UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 20-F

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2017

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________

OR

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report

Commission file number: 001-36631

GRUPO AVAL ACCIONES Y VALORES S.A.

(Exact name of Registrant as specified in its charter)

Republic of Colombia

(Jurisdiction of incorporation)

Carrera 13 No. 26A - 47

Bogotá D.C., Colombia

(Address of principal executive offices)

Jorge Adrián Rincón

Chief Legal Counsel

Grupo Aval Acciones y Valores S.A.

Carrera 13 No. 26A - 47

Bogotá D.C., Colombia

Phone: (+57 1) 241-9700

E-mail: jrincon@grupoaval.com

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Copies to:

Nicholas A. Kronfeld, Esq.

Yasin Keshvargar, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017

Phone: (212) 450-4000

Securities registered or to be registered pursuant to Section 12(b) of the Act:

None
(Title of Class)

Securities registered or to be registered pursuant to Section 12(g) of the Act: 

Title of each class	Name of each exchange on which registered
American Depositary Shares, each representing 20 preferred shares, par value Ps 1.00 per preferred share	New York Stock Exchange
Preferred Shares, par value Ps 1.00 per preferred share	New York Stock Exchange*

* Grupo Aval Acciones y Valores S.A.’s preferred shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to the requirements of the New York Stock Exchange.

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None
(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report.

Preferred shares: 7,110,350,245

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes   ¨ No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨ Yes   x No

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x Yes   ¨ No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

¨ Yes   ¨ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Emerging growth company ¨

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act.

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

US GAAP ¨ International Financial Reporting Standards as issued by the International Accounting Standards Board x Other ¨

If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.

¨ Item 17   ¨ Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

¨ Yes   x No

table of contents

		Page
PRESENTATION OF FINANCIAL AND OTHER INFORMATION		1
PART I		7
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS		7
A.	Directors and senior management	7
B.	Advisers	7
C.	Auditors	7
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE		7
A.	Offer statistics	7
B.	Method and expected timetable	7
ITEM 3. KEY INFORMATION		7
A.	Selected financial data	7
B.	Capitalization and indebtedness	13
C.	Reasons for the offer and use of proceeds	13
D.	Risk factors	13
ITEM 4. INFORMATION ON THE COMPANY		43
A.	History and development of the company	43
B.	Business overview	53
C.	Organizational structure	131
D.	Property, plants and equipment	131
ITEM 4A. UNRESOLVED STAFF COMMENTS		131
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		131
A.	Operating results	131
B.	Liquidity and capital resources	235
C.	Research and development, patents and licenses, etc.	239
D.	Trend information	239
E.	Off-balance sheet arrangements	239
F.	Tabular disclosure of contractual obligations	240
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		240
A.	Directors and senior management	240
B.	Compensation	246
C.	Board practices	246
D.	Employees	248
E.	Share ownership	249
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		249
A.	Major shareholders	249
B.	Related party transactions	250
C.	Interests of experts and counsel	253
ITEM 8. FINANCIAL INFORMATION		253
A.	Consolidated statements and other financial information	253
B.	Significant changes	256
ITEM 9. THE OFFER AND LISTING		256
A.	Offering and listing details	256
B.	Plan of distribution	256
C.	Markets	256
D.	Selling shareholders	259
E.	Dilution	259
F.	Expenses of the issue	259
ITEM 10. ADDITIONAL INFORMATION		259
A.	Share capital	259
B.	Memorandum and articles of association	259
C.	Material contracts	267

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D.	Exchange controls	267
E.	Taxation	267
F.	Dividends and paying agents	272
G.	Statement by experts	276
H.	Documents on display	276
I.	Subsidiary information	276
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK		276
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		292
A.	Debt securities	292
B.	Warrants and rights	292
C.	Other securities	292
D.	American depositary shares	292
PART II		294
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		294
A.	Defaults	294
B.	Arrears and delinquencies	294
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		294
A.	Material modifications to instruments	294
B.	Material modifications to rights	294
C.	Withdrawal or substitution of assets	294
D.	Change in trustees or paying agents	294
E.	Use of proceeds	294
ITEM 15. CONTROLS AND PROCEDURES		294
A.	Disclosure controls and procedures	294
B.	Management’s annual report on internal control over financial reporting	294
C.	Attestation report of the registered public accounting firm	295
D.	Changes in internal control over financial reporting	295
ITEM 16. [RESERVED]		295
ITEM 16A. Audit committee financial expert		295
ITEM 16B. Code of ethics		295
ITEM 16C. Principal accountant fees and services		296
ITEM 16D. Exemptions from the listing standards for audit committees		296
ITEM 16E. Purchases of equity securities by the issuer and affiliated purchasers		296
ITEM 16F. Change in registrant’s certifying accountant		296
ITEM 16G. Corporate governance		296
ITEM 16H. Mine safety disclosure		298
PART III		299
ITEM 17. Financial statements		299
ITEM 18. Financial statements		299
ITEM 19. Exhibits		299
APPENDIX A. SELECTED FINANCIAL AND STATISTICAL DATA PREPARED UNDER COLOMBIAN BANKING GAAP		A-1

ii 

PRESENTATION OF FINANCIAL AND OTHER INFORMATION

All references herein to “peso,” “pesos,” or “Ps” refer to the lawful currency of Colombia. ‎All references to “U.S. dollars,” “dollars” or “U.S.$” are to United States dollars. See “Item 3. Key information—A. Selected financial and operating data—Exchange rates” for ‎information regarding exchange rates for the Colombian currency. This annual report translates certain Colombian peso amounts ‎into U.S. dollars at specified rates solely for the convenience of the reader. The conversion of amounts expressed in ‎pesos as of a specified date at the then prevailing exchange rate may result in the presentation of U.S. dollar amounts ‎that differ from U.S. dollar amounts that would have been obtained by converting Colombian pesos as of another specified ‎date. Unless otherwise noted in this annual report, all such peso amounts have been translated at the ‎rate of Ps 2,984.00 per U.S.$1.00, which was the representative market rate published on December 31, 2017. The ‎representative market rate is computed and certified by the Superintendency of Finance on a daily basis and ‎represents the weighted average of the buy/sell foreign exchange rates negotiated on the previous day by certain ‎financial institutions authorized to engage in foreign exchange transactions. Such conversion should not be ‎construed as a representation that the peso amounts correspond to, or have been or could be converted into, U.S. ‎dollars at that rate or any other rate. On April 20, 2018, the representative market rate was Ps 2,757.96 per ‎U.S.$1.00.‎

Definitions

In this annual report, unless otherwise indicated or the context otherwise requires, the terms:

· “Grupo Aval,” “we,” “us,” “our” and “our company” mean Grupo Aval Acciones y Valores S.A. and its consolidated subsidiaries;

· “banks” and “our banking subsidiaries” mean Banco de Bogotá S.A., Banco de Occidente S.A., Banco Popular S.A. and Banco Comercial AV Villas S.A., and their respective consolidated subsidiaries;

· “Banco de Bogotá” means Banco de Bogotá S.A. and its consolidated subsidiaries;

· “Banco de Occidente” means Banco de Occidente S.A. and its consolidated subsidiaries;

· “Banco Popular” means Banco Popular S.A. and its consolidated subsidiaries;

· “Banco AV Villas” means Banco Comercial AV Villas S.A. and its consolidated subsidiary;

· “BAC Credomatic” or “BAC” means BAC Credomatic Inc. and its consolidated subsidiaries;

· “Corficolombiana” means Corporación Financiera Colombiana S.A. and its consolidated subsidiaries;

· “LB Panamá” means Leasing Bogotá S.A., Panamá and its consolidated subsidiaries;

· “Porvenir” means Sociedad Administradora de Fondos de Pensiones y Cesantías Porvenir S.A. and its consolidated subsidiary; and

· “Superintendency of Finance” means the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia), a supervisory authority ascribed to the Colombian Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público), or the “Ministry of Finance,” holding the inspection, supervision and control authority over the persons or entities involved in financial activities, securities markets, insurance and any other operations related to the management, use or investment of resources collected from the public.

In this annual report, references to “beneficial ownership” are calculated pursuant to the definition ascribed by the U.S. Securities and Exchange Commission, or the “SEC,” of beneficial ownership for foreign private issuers contained in Form 20-F. Form 20-F defines the term “beneficial owner” of securities as referring to any person who, even if not the record owner of the securities, has or shares the underlying benefits of ownership, including the power to direct the voting or the disposition of the securities or to receive the economic benefit of ownership of the securities. A person is also considered to be the “beneficial owner” of securities when such person has the right to acquire within 60 days pursuant to an option or other agreement. Beneficial owners include persons who hold their securities through one or more trustees, brokers, agents, legal representatives or other intermediaries, or through companies in which they have a “controlling interest,” which means the direct or indirect power to direct the management and policies of the entity.

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Financial statements

We are an issuer in Colombia of securities registered with the National Registry of Shares and Issuers, and in this capacity, we are subject to oversight by the Superintendency of Finance and required to comply with corporate governance and periodic reporting requirements to which all issuers are subject. We are not a financial institution in Colombia and we are not supervised or regulated as a financial institution. Commencing in September 2018, we will be subject to the supervision and regulation of the Superintendency of Finance as a financial conglomerate holding company and will be required to comply with capital adequacy and additional regulations applicable to financial conglomerates. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation.” All of our Colombian financial subsidiaries, including Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas, Corficolombiana, Porvenir, and their respective financial subsidiaries, are entities under the direct comprehensive supervision of, and subject to inspection and surveillance as financial institutions by, the Superintendency of Finance and, in the case of BAC Credomatic, subject to inspection and surveillance as a financial institution by the relevant regulatory authorities in each country where BAC Credomatic operates.

