Q1 2023 Grupo Aval Acciones y Valores SA Earnings Call
Speaker 1: scenario where inflation has been resilient and only started to subside in April and consequently the central bank applied another 25 basis points increase to its repo rate.
Speaker 1: However, because inflation and GDP growth have been in line with the central bank's estimates, this last rate increase should be the last one. And depending on inflation for the remainder of the year, we should start to see slight rate decreases.
Speaker 1: Additionally, banks' costs of funds continued to rise, but it finally shown signs of tapering off.
Speaker 1: Although GDP grew 3% in the quarter compared to the same quarter last year, it is the consensus of economic analysts that this will be the highest growth quarter of 2023, especially because those sectors that were pushing economic growth will not contribute much.
Speaker 1: during the remainder of 2023.
Speaker 1: With what I just mentioned as background, I will provide a slightly more in-depth overview of Columbia's macro scenario. I will then give a quick update of our digital efforts and will end with an overview of our financial performance during the quarter.
Speaker 1: So moving on to the macro environment, although monetary policies have started to slightly thwart inflation in the major economies globally, the outlook for the world economy has not changed much.
Speaker 1: Even though it is expected that most central banks are close to the end of this contractionary monetary cycle, policy continues to be restrictive and economies are growing moderately.
Speaker 1: Because the outlook for some regions of the world have slightly improved in recent months, in its latest forecast review, the International Monetary Fund expects that global growth will bottom out at 2.8% in 2023, before rising modestly to 3% in 2024.
Speaker 1: Among better performing economies, China is showing signs of a strong rebound, while business activity in Europe remains surprisingly resilient to the energy shock caused by the war in Ukraine.
Speaker 1: strong numbers, but the Fed has warned against thinking that the monetary policy is ready to be changed.
Speaker 1: Additionally, we'll have to see what new banking regulations are deployed as a result of the recent bank failures and how those might affect the U.S. economy.
Speaker 1: In Colombia, high frequency data suggests that private consumption is already cooling off due to high interest rates and persistent inflation. Sales of new houses fell around 50% in annual terms during the first two months of the year, while purchases of new vehicles declined 19% in April .
Speaker 1: The first quarter's growth of 3% when compared to the same quarter last year is expected to be the highest growing quarter in 2023, as I said before.
Speaker 1: We therefore expect 2023 GDP growth to be in the 1 to 1.5% area.
Consumer prices registered a monthly variation of 0.78% in April and caused the first slowdown in the rising inflation trend which started two years ago.
As a result, annual inflation decreased to 12.82% in April from 13.34% in March.
Food prices were the main driver for the inflation slowdown as production was supported by a reduction on input costs, particularly fertilizers, and more benign weather.
Over the next few months, the trend in inflation should continue in part due to weaker domestic demand. However, the annual CPI figure is likely to remain relatively high due to the 16% increase in minimum wages. Rent prices will continue to adjust index.
to last year's inflation and further increases in domestic gasoline prices.
In fact, recently the central bank revised its forecast for annual inflation at the end of the year from 8.7% to 9.5%.
We concur with the central bank's view and expect inflation to reach 9.5% in 2023. Because of inflation expectations, the central bank continued its tightening policy and in April raised its repo rate by 25 basis points to 13.25%.
However, if inflation and growth estimates continue to fall within the central bank's guidelines, it is likely that the central bank will maintain rates for the next few months with the possibility of monetary easing before the end of 2023.
In fact, we are expecting the interest rate cuts will begin in the last quarter, reaching 11 to 11.5% by year end.
March, labor market numbers were better than expected.
According to the latest figures published by Danny, the number of jobs increased to 22.8 million in March, which implies 1.1 million more jobs than the number reported last year.
46% of these jobs originated in the 13 main cities and metropolitan areas.
From the supply side, 11 out of the 13 reported sectors reported an increase in their payrolls. Job creation was particularly strong in professional activities, hospitality industry and food services, and public administration and defense, which together contributed 58% of the positions.
Going forward, however, it is likely that as business activity decelerates, we will see weaker job numbers during the upcoming months.
