Grupo Aval Acciones Y Valores S.A. Q4 FY2022 Earnings Call

Welcome to Grupo Aval's Fourth Quarter 2022 Consolidated Results Conference Call. My name is Brent, 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 SEC. As such, it is subject to compliance with securities regulations in Colombia and applicable U.S. Securities Regulation. Grupo Aval is also subject to the inspection and supervision of the superintendency of finance as a 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-IFRS measures, such as ROAA and ROAE among others are explained when required in this report. Banco de Bogotá executed a spin-off over 75% equity stake in BAC Holding International Corp. BHI. to its shareholders, and Grupo Aval subsequently spun off its equity interest to its shareholders on March 29, 2022. Prior to the spin-off, Banco de Bogotá was the direct and only parent of BHI. Furthermore, on December 19, 2022, Banco de Bogotá sold 20.89% of the outstanding investment of BHI through a tender offer. As of December 31, 2022, Banco de Bogotá held a 4.11% of BHI. This investment is reflected as an investment at fair value through other comprehensive income. As a result, for comparability purposes, we have prepared and presented a supplemental unaudited pro forma financial information for the 12 months ended December 31, 2021. That assumes the spin-off was completed on January 1, 2021. As a result of the sale of 20.89% of BHI, in this presentation, we have reclassified BHI's equity method to discontinued operation for the second and third quarter of 2022. The supplemental unaudited pro forma financial information does not purport to be indicative of our results of operations or financial position at the relevant transactions occurred on the dates assumed and does not project our results of operations or financial position for any future period or date. The pro forma financial information is unaudited, and the completion of the external audit for the year ended December 31, 2022 may result in adjustments to the unaudited pro forma financial information presented herein; any such adjustments may be material. For further information, please see the supplemental unaudited pro forma financial information in our fourth quarter of 2022 earnings release. 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 consequence of changes in general, economic and business conditions, changes in interest in 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 the 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 1,000s 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. Sir, you may begin.

