Q3 2023 Grupo Aval Acciones y Valores SA Earnings Call
Welcome to Grupo Grupo <unk> third quarter 2023 consolidated results conference call. My name is Krista and I will be your operator for today's call Grupo.
Grupo <unk> of all I see on is why valley. Our S. S. A Grupo <unk> is an issuer of securities in Colombia, and in the United States at D. C. As such it is subject to compliance with securities regulation in Colombia, and applicable U S Securities regulation Grupo of all is also.
Subject to the inspection and supervision of the superintendency of finance as holding.
Company of the evolve finance financial conglomerate. The consolidated financial information included in this document is presented in accordance with the Ifr as currently issued by the I a S. B details of the calculations of non I ask our measures.
S. R O a a and R O a E. Among others are explained when required in this report.
Banco de Bogota executed a spinoff of 75% equity stake and B, a Z Holdings International Corp.
H I to its shareholders and Grupo <unk> subset subs sequentially spun off its equity interest in his shareholders on March 29, 2022 on December 19th to 'twenty to 'twenty, two Banco de Bogota sold 28, 9% of the outstanding investment of BHI through.
Tender offer.
As of December 31, 2020 to Banco de Bogota held four point, 11% of BHI. This investment is reflected as an investment at felt at fair value through other comprehensive income following the sale the equity method recognized under the share of profit of <unk>.
Equity accounted Investees net of tax equity method between April and November was reclassified to discontinued operations for comparability purposes of this presentation, we have reclassified BH.
Is equity method for the second and third quarter of 2022, two net income from discontinued operations.
Banco de Bogota as remaining four point, 11% interest M. P. H I. It was disposed of in March 2023.
The report includes forward looking statements in some cases you can identify these forward looking statements by words, such as May will should expect plans anticipates believes estimates predicts potential or continue or the negative of these words and other comparable words.
Actual results and events may differ materially from those anticipated herein as a consequence of change changes in general economic and business conditions changes in interest and currency rates and other risk factors described from time to time in our filings with the register all National Valley or is.
The emission yours and the SEC.
Recipients of this documents are responsible to 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 expressively disclaim any obligation to review update or correct. The 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 its 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 of thousands of millions at this time all participants are in a listen only mode. Later, we will conduct a question and answer session. I will now turn the call over to Mr. Luis Carlos Sarmiento Gutierrez, Chief Executive Officer, Mr. Luis.
Carlos Sarah Mento, Gucci, Chris you may begin.
Good morning, and thank you all for joining our third quarter 2023 conference call.
Before the vehicle provides a detailed look at our numbers I will provide an overview of Columbia's macro scenario and also an update on recent changes at the top of <unk>.
Three of our four Colombian banks and I will finish with some highlights of our financial performance during this quarter and our view for 2024.
Let's start with the macroeconomic scenario.
Central banks around the world high rates to contain inflation. It is the consensus that a maximum level of rates has been reached and therefore, we should see easing monetary policies during 2024.
Before Mr. Pablo from the U S Federal reserve deliver keys assessments of monetary policy in the U S. This past.
It was a market consensus that the U S would be the first developed country to start a path.
In rates, however that changed after Mr Paulo cautioned against Overoptimism and instead declared that the fed would proceed slowly to lower rates and that it wouldn't do so until the.
Evidence existed that inflation was contained and trending towards 2%.
In any case the growth prospects of the U S economy have significantly improved.
Thank you.
This is actually hasn't been stronger than expected despite higher interest rates and the conflict in Ukraine.
On the other hand.
Music economy has delivered disappointing results.
The International Monetary fund anticipates, a still sluggish performance of global economic growth with a projection of 249% in 2024 slightly down from the 3% expected for this year.
This updated forecast incorporates a divergence in growth trajectories, among developed and emerging economies around the world.
In Colombia domestic demand continues to decelerate and how sales dropped sharply as the cost of debt rises and weighs heavily typical family's monthly revenue.
