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

Welcome to Grupo Aval's third quarter 2019 consolidated results conference call. My name is Sylvia and I'll be operating for today's call. Grupo Aval, Acciones y Valores DSA, Grupo Aval is an issuer of securities in Colombia and in the United States, registered with Colombia's National Registry of Shares and Issuers, Registro Nacional de Valores y Mesores, 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 bank subsidiaries, Banco de Bogota, Banco de Occidente, Banco Popular, and Banco Abrevillas, Borbidín, and Corfe 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 Law of Financial Conglomerates, which came into effect on February 6, 2019. Grupo Aval, as the holding company of his financial conglomerate, is responsible for the compliance with capital equity fee requirements, corporate governance standards, risk management, and internal control and criteria for identifying, managing, and revealing conflicts of interest applicable to his financial conglomerate. The consolidated financial information included in this document is presented in accordance with the IFRS as currently issued by the IASB. Details of the calculations of the non-GAAP measures such as ROAA and ROAE among others are explained when required in this report. Grupo VAR has adopted IFRS 16 retrospectively from January 1, 2019 but has not restated comparatives for the 2019 reporting period as permitted under the specific transitional provisions in the standards. The reclassifications and adjustments arising from the new leasing rules are therefore recognized in the opening condensed consolidated statement of financial position on January 1, 2019. Consequently, quarterly results of 2019 are not fully comparable to previous periods. IFRS 16 introduces single on-balance state accounting model for leases. As a result, Grupo Valdez's leases has recognized wide-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligations to make lease payments. Lesser accounting remains similar to previous accounting policies. Assets and liability deriving from a lease are initially measured on a present value basis. The lease payments are discounted using the interest rate implicated 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, and predicts, potential or continue, or the negative of these other comparable words. Actual results and investments may differ materially from those anticipated herein as consequence of exchanges 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, Invisores, and the SEC. Recipients of this document are responsible for the assessment and the use of the information provided herein. Matters described in this presentation and our knowledge of them may change intensively and materially over time, but we expressly disclaim any obligations to review, update, or correct information provided in this report, including any forward-looking statements and do not intend to provide any update for such material developments prior to our next earnings report. The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. When applicable in this document, we refer to billions as thousands of millions. 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 Sarmiento Gutierrez, you may begin.

