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

Welcome to Grupo Aval's first quarter 2021 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. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation. Grupo Aval is also subject to the inspection and supervision of the Superintendency of Finance as holding company of the Aval 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 ROA-A, among others, are explained when required in this report. 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 here 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 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 Gutiérrez, Chief Executive Officer. Mr. Sarmiento Gutiérrez, you may begin.

Good morning, and thank you all for joining our first quarter 2021 conference call. I trust that all of you and your families are keeping healthy. It is with great pride in our company and its employees that I will share with you our strong financial results for the quarter that ended on March 31st. As I usually do, I will refer to the situation of the economies of the countries in which we operate. I will provide an update on the status of our clients' loan reliefs and on our digitalization program, and I will refer to the main reasons for our financial results. Let's start with a view of the macro scenario during the quarter. To begin, I will venture to say that for the first time since the pandemic began over a year ago, the global outlook has become more favorable. In fact, the United States has set an example of efficacy in the mass production of the COVID-19 vaccine, in the inoculation of its citizens and citizens of many other parts of the world, and in the distribution of the vaccine to other countries. This has, without a doubt, played a crucial role in the economic recovery of the USA and has set in motion economic recoveries of many other countries and sectors. To be sure, COVID-19 continues to claim lives, especially in some emerging countries where the third wave of the virus has hit strong, as has been the case in India or Brazil. The threat is not over by any means, but hope has advanced exponentially in a short period of time. In Colombia, the year got off to a slow start associated to a second wave of contagions in January that resulted in new mobility restrictions and lockdowns. However, economic activity picked up significantly during February and continued through March as evidenced by a strong pickup in industrial production and the retail sales as quarantines were lifted. The beginning of the vaccination campaign on February 17th and the decline in the number of infections during the first few months of the year also contributed to an overall positive sentiment. Vaccinations continue in full force at a slower pace than most of us would like, but much better than in peer countries. As a result, On a seasonally adjusted basis, during the first quarter of this year, the economy grew 2%, positively surprising the market consensus that expected a contraction for the quarter. This growth compares favorably to the contractions of 15.6%, 8.2%, and 3.4% recorded during the second, third, and fourth quarters of 2020. Examining the quarter's performance from the supply side, Eight of the 12 sectors represented 61% of GDP expanded. The most dynamic relevant sectors were manufacturing that grew 8.4%, financial services that grew 4.8%, government services that grew 3.6%, and agriculture that grew 3.4%. The remaining sectors contracted with mining falling 4.6%, construction 5.3%, utility services 1.3%, and commercial activities 0.7%. From the demand side, total consumption increased 1.6% and investment grew 1.0%. Consumption growth was driven by a 5.1% increase in government spending and a 1% increase in household consumption. Unfortunately, we're now dealing concurrently with a new wave of contagions, albeit with much milder mobility restrictions and with social unrest, which temporarily will dampen a stronger rebound of domestic demand and overall activity. Demonstrations were triggered by the proposal by the government of a fiscal reform, but have continued even after the government withdrew its proposal, followed by the resignation of the Ministry of Finance. Active negotiations are being carried as we speak between the government and the promoters of the demonstrations. In any case, for the rest of the year, we anticipate further improvement in economic activity supported by stronger business sentiment, increased consumer spending, and a favorable external backdrop. We have cautiously improved our estimate of the country's GDP growth, and we now believe that it might be as high as 5.5% in 2021. The central bank recently raised its growth rate forecast to 6% from 5.2%, while market consensus has increased to close to 5%. We continue to expect a widening of the current account deficit to 3.5% of GDP by year's end, up from the 3.3% of GDP observed at the end of 2020, mostly driven by a larger trade deficit, with an increase in imports driven by domestic demand, somewhat attenuated by better oil prices. Regarding the exchange rate, we expect a return to the 3,600 pesos per dollar level in the next few months after overshooting up to 3,800 pesos per dollar Surrounding the uncertainty of the tax reform, the social protests, and more generally, the country's fiscal outlook. As of April, 12-month inflation stood at 1.95%, up from 1.51% a month earlier. In fact, the monthly inflation figure for April was 0.59%, well above the market consensus of 0.34%. The largest contribution to April's inflation came from food, non-alcoholic beverages, and housing costs. Going forward, we expect headline inflation to continue to trend up, driven by a statistical base effect, by a pass-through of higher commodity prices, and by a short-lived effect of price increases in transportation associated to the ongoing demonstrations. We anticipate that 12-month inflation should reach the 3% area by year's end. Well-anchored medium-term expectations should give the central bank enough room to continue with its current expansionary monetary policy. We expect little action in terms of monetary policy, at least until the fourth quarter, so the repo rate is likely to remain flat for now at its current level of 1.75%. We continue to anticipate a 200 to 300 basis points improvement in the labor markets during 2021. After a 557 basis points deterioration of the average total national unemployment during 2020 to 16.1%. However, during the first quarter, the second wave of infections slowed down the recovery of jobs, and as a result, national unemployment ended the quarter at 14%. 