This has negatively impacted economic growth, which only amounted to an adjusted 014 percent in the second quarter and minus 0.3% in the third quarter.
The other hand, social services basically subsidies geared to be elderly population mitigated the softer consumption of goods.
Additionally, while primary activity is in services improved the weakness of manufacturing and construction persistence.
Culture has improved as our Nino has delayed its arrival, especially benefiting coffee crops and oil production has not dropped as much as he was first bought after the government's drastic announcements.
Accordingly, we now anticipate GDP growth of approximately 1% in 2023, and a one 5% to 175% for 2024 <unk>.
Inflation fell less than expected in the third quarter, reaching 11% in the previous 12 months and consequently expectations for annual inflation during 2023 were revised upwards.
Monthly inflation during October came in at zero point, 25% below market consensus of zero point, 36% and broad 12 month inflation to 10, 48% inflation. During the last two months of the year will heavily depend on prices of regulated goods, especially gasoline prices, which are expect.
Two increased 600 business per gallon in November.
Energy tariffs there are highly dependent on the arrival of the El Nino phenomenon and tolls, which are expected to increase 13.25% before year end.
With this in consideration annual inflation will likely in 2023, and the nine 6% area.
We expect that inflation during 2024 will moderate down two 6%.
Regarding interest rates is the trend inflation persists.
The central bank might cut interest rates by 25 basis points in December meeting, bringing the repo rate to 13% in line with inflation, we expect additional repo rate reductions of approximately 500 basis points during 2024, ending the year at approximately 8%.
<unk> data has lagged economic performance and this is evidenced by a favorable trend in the labor market, which continued during the third quarter in fact, despite softer economic data the latest unemployment rates released by Donnie shows that in September unemployment decreased to nine three.
Improving from 10, 7% observed a year before.
However October data indicates that new job creations are slowing down and that dimension lag is fading.
Sequentially, we are anticipating an increase in the unemployment rate to 11% by year end 2023, holding at that same level during 2024.
Obviously, if the economy grows less than expected or in our point of view if Congress approves the proposed labor reform unemployment will be exacerbated.
Regarding the exchange rate, although surrounded by ample volatility the Colombian peso has appreciated approximately 18% during the year in fact.
This week is dropped under 4000 business per dollar one of the primary drivers of the stronger Colombian peso. In addition to the global weakening of the dollar.
Used to be the generalized perception that the most concerning aspects of the health labor pension funds and other reforms are less likely to be approved in Congress, particularly following the recent regional elections, we sold and which mostly members of opposition.
Vehicle bodies were elected governors mayors and city Council members.
Other contributing factors a steep decline in imports, which has decreased the trade balance deficit.
Looking forward the exchange rate will continue to experience heavy volatility influenced by external factors like interest rates in the U S.
We expect that once the central bank initiated its interest rate cut cycle.
The peso could experience some depreciation due to the reduction in the current interest rate differential with the U S.
On the physical front, even though the central government's fiscal deficit for 2023 was revised upward to <unk>.
Four 3% of GDP from the previous estimate of three 8% recent statements from the Ministry of Finance suggests that the final figure should be in proximity to the original estimate.
Contributing to this correction, our first tax collections, which remained robust despite weaker economic activity owing to the effects of the two recent tax reforms secondly, the government's continued plan to reduce the deficit associated with fuel subsidies by raising gasoline.
Prices, including two additional gasoline price hikes announced for November and December and thirdly for better for worse, the inability of government to execute public spending budgets to the tune of approximately 40 trillion business.
However, despite these recent positive developments for 2023, there are several risks to the fiscal outlook for 2024.
Government spending at the central level is projected to increase by 12% in nominal terms.
Reaching 25% of GDP in line with our larger fiscal deficit of four 5% of GDP.
Moving on to some of you might have seen in the news during the last few months three of our four Colombian banks presidents have changed we are very optimistic that these changes will serve towards refreshing corporate strategies, Inc.
