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Colombia's Grupo Aval bracing for legal blows after posting record 2018 profit

Despite Grupo Aval Acciones y Valores SA booking an 82.3% jump in its fourth-quarter net income, executives at the Colombian group described 2018 as a "year of contrast," due to the ongoing legal cases tied to the Ruta del Sol scandal that could see it slapped with fines totaling billions of pesos.

In a March 15 earnings call, CEO Luis Carlos Sarmiento Gutiérrez called the full year of 2018, which saw the company post a 48.4% increase in profits, the "strongest financial results ever." The increase came as Colombia — where Grupo Aval conducts around 70% of its business — saw its economic growth rate nearly double to 2.7%.

GDP growth in many of the Central American countries where Group Aval operates, came in at similar pace, despite a political turmoil in Nicaragua and a slowdown in Costa Rica. The CEO said the company expected Colombia and Central America to grow by 3.3% and 3.7%, respectively, in 2019.

Grupo Aval's total loans grew by 6.4% in 2018, driven by 10.1% growth in its consumer portfolio and 15.1% growth in the mortgage portfolio. Profits were boosted as higher volumes coincided with digital transformation efforts, a cost-reduction strategy and a retail banking focus, which helped to bring return-on-equity levels to back to a "desired level," the CEO said. In addition, tax optimization efforts added around 62 billion pesos to the bottom line.

According to the CFO Diego Solano, Grupo Aval's 2019 guidance sees a loan growth of between 8% and 10% and a net interest margin of 5.7%. It also projects cost of risk to drop by around 2.2% with lower nonperforming loan levels.

Preparing for legal costs, fines

Sarmiento Gutiérrez said the court case involving the scandal-plagued Ruta del Sol II highway project could see the group pay a maximum fine that would impact its attributable net income by some 220 billion Colombian pesos, or 1.2% of the Grupo Aval's attributable equity as of Dec. 31, 2018. The Colombian Superintendence of Industry and Commerce is investigating the company over purported anti-competitive practices and is probing several employees with violations, including Sarmiento Gutiérrez.

"Even though we believe that the legal basis and evidence supporting our defense are sound, if we are not successful, our companies may face the payment of fines for up to the equivalent of approximately $24.5 million per charge, and each of our employees may be responsible for points of up to the equivalent of approximately $490,000," Sarmiento Gutiérrez said.

Grupo Aval is connected to the scandal through subsidiary Corporación Financiera Colombiana SA, or Corficolombiana, and its affiliate Episol. The project was cancelled 2017, after an investigation revealed Odebrecht, the main contractor, had paid bribes worth millions of U.S. dollars to secure the contract.

According to the CEO, Grupo Aval has a credit exposure of around $225 million in the project, or an outstanding debt of 45%.

"We've had to invest ... to defend and protect Grupo Aval's interest in the different legal scenarios," the CEO said. He added that a separate tax case, also involving the Ruta del Sol II project, could lead to a fine of up to 273 billion pesos for Grupo Aval.

Conglomerate regulations applauded

Meanwhile, Sarmiento Gutiérrez applauded the new financial conglomerate regulations in Colombia, under which financial supervisor Superfinanciera has assumed the supervision of the country's 13 financial groups. The law means that Grupo Aval is now regulated as a official financial group, instead of merely a holding entity of financial companies. "We believe it will significantly strengthen the local capital markets and because it truly levels the playing field," the executive said during the call.

The law gives the regulator tools to monitor capital levels and other areas of risk at financial groups.

As of March 14, US$1 was equivalent to 3,137.50 Colombian pesos.