Our consolidated financial statements at December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016, and 2015 have been audited, as stated in the report appearing therein, by KPMG, and are included in this annual report and referred to as our audited consolidated financial statements. Our historical results are not necessarily indicative of results to be expected for future periods. We have prepared the audited consolidated financial statements included herein in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). Prior to January 1, 2014, our consolidated financial statements were prepared in accordance with the regulations of the Superintendency of Finance applicable to financial institutions (Resolution 3600 of 1988 and External Circular 100 of 1995) and, on issues not addressed by these regulations, generally accepted accounting principles prescribed by the Superintendency of Finance for banks operating in Colombia (which we refer to in this annual report, collectively, as “Colombian Banking GAAP”). We have included certain information prepared under Colombian Banking GAAP at and for the years ended December 31, 2013 and 2012 in “Appendix A. Selected Financial and Statistical Data Prepared under Colombian Banking GAAP” to provide information for prior years. Colombian Banking GAAP is not comparable to IFRS.

On June 21, 2016, Grupo Aval, Banco de Bogotá, Banco de Occidente and Banco Popular entered into the Amended Corficolombiana Shareholders’ Agreement to provide for Grupo Aval to directly control Corficolombiana. Prior to June 21, 2016, Banco de Bogotá, which held and continues to hold a 38.3% equity interest in Corficolombiana, controlled Corficolombiana. The amendment did not involve any modification in the equity interest held by these entities in Corficolombiana. As a result of the amended Corficolombiana Shareholders’ Agreement, Corficolombiana’s results are presented herein as a direct reporting segment of Grupo Aval and are no longer included in the Banco de Bogotá segment. Accordingly, the financial statements and financial information of Banco de Bogotá included herein for the year ended December 31, 2015 have been retrospectively adjusted to reflect these revised segments.

We, and our Colombian subsidiaries, are also required to prepare consolidated financial statements for publication in Colombia under International Financial Reporting Standards as adopted by the Superintendency of Finance in accordance with Decree 1851 of 2013 and 3023 of 2013 as modified by Decrees 2420 and 2496 of 2015 (which we refer to as “Colombian IFRS”). Colombian IFRS differs from IFRS as issued by the International Accounting Standards Board (“IASB”) in certain material respects.

Colombian IFRS is based on IFRS issued by the IASB in Spanish as of December 31, 2016, and requirements pursuant to certain Colombian regulations. As a result, rules subsequently issued by the IASB are not yet applicable under Colombian IFRS and our consolidated financial statements for local purposes differ from our consolidated financial statements under IFRS in the following principal aspects:

· Wealth tax, created by the Colombian congress in 2014 and to be paid by companies during 2015, 2016 and 2017, calculated based on the value of their shareholder’s equity can be recorded against equity reserves. However, under IFRS, according to IFRIC 21, wealth tax liabilities must be recorded against the statement of income.

2

· Allowances for loan losses calculated based on specific rules of the Financial and Accounting Basic Circular (Circular Básica Contable y Financiera) issued by the Superintendency of Finance (which is applied in the local separate financial statements), whereas under IFRS, allowances for loan losses are calculated according to the criteria set forth in IAS 39 and recorded in the statement of income.

· Debt securities are classified into one of two categories: fair value through profit or loss or amortized cost, and investments in entities with non-controlling and non-significant influence are recorded at fair value with changes in other comprehensive income, in accordance with the guidance set out in IFRS 9 (2012 version). Under IFRS until 2017, classification and measurement procedures are based in International Accounting Standard (“IAS”) 39. IFRS 9 (2014 version) will only apply in Colombia from January 1, 2018 onward.

Ratios and Measures of Financial Performance

We have included in this annual report ratios and measures of financial performance such as return on average assets, or “ROAA,” and return on average equity, or “ROAE.”

These measures should not be construed as an alternative to IFRS measures and should also not be compared to similarly titled measures reported by other companies, which may evaluate such measures differently from how we do. For ratios and measures of financial performance, see “Item 3. Key information—A. Selected financial and operating data— Ratios and Measures of Financial Performance.”

Market share and other information

We obtained the market and competitive position data, including market forecasts, used throughout this annual report from market research, publicly available information and industry publications. We have presented this data on the basis of information from third-party sources that we believe are reliable, including, among others, the International Monetary Fund, or “IMF,” the Superintendency of Finance, the Colombian Stock Exchange, the Colombian National Bureau of Statistics (Departamento Administrativo Nacional de Estadística), or “DANE,” the 2010 and 2011 World Bank Development Indicators, the Economist Intelligence Unit and Euromonitor International. Industry and government publications, including those referenced herein, generally state that the information presented has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Unless otherwise indicated, gross domestic product, or “GDP,” figures with respect to Colombia in this annual report are based on the 2005 base year data series published by DANE. Although we have no reason to believe that any of this information or these reports is inaccurate in any material respect, we have not independently verified the competitive position, market share, market size, market growth or other data provided by third parties or by industry or other publications. We do not make any representation or warranty as to the accuracy of such information.

Our statement of financial position and statement of income for the periods commencing on January 1, 2014, reflects information prepared under IFRS, while comparative disclosures of our financial and operating performance from our competitors are based on unconsolidated information prepared on the basis of Colombian IFRS reported to the Superintendency of Finance. We and our banking subsidiaries also report unconsolidated financial data to the Superintendency of Finance under Colombian IFRS. Unless otherwise indicated or the context otherwise requires, market share and other data comparing our performance to that of our competitors reflects the unconsolidated results of our banking subsidiaries, Corficolombiana, Porvenir and BAC Credomatic. “Grupo Aval aggregate” data throughout this annual report reflects the sum of the unconsolidated financial statements of our four Colombian banking subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas) as reported to the Superintendency of Finance under Colombian IFRS, and it is used for purposes of comparing our performance against that of our peer banks. These unconsolidated financial statements under Colombian IFRS do not reflect the consolidation of subsidiaries such as Corficolombiana, Porvenir or LB Panamá, are not intended to reflect the consolidated financial results of Grupo Aval and are not necessarily indicative of the results for any other future interim period. Except where otherwise indicated, financial and market share data pertaining to BAC Credomatic and its competitors has been presented in accordance with IFRS and it is based on publicly available information filed with regulators. All information regarding our market share and other comparative ratios and measures of financial performance to those of our competitors is presented on an unconsolidated basis under Colombian IFRS, in the case of our Colombian banking subsidiaries, Corficolombiana and Porvenir, and it is based on publicly available information filed with the Superintendency of Finance. This unconsolidated information does not account for businesses of our banking subsidiaries or those of our competitors that are operated through their respective subsidiaries.

3

Throughout this document, unless otherwise noted, references to average statement of financial position have been calculated as follows: for 2017, we calculated our average statement of financial position based on balances at December 31, 2017, at September 30, 2017, at June 30, 2017, at March 31, 2017 and at December 31, 2016. For 2016, we calculated our average statement of financial position based on balances at December 31, 2016, at September 30, 2016, at June 30, 2016, at March 31, 2016 and at December 31, 2015. For 2015, we calculated our average statement of financial position based on balances at December 31, 2015, at September 30, 2015, at June 30, 2015, at March 31, 2015 and at December 31, 2014.

Banks, merchant banks (Corporaciones Financieras) and financing companies (compañías de financiamiento) are deemed credit institutions by the Superintendency of Finance and are the principal institutions authorized to accept deposits and make loans in Colombia. Banks undertake traditional deposit-taking and lending activities. Financing companies place funds in circulation by means of active credit operations, with the purpose of fostering the sale of goods and services, including the development of leasing operations. Merchant banks invest directly in the economy and thus are the only credit institutions that may invest in non-financial sectors. Banks are permitted to invest in merchant banks. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation.” In Colombia, we operate four banks, one merchant bank and one financing company, and our market share is determined by comparing our banks to other banks reporting their results to the Superintendency of Finance.

We consider our principal competitors in Colombia to be Bancolombia S.A., or “Bancolombia,” Banco Davivienda S.A., or “Davivienda,” and Banco Bilbao Vizcaya Argentaria Colombia S.A., or “BBVA Colombia,” which are the three leading banking groups in Colombia after Grupo Aval.

The principal competitors of Porvenir, our pension and severance fund administrator, include Administradora de Fondos de Pensiones y Cesantías Protección S.A., or “Protección,” Colfondos S.A. Pensiones y Cesantías, or “Colfondos,” and Old Mutual Administradora de Fondos de Pensiones y Cesantías S.A., or “Old Mutual,” We have included in this annual report competitive market position data for Porvenir as compared to its principal competitors. Corficolombiana, our merchant bank, is a financial corporation, and its competitors include Banca de Inversión Bancolombia S.A., J.P. Morgan Corporación Financiera S.A., BNP Paribas Colombia Corporación Financiera S.A. and Itaú BBA Colombia S.A. Corporación Financiera.

Our principal competitors in Costa Rica, El Salvador, Guatemala, Nicaragua and Panamá include Banco Industrial, Banco General, Scotiabank, G&T Continental, Bancolombia and Banrural.

We include certain ratios in this annual report which we believe provide investors with important information regarding our operations, such as return on average equity, or “ROAE,” return on average assets, or “ROAA,” net interest margin, or “NIM”, and operational efficiency and asset quality indicators, among others. Some of these ratios are also used in this annual report to compare us to our principal competitors.

Other conventions

Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic summation of the figures that precede them. References to “billions” in this annual report are to 1,000,000,000s and to “trillions” are to 1,000,000,000,000s.

“Non-controlling interest” refers to the participation of minority shareholders in Grupo Aval or our subsidiaries, as applicable.