And Banco de <unk>, who joined <unk> in 2010 after having served as superintendent of finance assumed as president of the bank during the month of July.
Says that has served in various roles at most recently as president of bundle the Occidental since 2018.
So I said replace Alejandro if you get off who retired after very successfully leading the bank for 35 years as precedent.
Out of the sale of our replaced.
<unk> president of Bunkley oxygen.
Get out of there is a seasoned banker who has held several roles in monthly Aussie NZ since he joined the bank in 1994, most recently as VP of corporate banking since 2014.
And Banco popular but if another slot as recently took over as president of the bank, replacing Carlos who Peggy who resigned during September.
<unk> has over 25 years of experience both in the private and public sectors. Most recently as president of Accenture Columbia.
She had previously served as minister of mines, and energy and also executive VP of strategy and finance at Ecopetrol.
Between 2004 and 2010, she had worked in Grupo awards for beneath where she held various roles and to becoming Chief investment officer.
Now, let's move on to our financial results in the third quarter.
This quarter's lackluster performance fell largely in line with our expectations and last quarter's guidance on key business metrics, such as growth cost of risk banking NIM fee income and contribution from our investments in the nonfinancial sector.
However, we were negatively impacted by an unanticipated downturn in financial markets, which affected our investment portfolio's carried at fair value and our NIM on investments, let's examine some of these.
First growth of our loan portfolio during the quarter rose to one 1%, which compares favorably to GDP growth and far exceeded growth of our peers.
As we set out to do at the beginning of 2023, we have grown our market shares across all loan categories, resulting in a gain of over 50 basis points, both on a year to date and on an annual basis.
We will strive to continue gaining share over the next quarters, while we continue to follow a strict pricing discipline.
Second there are some.
Dissipated in our last call NIM on loans of our banking operations continued to recover this quarter up to approximately 5%. Despite continued pressures in cost of funds in fact, the cost of funds during the quarter was driven by a tightened liquidity market during July August and most of <unk>.
September.
This negatively affected our banks plans to reduce rates paid to wholesale savings accounts and time deposits renewals. However, we maintain our expectation of an improvement in banking NIM during the last quarter of this year as the cost of funds will begin to subside once the government starts to execute budgets here, we get into those.
<unk> currently retained the central bank into the financial system and also once the central bank starts cutting rates.
Notably the superintendency of finance adjusted the weights up two major NSF are factors effective end of month September bringing some relief to liquidity in the system.
Third cost of risk increased to 253% in the third quarter in line with our expectations as the key related unsecured consumer loans growth to higher delinquency and require further impairment charges on a positive note our forecasts of a slowdown.
In past due loan formation materialized, both 30, and 90 day metrics Consequently cost of risk likely peaked during this quarter.
Fourth cost control initiatives deployed throughout the year enabled up four 1% reduction in opex compared to a quarter earlier, despite a seven 2% increase in operating taxes and deposit insurance.
Operating taxes and deposit insurance accounts for 34% of administrative expenses.
We remain focused on achieving further efficiencies.
Fifth the contribution of our infrastructure nonfinancial sector investments remained relatively flat compared to a quarter earlier and was lower than the past explained by projects moving from the construction to the operation space.
Finally regarding our NIM on investments.
This quarter marks the worst quarter since we adopted <unk> back in 2014 because of negative valuations of our portfolio is carried at fair values, resulting from a material deterioration in the fixed income and equity markets coupled with the current high cost of funds are superior.
This investment portfolio has reflected the downturn in peso and dollar denominated Colombian sovereign debt linked to external factors like the federal reserve's increasingly hawkish view and to local factors like the persistence of inflation.
Going forward these portfolios could benefit from a falling interest rate environment.
Finally.
We view 2024, Europe transition and the path to return to our profitability targets sometime in 2025.
We forecast our banking segments profitability will recover driven by higher NIM lower cost of risk and the positive effects of cost control initiatives implemented in 2023.
