Grupo Aval Acciones y Valores S.A. ADR (Each representing 20 preferred shares)

Welcome to Grupo Aval's Second Quarter 2019 Consolidated Results Conference Call. My name is Hilda, and I will be your operator for today's call. Grupo Aval Acciones y Valores S.A., Grupo Aval, is an issuer of securities in Colombia and in the United States. Registered with the Colombia's National Registry of Shares and Issuers, Registro Nacional de Valores y Emisores, and the United States Securities and Exchange Commission, SEC. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation. All of our banking subsidiaries, Banco de Bogota, Banco de Occidente, Banco Popular, and Banco Avevillas, Porvenir, and Corfi Colombiana, are subject to inspection and supervision as financial institutions by the Superintendency of Finance. Grupo Aval is now also subject to the inspection and supervision of the Superintendency of Finance as a result of Law 1870 of 2017, also known as the Law of Financial Conglomerates, which came in effect on February 6, 2019. Grupo Aval, as the holding company of its financial conglomerate, is responsible for the compliance with capital adequacy requirements, corporate governance standards, risk management, and internal control and criteria for identifying, managing, and revealing conflicts of interest applicable to its 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 ROA and RAE, among others, are explained when required in this report. Grupo Aval has adopted IFRS 16 retrospectively from January 1, 2019, but has not restated comparatives for the 2018 reporting period. as permitted under the specific transitional provisions in the standard. The reclassifications and adjustments arising from the new leasing rules are therefore recognized in the open and condensed consolidated statement of financial position on January 1, 2019. Consequently, quarterly results for 2019 are not fully comparable to previous periods. IFRS 16 introduced a single on-balance sheet accounting model for lessees. As a result, Grupo Aval, as a lessee, has recognized right of use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. Lesser accounting remains similar to previous accounting policies. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicit in the lease, if that rate can be determined. or the group's incremental borrowing rate. 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, believes, 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 the information provided in this report, including any forward-looking statements, and do not intend to provide any update for such material development 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. 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. Sarmiento Gutierrez, you may begin.

Thank you, Hilda. Good morning, and thank you for joining us in our second quarter 2019 conference call. Once again, it is my pleasure to share with you our strong financial results for the quarter that ended on June 30. As in previous calls, I will cover the following subjects, an overview of our macro scenario, highlights of our results, and a brief update regarding the legal processes of Ruta del Sol. Colombia's economy, where 70% of our business resides, grew at 3% during the first half of 2019. Seasonally adjusted GDP growth during the first quarter was revised from 2.3% to 2.7%, or 3.1% unadjusted. And seasonally adjusted growth during the second quarter came in at 3.4%, or 3% unadjusted. Notably, during the second quarter, several sectors grew faster than the average economic growth, including retail, financial services, communications, and professional services. Lagging sectors included construction, industry and oil, and mining. These sectors are traditionally the main generators of jobs. Consequently, low growth in these sectors is in part responsible for the deterioration of our unemployment rate, which is currently averaging 10.1%. As I've mentioned before, We believe that two other significant factors contributing to the current unemployment level are the inflow of Venezuelan migrants with legal work permits and the consistent minimum wage increases in excess of inflation. Our current view on growth is still somewhat more conservative than the government's. We believe the GDP will grow between three and three and a quarter percent for the year. We further believe that unemployment will only start to improve once the construction and industry sectors pick up momentum. Commercial loan demand uses a proxy to detect acceleration in the growth of these sectors does not yet point in that direction. The latest inflation number of 3.79% for the 12 months ending in July represented the largest increment in monthly data of 12-month inflation since December 2017. This number also comes closer to the 4% cap of the central bank's acceptable range. However, the two drivers that fueled such pickup lead us to believe that inflation will correct downward and will then close to 3.5% for 2019. The first driver that accelerated inflation was food prices, mainly due to a short-lived El Nino weather phenomenon. Secondly, inflation for July 2018 was atypically low, and thus the base for comparison magnified the effect of July's number on the overall measurement. Data also suggests that there is still a moderate pass-through of the recent devaluation of the currency associated with more costly imports when converted to Colombian pesos. Consequently, the