Good morning and thank you all for joining our fourth quarter 2022 conference call. Last quarter was an eventful one. Colombia's economy lost its momentum, inflation continued unabated, Christmas holiday consumer demand disappointed, the cost of funds skyrocketed, and banks that concentrate on consumer lending, couldn't reprice their loan portfolios quickly enough to compensate for the increased cost of deposits. Notably, Banco de Bogotá accepted a tender offer to sell 21% of its remaining 25% participation in BAC Holding International Corp. BHI, the holding company of the Central American Banking Group, BAC Credomatic. Let's dive right into it. As you may recall, in March 2022, Banco de Bogotá completed the spin-off of 75% of BHI in favor of its shareholders and consequently retained a 25% stake in this holding company. Concurrently, Aval spun off the BHI shares that it received from Banco de Bogotá in favor of its shareholders, thus reducing our exposure to Central America to approximately 8.5% of our total assets. In December 2022, Banco de Bogotá accepted a tender offer for common shares of BHI at virtually the same price per share used as the basis for the March spin-off presented by a company controlled by Grupo Aval's shareholders. The price was acceptable to the bank considering higher discount market rates because it represented a 50% premium to the then trading price of the stock. As a result, the banks sold 20.89% of BHI lowering its stake to 4.11%. This decision was driven by the same considerations that had led the bank to spin off BHI in the first place. This transaction increased Banco de Bogotá's solvency ratio and improved its net scalable funding ratio NSFR, allowing for loan growth with reduced pressure on the cost of funds. The transaction was well-timed considering, as mentioned before, the accelerated adoption process occurring in Colombia, which resulted in a steep increase in the cost of funds as most Colombian banks competed almost exclusively by offering ever-increasing rates for longer-term deposits. As previously disclosed, Aval's first quarter '22 results included extraordinary net income of Ps. 724 billion as a result of Banco de Bogotá's spin-off of 75% of BHI. The fourth quarter 2022 sale of an additional 21% of BHI resulted in an extraordinary loss in Aval's P&L of Ps. 678 billion. Both transactions resulted in a one-time gain of Ps. 46 billion during 2022. Moving on to the macro environment: during 2021 and 2022, the global economy consolidated a post-pandemic recovery driven by commercial activity and domestic consumption. Stronger demand combined with weaker supply as the supply chain was disrupted by the COVID-19 pandemic led to higher inflation. In turn, Central Banks moved to contractionary monetary policies. As the supply chain has started to normalize, the supply of gas and fertilizers, among others, affected greatly by the military conflict in Ukraine, hampered the normalization of inflation. In fact, according to the IMF's latest projections, global growth will slow from 3.4% in 2022 to 2.9% in 2023. Colombia experienced an outstanding recovery during 2021 which continued into the first three quarters of 2022. However, the country's dependence on imports, complications in transporting agricultural products, a steep rise in food prices, and the challenging political environment drove very high inflation, which triggered significant monetary policy changes and the steepest increase in interest rates in this century. Strong growth during the first three quarters of 2022 boosted Colombia's GDP to grow 7.5% during the year, one of the highest growth rates among all emerging countries. Growth was driven by robust private consumption that grew 9.5%, alongside strong investment dynamics that grew 19.5%. Unfortunately, net exports had a negative impact on overall growth, due to a 23.9% expansion of imports that exceeded a 14.9% increase in exports over the year. On the supply side, growth in 2022 was driven by the recreation and entertainment sector, which experienced a 37.9% annual growth, followed by communications growing at 14.2%. Commercial activity grew by 10.7%, while manufacturing grew by 9.8%. Meanwhile, the agriculture sector contracted 1.9% over the year due to higher input costs and adverse weather conditions. Given the recent economic slowdown, the Central Bank has revised down its 2023 growth estimate from 0.5% to 0.2%, below the 1.3% market consensus. Furthermore, the IMF now expects GDP growth in Colombia to be 1.1% in 2023, lower than its previous projection of 2.3%. Economic activity is likely to be dragged down by higher interest rates, persistent inflation, a softer labor market, and uncertainty associated with a large pipeline of reforms, including labor, healthcare, and the pension system. Accordingly, we now anticipate GDP growth of 1% for 2023. As mentioned earlier, price pressures continued to build up in 2022, with food prices increasing more than 25% during the second half of the year. Accordingly, 12-month