We expect that the lower risk profile of our loan portfolio will continue to be a competitive advantage relative to our peers throughout the remainder of this challenging cycle.
During 2024, we will continue to build our digital payments ecosystems as our bank's digital clients surpassed 5 million clients.
Clients of our digital wallet daily increase as much as they did during 2023 or approximately $2 million and our digital transactions as a percentage of total transactions continued to register numbers in excess of 65%.
We expect Ford we needed to have a similar performance in 2024 relative to 2023 as the recovery of returns on a tabular station reserves will offset a slowdown in fee income related to a weaker job market compared to 2023.
We understand the importance of undertaking new nonfinancial investments through coffee, Colombia, and therefore, we are in the process of building a pipeline of projects and possible investments both in Colombia, where an infrastructure agenda is still to be well defined by the government and abroad.
We're optimistic as we consider some of our options, but it is still too early to tell whether any of these will materialize into actual opportunities in the meantime, coffee Columbian Anna will remain pressured by high financing costs and by lower income from its current toll roads.
Hi, 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 this year and 2024.
Thank you Carlos.
Beginning on page six.
It's increased 2% during the quarter and four 5% over the year.
You're running year net loans in fixed income investments gained weight, while unconsolidated equity investments decreased their share.
Mix remained relatively stable over the quarter.
Moving to page seven we present the evolution of our loans.
Gross loans increased one 1% during the quarter and six 5% year on year basically eliminated loans increased 1% during the quarter and eight 9% over the year.
Despite tighter or origination policies quarterly and annual growth of our loan book was stronger than that of our peers linked to market share gains in all loan categories, you round the year increasing market shares.
50 basis points for total loans 44 basis points for commercial loans.
<unk> hundred 12 basis points for consumer and 28 basis points for mortgages.
Commercial loans grew 1% over the quarter and seven 2% year on year.
Growth came primarily from working capital loans, while demand for Capex loans continued to be soft.
Consumer loans grew 1% over the quarter and five 2% year on year high interest rates slow economic activity and a softer macro outlook continued to underpin a sluggish performance of consumer loans.
Payroll loans account for 65% of our consumer portfolio, followed by personal loans credit cards, and auto loans that accounts for 24%, 12% and 9% respectively.
Total loans grew one 5% over the quarter, adding 2% year on year great.
Credit cards.
1% quarter on quarter, and 12, 6% year on year, while automobile loans grew <unk>, 5% and three 8% during the same periods.
Personal loans growth decelerated to 1% during the quarter accumulating a steel strong 15, 3% 12 months growth.
Finally, mortgages grew 2% over the quarter and six 8% year on year.
Recovering from a slow first half due to changes introduced by the government to its social housing program we.
We expect loan growth to remain soft across products and segments in line with the central bank policies, and a softer local and global economic outlook.
On pages, eight and nine we present several loan portfolio quality ratios.
Quality of our loan portfolio as measured by stages remained relatively stable over the quarter.
30, <unk> increased to five 3% and 18 basis points deterioration over three months.
Q4 basis points over 12 months.
<unk> 19, Aps were three 8% or 23 basis points deterioration over three months and 56 basis points deterioration over 12 months.
Although still high PDL formation on a 30 day basis improved for the second quarter in a row 19, eight plus pdl's improved as well relative to second quarter PDL formation reflects an improvement in the 30 day horizon in both commercial and retail loans.
During the quarter PDL formation for consumer loans decreased 22% and 11% on the 30 day and 90 day basis, respectively, driven by an improvement in personal loans and credit cards.
Cost of risk net of recoveries was 12, 5% up from two 2% a quarter earlier and one 4% in third quarter 2022, we expect that cost of risk of the current credit cycle has peaked very likely during the quarter. We're now reporting.
Tighter origination policies have shown positive signs in your vintages. In addition, our mix over weighted in payroll lending and underwriting personal loans and credit cards has been protective during this cycle.
