Grupo Aval Acciones Y Valores S.A. Q4 FY2021 Earnings Call

Welcome to Grupo Aval's Fourth 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 SA, 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 US 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 ROAA and ROAE 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 herein as a consequence of changes in general, economic, and business conditions, changes in interest and currency rates and other risks described from time to time in our filings with the Registro Nacional de Valores y Emisores and the SEC. Recipients of this document are responsible for the assessment and use of the information provided herein. Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update or correct the information provided in this report, including any forward-looking statements and do not intend to provide any update for such material 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, and thank you all for joining our fourth quarter 2021 conference call. It is my pleasure to share with you our strong financial results for the year 2021. I’m proud to report that during 2021 in the backdrop of a country's very strong economic recovery, we at Grupo Aval achieved the highest net income in the company's history. It has been 2 years since the lockdowns caused by the pandemic began. Since, we believe we successfully managed the crisis appropriately addressing risk management and commercial issues, supporting our customers in caring for our employees. We further believe that our handling of the crises, coupled with our diversification strategy, resulted in manageable volatility in our results, especially when compared to our peers. In Aval, during 2022 things have progressively gone back to normal. Among the most important changes to our customary way of working, we have migrated to a hybrid work scheme residential/remote, which will remain our standard going forward. We're now much more mindful of the benefits of such working standard, which we believe when applied wisely, results both in employee satisfaction and operating efficiencies. 2022 will also result in a material change to our ownership structure as we execute the spin-off of 75% of the Back Holding International Corp, BHI, the holding company which owns our Central American banking group, more on that later in the call. And now, before we jump into the detail of our financial results, I will refer to the economic performances of the countries in which we operate, I will provide a brief update of the status of our client's pandemic-driven loan reliefs, of our digital initiatives, of our EFG efforts, and as I said before, I will also update you on our progress regarding the spin-off. Around the world, 2021 was a year of economic transition with countries experiencing a rebound in their business activity, domestic consumption, and a marked acceleration in their inflation indicators. According to the IMF, global GDP in 2021 would have grown 5.9% in 2021 after the 3.1% contraction evidenced in 2020. For 2022, the IMF forecasts a GDP growth of 4.4% despite the Ukraine-Russia conflict that has already adversely affected growth prospects in Europe and developed countries. Specifically, during 2021 the Colombian economy recovered and surpassed in most instances the production levels lost during the sanitary crisis with one notable exception, unemployment. Additionally, as in most economies around the world, the recovery has not been devoid of inflationary pressures. In fact, Colombia's economy grew 10.6%, the highest rate in Colombia's history. During the last quarter GDP expanded at 4.3% above the market consensus of 2.6%. This result is mainly explained by a rebound in private consumption that grew 14.6% versus 2020 and 8.9% versus 2019. The recovery in domestic demand reflects the use of excess savings by households, a significant increase in remittances from abroad, the fiscal stimulus put in place during the pandemic and a partial recovery in the labor market. From the supply side, growth in the last quarter was driven by commercial activities and manufacturing that grew 4.6% and 2%, respectively, and represent 30.3% of GDP. Construction and government services representing 19.7% of GDP, grew 4.3% and 1%, respectively. Regarding COVID vaccinations, at year-end 2021 55.7% of Colombia's population had a complete vaccination schedule. In Central America, approximately 50% of the population has a complete vaccination schedule. Costa Rica leads with 75% and Guatemala lags at 32%. This has allowed Colombia and Central America to reestablish pre-pandemic production at a relatively good pace. However, 2022 is not free of other challenges. As you know, this is an election year in Colombia and the contractionary monetary policy currently in effect will no doubt affect the growth momentum. It remains to be seen how profound the impacts of these challenges are. Despite these challenges, 2022 also brings the opportunity to further normalize cost of risk, to strongly grow the loan portfolios, and in theory, to expand interest margins at least initially in our majority commercial loan portfolio banks. In addition, the unexpectedly higher oil prices boost export revenues and provide some relief to Colombia's twin deficits. All in all, we currently expect 2022 Colombia's GDP growth to be in the 4% to 4.5% range. This is in the lower side of market consensus and lower than the government forecast of 5%. The exchange rate registered material volatility during 2021 ranging between COP3,421 per dollar and COP4,024 per dollar, closing at COP3,981 per dollar. On average, a devaluation of 15.98%, mainly as a result of the global strengthening of the US dollar due to the expectation of an early reduction of monetary stimulus by the Federal Reserve, and the increase in the local country risk premium due to the partial loss of investment grade. However, during the last few days, the peso has strengthened below COP3,800 per dollar in response to the surge in oil prices due to the expected shortage of supply in the upcoming months. I must note that the Ukraine-Russia conflict implies an increase in the value of cereal and fertilizer imports, which will no doubt pass a toll on the Colombian trade balance. We currently expect some volatility of the exchange rate around the COP3,850 per dollar level during the remainder of the year. Inflation closed the year at 5.62%, up from 1.61% in 2020. On a 12-month basis, at the end of February inflation reached a 6 year high of 8.01%, mainly driven by supply factors affecting, particularly the agricultural sector. In fact, food prices increased a