Grupo Aval(AVAL) - 2019 Q4 - Annual Report

Presentation of Financial and Other Information Financial Statements and Conventions Outlines the report's accounting conventions, currency translations, key definitions, and data sources - All peso amounts are translated to U.S. dollars at a rate of Ps 3,277.14 per U.S.$1.00 as of December 31, 2019, unless otherwise noted[8] - The consolidated financial statements for the years ended December 31, 2019, 2018, and 2017 are prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB)[11] - The company adopted IFRS 16 (Leases) on January 1, 2019, using a modified retrospective approach without restating prior period comparatives[12] - Market share and competitive performance data are based on separate financial information prepared under Colombian IFRS as reported to the Superintendency of Finance, which may differ from the consolidated IFRS statements[23] - Grupo Aval's principal competitors in Colombia are identified as Bancolombia, Davivienda, and BBVA Colombia, while in Central America, competitors include Bancolombia, Banco General, and Banco Industrial[26][28] Part I Item 3. Key Information Presents selected consolidated financial data and a detailed discussion of significant business and security-related risks A. Selected financial data Provides a five-year summary of key financial data from audited consolidated statements under IFRS Consolidated Statement of Income (2017-2019) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total interest income | 19,552.7 | 18,356.6 | 18,741.8 | | Total interest expense | (8,267.2) | (7,484.8) | (8,227.7) | | Net interest income | 11,285.5 | 10,871.8 | 10,514.1 | | Net impairment loss on financial assets | (3,755.1) | (3,797.3) | (3,854.9) | | Income before income tax expense | 7,451.7 | 7,334.1 | 4,915.2 | | Net income for the year | 5,365.5 | 5,184.6 | 3,162.4 | | Net income attributable to Owners of the parent | 3,034.4 | 2,912.7 | 1,962.4 | Consolidated Statement of Financial Position (2017-2019) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Total loans, net | 173,942.3 | 168,685.7 | 160,754.3 | | Total assets | 278,832.6 | 259,675.2 | 236,538.5 | | Customer deposits | 175,491.4 | 164,359.5 | 154,885.2 | | Total liabilities | 245,484.3 | 230,120.8 | 210,667.3 | | Total equity | 33,348.3 | 29,554.3 | 25,871.2 | | Equity attributable to owners of the parent | 19,850.6 | 17,789.7 | 16,287.0 | Key Profitability and Credit Quality Ratios (2017-2019) | Ratio | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | ROAA | 2.0% | 2.2% | 1.4% | | ROAE | 16.4% | 17.8% | 12.6% | | Efficiency ratio | 47.6% | 45.7% | 50.1% | | Cost of risk (net) | 2.2% | 2.4% | 2.5% | | Loans past due > 90 days / gross loans | 3.3% | 3.1% | 2.8% | D. Risk factors Details material risks related to operations in Colombia and Central America, the financial industry, and the company's securities Risks relating to Colombia and other countries in which we operate Details macroeconomic, political, and social risks in Colombia and Central America impacting performance - The company's results are materially affected by economic and political conditions in Colombia and Central America, including changes in monetary policy, exchange rates, and governmental influence[65][70] - The company and its officers are subject to ongoing investigations by the DOJ, SEC, and Colombian authorities regarding the Ruta del Sol Project Sector 2, which could result in significant penalties and reputational harm[90][93][95] - Recent tax reforms in Colombia (Law 2010 of 2019) introduced changes including a progressive reduction of the corporate income tax rate and a temporary surtax for financial institutions[107] - The COVID-19 outbreak poses a significant risk, causing economic disruption that could adversely affect loan growth, fee income, and overall financial results[117][118][123] Risks relating to our businesses and industry Outlines operational and industry-specific risks including credit, market, competition, and cybersecurity threats - A deterioration in the asset quality of the banking subsidiaries' loan portfolios could lead to increased impairment losses, particularly from customers susceptible to economic downturns[127][128] - The company is subject to regulatory changes, including the implementation of Basel III capital requirements in Colombia by 2021 and supervision as a financial conglomerate, which could require additional capital[152][160][164] - Cybersecurity threats have increased significantly, and a security breach could result in financial loss, regulatory sanctions, and reputational damage[246][248] - The company faces intense competition from large local and foreign banks as well as non-traditional providers, which could affect market share and profitability[254][257] - The company is controlled by Mr. Sarmiento Angulo, who beneficially owns 97.5% of common shares, allowing him to determine the outcome of substantially