investments and high remittances favored this result. Moving to page 6, we present inflation and some interest rate benchmarks. 12-month inflation negatively surprised the market since our last call. The truckers’ strike propelled 12-month July inflation up to close to 9%. Even though this high level appears to be short lived, it resulted in an increasing market consensus on 2016 inflation from 6.95% to 7.4% as of yesterday. We still expect inflation to be lower in the latter part of the year as we experienced lower transference of the currency depreciation into inflation and the effect of the Central Bank recent actions feeding to the economy as well as the impact of the truckers’ strike and the [climate issue] food prices fade away. We expect year-end 12-month inflation to trend downwards to the mid 7% area. Consistent with the recent inflation data, the Central Bank has continued to raise its rates accumulating 325 basis points since August 2015, reaching 7.75%. The Central Bank voted 6 out of 7 in favor of a pass in yesterday’s meeting. This change in policy may signal the end of the rising interest rate cycle with at most one or none additional hikes left. With inflation close to 9%, the Central Bank continues to have a negative real interest rate. The DTF, our benchmark rate, has tracked the repo rate hovering in the 7.25% to 7.5% area over the past few weeks. On page 7, we present oil prices' effect on foreign exchange. The Colombian peso/US dollar exchange rate closed June at 2,919 peso, near 3% stronger than three months earlier and 12% weaker than a year earlier. Second quarter average exchange rate was 2,993 peso, stronger than the previous quarter and 20% weaker than the same quarter a year earlier. Even though weaker than in the past, a negative correlation exist between the Colombian peso/US dollar exchange rate and performance of oil prices. During the quarter, capital flows and remittances into Columbia strengthened the Columbian peso. Over the past few days, the US dollar has strengthened against other currencies following [indiscernible] recent positive comments on the US economy. In addition, oil producing countries’ currencies have weakened as oil prices have slightly corrected downwards following the inventory data and the OPEC members’ comments. The main drivers for the Columbian peso/US dollar exchange rate in the near future are expected to be year-end monetary policy in the US and the oil supply/demand balance as we get closer to 2017. On page 8, we present our chart on Central America macroeconomic drivers. Our view Central America continues to be positive. 2015 to 2018 GDP growth forecast for the region is 4.3% per IMS estimates. Monetary policy is expansionary. A positive correlation to the US economy will favor the region. I will now move to the results of Grupo Aval starting on page 9 with our asset evolution. Balance sheet and P&L accounts that you find in this report reflect the presentation standard used on our 20-F. Total assets grew 11.2% during the last 12 months and presented a slight increase of 0.4% during the last quarter. In absence of the effect of the Colombian peso fluctuations in Central America, assets would have grown 7.8% and 1.2%, respectively. Broken down by region, over the past 12 months, our Columbian assets grew at 8.5%, while the Central American assets grew at 5.1% in dollar terms and 18% growth in peso terms. Over the quarter, our Colombian assets grew at 1.1%, while our Central American assets grew at 1.1% as well in dollar terms, 1.7% contraction in peso terms. Our consolidated balance sheet structure was similar to that in place at the end of June 2015 and Mary 2016, with a slight increase in the weight of our loans and leases in total assets. Our net loans account for 66% of our assets, up from 64.8% 12 months earlier and 65.2% three months earlier. Lower weight of fixed income investments resulting from adjusting our portfolios when increasing interest rate environment has compensated this increase. Fixed income investments now account of 11.1% of assets, down from 13.2% one year ago. Colombian assets account for close to 72% of our balance sheet, 58 basis points higher than three months ago. Central American assets have increased their weight over the past 12 months, moving from 26% to 28%. Both changes, both the annual and the quarterly change, are mainly due to the Colombian peso fluctuation. On page 10, we present our loan portfolio evolution. Gross loans increased by 13.1% over the last 12 months. In absence of the effect of the peso depreciation in Central America, 12-months' growth would have been 9.7%. This change resulted from our Colombian book growing at 9.4% and Central America at 24.1% or 10.5% in dollar terms. Mortgages continue to be our most dynamic portfolio, growing at 23.2% over the last 12 months. Consumer and commercial loans grew 17% and 9.7%, respectively, during the same period. Broken down by region, mortgage loans grew 26.6% in Colombia and 7.8% in dollar terms in Central America. Consumer loans grew 12.7% in Colombia and 13.1% in US dollar terms in Central America. Commercial loans grew 7% in Colombia and 9.7% in dollar terms in Central America. During the second quarter of 2016, gross loans increased 1.4%. In absence of the effect of the peso appreciation in Central America, three month’s growth would have been 2.2%. This growth resulted from Colombian operation growing at 2.1% and the Central American at 2.3% in dollar terms. This is 0.4% decrease in peso