4

FORWARD-LOOKING STATEMENTS

This annual report contains estimates and forward-looking statements, principally in “Item 3. Key information—D. Risk factors,” “Item 5. Operating and financial review and prospects” and “Item 4. Information on the Company—B. Business overview.” Some of the matters discussed concerning our operations and financial performance include estimates and forward-looking statements within the meaning of the Securities Act and the U.S. Securities Exchange Act of 1934, as amended, or the “Exchange Act.”

Our estimates and forward-looking statements are mainly based on our current expectations and estimates on projections of future events and trends, which affect or may affect our businesses and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Our estimates and forward-looking statements may be influenced by the following factors, among others:

· changes in Colombian, Central American, regional and international business and economic, political or other conditions;

· developments affecting Colombian, Central American and international capital and financial markets;

· government regulation and tax matters and developments affecting our company and industry;

· declines in the oil and affiliated services sector in the Colombian and global economies;

· increases in defaults by our customers;

· increases in goodwill impairment losses, or other impairments;

· decreases in deposits, customer loss or revenue loss;

· increases in allowances for contingent liabilities;

· our ability to sustain or improve our financial performance;

· increases in inflation rates, particularly in Colombia and in jurisdictions in which we operate in Central America;

· the level of penetration of financial products and credit in Colombia and Central America;

· changes in interest rates which may, among other effects, adversely affect margins and the valuation of our treasury portfolio;

· decreases in the spread between investment yields and implied interest rates in annuities;

· movements in exchange rates;

· competition in the banking and financial services, credit card services, insurance, asset management, pension fund administration and related industries;

· adequacy of risk management procedures and credit, market and other risks of lending and investment activities;

· decreases in the level of capitalization of our subsidiaries;

· changes in market values of Colombian and Central American securities, particularly Colombian government securities;

· adverse legal or regulatory disputes or proceedings;

· successful integration and future performance of acquired businesses or assets;

5

· natural disasters and internal security issues affecting countries where we operate;

· loss of any key member of our senior management; and

· other risk factors as set forth under “Item 3. Key information—D. Risk factors.”

The words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend,” “expect” and similar words are intended to identify estimates and forward-looking statements. Estimates and forward-looking statements speak only at the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to the factors mentioned above, among others. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.

These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future.

6

PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

A. Directors and senior management

Not applicable.

B. Advisers

Not applicable.

C. Auditors

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

A. Offer statistics

Not applicable.

B. Method and expected timetable

Not applicable.

ITEM 3. KEY INFORMATION

A. Selected financial data

The following financial data of Grupo Aval for the years ended December 31, 2017, 2016, 2015 and 2014 and at December 31, 2017, 2016, 2015 and 2014 have been derived from our audited consolidated financial statements prepared in accordance with IFRS that are included in this annual report. Our historical results are not necessarily indicative of results to be expected for future periods.

This financial data should be read in conjunction with our audited annual consolidated financial statements and the related notes, “Presentation of financial and other information” and “Item 5. Operating and financial review and prospects” included in this annual report.

Statement of income

IFRS

	Grupo Aval
	For the years ended December 31,
	2017			2017			2016			2015			2014
	(in U.S.$ millions, unless otherwise indicated)(3)			(in Ps billions, except share and per share data)
Total interest income		6,280.7			18,741.8			17,547.0			14,075.6			11,421.8
Total interest expense		(2,757.3	)		(8,227.7	)		(8,392.4	)		(5,751.5	)		(4,498.7	)
Net interest income		3,523.4			10,514.1			9,154.6			8,324.1			6,923.1
Impairment loss on loans and accounts receivable		(1,380.5	)		(4,119.3	)		(3,004.2	)		(2,127.7	)		(1,697.5	)
Impairment loss on other assets		(58.4	)		(174.3	)		(47.5	)		(26.0	)		(0.5	)
Impairment loss on other financial assets		(0.0	)		(0.1	)		(70.4	)		(6.2	)		(11.5	)
Recovery of charged-off assets		88.7			264.6			290.4			219.7			189.6
Net impairment loss on financial assets		(1,350.2	)		(4,029.1	)		(2,831.7	)		(1,940.2	)		(1,519.9	)

7

	Grupo Aval
	For the years ended December 31,
	2017			2017			2016			2015			2014
	(in U.S.$ millions, unless otherwise indicated)(3)			(in Ps billions, except share and per share data)
Net commission and fee income		1,534.5			4,579.0			4,259.7			3,662.3			3,037.2
Net trading income		188.1			561.4			724.7			245.2			369.9
Other income(1)		710.0			2,118.7			2,786.4			2,542.4			2,269.0
Other expenses		(2,958.7	)		(8,828.8	)		(8,519.8	)		(7,609.1	)		(6,273.5	)
Income before income tax expense		1,647.2			4,915.2			5,573.8			5,224.7			4,805.8
Income tax expense		(587.4	)		(1,752.8	)		(2,056.9	)		(1,879.0	)		(1,808.3	)
Net Income		1,059.8			3,162.4			3,516.9			3,345.7			2,997.5
Net income attributable to:
Owners of the parent		657.6			1,962.4			2,139.9			2,041.4			1,815.0
Non-controlling interest		402.2			1,200.0			1,377.1			1,304.3			1,182.5
Earnings per 1,000 shares (basic and diluted earnings):
Common shares (in pesos)		-			88,075.6			96,039.9			91,619.0			86,853.8
Common shares (in U.S. dollars)(2)		-			29.5			32.2			30.7			29.1
Earnings per 1,000 shares (basic and diluted earnings):
Preferred shares (in pesos)		-			88,075.6			96,039.9			91,619.0			86,853.8
Preferred shares (in U.S. dollars)(2)		-			29.5			32.2			30.7			29.1
Dividends per 1,000 shares(3):
Common and preferred shares (in pesos)		-			48,000.0			88,200.0			57,900.0			61,733.7
Common and preferred shares (in U.S. dollars)(2)		-			16.1			29.6			19.4			20.7
Weighted average number of shares:
Outstanding common shares in thousands		-			15,216,468.6			15,262,660.1			15,309,380.7			15,406,634.6
Outstanding preferred shares in thousands		-			7,064,548.6			7,018,357.0			6,971,636.5			5,490,721.7
Outstanding common and preferred shares in thousands		-			22,281,017.2			22,281,017.2			22,281,017.2			20,897,356.4

(1) Includes net income from financial instruments designated at fair value (Ps 209.9 billion in 2017, Ps 181.0 billion in 2016, Ps 153.1 billion in 2015 and Ps 172.9 billion in 2014).

(2) Translated for convenience only using the representative market rate as computed and certified by the Superintendency of Finance at December 31, 2017 of Ps 2,984.00 per U.S.$1.00.

(3) Until 2016, Grupo Aval declared dividends semi-annually in March (from the net income generated in the six-month period between July 1 and December 31 of the previous year) and in September (from the net income generated in the six-month period between January 1 and June 30 of the ongoing year) of each year. Beginning in March 2017, the Company began to declare dividends on an annual basis (from the net income generated in the twelve-month period between January 1 and December 31 of the previous year). Dividends per 1,000 shares figures for 2016 include dividends declared in September, 2016 from the net income generated in the six-month period ended June 30, 2016 and dividends declared in March, 2017 from the net income generated in the six-month period ended December 31, 2016, to be paid in twelve equal installments between April, 2017 and March, 2018.

8

Statement of financial position

	Grupo Aval
	For the years ended December 31,
	2017		2017		2016		2015		2014
	(in U.S.$ millions, unless otherwise indicated)(1)		(in Ps billions, except share and per share data)
Assets:
Cash and cash equivalents		7,485.5		22,336.8		22,193.0		22,285.0		17,269.8
Financial assets held for trading through profit or losses		1,718.5		5,128.1		4,593.7		5,608.2		5,864.5
Available for sale financial assets		6,238.0		18,614.2		18,392.5		19,684.9		18,758.8
Held to maturity investments		971.5		2,899.0		2,570.5		2,395.3		2,665.8
Other financial assets at fair value through profit or loss		765.0		2,282.6		2,072.7		1,891.7		1,738.6
Loans and receivables, net		53,872.1		160,754.3		150,898.7		141,827.7		114,400.7
Other accounts receivables, net		1,420.7		4,239.3		3,524.6		3,202.2		2,233.4
Hedging derivatives		18.5		55.3		128.5		33.7		64.8
Non-current assets held for sale		34.0		101.4		259.5		199.5		211.2
Tangible assets		2,230.0		6,654.0		6,559.5		6,514.0		5,886.7
Concession arrangements rights		1,043.6		3,114.2		2,805.3		2,390.7		1,842.7
Goodwill		2,312.7		6,901.1		6,824.9		7,056.0		5,867.2
Other intangible assets		284.4		848.7		735.0		612.9		388.1
Income tax assets		350.8		1,046.9		779.1		1,485.2		440.0
Other assets(2)		523.7		1,562.8		1,736.1		1,492.3		1,209.6
Total assets		79,268.9		236,538.5		224,073.7		216,679.3		178,842.2
Liabilities:
Derivatives instruments held for trading		100.1		298.7		640.7		1,143.2		1,183.1
Customer deposits		51,905.2		154,885.2		143,887.1		135,954.6		113,528.5
Interbank borrowings and overnight funds		1,665.7		4,970.4		6,315.7		9,474.9		4,964.4
Borrowings from banks and others		6,101.0		18,205.3		17,906.6		18,750.6		13,685.8
Bonds issued		6,401.5		19,102.2		18,568.2		16,567.1		14,130.1
Borrowings from development entities		1,004.7		2,998.1		2,725.7		2,506.6		2,108.5
Hedging derivatives		4.5		13.5		43.4		337.7		559.5
Provisions		232.1		692.6		620.4		600.2		744.7
Income tax liabilities		679.5		2,027.7		1,651.9		1,892.1		1,691.3
Employee benefits		414.9		1,238.2		1,097.6		1,022.3		975.7
Other liabilities		2,089.6		6,235.5		5,957.2		5,523.5		3,914.7
Total liabilities		70,598.8		210,667.3		199,414.5		193,773.0		157,486.2
Equity
Controlling interest
Subscribed and paid-in capital		7.5		22.3		22.3		22.3		22.3
Additional paid-in capital		2,782.7		8,303.4		8,307.5		8,307.8		8,311.9
Retained earnings		2,404.3		7,174.4		6,522.1		5,699.4		4,961.5
Accumulated other comprehensive income		263.7		786.9		749.6		538.1		372.3
Equity attributable to owners of the parent		5,458.2		16,287.0		15,601.6		14,567.6		13,668.0
Non-controlling interest		3,211.9		9,584.2		9,057.7		8,338.7		7,687.9
Total equity		8,670.1		25,871.2		24,659.2		22,906.3		21,356.0
Total liabilities and equity		79,268.9		236,538.5		224,073.7		216,679.3		178,842.2

(1) Translated for convenience only using the representative market rate as computed and certified by the Superintendency of Finance at December 31, 2017 of Ps 2,984.00 per U.S.$1.00.