14.2%, 155 basis points worse than the 12.6% reported 12 months earlier. However, 720 basis points lower than the peak of 20.4% recorded in May 2020. On the fiscal front, Colombia has been no exception as the countries have had to wage battle against the pandemic with more aggressive subsidy programs, increased spending in the health system, a national vaccination program, and different stimulus programs to jumpstart the economy. As a result, after reaching a fiscal deficit of 7.8% of GDP for 2020, the government expects the fiscal deficit for 2021 to approximate 8.6% of GDP. The failed tax reform sought to collect 23 trillion pesos, or 2% of GDP, in order to correct the ongoing upward trend of public debt. Consequently, the government is currently working on a new draft of the tax bill with a lower tax revenue target, which should help it gain support in Congress. Moving on to Central America, according to the IMF, the region's economy contracted 7.2% in 2020, and should recover to a positive 5.6% during 2021. As you know, Central America greatly benefits from the recovery of the U.S. economy, as certain Central American countries are materially dependent on cash remittances incoming from the United States. After contracting a whopping 17.9% during 2020, The IMF now expects Panama to rebound to a positive 12% in 2021, as it should be favored by increased usage of the Panama Canal as international trade rebounds and by an aggressive vaccination program. GDP for El Salvador and Honduras contracted 8.6% and 8% respectively during 2020. 2021, the IMF expects GDP to grow 4.5% in Honduras and 4.2% in El Salvador, driven by stronger remittances in line with the recovery of the U.S. economy and by a recovery in their exports. Costa Rica's GDP contracted 4.8% in 2020, impacted by a decrease in external demand for services, mainly tourism. The IMF expects GDP to grow 2.6% in Costa Rica during 2021. Guatemala's GDP contracted 1.5% in 2020. Its economy is expected to grow 4.5% during 2021, according to the IMF. As in the case of El Salvador and Honduras, remittances should be a key driver in 2021. Finally, Nicaragua's GDP contracted 3% during 2020. The IMF now expects its GDP to grow 0.2% during 2021 as construction, transportation, and the financial sector recover, while the recovery of sectors related with tourism lag behind. Regarding the status of our loan relief programs, as of March, we had active reliefs representing approximately 11.8% of our total consolidated loan portfolio, or approximately 24.7 trillion pesos in loans. In Colombia, payment holidays are almost over. As of March 31, active reliefs amounted to 7.9 trillion pesos, or 5.9% of the Colombia loan portfolio, including 7.3 trillion in structural agreements. In Central America, reliefs amounted to 16.8 trillion pesos, representing 22% of the region's portfolio, driven by Panama, which amounted to more than half of the region's active reliefs. Of all loans that have concluded their relief periods in both geographies, 3.7% are currently past due 90 days or more, representing 1% of our total consolidated loan portfolio, and those currently past due 30 days or more represent 1.7% of our total consolidated loan portfolio. Our cost of risk reflects our estimation of losses related to the complete unwind of these relief programs. Let's move on to the results of our digital strategy. Our active digital clients grew almost 30% from 4 million at the end of March 2020 to approximately 5.2 million on March 31st, 2021. We have continued to add digital products to our offer. In fact, in the 12 months ending March 31st, we increased the number of digital products offered by our banks by 45%. Our banks sold 532,000 products in the first quarter of 2021. In addition, During the first quarter of 2021, of the total value of monetary transactions conducted through all our channels, almost 70% was transacted through our digital channels, up from 54% in the first quarter of 2020. Conversely, our branch network decreased its share of monetary transactions during the quarter and now represents only 26% of total amounts transacted down from 43% in the first quarter of 2020. Finally, regarding our financial results, Diego will refer next in detail to our financial performance during the first quarter of 2021. However, I would highlight the following. We are encouraged, albeit cautiously, by our strong financial performance during this first quarter. All in all, We see headwinds and tailwinds, but believe that perhaps the tailwinds are stronger than those against us. Some of the tailwinds that we see are an improving economy, a resilient loan portfolio, and as a result, cost of risk at levels better than expected. A cost containment program that is yielding good results because of digital initiatives to streamline our operating processes, and from a company-wide efficiency and cost reduction culture. A decided effort by Corpi Colombiana to keep developing its infrastructure programs, including its toll roads, airport concessions, agro-industrial initiatives, and gas transportation and distribution businesses, while minimizing the damage due to the pandemic to its hotel businesses. and a faster-than-expected recovery of the bank's revenues from fees, which will be more evident as the year progresses. There are, however, headwinds that keep us alert. Among the most important, we are keeping a close eye on the current demonstrations of social unrest and their possible repercussions, and on the animosity against the financial system expressed during the first few days of the marches. Although, in all candor, these expressions, sometimes violent, against banks have subsided. We're also vigilant of the current wave of contagions and the elevated number of daily deaths and therefore hope that the vaccination program keeps gaining speed. And finally, we are expectant of the tax reform that will be eventually presented to Congress and especially of any specific provisions that it might contain affecting the financial system. I am sure that these and other similar subjects will come up in future calls later this year. In the meantime, I thank you for your attention. And now I'll pass on the presentation to Diego, who will explain in detail our business results and provide further guidance for 2021. Thank you very much.