central bank is sort of on a tough spot On the one hand, it needs to make sure that inflation expectations remain controlled, and that might lead it in the direction of tightening monetary policy, especially if it feels that the exchange rate is affecting internal prices in a material way. But on the other hand, it also knows that the economy's recovery is still sluggish, and as such, an early tightening cycle could be harmful. As of now, We believe that the central bank will continue with a stable interest rate throughout the remainder of 2019. Even if inflation stays at current levels, it is difficult to envision more than one 25 basis point hike in the remainder of the year. Current account deficit is still an issue. Internal demand growth continues to boost the importation of goods, while devaluation of the peso has not been a clear promoter of more and diverse exports. Latest figures show that while imports are growing close to 10% year on year, exports are flat. Government is pushing for a better use of the signed free trade agreement and for strengthening of our tourism, but the reality is that our trade partners are not doing great, that international markets are not strong, and that tourism, despite growing, is far from contributing significantly to shrinking the current account gap. Finally, on the fiscal front, we still believe that this year's deficit will be in line with the fiscal rule requirement of 2.7%. Consequently, we do not see probable the government's own estimation of a 2.4 deficit for 2019. The reasons for our assertion are that, first, GDP growth will probably fall short of the government's estimation of close to 3.5% included in the medium-term fiscal plan. And secondly, the peso is weaker than anticipated, which has resulted in an increase in debt service in pesos, and the increase in income from oil revenues has not offset this debt service increase. As we have said before, a decoupling has occurred between FX and the price of oil. The exchange rate is more associated to a global deceleration and a flight to quality reaction. If this situation continues, The government might be forced to cut spending even more or even to privatize a portion of its assets, an idea that has started to make some public waves. The exchange rate is up to 3,400 pesos per dollar, and it seems that this is the new norm. Several pressures are in play. The strongest driver in our view continues to be a widening trade deficit. Additionally, as of August, Dollar flows into fixed-income local currency portfolios had decreased by 25% as compared to 2018 from $1.2 billion to $900 million. These pressures have been somewhat mitigated by an increase in remittances, which have grown by approximately $900 million in the last year and by a 21% increase as of July in structural foreign direct investment. Central America's growth has slightly decelerated. Although we still believe that the region's economy will grow upwards of 3% during 2019, the reality is that this growth is closely linked to the performance of the U.S. GDP, and as the U.S. economy slows down, so does Central America's. However, the macroeconomic fundamentals and the strength of our business in Central America continue to prove our strategy of sustainable results based on diversification. To highlight a few of this quarter's numbers, our attributable net income for the quarter was 813 billion pesos or 36.5 pesos per share, an increase of 19.3% versus 2018 second quarter results of 681.5 billion pesos or 30.6 pesos per share. And our return on average equity for the quarter rose to 18.3%. Our results were mainly driven by Loan portfolio growth, just shy of our 8% estimation for the year, but very profitable in nature, with faster growth in our retail portfolio than in our commercial portfolio. Net interest margin of approximately 6%, driven by a disciplined loan pricing strategy, controlled costs of funds, and better yields from our fixed income portfolios. Overall cost of risk approaching 2%, resulting from an improvement in our consumer portfolio's cost of risk partially offset by a deterioration of our commercial portfolio's cost of risk. Cost of risk will increase in the remainder of the year as our banks fully provision our remaining exposure in Ruta del Sol. Strong net income growing significantly faster than our loan portfolio due to solid banking and pension fund fees. Sustained contribution from our non-financial sector during the quarter, which as you are all aware, mainly comes from our operation in Corfe Colombiana. Continued focus on efficiency, resulting in controlled operating expenses in general, and specifically in slow growth of personal expenses, even below the minimum wage increase. Strong balance sheet, as reflected by our deposit to loan, liquidity, and tangible equity ratios. Diego will refer to each of these points in a few minutes. On the digitalization front, we continue to work at digitalizing products and processes in order to become more productive, but also to access segments of the population that were unbankable to us in the past. We expect to launch DALI, or FinTech, in the next couple of months. DALI is an ecosystem that will allow clients and non-clients to conduct P2P, P2C, and C2P money transfers at zero cost in one click. We share the government's goal to decrease the use of cash, and we also want to increase banking penetration. We will share with you more details of DALE