Earnings call: Grupo Aval reports robust Q2 growth, outlines strategic plans

Grupo Aval, the Colombian financial conglomerate, reported a strong performance in its second quarter of 2024, with significant growth in loans and deposits, improved asset quality, and controlled operating expenses. The company held its earnings call to discuss these results, as well as management changes, including the appointment of new CEOs for Banco AV Villas and Corficolombiana, and the creation of two new Corporate Vice President positions.

Grupo Aval (AVAL), which operates a variety of financial services in Colombia and Central America, highlighted its commitment to sustainability and detailed its plans to support Colombia’s economic recovery and sustainable growth in various key sectors.

Key Takeaways

• Grupo Aval announced management changes, with new CEO appointments at Banco AV Villas and Corficolombiana.
• The company is focusing on sustainability, with achievements in environmental and social impact.
• Stronger loan and deposit growth, improved asset quality, and controlled operating expenses were reported for Q2.
• Grupo Aval plans to support economic recovery in Colombia through initiatives in sectors like SMEs, housing, and energy.
• The company expects loan growth rates to rise later in the year and into 2025.
• Grupo Aval discussed the macroeconomic conditions in Colombia and the United States, including inflation, economic growth, and government fiscal policies.
• A decision to raise COP100 billion for Banco Popular was explained, highlighting the bank’s growth potential and capitalization needs.

Company Outlook

• Grupo Aval expects a better macroeconomic scenario in the second half of the year, which should support improved profitability in 2025.
• The company has provided guidance for 2024, forecasting loan growth between 7.5% and 8%, a net interest margin (NIM) in the 4% area, and a return on average equity between 6% and 6.5%.

Bearish Highlights

• The Central Bank’s reluctance to reduce interest rates quickly has impacted the net interest margin.
• The 90-day delinquency rate for personal loans increased, although the 30-day rate was the lowest in seven quarters.
• Mild deteriorations were observed in commercial loans and mortgages.

Bullish Highlights

• The company reported improvements in asset quality and the cost of risk for consumer loans, credit cards, and personal loans.
• Gross fee income and net fee income increased, particularly in pension and severance fees, as well as banking fees.
• The share of the loan portfolio classified as Stage 1 improved, primarily driven by better performance in consumer loans.

Misses

• Despite overall strong performance, there were mild deteriorations in commercial loans and mortgages.
• The company’s efficiency ratios increased slightly, indicating a potential area for improvement.

Q&A Highlights

• Diego Solano discussed the rationale for raising COP100 billion for Banco Popular, emphasizing the bank’s capitalization needs and growth potential.
• Banco de Occidente’s strong performance was noted, with no current need for additional capital.
• The process for raising Tier 2 capital for Banco Popular is set to be supported by the group, eliminating market execution risk.

Grupo Aval’s second-quarter earnings call demonstrated the company’s resilience and strategic direction amid changing economic conditions. With a clear focus on sustainability, economic recovery, and financial growth, the company is positioning itself to capitalize on future improvements in the macroeconomic environment. The strategic capitalization of Banco Popular underscores the company’s proactive approach to ensuring the stability and growth of its various banking entities. Investors and stakeholders will be watching closely as Grupo Aval continues to navigate the complex financial landscape of Colombia and the broader region.

InvestingPro Insights

Grupo Aval’s commitment to sustainability and strategic growth is evident in its recent performance, and this is further reflected in the real-time data and analysis available from InvestingPro. With a market capitalization of $2.46 billion, the company presents a robust financial profile. The P/E ratio, a measure of the company’s current share price relative to its per-share earnings, stands at 21, indicating investor expectations of future earnings growth.

InvestingPro Tips suggest that Grupo Aval’s net income is expected to grow this year, aligning with the company’s positive outlook for the remainder of 2024 and into 2025. Additionally, the stock is currently in oversold territory according to the Relative Strength Index (RSI), which may interest investors looking for potential buying opportunities. It’s worth noting that Grupo Aval has maintained dividend payments for an impressive 26 consecutive years, with a current dividend yield of 4.75%, which is particularly attractive to income-focused investors.

Moreover, analysts predict the company will be profitable this year, a sentiment backed by the fact that Grupo Aval has been profitable over the last twelve months. This aligns with the company’s reported improvements in asset quality and controlled operating expenses for Q2 2024.