(2) Includes investments in associates and joint ventures (Ps 1,043.0 billion in 2017, Ps 1,146.6 billion in 2016, Ps 927.6 billion in 2015 and Ps 717.2 billion in 2014).

9

Other financial and operating data

	Grupo Aval
	At and for the years ended December 31,
	2017			2016			2015			2014
	(in percentages, unless otherwise indicated)
Profitability ratios:
Net interest margin(1)		5.8	%		5.4	%		5.4	%		5.4	%
ROAA(2)		1.4	%		1.6	%		1.7	%		1.8	%
ROAE(3)		12.6	%		14.3	%		14.6	%		15.2	%
Efficiency ratio(4):		46.5	%		47.3	%		47.6	%		46.2	%
Capital ratios:
Period-end equity as a percentage of period-end total assets		10.9	%		11.0	%		10.6	%		11.9	%
Tangible equity ratio(5)		7.9	%		7.9	%		7.3	%		8.7	%
Credit quality data:
Charge-offs as a percentage of average gross loans(6)		1.7	%		1.6	%		1.3	%		1.3	%
Loans past due more than 30 days / total gross loans(6)		3.9	%		3.0	%		2.7	%		2.8	%
Loans past due more than 90 days / total gross loans(6)		3.6	%		2.0	%		1.7	%		1.7	%
Allowance for loans as a percentage of past due loans more than 30 days		90.7	%		95.0	%		98.9	%		96.7	%
Allowance for loans as a percentage of past due loans more than 90 days		128.2	%		143.9	%		157.9	%		157.0	%
Allowance for loans as a percentage of gross loans(6)		3.5	%		2.8	%		2.6	%		2.7	%
Operational data (in units):
Number of customers of the banks(7)		14,700,386			13,883,370			13,678,194			12,590,374
Number of employees		80,565			77,050			76,095			74,211
Number of branches(8)		1,771			1,789			1,785			1,769
Number of ATMs(8)		5,774			5,739			5,623			5,429

(1) Net interest margin is calculated as net interest income divided by total average interest-earning assets. Average interest-earning assets for 2017, 2016 and 2015 are calculated as the sum of interest-earning assets at each quarter-end during the applicable year and the prior year end divided by five. Average interest-earning assets for 2014 are calculated as the sum of interest-earning assets at December 31, 2014 and at January 1, 2014 divided by two.

(2) For the years ended December 31, 2017, 2016, 2015 and 2014, ROAA is calculated as net income divided by average assets. Average assets for 2017, 2016 and 2015 are calculated as the sum of assets at each quarter-end during the applicable year and the prior year end divided by five. Average assets for 2014 are calculated as the sum of assets at December 31, 2014 and at January 1, 2014 divided by two.

(3) For the years ended December 31, 2017, 2016, 2015 and 2014, ROAE is calculated as net income attributable to controlling interest divided by average equity attributable to controlling interest. Average equity attributable to controlling interest for 2017 is calculated as the sum of equity attributable to controlling interest at each quarter-end during the applicable year end and the prior year end divided by five. Average equity attributable to controlling interest for 2016 is calculated as the sum of equity attributable to controlling interest at each quarter-end during the applicable year end and the prior year end divided by five. Average equity attributable to controlling interest for 2015 is calculated as the sum of equity attributable to controlling interest at each quarter end during the year end and the prior year end divided by five. Average equity attributable to controlling interest for 2014 is calculated as the sum of equity attributable to controlling interest at December 31, 2014 and at January 1, 2014 divided by two.

10

(4) Efficiency ratio is calculated as personnel expenses plus administrative and other expenses divided by the sum of net interest income, net income from commissions and fees, net trading income and other income excluding other.

(5) Tangible equity ratio is calculated as total equity minus intangible assets (calculated as goodwill plus other intangible assets excluding those related to concession arrangements rights, Ps 3,114.2 billion in 2017, Ps 2,805.3 billion in 2016, Ps 2,390.7 billion in 2015 and Ps 1,842.7 billion in 2014) divided by total assets minus intangible assets (calculated as goodwill plus other intangible assets excluding those related to concession arrangements rights, Ps 3,114.2 billion in 2017, Ps 2,805.3 billion in 2016, Ps 2,390.7 billion in 2015 and Ps 1,842.7 billion in 2014). See “Item 3. Key Information—A. Selected financial and operating data— Ratios and Measures of Financial Performance.”

(6) Gross loans excludes Interbank and overnight funds (Ps 7,279.0 billion in 2017, Ps 3,569.6 in 2016, Ps 4,085.0 billion in 2015 and Ps 2,007.5 in 2014) as these are short-term liquidity operations that do not show deterioration.

(7) Reflects aggregated customers of our banking subsidiaries. Customers of more than one of our banking subsidiaries and BAC Credomatic are counted separately for each banking subsidiary.

(8) Reflects aggregated number of branches or ATMs of our banking subsidiaries and BAC Credomatic, as applicable, located throughout Colombia and Central America.

Ratios and Measures of Financial Performance

The tables in this section and elsewhere in this annual report provide the calculation of certain Ratios and Measures of Financial Performance, which are used by our management to analyze the evolution and results of our company. Some of the Ratios and Measures of Financial Performance presented by us are either non-IFRS or use non-IFRS inputs. This non-IFRS information should not be construed as an alternative to IFRS measures. The Ratios and Measures of Financial Performance as determined and measured by us should not be compared to similarly titled measures reported by other companies as other companies may calculate and report such measures differently.

ROAA and ROAE

ROAA, which is calculated as net income divided by average assets, provides a measure of return on assets. We believe ROAE, calculated as such, provides a measure of the total return generated from our company and our subsidiaries for shareholders.

The following table sets forth ROAA and ROAE for Grupo Aval for the indicated years.

	Year ended December 31,
	2017			2016			2015
	(in Ps billions, except percentages)
Grupo Aval (consolidated):
Average assets(1)		229,315.3			217,495.7			198,184.1
Average equity attributable to controlling interest(2)		15,635.9			14,993.3			14,019.9
Net income		3,162.4			3,516.9			3,345.7
Net income attributable to controlling interest		1,962.4			2,139.9			2,041.4
Net income attributable to non-controlling interest		1,200.0			1,377.1			1,304.3
ROAA(1)		1.4	%		1.6	%		1.7	%
ROAE(2)		12.6	%		14.3	%		14.6	%
Net Income attributable to non-controlling interest divided by net income		37.9	%		39.2	%		39.0	%

(1) For methodology used to calculate ROAA, see note (2) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data.”

(2) For methodology used to calculate ROAE, see note (3) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data.”

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The following table sets forth ROAA and ROAE of our subsidiaries for the year ended December 31, 2017.

	Year ended December 31, 2017
	Banco de Bogotá			Banco de Occidente			Banco Popular			Banco AV Villas			Corficolombiana
	(in Ps billions, except percentages)
Average assets(1)		144,807.0			36,906.7			21,218.5			12,406.8			20,346.5
Average equity attributable to controlling interest(2)		16,545.7			4,295.5			2,602.5			1,403.5			3,151.6
Net income		2,133.0			377.7			205.7			137.7			563.9
Net income attributable to controlling interest		1,908.0			376.0			187.0			137.3			212.9
Net income attributable to non-controlling interest		225.0			1.6			18.7			0.4			350.7
ROAA(1)		1.5	%		1.0	%		1.0	%		1.1	%		2.8	%
ROAE(2)		11.5	%		8.8	%		7.2	%		9.8	%		6.8	%
Net Income attributable to non-controlling interest divided by net income		10.5	%		0.4	%		9.1	%		0.3	%		62.2	%

(1) For methodology used to calculate ROAA, see note (2) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data.”

(2) For methodology used to calculate ROAE, see note (3) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data.”

Tangible equity ratio

The following table sets forth the tangible equity ratio of Grupo Aval and each of its business segments at December 31, 2017.

				Grupo Aval entities
	Grupo Aval Consolidated			Banco de Bogotá			Banco de Occidente			Banco Popular			Banco AV Villas			Corficolombiana
	(in Ps billions, except percentages)
Total Equity		25,871.2			18,192.1			4,404.3			2,671.0			1,464.5			5,242.7
Total Assets		236,538.5			149,389.1			37,746.9			22,322.1			12,318.1			21,115.0
Total Equity / Assets		10.9	%		12.2	%		11.7	%		12.0	%		11.9	%		24.8	%
Intangible assets(1)		7,749.7			6,047.4			192.1			80.5			46.3			482.8
Total Equity – Intangible assets		18,121.5			12,144.6			4,212.2			2,590.6			1,418.2			4,759.9
Total assets – Intangible assets		228,788.8			143,341.7			37,554.8			22,241.6			12,271.8			20,632.2
Tangible equity ratio(2)		7.9	%		8.5	%		11.2	%		11.6	%		11.6	%		23.1	%

(1) Intangible Assets are: goodwill and other intangible assets (excluding intangible assets related to concession arrangements rights of Ps 3,114.2 billion for both Grupo Aval and Corficolombiana).