terms. The structure of our gross loan portfolio remains stable when compared to the previous quarter. Commercial loans account for 60% of our portfolio, while consumer and mortgages account for 30% and 9.5%, respectively. Loans to individuals, which includes consumer, mortgage and microcredit loans were 1.8 percentage points higher than a year earlier. Colombia accounted for 73% of our loan portfolio, up from 72% three months earlier and down from 75% 12 months earlier. The increase in weight of our Central American operation has been mainly due to the Colombian peso fluctuation. We expect 2016 loan growth [to be short of] 10% with corporate loans growing at 7% to 8% and loans to individuals growing between 12% and 14%. Growth in Columbia and growth in Central America in dollar terms will be [seen]. On page 11, we present several loan portfolio quality ratios. On the top-left of the page, you will find the evolution of our loans past-due more than 30 days and our non-performing loans, both as a percentage of total loans, excluding interest account receivables. During this quarter, our delinquency ratio, measured as 30-days past due loans to total loans, deteriorated by 5 basis points from 2.7% to 2.8%. Delinquency, measured as NPLs to total loans, improved by 6 basis points from 1.8% to 1.7% during the second quarter. Moving to the right, unrealized net provision expenses, net of recoveries of charged-off assets for the quarter was 1.9% of average loans, the same as three months earlier and up from 1.6% recorded 12 months earlier. Provision expenses for Pacific had a relevant impact on our cost of risk [indiscernible] 80 billion pesos and 63 billion pesos during the first and second quarter, respectively. Excluding this event, the cost of risk, net of charged-off assets for both quarters would have been 1.7%. The bottom-left, you will find the annualized ratio of charge-offs to average NPLs. This ratio was 1.1 times during the second quarter of 2016. Excluding the Pacific related charge-offs, the ratio would have remained stable at 0.9 times. Finally, on the bottom-right, we present several loan impairment allowance coverage ratios. Our allowances are 2.7% of total loans and cover 1.6 of NPLs and 1 times our 30-days past due loans. We expect full year 2016 gross cost of risk to be in the 1.85% to 1.90% area, incorporating 10 basis points impact from Pacific. Recovery of charged-off assets would reduce this figure by 15 basis points to 20 basis points. On page 12, you will find further detail on the quality of our loan portfolio. On this page you will find the evolution of our loans past due more than 30 days and our non-performing loans as a percentage of total loans. We will also refer to 90-days non-performing loans even though not included on this chart. During this quarter, our delinquency ratio slightly deteriorated when measured as 30-days PDLs to total loans by 5 basis points from 2.7% in the first quarter to 2.8% during the second quarter. During the quarter, our 90-days PDLs to total loans improved by 7 basis points to 1.5% and our NPLs to total loans improved by 6 basis points to 1.7%. All ratios are calculated as a percentage of total loans excluding interest account receivables. Broken down by type of loan on a quarterly basis, commercial loans slightly deteriorated by 7 basis points to 2.1% when measured as 30-days PDLs, but improved 11 basis points to 1.3% when measured as 90-days PDLs, and 11 basis points to 1.3% when measured based on NPLs. Consumer loans remained stable at 4.1% when measured as 30-days PDLs, at 1.9% when measured as 90-days PDLs and 2.7% when measured based on NPLs. Mortgage loans improved their quality from 2.9% to 2.7% when measured as 30-days PDLs and from 1.2% to 1.1% when measured based on NPLs. Funding and deposit evolution are presented on page 13. Total funding grew 12% over the last 12 months and 0.6% during the last quarter. In absence of the effect of the Colombian peso exchange rate fluctuations in Central America, 12 months and three-months growth would have been 8.6% and 1.4%, respectively. Broken down by region, Colombia funding grew at 10.4% over the last 12 months and 1.5% during the quarter. Central American funding grew at 4.1% in US dollar terms or 17% in Colombian peso terms over the last 12 months. For the second quarter of 2016, Central American funding grew at 0.8% in US dollar terms. This is 1.9% decrease in Columbian peso terms. Deposits increased at 11.8% during the last 12 months and 0.1% during the last quarter. In absence of the effect of the peso depreciation in Central America, 12-month and three-month’s growth would have been 8.5% and 0.9%, respectively. Broken down by region, Colombia accounted for 73.4% of total deposits. Colombian deposits grew 9.2% over the last 12 months and 0.9% during the quarter. Central American deposits grew 19.6% in Colombian peso terms, or 6.5% in US dollar terms over the last 12 months. Over the quarter, Central American deposits increased by 0.6% in dollar terms, 2.2% decrease in peso terms. Our funding and deposit structure had minor changes during the quarter. Deposits accounted for 75.2% of our total funding at the end of period. Our deposits cover 96% of our total net loans. On page 14, we present the evolution of our total capitalization, our attributable shareholders' equity and the capital equity ratios of our bank. Our total equity, defined as attributable equity plus minority interest, was 23.8 trillion pesos as of the end of the second quarter of 