all shareholder actions[264][265][266] Risks relating to our preferred shares and ADSs Details risks for preferred shareholders and ADS holders, including exchange rate volatility and limited voting rights - Significant fluctuations in the Colombian peso to U.S. dollar exchange rate could adversely affect the U.S. dollar value of dividends and the market price of ADSs[277][278] - The Colombian securities market is relatively small and illiquid, which may impair the ability of shareholders to sell preferred shares at the desired price and time[280][281] - Holders of preferred shares and ADSs have limited rights, including no voting rights for the election of directors, and may face difficulties protecting their interests[285][286][288] - As a foreign private issuer, the company follows Colombian corporate governance practices, which differ from NYSE standards and may offer fewer investor protections[293][294] - Enforcement of U.S. court judgments in Colombia is difficult and not guaranteed, as there is no bilateral treaty for automatic recognition[304][802] Item 4. Information on the Company Provides a comprehensive overview of the company's history, corporate structure, business strategy, and operational segments A. History and development of the company Establishes the company's market leadership and details its history, multi-brand strategy, and key growth pillars - Grupo Aval is the largest banking group in Colombia and Central America by total assets as of December 31, 2019[307] - The company operates a multi-brand strategy, with each of its four Colombian banks focusing on specific customer segments while adhering to group-level policies[311][332] - The company's growth strategy is based on five pillars: Risk management, Innovation and Digitalization, Efficiencies, Talent management, and Sustainability[336][345] - Key historical milestones include the acquisition of BAC Credomatic in 2010, the initial public offering of ADSs on the NYSE in 2014, and becoming a supervised Financial Conglomerate in 2019[376][377] B. Business overview Details the company's operational structure, competitive positioning, lending activities, and regulatory environment Our Operations and Competition Presents the company's operational structure and competitive analysis with market share data for key segments Colombian Market Share - Deposits (Dec 31, 2019) | | Grupo Aval aggregate | Bancolombia | Davivienda | BBVA Colombia | | :--- | :--- | :--- | :--- | :--- | | Checking accounts | 37.5% | 24.0% | 9.7% | 10.8% | | Savings accounts | 25.7% | 27.2% | 13.2% | 10.4% | | Time deposits | 23.0% | 22.1% | 15.8% | 12.5% | | Total deposits | 26.4% | 24.8% | 13.7% | 11.2% | Central American Market Share (Dec 31, 2019) | | BAC Credomatic | Bancolombia | Banco General | Banco Industrial | | :--- | :--- | :--- | :--- | :--- | | Loans, net | 10.3% | 9.3% | 7.6% | 6.0% | | Assets | 9.4% | 8.0% | 7.4% | 7.0% | | Deposits | 9.7% | 8.1% | 7.0% | 6.5% | Porvenir Market Share - Assets Under Management (Dec 31, 2019) | Fund Type | Porvenir | Protección | Colfondos | Skandia | | :--- | :--- | :--- | :--- | :--- | | Mandatory | 44.3% | 35.9% | 13.5% | 6.3% | | Severance | 47.9% | 38.9% | 10.6% | 2.6% | | Total AUM | 42.9% | 36.6% | 12.9% | 7.6% | Business Segments and Statistical Data Provides a detailed statistical breakdown of each business segment's loan portfolios, deposits, and distribution networks Consolidated Total Loans, Net by Segment (Dec 31, 2019) | Segment | Commercial | Consumer | Mortgages | Microcredit | Total Loans, Net | | :--- | :--- | :--- | :--- | :--- | :--- | | Banco de Bogotá (Consolidated) | 69,208.8 | 33,440.1 | 15,199.0 | 404.0 | 113,110.1 | | Banco de Occidente | 22,062.0 | 7,208.2 | 1,641.3 | — | 29,374.1 | | Banco Popular | 7,333.2 | 11,961.1 | 951.8 | 5.4 | 19,260.2 | | Banco AV Villas | 2,947.8 | 6,797.0 | 2,419.3 | 0.9 | 11,671.2 | | Corficolombiana | 1,693.0 | 434.1 | 10.2 | — | 2,115.9 | | Grupo Aval Consolidated Total | 101,655.7 | 59,840.5 | 20,221.7 | 410.3 | 173,942.3 | Consolidated Customer Deposits by Segment (Dec 31, 2019) | Segment | Checking accounts | Savings accounts | Time deposits | Total Deposits | | :--- | :--- | :--- | :--- | :--- | | Banco de Bogotá (Consolidated) | 33,990.7 | 34,744.9 | 48,739.5 | 117,795.0 | | Banco de Occidente | 6,366.4 | 12,574.6 | 9,728.0 | 28,726.4 | | Banco Popular | 1,101.0 | 8,300.2 | 7,573.3 | 16,988.9 | | Banco AV Villas | 1,072.5 | 6,156.9 | 4,618.2 | 11,851.4 | | Corficolombiana | — | 467.8 | 3,530.7 | 4,067.5 | | Grupo Aval Consolidated Total | 42,449.7 | 59,352.8 | 73,225.2 | 175,491.4 | - The loan portfolio is analyzed by risk categories from 'A' (Normal risk) to 'E' (Risk of non-recoverability); as of Dec 31, 2019, 90.6% of the portfolio was classified as 'A' (Normal risk)[625][629] Supervision and regulation Outlines the regulatory framework, including supervision as a financial conglomerate and Basel III capital requirements - Grupo Aval and its subsidiaries are primarily regulated by the Superintendency of Finance, the Central Bank, and the Ministry of Finance in Colombia[666] - Since February 6, 2019, under Law 1870, Grupo Aval is supervised as the financial holding company of the Aval Financial Conglomerate, subject to consolidated supervision[681][692] - Colombian credit institutions are transitioning to Basel III capital requirements, effective January 1, 2021, which includes higher minimum capital ratios and capital buffers[717][719][720] - Lending to a single borrower is generally limited to 10% of a bank's technical capital, extendable to 25% with eligible collateral or for financing 4G infrastructure concessions[745][746] - FOGAFIN provides deposit insurance covering up to Ps 50 million per individual or corporation in the event of a bank liquidation[781] D. Property, plant and equipment Details the carrying amount of property, plant, and equipment categorized by asset type and operating segment Property, Plant and Equipment by Segment (Dec 31, 2019, in Ps billions) | Segment | Buildings and land | Machinery | Equipment | Bearer plants | Other properties | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Banco de Bogotá | 1,225.7 | 6.4 | 679.1 | — | 188.5 | 2,099.7 | | Banco de Occidente | 357.4 | 0.0 | 95.8 | — | 11.3 | 464.6 | | Banco Popular | 444.0 | 0.7 | 69.8 | — | 13.2 | 527.7 | | Banco AV Villas | 248.3 | — | 36.7 | — | 13.3 | 298.3 | | Corficolombiana | 955.5 | 1,118.9 | 39.0 | 224.1 | 51.9 | 2,389.3 | | Grupo Aval Total | 3,231.0 | 1,126.5 | 922.1 | 224.1 | 279.6 | 5,783.2 | Item 5. Operating and Financial Review and Prospects Presents management's discussion and analysis of financial condition and results of operations for the last three years A. Operating results Provides management's analysis of financial performance, including key economic factors and a segment-by-segment review Principal Factors and Critical Accounting Policies Discusses key macroeconomic drivers and critical accounting policies that require significant management judgment - Colombian GDP grew at a rate of 3.3% in 2019, up from 2.5% in 2018, driven mainly by private domestic consumption[816][817] - The Colombian Central Bank's interest rate remained stable at 4.25% throughout 2019, while inflation closed the year at 3.80%[827][828] - Critical accounting policies requiring significant judgment include impairment of financial assets (ECL), fair value of financial instruments, goodwill impairment, and deferred tax assets[838][840][841] Results of Operations for the Year Ended December 31, 2019 Compared to the Year Ended December 31, 2018 Analyzes the consolidated and segment-level financial results for 2019 compared to 2018 Grupo Aval Consolidated Results (2019 vs 2018) | (in Ps billions) | 2019 | 2018 | Change (%) | | :--- | :--- | :--- | :--- | | Net interest income | 11,285.5 | 10,871.8 | 3.8% | | Net impairment loss on financial assets | (3,755.1) | (3,797.3) | (1.1)% | | Net income from commissions and fees | 5,455.3 | 4,839.6 | 12.7% | | Other expenses | (10,171.3) | (9,371.0) | 8.5% | | Net income for the year | 5,365.5 | 5,184.6 | 3.5% | | Net income attributable to Owners of the parent | 3,034.4 | 2,912.7 | 4.2% | - Banco de Bogotá's attributable net income decreased by 5.8%, impacted by higher operating expenses and impairment losses[903] - Banco de Occidente's attributable net income increased by 36.3%, driven by a significant decrease in net impairment loss and higher other income[985] - Corficolombiana's attributable net income decreased by 5.5%, mainly due to lower gross profit from its infrastructure projects compared to a strong 2018[1095] Results of Operations for the Year Ended December 31, 2018 Compared to the Year Ended December 31, 2017 Analyzes the consolidated and segment-level financial results for 2018 compared to 2017 Grupo Aval Consolidated Results (2018 vs 2017) | (in Ps billions) | 2018 | 2017 | Change (%) | | :--- | :--- | :--- | :--- | | Net interest income | 10,871.8 | 10,514.1 | 3.4% | | Net impairment loss on financial assets | (3,797.3) | (3,854.9) | (1.5)% | | Net income from sales of goods and services | 2,643.9 | 757.0 | 249.3% | | Other expenses | (9,371.0) | (9,003.1) | 4.1% | | Net income for the year | 5,184.6 | 3,162.4 | 63.9% | | Net income attributable to Owners of the parent | 2,912.7 | 1,962.4 | 48.4% | - The strong performance in 2018 was driven by Colombia's economic recovery, lower interest rates, strong results from non-financial operations, and a favorable tax impact[1136][1141] - Banco de Bogotá's attributable net income increased by 53.9%, largely due to a Ps 956.0 billion increase in other income from PP&E optimizations and equity method investments[1192][1193] - Corficolombiana's net income attributable to owners increased by 121.1%, driven by a Ps 1,886.9 billion increase in gross profit from the construction phases of 4G infrastructure projects[1144]