(2) Tangible equity ratio is calculated as total equity minus intangible assets divided by total assets minus intangible assets.

Exchange rates

The Colombian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of pesos by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

The Superintendency of Finance calculates the representative market rate based on the weighted averages of the buy/sell foreign exchange rates quoted daily by certain financial institutions, including certain of our banking subsidiaries, for the purchase and sale of U.S. dollars. On April 20, 2018, the representative market rate was Ps 2,757.96 per U.S.$1.00, and on December 31, 2017, the representative market rate was Ps 2,984.00 per U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for pesos/U.S. dollars.

The following table presents the monthly high and low representative market rate during the months indicated.

12

Recent exchange rates of pesos per U.S. dollar	Low		High
Month:
November 2017		2,976.39		3,055.57
December 2017		2,962.14		3.029.75
January 2018		2,783.13		2,984.00
February 2018		2,806.67		2,908.70
March 2018		2,780.04		2,879.15
April 2018 (through April 20, 2018)		2,705.34		2,792.96

Source: Colombian Central Bank.

The following table presents the average pesos/U.S. dollar representative market rate for each of the five most recent years, calculated by using the average of the exchange rates on the last day of each month during the period, and the representative year-end market rate for each of the five most recent years.

Pesos/U.S.$1.00 representative market rate	Average		Year-end
Period:
2013		1,868.90		1,926.83
2014		2,000.68		2,392.46
2015		2,746.47		3,149.47
2016		3,053.42		3,000.71
2017		2,951.15		2,984.00

Source: Colombian Central Bank.

Exchange rate fluctuation will affect the U.S. dollar value of any distributions we make with respect to our shares of preferred stock. See “—D. Risk factors—Risks relating to our preferred shares and ADSs.”

B. Capitalization and indebtedness

Not applicable.

C. Reasons for the offer and use of proceeds

Not applicable.

D. Risk factors

Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. In such an event, the market price of our preferred shares or our American Depositary Shares, or ADSs, could decline, and you could lose all or part of your investment. We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business.

Risks relating to Colombia and other countries in which we operate

Adverse economic and political conditions in Colombia and other countries in which we operate, including variations in the exchange rates or downgrades in credit ratings of sovereign debt securities, may have an adverse effect on our results of operations and financial condition.

Our principal subsidiaries in Colombia are financial institutions (four commercial banks, a pension and severance fund administrator and a merchant bank), and a substantial majority of our operations, properties and customers are located in Colombia. As a consequence, our results of operations and financial condition are materially affected by economic and political conditions in Colombia.

Colombia is subject to economic, political and other uncertainties, including changes in monetary, exchange control and trade policies that could affect the overall business environment in Colombia, which would, in turn, affect our results of operations and financial condition. For example, the Central Bank of Colombia (the “Colombian Central Bank” or “Central Bank”), could sharply raise or lower interest rates, which could negatively affect our net interest income and asset quality and also restrict our growth. Extreme variations in exchange rates could also negatively affect the foreign currency positions of our borrowers. Any of these events could have an adverse effect on our results of operations and financial condition.

13

Decreases in the growth rate of the Colombian economy, periods of negative growth, material increases in inflation or interest rates, or high fluctuations in the exchange rate could result in lower demand for, or affect the pricing of, our services and products. Because a large percentage of the costs and expenses of our subsidiaries is fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, in which case our profitability could be affected.

In the case of our pension and severance fund management business, economic conditions may affect the businesses and financial capacity of employers, which may result in a reduction in employee-contributor head counts or decrease the ability of employers to create new jobs or increase employee incomes.

BAC Credomatic’s results of operations and financial condition depend on economic, political and social conditions in the countries where it operates, primarily in Central America. The political, economic and social environments in such countries are affected by many different factors, including significant governmental influence over local economies, substantial fluctuations in economic growth, high levels of inflation, exchange rate movements, exchange controls or restrictions on expatriation of earnings, high domestic interest rates, drug trafficking and other forms of organized crime, wage and price controls, changes in tax policies, imposition of trade barriers, changes in the prices of commodities and unexpected changes in regulation. The results of operations and financial condition of our Central American operations could be affected by changes in economic and other policies of each country’s government, which have exercised and continue to exercise substantial influence over many aspects of the private sector, and by other social and political developments in each country. During the past several decades, El Salvador, Guatemala, Honduras, Nicaragua and Panamá have experienced civil strife and political instability that have included a succession of regimes with differing economic policies and programs. Previous governments have imposed, among other measures, controls on prices, exchange rates, local and foreign investment and international trade, and restricted the ability of companies to dismiss employees, expropriated private sector assets and prohibited the remittance of profits to foreign investors.

Adverse economic, political and social developments, including allegations of corruption against the Colombian government and governments of other countries in which we operate, in Central America may adversely affect demand for banking services and create uncertainty regarding our operating environment, which could have a material adverse effect on BAC Credomatic and, consequently, on our company. In addition, changes in political administrations may result in changes in governmental policy, which could affect BAC Credomatic and, consequently, our business.Downgrades in credit ratings of debt securities issued or guaranteed by governments in countries in which we operate may increase our and our subsidiaries’ cost of funding or limit the ability of borrowing funds from customary sources of capital.

The Colombian and Central American economies remain vulnerable to external shocks.

A significant decline in economic growth of any of Colombia’s or Central America’s major trading partners—in particular, the United States, China, Ecuador and Venezuela—could have a material adverse effect on each country’s balance of trade and economic growth. In addition, a “contagion” effect, where an entire region or class of investments becomes less attractive to, or subject to outflows of funds by, international investors could negatively affect Colombia or Central American countries. Lower economic growth than expected may result in asset quality deterioration and could negatively affect our business.

Pension funds, such as those managed by Porvenir, are global investors and thus are affected by regional and global economic factors. Lower economic growth of Colombia’s major trading partners or a contagion effect in the region or globally may lead to lower pension fund returns, which may in turn result in decreases in assets under management and impair our business, results of operations or financial condition. In recent years, pension fund returns have been subject to increased volatility in international financial markets. Foreign investments represented 33.3% and 27.0% of Porvenir’s total assets under management at December 31, 2017 and 2016, respectively.

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Fluctuations in commodity prices and volatility in exchange rates have in the past led to a deceleration in growth. In particular, the oil industry remains an important determinant of the country’s economic growth. Substantial or extended declines in international oil prices or oil production falls may have an adverse effect on the overall performance of the Colombian economy and could have an adverse impact on the results of operations and financial condition of oil industry companies, which could have an adverse impact on our loans to oil industry companies. Our banking subsidiaries do not maintain a significant overall exposure to oil industry clients and have not been materially impacted by the decrease in international oil prices, however, continuing falling market prices, such as the one experienced during the recent years, pose significant challenges to Colombia’s near-term outlook and may impair the ability of some of the clients of our banking subsidiaries to repay their debt obligations. As of December 31, 2017, our combined exposure to the oil sector is 2.38% of the consolidated loan portfolio (including BAC) with the principal exposure being to Empresa Colombiana de Petróleos S.A. “Ecopetrol,” (0.68%) and to oil pipelines (0.94%) in which Ecopetrol is the majority shareholder. As of December 31, 2017, our exposure to oil service companies and suppliers to the oil sector (0.34% and 0.29%, respectively) is not material. While the credit quality of the companies participating in these sectors has been affected and additional allowances for loan losses will be required, we do not believe that they will materially affect our results. Although the growth of the Colombian economy is expected to gradually recover in the future, there is no guarantee that the past decade´s average growth will be maintained. A low rate of growth of the Colombian economy, a slowdown in the growth of customer demand, an increase in market competition, or changes in governmental regulations, could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses. All of these conditions could lead to a general decrease in demand for borrowings. In addition, the effect on consumer confidence of any actual or perceived deterioration of household incomes in the Colombian or Central American economies may have a material adverse effect on our results of operations and financial condition.

Colombia has experienced and continues to experience internal security issues that have had or could have a negative effect on the Colombian economy.

Colombia has experienced internal security issues, primarily due to the activities of guerrilla groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia), or “FARC,” and the National Liberation Army (Ejercito de Liberación Nacional), or “ELN”, paramilitary groups and drug cartels. In remote regions of the country with minimal governmental presence, these groups have exerted influence over the local population and funded their activities by protecting, and rendering services to drug traffickers. The Colombian government reached a peace deal with the FARC in November 2016. The Colombian government also began negotiations with ELN in October 2016, which, after a series of bomb attacks by ELN, the Colombian President ordered in January, 2018 the suspension of peace talks. On March, 2018, more than two months after they were suspended, Colombia's government and ELN resumed peace talks in Quito, Ecuador aimed to agreeing a new ceasefire as the preamble for a final peace agreement. Any breakdown in peace, or renewed or continuing drug-related crime and guerilla and paramilitary activities may have a negative impact on the Colombian economy in the future. Our business or financial condition could be adversely affected by rapidly changing economic or social conditions, including the Colombian government’s response to the recently concluded peace deal with the FARC, or any peace negotiation with ELN or other group, which may result in legislation that increases our tax burden, or that of other Colombian companies, which could, in turn, impact the overall economy, or legislation that could directly impact our business, such as those requiring more flexible credit conditions for, or the employment of, former FARC members.