2016. This implies a 7.1% increase over the last 12 months and a 3.9% during the last quarter. Attributable equity accounted for 63.4% of total equity as of June 2016. Attributable equity was 15.1 trillion pesos as of the end of June. This implies a 6.8% growth during the last 12 months and a 4.9% growth during the quarter. On this chart, we also show the consolidated solvencies of our banks. Solvencies at the end of period were 13% for Banco de Bogotá, 12.4% for Banco de Occidente, 9.7% for Banco Popular and 11.2% for Banco AV Villas. The deconsolidation of Corficolombiana [was continued] and accounted for during June. This process generated 2.2 trillion pesos in income according to IFRS. This income contributed to secondary capital at 50% as of the end of period. We plan to [indiscernible] amount in our shareholders’ meeting during mid-September. This results in a 2.5 percentage point increase in primary capitalization and a 1.3 percentage point increase in total solvencies. On page 15, we present our net interest margins. Our net interest margin expanded to 5.6% from 5.3% recorded during the same quarter a year earlier. This increase was driven by an expansion in net interest margin and loans and a higher share of loans over the average interest-earning assets. Compared to the previous quarter, total net interest margin experienced a slight contraction of 0.1 percentage points, driven by lower net interest margin on investments. The net interest margin on loans was 6.5% during the second quarter of 2016, up from 6.4% a year earlier and at the same level as the previous quarter. Net interest margin on investments was 0.8%, down from 0.9% a year earlier and down from 1.3% a quarter earlier. Our quarterly net interest income including net trading income from investments held for trading through a profit and loss grew 16.7% from 2 trillion pesos in the second quarter of 2015 to 2.4 trillion pesos in the second quarter of 2016. Net interest income had a 1% decrease compared to the previous quarter. We expect 10 basis points to 15 basis point expansion in net interest margin on loans as the reprising of loan catches up with the reprising of funding, given the expected end of the monetary cycle. On page 16, we present net fees and other income. Fee income is presented on the top of the page. Gross fee income grew by 18% compared to same period a year earlier and decreased by 0.3% to that received during the first quarter of 2016, mainly explained by the Columbian peso fluctuation. When excluding the effect of FX movements, fees grew by 108% and 3.2%, respectively, compared to that period. Broken down by geography, Columbia accounted for 61% of total gross fee, domestic fees grew at [indiscernible] over the last 12 months and 3.8% during the quarter. Central American quarterly fees grew by 15.8% in dollar terms. This is 38.8% increase in Columbian peso terms over the last 12 months. During the quarter, Central American fees increased by 2.2% in dollar terms, 6.1% decrease in Columbian peso terms. At the bottom of the page, we present other income. Other income for the quarter was 770 billion. On page 17, we present efficiency. On this page, we show our operating expenses as a share of total income and of average assets. Our efficiency slightly deteriorated during the period. Efficiency measured as operating expense divided by average assets showed deterioration from 3.4% in the first quarter 2016 to 3.5% in the second quarter of 2016. In Colombia, this ratio deteriorated by 21 basis points to 2.9%. In Central America, the ratio improved by 6 basis points to 4.8% in peso terms. Efficiency measured as operating expense divided by total income was 47.2% during the quarter, up from 44.1% recorded during the previous quarter. In Colombia, this ratio deteriorated from a particularly favorable 38.5% during the first quarter to 43.5% during this quarter. In Central America, this ratio improved from 55.4% to 54.8% in peso terms. This quarterly cost to income results are in line with our full-year expectation of 47%, 100 basis points improvement versus 2015. On page 18, we present our net income and profitability ratios. Attributable net income for the quarter was 601 billion pesos, or 29 pesos per share. Year to date, attributable net income net of the effect of the 179 billion pesos of attributable equity tax was 1,246 billion pesos, 12% higher than that for the same period a year earlier. Return on average assets and return on average equity for this quarter were 1.7% and 16.3%, respectively. Before we move to Q&A, I want to recap our guidance for 2016. Growth in loans in absence of FX movements will be short of 10%. We expect similar growth for our Colombian and our Central American operations. The quality of loans is expected to remain stable at current levels. Gross cost of risk will be between 1.85% and 1.9%. Net of recoveries, this ratio will be 15 basis points to 20 basis points lower. These figures incorporate 10 basis points impact. We expect the net interest margin on loans to increase 10 basis points to 15 basis points as the reprising of loans catch up with the reprising of funding. We expect total net interest margin to be in the 5.7% to 5.8% area. This result will depend on the performance of our investment portfolio. Regarding efficiency ratios, we expect this year – full year to end at 47%, gaining back 100 basis points of what was lost during 2015. Finally, as previously guided, we expect our ROE to be close to 15%. I’ll now open it to questions.