record high of 23.3% in annual terms. As monetary policy starts to anchor inflation expectations, we expect 12 month inflation to slowly come down to 5.5% by the end of the year, above the Central Bank's target of between 2% and 4%. We will remain observant, however, of additional inflationary pressures derived from the Ukraine-Russia conflict and its effects on commodity prices in the international markets. After keeping the repo rate stable during the first 9 months of the year, the Central Bank, once it became evident that inflation was accelerating, increased the inflation rate 125 basis points between September and December 2021 from 1.75% to 3%. The repo rate is currently at 4% after a 100 basis points hike during the last meeting in January. As the inflationary pressures linger throughout 2022, an accelerated cycle of increases in the repo rate is foreseeable. In fact, we now anticipate that the repo rate could reach 6% by the first half of 2022 and 7% by the end of the year. Although the labor market has lagged, it has also continued to improve after an average national unemployment rate of 13.7% at the end of 2021, down from 16.1% in 2020, it still did not reach the pre-pandemic level of 10.5% achieved in 2019. As our recovery process continues, we expect a further decline in the unemployment rate to an average of 12% in 2022. The current account deficit widened to 5.7% of GDP in 2021, mainly driven by a greater imbalance in the trade balance that reached a deficit of $20.5 billion in 2021 to a much faster growth in imports reflecting stronger domestic demand and a more modest growth in exports. The widening of the current account was financed 53% by foreign direct investment and by portfolio inflows as the appetite by foreigners for domestic public bonds in the local market resumed during the second half of last year. Going forward, external accounts should improve mainly because of oil prices and better crude and coal production levels. However, rising prices of imported goods affected by the Ukraine-Russia conflict could dampen this improvement. Despite the expected surge in oil and coal exports, the current account deficit is expected to hover around 4.8% in 2022. On the fiscal front, the fiscal deficit for 2021 was 7.1% at GDP, lower than the 8.6% expected by the government. This was a result of higher economic growth, better tax collection, and lower execution of the government spending budget. Even though the government managed to push through a tax reform amid a complex political environment, Colombia's credit rating was downgraded by the rating agencies, which had an adverse effect on the country's risk premium and on the ratings and yields of Colombian issuers. For 2022, the government expects a further decline of the fiscal deficit to 6.2% based on the ongoing economic recovery and additional revenues from the oil sector. We move on to Central America. During 2021, the region benefited mainly from the economic recovery of the United States and the positive implications in trade and remittances. As a result, after a contraction of 7% in 2020, the IMF projects real GDP growth of 6.8% for the region in 2021, with the highest growth in Panama 12% and El Salvador 9%, followed by Guatemala 5.5%, Nicaragua 5%, Honduras 4.9% and Costa Rica 3.9%. For 2022, GDP growth for the region is expected to be 4.2%, slightly above the annual average of 4% registered between 2010 and 2019. As Central American countries are predominantly oil importers, the increase in oil prices and the disruption in global supply chains have pressured inflation and will most likely continue to pressure inflation in the region. During 2021, Nicaragua, Honduras, and El Salvador were the most affected with inflations of 7.2%, 5.3% and 6.1%, respectively. Costa Rica and Guatemala registered inflations of 3.3% and 3.1%, respectively, while Panama registered 2.6% inflation. As of December, we had COP21.6 trillion in active reliefs or under structural agreements, representing approximately 9.5% of our total consolidated loan portfolio. In Colombia, active reliefs amounted to COP7.4 trillion or 5.3% of the Colombian loan portfolio. And in Central America, reliefs amounted to COP14.3 trillion, representing 16.1% of the region's portfolio. Panama accounted for approximately 49% of the region's active reliefs. Of all loans that have concluded the relief periods, those currently past due 90 days or more represent approximately 1% of our total consolidated loan portfolio, while those currently past due 30 days or more represent 1.6% of our total consolidated loan portfolio. If we move on to digital, these are some numbers that back up the execution of our strategy during 2021. In Colombia, active digital clients totaled 3.8 million, approximately 44% more than 12 months ago. Our banks sold 1.5 million digital products during 2021, an increase of 59% versus 2020. 60% of all sales of retail products for which a digitalized solution has been developed were conducted digitally. Our recently improved mobile banking apps reached 1 million downloads in both Android and iOS. Transactions conducted through Aval's close payment gateway, AvalPay Center, increased 122% versus 2020. Campaigns using advanced analytics developed based on our unified database platform Augusta had been able to increase effective disbursements by 40%. Mathilde, our programmatic ad platform has allowed us to reduce by 41% our cost per 1,000 impressions. In Central America, digital clients increased 20% during the year, reaching almost 2 million clients at year-end. Digital sales increased 41% versus 2020 through 37 digital products. PFMO, personal finance management, a personal finance solutions app that helps our customers understand their finances and make better decisions was successfully launched. KASH, our transactional app despite being relatively recent was one of the most downloaded apps in the region. Let's move on to ESG. In the past decade ESG has become an integral part of our strategy. Alongside our subsidiaries, we are firmly committed to becoming better at it every year that passes by continually raising our standards of environmental protection, by striving to improve our interactions with all our stakeholders, and by pushing for strong corporate governance. These are a few of our ESG milestones during 2021. On corporate governance and risk management, after having implemented ESRA, environmental and social risk analysis systems on Banco de Bogota back in MultiBank, we begin to rollout to our other Colombian banks. On the economic performance front, Corficolombiana issued COP500 billion social