February 8, 2016: Grupo Aval is Colombia and Central America’s largest financial conglomerate; it operates in 12 countries, serving more than 13 million banking customers and 11 million pension and severance fund affiliates. It consolidates more than $68 billion in assets, with over $128 billion in assets under management. Grupo Aval posted a net income of $592 million in the last 12 months (LTM) ended on September 2015. Furthermore, the company has posted strong growth and profitability metrics, as evidenced by a compound annual growth rate of more than 20%[1] and a solid return on average equity currently standing at 13.5% (LTM).

Its current position within the markets it operates is the result of both the vision of Mr. Luis Carlos Sarmiento Angulo, founder, Chairman of the Board and majority shareholder of the group, and the leadership skills and tenacity of Mr. Luis Carlos Sarmiento Gutiérrez, CEO and President of Grupo Aval, who has led Aval into the international arena and who now leads the innovation strategy for the group, a key area of future success as traditional banking is being redefined and as the needs of the clients have to be met in diverse ways.

Grupo Aval consolidates four commercial banks in Colombia (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas); one bank in Central America: Banco de America Central (BAC) Credomatic with presence in Panama, Costa Rica, Guatemala, El Salvador, Nicaragua and Honduras; the largest private pension and severance fund manager (Porvenir); and the largest merchant bank (Corficolombiana), both in Colombia.

Grupo Aval operates through a multi-brand banking model that allows maximum penetration and profitability. Banco de Bogotá is a full-service bank with nationwide coverage and focuses on commercial lending; Banco de Occidente focuses on mid-market and affluent segments and has a leading presence in the southwest region of Colombia and in niche products, such as auto loans and leasing.

Banco Popular is the market leader in payroll loans and is the leading provider of financial solutions to government entities across Colombia; and finally, Banco AV Villas is a consumer-focused bank and targets mid-income segments of the population.

As of September 2015, Grupo Aval´s banks in Colombia held a 30% market share of loans and a 34% market share of net income and served more than 10 million banking clients through its 1,397 branches and 3,775 ATMs.

Grupo Aval’s merchant bank Corficolombiana holds investments in various sectors, such as energy and gas, infrastructure, agro-industrial and hospitality, among others. The company focuses mainly on two areas: infrastructure projects and energy. In infrastructure, Corficolombiana stands out as the largest concessionaire in the country, while in energy, it consolidates the largest gas pipeline in Colombia.

Grupo Aval´s Private Pension Fund Manager, Porvenir, is the largest private pension and severance fund manager in Colombia and holds close to 50% of market share in each category. Porvenir has 7.1 million affiliates in the mandatory pension fund, 3.8 million affiliates in the severance fund and 169 thousand affiliates in the voluntary pension fund.

Grupo Aval will continue to benefit from its scale and leadership position in Colombia as growth expectations in the country are amongst the strongest in the region despite the economic difficulties resulting from the drastic drop in oil prices and its implications on government revenues.

One of the main drivers of marginal GDP growth in the coming years in Colombia is the 4^th generation concession program. This program includes the construction of more than 3,000 km of new roads and will demand at least $15 billion of capital investments. The program is expected to contribute with more than 100 pbs of GDP each year in the coming years and will increase the competitiveness of the country as it will decrease the transportation in a material form.

Grupo Aval will take part in the 4^th generation concession program in two ways. On the one hand, it expects to participate, with its natural market share and through its four banks, providing funds to the constructors who were granted the concessions. On the other hand, it will participate as an equity investor through Corficolombiana, which has already been granted three concessions, which involve the construction of 366 kilometres of roads and will require demand CAPEX of approximately $2 billion.

Aside from a positive mid-term GDP scenario, banking penetration will continue to favour financial institutions in Colombia. Measured as total loans to nominal gross domestic product (GDP), banking penetration stands below 50% suggesting that loan growth can continue to outpace that of the economy. Furthermore, the country’s middle-income class is expected to continue to expand and unemployment is expected to improve in the mid-term, both positive for the financial industry.

On top of the Colombian story, new foreign winds are boosting the size and profitability of Grupo Aval thanks to a decision taken five years ago to diversify risks and sources of revenue. Back in 2010, Mr. Luis Carlos Sarmiento Gutiérrez decided to start the internationalisation process of Grupo Aval with the acquisition of BAC Credomatic, the leading and most profitable regional banking group in Central America with operations in six countries.