For those interested in further insights, there are additional InvestingPro Tips available at providing a deeper dive into Grupo Aval’s financial health and market position. These tips can offer investors a more comprehensive understanding of the company’s potential and the factors influencing its stock performance.

Full transcript – Grupo Aval (AVAL) Q2 2024:

Operator: Welcome to Grupo Aval’s Second Quarter 2024 Consolidated Results Conference Call. My name is Regina, 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 regulation in Colombia and applicable U.S. securities regulation. Grupo Aval is also subject to the inspection and supervision of the Superintendency of Finance as holding company of the Aval Financial Conglomerate. The consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IASB. Unconsolidated financial information of our subsidiaries and the Colombian banking system are presented in accordance with the Colombian IFRS as reported, the Superintendency of Finance. Details of the calculations of non-IFRS 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, expect, 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 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. With us today are Ms. Maria Gutierrez Botero, Chief Executive Officer; Mr. Diego Solano, Chief Financial Officer; Mrs. Paula Durán, Corporate VP of Sustainability and Strategic Projects; and Mr. Camila Perez, Banco de Bogota Chief Economist. I will now turn the call over to Ms. Maria Lorena Gutierrez Botero, Chief Executive Officer. Ms. Maria Lorena Gutierrez Botero, you may begin.

Maria Gutierrez Botero: Good morning, everyone and thank you for joining us for our second quarter 2024 conference call. I am here with Diego Solano, our CFO; Camila Perez, Chief Economist of Banco de Bogota; Paula Durán, our Corporate VP of Sustainability and Strategic Projects and people of the company. Let me start with some ESG highlight. To better support the execution of our strategy, we are taking actions to renew and strengthen our management teams, at the first and second levels, both at our main businesses and at holding company level. Juan Camilo Angel resigned as CEO of Banco AV Villas after 30 years of service. Gerardo Hernandez was appointed as his successor. Mr. Hernandez is the former Chief Legal Officer of Banco de Bogotá and previously served as part of the Board of Directors of Colombia Central Bank and as Superintendent of Finance. We also appointed Mrs. Milena López, replacing me as CEO of Corficolombiana. Milena has over 20 years of experience in the private and public sector, most recently serving as CFO to Ecopetrol and CENIT. Also in July, we strengthened our structure at the holding level with the creation of two new Corporate Vice Presidents. The VP of Sustainability and Strategic Projects led by Paula Durán and the Corporate Vice President of Financial Assets and Efficiency led by Jorge Castaño. Paula is the former VP of Strategy and Sustainability at Corficolombiana and Jorge is the former Financial Superintendent. They both have more than 20 years of experience in the public and private sectors. I am confident that the personal and professional qualities of our team will continue to strengthen our market position and help achieve our group of our long-term strategic goals. Now, I will invite Paula to go over additional ESG achievements during this quarter.

Paula Durán: Thank you, Maria Lorena and good morning to you all. First of all, I would like to congratulate Banco de Bogotá on its issuance of COP500 billion in sustainable senior bonds. Also, our banks presented their Principles of Responsible Banking report as part of the adherence to UNEPFI. This implies that all our banks will have plans to move towards goals in terms of climate change, gender equality, financial inclusion and sustainable finance, among others. During this quarter, we received several recognitions for our advantages in terms of diversity and inclusion. Grupo Aval ranked sixth in Latin American for its commitment in these areas and Banco the Bogotá ranked first. Corficolombiana was also recognized for its work towards closing the generational gap. And Porvenir successfully launched a job site for employability of senior citizens. As per recent advances in environmental impact, Banco de Occidente celebrated 30 years of the Planeta Azul prize that recognizes initiatives aimed at water preservation and protection. Also, our toll road concessions successfully implemented several biodiversity projects in more than 700 hectares, as well as solar energy projects generating significant efficiencies in energy consumption. In terms of our social impact, in addition to our programs implemented by our subsidiaries, we continue advancing in the Mision La Guajira program. Up to now, we have benefited more than 340 families that is 3,500 people, with clean drinking water solutions as well as food security. Finally, I would just like to highlight that Grupo Aval sustainability is not just a commitment. It’s a core principle that drives our every decision. We’ve dedicated to building a future where financial strength and social and environment sources go hand in hand, ensuring our positive interest for generations to come. We continue advancing the determination towards our sustainability inputs and goals.