Good morning, CBM. Thank you. Apologize in advance because I'm getting rid of a cold, so I'm all stuffed up. But here we go. Good morning, all, and thank you for joining us in our third quarter 2019 conference call. Once again, it is my pleasure to share with you our strong financial results for the quarter that ended on September 30. Today, I will cover the following subjects, an overview of the country's macro scenario, highlights of our results, an update regarding the legal processes of Ruta del Sol, and also our recent announcement of the agreement to acquire a multifinancial group holding up multibanks in Panama. Let's start with a macro scenario. Colombia's economy, where almost 70% of our consolidated business resides, continues its path of acceleration despite a worldwide broad-based economic growth slowdown. In fact, as all of you already know, GDP growth during the third quarter accelerated to 3.3%, the strongest quarter in the last four years, and higher than the 3% average of the first half of this year. This result was mainly driven by stronger private consumption and investment, from the demand side, while driven by commerce and financial services from the supply side. In fact, sectors such as commerce, financial services, and professional services grew at a stronger pace than average GDP, while sectors such as construction, industry, oil, and mining, and communications grew at a slower pace. The biggest drag on the economy continues to be the country's trade deficit amid weak exports and robust imports. All in all, we continue to expect that GDP will grow 3.2% during the year. Assuming a slowdown in government spending next year, a slow recovery in the trade deficit, but sustained private consumption and growth contribution from infrastructure, we forecast a slight improvement in GDP growth to 3.3% in 2020. Employment continues to be soft, with unemployment currently averaging 10.4%. As mentioned in previous calls, we believe that this indicator is being impacted by the notorious inflow of Venezuelan immigrants and the consistent minimum wage increases in excess of inflation. Unemployment numbers will only start to improve as the labor-intensive sectors of the economy gain momentum. As such, we currently expect a slight and only a slight improvement in unemployment for next year. Twelve-month inflation continues to push towards the 4% upper limit of the central bank's closing at 3.86% in October as compared to last year's inflation of 3.2%. However, the pickup in core inflation has been moderate, while food prices have accounted for approximately 90% of the increase. Also, contributing to the acceleration in inflation is a pass-through of the devaluation of the currency, resulting in more costly imports when nominated in Colombian pesos. we expect inflation for 2019 to be 3.8%. Food prices should somewhat ease in 2020 and thus we expect inflation to return to the 3.5% area next year. Despite higher inflation pressures, due to the yet to consolidate economic recovery and the worldwide trend of monetary policy easing, We believe that the central bank will continue with a stable repo rate of four and a quarter throughout the remainder of 2019 and most, if not all, of 2020. As I briefly mentioned before, current account deficit continues to be one of the major vulnerabilities of Colombia's economy. Despite a significant increase in foreign direct investment during 2019, Colombia's internal demand growth continues to push for the importation of more expensive goods while weakening external economies and lower oil prices have precluded an increase in exports and export revenues at a similar pace. Finally, on the fiscal front, tax revenues for a year have been a positive surprise, thus increasing the probability that the government will meet its expectation of achieving a lower fiscal deficit than the 2.7% demanded by the fiscal rule target. However, bidding 2020's targets of 2.3% will pose a bigger challenge due to the recent revocation by Columbia's Constitutional Court of the December 2018 financing law. I must note that the effects of this law were not revoked for 2019, except for the surcharge income tax of 4% that the law imposed on the financial sector. The biggest challenge for the government arises from the need to get a new or the same law approved by Congress during the remainder of this year to take effect on January 1st, 2020. This was a quarter of high volatility in the exchange rate ranging between 3,170 and 3,480 pesos per dollar and recently averaging in the 3,400 pesos per dollar area. The devaluation of the Colombian peso has been driven by a strengthening of the U.S. dollar globally and a higher risk perception for emerging economies. Given the current economic indicators, we expect the exchange rate to hover around 3400 and 3500 pesos per dollar for the remainder of the year and for 2020. Moving on to Central America, our growth outlook continues to be positive. We expect that the region's economy will grow slightly less than 3% during 2019 and closer to 3% in 2020. A contributor to the region's slow growth is Nicaragua, whose economy is expected to continue contracting as much as 5% in 2019 and to not grow during 2020. On the other hand, we were pleasantly surprised by the appointment of the new finance minister, Rodrigo Chavez, in Costa Rica after the resignation of the previous minister. Mr. Chavez is currently a high-ranking official of the World Bank in Asia, and according to his first public statement, his mandate points towards austerity in public spending and macroeconomic stability. It is believed that he will continue to work on solving Costa Rica's pronounced fiscal deficit. Moving on to our financial highlights. To highlight a few of our figures, our attributable net income for the quarter was 743 billion pesos, or 33.4 pesos per share. Excluding provisions for CRDS, this number approximated 891 billion pesos for the quarter, or 40 pesos per share. Unadjusted accumulated attributable net income for the nine months ended September 30 was 2.3 trillion pesos, showing an increase of 12.5% versus the same period in 2018. Return on average equity for the quarter was approximately 16% and approximately 19% when excluding the mentioned provision for CRDS. Our unadjusted cumulative return on average equity for the year is 17%. Our loan portfolio grew strongly close to 11% year on year and 5% in the quarter with a distinct pickup in the commercial portfolio. Our net interest margin for the quarter was 5.7%, in line with our expectations, as a result of a 6.4% NIM on loans and 2.3% NIM on investments. As expected, our cost of risk, excluding CRDS provisions, was 1.8% for the quarter and 2.5% if unadjusted. Cumulative cost of risk for the first three quarters was 2.2% and 1.9% excluding provisions for CRDS. Our net fee income for the nine months ended September 30 increased by 12% when compared with the same period in 2018. Almost 14% increase versus the same quarter in 2018. and remain stable versus the previous quarter due mainly to strong banking and pension fund fees. Corfi Colombiana's non-financial sector