[Operator:]

[Operator Instructions] And our first question in line comes from Carlos Macedo from Goldman Sachs.

[Carlos Macedo:]

One question really on margins. We saw in the quarter the margin, the net interest margin, was down and you attributed that a lot to the investment margin that was down as well. When we look at the sequential growth in NII and even the year over year growth, this is significant growth in the cost of deposits and that’s understandable given how far rates have moved. You don’t really see a comparable increase in the yields from loans. How do you expect that to behave going forward? I mean, first, what happened during the quarter, you had 15% expansion in cost of deposits and loan interest income was up only about 5%. Is your balance sheet more sensitive? Are your liabilities more sensitive to rates than your assets? How should we think about that?

[Luis Carlos Sarmiento Gutiérrez:]

Carlos, actually our balance sheet is asset sensitive. The reason for that is that we fund our operation with a substantial amount of checking accounts, retail saving accounts. Those accounts are not sensitive to the changes that we’ve experienced. Therefore, we end up with an asset sensitive balance sheet. This is a combination of a couple of situations. One, the reprising of funding happens much faster than the reprising of the lending side. Our portfolio has different kinds of performance. The corporate portfolio reprises with DTF and it reprises pretty fast, but just to follow the sequence. What you will find happening in Columbia, it happens around the world, is you get a Central Bank interest increase that is followed several weeks after by the benchmark rate, in our case, DTF catching up and then you have our portfolios that are based on – or floated on DTF reprising at different points in time, basically over a three-month horizon. In such an environment, reprising of loans still has a lag to the reprising of funding. Given that we’ve been in a process of non-stop interest rate hike cycle, by the time our loans are reprising, funds are also reprising faster. Therefore, we pointed out during the speech, the relevance of the pause in the monetary policy. What happens at that point is that our loans continue to reprise, but our liabilities seize to reprise. Therefore, there is a slight lag there. The other element to take into account is, given the cycle, we’ve been keen on deposit growth. If you compare our results to other players, we’re making sure that we’re getting our deposits perhaps in a more aggressive way. We believe that it’s absolutely key for growth in the future, or looking into the short term horizon to be able to source potential loans with the appropriate maturities as well as level of funds. If we had given up our deposit to loan relationship, we would have been able to repay or to defend our cost of funds more. In addition, to put some events to what I just said, I mentioned that we are working on generating a longer maturity on our funding side, an evidence of that is the bonds recently issued by Banco de Bogotá, in addition, the loan that we gave them last year as well, plus other local capital market operations that they’ve been floating. Therefore, we are increasing the maturity, hence the cost of fund of our portfolio. We’re getting prepared to the first fourth-generation concession loans that should start to be been later this year.