inflation reached 13.1% in December 2022, the highest since 1999. In January 2023, inflation continued to accelerate, reaching a 12-month inflation rate of 13.3%, with food prices accounting for 35% of the overall price increase. Going forward, lower global prices of fertilizers and better weather conditions should help alleviate price pressures on the agribusiness sector with inflation slowly easing over the next few months. While market consensus forecasts a 12-month inflation rate of 7.8% by the end of 2023, we expect it could reach 9%. In this context, the Central Bank's contractionary monetary policy has dictated continued hikes of its repo rate up to its current 12.75% after a 75 basis points hike during its January meeting, accumulating an 1100 basis points hike since September 2021. Considering the persistence of inflation, we don't rule out the possibility of one or two additional hikes bringing the rate to 13.25% during the coming months, shifting to lower rates during the second half of the year, which could lead to a year-end rate of close to 10.5%. The labor market continued to improve during 2022, but this improvement has started to slow down. The average 2022 unemployment rate fell to 11.2%, improving from 13.8% in 2021. In December, the national unemployment rate reached 11.3% versus 12.1% in December 2021. However, we do anticipate a softening of the labor market during 2023 given the slowdown in job creation at the end of 2022, the economic slowdown, the 16% increase in the minimum wage, and anti-technical labor reform in the current contractionary monetary environment. We expect average annual unemployment to deteriorate to 12% in 2023. Regarding the exchange rate, during the last few days, the peso has been volatile in the range of 4,750 to 4,950 pesos per dollar as a result of market jitters concerning higher interest rates in the U.S. and their effect on the Colombian economy given its dependence on external financing. Additional volatility in the Colombian peso has been driven by uncertainty around mentioned reforms, which appeared to be oriented towards reducing the role of the private sector in certain industries such as health, pensions, and utilities. This adds to previous rhetoric regarding reducing or stopping altogether oil and gas exploration as part of an energy transition towards cleaner alternative sources. These reforms could reduce domestic savings and impact the country's external financing position, making it more vulnerable to external shocks. Market consensus suggests that the country could end the year with a current account deficit of around 4.5% of GDP, which is likely to prevent the peso from appreciating to its pre-pandemic levels. Finally, on the fiscal front, at the end of 2022, the fiscal deficit was 5.5% of GDP, an improvement compared to the 7.1% recorded in 2021, reflecting the strong rebound of the economy and the positive effect of higher oil prices and tax collection. Net public debt to GDP fell to 59.6% in 2022, down from 60.8% in 2021 due to higher nominal GDP growth despite the weakening of the peso during the previous year. On the digital transformation front, during 2022, in accordance with our strategy, the vast majority of our traditional legacy products are now offered by our banks digitally. A substantial number of our internal operations have been digitized. We're working to expand our ecosystems and in the second semester, we launched a drive to enroll new clients in our digital wallet, Dale. Our banks sold 2.2 million digital products, an increase of 43.7% compared to 2021. Digital transactions represented almost 70% of total transactions and increased by 43% over the year. In the same period, transactions conducted in our branches decreased by approximately 13%. Digital customers of Aval's banks approximate Ps. 5 million in Dale. Our digital wallet clients are running close to 1 million. At this rate, we should end the year with approximately 3.5 million to 4 million customers in Dale. Dale has also begun to participate in the dispersion of subsidies, which has been a significant boost for the growth of other digital wallets in the market. Finally, it has also successfully closed several banking-as-a-service agreements, including agreements with LifeMiles and others. Our data analytics continue to evolve, and the cost of acquiring new digital clients continues to drop as we improve our spending effectiveness, supported by our database platforms developed by Aval's digital labs. During 2022, we continued strengthening our ESG efforts and improving our sustainability model. These are a few of our ESG milestones during the year: We reaffirmed our addition to the United Nations Global Pact and, along with other banks, joined the financial initiative UNEP FI. Grupo Aval's subsidiaries received a friendly certification in Banco de Bogotá, Banco Popular, Banco de Occidente, Corficolombiana, and Porvenir, which have been recognized by Great Place to Work as some of the best employers in the country. The