Maria Gutierrez Botero: Thanks, Paula. Now on the macro side, let me mention some relevant issues in this quarter. Inflation continues to trend down in July. Further supporting our view of an over Colombia’s Central Bank that could cut rates faster, reducing real interest rates from current levels above 6%, and continuing to improve corporate, the banking sector and economic recovery. Economic growth has continued to be slow and investment remains well below historical levels. The country’s fiscal accounts remain undisputed, even after spending cut program. The government is working on a second wave of spending costs and considering a tax reform or financial law, including surcharges to additional sectors while lowering the general corporate tax rate. Camila will further comment on this and share our view on the economy.

Camila Perez: Thank you, Maria Lorena. Good morning to all candidates. Economic activity has turned out better than expected at the beginning of 2024, with an annual growth of 2% so far this year through May, compared with projections between 1.5% and 1.8% for the year. The improvement has been influenced, first by the recovery of the global economy, which has been reflected in a better performance of foreign trade. Secondly in the local context, better dynamics in sectors such as public administration, agriculture, recreation and utilities, especially electricity have also explained the positive surprise in economic performance. In contrast, more traditional sectors of the economy, such as construction, commerce and manufacturing, maintained construction rates at the beginning of the year. This is evidence of the current dispersion impacts our performance. Growth in 2024 is likely to exceed the 0.6% of 2023. However, it will remain below that of the long-term. A slow recovery in investment, affected by low levels of confidence for both businesses and households, coupled with still high interest rates, has had a negative impact on the present and has also reduced the outlook for future growth. The 12-month aggregate investment rate as of March 2024 approached its lowest level since the beginning of the series in 2005, that 13% of GDP, which will have a negative impact on economic growth in the coming years. Thus, potential growth is now estimated to be between 2.5% and 3%, lower than the pre-pandemic estimate of between 3% and 3.5%. Nevertheless, some modest signs from the consumer suggest that the worst is behind. The national employment rate show annual increase of just 0.2 percentage points in the first half of 2024 to 11.1%, benefiting from higher public and services hiring, which has compensated to some extent for job losses in sectors that were traditionally the engine of the labor market. In addition, we expect lower rates also higher purchasing powers as wages increase more than inflation and the exchange rate has revalued and a reduction in the financial burden will allow for a change in the consumption cycle. This has been evident in the positive presence of imports of consumer goods in the first half of the year. We have upgraded our estimate for growth for 2024 to around 1.75%, against a consensus just below that level. We will have the efficient numbers for growth in the second quarter later on today. In July, inflation with its downward trend falling below 7% after being stuck just above this level during the second quarter. Also, inflationary pathway continues indexation of services, especially rents, the potential depreciation of the Colombian peso and the increase in default prices will only allow inflation to represent the next crisis between 2% and 4% until mid-2025. For the year, our forecast is for inflation to trend towards 5.6%. The aforementioned macroeconomic balance has explained Banco de la Bogota political discussion in its process of easing monetary policy, where in July it completed four meetings with negative 50 basis points rate cuts. However, given the improvements in inflation and the convergence of expectations to those markets, the pace of rate cuts is set to accelerate to 75 basis points soon. Furthermore, the forecast of lower rates at a global level reinforces the above. For the year-end, we expect the Central Bank’s rate to reach 8.75%. In terms of external accounts, the country has seen a significant adjustment, with a reduction in the current account deficit to levels close to 2% of GDP. This can be explained by a combination of lower demand for goods produced abroad, especially inputs and capital goods, while the country has seen a greater inflow of dollars from remittances and tourism. In net terms, this situation has resulted in a lower need for dollars, which has provided some support to the exchange rate. The other factors that play into the currency behavior are potential interest rate cuts by the Federal Reserve, the United States elections, the fiscal situation and local uncertainty. If rate cuts are delayed, the Republican does not convince the presidency, the fiscal situation deteriorates further and local political market returns, the exchange rate would tend to devalue. For the time being, the aforementioned forces have found a fragile balance that favors a flat exchange rate with an average balance, in the midst of recession period in the United States. On the fiscal front, even though the government has straightened out its accounts with a significant spending cut, risks are still present and compliance with the fiscal rule departed as indicated by the autonomous committee of the fiscal rule. For the remainder of the year, it is necessary for tax collection to meet the established targets and for the government to restrain its spending in order to ease concerns about the sustainability of public finances. In any case, rating agencies are alert to any new developments, while the markets are already pricing at a lower level for the foreign trading. Fiscal risks remain for 2025 due to potential budget financing issues, with the need for the approval in Congress of a financing law and an earlier end to the transition period of the fiscal rule. As of today, details regarding the financing law are still limited. That sums up our economic view. Thank you. Back to you Maria.