Thank you, Ms. Carlos. I will now move to the consolidated results of the profile under IFRS. Starting on page 9. Even though not yet back to historic levels, selling growth are increasing, gaining momentum. Our assets grew 4.3% over the quarter. With this result, we accumulate a 5.1% year-on-year growth. As mentioned over our last three calls, on May last year, we completed the acquisition of MSG, contributing to our 12-month growth. Excluding these effects and that of FX movements of our Central American operations, Total asset growth grew 2.8% year-on-year. Colombian assets grew 2.7% during the quarter and 0.3% year-on-year, while Central American assets recorded a 0.3% public growth in direct terms and a 0.7% year-on-year growth. MRG contributed with 18 percentage points to year-on-year growth of Central America. Our quality depreciation at 7.2% and a 12-month appreciation at 9.3% take quarterly and annual growth in pesos of Central America to 7.5% and 15.2%. The share of Central America of our book increased slightly during the quarter to 36%. Moving to page 10. Loan growth is progressively recovering, mainly driven by a substantial performance of high-quality retail lending products and an increasing uptick in commercial loan growth in Colombia. Loans grew 3.8% over the quarter, reaching a 4.4% increase year-on-year. Excluding the acquisition of energy and ethics movements of our Central American operations, consolidated loans grew 1.4% over the quarter, The acquisition of MLG contributed with 6.3% of 12-month consolidated growth in special terms. Colombian gross loan portfolio increased 1.7% in the quarter, given by the strong growth of our retail portfolio and an improvement in the dynamics of our commercial portfolio. 12-month growth was 1.5%. Demand for consumer loans remained strong in Colombia, resulting in a 2.7% increase in the quarter and 8.1% year-on-year. Competition remains high, particularly on payroll lending. Payroll lending that accounts for 60% of our Colombian consumer portfolio grew 5.7% over the quarter. Mortgages remain dynamic in Colombia, expanding 2.6% over the quarter and 10.9% year-on-year. Artified financing that accounts for 7%, 2.6% over the quarter. In contrast, as has happened over the pandemic, Credit cards and personal loans remained soft, contracting 2.9% and 1% respectively during the quarter. This product accounts for 12% and 20% of our Colombian consumer portfolio. Colombian corporate portfolio slightly recovered its dynamic, growing 1% during this quarter after two consecutive periods of contraction. Community 12-month growth was negative at minus 2.8%, with a high comparison base a year ago. Moving to Central America, our gross loan portfolio increased 0.7% over the quarter and 21% year-on-year in dollar terms. NFG contributed 20% to year-on-year growth. Casualty performance resulted from a 1% growth of commercial loans and a 1.2% growth of mortgages. Consumer loans contracted by 0.2% over the quarter after a seasonally high for a quarter. This performance was driven by a 0.9% or a 1% growth in payroll and outlending, respectively, and by a 1.4% contraction in credit cards. We expect commercial loan growth to continue recovering as economic activity and business confidence improves throughout the year. On the retail lending front, we expect an improvement in employment outlook in we will allow our banks to increase their risk appetizing products that were de-emphasized during the shock. In spite of our year-end view, we may face temporary acceleration in the speed of recovery during the second quarter, associated with a disruption of the normal operation of some of our customers during April and May due to strikes and a new wave of COVID-related mobility restrictions. On pages 11 and 12, we present several loan portfolio quality ratios. The COVID-19 credit juncture continued unwinding during the first quarter. In the first phase of the pandemic last year, we put provisions ahead of observed delinquency in line with our view on future deterioration, looking beyond the assertions introduced by loan reliefs. In this second phase, actual delinquencies, which we have already begun to provision during the first phase, materialized once release expired. This unwind has evolved favorably for our bands up to date, although we're still cautious given that a proportion of release remains under payment holidays, particularly in Central America, and that sanitary challenges are not yet behind. As of March 