Grupo Aval Acciones y Valores S.A.
Q2 2021 Earnings Call Transcript

Published: 12 Aug 2021

[Operator:]

Welcome to Grupo Aval's Second Quarter 2021 Consolidated Results Conference Call. My name is Jenny, and I'll be your operator for today's call. Grupo Aval Acciones y Valores, S.A. Grupo Aval is an issue 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 regulations. Group 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, beliefs, 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, 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. . I will now turn the call over to Mr. Luis Carlos Sarmiento Gutierrez, Chief Executive Officer. Mr. Sarmiento, you may begin.

[Luis Carlos Sarmiento Gutierrez:]

Good morning, and thank you all for joining our second quarter 2021 conference call. I trust that all of you and your families are keeping healthy. Today, it is my pleasure to present our strongest quarter ever. In doing so, I will cover the following

[Diego Solano Saravia:]

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS. Before covering the following pages, bear in mind that, as of June 2021, MFG no longer affects the comparison of our volumes relative to a year earlier given that its acquisition was completed on May 2020. However, the year-on-year comparisons of our P&L lines are still affected given that the second quarter of 2020 only included 1 month of MFG's operations. Now starting on Page 9. Our assets grew 2.2% over the quarter and 3.4% year-on-year. Colombian asset growth continued strengthening, recording 2.3% increase during the quarter and 3.4% year-on-year, while Central American assets recorded a 0.1% quarterly and a 3.6% year-on-year growth in dollar terms. Quarterly depreciation of 1.9% and a 12-month appreciation of 0.2% take quarterly and annual growth in pesos of Central America to 2% and 3.4%, respectively. The share of Central America in our book remained at 36%. Moving to Page 10. Loan growth continued to show a positive trend that now includes a rebound in Central America. In Colombia, the sustained growth of high-quality retail lending products was partially dampened by a still sluggish growth of commercial loans. The social unrest experienced during April and May in Colombia temporarily held back loan origination. Our total loans grew 2.1% over the quarter and 2.2% year-on-year. Colombian gross loan portfolio increased 1% during the quarter, slightly lower than the quarter earlier, while 12 month growth was 1.5%. Demand of consumer loans remained high in Colombia, resulting in a 1.7% increase during the quarter and 11.3% year-on-year. Competition remains high in low-risk products such as payroll loans. However, as a new development, unsecured products have started to regain traction over the past couple of months. This may signal an increase in the risk appetite of banks. Payroll lending, that accounts for 61% of our Colombian consumer portfolio, grew 3.1% over the quarter and 21.3% year-on-year. Contrast, although performing better than a quarter earlier, credit cards contracted 1.6% and personal loans remained relatively stable. These products account for 12% and 20% of our Colombian consumer portfolio, respectively. As seen in other secured retail products in Colombia, mortgages remained dynamic, expanding 3.1% over the quarter and 12% year-on-year. Our Colombian corporate portfolio continued its mild recovery, growing at a still shy 0.4%. Our growth versus that of our peers continues to benefit by our pricing discipline where we privilege profitable customer relationships over market share. Cumulative 12-month growth was negative at minus 4.4% with a still high comparison base a year ago. Moving to Central America. Our gross loan portfolio increased 2% over the quarter and 3.6% year-on-year in dollar terms. Quarterly performance in Central America, the strongest since fourth quarter 2019, was driven by a 2.9% growth of consumer loans. This performance resulted from a 4.4 growth in credit cards and a 1.3% growth in payroll loans. Quarterly growth in credit cards took the year-on-year growth to 5.8%, the first positive figure in second quarter 2020. Commercial loans and mortgages grew 1.7% and 1.1%, respectively, during the quarter in Central America. Looking forward, fundamentals for loan growth continues to strengthen in both geographies. We expect commercial loan growth to be supported by improvements in economic activity and business confidence. In the retail lending front, we expect that the improvement in employment outlook will continue to allow an increase in our bank's risk appetite in products that were deemphasized during the shock. On Pages 11 and 12, we present several loan portfolio quality ratios. The COVID-19 credit juncture continued on unwinding favorably for our banks during the second quarter driven by a stronger and faster recovery in both economies than initially forecasted that has translated into a better evolution of reliefs and a stronger performance of the rest of our portfolio. This has resulted in a lower cost of risk than initially forecasted. Loan reliefs continue to expire and return to active payment schedules. As expected, these loans have higher delinquency ratios than the average. In contrast, the remainder of our loan portfolio, 88.5%, continues to improve, in line with a stronger economy offsetting the burden of the relief loans. As of June 30, we had 3% of our total gross loans under payment holidays and 8.5% under structural