bond. In addition, our banks launched green products in sustainable development credit lines, among the most important, the Amazonia card in Banco de Bogota, the UNICEF card in Banco de Occidente, sustainable housing, and electric vehicle lines, and others. Regarding corporate efficiencies, we adhere to the United Nations Global Compact, reaffirming our commitment to the sustainable development goals. Through machines, we carry on recycling initiatives, recycling approximately 0.5 million plastic bottles. On talent management, we developed our corporate diversity and inclusion policy. Banco de Bogota, Occidente, Popular, and Porvenir received the Great Place to Work certifications. We migrated to a hybrid residential/remote work scheme that will be our standard going forward, maintaining an exclusively remote work scheme for some positions. Finally, regarding the social and environmental initiatives, Banco de Bogota and Corficolombiana became part of the Dow Jones Sustainability Index. Banco de Bogota is among the top 8 most sustainable banks. We implemented through our subsidiaries' environmental initiatives, including the reforestation of the Amazon and the use of renewable energies in some of our branches and headquarters. Finally, our subsidiaries, jointly with our controlling shareholder, fully funded the construction of a $500 million state-of-the-art cancer treatment and research center in Colombia, which is currently being staffed and equipped and is scheduled to open its doors to patients in the second quarter of this year. As you recall, during September of 2021 Banco de Bogota informed the markets of its intention to spin-off to its shareholders, including Grupo Aval, 75% of the shares the bank currently owns of Back Holding International Corporation, BHI, the holding company that ultimately owns a 100% of the shares of our Central American banking group BAC Credomatic. Concurrently, Grupo Aval informed the markets of its intention to spin-off to its shareholders the shares of BHI received as a result of the mentioned Banco de Bogota spin-off. There are several reasons behind these transactions. On the one hand, as a consequence of BAC's excellent financial performance since we acquired it in 2010, accentuated in multi-years by the Colombian peso natural devaluation against the US dollar, BAC is currently almost the same size as its owner Banco de Bogota. In this regard, we do not consider it convenient that Banco de Bogota owns another bank of equal size. Additionally, the transaction will strengthen Aval's and Banco de Bogota's strategic focus on Colombia, because as a result of the spin-off and the deconsolidation of this investment in our numbers, we will simplify our corporate structure, eliminate multi-jurisdictional complexities and increase our agility and flexibility to respond to the dynamics of the local markets in which we operate. We also expect to gain flexibility in the administration of regulatory capital as we continue to move towards full Basel III principles. This, in turn, should allow us to improve our strategic position to capture future growth. Lastly, we hope, although obviously we cannot guarantee, to unlock some value for our shareholders. As anybody that follows our shareholders knows, the multiples at which our shares trade with respect to the company's earnings are comparatively depressed and have been so for a while when compared to those of our peers. In fact, an independent valuation determined that Aval's share value after the spin-off would have a price similar to the price at which it trades today. Under that scenario, Aval's price multiples to earnings will be fairly comparable to those of our peers. BHI's shares will trade on the Colombian Stock Exchange along with the shares of Banco de Bogota and Grupo Aval. BHI will also trade on the Panamanian Stock Exchange. Therefore, we expect that the stock will be marketable and liquid. As of yesterday, this transaction has received all the required regulatory approvals, and therefore, we will now proceed with the execution stage. Our intention is to close the spin-offs and deliver the BHI shares to the eligible shareholders by the end of March. If that is the case, our financial statements at the end of this quarter will cease to consolidate BHI and any income derived from the 25% investment that Banco de Bogota will retain in BHI will be accounted for via the equity method. Furthermore, we also expect to book extraordinary net income from the realization of certain OCI accounts at Banco de Bogota as a byproduct of deconsolidation. We will have a better idea of that extraordinary net income amount, the day of the spin-off. As Diego will explain, the spin-off should boost Banco de Bogota's regulatory capital by approximately 130 basis points. However, to further boost this ratio to absorb other changes to regulatory capital derived from the progressive adoption of Basel III principles, Banco de Bogota's Board will propose to its shareholders not to declare a cash dividend in the upcoming shareholders' meeting. Aval will follow suit, as it is the company's unwritten custom to declare dividends in the same amount as it receives from its subsidiaries. Regarding our financial results, Diego will refer next in detail to our financial performance during 2021. However, I would highlight the following. Our banking subsidiaries successfully rode the wave of the country's economic rebounds that improved the credit profile of our customers, presented growth opportunities, lowered the cost of risk, and increased recoveries of written-off loans. As a result, we achieved net income of COP3.3 billion, 40.4% higher than in 2020, and 9% higher than in 2019. This marks 2021 as the year with the highest net income in our history. Return on average equity was 15.3% and return on average assets was 1.65%. At year-end versus 2020, consolidated assets grew by 13.6%, consolidated gross loans grew by 13.2%, 30 and 90 day PDLs indicators improved by 86 basis points and 66 basis points, respectively versus 2020. Cost of risk improved by 110 basis points. Net income for the year increased by approximately 10%, our cost to assets improved by 10 basis points and our funding and liquidity positions remained strong. I thank you for your attention. And now, I'll pass on the presentation to Diego, who will explain in detail, our business results and provide guidance for 2022. I will add that the guidance that Diego provides for 2022 will be devoid of the extraordinary net income that results as a consequence of the spin-off. I thank you for your attention once again. And Diego, please continue.