investments continue to contribute during the quarter, and thus income from non-financial investments increased 10% versus the previous quarter. Personnel, including severance costs and SG&A expenses, grew by 6.2% for the nine months ended September 2019 versus the same period in 2018. Allowances for pass-through loans more than 90 days at 153%, our deposit-to-loan ratio at one times, liquidity at approximately 16%, and tangible equity at 8.9%, all of this as of September 30, 2019, complemented the balance sheet strength. Diego will refer later to each of these points in a few minutes. With regards to digitalization, Our digitalizing efforts continue to show results as evidenced by figures such as the following. In Colombia, digital sales in the third quarter represented 40% of our total retail sales, up from 23% in the last quarter of 2018, 28% in the first quarter of 2019, and 31% in the second quarter of 2019. We now have close to 2 million digital customers in our Colombian banks, increasing 13% in the last 12 months. In Central America, 40% of the transactions are done through digital channels, and we now have in excess of 1.3 million digital customers. Moving on to legal matters. Regarding ongoing legal matters related to Ruta del Sol, I will briefly share with you an update on the most relevant development since our last call. The main development is related to the Tribunal Administrativo de Cundinamarca, or TAC, where last December a class action suit was ruled in first instance against CRDS, its shareholders including Episol, and other individuals and entities not related to Avalor, its affiliates, jointly and severally, to pay damages to the nation for approximately 715 billion pesos. A subsequent appeal to this ruling was granted by the TAC on February 2019, and the effects of the ruling were suspended until the appeal is decided by a higher court, in this case, the Consejo de Estado. On October 24, 2019, the Consejo de Estado, which has not yet ruled on the appeal, modified the suspended effects of the appeal. Immediately, the lawyers of all the parties involved submitted legal requests to get that decision overturned. We're still waiting to hear the court's decision regarding those requests. However, if the decision is upheld, The first instance ruling will become immediately effective with respect to the ineligibility of the defendants to contract with the Colombian government for a term of 10 years. The ruling should only affect contracts held directly by EPISOL and not by any of its affiliates. In that respect, EPISOL has never directly contracted with the government. Just as importantly, the eventual payment of damages by the defendants will only become effective in the case that the appeal against the first instance decision is lost. On other fronts, in the antitrust investigation, during the last three months, the Superintendency of Industry and Commerce, SEEK, has conducted hearings to ratify previous testimonies and has formally interviewed new witnesses. In the Arbitration Tribunal, Nearly a dozen appeals were filed for the annulment of the arbitration ruling. Among those filing appeals were episodes and our banking subsidiaries. Recurring reasons to justify the appeals included gross arithmetic errors, lack of competence of the tribunal to decide over certain matters, and decisions of the tribunal not based on the applicable legal statutes. The Consejo de Estado will hear the appeal and reach a final decision, which could take several months. Moving on to our acquisition. On October 31st, we announced that Banco de Bogota, through one of its holding on affiliates, had entered into an agreement to acquire MFG Holdings of Multibank Panama. This transaction represents an important step in strengthening our presence in Central America. In fact, we will become the second largest player in terms of assets in Panama with a market share of almost 11%. Just as important, this transaction is highly complementary to our own operation in Panama as it expands our customer base and expands also our product offering and capabilities, particularly in the commercial and corporate segments. As of June 30, 2019, MFG had consolidated assets of approximately $5 billion and total shareholders' equity of $560 million. In the last 12 months, end of June 30, 2019, MSG's income amounted to approximately $60 million. The price offered, which may be adjusted as a result of certain events, represents 1.3 times its total shareholders' equity. Through this acquisition, we will add to our consolidated balance sheet approximately $3.5 billion in loans and approximately $3 billion in deposits. In Central America, as of June 30, 2019, we held, through BAC Credomatic, $16 billion in loans and $16 billion in deposits. After this transaction, 13 of our total consolidated loan exposure will be in Panama and 35% in Central America. The transaction is expected to close in the second quarter of 2020 after the required regulatory approval processes are completed. And with that, I'll pass this to Diego, who will explain in 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 and 2020. Third quarter 2019 was a strong quarter for Grupo Aval when taking into account that we recorded 148 billion pesos impact on the triple net income of Ruta del Sol's provisions. The solid performance was driven by a strong pickup of our loan dynamics during the quarter in Colombia and Central America, in particular that of our corporate portfolio. Improving cost of risk aside of Ruta del Sol loan. Solid performance of our fixed income portfolio and at the same contribution from our non-financial sector investments. Starting on page nine, assets grew 13.4% over the year and 3.5% during the quarter. Colombian assets grew by 9.8% over the year and 1.2% during the quarter, driven by cash, net loans, and intangibles and financial assets from our concessions and right-of-use assets. In spite of our annual and quarterly contraction of 14.8% and 4.4% of Nicaraguan assets, Central America delivered a 4.5% and 0.5% 12-month and 3-month growth in dollar terms. Moving to page 10, loans excluding repos grew 10.8% over the year and increased 5% during the quarter. Loan dynamics in Colombia posted solid growths, and Central America picked up from the lackluster activity evidenced throughout the first half of the year. As anticipated, the Colombian corporate loan portfolio growth accelerated to 2.6% over the quarter and 4% over the year. The Colombian retail portfolios posted strong growths with consumer and mortgage businesses expanding 9.8% and 15.7% respectively over the 12 months. Quarterly growths were 2.2% and 3.8% respectively. Our Central American operations, excluding Nicaragua, expanded 5.9% in dollar terms over the year and 2.6% during the quarter. Nicaragua, which weighs approximately 5% of our Central American loans, contracted 26.7% and 5.6% during the quarter. On pages 11 and 12, we present several loan portfolio quality ratios. Over all 30 and 90 days, PDLs remain relatively stable. Commercial loan portfolios showed a mild deterioration during the quarter. We recorded a 13 basis