Central America, as a region, presented vast opportunities because of its size, low banking penetration and high returns. Having close ties to the United States, the region’s economy is expected to grow more than Colombia both in 2015 and 2016. Furthermore, being a net importer of oil the region has benefited from the decline in oil prices that affected Colombia negatively. From a macroeconomic standpoint the diversification option taken by Aval has proven to be successful.

Aside from the culture similarities, BAC Credomatic turned out to be the perfect fit for Grupo Aval. Led with solid corporate governance standards and similar risk and reporting models, BAC started to generate synergies almost immediately after the acquisition. Between 2010 and 2014, Grupo Aval was able to double the size of the bank in Central America and double its net income. It now serves more than 3 million clients in those six countries (on top of the 10 million it serves in Colombia), through 356 full-service branches and 1,736 ATMs.

Cross synergies include best in class credit card operations imported to Colombia and solid corporate banking practices exported to Central America. With room for further improvement, returns should remain strong over the coming years.

The internationalisation process of Grupo Aval has surpassed the M&A field. In 2012, Grupo Aval entered the debt capital markets when it issued two Reg S/144A senior bonds, and in 2014 it entered the equity capital markets when it issued fully registered ADRs in the NYSE.

The last five years have been transformational for this group and new projects are already on their way. Materialisation of further synergies among its Colombian and Central American subsidiaries and investments on innovation are on top of Mr. Sarmiento´s to-do list. Aside from this, the group will remain true to its core principles and continue to look for growth opportunities in close-by markets where it can achieve a dominant position with sizable market share.

To be noted

[1] Compound annual growth rate for the last 5 years

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 June 07, 2013: Court proceedings have begun on an 8.5 billion settlement between Bank of America and investors in mortgage securities that turned bad during the financial crisis in 2008. Bank of America (BAC) had agreed to the proposed settlement in June 2011 to resolve the claims made by investors who held bonds issued by Countrywide Financial, which America bought in 2008.  Twenty two institutional investors, including BlackRock (BLK), Metlife (MET), and Allianz SE’s Pacific Investment Management Co had entered into the deal. But American International Group (AIG) and others objected saying the settlement offered to  them is a fraction of the money they lost. Matthew  Ingber, a lawyer for Bank of New York Mellon, the trustee overseeing the securities, made the case for the deal as a long awaiting proceeding for approval of the settlement got underway in a state court in New York.  Bank of New York Mellon, as the trustee, is asking a New York state court to approve the settlement and make it binding on all the investors.

Justice Barbara Kapnick of New York State Supreme Court will decide the case without a Jury. She has set aside the first two weeks of June to hear the case. If she rejects the settlement, the parties could face years of litigation. Kathy Patrick who will argue for the institutional investors said the objectors comprise only seven percent of certificate holders. She said there is huge support for the settlement.  However, Colorado Attorney Daniel Reilly, who represents AIG said “The proposed deal offers pennies to dollars”. Nearly 20 AIG entities and the home banks of Boston, Indianapolis and Chicago are among the 65 opponents of the settlement” he said. The losses to the trusts may exceed more than $ 100 billion, according to court documents. The opponents also claim that BNY Mellon placed its interests and that of Bank of America above certificate holders. They alleged that BNY Mellon gets trust business from the bank.  The case was filed by Bank of New York Mellon Corp. (BK), the trustee which manages 530 trusts that held the securities is asking the court to approve the settlement and make it binding on all the beneficiaries. “You may hear a lot from the objectors about what the trustee should have done, could have done or might have done,” Ingber arguing for the trustees told Justice Barbara Kapnick. “But, your honor, all those coulda, woulda, shoulda, are irrelevant if the pot of gold isn’t going to be there.”, “ Approval of this is a win to all investors” he said.

The Investor group which is supporting the deal includes Pacific Management Company, Goldman Sachs Asset Management, and Met Life Inc. The investor groups have termed their opponents as a “vocal minority”.

“Rejection of this landmark settlement would plunge thousands of innocent investors and hundreds of trusts into decades of potentially fruitless litigation that could well end in Countrywide’s bankruptcy and a resulting scramble among its creditors over assets which are less than $ 8.5 billion payment”, the investor group said.

Issac Gradman, a mortgage finance litigator in Santa Rosa said, “The settlement is the centerpiece of the strategy to resolving Countrywide’s mortgage liability”. He said “It’s imperative they get this approved or there’s going to be a lot more pain down the road”.

Justice Barbara Kapnick has set aside the first two weeks of June to hear the case. A ruling could take months after the trial is completed.

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