Maria Gutierrez Botero: Thank you, Camila. We strongly believe that the country’s recovery needs to be driven by government policies that lead to a stronger investment, effective execution and confidence on the legal environment and physical security. However, we believe that in addition to these forwarding efforts, private sector initiatives will add to recovery. We have set ourselves to contribute and support the country’s economic recovery by launching a group-wide plan to contribute to sustainable growth and employment generation in key sectors such as, SMEs, housing, energy transition, agriculture and the popular solidarity economy. These sectors have immediate effects on economic activity and employment. We have committed to provide funds at preferential rates to these key growth sectors, ensuring strong risk management processes. We will also continue our ambitious plan of more than COP1.9 trillion in priority sectors such as infrastructure, gas, agribusiness and tourism. Before Diego gives the details of our results, let me go over the highlights of our financial results. The second quarter showed stronger loan and deposit growth that allowed us to continue increasing our market share. Over the quarter, our bank combined gross loans grew 1.8%, reaching a 25% market share by March of this year. Cost of risk and asset quality improved relative to the previous quarter and operating expenses remained under control. Regarding asset quality, it seems we have finally reached the peak in cost of risk and delinquency for consumer loans. On commercial loans, the increase in delinquency has been milder that — what could be expected in this cycle. We remain vigilant for potential climate signals or weaker sectors. We are currently designing an ambitious corporate synergies and efficiency plan, which we will launch over the coming months. I expect to provide you details on our following calls. Finally, the Central Bank continues to be reluctant to speed up interest rate reductions. We maintain our view that the Central Bank can cut rates faster, reducing historical high real interest rates, which have resulted in a lower net interest margin than our initial forecast. Net interest margin on retained loans have benefited for the pricing process of loan. However, the adjustments made by the Superintendency of Finance to the formula used to determine interest rate cuts has forced a steeper decline in credit cards, personal loans and other target rate consumer lending growth. On the other hand, net interest margin for commercial loans has been affected by competition, which puts pressure in place, mainly in the higher credit quality corporate segment. As a result, net income to our shareholders was COP204 billion and return on average equity was 4.9%. This result was obtained in the Colombian context of 10 banks out of a total of 28, incurring cumulative net losses as of May, the worst figure since 2009. We expect the end of the credit cycle on consumer loans and the recovery of net interest margin will enable the banking sector to return to the profitability over the next months. To position our banks for upcoming growth and replenish capital in two of our banks with weak performance in the cycle, we are strengthening the capital structure of Banco de Occidente, Banco Popular and Banco AV Villas. Now, I would like to pass the call to Diego, who will give the details of our results.