payment programs, together accounting for 11.5% of our loan portfolio. In Colombia, 5.9% of our loans have some type of relief. Only 0.2% of our Colombian gross loans are still under payment holidays. The remaining reliefs are under structural payment programs. In Central America, 20.9% of our loans still have some type of relief with 7.8% of gross loans under payment holidays and 13.2% under structural payment programs. Payment holidays persist mainly in Panama that account for 94% of those in the region. At end of period, 4.2% of our total loans that in the past had benefited either from payment holidays were restructured and that had returned to active payment schedules were past due more than 90 days. These past due loans represent 1% of our total gross loans. These numbers were 7.3% and 1.8% for loans past due more than 30 days. In Colombia, 5.7% of loans previously relieved that had resumed active payment schedules were 90 days past due, representing 1.1% of gross loans. For 30 days past due loans, these numbers were 9.3% and 1.8%. In Central America, 2.6% of loans previously relieved that had returned to active payment schedules were 90 days past due representing 0.9% of gross loans. For 30 days PDLs, these numbers were 5.3% and 1.8%. As mentioned before, the deterioration in relief loans was partially offset by the improvement of the rest of our loan portfolio. This resulted in the overall metrics for 30 days and 90 days PDLs remaining relatively stable during the quarter. Our allowance coverage of 30 days and 90 days PDLs remained flat as well as our -- over the quarter. The ratio of charge-offs to average 90-day PDLs stood at pre-COVID levels. Regarding 30-day PDL formation, 76% was explained by retail products with credit cards and personal installment loans contributing 28% and 20% of PDL formation, respectively, despite representing only 8% and 5% of our gross loans. This behavior was mainly driven by relief loans that became delinquent. The quality of our loan portfolio was materially stable quarter-on-quarter at 4.76% on a 30-day basis and 3.42% at 90-day PDL basis. With 30-day and 90-day PDL -- sorry, our 30-day and 90-day PDL were 71 and 42 basis points higher than those a year earlier. Composition of our loan portfolio in terms of stages shows an improvement in the share of Stage 1 loans compensated by a decrease in Stage 2 loans. As anticipated, part of the Stage 2 loans migrated to Stage 3. This improvement was mainly driven by our consumer loan portfolio in both geographies, which recorded a 146 basis points increase in the share of Stage 1 loans and 155 basis points decrease in Stage 2. Coverage of each stage remains relatively stable compared to a quarter earlier. Cost of risk net of recoveries was 2%, 23 basis points lower than the 2.2% in the previous quarter and 111 basis points lower than the 3.1% a year earlier. The quarterly improvement incorporates 58 basis points decrease in retail loans and a 5 basis point increase in commercial loans. Quarterly cost of risk improved by 34 basis points in Colombia and 4 basis points in Central America. In Colombia, the cost of risk of retail loans improved 84 basis points while that for commercial loans remained stable. In Central America, the cost of risk of retail loans fell 22 basis points and increased 17 basis points for commercial loans. On Page 13, we present funding and deposit evolution. Funding growth during the quarter continued to reflect a high liquidity environment. Our deposits to net loans ratio and our cash-to-deposit ratio remained stable over the quarter at 110% and 15.8%, respectively. Our funding structure remained materially unchanged with deposits accounting for 78% of total funding. Deposits increased 1.7% during the quarter and 6.4% year-on-year. Colombia grew 1.4% during the quarter, while Central America grew 0.2% in dollar terms. For the 12-month period, Colombia grew 3.3% and Central America 11.6% in dollar terms. Annual growth of deposits above that of loans reflects a conservative liquidity standing, particularly in Central America. On Page 14, we present the evolution of our total capitalization, our attributable shareholders' equity and the capital adequacy ratios of our banks. Total equity grew 5% over the quarter and 8.2% year-on-year, while our attributable equity increased 5.3% and 7.6%, respectively, mainly driven by our earnings. Solvency ratios under Basel III remained relatively stable as net income provides the support for risk-weighted assets growth over the quarter. On Page 15, we present our yield on loans, cost of funds, spread and NIM. NIM performance during the quarter was driven by a stable NIM on loans and an improvement of NIM on investments. NIM on loans remained at 5.8% during the quarter as the spread between yield on loans and cost of funds remained flat at 6%. Yield on loans continue to keep decreasing. However, it was compensated by a similar decrease in cost of funds. NIM on investments was 1.4% during the quarter, returning to positive ground from the minus 0.4% recorded last quarter. The excess liquidity associated with the prudent liquidity standard continued to weigh on our NIM. On Page 16, we present net fees and other income. On this page and the following, we will present several P&L lines and metrics. Please bear in mind that 2 factors limit the comparability of our results year-on-year

[Operator:]

. And our first question comes from Sebastian Gallego from CrediCorp Capital.