Thank you, Luis Carlos. I will now move to our consolidated results of Grupo Aval under IFRS. Starting on page 11, assets grew 13.6% during 2021 and 4.3% during the quarter, excluding the FX movements of our Central American operation, total assets grew 7.6% during the year and 2.7% during the quarter. Our assets grew 9.3% during the year in Colombia and 4.8% in dollar terms in Central America. The 16% depreciation over the last 12 months resulted in a 21.8% annual growth in Colombian pesos of Central America. Quarterly growth was 2.1% in Colombia and 3.5% in dollar terms in Central America. A 4.9% depreciation during the quarter resulted in an 8.3% growth of Central America in Colombian pesos. The weight of Central America reached 37% of our book with BHI and MFH accounting for 32% and 5%, respectively. Moving to page 12, loans grew 13.2% over the year and 4.3% during the quarter. Our Colombian gross loan portfolio grew 6.6% over the year and 2.2% during the quarter. Quarterly performance in Colombia reflected a strong dynamic in retail lending and still softer in commercial lending, similar to the trends of the banking system. Demand for consumer loans in Colombia continued to be strong resulting in a 3.2% growth during the quarter and 11.5% for the full year. 12 month growth remained, driven by payroll loans with a 15.7% increase while our quarterly growth included a strong performance of unsecured products. During the year automobile loans grew 9.8%, personal loans 6.1% and credit cards 2.2%. Payroll lending and auto financing are our main consumers of secured products with 2.3% and 5.2%, respectively during the quarter. These products account for 61% and 7% of our Colombian consumer portfolio. Both personal loans and credit cards, which account for 20% and 12% of our Colombian consumer portfolio, grew at 4.3% during the quarter. As other secured retail products, mortgages remain dynamic, expanding 4.7% over the quarter and 15% year-on-year. On the other hand, corporate lending growth in Colombia continued to be weak. The commercial loan portfolio, excluding repos, grew 1.2% over the quarter, taking annual growth to 2.9%. In addition to market trends, our growth is affected by a disciplined pricing approach that focuses on profitable growth. Moving forward, business confidence in Colombia and the positive trends in economic activity support a strong commercial loan growth rate. In addition, we expect that retail lending momentum will persist as employment continues its recovery and household demand consolidates, allowing banks to extend further into higher-risk products. We have a positive view on 2022 growth despite temporary headwinds in confidence during the first half of this year derived from the election cycle and the uncertainty associated with the global geopolitical events. Moving to Central America, our gross loans portfolio increased 8.3% in dollar terms year-on-year and 3.2% over the quarter. Quarterly performance in Central America evidenced a recovery in economic activity that resulted in 3.9% and 3.7% growth in consumer and commercial loans, respectively. Mortgages increased by 1.1% over the quarter. On pages 13 and 14, we present several loan portfolio quality ratios. Cost of risk has returned to recurring pre-pandemic levels, we see that earlier than expected due to our favorable evolution of the behavior of reliefs customers returning to regular payment schedules and a fast and strong rebound of the economy. This improvement reflects in a better composition of our loan portfolio, measured by loans classified by stages. Relief programs were successful in allowing us to manage the COVID-19 shock with lower impact on our consumers and thus impairment losses than what was expected at the beginning of the pandemic. As of December, 0.8% of our gross loans remained under payment holidays and 8.7% under structural payment problems, together accounting for 9.5% of our loan portfolio. In Colombia, 5.3% of our loans have some type of relief. Only 0.04% of our Colombian gross loans are still under payment holidays. Most reliefs are structural payment programs under the path of the government-sponsored borrower support program. In Central America, 16.1% of our loans still have some type of relief. This is broken down into 14.1% of gross loans under structural payment programs and 2% under payment holidays. The payment holidays that remain are concentrated in Panama that accounts for 88% of those. The outstanding balance of payment holidays in the region contracted 41% over the quarter, down to $443 million. At end of period, 4.3% of our total loans that in the past had benefited either from payment holidays or were restructured and as that return to active payment schedules were past due more than 90 days. These past due loans continue representing 1% of our total gross loans, and these numbers are 6.9% and 1.6% for loans past due more than 30 days. In Colombia, 6.7% of loans previously relieved that had resumed active payment schedules were 90 days past due, representing 1% of gross loans. For 30 days PDLs, these numbers were 9.3% and 1.4%. In Central America, 2.7% of loans previously relieved that had returned to active payment schedules were 90 days past due, representing 0.9% of gross loans. For 30 days PDLs, these numbers were 5.3% and 1.8%, respectively. We saw significant development evidencing the recovery after the pandemic, PDL formation had returned to pre-pandemic levels. As reported in our last call, third-quarter PDL formation benefited from over COP580 billion of the Avianca Taca Group loans returning to current. Regarding delinquencies, metrics for 30 days and 90 days PDLs continued improving during the quarter. Our allowance coverage of 30-day PDLs and 90-day PDLs also improved over the quarter. The quality of our loan portfolio improved relative to a quarter and a year ago. 30-day PDLs fell to 4.04%, a 36 basis points improvement over 3 months and 86 points improvement over 12 months. 90-day PDLs fell to 2.9%, a 20 basis points improvement over 3 months and 66 basis points improvement over 12 months. Even though not yet to pre-pandemic levels, the breakdown of our loan portfolio by stages continues to improve with Stage 1 loans gaining 91 basis points in the mix compensated by 72 basis points and 19 basis points decrease in Stage 2 and Stage 3 loans. This improvement was mainly driven by our consumer loan portfolio in both geographies, which recorded a 138 basis points increase in share of Stage 1 loans to 83% and a 102 basis points decrease in Stage 2 to 12.8%. The higher than normal level of Stage 2 loans will linger for several quarters, but is expected to improve as previously relief customers maintain a healthy payment behavior throughout this year or fully paid their outstanding balances. We expect this behavior to materialize and support our positive view on the evolution of cost of risk during 2022. 2021 cost of risk, net of recoveries was 1.9%, in line with our previous guidance. This result incorporates a 28 basis points increase in cost of risk of our total portfolio over the quarter with a 64 basis points increase in commercial and a 15 basis points improvement in retail. Quarterly cost of risk increased 45 basis points in Colombia, driven by commercial loans and remained flat in Central America. Finally, the ratio of charge-offs to average 90-day PDLs was 0.7% times for 2021 and for the quarter. On page 15, we present funding and deposit evolution. Funding growth during the quarter reflects a still highly liquid environment. As a result, our deposit to net loans ratio remained high at 106%, while our cash to deposits ended the quarter at 15.6%. Our funding structure remained relatively stable with deposits accounting for most of our funding at 76%. Deposits increased 10.7% year-on-year and 4.1% during the quarter. Colombia grew 1.5% during the quarter, while Central America grew 3.2% in dollar terms. Over the 12-month period, Colombia grew 2.6% and Central America 7% in dollar terms. On page 16, we present the evolution of our total capitalization, our attributable shareholders' equity and the capital equity ratio of our banks. Both our total equity and attributable equity grew 11.4% over the year, mainly driven by our earnings. Total equity increased 2.8% during the quarter, while attributable equity increased 3%. As of fourth quarter 2021, our banks showed a profit and total solvency ratios. Moving forward, we estimate that the spin-off described by Luis Carlos will have a positive impact of close to 130 