Political and economic instability in the region may affect the Colombian economy and, consequently, our results of operations and financial condition.

Some of Colombia’s neighboring countries and principal trading partners, particularly Venezuela, have experienced and continue to experience periods of political and economic instability. Moreover, diplomatic relations with Venezuela and Ecuador have from time to time been tense and affected by events surrounding the Colombian armed forces’ confrontations with FARC and ELN throughout Colombia, particularly on Colombia’s borders with each of Venezuela and Ecuador.

On November 19, 2012, the International Court of Justice placed a sizeable area of the Caribbean Sea within Nicaragua’s exclusive economic zone, which until then had been deemed by Colombia as part of its own exclusive economic zone. A worsening of diplomatic relations between Colombia and Nicaragua involving the disputed waters could result in the Nicaraguan government taking measures, or a reaction among the Nicaraguan public, which would be detrimental to Colombian-owned interests in that country, including those owned by us through BAC Credomatic.

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Further economic and political instability in Colombia’s main trading partners or any future deterioration in relations with Venezuela, Ecuador, Nicaragua and other countries in the region may result in the closing of borders, the imposition of trade barriers and a breakdown of diplomatic ties, or a negative effect on Colombia’s trade balance, economy and general security situation, which may adversely affect our results of operations and financial condition.

Finally, political conditions such as changes in the United States policies related to immigration and remittances could affect the regions in which we operate. Economic conditions in the United States and the region generally may be impacted by the potential renegotiation of the North American Free Trade Agreement (“NAFTA”). This could have an indirect effect on the Colombian economy and the countries in which we operate.

Changes in government policies and actions, including the upcoming 2018 presidential election, as well as judicial decisions in Colombia and other countries in which we operate could significantly affect the local economy and, as a result, our results of operations and financial condition.

Our results of operations and financial condition may be adversely affected by changes in Colombian and Central American governmental policies and actions, and judicial decisions, involving a broad range of matters, including interest rates, exchange rates, exchange controls, inflation rates, taxation, banking and pension fund regulations and other political or economic developments affecting Colombia and other countries in which we operate.

Colombian and Central American governments have historically exercised substantial influence over their economies, and their policies are likely to continue to have a significant effect on companies, including us.

Presidential elections will take place in Colombia in May 2018. The president of Colombia has considerable power to determine governmental policies and actions relating to the economy, and the next president may adopt policies that are inconsistent with those of the current President or that negatively affect us. Two candidates, Sergio Fajardo, a politically aligned center-left presidential candidate, and Gustavo Petro, a leftist presidential candidate, have been favored in some of the polls. During the campaign, Mr. Fajardo has broadly indicated that he wants to tackle social disparities and corruption and Mr. Petro has campaigned on an agenda that includes guaranteeing free access to health and education, rejecting current economic trajectories and promoting economic nationalism in lieu of free trade. We cannot predict whether Mr. Fajardo, Mr. Petro or any other candidate if elected will have sufficient support to pass their proposed reforms and whether the elected president will maintain current policies or adopt policies that will negatively affect us. Any future governmental policies and actions, or judicial decisions, could adversely affect our results of operations or financial condition.

Moreover, regulatory uncertainty, public dialogue on reforms during and following the presidential election in Colombia and other countries where we operate, or the passage of reforms may be disruptive to our business or the economy and may result in a material and adverse effect on our financial condition and results and operations.

We and our subsidiaries are subject to anti-corruption laws and other laws in the jurisdictions in which we operate and violation of these regulations could harm our business.

We and our subsidiaries are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as anti-corruption, taxation, internal and disclosure control obligations, securities and derivatives regulation, anti-competition regulations, data privacy and labor relations. Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business or the business of our subsidiaries could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these laws or regulations in connection with the performance of our obligations to our customers, as well as in connection with the performance of our subsidiaries’ obligations, could also result in liability for significant monetary damages, fines or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to process information and allegations by our customers that we have not performed our contractual obligations. Because of the varying degrees of development of the legal systems of the countries in which we operate, local laws might be insufficient to protect our rights.

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In particular, practices in the local business community may not conform to international business standards and could violate anti-corruption laws or regulations, including the U.S. Foreign Corrupt Practices Act. Our employees, and joint venture partners, or other third parties with which we associate could take actions that violate policies or procedures designed to promote legal and regulatory compliance or applicable anti-corruption laws or regulations. Violations of these laws or regulations by us or our subsidiaries, our employees or any of these third parties could subject us to criminal or civil enforcement actions (whether or not we participated or knew about the actions leading to the violations), including fines or penalties, disgorgement of profits and suspension or disqualification from work, including governmental contracting, any of which could materially adversely affect our business, including our results of operations and our reputation.

Allegations and ongoing investigations of alleged improper payments or corruption involving the Colombian government, politicians and private industry could create economic and political uncertainty. In addition, an ongoing corruption investigation against a former president of one of our subsidiaries relating to his alleged conduct while president of the subsidiary may impact our ability or the ability of our subsidiaries to conduct our or their business, harm our reputation and negatively impact our financial results.

Allegations of corruption against the Colombian government, politicians and private industry could create economic and political uncertainty. More specifically, proven or alleged wrongdoings by the Colombian government, politicians or private industry could have adverse effects on the political stability of Colombia and the Colombian economy. Furthermore, if we, one of our subsidiaries, or entities or projects we participate in, is found to be involved in any way in these activities, it could result in a material adverse effect on our business, including by depressing business volumes, debarring us or our subsidiaries from participating in future projects and/or negatively affecting our reputation.

On December 21, 2016, the United States Department of Justice announced that Odebrecht S.A. (“Odebrecht”), a global construction conglomerate based in Brazil, pled guilty and agreed to pay a monetary penalty to resolve charges with authorities in the United States, Brazil and Switzerland arising out of their schemes to pay approximately $800 million dollars in bribes to government officials in twelve countries around the world, including $11.5 million dollars in Colombia, where the company admitted to offering bribes in order to obtain and extend infrastructure contracts. Odebrecht further admitted to effecting these payments directly from its Brazilian headquarters through its division of structured operations.

Soon after Odebrecht’s guilty plea, Colombia’s Attorney General’s Office (the “Fiscalía General de la Nación” or “Fiscalía”) initiated an investigation that has identified and incarcerated some of the Colombian recipients of the Odebrecht bribes and has made findings that, among other things, Odebrecht effected payments directly from its Brazilian headquarters through its division of structured operations to obtain a contract for the construction of “Ruta del Sol Sector 2” toll road concession awarded to Concesionaria Ruta del Sol S.A.S. (“Concesionaria Ruta del Sol” or the “Concessionaire”) in 2009. This contract, Concession Contract No. 001 of 2010, for the construction of Ruta del Sol Sector 2 (the “Concession Contract”), was signed on January 14, 2010. Episol S.A.S. (“Episol”), a wholly-owned subsidiary of Corficolombiana, is a minority (33%) non-controlling shareholder in the Concessionaire and Odebrecht is the majority controlling and operating shareholder with a participation of 62%. A third shareholder, CSS Constructores S.A., participates with 5%. This investigation is ongoing.

The Fiscalía has expanded its investigation to include other politicians, public servants and private industry members. As part of the investigations into corrupt practices conducted by Odebrecht and Colombian government officials in connection with the awarding of Ruta del Sol Sector 2, on May 9, 2017, the Fiscalía announced an investigation of Mr. José Elías Melo Acosta, who served as President of Corficolombiana for 8 years until May 2016. On December 7, 2017, the Fiscalía filed an indictment against Mr. Melo, charging him with undue interest in the arrangement of contracts (Interés Indebido en la Celebración de Contratos) and bribery (Cohecho por Dar u Ofrecer). Mr. Melo has denied the charges. The trial is expected to begin in the coming weeks with a “preliminary hearing” where the Fiscalía and the defense of Mr. Melo are expected to present their arguments. Mr. Melo’s case has been widely publicized in the local media.

We cannot predict the outcome of the trial against Mr. Melo; however, as the former president of Corficolombiana, a guilty verdict against him could have a material and adverse effect on our or our subsidiaries’ reputation and business activities. Although Corficolombiana or its subsidiaries have not been named or made a part of by the Fiscalía in any of the ongoing criminal investigations, a conviction of Mr. Melo may imply the potential risk for us or our subsidiaries, including Corficolombiana or Episol, of facing possible civil, administrative or criminal allegations based on improper actions of a former member of our senior management. We do not believe that a criminal conviction of Mr. Melo would in and of itself trigger criminal or administrative liability of Grupo Aval or any of its subsidiaries. However, we can provide no assurance that we or our subsidiaries, including Corficolombiana or Episol, will not be involved in legal proceedings or be sanctioned or that political decisions will not result in additional investigations or direct or indirect sanctions by regulators or governmental authorities in Colombia or outside Colombia against us or our subsidiaries, which could materially affect our business. It is possible that information damaging to us and our interests will come to light in the course of the ongoing investigations of corruption by Colombian authorities. Our management may be required to direct its time and attention to defending against allegations arising from such investigations, which could prevent them from focusing on our core businesses. See “Item 8. Financial Information—A. Consolidated Statements and other financial information—Other Litigation.”

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On January 20, 2017, the Superintendency of Industry and Commerce (the Colombian Antitrust Authority) initiated an administrative proceeding to investigate whether any anti-competitive behavior had been conducted in the public bidding process for the awarding of the Concession Contract.