[Sebastián Gallego:]

Congratulations on very strong results. I have several questions today. First of all, you just mentioned -- Mr. Diego mentioned an ROE guidance of 15% to 15.5% in 2021. Can you discuss on how sustainable are these type of returns going into 2022 and on a long-term sustainability basis? Second, it caught my attention, Mr. Luis Carlos' comments on potential competition on digital platforms and how those platforms could have trouble monetizing the -- I mean, their users. Can you discuss a little bit more the competitive environment on that front? And why are you so confident that other players may not be able to monetize those users? And finally, if you could provide an outlook for loan growth, breaking down per region and breaking down per segment given the 9% to 10% guidance?

[Luis Carlos Sarmiento Gutierrez:]

Okay. Let me start with your question #11 on digital. What I meant is the following, what we see around the region with platforms, fintech platforms that have been able to turn in net income is basically the -- not charging fees but charging substantial interest rates in one way or another. In Colombia, as I said, it's a little bit more complicated because we have very strict usury rate regulation. So here, when you bring on digital clients, you have to consider how you're going to monetize them. And you can massively increase your digital clients in those sort of platforms. But if, in that massification, you acquire a lot of digital clients that will probably not transact too much like, for example, clients that just become so to receive subsidies from the government or other types of clients that will probably not be subject to becoming debtors in -- via loans, it might be a little bit harder to monetize them. So I don't have the solution. And I am sure that everybody who is coming up with a digital platform has thought about this. And obviously, most of it is going to depend on what your cost of funds is if you are planning to take in funds to then try to make those customers into borrowers. It also depends on your costs structure. And obviously, some of these fintechs which are starting in -- from the beginning as solely digital platforms with no legacy of other types of costs have an easier time of keeping costs down. But all that I'm saying is, in our case, when we think about massification of digital clients, we always think in terms of what's that going to produce with respect to net income for the company. So in that respect, we usually say let's start with those actions that we know are going to result in valuation and valuation via additional net income because, as you know, we are basically valued based on a price to earnings ratio, and so we have to produce the earnings. And that's why we're saying in our strategy, we first decided we would put a lot of emphasis on being able to offer our own legacy products in a digital manner so that new clients could acquire them that way. And secondly, we've been going through the digitalization of processes and operations in the banks, and that has resulted in cost savings. We will obviously not discard in any shape the idea of massifying digital clients, but we have to make sure and -- that those clients have some future in terms of producing additional revenues for the company. So that's what I was referring to in -- when I talked about our digital strategy.

[Diego Solano Saravia:]

And moving to your guidance questions. Regarding return on equity, even though we are not giving guidance on 2022 on this call, just to give you a framework to think around it, we have a few things that are still to continue improving into the future, particularly cost of risk still has room to improve throughout the year and into next year. That has been part of what has helped us in sustaining our stronger results than market. And we expect to continue seeing that improvement into the future. The other part that will be helping us as well is all that, that is related to increased macro activity in Colombia regarding stronger growth, regarding increases in rates that -- as you know, for banks, a slight increase in rates is always a positive, increase in fee income associated with activity. What could dampen the kind of positive numbers that I'm pointing into, it is the tax reform. It is building in what comes out from that reform is still to be seen. At this point with the tax reform that is currently in Congress, the numbers might not change substantially compared to this year. But the expectation of having lower taxes into the future somehow has faded away. So we have a combination of improvement on the operational front. And then the -- almost on the last line, we have the impact of taxes. That's a long way to tell you that even though we are not giving guidance, these kind of numbers are numbers that we could expect to continue seeing into the future. Then regarding the breakdown of what is going to happen with loan growth, as mentioned, we have a much better performance from the growth perspective on the consumer front. We could expect to see something in the 12% to 14% area growth. And on the commercial front, it should be somewhere between 6% and 7%. If you break down that by regions, Colombia should be in the 6% to 8% area growth. And Central America should be at a similar rate, if you look at it in dollar terms, but you have to build in that we have already run through around an 11% depreciation, I mean, not as of today, but up to the numbers that we believe could be numbers at the end of the year. So that will help and that will propel what is happening with Central America.

[Operator:]

Our next question comes from Adriana De Lozada.