Diego Solano: Thank you, Maria Lorena. I will start on pages 8 and 9 with a few charts regarding the growth rate and quality of our loan portfolio relative to the rest of the Colombian banking system. For comparability reasons, these figures are unconsolidated under Colombian IFRS published by the Superintendency of Finance. We continued to outgrow our competitors in all loan categories. This yielded by end of May, year-on-year market share gains of 83 basis points in total loans, 108 basis points in commercial loans, 125 basis points in consumer loans and 57 basis points in mortgages. On Page 9, the quality of consumer loans appears to have begun to improve in the Colombian banking system, while commercial loans and mortgages slightly deteriorated. As mentioned in the past, Aval’s portfolio composition is skewed towards lower consumer risk products resulting in a better credit quality than the system average. I will now move to the consolidated results of Grupo Aval under IFRS. Starting on Page 10. Assets grew 3.2% over the quarter to COP317 trillion accumulating a 6.2% increase year-on-year. Gross loans, our main asset reached COP193 trillion, growing 2.4% during the quarter and 4.8% year-on-year. An 8% depreciation of the Colombian peso during the quarter had a positive effect on quarter-on-quarter metrics, contributing 1.3 percentage points to quarterly growth. Over the year, the peso appreciated 0.7% having no material impact on growth metrics. Commercial loans and mortgages continue driving our nominal growth, while consumer loans resumed growth following two consecutive quarters of contraction. Commercial loans expanded 2.9% in the quarter and 5.9% year-on-year, with peso depreciation contributing 1.8 percentage points to quarterly growth. Consumer loan growth, even though still at a soft 0.9%, improved during the quarter. Payroll loans and auto loans grew 1.6% and 2.6% respectively during the quarter, while personal loans and credit cards continue contracting 0.3% and 1.7% respectively during the quarter. Finally, mortgages grew 4.3% over the quarter and 10.8% year-on-year. We anticipate loan growth rates to rise later this year and into 2025 due to the normalization of monetary policy, stronger GDP growth and improvement in consumer loan quality. We expect our 2024 loan growth to continue outpacing the banking system. On Page 11 we present funding and deposits evolution. Total funding increased 3.4% during the quarter accumulating 6.8% year-on-year. Deposits account for 75.2% of our funding, growing 4.8% quarter-on-quarter and 10.1% year-on year. Saving deposits grew 7.3% during the quarter and 14.8% year-on-year, increased their share of our deposit mix by 169 basis points and 94 basis points respectively for these periods. Our deposit to net loans ratio increased to 108%. On Page 12, we present the evolution of our total capitalization, our attributable shareholders equity and the capital adequacy ratios of our banks. Our total equity grew 1.9% over the quarter and 3% year-on-year, while our attributable equity increased 1.6% over the quarter and 1.5% year-on-year. We are in the process of strengthening the capitalization of our banks to position them for stronger growth. Banco de Occidente’s second quarter ratios reflect a $175 million and a quarterly 145 Tier 2 notes issued on May 7 that added 145 basis points to its solvency. In addition, we recently announced issuances of COP100 billion in equity and COP100 billion in subordinated bond at Banco Popular to strengthen its capital position. Banco Popular’s unconsolidated solvency ratios were 12.3% for total solvency and 10.6% for core equity Tier1. These issuances will add approximately 1 percentage point to unconsolidated solvency. Finally, we are also considering a subordinated bond issuance for Banco AV Villas. On Page 13, we present our yield on loans, cost of funds, spreads and NIM. Total NIM increased 5 basis points quarter-on-quarter to 3.4%. Our consolidated NIM on loans was stable at 4.3%. NIM on retail loans predominantly priced at fixed rates, expanded 21 basis points to 5.1%, while NIM on commercial loans predominantly floated over IBR, fell 18 basis points to 3.7%. The expansion of NIM on loans continues to be slow due to higher funding costs in line with a shy Central Bank intervention rate reduction pace. In addition, loan rates have been pressed by a concentration of growth in higher quality lower rate assets and by changes made by the Superintendency of Finance in the formula used to determine interest rate cuts affecting some credit cards and personal loans. We expect that the Central Bank will have room to accelerate its pace in rate cuts as the year progresses, given the positive evolution of inflation, the current high forward-looking real interest rate level and the recent reduction in the outlook for U.S. rate levels. This scenario supports our view of NIM expansion over the following quarters. Finally, contributing to total NIM expansion, our NIM