[Carlos Macedo:]

Just to make it clear what you’re saying, the rate hikes may have paused, it might go up a little bit more, but eventually probably next year you’re going to start seeing rate cuts as inflation starts to recede. What you’re saying is that the inverse of what’s happening now should happen next year then, with your margins staying more resilient in the first part of the cut cycle as your liabilities reprise quicker than your loans. Would that be accurate?

[Luis Carlos Sarmiento Gutiérrez:]

Yeah, I believe so. Trying to summarize what we expect to see is further expansion on loans, as I mentioned before. I can’t just make a precision on the numbers that you stated at the beginning. Our average cost of funds has increased by 110 basis points, while our average yield on loans has increased by 140 basis points. This is a 30 basis points expansion over the last 12 months. In addition, we expect to see a further expansion in the 15 basis points to 20 basis points area. So we would end up with an expansion of around or close to half of a percent point.

[Operator:]

Our next question in line comes from Nicolas Riva from Citi.

[Nicolas Riva:]

My question is in loan loss provisions. So that increased to 2.1% of loans this quarter, you explained that this was related to provisions for Pacific Rubiales. I remember in the last conference call you guided for 1.7% of loans for this year. That number, the 1.7%, looking into next year, is that a reasonable number to assume for next year, the 1.7%?

[Luis Carlos Sarmiento Gutiérrez:]

Nicolas, you’re right. We had guided to a lower number. We actually reviewed our guidance in this call slightly up to reflect what has happened. It is not only the Pacific event what we’re basing this adjustment done, but also reflecting some deterioration on the consumer portfolio that you could expect with what we’ve seen in employment. Moving into next year, even though we are cautious on giving guidance on next year until we get more clarity throughout this quarter, our expectation is however that we should see improvement in the cycle. We believe we [might have seen] already what we were to see. We, as market consensus, believe that there could be around 100 basis points of further growth, GDP growth next year. And I went through [indiscernible] positives to this result. To summarize, yes, you’re right, we’re expecting to see some improvement. I would be careful on telling you we’re returning to this 1.7%, but it would be a fair estimate at this point.

[Operator:]

Our next question comes from Sebastian Gallego from Credicorp.

[Sebastian Gallego:]

I want to ask regarding on the effective tax rate. What can we expect for this year? And moving forward, can you provide a little bit more color on what could we expect in terms of effective tax rate, given the operations that you’re doing between Banco de Bogotá and Leasing Panama?

[Luis Carlos Sarmiento Gutiérrez:]

Sebastian, I believe what you’re pointing to is effective tax rate, am I right?

[Sebastian Gallego:]

Right.

[Luis Carlos Sarmiento Gutiérrez:]

The way to think about our theoretical tax rate is you have to bear in mind that around 30% of our operation happens in Central America. And in that region, we have a tax rate of around, let’s say, 25%to 28%. The remaining is what happens in Columbia. Therefore, when you blend our Central American operation with our Columbian operation, the theoretical tax rate should be somewhere between 36% and 37%. The variations around this number depend on tax specific issues such as how tax returns are affected by depreciation and other specific issues, but the theoretical tax should be somewhere around that number. Up to this point, our effective tax rate has been around 35% in what has been happening throughout the year. There could be some increase during the second quarter. This is business as usual. However, this is something that we’re still working on and it is the potential impact of merging Banco de Bogotá with Leasing Bogotá Panama. That has a positive impact due to bringing the amortization of goodwill into Columbia, but we’re still in the process of making calculations on that. So once we have something clear there as in the past when we decided to deconsolidate Corficolombiana, we will be more precise on what we expect.