basis points in Banco de Bogota's capitalization ratios. Two forces will improve the capitalization of Banco de Bogota. First, the consolidation of $20 billion or 46% of Banco de Bogota's risk-weighted assets; and second, Banco de Bogota will cease to deduct $1.6 billion in goodwill and intangibles from its core equity Tier 1. On the other hand, some negative elements result from the spin-off. First, $2.6 billion or 36% of Banco de Bogota's equity will be spun-off. Second, the bank will deduct $0.5 billion from its core equity Tier 1 associated with its remaining 25% minority interest in BHI. And third, Banco de Bogota will no longer benefit from the $520 million AT1 issued by BAC International bank in 2020. However, despite this positive effect, we expect Banco de Bogota's first quarter 2022 capitalization ratios to be similar to those reported for year-end 2021. The depreciation of fixed income markets has led to unrealized losses to our OCI, reducing core equity Tier 1. In addition, the adoption of Basel III, including changes in operational risk during this quarter is expected to increase risk-weighted assets. To further strengthen Banco de Bogota's and Grupo Aval's capital basis, the Board of Directors will recommend to their respective shareholder meetings to be held in the upcoming weeks that neither Banco de Bogota nor Grupo Aval distribute cash dividends related to 2021's net income. These recommendations seek to, on the one hand, prime Banco de Bogota's capital base to capture growth potential during the upcoming years, and as far as Grupo Aval is concerned, the recommendation was largely in line with Aval's custom to not distribute dividends unless it receives dividends from its affiliates. In recent years, Aval and Banco de Bogota have distributed an average of close to 50% of their annual net income. On page 17, we represent our yield on loans, cost of funds, spreads and NIM. 2021 interest rate behavior was driven by falling average reference rates, a growth focus on lower risk lower return products and segments during most of the year, and by the increase in price competition and else. The annual average Central Bank rate in Colombia contracted 95 basis points to 1.92% in 2021, while the average 3-month LIBOR contracted 49 basis points to 0.16%. These changes negatively impacted yields in both regions during the year. As a result of these trends, our annual net interest margin contracted 36 basis points to 4.8%, driven by a 17 basis points decrease in net interest margin on loans to 5.8% and a 64 basis points decrease in net interest margin on investments to 0.9%. Quarterly NIM fell 12 basis points quarter-on-quarter, driven by a 37 basis points contraction of NIM and investments and up 7 basis points in NIM and loans. NIM and loans remained stable in Colombia during 2021 at 5.6% and fell 53 basis points to 6.1% in Central America. The variation in Central America resulted from a slight contraction in BHI and the effect of the full year versus 7 months in 2020 of MFG. MFG has tighter net interest margins, given that it operates in Panama only. We expect that the rising interest rate cycle can provide an upside for higher NIM and loans with an initial temporary downward pressure, given the accelerated pace at which it is happening and in repricing timing differences between assets and liabilities. Price competition, given the positive macro outlook could also delay such improvement. Net interest margin and investments will be under pressure in this environment and could be affected by global monetary policies and geopolitical events. On page 18 we present net fees and other income. Gross fee income for the year reflects a pickup in banking services and debit and credit card fees as lockdowns receded and transactional activity recovered to pre-pandemic levels. 2021 consolidated gross fees increased 10.6% resulting from an 8.7% growth in Colombia and a 10.9% growth in dollar terms in Central America. Gross fees increased 4.4% quarter-on-quarter in Colombia and 13.1% in dollar terms in Central America. The recovery of consumer activity added to the high seasonal behavior of the fourth quarter yielding this strong result. Income from the non-financial sector was strong during 2021. Our infrastructure sector, that is the largest contributor to our non-financial income, grew 15.7% in 2021. Energy and gas companies decreased their contribution for the non-financial sector by 6.9% given a high comparison base in 2020 from Promigas' companies in Peru. Finally, although historically a low contributor to our non-financial sector, our hospitality business had a positive result during the second half of the year as occupancy rates rose. Despite this improvement, its annual result was up COP14 billion less. Finally, on the bottom of the page, other income was lower than a year earlier. Other income included optimization strategies executed during the fourth quarter of 2020. And income from non-consolidated investments increased due to the recovery in equity method from Promigas' associates and a COP45 billion extraordinary dividend from Groupe in the third quarter of 2021. On page 19, we present some efficiency ratios. All our business units continued implementing cost-efficient initiatives during 2021. Cost to assets for 2021 was 3.3% down from 3.4% in 2020. Cost to income was 47.6%, up from 46% a year earlier and stable relative to 2019. Cost to income was affected by a 36 basis points contraction in NIM and a 10.5% decrease in other income from operations, given the high comparison base in 2020. Other expenses increased 7% year-on-year with Colombia growing 5.6% in line with inflation and Central America 6.9% in dollar terms. The latter was impacted by 5 additional months of consolidation of MFG. Without the effect of MFG, other expenses would have increased by 6% for Aval and 4.8% in dollar terms in Central America. Personnel expenses grew by 2.6% in 2021 with Colombia growing by 3.9% and Central America 1% in dollar terms. General and administrative expenses increased by 10.1% in 2021. General and administrative expenses increased by 4.7% in Colombia and 15.6% in dollar terms in Central America. The increase in Central America is tied to expenses associated with the recovery in fee income and increased marketing expenses. Depreciation and amortization grew by 1.5% year-on-year. Depreciation and amortization increased by 0.2% in Colombia and 1% in dollar terms in Central America. Finally, on page 20, we present our net income and profitability ratios. Attributable net income for 2021 was COP3,298 billion or a COP148 per share or 3.4% higher than the result for 2020. Attributable net income for the quarter was COP777 billion or COP34.9 per share. Our return on average assets and return on average equity for the year were 1.6% and 15.3%, respectively. These ratios were 1.4% and 13.7% for the fourth quarter. Before moving into questions-and-answers, I will now summarize our general guidance for 2022. Given that we expect to complete the spin-off of 75% of BHI shortly and cease to consolidate BHI starting this call, our guidance will refer to our continued operations. We expect loan growth from our continued operations to be in the 14% area with commercial loans growing in the 12% area and retail loans in the 16% area. We expect our cost of risk, net of recoveries to be in the 1.6% area. We expect full-year NIM to be in the 4.3% to 4.5% range with NIM on loans between 5.4% and 5.6% benefiting from a slight positive effect from the rising interest rate scenario. We expect cost to assets to be close to the 2.6% area or a 20 basis points improvement versus the comparable metric in 2021. We expect our fee income ratio to be in the 15% to 17% range. We expect our non-financial sector to contract 25% relative to 2021's. Finally, we expect our return on average equity of our continued operations to be in the 15% area. Regarding BHI, that will no longer be consolidated by Aval after the spin-off, we provide the following guidance in dollar terms. We expect loan growth to be in the 7% area with commercial loans growing in the 10% area and retail in the 6% area. We expect cost of risk, net of recoveries to be in the 1.9% area. We expect full-year NIM to be in the 5.8% to 6% range, with NIM on loans between 6.7% and 6.9%. We expect cost to assets to be in the 4.3% area. We expect fee income ratio to be in the 30% to 32% range. Finally, we expect the return on average equity of BHI to be in the 13% area. With this, we are now available to address your questions.

