Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Grupo Aval Acciones y Valores / Equity Bottom-Up

Colombia is recovering from a traumatic bout of civil unrest, fuelled no doubt by frustrations with a tough Lockdown. Similar to Chile’s protests awhile back, there was an eruption of popular protest against what was perceived to be unfair government policy. Similar to South Africa, unemployment is way too high. However, there are signs that the economy is gradually on the mend (judging by GDP pickup at Q121) and that Colombia, like Chile, still remains a less unstable proposition, though still far from ideal, when compared to populist jurisdictions elsewhere in the region such as Brazil, Peru, and Argentina and to some extent Mexico. There is though a real risk that Colombia will lose its Investment Grade status (as it did in the Samper-Pastrana years) as attempts to “fix” its burgeoning Fiscal Deficit, the result of C-19, are politically challenging.NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.Colombia accounts for 64% of Aval Assets while Central America contributes 36% of the total. Colombian operations generally show better Profitability and Efficiency though Asset Quality and CoR, growth of Deposits, Income Diversification, and NIM are more advantageous in Central America. While once seen as a weak link in the Sarmiento chain, Central America is progressively showing its merits within the Group and adding value to the Group.In terms of trends and value-quality, a PH Score™ of 5.6 understates the fundamental momentum of the Group. Liquidity, Provisioning, and Efficiency are all moving in the right direction while well above-average Profitability has not eroded greatly. Common Equity/Assets is broadly stable: with Basel 111 Solvency rules, now implemented, key Capitalisation ratios are improving.  NIM (still relatively elevated versus Asia or Europe for example) and Asset Quality (controlled) showed some softness.While Earnings Quality looks optically poor, it rather reflects the weight of the contribution of hotels, gas, and energy holdings plus non-controlling interest in Grupo Aval (the minority stakes that third party shareholders hold in each of its direct consolidated subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana), and the minority stakes that third party shareholders hold in the consolidated subsidiaries at the bank level (mainly Porvenir pension fund)).<div class="content-highlight">A FV of 11%, a PBV of 1.15x, an Earnings Yield of 11.9%, a Dividend Yield of 5.1% and a Total Return Ratio of 1.6x should raise animal spirits somewhat. While the bank commands moderate fundamental momentum, the combination of an oversold trading position and a quite attractive valuation all place Aval in the the top global quartile by VFM (Valuation, Fundamentals, and Momentum).</div>

Colombia is recovering from a traumatic bout of civil unrest, fuelled no doubt by frustrations with a tough Lockdown. Similar to Chile’s protests awhile back, there was an eruption of popular protest against what was perceived to be unfair government policy. Similar to South Africa, unemployment is way too high. However, there are signs that the economy is gradually on the mend (judging by GDP pickup at Q121) and that Colombia, like Chile, still remains a less unstable proposition, though still far from ideal, when compared to populist jurisdictions elsewhere in the region such as Brazil, Peru, and Argentina and to some extent Mexico. There is though a real risk that Colombia will lose its Investment Grade status (as it did in the Samper-Pastrana years) as attempts to “fix” its burgeoning Fiscal Deficit, the result of C-19, are politically challenging.NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.Colombia accounts for 64% of Aval Assets while Central America contributes 36% of the total. Colombian operations generally show better Profitability and Efficiency though Asset Quality and CoR, growth of Deposits, Income Diversification, and NIM are more advantageous in Central America. While once seen as a weak link in the Sarmiento chain, Central America is progressively showing its merits within the Group and adding value to the Group.In terms of trends and value-quality, a PH Score™ of 5.6 understates the fundamental momentum of the Group. Liquidity, Provisioning, and Efficiency are all moving in the right direction while well above-average Profitability has not eroded greatly. Common Equity/Assets is broadly stable: with Basel 111 Solvency rules, now implemented, key Capitalisation ratios are improving.  NIM (still relatively elevated versus Asia or Europe for example) and Asset Quality (controlled) showed some softness.While Earnings Quality looks optically poor, it rather reflects the weight of the contribution of hotels, gas, and energy holdings plus non-controlling interest in Grupo Aval (the minority stakes that third party shareholders hold in each of its direct consolidated subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana), and the minority stakes that third party shareholders hold in the consolidated subsidiaries at the bank level (mainly Porvenir pension fund)).A FV of 11%, a PBV of 1.15x, an Earnings Yield of 11.9%, a Dividend Yield of 5.1% and a Total Return Ratio of 1.6x should raise animal spirits somewhat. While the bank commands moderate fundamental momentum, the combination of an oversold trading position and a quite attractive valuation all place Aval in the the top global quartile by VFM (Valuation, Fundamentals, and Momentum).

Grupo Aval: Calm After the Tropical Storm