[Operator:]

Our next question on line comes from Alonso Aramburu from BTG Pactual.

[Alonso Aramburu:]

Just a follow-up on the margin question initially, is it your assumption that Central Bank will pause for the rest of the year or your 10 basis point to 15 basis point increase on the NIM? Related to that, this quarter in your deposits, we saw checking accounts decline about 8% quarter on quarter and time deposits increased close to 4%. I guess that’s in line with your comment that you’re being more aggressive on capturing deposits. Are you factoring that into your cost of funding for the second half of the year? Is this a trend that we should expect to continue?

[Luis Carlos Sarmiento Gutiérrez:]

Answer for both, yes. We believe this pause could be permanent. We believe that there might be at most an additional interest rate increase. We need to see more information coming out from the Central Bank. However, a six to one vote on pause is a relevant signal that this could be the end of the cycle. And we do expect to see inflation moving back down to the 7.5% area, therefore, more arguments why this could be the last pause. In factoring our changes in mix to net interest margin expectations, yes, there were rates factored in. And to tell you what’s happening there is part of what we’ve been working on is strengthening some of the funding structures of some of our banks, particularly Banco Popular where you will find this kind of a change. The other area we’re working on is on increasing deposits from our retail branch.

[Operator:]

Our next question in line comes from Mr. Carlos Gomez from HSBC.

[Carlos Gomez:]

Two brief questions. First on the capital side, you show us the capital ratio for each of your banks and we see a particular decline in Banco de Bogotá, I believe it is 6.8% in the quarter. So I would like to understand exactly how the capital moves there. And second, could you clarify again on the tax side, you mentioned 36%, 37%, that is for the Columbian part of the business or for the company as a whole?

[Luis Carlos Sarmiento Gutiérrez:]

The tax is for the company as a whole. If you do the blended numbers of around 40% for Columbia and around 25%, 28% for Central America, you’ll end up with those numbers. Regarding the capital side, if you refer to the presentation, we included two columns for Banco de Bogotá, one as reported for June and the other a pro forma column once we capitalize the gains from the deconsolidation of Corficolombiana. The way it mechanically works is in our previous shareholders’ meeting we declared how much of our earnings we were to retain in the next shareholders’ meeting, but we were to capitalize in the next meeting. That was 50% in the case of Banco de Bogotá. Therefore, given that this earnings were generated end of semester before we had our shareholders’ meeting where we capitalized those earnings, this is presented as general earnings. Therefore, it only accounts for – or it only contributes at 50% of that value to secondary capital. Once we have a shareholders’ meeting and we capitalize those earnings, they move into Q1 100%. That’s the reason why you see a 6% that when you move to the right it becomes a 9% and this earnings haven’t yet become Tier 1 capitalization. The reason why you temporarily see those numbers falling is that we do get a negative effect when we deconsolidate Corficolombiana another way minority interest had contributed in the past to its capitalization. So that’s why you see a number that is temporarily low, but this number should move up within this month.

[Operator:]

And our final question comes from Mayara Riddlebaugh from Wells Fargo.

[Mayara Riddlebaugh:]

My question is also on the solvency ratios related to Popular, there was almost 200 basis point decline on the solvency ratio quarter over quarter. I was wondering if you could explain that, give us a little bit more detail on that on what happened and if that’s the level that we should be going forward?

[Diego Fernando Solano Saravia:]

It’s a combination of two reasons. One, organic, it’s a bank that is growing the most. And then also in the process of deconsolidating Corficolombiana there is a change in the way the minority interest is treated, the way it is treated. What we’ve been looking into Popular as we’ve been looking into the rest of our banks is that in the past we haven’t seen secondary capitalization as much as we could and we’re studying what we could do on that front.

[Operator:]

We have no further questions at this time. I’d like to turn the call over to Mr. Sarmiento for closing remarks.

[Luis Carlos Sarmiento Gutiérrez:]

Thank you very much, Richard. I think that’s basically very good questions. I hope we were able to provide answers. If not, we’ll be happy to take any questions offline to the extent that we can answer them. And nothing else, just to say thank you very much for attending our call and we’ll see you next quarter. Thank you, Richard.

[Operator:]

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