points increase in 30-days commercial PDLs and 12 basis points in 90-days PDLs in Colombia. In Central America, 30-day and 90-day commercial PDLs showed some deterioration with 30-days PDLs increasing seven basis points and a 90-day 11 basis points. Mentioned by Luis Carlos, we substantially increased our provision for Ruta del Sol this quarter, recording 295 billion pesos provision expense, reaching an 86% coverage. We expect to fully provision the remaining 102 billion pesos of Ruta del Sol during the fourth quarter of 2019. Our coverage for SIPP companies stood at 40% at end of quarter. Delinquency ratios for consumer loans continued improving during the quarter. In Colombia, the improving trend in delinquency of consumer loans persisted, with 30 days past due loans falling 30 basis points to 4.9%, accumulating a reduction of 112 basis points since peak in first quarter 2018. Ninety days past due loans improved two basis points to 3% relative to second quarter 2019, and were 36 basis points lower than a year earlier. In Central America, 38 PDLs for consumer loans increased five basis points to 4.9, while 98 PDLs increased eight basis points to 2.1. Our mortgage PDLs increased during the quarter driven by Central America. Both 30 and 98 new PDL formations improved in both geographies when excluding FX movements. Our new 38 past year loan formation in absence of FX movements was 1.2 trillion pesos during the quarter, 122 billion pesos lower than the previous period. Our cost of risk was 2.5%, with a quarterly increase of 26 basis points driven by commercial loans in Colombia, stability in Central America, and improvement in Colombian consumer loans. The Ruta del Sol provision accounted for 68 basis points of cost of risk during the quarter. PDL coverage for 90-day PDLs was stable at 1.53 points. On page 13, we present funding and deposit evolution. Funding dynamics were consistent with loan growth. Our funding structure remained materially stable with deposits representing 76% of total funding, and our deposits to net loan ratio stable at 1 times. Our liquidity position continues to be strong with cash-to-deposit ratio at 16%. Deposits increased 4.8% in the quarter and 13.6% over the last 12 months. During the quarter, Colombia grew at 2.3% and Central America grew at 2% in dollar terms. The 12-month period, Colombia grew at 9% while Central America grew 6.6% in dollar terms. On page 14, we present the evolution of our total capitalization, our shareholder's equity, and the capital and equity ratio of our banks. Our total and our total equity increased during the quarter, mainly driven by our net income. Our total equity increased by 1 trillion pesos, while our total equity increased by 1.8 trillion pesos. OCI also contributed to our equity during the quarter. As of third quarter 2019, our banks show appropriate tier one and total sovereignty ratios. On page 15, we present our yield on loans, cost of funds, spread, and net interest margins. Our net interest margin increased 17 basis points to 5.7%, mainly driven by a tighter net interest margin and loans in Colombia. Our name and investments continue to be particularly strong at 2.3%. As anticipated, pricing in Colombia became more aggressive during the quarter due to the improvement in consumer loan quality and a better outlook of the corporate portfolio resulting from stronger GDP. We continue to expect some pressure on our minimum loans as growth increases and the share of newly-priced loans enters our mix. On page 16, we present net fees and other income. Gross fee income grew 13.7% when compared to a year earlier and was slightly higher than that of a particularly strong second quarter. Roski increased 10.1% in Colombia and 5.7% in dollar terms in Central America compared to first quarter 2018. In addition, our non-financial sector continues to be a strong contributor to our income, adding 10% more than in the previous quarter. Finally, our other operating income was particularly strong this quarter as our banks realized gains on fixed income investments, taking advantage of the current interest rate environment. On page 17, we present some efficiency ratios. Year-to-date personnel and general and administrative expenses increased 6.3%, with a 2.1% increase in Colombia and a 1.2% increase in Central America in dollar terms. FX fluctuations explain the remainder of this graph. Year-to-date personnel expenses increased 6.8%, with 2.1% increase in Colombia, affected by termination expenses. and a 1.2% increase in Central America in dollar terms. Year-to-date, general and administrative expenses increased 5.9%. When adding IFRS 16-related depreciation and amortization to administrative expenses, this figure was 7.9% in Colombia and 8.2% in Central America in dollar terms. Certain non-recurrent expenses increased our Colombian expenses while Central America incorporated the introduction of VAT and services in Costa Rica and a temporary increase in marketing expenses. Non-recurrent events that affected our expenses in this quarter include, first, a 63 billion pesos non-income tax expense reported as a general administrative expense was incurred in order to raise the fiscal cost of certain fixed assets, which will enable us to sell them in the future with a lower income tax expense. This charge was offset by deferred income tax recoveries of 99 billion pesos, resulting in a 29 billion pesos positive net effect and an attributable net income. Second, we recorded 18 billion pesos of termination expenses in Banco Popular. Year-to-date, total other expenses that include personnel, general and administrative depreciation and amortization and other expenses grew 9.6% relative to a year earlier. Total expenses grew 5% in Colombia and 4.8% in Central America in dollar terms during this period. FX fluctuations explain the remainder of this graph. Finally, on page 18, we present our net income and profitability ratios. True net income for the third quarter 2019 was 743 billion pesos or 33 pesos per share. Year to date, the true net income was 2,319 billion pesos or 104 pesos per share. Return on average equity and return on average assets for the quarter were 15.8% and 2% respectively. This incorporates 314 basis points of negative impact of brutal soil provisions and return on average equity. Before we move into questions and answers, I will now summarize our general guidance for the remainder of 2019 and for 2020. We expect low growth to be in the 9% area in 2019 and picking up to 10 to 12% in 2020. We expect our cost of risk net of recoveries to be in the 2.2% area in 2019, falling to 1.9% area in 2020. We expect fully net interest margin to be in the 5.7% area in 2019, contracting to 5.6% in 2020. Finally, we expect a return on average equity to be in the 16.25% area in 2019 and in the 15.75% area in the 2020 year. Now I will open it to questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star then 1 on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If 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 touch-tone phone. And our first question comes from Jason Mullen from Scotiabank.