Even though milder than our peers, we expect our cost of risk to remain high in the following quarters as the weaker vintages in personal loans and credit cards originated between August 2022.
February 2023 complete their deterioration cycle.
<unk> are fully impaired and ultimately charged offs.
Finally, the ratio of charge offs to average 19 Aps was temporarily low.
Five times, we expect it to increase back to closer to <unk> seven times over the following quarters.
On page 10, we present funding and deposit evolution funding.
Funding grew 7% during the quarter and 5% over the year basically eliminated funding increased one 7% during the quarter and 13, 7% over the year.
<unk> that account for 72% of our funding remained stable over the quarter and grew eight 3% year on year.
Deposits reached 49, 2% of our deposits.
Pressure on cost of funds remained high during the quarter.
From the compounding high Central Bank rates, we've had an unusually high spread between deposits and sovereign rates. The restructuring in this spreads resulted from low liquidity in term funding induced by a low government budget execution and a concentration of time deposit maturities in the system during the quarter.
As an aftershock of the changes to net stable funding ratios.
As mentioned by Luis Carlos pressure on deposit rates subsided towards the second half of September as the Superintendency of finance made some transitory adjustments to the net stable funding ratio our deposit to net loan ratio remained flat at 101%.
On page 11, we present, the evolution of our total and the truth of all equity and the capital adequacy ratio of our banks. Our total equity remained flat over the quarter, while our attributable equity decreased <unk> five.
5%. This was driven by lower net income and and then favorable valuation of fixed income investments health tools OCI at fair value.
All of our banks remained materially at the same tier one and total solvency levels as a quarter earlier.
Although.
This will only be reflected on our following quarterly report I would like to mention that Banco popular strengthened its total solvency during October with the issuance of 250 billion peso 10, nonqualified subordinated local instruments.
On page 12, we present, our yield on loans cost of funds spread and NIM for group and for our banking segment.
Quarterly NIM fell 63 basis points quarter on quarter to two 8%.
Alright and improvement in our NIM on loans that.
The construction of our NIM was driven by a negative new money investments that resulted from four capital markets performance that dragged our subsidiaries investment fixed income portfolio at fair value through P&L and port of any of the sterilization reserves.
NIM on loans continued to improve increasing 16 basis points to four 2% despite.
Despite the pressure on cost of funds. We have described this stable central banking intervention rate allowed our yield on loans to increase 35 basis points during the quarter, while our cost of funds increased 18 basis points.
Pressure on funding continue to lay a deeper improvement in our NIM.
The name of our banking segment contracted 35 basis points to three 9% during the quarter with NIM on loans, expanding two 5% and new money investments falling to negative one 8%.
The name on retail loans off our banking segment continued improving and expanded 25 basis points, the NEMA and commercial launch of our banking segment contracted eight basis points over the quarter as funding costs were temporarily depressed by the liquidity context, we have seen cost of funds come down since the mid October.
Is there concentration of time deposit maturities is mostly over and government budget execution starts to pick up.
This has allowed the spreads between both time deposits and savings relative to sovereign risk to start correcting, particularly in instruments with longer maturities.
Moving to page 13, we present net fees and other income.
Net fee income increased 15, 1% year on year and decreased two 8% quarter on quarter.
Rusty income increased 12, 1% year on year and decreased one 2% quarter on quarter.
Both pension and trust fees decreased over the quarter due to lower performance based management fees driven by negative returns on financial markets.
Banking fees increased one 1% in line with loan growth income from the nonfinancial sector was stable relative to a quarter earlier and the bottom of the page quarter on quarter variation of other operating income is mainly explained by a higher income from derivatives and FX gains related to our financial operations, partially offsetting.
The negative impact of fair value of investments in fixed income in a NIM on investments.
In addition, our banks and subsidiaries carried out property plant and equipment optimization plans that resulted in income recorded under other income on page 14, we present, some efficiency ratios on comparable basis.
Cost to assets of two 7% improved 11 basis points relative to a quarter earlier and remained flat year on year, incorporating the results of our group wide cost containment efforts.