on investments improved to 0.2% during the quarter. Regarding our banking segment, its NIM on loans contracted 11 basis points quarter-on-quarter to 5%, still far below historic levels. This incorporates a NIM on retail loans that expanded 14 basis points to 5.7% and a NIM on commercial loans that decreased 29 basis points to 4.4%. The total NIM of our banking segment expanded 3 basis points to 4.3%, driven by the same trends impacting our consolidated NIM. On pages 14 to 16, we present several loan portfolio quality ratios. Starting on Page 14, the evolution of asset quality points to the end of the credit cycle for consumer loans, with PDL ratios and PDL formation peaking during first quarter of 2024 across all products. PDL formation for credit cards and personal loans was the lowest in seventh quarters. 30-day PDLs decreased to 5.8% while 90-day PDLs increased to 4.2%. Consumer loans PDL formation improved on a 30-day and 90-day basis was reduced. Commercial loans and mortgages showed mild deteriorations over the quarter. PDL formation reflects an improvement in the 30-days horizon and the roll-forward to 90-days of a portion of commercial loans than became delinquent since last quarter. Finally, the annualized ratio of charge-offs to average 90-day PDLs was 0.64x. On Page 15, the share of our loan portfolio classified as Stage 1 portfolio improved slightly over the quarter, mostly driven by a better performance in consumer loans. Coverage measured as the allowance for Stage 2 and 3 loans as a percentage of Stage 2 and 3 loans, slightly fell during the quarter to 37.4%, with coverage for consumer and commercial loans of 45.9% and 35.4%, respectively. On Page 16, as anticipated, the cost of risk improved during the quarter. We expect a positive trend over the following quarters, building on a more favorable local macro scenario. Cost of risk, net for consumer loans improved 194 basis points to 5.56%. The cost of risk of credit cards and personal loans substantially improved quarter-on-quarter falling 563 basis points to 9.6% and 253 basis points to 12.9%, respectively. The lower cost of risk in commercial loans incorporates an improvement in credit ratings of previously deteriorated corporate clients that have had overtime a consistent good payment behavior. This explains improvements of 36 basis points in total cost of risk and 68 basis points for commercial loans during the quarter. On Page 17, we present net fees and other income. Gross fee income grew 2.3% quarter-on-quarter and 4% year-on-year. Net fee income increased 0.9% and 1.9%, respectively during these periods. Net pension and severance fees grew 2.7% quarter-on-quarter and 7.3% year-on-year, due to higher mandatory pension fund management fees. Gross banking fees increased 3.1% quarter-on-quarter and 3.6% year-on-year due to higher transactional volume. Income from the non-financial sector contracted 24.5% during the quarter driven by some concessions that are transition from the construction phase to operation. Finally, on the bottom of the page, the quarterly decrease in other operating income is explained by: one, derivatives and FX losses that are negatively correlated with the higher returns from the non-financial sector. Two; net losses on sale of investments and OCI realization associated with fixed income portfolio management. And three, the comparison with our seasonally high dividends received by our subsidiaries during the first quarter. On Page 18, we present some efficiency ratios. In line with our cost control efforts, total other expenses increased 0.9% quarter-on-quarter and 1.2% year-on-year. General and administrative expenses grew 3% quarter-on-quarter and 3.1% year-on-year. General expenses continued to be driven by operating taxes and deposit insurance that account for 38% of total G&A expenses. Cost to assets for the quarter was 2.7%, improving 4 basis points quarter-on quarter and 9 basis points year-on-year. Our quarterly cost to income increased to 54.7%, mainly due to lower power operating income described on the previous chart. Finally, on Page 18, we present our net income and profitability ratios. Attributable net income for the quarter was COP204 billion or COP8.6 per share. Return on average assets and return on average equity for the quarter were 0.6% and 4.9%, respectively. Before passing to the fact to Maria Lorena, I will now summarize our general guidance for 2024. We expect loan growth between 7.5% and 8% with commercial loans growing between 9% and 9.5% and retail loans growing between 5% and 6%. NIM in the 4% area, with NIM on loans in the 4.5% area. NIM of our banking segment in the 4.5% area, with NIM on loans in the 5.25 area. Cost of risk, net of recoveries in the 2.2% area. Cost to assets in the 2.7% area. Income from the non-financial sector of 80% of that for 2023. A fee income ratio between 20% and 25%. And finally, we expect our 2024 return on average equity to be between 6% and 6.5%. I pass it back to Maria Lorena.