31st, we had 4.8% of our gross loans under payment holidays, 230 basis points lower than last quarter. and 7% under structural payment programs in these 120 basis points higher than that quarter. Together, this accounts for 11.8% of our loan portfolio. At the same date, 6.8% of loans that have returned to active payment schedules and that in the past have benefited either from payment holidays or were restructured were paid in more than 30 days. This represents 1.7% of those loans. Former numbers are 3.7% and 1% for loans past due more than 9 days. Payments followed in Colombia are substantially over, down to 0.4% of gross loans. In Mauritian, 5.5% of our gross loans were under structural payment programs. Together, we rise to 5.9% of our loan performance. In Central America, payment holidays have extended longer, accounting for 12.4% of those loans, with Panama expanding close to 90% of its fee. In addition, 9.7% of those loans are under structural payment problems, together with this to add to 22%. Regarding delinquency metrics for 30- and 90-day PASI loans, we saw improvement during the quarter, explained by a TVL formation similar to pre-COVID levels, The ratio of charge-offs to average 98 PLs returned to its five-year average. Lower charge-offs during 2020 were associated with relief problems. Our allowance coverage of 30 days and 98 PLs slightly improved gain of water. Regarding PL formation, 69% was explained by retail products with a wide performance variation across products. Personal involvement loans contributed 24% to PEL formation, despite representing only 5% of our gross loans. Similarly, credit cards contributed 26% to PEL formation while accounting for 8% of our gross loans. In contrast, payroll lending and mortgages that weigh 16% and 12% of our total loans explained 11% and 4% of PEL formation respectively. The quality of our loan portfolio on a 30-day APL basis includes 14 basis points to 4.75% QT, and 15 basis points to 3.41% on a 90-day APL basis. Our 30-days and 90-day APLs are now 59 basis points and 27 basis points higher than they were a year earlier. Composition of a loan portfolio in terms of stages as measured by IFRS 9 remained relatively flat over the quarter with a slight increase in Stage 2 loans. Cost of risk net of recoveries was 2.2%, 129 basis points lower than the 3.5% in the previous quarter, and 7 basis points higher than a year earlier. This incorporates 187 basis points and 84 basis points improvement in retail and commercial lending respectively over the quarter. Currently, cost of risk increased by 144 basis points in Colombia and by 102 basis points in Central America. In Colombia, cost of risk of retail loans increased 196 basis points, and that of commercial loans increased 114 basis points. In Central America, the cost of risk of our retail portfolio increased 129 basis points, and commercial loans' cost of risk increased 13 basis points. On page 13, we present funding and deposit evolution. Funding growth during the quarter continued to reflect the high liquidity environment. As a result, our deposits to net loans remain high, slightly increasing to 110%, while our cash to deposit ratio ended the quarter at 15.8%. Funding structure maintains its concentration on deposits, which account for 78% of total funding. Deposits increased 4.8% in the quarter and 9.3% year-on-year. Colombia grew 1.6% in the quarter, and Central America grew 2.8% in dollar terms. In the 12-month period, Colombia grew 1.8% and Central America 36% in dollar terms. Same percentage points of growth in Central America are explained by energy. On page 14, we present the evolution of our total capitalization, our actual shareholders' equity, and the capital-to-equity ratio of our banks. Our total equity grew 6.6% year-on-year, while our actual equity increased 4.6%, mainly driven by our earnings. Earnings by 1,203 billion pesos and of 724 billion pesos were declared to our shareholders and to the minorities of our series, respectively, during the fall. This resulted in a contraction of 281 billion pesos in referral equity and 245 billion pesos in actual equity. This is the first quarter in which we report our solvency ratios on the base of three. As anticipated, all of our banks increased their solvency ratios as compared to those on the previous regulation. Bear in mind that March figures are seasonally low, impacted by the dividend distributions of our banks. On page 15, we present our yield on loans, cost of funds, spreads, and