Cost to income increased to 54, 8% over the quarter driven by the sluggish performance of our investment portfolio at fair value.
Quarterly expenses fell four 1% quarter on quarter and grew six 9% year on year.
Administrative expenses decreased seven 2% quarter on quarter and increased seven 2% year on year.
Administrative expenses have impressed by a 44% year on year, increasing operating taxes, particularly of industry and commerce stacks that accounts for 31% of quarterly administrative expenses.
In addition deposit insurance cost increased 20% now accounting for 13% of our quarterly administrative expense.
Ex base 10.2 percentage points and two four percentage points of your administrative expenses year on year growth.
The remaining administrative expenses categories.
Tracked at eight 3% year on year, and 16, 3% quarter on quarter on aggregate.
Personnel expenses fell three 9% over the quarter and grew three 4% year on year, well below the 16% increase in minimum wage in Colombia.
Finally on page 15, we present, our net income and profitability ratios.
Total net income for the quarter was 65 billion pesos or two seven pesos per share bringing year to date attributable net income to 656 billion or 27 six pesos per share.
Return on average assets and our return on average equity for the quarter were 4%, one 6%, respectively, bringing year to date annualized return on average assets and retain on average equity to <unk>, 8% and five 3% respectively.
Before moving into questions and answers I will now summarize our general guidance for 2023 and 2024.
Our guidance for 2023 remains relatively the same as on our last call except for an update on NIM due to this quarter's performance on investments and a slight increase in cost of risk. We now expect 2023 consolidated NIM to be in the three 3% area with consolidated NIM on loans.
And the 4% area. This builds on the NIM on all of our banking operation in the four 2% area with NIM on loans in the 5% diary.
We now expect our cost of risk net of recoveries to be in the two 1% area there.
The rest of our previous guidance for 2023 remains the same loan growth in the 4.5% to 5% range with commercial loans growing in the five 5% to 6% range and retail loans growing in the 3% to 4% range cost to assets in the two and three quarters area.
Income from the nonfinancial sector of 60% of that for 2022 and fee income ratio in the 20% to 25% area. As a result, we now expect our 2023 return on average equity to be aimed at 5% area.
Regarding 2024, we are expecting loan growth in the 10, 5% area with commercial loans growing around nine 5% in retail loans growing around 12% NIM in the four 1% that was the NIM on loans in the 5% area.
Meanwhile, for the banking segment.
In the four 8% area with NIM on loans in the five 5% area.
Cost of risk net of recoveries in the 2% diarrhea.
Two assets in the two 7% area.
Income from the nonfinancial sector up 60% of that for 2023.
Our fee income ratio in the 20% to 25% area with 19% for our banking segment and finally, we expect our 2020 for return on average equity to be in the eight 5% to 9% 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 one on your Touchtone phone if you wish to be removed from the queue again press star one.
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 one on your Touchtone phone, what pause for a moment to compile the Q&A roster.
And we have no questions at this time, Mr. Luis Carlos Sarmiento Gutierrez I turn the call back over to you.
Yeah.
Alright, Thank you Chris.
I think maybe this time around us as Diego settlements presentation our guidance.
For good or bad, but our guidance was right on and.
Besides that well as we all know.
The country has now entered into a path.
Shrinkage and hopefully we'll be able to compensate that in right and right on the coat tails of the economic recovery.
Other than that we're working very very hard.
Putting together a Europe recovery a transition year for 2024 as we also said.
So hopefully it will be.
Delivering newest in accordance with our with our strategy and we will be happy to share everything with you as we always do and we will be.
As.
Timely with our with our presentations and accurate as a result, as we have always been and therefore will meet everybody again and when we.
Come up with our results for the 2023 and hopefully we'll have good news as 2024 begins I. Thank you all for joining the call and we'll see you next time.
Thank you ladies and gentlemen. This concludes today's conference. Thank you for participating and you may now disconnect.
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