in our next call. Regarding ongoing legal matters related to Ruta del Sol, in the last few weeks, two proceedings have advanced. On the one hand, the Arbitration Tribunal ruled on August 6th and then confirmed its ruling on August 16th after declining to respond to multiple requests for clarifications from all the parties involved. First, and as expected, the Ruta del Sol contract was declared null. Importantly, this part of the ruling allowed the tribunal to base its calculation of the liquidation value of the contract on law 1882 of 2018 and had no other implication as the project was reversed to the government almost two years ago. The tribunal ruled that on top of the payments that have been made to employees, suppliers, and banks since the contract ended in February 2017, which add up to approximately 1.5 trillion pesos, the government should pay an additional 211 billion pesos to CRDS's creditors, among which the banking system is owed approximately 1.2 trillion pesos. We have been studying very closely and in painful detail the text of the 700-page ruling and have several issues as to how the judges apply the law to reach the liquidation value number. We don't know what all the parts affected by this ruling are going to do in terms of looking for legal recourses, but we will consider all the avenues supported by the law. Since the final resolution might take some time, we foresee that our banks will have to provision their current exposure to CRDS before this year ends. In our case, as of June 30, we had a net exposure of 380 billion pesos equivalent to 23 basis points of our current average loan portfolio. We estimate in 170 billion pesos, the impact after taxes of this edition of provision expense on our own attributable net income or about 5% of our yearly results. The other front that showed some advances was the antitrust process at the Superintendence of Industry and Commerce, the SIC. As part of this proceeding, all the parties to this investigation had officially requested that the SIC included certain documents and call certain witnesses to support the investigation. In a recent decision, the SIC granted most of these requests. That investigation continues and we will report of any material advances once they occur. We have no further information regarding Ruta El Sol legal proceedings. To end, allow me to summarize our microeconomic guidance for 2019. GDP growth between three and three and a quarter percent. Inflation around three and a half percent with an upward bias due to the pass-through effect of the devaluation. Unemployment not improving. Exchange rate of around 3,400 pesos per dollar for the remainder of the year. Fiscal deficit on target for this year at 2.7%. Next year, the government will have to face the decision of either cutting costs or disposing of some assets. On the current account front, the vulnerability will persist until we find a strong source of alternative exports or reduced imports. And growth in Central America upwards of 3%. And now I'll pass the presentation on to Diego who will explain in further detail our business results.

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS and wrap up with our guidance for 2019. As mentioned by Luis Carlos, the second quarter of 2019 was a strong quarter for Grupo Aval due to an improvement in loan dynamics during the quarter, particularly in Colombia. stronger net interest margin on loans and a solid performance of our fixed income portfolio, robust fee income during the quarter, mainly attributable to pension fund management and banking fees, a sustained contribution of our non-financial sector, and strict cost control discipline. Starting on page nine, assets grew 12.8% over the year and 2.5% during the quarter. Colombian assets increased 12.7% over the last 12 months and 3% during the quarter, driven by net loans, cash, and intangibles and financial assets from our concessions and right-of-use assets. In spite of an annual and quarterly contraction of 19.5 and 1.6% of the Nicaraguan assets, Central America delivered 3.5 and 0.2% 12-month and 3-month growth in dollar terms. Moving to page 10, Loans including repos grew 6.5% over the year and 1.3% during the quarter. Loan dynamics in Colombia continued trending positively, while growth in Central America remained underpinned by the dynamics of Nicaragua. Our Colombian corporate loan portfolio increased 0.9% over the quarter and 0.8% over the year. Commercial peso-denominated loans grew 0.9%, the second consecutive positive quarter figure since first quarter 2018, following three consecutive quarters of contraction. Strong growth of our Colombian retail portfolios continued to compensate the soft dynamics of our corporate portfolio. Colombian consumer and mortgage businesses expanded 9.9% and 16.3% respectively over the 12 months. Quarterly growths were 2% and 3.4% respectively. Central American operations, excluding Nicaragua, expanded 4.4% in dollar terms for the year. Nicaragua, which weighs approximately 6% of our Central American loans, contracted by 27.7%. On pages 11 and 12, we present several loan portfolio quality ratios. 