net interest margin. Neem performance in the quarter was driven by negative Neeman investments and a slight decrease in Neeman loans. Neeman investments was minus 0.4% in the quarter as a result of a global steepening of yield curves and market concerns on Colombia's sovereign rating. This took a total in advance, and for Veneo portfolios measured at per value. This was partially offset by gains in FX and derivatives recognized under other income. Net interest margin on loans contracted 8 basis points to 5.8% in the quarter, mainly due to repricing pressures in net interest income as Veneo and loans decreased 28 basis points to 8.4%, while cost of funds decreased 19 basis points to 2.4%. A conservative liquidity management appropriate on the current environment has implied a burden on net interest markets. The spread between yield and loans and cost of funds contracted 11 basis points to 6%. On page 16, we present net peace and other income. Grossly income increased 1% year-on-year and decreased 2.3% to a relatively high fourth quarter. Early fees decreased 1.3% in Colombia and 1% in dollar terms in Central America. On a year-on-year basis, loss fees increased 3% in Colombia and decreased 2.8% in Central America. Income from the non-financial sector reflects the strong performance of the infrastructure and energy and gas sectors. The infrastructure sector that is the largest contributor to our non-financial income with 24% of the quarter, mainly explained by construction in progress. The energy and gas sector income increased as compared to a year earlier due to high distribution and transportation volume. A quality decrease is explained by a high mark in fourth quarter 2020 associated with one-time event in Cundinamarca operations. Finally, our hospitality business remains underpinned by low occupancy rates during the pandemic. The bottom of the page, The year-on-year increase in our income is explained by better performance in effects and derivatives, partially upsetting the negative performance of fair value investments described earlier in the discussion. In addition, this quadrant benefited from OCI realization from fair value to OCI portfolios and from dividends received from our unconsolidated equity investments. On page 15, we present some efficiency ratios. All of our banks of our business units, continued implementing cost contention and reduction initiatives during the quarter, and capturing benefits from the digitalization of core processes. Other expenses were materially unchanged with a slight increase of 0.2% year-on-year, despite the acquisition of MFG and FX fluctuations. Excluding these effects, our expense contracted 3.9% year-on-year. Other expenses decreased 8.8% over the quarter. As a result, cost to assets improved to 3.1% down from 3.4% a year earlier. Cost to income improved to 44.7% down from 47.1% a year earlier. Colombian order expenses decreased by 2.1% year-on-year and 10.3% over the quarter. Central American expenses contracted 4.2% over the quarter and increased 2.7% year-on-year in dollar terms. Excluding MFG, Central American dollar expenses fell 6.4% year-on-year in dollar terms. Consolidated quarterly personal expenses decreased 1.5% both over the quarter and year-on-year. When excluding the effect of MFG, MFX fluctuations consolidated personal expenses decreased 5.2% year-on-year. Over the year, personal expenses fell 0.8% in Colombia and 2.9% in dollar terms in Central America. Excluding NFG, personal expenses fell 10.6% year-on-year in dollar terms in Central America. Quarterly, general and administrative expenses fell 1.7% year-on-year and 4.1% over the quarter. Year-on-year GNA expenses reduction reached a 4.1% decrease when excluding the effect of NFG and its expectations, with reductions of 1.8% in Colombia and 7.5% in dollar terms in Central America. Finally, on page 18, we present our net income and profitability ratios. Our general net income for first quarter 2020 was 792 billion pesos, or 35.5 pesos per share. This result was 24.7% and 13.1% higher than a quarter in a year earlier respect. Return on average equity and return on average assets We're 15.4% and 1.8% to respect. I will summarize our guidance for 2021. We expect loan growth to be in the 9% to 10% area. Cost of risk to be between 2.3% and 2.4%. Peace to grow in line with our loan portfolio. Expenses growth will be in the 4.5% area. Return on average equity to be in the 13.5% area. We are now I really want to address your questions.