Hi. Hello, everyone. My first question is related to the recent announcement of the acquisition of Multibank Panama. You talked about the strategic rationale for doing this. Can you give us some color on what financing options Aval is considering and potential implications for capital at Aval and or subsidiaries such as Banco de Bogota? And my second question is on the outlook for provisions you mentioned. guidance for cost of risk in the 1.9% range. You know, should we be considering provisions for retail sold, something of the past now, and are there any other specific cases that we should be aware of that could come up in the upcoming quarters? Thank you.

Sure, Jason. Thank you. Regarding your first, I'll take the multi-bank question, and Diego can take the provisions question. Regarding multi-bank, Well, the good news is that we are now sure that we won't need any new capital or capital influxes to pay for the bank. And we are considering several types of funding options, Jason. We really have a whole array of options available to us, including maybe upstreaming some dividends from BAC to its holding company, Leasing Bobotapanama, which is the company that we've selected to buy the bank. And BAC has already been preparing for that event. It just did an issue of credit card receivables and where it just that issue alone would pay for the bank at about 2.7% after tax cost of funds. So as I said, we are considering several alternatives. We will probably put together a package of funding and obviously we'll do it in a way that the acquisition is accretive for our share and for bank level with that.

Regarding the provisions, I didn't highlight it during the presentation, but I need to point out that we actually reduced our guidance for this year of cost of risk from 2.3 to 2.2%, including fully provisioning Ruta del Sol. At this point, the larger cases that we have been discussing over the past couple years are pretty much done with. Electricaribe, many quarters ago. Ruta and Sol will be done by year end. And then SITP, the one we needed to provision, we already provisioned. And by the way, as of October, we have already written up. The other companies, SITP are performing actually much better than expected. Therefore, we are not for seeing more provisions there. In 2020, I think there's two sorts of provisions. Some are good to have and some are bad to have. The good to have are those that are related to growth and the bad to have are the bad case. At this point, we feel that we're moving into more of the first kind of provisions related to growth rather than expecting negative surprises. That applies for Colombia and also for Central America, where the traveling countries are all improving as we have highlighted before.

Thank you very much. Very helpful, both of you.