We expect average unemployment to deteriorate to 11.5% to 12.5% in 2023.
Regarding the exchange rate, the peso continues to trade with high volatility, and during the last few weeks it has fluctuated in the 4400 to 4700 pesos per dollar range.
Markets are not only concerned about the prospects of interest rates and economic growth in the US, which could obviously affect the peso given Colombia's dependence on external financing, but also about local developments, particularly the ongoing reform agenda, in particular the health and labour reforms which have been presented to Congress in the past.
and the pension reform which is now expected to be discussed during the next legislature.
We expect the approval or disapproval of the reforms or the final drafts approved by Congress will have a direct impact on foreign exchange.
In any case, market consensus suggests that the country could end the year with a current account deficit of around 4.5% of GDP, which is likely to prevent the peso from appreciating to its pre-pandemic levels.
Finally, on the fiscal front, the fiscal deficit for 2022 was revised down to 5.3% of GDP.
It is also good news that GDP growth drove the index of net public debt to GDP to fall to 59.6% in 2022, down from 60.8% in 2021.
The new Finance Minister Ricardo Bonilla has restated the government's commitment to complying with the fiscal rule.
and to reducing the deficit of the Fuel Prices Stabilization Fund by closing the gap between the external and domestic gasoline prices, which is a much needed action to alleviate the Co-Petrol's balance sheet and the strong pressure on the fiscal accounts derived from current subsidies of gasoline prices.
On the negative side, higher gasoline prices will impact inflation.
This year's fiscal deficit is expected to comply with the fiscal rule and to close to around 4% of GDP.
And now some salient facts related to the digital transformation of our banks during this first quarter.
We have now reached 70% of digital adoption of our well-regarded mobile banking platforms.
Our banks sold more than 600,000 digital products during the first quarter of 2023, an increase of 23.2% versus first quarter 2022. Credit card loans related to cards sold through digital channels already represent more than 600,000 digital products.
than 26% of the group's total credit card loan balance.
And additionally, 65% of the growth in the total credit card loan portfolio is associated with credit cards sold through those digital channels.
Digital transactions represented 62% of total transactions and increased by 7.3% in the first quarter of 2023 versus the first quarter of 2022.
In the same period, transactions conducted at our branches decreased approximately 11.1%.
Our digital wallet, Dali, continues to ramp up its client base and is now approaching 1,150,000 active clients.
We have concluded development of DALY 2.0 and will launch the app in the next few weeks for friends and family testing.
DALE 2.0 substantially improves its capability and user experience.
We are also weeks away from migrating to a new core system for DALI, which will improve scalability, accelerate rate of innovation, and ensure system uptime.
And now turning to about financial results, this is a general overview.
As expected, Bank of the Bughu-Thang Bank of the Uxiente, Awal's larger banks,
both of which specialize in commercial lending, continue to do well in this high-rate scenario as they reprice their mostly variable rate loan portfolios despite the increase in their costs of funds.
On the other hand, Banco Pular and Banco Abbeville, which specialize in payroll loans and general consumer loans respectively, will continue to struggle as their mostly fixed rate portfolios take longer to reprice and their margins continue to be squeezed.
because of sharply rising costs of funds.
However, lately and mostly because the banking system in general has expanded its deposit base and lengthened its duration to comply with new Basel III liquidity requirements, we have started to see an ease in deposit rates which should immediately benefit costs of funds.
Additionally, we have taken steps towards reducing the overall cost basis of those banks and will start to see the benefits of those measures once the costs to enact them are amortized throughout this year.
If our views are correct, further relief will flow through our P&Ls as the central bank stops its rate hikes, and more so when it starts cutting rates later this year.
On the other hand, growth will be harder to come by, and credit quality deterioration, particularly in consumer loan portfolios, is a concern.
In fact, we have seen deterioration in unsecured consumer loans generated during late 2022. And even though the profile of our loan mix mitigates the impact on our banks relative to our peers, we are closely monitoring the PDL's formation.
Our aim is to start increasing our total banking NIM, net of cost of risk, in the following quarters.
In the meantime, we will continue to rely on our pension fund administrator and on our non-financial sector investments to complement our earnings as they handsomely did during this first quarter.