30 days PEL showed a slight deterioration during the quarter. Slow growth continues to affect PDL ratios in commercial loan portfolios in Colombia. We recorded an 18 basis points increase in 30 days commercial PDLs and 27 basis points in 90 days PDLs in the quarter in Colombia. In Central America, 30 days and 90 days commercial PDLs remained relatively stable, both during the quarter, with 30 days PDLs increasing seven basis points and 90 days PDLs stable. We continued reducing the burden of the three corporate cases coverage for Ruta El Sol closed June at 47%. We expect to provision the remainder of Ruta El Sol during the rest of the year. Our coverage for SITP companies stands at 40% during the quarter. A slight increase in delinquency ratio of our consumer loan portfolio was driven by Central America. In Colombia, the improving trend in delinquency of consumer loans persisted, with 38 PDLs falling nine basis points during the quarter to 5%, accumulating a reduction of close to one percentile point since the peak in first quarter 2018. Ninety-eight PDLs remained stable at 3% relative to first quarter 2019 and were 51 basis points lower than a year earlier. In Central America, 30 days PDLs consumer loans increased 34 basis points to 4.8%, while 90 days PDLs increased 11 basis points to 2%, both compared to a year earlier. Our PDL for mortgages increased during the quarter driven by Central America. Despite of that, the quality of our mortgage portfolio continues to be substantially better than the market average. Cost of risk was 2.2% with a quarterly increase of 20 basis points driven by Colombian commercial loans with stability in Central America and an improvement in the Colombian consumer portfolio. PEL coverage for 90 days PELs was 1.53 times. On page 13, we present funding and deposits evolution. Funding dynamics were consistent with the strengthening of our balance sheet as we position ourselves for upcoming growth. Funding structure remain materially stable with deposits representing three quarters of our total funding and our deposits to net loans ratio reaching one. Our liquidity position continues to be strong with our cash to deposit ratios at 18.0%. Deposits increased 1.7% in the quarter and 9.2% over the last 12 months. Colombia increased 1.2% and Central America grew 1.8% in dollar terms respectively during the quarter. For a 12-month period, Colombia grew at 7.4%, while Central America grew at 3.9% in dollar terms. On page 14, we present the evolution of our total capitalization, our retrieval shareholder's equity, and the capital adequacy ratio of our banks. Our total and retrieval equity increased during the quarter in line with net income. Total equity increased by 1.6 trillion pesos, while our total equity increased by 926 billion pesos. As of second quarter 2019, our banks show appropriate Tier 1 and total solvency ratios to enable adequate growth. On page 15, we present our yield on loans, cost of funds, spreads, and net interest margin. Our net interest margin increased 14 basis points, mainly driven by a stronger net interest margin on loans in Central America. Our net interest margin on investments continues to be solid. As anticipated, pricing on consumer loans in Colombia became more aggressive during the quarter due to improvement in quality. We continue to expect some pressure on net interest margin on consumer loans as growth increases the share of newly priced loans in our mix. On page 16, we present net fees and other income. Grossly income dynamics was particularly strong during the quarter. Pension funds management fees posted strong results coming from fees charged on return basis. Gross fees increased 8.7 in Colombia and 1.4% in dollar terms in Central America compared to second quarter 2018. Our non-financial sector continues to deliver strong results and remain relatively stable over the quarter with better results from our energy and gas sector and a slight decline in income from infrastructure explained by slower progress in construction due to weather conditions. Our other operating income was substantially at the same level as in the previous quarter. Seasonal decrease in dividend income was offset by a 41 billion pesos income from Banco de Bogotá's one-time change in five-year benefit plans for non-unionized employees with a 24 billion pesos effect on Aval's attributable income. On page 17, we present some efficiency ratios. Year-to-date, other expenses grew 5.7% relative to a year earlier. Total other expenses grew 0.7% in Colombia and 2.4% in Central America in dollar terms during this period. Year-to-date personal expenses increased 4.1%. Year-to-date administrative expenses increased 0.5%. And when adding IFRS 16 related depreciation and administration to administrative expenses, the figure was 7.0%. Improvement in year-to-date efficiency measured as cost-to-income resulted from tightening expenses, a higher net interest margin, and higher income from our non-financial sector. Finally, on page 18, we present our net income and profitability ratios. Actual net income for second quarter 2019 was 813 billion pesos or 36 pesos per share. Return on average assets and return on average equity for the quarter were 2.1% and 18.3% respectively. Before moving into questions and answers, I will now summarize our general guidance on financial performance. We expect loan growth to be in the 8% area in 2019. We expect our cost of risk net of recoveries to be in the 2.3% area in 2019, incorporating fully provisioning Ruta El Sol by year end. We expect full year net interest margin to be in the 5.7% area. Finally, we expect return on average equity to be in the 16% area during the year. We now are available for your questions.