Our next question comes from Gabriel Nobrega from Citibank.

Hi, everyone. Thank you for the opportunity to ask me questions. So my first question is actually a follow-up on the MFG agreement of acquisition. When we look at the numbers from the Panamean superintendents, we actually see that the profitability of this bank has been reducing over the past few years. So if you could just give us a bit more color on what are your strategies for increasing the ROE of this bank once again. And now for my second question, it's actually on your MIM guidance. I see that you are expecting a MIM contraction of around 10 deeps in 2020. I just wanted to understand if this is the fruit of maybe higher competition or if it's still going to be fruit from the higher and faster growth of time deposits which have actually been pressuring your own funding costs? Thank you.

I'm willing to take your first one. I'll be happy to do that, but I missed a part of it. I'm sorry if you would. Just mention again, what have you said has been reducing over the last few years in MFG? I'm sorry, I didn't catch that.

Yes, sorry. DMROE of the bank has been reducing over the past few years.

Okay, I'm sorry. All right, fine. Well, listen, yeah, the bank has grown very fast, and there's probably some contraction of margins, and some additional expenses. Actually, we have a nice planning place to do a good work on ROE, specifically through very important synergies in the running of the bank in conjunction with our Shared Services Center in Costa Rica, out of which we run the six banks in Central America. We will be putting that plan in place quickly, and I think that over the next 12 months, we'll see very significant improvements in efficiency in the acquired bank. Also, we should be able to extend to the bank some of our cost of funding better rates and also some of the treasury that we do in our own banks, we should be able to extend to the new bank. And all in all, we expect that after obviously going through some acquisition expenses as we implement all these new changes, it'll come out being a much, much more robust bank.

Now, regarding net interest margin contraction, It's a combination of a few things. The first one is more of an arithmetic effect of the changes we have already seen throughout this quarter on net interest margins. As you pointed out, part of that is related to higher competition, higher competition that is related to stronger growth and a better outlook for the quality of the portfolio. So in our net interest margin, we're including that as an effect that will add up to what happens next year on the Neiman Loans side. On the other hand, the net interest margin on investments has also been quite strong throughout this year. This is related to the overall interest rate environment that we've seen globally, and we believe that part of that will not continue until next year. We should migrate to slightly lower, more similar to historical average net interest margin on investments.

Perfectly clear. Thank you so much.

Our next question comes from , from Credit Corp.

Hi. Thank you for the question. I had a couple of questions. I wanted to know more about the MPO ratio of Central America. If you could give me more details on that because we saw an increase and an important increase in the NPL ratio of Central America. And if you could explain me a bit more on the episode case, I got a bit lost over this. Thank you.

Okay, let me take the first one regarding NPLs in Central America. You're right, in the past we had experienced some NPLs, particularly in two countries that we have highlighted in the past calls. One is Nicaragua and the other one was Costa Rica. both for very different reasons. In the case of Nicaragua, this was a political unrest that disrupted how the country was performing. And in the case of Costa Rica, we had a high or still have high fiscal deficit, but actions were taken. What we see is changing trends in both countries. In the case of Nicaragua, even though it's not yet over, the cycle has started to improve. The contraction has started to accelerate, and we've seen an improvement in some of the segments of our business there that should impact an improvement in TDLs. And the Costa Rican side, we've seen some positive events there. The fiscal reform, even though not enough to solve long-term the fiscal deficit problem in Costa Rica, has reduced pressure and rates throughout the country. And then we see as a very positive evolution the new Minister of Finance who's at least at this point verbally pointing in exactly what the right actions should be. Therefore, this cycle that we've seen in Central America, we are quite positive on how it should be evolving into the future.

Okay, and let me try to give you a very quick response Is it all possible regarding your second question? Some time ago, the Procuraduría General of Colombia brought up a class action suit against about 20 or 20-something defendants all related to the CRDS scandal. That class action suit was ruled against those defendants in first instance by the Tribunal Administrativo de Cundinamarca where it was being considered. The ruling had two effects. One, it declared or ruled that the dependents had to pay 715 billion pesos, about $200 million, to the government, to the nation. And secondly, it declared that those dependents themselves, they personally, those who lost the lawsuit, could not contract with the government for the next 10 years. The ruling was appealed and it's being heard by the Consejo de Estado. The first feedback that we got regarding the appeal was that two effects of the appeal were suspended up until the Consejo de Estado ruled on the appeal itself. And just recently, One of the judges who is considering the case issued a statement saying that regarding the two effects of the first instance ruling, one of the effects, that which precluded the defendants from contracting with the government for the next 10 years, was to be immediately put in effect. That in itself has a lot of contradictions and we have appealed that statement. But what I was saying was that in case that the statement stood and that in fact the defendants could not contract with the government for the next 10 years, The highlight that I was making of EPISOL was that EPISOL itself, which is one of the defendants, has never contracted with the government and has no intentions of contracting with the government. The entity that contracted with the government was Concesionaria Ruta del Sol, in which EPISOL was, as you know, minority shareholders. So all that I was saying is, obviously, we are appealing the decision but it will in fact have no effect regarding EpiSol itself.