I thank you for your attention and now I'll pass on the presentation to Diego, who will explain in detail our business results and provide guidance for 2023. Thank you so much.
and now I'll pass on the presentation to Diego, who will explain in detail our business results and provide guidance for 2023. Thank you so much. Thank you, Ms. Carlos.
Beginning on page six.
Assets grew 1.1% during the quarter and 14.5% over the year.
Over the quarter, our mix increased in cash and decreased in net loans.
Moving to page 7, we present the evolution of our loans. Those loans grew 1.2% during the quarter and 16.6% over the year.
higher interest rates, the slow down in economic activity, and a lower macro outlook drove the software quarterly growth. In addition, since the fourth quarter of last year, our banks have reduced their appetite for riskier consumer products.
Commercial load growth reached 1.3% over the quarter and 16.6% over 12 months.
Consumer loans grew 1.3% over the quarter and 15.8% year-on-year.
Federal loans are our largest consumer lending product with 55.4% of the total, followed by personal loans and credit cards with 23.2% and 12% respectively.
Auto loans represent 9% for consuming books. Payroll loans grew 0.2% over the quarter, adding 8.1% over 12 months.
4.1% year on year.
credit cards and automobile loans grew to 0.4% and 0.3% over the quarter, taking animal growths to 21.2% and 19.3% respectively.
Finally, mortgages grew 0.8% over the quarter and 20.1% year on year.
Loan growth is expected to remain soft across products and segments in line with the central bank's policy and softer local and global economic outlook.
On pages 8 and 9, we present several loan portfolio quality ratios.
However, PDL metrics, particularly on the 30-day horizon, started to deteriorate, consistent with a substantial increase in interest rates and a weaker macro environment.
Our overall mix by stages had divergent performances across low categories.
levels in all loan categories.
Regarding delinquencies, 30 day PDLs increased to 4.86%, 31 basis points deterioration over 12 months and 51 basis points over three months. 90 day PDLs was 3.45% and eight basis points improvement over 12 months.
and pointy oasis points deterioration relative to last quarter. TEL formation increased during the quarter.
Regarding 38 TL formation, 54% of the quarterly increase is explained by commercial loans and 46% by retail loans.
The increase in 98 PDLs is explained 70% by personal loans and 24% by credit cards.
Cost of risk net of recoveries was relatively stable at 1.7 percent relative to first quarter 2022 and deteriorated 26 basis points versus a quarter earlier, driven by consumer lending. We expect our loan mix, under weighted in personal loans and credit cards and over weighted in parallel lending.
to be protected through this credit cycle. However, even though milder than our peers, we expect pressures and cost of risk to affect our results over the following quarters. Finally, the ratio of charge-offs to average 98 PELs was 0.54 times.
On page 10, we present Funding and Deposit Evolution.
Funding grew 1.2% during the quarter. This behavior for the period was determined by the adjustments in funding required by our banks to comply with a more demanding net stable funding ratio, effective starting on March.
In order to prepare for this transition, our banks experience particularly high growths in time deposits. As I'll further explain when we refer to margins, this process heated up prices, temporarily distorting the relationship between the cost of funds in the system and the sovereign debt rate.
Our banks are now positioning their balance sheets to benefit from a lower interest rate environment in line with our projections of the central bank reference rates. As of first quarter, 2023, 77% of our time deposits are due in less than one year and 24% have floating rates.
Deposits now account for 72% of our funding, increasing 2.9% quarter on quarter and 16.8% year on year.
Time deposits grew 17.8% during the quarter and are now the largest component of our funding.
As a result, our deposits to net loans ratio increased to 100%.
On page 11, we present the evolution of our total and attributable equity and the capital-equity ratio of our banks.
Changes in equity during the quarter reflect dividends declared by Group A walls with shareholders and by our subsidiaries to minority shareholders.
Our total equity decreased 1.9% over the quarter and increased 2.1% year on year. Our attribute total equity decreased 1.8% over the quarter and 0.3% year on year.
Banks normally report their lowest levels of core equity to one and total sovereignty ratios at the end of first quarter given that dividends are normally declared during that period.