Maria Gutierrez Botero: Thank you, Diego. Finally, let me mention that we are focused on sustainable growth and expect that a better macroeconomic scenario in the second half of the year will support better profitability going into 2025. So may we have questions.

Operator: [Operator Instructions] Our first question comes from the line of Julian Ausique with Davivienda Corredores.

Julian Ausique: First of all, I would like to confirm the guidance.

Diego Solano: We cannot understand what you were saying. Could you speak a little higher, please?

Julian Ausique: Okay. Can you hear me now? Is it better?

Diego Solano: Go ahead, but it’s still difficult to understand.

Julian Ausique: Okay. So first of all, I would like to confirm the guidance in terms of demand ROE. And my second question is regarding the impact of Banco Popular, due to the equity issuance that made — that was announced yesterday. And why will the participation that Grupo Aval would have to take in that sense? And the third question is regarding if you already have any view about 2025 results, a little bit of what is the call or what are the expectations for 2025?

Diego Solano: Could you please repeat your first question?

Julian Ausique: Yes. Could you confirm the ROE guidance?

Diego Solano: Yes. ROE guidance is 6.5%. As you might remember, we give out two different sets of guidance for the banking segment and growth for our full year numbers and also consolidated [indiscernible] interest expense and in internal engine. So NIM of our banking segment is a 4.5% area with minimum loans of the banking segment in the 4.25% area. That implies of the remaining of 3.75% area, with retail loans in the 4.5% area, that’s your first one. Then regarding Banco Popular, the issuance are supported by Grupo Aval as we financed in the past. So that’s what we expect to see. We will be answering those. And finally, on the year 2025, here we can only be directional as Maria Lorena mentioned and [Paula Durán] emphasized a positive trend NIM and cost or risk and are returned to normal numbers from Central Bank somewhere at the middle of next year. If we had a positive results, we have given out quantitative guidance.

Operator: [Operator Instructions] Our next question comes from the line of Nick Dimitrov with Morgan Stanley.

Nick Dimitrov: I have a couple of questions, and apologies, the connection seems to be pretty bad. So I don’t know you might have already answered this, but I have a question about your capital allocation decisions. So it became clear that Banco Popular shareholders have agreed to raise COP100 billion yesterday. Can you walk me through the rationale for that? Because I know that the entity has been struggling for 1.5 years. But when I look at capital, it’s 18% — 18.2% to be exact. At the same time, this is the strongest or the best capitalized subsidiary within the group. At the same time, there’s banks such as Banco Occidente’s, whose capital is significantly lower. So I was just kind of wondering about the rationale to raise equity for Banco Popular when it’s the strongest capitalized entity within the group and why not Banco de Occidente? So that is the first question. And the second one is on — I understand that there is also a decision to raise COP100 billion of Tier 2 capital, again for Banco Popular. So I was looking to get an update in terms of where you are in the process of raising the Tier 2 money?

Diego Solano: Could you go over the first question just to make sure I got it right?

Nick Dimitrov: I’m sorry, say that again?

Diego Solano: Could you repeat your first question just to make sure I got it right?

Nick Dimitrov: Yes. So the first question is the rationale for Banco Popular to raise money when optically it looks that it’s well capitalized.

Diego Solano: Sorry. Number two. Let me answer the first two and then you can repeat the third one. The decision to strengthen Banco Popular is two sided. Number one, we look not only at a consolidated number, but also the unconsolidated numbers and the only bank that’s there is a material difference between those numbers, in fact, when I went through the numbers, I will point out for Banco Popular. Then Banco Popular has a combination of two things happening with cycle. Number one, it’s ha been losing money therefore, it’s been destroying capital over several periods. And then we see a very strong potential for growth moving forward. So we’re also capitalizing as because refinishing part of what was lost in the process. And also we expect the management of the bank to be able to execute a much more aggressive growth strategy, that we’ll be requiring that sort of capitalization. Then moving into an Banco de Occidente. The Banco de Occidente is somehow different than Banco Popular because they’ve been quite topical throughout the cycle. We will continue strengthening the bank before the required is demanded by growth. At this point, the use of capital seems to be the right amount. But as we said in the past, if we see our bank enable to outflow our expectations, we can build and review that plan. And then could you repeat your question?

Nick Dimitrov: Yes. The second question is regarding COP100 billion of Tier 2 capital for Banco Popular. Where are you in the process of raising the money?

Diego Solano: Okay. I think that was the previous question. I would say we are ready to support it from the group. So we do not see a market execution risk in that essence.

Operator: There are no further questions at this time. Ms. Maria Lorena Gutierrez Botero, I turn the call back over to you.

Maria Gutierrez Botero: Thank you to all to be with us in this call. And as you know, if you have question comment in the coming months, you can call us. And see you in the next call. Have a good day.

Operator: Thank you, ladies and gentlemen. This concludes today’s conference. Thank you for joining. You may now disconnect.

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