Our next question comes from Sebastian Gallego from Credit Corp Capital.

Hi, good morning everyone. Thanks for the opportunity. I have two questions. The first one, can you provide a bit more color on growth expectations within the Central American operation? And the second question is related to OPEX. Can you just provide further explanation on growth on OPEX, excluding the FX? And what is your guidance for OPEX growth going forward?

Regarding growth, We've seen Central America picking up over the past quarter. As mentioned, this has happened in the corporate segment, and it has also happened broadly throughout the region except Nicaragua. In the case of Nicaragua, the changes, the contraction is happening at a much lower pace. Part of what we will be working throughout next year at some point is the integration of MFGs that will provide us some inorganic growth there and in the rest of the countries also working on organic growth as we usually do. Regarding expenses, I need to say we were not that happy with our expense performance during the quarter. And action has been taken, particularly in Central America, where some of the expenses could become recurrent to adjust them down. And work is being done throughout the region to attend that area. Colombia has been performing pretty well. As mentioned in the past, it's been a combination of discipline plus some of the results from the digital strategy that are helping us contain costs. What we expect to see into next year is cost growth in the order of 6%, 5% to 6%. That should be short of what we're pointing out for asset growth and for loan growth. Therefore, we should see some improvement in that front.

Our next question comes from Carlos Rodriguez from Otra Servinco.

Good morning, everyone. Thank you for the conference call. I have two questions. The first one is could you give us more detail on the increase of the trading asset in the balance sheet and if this trend will continue in the coming quarters? And my second question is just a follow-up on the OPEX. If you could share with us your medium and long-term target in efficiency in Central America and in Colombia, how much you can push the efficiency in Colombia? Thank you.

I'm not sure I got your question right for the first one. I believe you were referring to the trends in assets, trading assets, I'm sorry. Regarding the trading assets, What we saw this year was a particularly healthy return on the portfolio. Part of the reason why we're guiding into a slightly shorter return on equity for next year compared to this year is we do not see these kind of returns being maintained for the long term. We do expect to see positive results on the trading side, however, not as solid as this year.

On the efficiency front, and on your second question regarding the efficiency short and medium-term targets, I think that what we've been working on, and it's Still too early to say exactly how much we will be able to improve our efficiency, but we have, as I mentioned briefly, just recently inaugurated a shared services center in Costa Rica where we are in the process of moving all those services that we can share for the six banks and now seven banks in Central America, and we should start seeing results very soon with that. That shared services center is also located in a duty-free zone, and that obviously will help with the fiscal situation. And in Colombia, we are in the process of moving in the same direction. It's still too early to tell. We're starting all the consultancy work that is required, but we will be putting together a similar shared services center in the next few years, and we'll keep you abreast of that.

Our next question comes from Juliana Maya from the Vivienda Corredores.

Good morning. Thank you for the presentation. I have two questions. During this quarter, the effective tax rate was way below of other quarters. Could you explain a little bit further these results? And also regarding the elimination of the 4% surcharge tax, it would be any impact on the fourth quarter? Thank you.

Okay, regarding the low income tax, I mentioned that we went through a process of raising the fiscal cost of some fixed assets. I mentioned that that generated an expense, but also said that it had generated 99 billion pesos positive impact on deferred income taxes. So the reason why you see that low number during this quarter is that we have that positive effect on taxes. As I mentioned, the net effect of both of those were around $29 billion. Regarding the elimination of the surcharge, there's two different sorts of effects, one regarding the surcharge and the other part regarding what the fiscal reform could look like. Regarding the first one, what we see in our initial numbers is we could have around 60 billion pesos positive impact from that surcharge. This is in the makings at this point because we need to see how the new fiscal reform comes out and what the impact on deferred taxes looks like. So, our preliminary numbers are looking more into what the current tax effect would be, but there should be a deferred tax effect at this point. It's too soon to tell because we have no clue on how the final fiscal reform will look like.