In addition, this quarter was negatively impacted by a step up in risk-weighted assets associated with operational risk transition to Basal III.
On page 12 we present our Yield and Loans Cost of Funds Spread and NIM on Comparable
As we have mentioned on previous calls, our consolidated NIM is negatively impacted by the NIM of CortiCo's non-financial companies.
The nature of Corticol's main subsidiaries is infrastructure, gas transportation and distribution, hospitality and agro-industries. These companies mainly take long-term funding to finance their operating activities that over time is recognized mainly under income from the non-financial sector.
In addition, our consolidated NIMAN investment incorporates results of mark-to-market investments held by Porvenir under mandatory stabilization reserves and its proprietary investment.
These are mainly funded with equity. With this in mind, we have included on this call the key indicators of financial intermediation activity from our banks banking segments only.
We believe it facilitates a better understanding of our financial intermediation activity and improves the comparability of our results with those of our peers that do not have substantial non-financial or pension fund management activities.
During the quarter, Colombia's central bank increased its reference rate by 100 basis points from 12% to 13% in an effort to contain infrastriatory pressure.
An additional 25 basis points increase in April raised the intervention rate to 13.25%, which could be the end of the current cycle according to market consensus.
Additional 25 basis points increase in April raised the intervention rate to 13.25%, which could be the end of the current cycle according to market consensus. As mentioned on our last poll,
an exceptional pressure on demand for time deposits in order to comply with the net stable funding ratio requirements built up throughout the banking system. This pressure raised the spread between time deposits and the Colombian sovereign debt close to 450 basis points above historical level.
This unprecedented level had receded to 60 ACEs points by the beginning of April . The impact of this overshoot in funding costs will linger for a few quarters while these time deposits expire.
In this environment, the cost of funds of our banking segment rose to 8.5%, an increase of 155 basis points during the quarter and 573 basis points compared to first quarter 2022.
The magnitude and speed of the increase in the central bank intervention rate coupled with the distortion in rates induced by the changes in net stable funding requirements is altered in a contraction of the NIMA loans of our banking segment to 4.5% materially below historic levels.
Even though our loans substantially reprised up 108 basis points during the quarter and 461 basis points relative to first quarter 2022, this fell behind the increasing cost of funds.
This environment mainly affected the margin of our retail loans given their predominant 6th rate nature. In addition, given the abnormal temporary pricing of time deposits, commercial loans suffered as well during the quarter despite their predominant floating rate nature.
Neman Retail Loans contracted 89 basis points while Neman Commercial Loans contracted 11 basis points over the quarter.
We expect this compression to start receding during the second half of this year as the temporary distortion in time deposit pricing dilutes and the central bank intervention rate cycle changes.
This will allow the pricing of our low portfolios to continue catching up with cost of funds. Favoring this quarter's performance, the Neman investments of our banking segment was 3.3%, benefiting from a downward shift of the yield curve that improved the performance of mark-to-mark.
market portfolios.
Orbeznir's portfolio had a strong performance under this environment. On page 13 we present net fees and other income on comparable basis.
Roughly income increased 9.6% quarter and quarter and 9% year on year. Net fee income increased 12.3% quarter and quarter and 18.6% year on year.
Pension fees and fund management fees increased over the quarter due to higher performance-based fees. Over the year pension fund management fees continued to be negatively impacted by higher insurance premiums associated with increased mortality rates consequence of the pandemic.
Income from the non-financial sector remains strong given a positive quarter in infrastructure. At the bottom of the page, the quarterly increase in other operating income is mainly explained by seasonality of the events received by our subsidiaries and a higher net gains on OCI realization. These were partially offset by lower derivatives and FX gains.
position. Given the prevailing interest rate differentials between US dollar and the Colombian peso, this change in structure implied a net cost of managing this exposure to derivatives. Thank you. This is a question for the panel. We will now move to the next question.
On page 14, we present some efficiency ratios on comparable basis.
Cost to assets of 2.8 includes quarter and quarter, incorporating some initial results of our cost containment efforts.