holding company measured its carbon footprint for the first time during 2022, analyzing the years 2019, 2020, and 2021 for Scopes 1, 2, and 3. In 2021, we saw a reduction of 56% in our footprint when compared to 2019. Banco de Bogotá designed its climate strategy aligned with net-zero and published the first report following TCFD recommendations. Furthermore, Banco de Bogotá is the first carbon-neutral bank in Colombia. In 2022, the diagnostic stage began in Banco de Occidente, Banco Popular, and Banco AV Villas. We expect to conclude the implementation process in 2023. Banco de Bogotá and Corficolombiana were included in the Dow Jones Sustainability Index yearbook. Lastly, in 2022, the Cancer Treatment and Research Center began operations and attended approximately 2,500 patients. Regarding our financial results, Diego will refer next in detail to our financial performance during 2022. However, I would like to highlight the following. First, as addressed before, net income during the last quarter of the year included a Ps. 0.68 trillion one-time negative effect caused by Banco de Bogotá's decision to sell 20.89% of the stake it held in BHI in response to a tender offer. This negative non-recurrent loss was sufficient to offset the quarter's net income from recurrent operations of Ps. 0.31 trillion, as the Ps. 0.68 trillion non-recurring charge partially offset the Ps. 0.72 trillion non-recurring gain booked in the first quarter of 2022 after Banco de Bogotá spun off 75% of BHI. During 2022, the net effect in Aval's P&L of BHI's transactions amounted to a Ps. 0.50 trillion positive non-recurring gain. Total attributable net income for the year amounted to Ps. 2.5 trillion. However, absent income from discontinued operations almost entirely related to BHI, Aval's 2022 attributable net income on a recurring basis reached Ps. 1.9 trillion. This result, however, is clearly divided in two: the positive macro environment during the first half of 2022, which led to net attributable income from continuing operations of Ps. 1.2 trillion, and the acute economic downturn during the second half of the year, which led to net attributable income from continuing operations of Ps. 0.7 trillion. During the first half, our banking subsidiaries benefited from a rebound in loan growth, a favorable evolution of asset quality, and higher recoveries of written-off loans. However, this environment changed materially during the second half of 2022 given the massive increase in the Central Bank intervention rate and the unprecedented speed at which monetary policy has been transmitted to the cost of funds of banks due to the accelerated implementation of regulations in Colombia. In fact, the spread between the central bank policy rate and rates paid for time deposits widened by as much as 400 basis points as banks competed to raise time deposits exclusively via higher rates. The speed and magnitude of these rate increases compressed margins in banks in general, and more dramatically in banks with predominantly fixed-rate consumer loan portfolios. Conversely, higher interest rates favored net interest margin in our corporate banks, which have mostly variable interest rate commercial loan portfolios. This pressure should start to ease in 2023 as the new requirements have been met, inflation subsides and the Central Bank starts to lower rates, while fixed-rate loan portfolios start to mature and reprice. Obviously, the rising rates also affected the yield curve, which in turn negatively impacted fixed-income securities portfolios, including the proprietary fixed-income securities portfolio of our pension and severance fund manager, Porvenir. Porvenir was also affected by a steep increase in life and disability insurance premiums, which directly lowered its fee income. Insurance premiums have sharply risen since the pandemic accelerated insurance claims at unprecedented rates. We remain highly watchful of the proposed reforms, details of which have not yet been made public. During 2022, Porvenir contributed 4.7% of our total net income. All in all, in line with our previous guidance, in 2022, Aval produced attributable net income of approximately Ps. 105 per share, a return on average assets of 1.6%, and a return on average equity of 14%. Loan growth exceeded our expectations at 18%, and loan quality, including cost of risk, continued to improve. Growth for 2023 will likely be close to 0 in real terms, which is equivalent to nominal growth of approximately 10%. However, cost of funding should drop, and net interest margins should expand. The big question mark revolves around employment and the effect that this might have on the quality of consumer loan portfolios. We will continue to navigate this challenging environment, revise and respond to the extent of our capabilities in the final details of the proposed reforms, deploy capital, devise optimal funding strategies, and, as always, maintain cost control and loan pricing discipline. 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 2023.