Our next question comes from .

Thank you very much for taking my questions. I've got two questions. So basically two topics. So the first one is on MPL and the second one is on capital. I'll kick off with the MPL number. So in a country where you have an unemployment of roughly 11%, I'm just wondering what is your unique selling point in terms of, you know, not underwriting more toxic assets because, I mean, it is, I think, I mean, it is quite unique, you know, to have a stable MPL across the cycle. And I was also just wondering, when you look at your MPL number, which is 4.5%, I'm just wondering which portion of that has been carried forward longer than a year. So basically, I want to understand your write-off strategy, whether you're going to write off any MPLs in one year or 180 days. So if you could give color on that. And on the capital, I'm just wondering, like, I mean, ahead of Basel III implementation, what is your capital planning for next year? Because it seems like, you know, you might be a bit low on capital assuming, you know, moving to a Basel III framework. And also, in terms of, you know, your capital stack, your equity, I just want to understand which portion is tangible and which portion is intangible. Thank you.

Okay. Let me take the first one regarding NTLs. Just to make sure that I understood your question, you said that you hadn't seen a strong variation of NPELs throughout the cycle. I need to say that we actually did have a quite strong or a visible effect of the cycle. We used to run at a cost of risk that was between 1.5 and 1.8%. This went up to the kind of numbers that we've mentioned recently and that we had last year. And at this point, we're returning to something that is below 2% for next year. The driver of this cycle was at first what was happening with the consumer portfolio that came first into deteriorating and then was first to recover. And then with some lag of around two to three quarters, we saw the corporate portfolio, particularly on the commercial side, starting to deteriorate. At this point, we see the process passing. We haven't yet seen the improvement in the cycle, but given that we are forecasting GDP growth above 3% and growth picking up so the denominator should be improving, we should see also some improvement in that front. Regarding your write-offs, perhaps the only relevant loan that has been provisioned already for some time that is still in our books and hasn't been written off is Electricaribe, which we're actually looking into if it's the right time to write it off. The reason not to write it off is there has been uncertainty on potential recovery on that debt, and that has deferred our decision, but we're in the point of looking at that decision now.

Thank you. And regarding your question on capital, well, let me say to start with, we have informed the superintendency of banks that we will be early adopters of Basho 3. We expect that to happen within the first two quarters of next year. As we adopt Basel III, as you probably know, our first calculation is that our risk-weighter assets will drop substantially based on Basel III. And on the other hand, we will have some additions to Tier 1 with which we don't count now in terms of regulatory capital. For example, all the OCI account will count towards regulatory capital as well as all the earnings generated within a period, which they don't actually. So, at least in three of our banks, Banco del Occidente, Banco Popular, and Banco Avivillas, we will see a substantial increase in regulatory capital. When we talked about Banco de Bogota, There are many more things happening when we adopt Basel III. On the one hand, we will have a decrease in Tier 1 capital due to the fact that because we were grandfathered by regulation of some years ago, the goodwill that we generated when we purchased Bach, which was about a billion dollars, has not counted towards a reduction in Tier 1 capital, and it will from the moment that we adopt Basel III, but on the other hand, with OCI with earnings becoming part of the regulatory capital, as well as with the way that Banco de Bogota will account for its investment in Corfe Colombiana with respect to regulatory capital, where it now, under Basel II, from its tier one regulatory capital, the full of its investment in Corfi Colombiana, which is about a billion dollars, it will not have to discount all of the 3.4 billion pesos or $1 billion in Corfi Colombiana in Banco de Botas Corp y Colombiana, investment in Corp y Colombiana. So one thing will tend to offset the other. We will have to discount regulatory capital for the goodwill book when we purchase, but it will recover in a way the billion dollars more or less that is now discounting tier one regulatory capital with respect to the investment it has, Banco de Botas Corp y Colombiana. And it also expects that its risk-weighted assets will have, will all in all probably decrease except that we're waiting for, to hear what exactly the superintendents in Colombia wants the Banco de Bogota and its consolidated balance sheet to account in terms of regulatory risk-weighted assets for the assets that it has in Central America.

We have no further questions.

Great. Well, Sylvia, thank you very much, and thank you all for attending this call, and we certainly hope to keep producing the results that you expect us to, and we'll see you in our next call.

Thank you, ladies and gentlemen. I will now conclude today's conference. Thank you for participating. You may now disconnect.