[Adriana De Lozada:]

Congratulations on the results. I wanted to see if you can help us have a better sense of fee income growth. I know in the quarter, there was a slight impact from the protest. But if you can help us with that, that would be great.

[Diego Solano Saravia:]

I'm sorry, were you referring to fee income or to income growth? I didn't hear you properly.

[Adriana De Lozada:]

Well, it could be talking about normalized levels of growth, but however you think it's best to formulate it.

[Diego Solano Saravia:]

Okay. Well, regarding the loan side, I just mentioned it before, it is volume-wise, we have the dynamics I just covered when referring to Sebastián's question. Regarding margins, we're actually moving into a better ground for margins given that we expect to see the central bank increasing rates. On the fees side, we mentioned we are slightly short from loan growth because loan growth is starting to come stronger. Therefore, if loans are growing in the 9% to 10% area, we could see a couple of percentage points below that on the fee side. Fees still has some room to increase, particularly for 2 reasons. Number one, on the pension side, we had some impact during this quarter of volatility that implied that some of our fees that are related to our profitability and the funds was affected. Bear in mind that there is a lag between how we get those into our P&L and how they happen in the market because we charge fees after the returns have been obtained. So we are -- we have some delay there. But then -- and I would say the main driver will be economic activity. We're seeing a strong pickup. We're seeing a pickup in products that are reaching fees such as credit cards and other consumer products that, in the past, we have deemphasized and, at this point, we're ready to start to open our risk appetite. So that will come with fees as well. I don't know if I covered what you were referring to, but those are the main drivers.

[Operator:]

. Our next question comes from Brian Flores from ASA Investments.

[Brian Flores:]

Can you please confirm, what was the guided figure for cost of risk? And then I'll give a second question.

[Diego Solano Saravia:]

Okay. Regarding cost of risk, you might have noticed that we lowered our guidance we had previously given. Initially, we started out with 2.5%, lowered it to 2.3% to 2.4%. And this time around, we're lowering it to 2.1% to 2.2%. The reason for that is we're seeing a much better performance on our loan portfolio, particularly on the retail side. And then given the much stronger economy that we're looking into in Colombia and Central America, the remainder of the portfolio beyond what was benefited from reliefs is also performing much better. So that's the reason we're doing that. Something there that we're still holding back from being more aggressive is provisions in Central America, particularly in Panama, given that they're later in the process of finishing reliefs. In absence of that, we might have had a positive bias on the numbers that I mentioned.

[Brian Flores:]

My second question would be on 2022. I know it's still a bit early, but we're getting closer to it. So just thinking about your guidance, if you have any idea of how any of these lines would look like? And what are you aiming for in terms of sustainable ROE?

[Diego Solano Saravia:]

I would prefer to stick to the answer to Sebastián regarding guidance and what to expect on ROE. At this point, I would say we would be very happy to be able to transfer our optimism on the economy and performance into guidance, but we prefer to be prudent at this point.

[Operator:]

Our next question comes from Yuri Fernandes from JPMorgan.

[Yuri Fernandes:]

First, congrats on the results. Very good quarter. I have a question on margins. Actually, on the liability side, I guess we are seeing loan book accelerating in Colombia, right? But my question is regarding the funding. Do you think you'll be able to keep growing deposits at a healthy pace? Because over the last 1, 2 years, we saw you and Colombian banks in general having a very good funding structure, right, like demand deposits growing, deposit costs coming down. So my question is should we see an inflection point for funding cost and we start to see funding costs slightly moving up? And how that could affect the margins? Because that could be negative, if that's correct. If that assumption that maybe funding cost will be higher, that can penalize a little bit the NIMs. But on the other hand, maybe Stage 3 loans will peak and that will help a little bit to have higher rates in Colombia. So I guess the bottom line here is what should we expect for NIMs in the coming quarters for you?

[Diego Solano Saravia:]

Yes. Trying to -- I'm going to give you first the short answer and then I can go into detail. The short answer is deposit growth, we should expect to continue sustaining that. However, I mentioned somehow or I hinted twice that we've had excess liquidity that has been a burden on our net interest margin. That's been a prudent way to manage it, particularly in Central America, where there's no central banks. We've taken excess deposits to what would be the normal way to run the bank. So deposit growth, we will have at least some time where we have the leisure of having excess deposits, so we can be picky on prices, and that will help us over several quarters. Regarding margins, we suffer when rates come down, particularly those from the central bank, and we benefit when those go up. Something that we have already started to feel is that the IBR from that -- basically is the interbanking rate in Colombia has already started to pick up, reflecting expectations on increase of profits. If you'll recall, what we have in our commercial portfolio in Colombia is substantially floating loans based on IBR. So we've started to feel that already benefiting us and expect to see that in the future. Then the other side of deposits is our retail franchise where those deposits are not as elastic to what is happening with the central bank. And that's the main source of improvement in margin when rates go up. There's 2 different types of cycles, some cycles where rates are going up because risk is going up, therefore, the cost of risk is built into the pricing of the banks. However, this time around, we're looking into a cycle where rates are going up with an improvement in cost of risk. So I would say that will be benefiting our margins and more so our margins after cost of risk.