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS. Starting on Page 8, assets grew 16.2% during 2022 and 3.4% during the quarter. Over the year, net loans and leases increased their share of our mix, with a trade-up in the share of fixed income investments and cash and equivalents. Moving to Page 9, loans grew 18.1% over the year and 4.1% during the quarter, with similar performances in commercial and retail loans. Annual loan growth rates accelerated to 18.3% in commercial loans and 17% in consumer loans. The 12-month growth in consumer lending was driven by personal loans with a 33.7% increase, followed by automobile loans and credit cards that grew 18.9% and 17.8%, respectively. Payroll loans grew 11.2% over the year. Growth over the quarter was 4.5% for commercial loans and 3.1% for consumer loans. Though still high, the strength of performance was driven by the impact of higher interest rates and loan demand, along with a deterioration in consumer confidence. Personal loans and credit cards, which account for 23% and 12% of our consumer portfolios, grew 8.2% and 5.7%, respectively, during the quarter. Federal loans and auto financing, our main consumer secured products, grew 0.2% and 5.7%, respectively. These products account for 56% and 9% of our consumer portfolio. Mortgages grew 21.8% year-on-year and 5.4% over the quarter. Loan growth has begun to decelerate in riskier products and segments. We anticipate slower growth of our loan portfolio during 2023, in line with the softer economic outlook both locally and globally. On Pages 10 and 11, we present several loan portfolio quality ratios. The quality of our loan portfolios improved during the year, both measured by stages and by PDLs. This resulted in a lower cost of risk over the year. Stage 1 loans now represent 87.2% of our gross loans, improving from 81.7% twelve months earlier and 86.3% three months earlier. Regarding delinquencies, 90-day and 30-day periods improved by 38 basis points and 30 basis points year-on-year. Over the quarter, there was a slight deterioration in both metrics due to a slower growth rate of our loan portfolio, a lower level of charge-offs, and a higher 90-day PDL formation. The cost of risk net of recoveries for the year was 1.5%, compared to 1.8% in 2021, and posted a ten basis points increase over the quarter to 1.46%. Finally, the ratio of charge-offs to average 90-day PDLs was 0.56 times for the quarter and 0.57 times for 2022. On Page 12, we represent the funding and deposit evolution. Funding increased by 3.6% during the quarter, supporting loan growth. As a result, our deposits to net loans ratio remained high at 97%. The share of deposits in our funding mix remained relatively stable at 71% while bonds, loans from banks, and other funding sources added to our capital. Deposits grew by 17% year-on-year and 4.1% during the quarter. Time deposits gained share in our mix, anticipating the high requirements for the net stable funding ratio that will be applicable at the end of this month. On Page 13, we represent the evolution of our total capitalization, our attributable shareholders' equity, and the capital adequacy ratio of our banks. Our total equity decreased by 21.9% over the year due to the spin-off of 75% equity stake in BHI in March 2022. Part of this transaction reduced our assets and equity by Ps. 9.7 trillion. The impact of this transaction led to a decrease in attributable equity of Ps. 6.6 trillion. Additionally, the OCI tied to our fixed income portfolio showed a loss of Ps. 0.9 trillion in deferred taxes. Part of the performance was driven by a one-time negative effect of the sale of 20.9% of BHI in December. As of the fourth quarter of 2022, our banks reported Tier 1 and total solvency ratios similar to those reported for September 2022. To strengthen Banco de Bogotá and Grupo Aval's capital basis, their respective shareholders' meetings approved the distribution of stock dividends. Shareholders are required by law to accept stock dividends or else they are paid in cash our unpaid cash dividends of Ps. 0.1 trillion in March of 2022. Banco de Bogotá does not fully incorporate the benefit of exiting its investment in BHI given the reduction of its 4.1% minority stake in the company that poses a burden of 30 to 40 basis points to its primary capital ratio. Banco de Occidente increased its secondary capital through a $100 million increase in subordinated loans. On Page 14, we represent our yield and loans, cost of funds, spread, and net interest margin (NIM). Interest rate behavior for 2022 was driven by the contractionary monetary policy implemented by the Central Bank. The year-end benchmark rate in Colombia increased 900 basis points during 2022 to 12%, but the average rate increased 528 basis points to 7.2% relative to 2021. Additionally, the split which monetary policy transmitted to the cost of funds has been unprecedentedly fast due to the recently increased requirements of longer-term funding to comply with the net stable funding ratio. The pressure on demand for time deposits increased the spread between those and the Colombian sovereign debt up to approximately 450 basis points above historical levels. We expect a substantial part of this phenomenon to be temporary. In fact, over the last few weeks, this spread has come down to 250 basis points above historical levels. The magnitude and speed of the increasing funding rates compressed the NIM of retail loans. This was due to some of the higher credit quality retail loans, such as payroll loans, being fixed rates. We expect this compression to recede during the second half of 2023 as funding prices are expected to fall due to the reduction in the Central Bank intervention rate, loan portfolios continue repricing, and as the banking system fully adjusts to tighter Regulations. In the meantime, we expect the pressure for higher funding costs and NIM of our fixed-rate retail portfolio to persist over the next few quarters. The compression of margins happened mostly during the second half of the year as two-thirds of the central bank rate increase occurred during that period. During the fourth quarter, the NIM on loans contracted by 40 basis points to 4.15%, and the spread between average yield on gross loans and average cost of funds contracted by 39 basis points to 4.7%. The cost of funds of our non-financial activity is included in an overall net interest margin, which distorts our numbers. In this context, the net interest margin on loans of our banking segments contracted 41 basis points during the year to 5.29% in 2022. However, the higher funding costs of our non-financial activity resulted in an overall NIM on loans of 3.68%, which contracted by 67 basis points during the year. Bear in mind that the increase in interest expenses associated with the funding of our non-financial activity was offset by a stronger performance of the non-financial sector, benefiting from inflation. Tailwinds on our commercial lending activity led to a 125 basis points increase to 4.55% in 2022's NIM of commercial loans in our banking segments. In