Thank you. We will now begin the question and answer session. If you have a question, please press star and then one on your touchstone phone. If you wish to be removed from the question queue, please press the pound sign or the hash key. 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 and then one using your touchstone phone. We have a question from Jason Mullen from Scotiabank. Please go ahead.

Thank you. Hello, everyone. You mentioned, I mean, there's lots of uncertainty in the region, in Colombia specifically, but everywhere it seems these days. One question I have I haven't asked in a while is, is about what you typically refer to, and I think the market does, is the double leverage at the group level. And the debt at the group level, it's serviced with, I believe, the majority interest income on loans, the subsidiaries, and cash and cash equivalent. So I just wanted to talk, we saw it pick up a tiny bit in the quarter and a little bit more year on year. If you can talk about that strategy From our perspective, we like the returns it gives to shareholders as long as things go okay. So I just wanted to hear about your views on that strategy. Any change should we expect the move up to reverse itself? Do you feel comfortable here? And any other comments on this would be helpful. Thank you.

All right, Jason. Let me take the first part of your question, and then Diego will take the double leverage part of it. As far as the debt at the holding company, we have kept the debt down to two strategies, if you will. On the peso side, we've kept the debt constant for the last – maybe three years or so. And that debt in pesos is composed of some peso-denominated bonds and on some bank financing. And because we distribute in cash dividends an equal amount to the cash dividends that we receive at Grupo Aval, then there hasn't been any necessity to increase the peso denominated debt. As far as dollar denominated debt, we have two bond issues outstanding, each one for a billion dollars. The first one is coming due in 2022, and our intention is to pay that one. And then the second one is coming due in the year 2030. The 2000 – both issues are, as I said, they add up to about $2 billion, and the monies that we received as a result of those two bond issues, we have un-lend them to our own entities. Those of our entities, subsidiaries of Aval or subsidiaries of subsidiaries of Grupo Aval, that one – can't get financing in the capital markets because of their sizes, or two, if they could get financing, it would be more expensive than the financing that Aval could borrow the money for, or three, that the size of the financing they need is not material enough to issue a bond in the capital markets. So what we do is we take that financing in Aval and then we un-lend it to those entities at rates that are equal or superior to the ones that we borrow at in Aval, therefore creating a positive spread and guaranteeing that Aval will always have the liquidity to pay the coupons, And then when the bonds come due, we make sure that those entities, in turn, have the ability to pay down the loans that they received from Aval in order for Aval to have the liquidity when the bonds come due, which is, for example, what we're going to do with the 2022 maturity. By that time, we will have received the billion dollars, and we will pay that one down. And then our total debt... will drop by a billion dollars early next year. I think it's February when it comes to, no, sorry, that was the first one, no, September. September is when it comes to next year. So that's the strategy at the bond level, and that's what we've shared with our bondholders. And so as you can see, we keep, just to summarize and to finish, In terms of pesos, we pay cash dividends equal to the cash dividends that we receive so that we never have a cash shortage in pesos. And in terms of dollars, the dollars that we take in, we lend to our own entities and then collect them so that we can pay down our own debt. That's as far as the debt strategy. And then about double leverage, Diego will give you an idea.

Regarding double leverage, Jason, What we've been doing over time has been basically maintaining our double leverage stable. What increased our double leverage last year was the issuance by Central America and the acquisition by Groupon Limited of an 821 bond that is dollar denominated. That brought slightly up our double leverage at that point, And the projection based on organic growth or organic generation of equity through net income was that we should be seeing that number falling down in time. Particularly when you look at the first quarter, given that this 81 is dollar denominated and our equity is specially denominated, you have a slight increase. in double leverage. So that's the explanation. But from the strategic standpoint, we continue seeing exactly what we saw in the past. And basically, it says that we should be seeing that number trending down as retained earnings increase our equity. I just want to reiterate on what Rizkar mentioned before. It's from the probability to pay the funds in The way we pay our bonds that are dollar-denominated is based on dollar-denominated interest-earning assets. What we do is we have at the group of unlimited level, we have these two bonds that Luis Carlos mentioned, and most of that is backed by dollar-denominated assets that are mainly either deposits or loans to our own entity. At this point, we actually have a positive carry. Therefore, it's not only from the principal standpoint, but also from the interest service side, that Grupo Aval somehow is self-sufficient. Therefore, up to date, since we began issuing bonds in 2012, there has been no need to send a single peso from Colombia to Grupo Aval Limited based on the dividend stream that we received to be able to service our bonds.

Thank you. Our next question comes from Yuri Fernandez from JP Morgan.

Thank you, Luiz Carlos Diego. I have a first question regarding asset quality. I guess you slightly revised the cost of risk guidance, right? Like this was about two and a half. Now you're seeing 2.3, 2.4. And the results, they were very good in the first queue regarding asset quality. But my question is, how should we think about this? Because we still see a lot of uncertainty in Colombia, those protests, the 20 plus percent of loans in Central America is still in great spirit. So it's 2.3, 2.4, like not much higher than previous levels for this crisis. Like what could be the negative surprises here? Like maybe, I don't know, like mass transportation companies, like some big corporations hitting the tape. My question is basically, you know, like how confident you are with those levels and if we could not see a negative surprise. That's the first one. And my second question is regarding the S&P downgrade. It's pretty clear, like the effects, the rate impact, but should we expect any kind of more direct impact for the company or it's mostly indirect macro related impacts for a group of all?

Thank you. Okay. If you will, I will start with your last question first. There has already been a decision from S&P basically to maintain Banco de Bogotá's ratings table, and that would be the direct effect that you might worry about. So short answer is we will have the macro indirect effects because the direct effects are already cleared as of this time. Then regarding cost of risk, I think the way to think about cost of risk at this point is we had already guided into a cost of risk that was superior than what a standard cost of risk for Aval would be. Aval should be running at a 2% or lower cost of risk under normal circumstances. However, built into our guidance, we already had a lot of these positive possible downsides that you might have seen materializing. However, what we're seeing from the macro standpoint is the positive surprise that we had this year, and actually a milder but also positive surprise on how we closed 2020 are giving us a better environment in which to face this kind of potential down risk than what we had included in our expectations when we guided at the very beginning. So yes, you're absolutely right, we're facing these headwinds that actually Luis Carlos mentioned some of those in his introductory words. But we're starting from a higher ground to face those than what we were thinking in the past. That's the reason why we're improving our view on cost of risk.