Thank you. We have a question from Juan Recalde from Scotiabank. Please go ahead.

Hi, good morning. Thank you for taking my question. My question is about the potential capital increase. In the previous call, it was mentioned that raising capital at Banco de Bogota was an option. Now, you've indicated that there will not be a dividend payment. Will that be sufficient, or is raising capital still a possibility? Thank you.

Thank you, Juan for your question. Well, yes, as you mentioned yourself, a proxy for raising capital is, obviously, not distributing dividends and that's what we're doing. What we've noticed so far, as we mentioned in the call is that, the spin-off by itself will raise Banco de Bogota's capital ratios by about 130 basis points. And obviously, there'll be a further positive by not distributing dividends. With all that in mind, there really should not be a need for any capital raises, but that does not mean that if we see the bank growing the way we expect it to, we might later on in the year consider an additional capitalization. But for now, as I said, with the actions that we've taken, there is absolutely no need for capital at the bank or at Grupo Aval.

Thank you. The next question comes from Yuri Fernandes from JP Morgan.

Thank you, Luis Carlos and Diego. I have a question about the improvements in your asset quality, which I found to be a positive highlight. On the consolidated entity, we observed progress with 30-day and 90-day metrics. Overall, asset quality appears to be strong this quarter, but during your presentation, I noted that 9.5% of your total loans are still under relief, down from 9.8% in the previous quarter. It seems that the relief book remained stable quarter-over-quarter. Is that accurate? Is the amortization on these reliefs slowing down, potentially influenced by Central America? I would like to verify this information. Additionally, regarding the asset quality of the reliefs, I see that 1% of your total loans under relief are past due. This represents around 10% of all loans under relief, while if we consider 1% of your total loans that are past due, it results in a 10% 90-day non-performing loan ratio for the reliefs, and roughly 50% to 60% for the 30-day metrics. Overall, I would appreciate any additional details on the reliefs, specifically about the amortization trends and asset quality. Also, I have a second question concerning growth. I noticed your guidance projects a 40% loan growth for Colombia, which seems to exceed market expectations. You mentioned competition and compression on spreads during your presentation. Is Aval Bank becoming more aggressive in trying to regain market share, or is the increased competition coming from other players? I'm interested in understanding your pricing strategy, spread strategy, and whether you plan to be more competitive on pricing to regain market share. Thank you.

Well, very good questions you have. I wrote down 3 different questions. The first one regarding the mechanics of the reliefs and how the numbers should evolve. The reason why you should expect to continue seeing the number for reliefs to be relatively stable, though falling in time is that, anything that was believed regardless that it is paying or not, we have marks on, particularly for the part of the portfolio that was under part, the government-sponsored borrower support program, we continue to market in this category. So, to try to bring the numbers down, out of that 9.5%, around 0.8% of our gross loans are what remains under payment holidays and that includes mainly what comes from Panama in Central America. In the case of Colombia, the number is 0.04%. So, you're talking about a very, very slim number. So in that sense, you could say that reliefs are over, except for the Panamanian ones that are falling very fast. Around half of those reliefs went away during the quarter. But part of those go to something structural and that's what we continue reporting and continue tracking. As a matter of fact, part of what we did at the end of the year was, we included some overlays on part of these loans that had relief at some point in time and that yet needed to prove that they would return to normal. So, in trying to give you an idea of what to expect into the future, we should see that number trending down, however, until these loans go back to fully normal, fully normal means, over a year of experiencing the proper payment performance or being paid out, will you start to see those numbers falling. So, that is something that should be happening later on during the year. And it was not your question, but to give you some additional color. That's the reason why our guidance on cost of risk for the full year is lower than what we already gave for the last quarter of last year. And it is that we expect to see a positive evolution as those loans actually demonstrate that they are back to normal. So, that was question number one regarding what to expect from reliefs and to try to match that to the rest of the behavior. Then regarding loan growth, we've picked up the number on loan growth bringing into consideration 2 things. The first one is, we've seen inflation picking up. So part of what brings this number higher is also our view on higher inflation that Luis Carlos mentioned before. So, in real terms, this is not as large a change to what our view was previously. Then the second piece is you're absolutely on the spot. We have an aspiration and that ties to the Banco de Bogota or the BHI spin-off to see recovery in market share that our banks gave away and that's built into our numbers and built into our strategy. What are we thinking regarding that? It's a combination of 2 things. One, what the bank has to do internally and it ties into a stronger commercial activity and other changes in the way they approach the market. And then part of what has slowed us down in the, let's say, the latter part of last year was aggressive pricing in the market that in our pricing models was not profitable growth. To say it, in other words, those were businesses that in our numbers might be losing money in the long term. However, with the behavior that we're seeing from the economy this year and the dynamics in the market, we expect to see pricing return to more reasonable levels. So, it's a combination of things that we're doing internally with how we see the market evolving. Then spread wise, that's perhaps the toughest question of all because we are seeing the Central Bank raising rates very fast. Under a normal scenario where this would be a progressive process where rates were going up slowly, we would have a chance to catch up between assets and liabilities and get a benefit on NIM in the short term. That's what we expect to see in the longer term. And it is to see our spreads and loans to expand due to a higher interest rate environment. However, the speed does determine what happens in the short term, the repricing differences between assets and liabilities might put some pressure initially. And finally, we mentioned competition around a stronger Colombian economy. Pricing also includes cost of risk, it's implicit in how we price our loans through a better view on provisions also build into NIM. Perhaps the way we look at these numbers is, NIM after cost of risk is a good way to think about how these numbers will be evolving. And in that sense, the combination of those 2 should have a positive effect, regardless of the sort of growth that we pointed to.

Thank you. Our next question comes from Nicolas Riva from Bank of America. Please go ahead.

Thanks very much, Luis Carlos and Diego for taking my questions. I have 2 questions. The first one on the 2022 bond, if you can discuss how you plan to finance the $1 billion maturity in September? Second question on the spin-off. So then you said you see no need to raise capital at this moment at either the Banco de Bogota or Aval level, you're not going to pay a dividend at this point. And when you talked about the guidance for the capital ratio, you said 130 basis points positive impact on Banco de Bogota because of the spin-off. Does this include all of the impacts really from the spin-off? So the deconsolidation of the risk-weighted assets, the fact that you will no longer have to have any goodwill, all of that is already factored into that assumption or projection? And then third question on the election. So this year Colombia has presidential elections and we know that Gustavo Petro is ahead in the polls. If you can talk about what Petro has said specifically that he would try to do regarding the banking sector? My concern basically would be higher taxes and we know that the banks already pay higher taxes than the corporates, and also taxes on wealth, the tax on shareholders' equity that I know that Colombia has implemented in the past. But also if you can discuss your thoughts regarding the risk of nationalizing pension funds, which I'm sure would have a negative impact on Porvenir. And what's the likelihood that he would be able to do such a thing? Thanks.