contrast, headwinds on our retail loans, which have a longer repricing period, led to a 228 basis points contraction to 6.2% in our 2022 NIM and retail loans of our commercial banking segments. NIM on investments for 2022 decreased 49 basis points to minus 0.1%, reflecting the increase in cost of funds and the challenging performance of global capital markets throughout the year. NIM on investments includes the performance of mark-to-market investments held by Porvenir under mandatory stabilization reserves, which posted negative returns in 2022. NIM on investments of our banking segments decreased by 22 basis points to 0.46%. On Page 15, we represent net fees and other income. Gross fee income for the year 2022 increased by 2.1%, while net fee income decreased by 5.2%. Gross fee income for the quarter fell by 1.7% year-on-year and increased by 1.3% quarter-on-quarter. Net fee income decreased by 6.9% year-on-year and increased by 0.4% quarter-on-quarter. Net fee income incorporates substantial improvements in banking and trust fees, and a sharp decrease in pension and severance fees. Gross banking fees for the year increased by 17.1%, reflecting the recovery of bank insurance merchant acquiring debit and credit card fees, in line with strong loan growth and dynamic domestic demand. Annual net pension and severance fees decreased by 37% mainly due to higher insurance premiums associated with increased mortality rates during the pandemic and to a lesser extent to lower performance-based fees in line with capital market conditions. Income from the non-financial sector was strong during 2022. Our infrastructure sector, the largest contributor to our non-financial income, grew 54.1% as financial assets from our concession agreements benefited from higher inflation and the depreciation of the Colombian peso. Fourth-quarter performance was negatively impacted by cost overruns in some of our road concessions. Energy and gas companies increased their contribution to our yearly non-financial sector by 4.6%, driven by higher gas transportation volumes, improvements in industrial consumption, and aided by depreciation of the Colombian peso. In the fourth quarter, income was affected by tariff adjustments on gas transportation, lower income from construction activity in Peru, and lower volumes driven by softer industrial demand and scheduled maintenance, while lower contributors to our non-financial sector, our hospitality and agricultural businesses, had record-high contributions in 2022. Hospitality business performance improved as room and food prices benefited from inflation, and occupancy ratios fully recovered to pre-pandemic levels. Finally, at the bottom of the page, other income during 2022 was lower than a year earlier, mainly because of lower results in real estate and foreign exchange gains, along with lower net gains on sale of investments and OCI realization. On the topic of derivatives and FX gains, exiting its business with BHI changed Banco de Bogotá's structural balance sheet from a long U.S. dollar position to a short U.S. dollar position. Given the prevailing interest rate differentials between the Colombian peso and the U.S. dollar, this change implied a net cost of managing this exposure through derivatives. Regarding net gains on the sale of investments and OCI realization, some of our subsidiaries realized losses in fair value OCI fixed-income instruments, particularly during the fourth quarter. As a positive for other operating income, during the fourth quarter, we continued our optimization of property, plant, and equipment, resulting in other income from our operations of Ps. 85 billion. On Page 16, we represent some efficiency ratios. Our business units continued implementing cost-containment initiatives throughout 2022. Total OpEx grew by 9.1% during the year, well below inflation of 13.1%. Personal expenses grew by 7.6% from the year, while depreciation and amortization increased by 6.4%. General and administrative expenses increased by 15.4% in 2022, of which 6 percentage points are explained by a 28% increase in operating taxes. In Colombia, the industry and commerce tax is based on gross income. As such, the base for taxes increased significantly during this rising interest rate cycle. Additionally, this tax is determined at a local and regional level, as the tariff structures were modified during 2022 allowing each local government to set their rates. Some cities substantially increased their tariffs, resulting in cases where 2022 rates were five times those applicable in 2021. Quarterly OpEx grew by 7% year-on-year, of which 4 percentage points are driven by taxes. Quarter-on-quarter growth was additionally affected by seasonal effects. Cost to assets for 2022 was 2.7%, down from 2.8% in 2021. Cost to income was 45.8%, up from 42.8% a year earlier. The deterioration in cost to income was mainly driven by the contraction in NIM and the decrease in pension fund fees. Finally, on Page 17, we represent our net income and profitability ratios. Attributable net income for 2022 was Ps. 2.483 trillion or Ps. 107 per share, 27.5% lower than the result for 2021. Attributable net income for continued operations was Ps. 1.889 trillion, 24.7% lower than in 2021, while attributable net income from discontinued operations was Ps. 594 billion. During the quarter, the net income from continued operations at the Aval level reached Ps. 310 billion, while the losses from discontinued operations at the Aval level were Ps. 641 billion. As a result, our attributable net income for the quarter was a negative Ps. 330 billion. Discontinued operations for the quarter resulted from income from the equity method of BHI of Ps. 37 billion during October and November and a one-time loss of Ps. 678 billion associated with the sale of 20.9% of BHI. The total one-time effects during 2022 of exiting the investment in BHI were Ps. 46 billion at the Aval level when considering the Ps. 724 billion one-time effects from the spin-off recorded in the first quarter. Given that we recognized Ps. 548 billion of BHI's net income at the Aval level in addition to the Ps. 46 billion one-time effects of exiting BHI, the attributable net income from discontinued operation comes to Ps. 594 billion for the year. Finally, our return on average assets and our return on average equity for the year were 1.6% and 14%, respectively. These ratios were negative 0.6% and negative 8% for the quarter. Before moving into questions and answers, I will now summarize our general guidance for 2023. We expect loan growth to be in the 9% to 11% range, with commercial loans growing in the 9% to 10% range and retail loans in the 11% to 12% range. We expect our cost of risk net of recoveries to be in the 1.5% to 1.6% range. We anticipate full-year NIM to be in the 3.75% area, with NIM on loans in the 4.5% area. We expect cost to assets to be in the 2.5% to 2.6% range. Furthermore, we expect our fee income ratio to be in the 20% range. Finally, we expect a return on average equity to be in the 11% to 12% range. We are now available to address your questions.