Our cost to income improved to 46.7% over the quarter, driven by the results from our non-financial sector, and deteriorated relative to first quarter 2022, mainly due to a contraction in that interest margin.
quarterly expenses decreased 1.1% quarter-on-quarter and increased 23.7% year-on-year.
admin expenses growth has been pressed by a 49.1% year-on-year increase in operating taxes, particularly the industry and commerce tax, and strong increases in deposit insurance costs associated with higher liquidity. This explains 11.9 and 3.1% admin expenses growth respectively.
In addition, further pressure and admin expenses growth came from the 16% minimum wage increase, that's 13.1% 2022 inflation, that's 23.7% 2022 depreciation of a combined PESQ.
Personal expenses increased 13.7% below the 16% increase in minimum wage in Colombia.
Finally, on page 15, we present our Net Income and Profitability Ratios as reported.
A tribute to old net income for the quarter was 425 billion pesos or 17.9 pesos per share. Return on average assets and return on average equity for the quarter were 1.4% and 10.4% respected.
Before we move into questions and answers, I will now summarize our general guidance for 2023.
We expect loan growth to be in the 7% to 8% range, with commercial loans growing in the 8% to 9% range and retail loans in the 6% to 8% range.
We expect our cost of risk net up recoveries to be in the 1.6 to 1.7 percent
We expect full year NIM of our banking operations to be in the 4.5% area with NIM on notes between 5% and 5.25%.
We expect full year consolidated NIM to be in the 3.75% area with NIM unknowns in the 4.5% area. We expect our cost to be in the 2.6% area.
We expect our fee income ratio to be in the 20% area with an 18% for our banking segment. Finally, we expect our full year reported return on average equity to be in the 10 and a half percent range.
We are now open for questions and answers.
Thank you. We will now begin the question and answer session. If you have a question, please press star, then the number one on your telephone keypad. If you wish to be removed from the queue, please press star one again. If you are using a speakerphone, you may need to pick up the handset first before pressing the numbers.
Once again, if you have a question please press star then 1 on your touchtone phone. Your first question is from Juan Recald of Scotiabank. Please go ahead. Your line is open. Hello. Good morning and thank you for taking my question. My first question is related to the non-financial sector income which was particularly strong in energy and...
energy and gas and also infrastructure. So my question is how sustainable are these levels and how do you see these lines going forward? Way up there, right?
And for memory, I believe that the threshold for the rating agencies to make more differences between the HOLC and the OPCO in terms of ratings would be 120%. So you would be about at level. And I wanted to ask if you're considering any actions to reduce double leverage.
at the holding company, and if there are any plans to buy back some of your 2030 bonds as they are trading in the 70s. And then the second question, a few other Colombian banks have mentioned in the first quarter in the school, some pressures on net interest margins specifically coming besides higher interest rates, but also coming from the implementation of the.
you're right we're targeting to get back into 120. Getting back into 120 incorporates a couple things. One is a build up of equity through net income and the other part that could affect the double leverage is we have
and 81 that has its full period coming in a couple years. So these kinds of events should help us speed up the process of getting back into 120, but you're absolutely right, we target 120 and we believe we can get there in the short or medium term.
Regarding buying back bonds, we look into those kinds of opportunities. However, you have to bear in mind that the liquidity of those bonds is quite slim. So if at any time we decide to try to buy back any substantial amount, we will make that information public.
And then finally to your question on the net stable funding ratio, you're absolutely on the spot. It has distorted the cost of funds in a very substantial way. There's two sorts of distortions. One was a short-term distortion that came from building up unusual prices, particularly of time deposits.
through last quarter of last year and first quarter of this year. I mentioned it on the call, it went up to around 450 basis points this portion in the price of time deposits. And it also forced us to increase the percentage of time deposits in our deposit mix.