Okay. Let's begin with the 2022 bond, Nicolas. We already have the funds available to pay off that bond. Our strategy for international debt has always been to use the proceeds from bond issuances and invest them in our subsidiaries, particularly those that either lack access to international markets or would face higher borrowing costs than Aval. We lend that money to our affiliates in these situations and align the loan maturities with our bond maturities. Currently, the funds for the 2022 bonds are either in short-term deposits that we have already liquidated or out with our affiliates who will pay us back before the bond matures in September 2022. Therefore, the September 2022 bond will be settled as we stated while marketing the 2030 bond. Regarding your question about whether this includes all the effects, yes, it does. I’d like to explain why the numbers appear favorable. The spin-off entails the complete removal of 100% of the risk-weighted assets and 75% of the total equity, along with substantial goodwill. To clarify, out of the $2.6 billion in equity being spun off, $1.6 billion is intangible. Thus, what is actually being spun off amounts to $1 billion in tangible equity from Banco de Bogota, which represents roughly 14% of Banco de Bogota's equity after accounting for these intangibles. Essentially, we are removing 46% of risk-weighted assets while only taking away 14% of tangible equity. Additionally, 25% of the investment is recorded as a minority investment in financial companies, and the issued 81 that BAC International Bank will spin off also means Banco de Bogota will not benefit from it. This is why our figures are positive, as a large portion of what we're spinning off consists of intangible equity relative to the risk-weighted assets. So, back to your question, yes, this does account for all effects. That should cover it.

Regarding your third question about Mr. Petro, yes, he is currently leading in the polls. However, this past Sunday revealed an interesting dynamic. Petro received about 5 million votes in his primary, but it’s notable that his party only garnered 2.5 million votes for Congress. This points to a significant disparity between the votes he secured personally and those for his party. This difference suggests that the makeup of Congress will remain crucial for his ability to pass legislation, particularly concerning higher taxes, wealth taxes, and taxes on the financial sector. We will also discuss his proposals related to the nationalization, or as he terms it, the democratization of pension funds. While he is ahead now, we must determine whether the 5 million votes he received will translate into support in the initial round of the presidential elections. It's important to remember that we anticipate between 20 and 21 million votes in the presidential election, which means there are still a substantial number of votes unaccounted for. Even if he secures all the votes from his coalition in the primary, approximately 10 million votes remain uncertain in their destination for the presidential election. Moreover, even in the event of victory, the composition of Congress has already been determined and, although his party secured more seats than others, it did not achieve a majority. This means that potential opposition remains in Congress regarding his proposed measures on higher taxes and the financial system. We are still learning how Congress will respond to those proposals. You also mentioned the potential nationalization of pension funds. There has been significant public backlash following his recent statements where he directly outlined his intentions. Many associated with the pension funds have voiced their opposition, particularly to his assertion that pension funds belong to the administrators, which is factually incorrect. While this is indeed uncomfortable for him, I do not believe it is a foregone conclusion. Much work remains before any campaign promises could materialize into reality.

Thank you. Our next question comes from Sebastian Gallego from Ashmore. Please, go ahead.

Hi, good morning. Thank you for the presentation. I have several questions. The first one is just a follow-up on capital and positive effect that you mentioned on 130 basis points on Bogota. I'm wondering if you could clarify the OCI effect that Diego mentioned in the presentation, because it seems that the OCI unrealized losses may mitigate the positive effects from the 130 basis points. So that clarification will be nice for the first question. The second question is also a follow-up on the comments that Mr. Luis Carlos mentioned on capital increase. You mentioned that you probably will need a capital raise, but it could come later on in this year. We're wondering if excess cash could be an inefficient capital allocation at Banco de Bogota? And we're wondering if you're thinking about M&A activity in Colombia to foster growth at Banco de Bogota? And the third question will be on risk appetite on consumer loans. You provided guidance of 16% for retail and we are seeing higher growth on unsecured lending. Can you talk about that? and what could be the strategy on a sustainable basis? Thank you very much.

Yeah. Going through your 3 questions, the first one regarding the negatives that are offsetting the positive benefit from the spin-off? You mentioned one of those and you're absolutely right, OCI is something that is moving and we expect to continue to see moving over the remainder of the year as the global interest rate environment picks up and that affects banks either through OCI, in our case, where we are concentrated in fair value to OCI or affects banks directly to P&L if you have those as fair value to P&L. So either way, it ends up eating capital from banks and that's a global trend that we see happening and it also affects Aval. However, there is a second piece of what I mentioned that perhaps I need to highlight more. And it is part of the transition to Basel III includes changes in operational risk. Starting this year, there is a trigger and this is one of the last triggers on this transition that will be generating this sort of effects and it says not to get technical there are some coefficients that are determining what is the translation from operational risk into risk-weighted assets. It's pretty substantial of what we expect to see in the Colombian market and that's why the order of magnitude of the combination of these 2 effects adds to around 130 basis points or 100 basis points or something on that area. So you're right on the OCI, not only for Aval, but for all the banks in Colombia and around the world. But what is particular to Colombia and all the Colombian banks is this next step in operational risk.

Regarding the capital increase at Banco de Bogota, I want to clarify that there is no need for capitalization due to the spin-off, as previously mentioned. However, if necessary, we would consider a capitalization later this year. We wouldn't pursue capitalization just to hold cash, as that would be an inefficient use of capital. Any potential capitalization would be aimed at growth or M&A opportunities. Currently, we do not have specific plans in mind, but our focus is on profitable growth. We are always vigilant about growth opportunities, and if growth necessitates capital, we view that as a justified need. Therefore, while no capital will be needed due to the spin-off, we remain open to considering capitalization in the future, although we have not determined the amount yet.