Thank you. Our next question comes from Brian Flores from Citi.

Hi. Thank you for the opportunity to ask questions. Some follow-ups on asset quality, particularly regarding charge-ups, because we have seen them increasing as a percentage of gross loans. So could you elaborate a bit on where particular segments are this focused on, and should we expect this phase to continue? That is my first question. And my second one is if you could remind us of Your coverage of Avianca and IDHAS somehow evolved over the last quarters. Thank you.

Okay. Avianca remains as was said in our last call. Avianca is slightly above $180 million, and we provisioned that at 45%. That's the coverage. The reason why that coverage seems reasonable is around 73% that those loans are backed by receivables, international receivables, and the 20% remaining, or most of the remaining part that is 20% is backed by the headquarters buildings in Bogota. So that's the reason why we believe that the right number and that should be representative of where we stay at. Regarding charge-ups, yes, relative to the numbers you saw last year, these numbers are higher, however, If you strip out this quarter and take a five-year average, you'll come up to 0.75 times. And that's the number that we have been running over the past five years. And that includes last year that was actually a low number. The question perhaps is why was that a low number? And the reason is with relief, mechanically loans never get past due. Therefore, charge-offs get delayed. And the numbers that are actually up the cycle are those that we saw last year. 0.75, 0.8 is the kind of numbers you should expect.

Thank you. Our next question comes from Carlos Gomez from HSBC.

Yes, thank you very much. You may have already commented on that. I missed the early part of the call. What are your prospects in terms of your tax rate and what possible tax reform can come out from the current discussions? And then longer term, we noticed how Central American becomes a bigger and bigger portion of your business. It's now actually bigger than the domestic part of Banco de Bogotá. So I was wondering if in the long run, does it make sense for the Central American business to continue to be at Bogotá or could you put it directly at the aval holding company level and that might actually improve the ratios for Bogotá?

Regarding tax rates, the way to think about it is we have a blended rate between what we have in Colombia that includes actually at this point a surcharge to taxes plus what we get from Central America, and that number is somewhere between 28. Cost of risk was lower during the quarter. Just to summarize, what we mentioned was there has been a substantial difference across products. For your patient, Mr. Sarmiento, you may resume. And we're seeing new PDL formation going back to numbers similar to pre-pandemic, and the reason for that is that a very substantial portion, around two-thirds of our Colombian portfolio, is payroll lending, and payroll lending is generating around 20% of PDL formation in proportion to what you're getting off from more risky products such as installment loans and credit cards. So that's in summary the reason why we're seeing that. And we said we're not over-optimistic at this point, even, that there's still some reliefs that need to expire, particularly in Central America and the Central American impact. Regarding your first observation,

concerning the demonstrations in the Valle del Cauca region. You're right, as you yourselves have noticed, I'm sure, the financial system was hit hardest in Cali specifically, and where vandalism was probably the most during the beginning of the social unrest demonstrations. But it has fortunately subsided, number one. Secondly, all the banks were hit hard. It so happens that one of our banks, Banco de Occidente, as you mentioned, is headquartered in Cali. And as such, the headquarter building was also hit. The vandalism was – perpetrated at the lobby level, but that's all material damages, and it's all fortunately covered by insurance. Regarding the exposure of that bank to the Valle del Cauca debtors, one has to remember that Banco del Occidente is, as the other bank of ours, a national bank, and as such, its own exposure to the Valle del Cauca region is really not significant or materially larger than the exposure of all the other banks to the region. So the difference really of Banco de Occidente with the other banks is that it's headquartered in Cali, but its exposure is not really that much bigger to the Valle del Cauca region. And as such, its portfolio will only be affected as much as the portfolio of all the other financial system banks to the Valle del Cauca region. We expect, we hope that will be the case.

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

Hi, good morning. Thanks for the presentation. I have three questions today. The first one, you provided the new numbers on capital ahead of the Basel III implementation. And I'm just wondering if you feel comfortable with the current position of on set one ratio on Banco Bogota particularly. it seems that it might be lower than other banks. And when you compare to a potential minimum requirement of 7% or a little bit higher, if you add some management buffer, it seems a little bit tight, particularly when compared to peers and when compared to other banks of Aval. So I'm just wondering how comfortable you are with the actual set one ratio of Banco de Bogotá despite the improvement. The second question is probably on growth and appetite. As you described, your strategy is focused on payroll and auto lending, but we have seen some better numbers on credit cards and the commercial portfolio on a quarterly basis. Do you have a high-risk appetite as of now, both in Colombia and Central America? And the third question is probably an unusual one, but given the current trends in Colombia and the social tensions, I have to ask or I would like to ask also if you, Mr. Luis Carlos, are currently active on the ongoing negotiations helping the government or whether you are meeting with even with some other people just to get consensus on what we need to do as a country and putting together actual solutions as a country. Thank you very much.