Thank you. Your first question is from Yuri Fernandes with JPMorgan. Your line is open.

Hi, guys. Thank you. Hi, Diego. Can you hear me?

Go ahead. We had a technical problem here so we had two lines at the same time; go ahead, please.

Okay, perfect. Guys, sorry, there was a line calling me here. I wasn't sure. So just on BHI, if you can provide the rationale for the sale, I guess there were some related par transactions, so just why did you decide to sell it now? What is the rationale behind this tender? And on margins, I would like to understand the impact of lower rates. In the past, we had a view that higher rates would be good for you. But funding was a surprise, right? It was a negative surprise? And maybe rates will start to come down later this year, right, maybe in the third quarter, first quarter. So my question is, should we start to see margins improving when rates come down? What is the impact of lower rates for you? Thank you.

Understood correctly, this is Luis Carlos; how are you? As I understood, you wanted to ask about the rationale behind the sale of BHI, was that your first question, Yuri?

That's it, like, why should I sell this now and maybe not sell this in the future? What is the direction for Aval to sell this now?

Okay. As we said before, when you look back at BHI or BAC Credomatic when we purchased it back 13 years ago, in 2010, the size of that bank was about one-third of Banco de Bogotá. Over time, as you know, those financial statements are converted into dollars when they get consolidated under IFRS. The bank kept its investment as a dollar-denominated asset converted to pesos. With the increase in size, the bank has done very well in that respect; and lately, with the devaluation of the peso against the dollar, the bank has grown to be about the same size as its owner, Banco de Bogotá. So that was the first concern that we had because it really didn't make sense to us to have a bank that owned another bank of the same size. Secondly, that made cumbersome and complicated capital allocation decisions, dividend decisions, and others. We finally concluded that it doesn't make a lot of sense to keep BHI under Banco de Bogotá. So that was the reason that Banco de Bogotá spun it off. Once it was spun off from Banco de Bogotá, it also didn’t make sense to keep it as an Aval asset anymore because we wanted to unlock some value. Our estimates showed that by keeping BHI too buried under the overall Grupo Aval structure, it wasn't fully reflected in its real value. So that was the reason we decided that we would spin it off from Aval and virtually separate international and domestic investments our shareholders were invited to participate in. Since then, there have been a couple of tender offers, and some people have sold while others have not. But now, that's the remaining structure: the domestic group and the international group.

Let me take the one on rates. Perhaps something I should have emphasized more when I went through the presentation was that we're currently witnessing a combination of two different forces. Number one, the monetary policy from the Central Bank, which has raised interest rates and that we expect at some point during the latter part of this year to revert partially and enter 2024, go back to numbers that are more in line with historical average. However, what has compressed our margins most during the last quarter of last year and into this year has been the adoption of the net stable funding ratio in Colombia that strongly distorted the time deposit market. To give you a very brief idea of the magnitudes of this impact, the spread between time deposits and the zero-coupon sovereign curve has been around 50 to 100 basis points depending on maturity. What we saw during the last quarter of 2022 was this spread increase to 450 to 550 basis points. As of late January, it was around 500 basis points, and it has recently come down to around 200 to 300 basis points. This means that within February, we've had a - receiving in that spread of 200 to 300 basis points depending on different points of the curve. That generated a much higher cost of funds due to the fact that the banks were raising mainly time deposits to prepare to comply with the net stable funding ratio requirements that we have later in the month. This is something we expect to adjust much faster; it is what is happening with this distortion in the market that seems to be going back to historical levels. On top of that, if it were only the Central Bank acting, we would see some compression in the commercial banking ratios. However, because of this matter with the net stable funding ratios, we will see improvement in margins for the commercial banks. All in all, we expect to see improvements in yields later this year. It will not happen immediately because this affects mainly time deposits, so you need to renew many of them to capture the full impact. This will impact two different areas: first, fixed loans repricing over time, particularly the consumer lending side; and secondly, overall adjustments due to lower inflation. I apologize for a very long explanation, but I think your question touches upon one of the key issues that we are facing in the banking sector today in Colombia.