Deposits are roughly 70% of our total funding and time deposits used to be around one-third of our mix of deposits and it grew up to short of 50%. So you can imagine that overpriced time deposits that became heavier in the mix.
are a big explanation of what we've been looking into in our net interest margin. Then the second piece of your question, or you didn't ask, but the second effect of the net stable funding is what will be a permanent shift in the curve, and it has to do with...
how we're able to continue adjusting our mix of funding to try to reduce excess time deposits in the mix. However, there's been a shift in the percentage of time deposits. The last piece is this adds up to the steepest increase in central bank rate that we've seen in many years, decades.
it might be the right approximation. So it compounded increasing the cost of fund and that's what you've been seeing in the system. So trying to look forward has a couple implications. The first one, the distortion of these outrageously expensive time deposits is already fading away.
So there's a dispersion of around 50 basis points at this point, 50 to 100 basis points, depending on the width you look at. But this should continue receding to something that is more in line with central bank rate. And then the other piece is being able to catch up or to reprise up.
our loan portfolio to World Costa Fund has reprised, stripping out this, I would say temporary effect of the more stringent net stable funding rate.
Your next question is from Daniel Mora of Credit Corp. Capital. Please go ahead. Your line is open.
Hi, good morning and thank you for the presentation. I have three questions if I may. The first one is regarding asset quality indicators. I would like to know for you what do you expect to be the, when do you expect to be the peak in asset quality deterioration given the increase in NPLs that we have been
color of what will be the performance of each bank of about in the coming quarters. We have the performance of V that's unpopular but also of Bogota and Occidente. We're gonna see different performances in the coming quarters. And the third one is
regarding profitability, what do you expect to be the long-term target profitability and what are the key indicators to reach to that figure in terms of margins, cost of risk, long growth. Thank you so much.
Okay, that's it.
That's several questions. So regarding quality, when should we pick? We are expecting this to happen either during this current quarter, second quarter, or into next quarter. That is consistent with our expectation of GDP growth of one to one and a half percent.
So regarding the Part B of your question, will this affect 2024, it is very much related to what happens with GDP growth in the remainder of this year. To put in context why we think that these quarters could be those where we're picking in.
A lot of what we're seeing going sour has to do with vintages that were given out, particularly of personal loans, August through roughly October last year. So a lot of that has already entered the cycle of 30 days and passing to 90 days in this process. So that's the reason why we believe this to be a short-lived cycle if the economy behaves as expected. I think gun
Then regarding current coverage, once we move into IFRS in 2015, we don't really think about coverage as a target. It's rather the way mechanically you have to provision for different stages of loans and then inside stages you also have
different probabilities of expected losses. So the coverage mainly reflects the profile of the loans that you have in each one of the banks. So banks that have shorter maturities and a short-term income that is more than likely at the bank. So that's the coverage that you have in each one of the banks. So the coverage mainly reflects the profile of the loans that you have in each one of the banks.
unless expected loss ends up with lower coverages. Then moving into margins of banks, we do not have that guidance handy. I can give you more of a conceptual view of what to expect. When you look into the banks that are more retail oriented, more present in...
Retail products that are fixed rate, those are taking a much stronger hit of the cost of funds cycle. So you're on the spot, those are popular and indigenous.
that conflicts with what happens with the more commercial lending banks such as Banco de Oota and Banco de Occidente. Those banks will recover much faster because they're hurt at this time with what I mentioned regarding the very high time deposit.
that we had to pay to adjust to the net stable funding ratio, but they have a substantial floating rate portfolio that benefits from higher rates. So those are like the two different markets of banks that we have. They also ask for profitability in the long term.
We're basically expecting to go back to 15%. Going back to 15% takes basically two things into account. Number one, to see margins approaching, not necessarily meeting pre-cycle levels.
What we're looking into is around the 200 basis points distortion at this point, and we expect to see that recovering in the following quarters. The other indicator that also plays there is, as you are asking your first question to see the quality of the portfolio.
basically going back to more normal levels around next year. There are no further questions at this time. I will now turn the call over to Mr. Sormento for closing remarks.
Thank you so much Errol, and thank you all for attending the call. We have an interesting year in front of us, we'll be very watchful of all the reforms that are being passed in Congress. That will probably have a direct effect on the banking business and the pension fund business.
and other businesses outside the banking world that up but they do have consequences for the banking world such as a health reform. On the other hand we are optimistic with inflation having peaked and with central bank rates having peaked and as Diego was saying that should immediately start relieving