You asked about our risk appetite, and yes, we have increased it. This change is due to the improvement in performance we anticipated, allowing us to explore areas we had previously avoided during the pandemic. To quantify this, loan formation, specifically past due loans, has returned to pre-pandemic levels. When analyzing by loan segment, we observe similar trends both overall and in specific segments. Currently, the percentage of loans in Stage 2 is higher than it was before the pandemic, around 11% to 12%, compared to the 5% we saw previously. Nevertheless, the data indicates that many of these Stage 2 loans, previously reclassified, are returning to pre-pandemic performance. This improvement enables us to reintroduce higher-risk products that we temporarily set aside in recent years. Consequently, our fourth quarter reflects a significant increase in credit cards and personal loans, products we had previously downplayed. The same trend applies to certain sectors of commercial loans that, while once deemed riskier, now appear more favorable as market conditions change. Additionally, the unemployment rate is improving by roughly 200 basis points each year, and we expect this trend to continue, creating an environment where we feel more comfortable returning to our normal risk appetite. We have operated in a risk-coverage mode for the last couple of years, but now we are moving back towards our standard practices.

Thank you. Our next question comes from Daniel (ph) from Credicorp Capital.

Hi, good morning, and thank you for the presentation. I have just a couple of questions. The first one is a follow-on on the capital ratios. I would like to just understand with the 130 basis points improvement in capital ratios that will be reflected in the Stage 1 with the latest figure that you published in the fourth quarter that Stage 1 of Banco de Bogota has stood at 10.2% with these 100% improvement we can reach a figure of 11.5%. I would like just to confirm this figure, and also ask what will be the internal Stage 1 guidance or targets that you would like to maintain in the coming year to comply with Basel III standards considering that peers have Stage 1 ratios around 12%? And my second question is regarding the spin-off of BAC. Considering that you are really requested the suspension of the trading of (ph) stocks at Aval and Bogota in the weak and we, I guess if we need to have more information regarding the exact number of shares that BAC Holding international will have and also the changed terms between those investors that will have shares benefit at Aval, and share benefit at Bogota BAC Holding International. And that will be my 2 questions. Thank you so much.

Thank you for your question regarding the capital ratio. In light of the current market situation, including the OCI and operational risks we've previously discussed, we're anticipating an overall improvement of around 130. Core equity Tier 1 may see a similar increase, ranging from 120 to 130. However, the factors I've mentioned do influence this rate. The OCI directly impacts core equity Tier 1 by lowering the equity number, which in turn decreases core equity Tier 1. Additionally, growth in risk-weighted assets also creates pressure on this figure. We expect a slight improvement compared to December, reflecting a combination of the positive impacts from the spin-off and the challenges previously noted. One figure that will decrease is the H1 bucket, which will diminish immediately following the spin-off. Regarding total solvency, it should remain consistent with the figures we're reporting in this call. In terms of peer comparison, that's currently a fluid situation. As for Banco de Bogota, we've halted dividend distributions, while our nearest competitor is trading at around 70% of equity, which will affect our comparisons. We'll need to analyze how all related numbers evolve to provide a clearer long-term outlook for core equity Tier 1. Regarding your second question about the recent announcements, it's already public knowledge that when we execute the spin-off of BHI from Banco de Bogota, the shareholders will receive shares of Banco de Bogota based on the number they own. The same principle applies to Aval shareholders, who will receive shares in the recipient company. It’s important to note that the number of shares among Aval, Banco de Bogota, and BHI differs, so we’ll need to normalize these during the merger process. Our plan is to normalize based on the share count of Aval, ultimately determining the number of shares for BHI. Therefore, Aval shareholders can expect to receive shares in the new company once the spin-offs and mergers are complete.

When you normalize the numbers and you take the largest common denominator to do that, the number of shares in BHI is going to be like about 42 billion shares.

Thank you. Our next question comes from Julian Ausique from Davivienda Corredores.

Hi, everyone, and thank you for allowing me to ask questions. I have two questions. First, could you please repeat the number of shares that BHI will have? My second question is related to the efficiency and provision expenses we observed during the quarter. There was a negative impact on the efficiency rate, and I would like to know if there will be further actions this year regarding these metrics. Additionally, could you clarify why the provision expenses have changed compared to previous quarters? We saw a decrease in provision expenses, but there was an increase in the first quarter. Thank you.

Okay. Regarding the efficiency ratio, you asked two questions: one about efficiency and the other about the cost of risk. As I mentioned in the presentation, we had some additional overlays, primarily as we move past the pandemic. We reviewed our entire portfolio and the various sectors, which resulted in slightly higher provisions. We've actually seen the guidance we've provided throughout the year. The overlays function by having the models attempt to shift loans from Stage 2 back to Stage 1 due to improved performance. At that stage, we maintain certain segments or customers in Stage 2 based on regulatory standards to ensure proper application. Consequently, those that might have seen lower provision expenses did not. Our approach involved reviewing sectors and customers on a quarterly basis, and we're aiming for a more thorough review at year-end, again to move past the pandemic. Concerning efficiency, several extraordinary expenses impacted our costs in the fourth quarter. Additionally, there is a seasonal trend in our numbers where the fourth quarter consistently shows higher expenses and income compared to the first quarter. This pattern is especially notable in Colombia and even more so in Central America. In Colombia, we faced two main impacts. First, we made provisions related to customers transitioning from mandatory pension funds to the public pension system, which are legal processes that typically occur gradually. We provisioned in advance for these proceedings, adding about $120 billion to expenses. The second impact involved Corficolombiana; as we near the completion of the Pacifico project, we reassessed our expenses and included provisions for cost overruns related to the project, amounting to between COP60 billion and COP80 billion. These two events in Colombia contributed to the high seasonal performance, which you can review historically.

And Julian to answer your question, I'll repeat the number that I told Daniel before, the number of shares of BHI is going to be somewhere around 42,000 million shares.

Thank you. Thank you. We have no further questions at this time. I will turn the call over to Mr. Sarmiento Gutierrez for his final remarks.

Hilda, thank you very much and thank you to everyone on the call. We will keep striving to deliver for you. After the spin-off, we will assess what guidance we can provide regarding BHI and determine how much guidance we can offer. However, we will certainly continue to update you on our ongoing operations. With that, I will conclude. Thank you once again. As always, our phones are open, and if you have any additional questions, we will be happy to assist. We look forward to speaking with you next quarter. Thank you again.

Thank you, ladies and gentlemen, this concludes today's conference. We thank you for participating. You may now disconnect.