[Yuri Fernandes:]

If I may ask just a quick follow-up. Do you have a sensitivity on rates that you can provide? Like if there is -- I know it's not -- the NIM is not the reference rate, but just as a proxy, like if the rates move up 100 bps, what should we see for your NIMs?

[Diego Solano Saravia:]

Well, yes, you have to build in cost of risk into that. We -- in the past, we used to disclose some sort of sensitivity around the 20 basis points or the COP 0.20 per dollar kind of sensitivity, but that was pure interest rate sensitivity. However, pricing has become growingly intelligent in Colombia and you have to build in as well the cost of risk into those. So that has made a difference. And perhaps that was what I was pointing out before. And if there's cycles where you're seeing increases in rates combined with improvement in cost of risk are perhaps the most positive and most sensitive or elastic cycles to interest rates. However, we have ceased to do that because of that last factor, and it depends very much on the speed at which the risk premiums are built into pricing.

[Operator:]

And our next question comes from Julian Ausique from Davivienda.

[Julian Ausique:]

First of all, congratulations for the results. I would like to know if you can give us a little bit more color on your expectation for the second half of 2020. Like you think the earnings is going to be -- are going to behave the same as the first half of the year? And also, I would like to know if you can give us a little bit more color about what are your expectations on loan growth. Like if you can give us like the consumption, the consumer, the market segments, how they will grow if you have the detail.

[Diego Solano Saravia:]

I think we covered many of those before in the guidance for -- by the way, not 2020, 2021 incorporates what is going to happen over the second half of the year. We are quite positive on how the second half of the year will behave. As I mentioned, still prudent on the cost of risk side. That's the reason why we're guiding into 15% to 15.5% ROE for the year in spite of having already overperformed those numbers. So we are prudent on that side because the cycle is not over yet, but we are quite positive on the core banking side of how things are behaving. And regarding loan growth, just to repeat what I answered Sebastián at the beginning, we're looking into commercial lending growing somewhere in the 6% to 8% area, and the consumer side, the retail side, growing more in the 12% to 14% area.

[Operator:]

Our next question comes from Andres Soto from Santander.

[Andres Soto:]

My question is related to expenses. When I compare expenses this quarter with the second quarter of 2019, there is a 14% growth. Obviously, you have inorganic growth in the middle, but still you have a real expense growth over the period. So I would like to understand if there is any strategy to achieve efficiency. In the past, you mentioned that this will be one of the opportunities that the digital transformation could bring to Grupo Aval through the back-end integration of the different brands. So I would like to understand your thoughts about your expense performance.

[Diego Solano Saravia:]

Well, I will start first with the quantitative discussion here, and then we can move into the more strategic one. Regarding expense growth, I would say '19 is also a tricky year. It's a tricky year because we had cost growth throughout the year. It was also affected by a depreciation of the U.S. dollar, and therefore, we saw some effect coming from Central America that started to weigh much more in our costs and also had the conversion. The numbers, when you run them, ex FX impact, are more positive than what you're looking into. And I think that's perhaps the way to look at those. Then you're absolutely right, the MFG acquisition also has some impact there because we're talking of a larger bank. Therefore, perhaps the best way to look at it is more on the cost to assets or cost to income base to try to have that. Having said so, part of what are the positive takeaways from the pandemic is we had to go back and rethink a lot of the costs that we had, the digital front that you rightly mentioned, is something that has allowed us to bring costs down. But we have a lot of work still to do and the pandemic evidence that we have still a lot of potential to improve costs. So we will continue working on that, and the mandate for our banks is basically on those lines. Digital helps as an enabler to lower costs, and that's part of what we've been using.

[Operator:]

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

[Luis Carlos Sarmiento Gutierrez:]

Thank you very much. I thank you for everybody's questions. Thank you for the attendance. We hope to keep delivering, and we hope to have -- to start giving guidance for 2022 in our next call. Other than that, just hope to see you -- I hope all of you can attend next call as well. And thank you, Jenny, and thank you, everybody else.

[Operator:]

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