This administrative proceeding is primarily based on actions alleged to be contrary to free economic competition conducted by Gabriel García Morales, a recipient of Odebrecht’s bribes, former Vice Minister of Transportation and acting manager of the National Institute of Concessions (the “INCO”), a government agency later replaced by the National Infrastructure Agency (the “ANI”) and some of Odebrecht’s companies (controlling shareholder of the Concessionaire). As part of this administrative proceeding, on February 16, 2017, the Superintendency of Industry and Commerce issued Resolution 5216 ordering, as a precautionary measure, the suspension or cessation of the effects of acts allegedly contrary to free economic competition, by ordering the ANI to immediately terminate the Concession Contract. The precautionary measure is also based on the admission made by Odebrecht and the admission made by Gabriel García Morales to the charges of bribery made by the Fiscalía.

Corficolombiana, as parent company of Episol, and Episol, as shareholder (33%) of the Concessionaire, were required to provide information to the Superintendency of Industry and Commerce, and some members of their management provided testimony related to this administrative proceeding. Although we have no reason to believe that we or any of our subsidiaries are the focus of this antitrust investigation, we can provide no assurance that we or our subsidiaries, including Corficolombiana and Episol, will not be involved in these proceedings. If the Superintendency of Industry and Commerce decides to include Corficolombiana and or Episol and/or their management or employees in this or any other investigation, and attributes any responsibility to them for any anti-competitive acts, our subsidiaries and/or their employees may face the payment of significant fines and our reputation may be affected. Pursuant to Law 1340 of 2009, entities may face fines for up to 100,000 monthly minimum wages, equivalent to Ps 78.1 billion (approximately U.S.$26.2 million) or up to 150% of any gain derived from the improper behavior. Individuals may be responsible for fines of up to 2.000 legal monthly minimum wages, equivalent to Ps 1.6 billion (approximately U.S.$524,000).

The Odebrecht scandal has also prompted additional investigations and proceedings from other judicial and administrative authorities such as the Superintendency of Corporations and the Superintendency of Transportation. Other proceedings include the Class Action lawsuit described below (the “Class Action”) and a proceeding initiated in an arbitral tribunal to resolve the disputes between the Concessionaire and the ANI, including a dispute regarding the termination and liquidation of the Concession Contract (the “Arbitration Proceeding”). These investigations and proceedings may result in additional liability against us, including fines and losses on investments. See “Item 8. Financial Information—A. Consolidated Statements and other financial information—Other Litigation.”

New or higher taxes resulting from changes in tax regulations or the interpretation thereof in Colombia and other countries in which we operate could adversely affect our results of operations and financial condition.

New tax laws and regulations, and uncertainties with respect to future tax policies, pose risks to us. In recent years, Colombian tax authorities have imposed additional taxes in a variety of areas, such as taxes on financial transactions and taxes to fund Colombia’s war against terrorism and taxes to fund post-conflict programs related to the peace negotiations with guerrilla forces. Colombian government is also obliged by Law 1473 of 2011, also known as Law of Fiscal Rule to significantly reduce its fiscal deficit over the following years. This, in addition to pressure from rating agencies could lead to additional taxation rates on our business and that of our borrowers. Changes in tax-related laws and regulations, and interpretations thereof, can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting tax deductions, and eliminating tax-based incentives and non-taxed income. In addition, tax authorities or courts may interpret tax regulations differently than we do, which could result in tax litigation and associated costs and penalties.

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Until December 31, 2016, in order to avoid double taxation, our Colombian subsidiaries usually distributed dividends from profits that had already been subject to income tax at the corporate level. These dividends were usually not taxable for Grupo Aval in Colombia, and dividends paid by Grupo Aval to its shareholders in Colombia from these sources of income also were usually not taxable, in each case provided that such profits had been taxed at the subsidiary level. However, on December 29, 2016, the Colombian government enacted a new tax reform (Law 1819) eliminating this treatment and introducing other substantial changes to the then current tax legal framework, including, pursuant to certain rules, taxation on dividends distributed to residents and non-residents from profits generated from 2017 onwards, a modified corporate income tax regime, and an increase in the Value Added Tax rate, among others. Law 1819 of 2016, also repealed Article 36-1 of the Colombian Tax Code which established that capital gains obtained in a sale of shares listed on the Colombian Stock Exchange were not subject to income tax in Colombia, provided that the shares sold by the same beneficial owner during each fiscal year did not represent more than 10% of the issued and outstanding shares of the listed company. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation—Tax Reforms.”

Between 2012 and 2016, the Colombian Congress passed three tax reforms submitted by the Colombian government. The Colombian government may implement new changes in the tax rules applicable to our securities which could have a material adverse effect on our results of operations and financial condition or that may adversely affect our shareholders or holders of ADSs. ADSs do not have the same tax benefits as equity investments in Colombia. Although ADSs represent our preferred shares, they are subject to a different tax regulatory regime. Accordingly, the tax benefits applicable in Colombia to equity investments, in particular those relating to dividends and profits from sale, may not apply or apply differently in the case of our ADSs.

In addition to the tax reform approved in December 2014, the Colombian Congress enacted Law 1819 on December 29, 2016, introducing substantial changes to the then current tax legal framework, including, pursuant to certain rules, taxation on dividends distributed to residents and non-residents from profits generated from 2017 onwards, a modified corporate income tax regime, and an increase in the Value Added Tax rate, among others.

Colombian tax haven regulations could adversely affect our results of operations and financial condition.

Decree 1966 of 2014, as amended by National Decree 2095 of 2014, put into effect article 260-7 of Colombia’s Tax Code, which regulates applicable rules for tax havens. Accordingly, a number of jurisdictions, including countries in which our banking subsidiaries operate, were either declared tax havens for Colombian tax purposes or temporarily excluded from such list subject to the completion of tax information exchange treaties within a short timeframe.

Article 260-7 of the Colombian Tax Code was recently reformed by Law 1819 of 2016. This reform establishes a new legal framework and provides criteria pursuant to which certain jurisdictions may be classified as non-cooperative jurisdictions with low or no taxation or as jurisdictions with preferential tax regimes. The new legal framework establishes a higher tax-withholding rate on Colombian source payments to those jurisdictions and entities considered part of such a jurisdiction.

As a result, some of our clients with financial products offered by our banking subsidiaries in such jurisdictions may experience, among other effects, an increase in their withholding tax rates, transfer pricing regulation, increased likelihood of being found in violation of tax regulations by the Colombian authorities and elevated information disclosure requirements which could have a negative impact on our business, financial condition and results of operations.

In October 2016, Panama ratified to the Convention on Mutual Administrative Assistance in Tax Matters developed by the OECD as a multilateral instrument of tax cooperation to tackle tax evasion and avoidance. The convention facilitates bilateral agreements for the automatic exchange of information by participating jurisdictions.

Panama also agreed to enter into a Double Taxation Agreement (DTA) with Colombia. The treaty is expected to include provisions regarding the automatic exchange of financial information by 2018. Failure to execute this treaty or the designation of Panama as a tax haven could have a negative impact on our customer base and on our business, financial condition and results of operations.

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Natural disasters, acts of war or terrorism, or other external events could disrupt our businesses and affect our results of operations and financial condition.

We are exposed to natural disasters, such as earthquakes, volcanic eruptions, tornadoes, tropical storms and hurricanes. Heavy rains or abnormally low rainfall in Colombia, attributable in part to the La Niña and El Niño weather patterns, have resulted in severe flooding and mudslides and prolonged droughts in the past. These are recurring weather phenomena that may contribute to flooding, mudslides, droughts or other natural disasters on an equal or greater scale in the future. In addition to severe weather and natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business and may, among other things, affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, cause us to incur additional expenses and/or result in loss of revenue. In the event of such circumstances, our disaster recovery plans may prove to be ineffective, which could have a material adverse effect on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised. Natural disasters, acts of war or similar events could also result in substantial volatility in our results of operations for any fiscal quarter or year.

Risks relating to our businesses and industry

Risks relating to our banking business

A deterioration in asset quality, including the loan portfolios of our bank subsidiaries, may have an adverse effect on our results of operations and financial condition.

Changes in the financial condition or credit profiles of customers of our banking subsidiaries and increases in inflation or interest rates and foreign exchange volatility could have a negative effect on the quality of our banks’ loan portfolios, potentially requiring them to increase impairment losses on loan and accounts receivable or resulting in reduced profitability. In particular, the percentage of non-performing loans may increase in the future as a result of factors beyond our control, such as economic conditions and political events affecting Colombia generally or specific sectors of the economy.

A substantial number of our banks’ customers are individuals and small and medium sized enterprises, or “SMEs,” and these customers are potentially more susceptible to downturns in the economy than large corporations and high-income individuals. For example, unemployment directly affects the ability of individuals to obtain and repay consumer and residential mortgage loans. Consequently, our banking subsidiaries may experience higher levels of non-performing loans, which could result in increased impairment losses on loan and accounts receivable due to defaults by, or deterioration in the credit profiles of, individual borrowers. Non-performing loans and resulting loan losses may increase materially in the future and adversely affect our results of operations and financial condition.

Existing loan loss allowances may not be adequate to cover any increases in non-performing loans or deterioration in the credit quality of loan portfolios. As a result, our banking subsidiaries may be required to increase impairment loss on loan and accounts receivables, which may adversely affect our results of operations and financial condition.

In addition, there is no precise method for predicting loan and credit losses, such that loan loss allowances may not be sufficient to cover actual losses. If we and our banking subsidiaries are unable to manage the level of non-performing or other poor credit quality loans, our results of operations and financial condition would be materially and adversely affected.

The loan portfolios of our banking subsidiaries have grown substantially in recent years. See “Item 4. Information on the Company—B. Business overview—Selected statistical data.” As default rates generally increase with the age of loans, the level of non-performing loans may lag behind the rate of growth in loans but may increase when growth slows or the loan portfolios become more mature. As a result, historic loan loss experience may not necessarily be indicative of future loan loss experience.

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Our banking subsidiaries may be unable to realize on collateral or guarantees securing loans, which may adversely affect their results of operations and financial condition.