So let me take the first couple questions regarding core equity tier one. Yes, we feel comfortable with the performance and something that is actually helping the bank is that the return on equity of the bank is outperforming the return of equity of most of the system and substantially some of the larger banks. Therefore, it's getting an advantage in being able to internally generate capital. In addition, from the quality standpoint, the bank did a very good job last year provisioning what we thought could go sour from the pandemic, so we see less downside in capital consumption in that sense moving forward. You're right, numbers are relative to others. We feel comfortable in absolute values. Perhaps the question for other banks is why a much higher number might be required. Regarding appetite, what our banks are actually doing is slowly migrating into higher risk kind of products. You know that Aval has traditionally been a laggard running, jumping into changes. However, we do look at numbers and numbers. As you said, even though they're evolving positively, there's still some down risk in some of the riskier products. So we've been shyer than others coming into the products. And we're, in addition, being quite careful on pricing and loans. That is not as important for the consumer side, but on the corporate side, we're making sure that we're getting the right prices. So part of what you might be seeing is not a risk aversion of not being ready to go into some of the corporate segments, but just that it's not cutting what our minimum expected returns for loans could look like. Having said so, Even though we've discussed many of the downsides of the economy, we're positive on how we see recovery and trending throughout the year, and that will pull us into being much more aggressive into these kind of products.

And regarding your third question, which had to do with my own involvement in the ongoing negotiations, you actually – made me think of something that my mom always says, which is never to waste an opportunity to say nothing. And so, no, I try to be as helpful as I can whenever I'm asked to participate or to contribute or to opine. If I'm not asked, I do not participate. And obviously, I keep a very very apolitical posture on everything that happens. I spend enough time managing this big company, so I don't really have a lot of time to do other things. And then thirdly, well, we try to express our thoughts through Asovankaria, which is the association that combines all the banks' views. And so... So I think that's the extent that I can answer that question, but thanks for the question anyhow.

Thank you. Once again, for any questions, you can press star 1. The next question comes from Andres Soto from Santander. Yes.

Good morning, everybody, and thank you for this presentation. I would like to break your brains regarding Colombia's macro and political challenges, also considering that the country will hold elections in 2022. A downgrade by S&P was probably a surprise, as most people expected rather Fitch to be the first one to downgrade. In this context, it now looks even more challenging for Colombia to retain its investment rating. Considering this, do you still believe that the government should pursue an increased taxation as a way of rebalancing or should rather prioritize growth to achieve this rebalancing over the medium term?

Yeah, that's a great observation. You know, we're getting into territories where I don't really think we can contribute so much in a call like this. But yeah, you're right. It was sort of surprising. to see S&P downgrade. Maybe the surprise was, as you say, not that S&P downgraded, but that it was the first one to downgrade. We'll see how Fitch and Moody's feel about it. As you have seen, if you have seen the markets today, they're not really showing too much volatility, and it probably had to do with the downgrade was sort of factored into what's been happening in the last couple of weeks. And To your specific point, yeah, I sort of tend to agree. I think it takes off the pressure on the government at least because there's been so much anticipation in the last few weeks, in the last month regarding the downgrade that now that it happened, maybe it's the time to regroup and not to force through a tax reform that won't be at its best. The tax reform that the government is trying to put together, which is one that is consensuated by everybody, you know, that's a tough way to try to come up with a tax bill. So hopefully the government is sitting down right now as we speak and thinking about the convenience of forcing tax reform through whose supposed objective was to avoid the downgrading. Downgrading already happened. Markets seem to have factored it in already. So, yeah, maybe it's not the time to try to force things, something that won't be at its best.

Perhaps something to bear in mind is when you add the fiscal deficit for last year with this year, you're talking about around 16% of GDP. In that time, under normal circumstances, that should have been around, or 5% of GDP, so we do have 10% of GDP bill to pay at some point in time. So it doesn't need to be something that solves the problem overnight. It might be something that takes much more time to be adjusted, but we actually have, as basically the rest of the world has, around 10% of GDP to pay the bill for.

Thank you. And at this moment, we show no further questions. I would like to return the call to Mr. Sarmiento for closing remarks.

Well, thank you, Hilda, and thanks, everybody, for being on the call. Thanks for your good questions once again. And all that I can promise is we'll keep on working on trying to bring forth the results, and hopefully we'll keep on trucking. And we'll see you in the next call. Until then, As always, anything we can share with you, we will. And thank you, Hilden. Thank you, everybody in the call.

Thank you. This concludes today's conference. We thank you for participating. You may now disconnect.