No, that's particularly very helpful. So in the end, it was a competition for funding that suggested that this new LCR mark, plus the Central Bank pressure, right? So once this competition fades and banks comply with the new liquidity requirements, things will play much better for the funding side, this is what I understood, right? So this is.

Yes, you got it right then. And perhaps to add to that, what we've seen is a very quick adjustment to that; it is already March and the adjustment requirements are due at the end of the month. But we feel most of the banks have already done what they need to do.

Perfect. Thank you very much, guys.

We have no further questions. Your next question is from Yuri Fernandes with JPMorgan. Your line is open.

Thank you, Luis Carlos. Just a final follow-up on dividend payout. Your ROE guidance and your loan growth guidance are somewhat similar, both like the loan book growing in high single digits. ROEs 11 to 12. So my question is, what is your view for dividend payouts this year? Given ROE, our visibility is slightly under pressure. Maybe your potential for dividend payouts may be impaired by that, right? Like, maybe if you don't want to build a lot of leverage, your payout should be lower. So again, how do you think about payout this year for Aval? Thank you. And that's my final question.

Okay. I think it's twofold. You have some of our banks that, exactly as you described, need to be much more careful with their dividend payouts, particularly the retail banks. Are you still there, Yuri?

Yes. I'm here. I can listen to you.

Okay. I thought we had lost connection once again. The retail banks need to be much more careful with their dividend payouts. However, the corporate banks have much more room for dividends. We are actually in the process; I can’t be precise here because we are starting to provide information to the market at this point about how dividends will come out. However, we see a broad distinction between a couple of our banks and the other two banks, based on how they are performing currently and how they will perform moving forward.

But sorry, go ahead.

Sorry, Yuri, I want to elaborate on what Diego mentioned. The two consumer-oriented banks, Villas and Popular, need to carefully assess whether they can declare and pay dividends. On the other hand, the commercial banks have typically maintained dividend policies ranging from 40% to 50%, and I don't expect this year to be significantly different. Additionally, we follow a policy where we usually distribute cash dividends equivalent to the cash dividends we receive from Banco de Occidente, which will be beneficial.

Hi, good morning and thank you for taking my question. I have two questions. The first one is related to the guidance. What is the effective tax rate incorporated into your 2023 guidance? And the second question is related to sustainable ROE. What is your expectation for sustainable ROE for Grupo Aval? Thank you.

While you're asking about ROE, what's your second question?

Yes, the second one is in terms of sustainable ROE or long-term ROE expectation.

Long-term ROE expectation, yes. Short-term ROE should be around 10% plus/minus or, I'm sorry, 11% to 12%. We expect long-term ROE to return to 15% once we see adjustments in the net interest margin that we described previously. For taxes, expect something in the order of 36% within our consolidated figures.

Okay, perfect. Do you think that in the medium to long term, the effective tax rate will remain close to that 36% or do you expect an increase?

We expect numbers in this range into the future, as long as there are no adjustments in tax reforms. Bear in mind that in addition to the general taxes, we have a very heavy burden of local taxes that we mentioned before. Overall, our tax burden has increased substantially when you add up operational taxes and net income taxes.

Got it. That's very helpful. Thank you for the comments.

There are no further questions at this time. I will now turn the call back over to the Chief Executive Officer, Mr. Luis Carlos Sarmiento Gutierrez.

Thank you, Brent. Thank you all for your patience. So all that I was saying is thank you for being on the call today. And as you can tell, we have had some challenging last few months, not resulting because of our results as much as because the environment here, the political and economic environment is tough to decipher. We must understand the wording of all the new reforms that are being discussed. The health reform is concerning. It won't affect us much, but we will definitely be more impacted by the other reforms, particularly labor, pensions, and others. We continue working on cost efficiency, loan pricing responsibility, and we will keep looking for pipelines to invest here and in other regions as infrastructure projects here dwindle down. We will keep you updated on our actions in every call. With that, I'll let you go and thank you again for joining us today.

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