Our banking subsidiaries make loans that are secured by collateral, including real estate and other assets that are generally located in Colombia and the countries where we operate. The value of collateral may significantly fluctuate or decline due to factors beyond the control of our subsidiaries, including, for example, prevailing economic and political conditions in the relevant jurisdiction. At December 31, 2017, 37.3% of total past due loans (including our foreign operations) were secured. An economic slowdown may lead to a downturn in the Colombian or Central American real estate markets, which may, in turn, result in declines in the value of real estate securing loans to levels below the principal balances of these loans. Any decline in the value of the collateral securing these loans or any other collateral securing these loans may result in reduced recoveries from collateral realization and have an adverse effect on our results of operations and financial condition. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If this were to occur, we may need to make additional impairments to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

Our banking subsidiaries also make loans on the basis of guarantees from relatives, affiliates or associated persons of their principal borrowers. To the extent that guarantors encounter financial difficulties due to economic conditions, personal or business circumstances, or otherwise, the ability of our banks to enforce such guarantees may be impaired.

In addition, our banking subsidiaries may face difficulties in enforcing their rights as secured creditors against borrowers, collateral or guarantees. In particular, timing delays, documentary and procedural problems in realizing against collateral, as well as debtor-protective judicial interpretations of the law, may make it difficult to foreclose on collateral, realize against guarantees or enforce judgments in our favor, which could materially and adversely affect our results of operations and financial condition.

Colombian insolvency laws may limit the ability of our banking subsidiaries to collect on monetary obligations and enforce rights against collateral or under guarantees.

Colombian insolvency laws provide that creditors of an insolvent debtor are prohibited from initiating collection proceedings outside the bankruptcy or reorganization process of such debtor. In addition, all collection proceedings outstanding at the beginning of the bankruptcy or reorganization process must be suspended and any creditors are prevented from enforcing their rights against the collateral and other assets of the insolvent debtor.

Once a non-merchant individual has ceased paying his or her debts, such individual can initiate a voluntary insolvency proceeding before a notary public or mediator to reach an out-of-court agreement with creditors. The terms of any agreement reached with a group (two or more) of creditors that represent more than 50% of the total amount of the claims will be mandatorily applicable to all relevant creditors. The insolvency law also provides for increased debtor protections, including an automatic stay for a maximum of 90 days. A perception that loans to individuals may be difficult or impossible to recover could cause our banking subsidiaries to enhance credit requirements and result in decreased lending to individuals by making access to credit more expensive or more onerous. In addition, increased difficulties in enforcing debt and other monetary obligations due to Colombian insolvency laws could have an adverse effect on our results of operations and financial condition.

Any failure of risk management processes, including credit and market risk, could materially and adversely affect our banking businesses, results of operations and financial condition.

Credit risk is the principal risk inherent in the business of our banks. Although we have group-wide risk management guidelines, each bank is responsible for managing its own risk. Each bank’s policies and procedures, which are designed to identify, monitor and manage risk, may prove to be insufficient. Furthermore, our banks may not be able to upgrade risk management systems on a timely basis. For example, our banks’ risk management systems utilize an internal credit rating system to assess the risk profile of each customer. As this process involves detailed analyses of the customer’s credit risk, taking into account quantitative and qualitative factors, it is necessarily subject to human error. Due to limitations in the availability of information and the developing information infrastructure in Colombia, our assessment of credit risk associated with a particular customer may not be based on complete, accurate or reliable information. Personnel of our banking subsidiaries may fail to detect risks before they occur, or may not effectively implement their risk management systems, which may increase exposure to credit risk. As a result, any failure by our banking subsidiaries to effectively implement or consistently follow or refine risk management systems may result in higher risk exposures for our banking subsidiaries, which could materially and adversely affect our results of operations and financial condition.

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Declines in the value of our banks’ sovereign debt portfolios could have an adverse effect on our results of operations.

Our Colombian banks’ portfolio of securities primarily consists of sovereign bonds, mainly securities issued or guaranteed by the Colombian government. LB Panamá’s securities portfolios primarily consist of securities issued by corporate and sovereign issuers. We are exposed to significant credit, market and liquidity risks associated with sovereign debt. At December 31, 2017 and 2016, debt securities represented 9.9% and 10.1%, respectively, of our consolidated total assets; approximately 45.9% and 51.2%, respectively, of these securities were issued by the Colombian Central government, and 9.2% and 9.6% of these securities, respectively, were issued or backed by Central American governments during each period. A significant decline in the value of these government securities could materially and adversely affect our debt securities portfolio and, consequently, our financial condition and results of operations. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation—Mandatory investments.”

We are subject to market risk in our banking business.

Our bank subsidiaries are directly and indirectly affected by changes in market conditions. Market risk, or the risk that the value of assets and liabilities or revenues will be adversely affected by variation in market conditions, is inherent in the products and instruments associated with our operations, including loans, deposits, securities, bonds, long-term debt, short-term borrowings, proprietary trading in assets and liabilities and derivatives. Changes in market conditions that may affect our financial condition and results of operations include fluctuations in interest and currency exchange rates, securities prices, changes in the implied volatility of interest rates and foreign exchange rates, among others.

We are subject to counterparty risk in our banking business.

Our banks and, to a lesser extent, Corficolombiana, Porvenir and our international banking operations, are exposed to counterparty risks in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivative contracts under which counterparties have obligations to make payments to us, or executing securities, futures, currency or commodity trades from proprietary trading activities that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, exchanges, clearing houses or other financial intermediaries. These risks could materially and adversely affect our results of operations and financial condition.

Our banks are subject to market and operational risks associated with derivatives transactions.

Our banks and, to a lesser extent, Corficolombiana, Porvenir and our international banking operations, enter into derivatives transactions primarily for hedging purposes and, on a limited basis, on behalf of customers. Those transactions subject us to market and operational risks, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of a counterparty to perform its obligations to us).

Market practices and documentation for derivatives transactions in Colombia and the countries where we operate, may differ from those in other countries. For example, documentation may not incorporate terms and conditions of derivatives transactions as commonly understood in other countries. In addition, the execution and performance of these transactions depend on our banks’ ability to develop adequate control and administration systems, and to hire and retain qualified personnel. Moreover, our banks’ ability to monitor and analyze these transactions depends on their information technology systems. These factors may further increase risks associated with derivatives transactions and could materially and adversely affect our results of operations and financial condition.

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Our banking subsidiaries are subject to liquidity risk, which may result in increases in funding costs.

The principal sources of funding for our banking subsidiaries are savings deposits, time deposits and checking accounts, which together represented 73.3% and 72.0% of consolidated total liabilities at December 31, 2017 and 2016, respectively. Because our banking subsidiaries rely primarily on short-term deposits for funding, a sudden or unexpected shortage of funds in the banking systems in which we operate and overnight money markets may prevent our banking subsidiaries from meeting their obligations or obtaining necessary funding without incurring higher costs or selling certain assets at prices below prevailing market values, which could materially and adversely affect our results of operations and financial condition. The liquidity of our financial entities could be affected by reputational events affecting our entities.

Default by one or more of our largest borrowers could adversely affect our results of operations and financial condition.

The aggregate outstanding loans to our banks’ ten largest borrowers represented 4.2% of our consolidated total loan portfolio at December 31, 2017. Default on loans by one or more of these borrowers may adversely affect our results of operations and financial condition.

In connection with the Odebrecht scandal and in compliance with Resolution 5216 issued on February 16, 2017 by the Superintendency of Industry and Commerce, on February 22, 2017, the ANI and Concesionaria Ruta del Sol, one of our ten largest borrowers, entered into a formal agreement (the “Termination Agreement”) for the termination and liquidation of the Concession Contract relating to the construction of toll road concession Ruta del Sol Sector 2. Pursuant to the terms of the Termination Agreement, the amounts to be paid by the ANI were expected to be sufficient to allow the full payment of Concesionaria Ruta del Sol’s indebtedness with financial entities, including indebtedness with our banking subsidiaries. However, on August 3, 2017, during the course of the Arbitration Proceeding where the Concessionaire had expected to receive the arbitrator’s ratification of the concession’s liquidation formula established under the terms of the Termination Agreement, the ANI stated its unwillingness to abide by the formula established in the Termination Agreement.

Nonetheless, on September 14, 2017 the Tribunal Administrativo de Cundinamarca (a State Court competent on administrative law matters) issued a judicial order compelling the ANI to instruct full payment to all good standing creditors of Concesionaria Ruta del Sol. As a result of this order, on December 22, 2017, the ANI partially complied with its obligation by authorizing a partial payment to financial entities, including certain of the indebtedness with our banking subsidiaries. This payment, in the amount of Ps 0.8 billion (approximately U.S.$266 million) fell short of the total amount of Ps 2.7 trillion (approximately U.S.$890 million, including principal and interest accrued and unpaid) outstanding with financial entities as of the date of such payment. 

The payment was applied first, to accrued and unpaid interest, and second, to principal, reducing outstanding indebtedness of Concesionaria Ruta del Sol with financial entities to Ps 1.9 trillion (approximately U.S.$624 million), of which approximately Ps 0.9 billion (approximately U.S.$309 million) correspond to loans with our banking subsidiaries. The same amount remained outstanding as of December 31, 2017.

The Arbitration Proceeding is expected to resolve the differences between the Concessionaire and the ANI regarding the termination and liquidation of the Concession Contract. This proceeding could determine a liquidation value of the Concession Contract and as a result, there is a risk that the Concessionaire may not recover all, or any of, its remaining investment in Ruta del Sol Sector 2. Accordingly, we have no certainty that the amounts to be paid by the ANI will be sufficient to allow payment of all, or any of the Concessionaire’s indebtedness with financial entities, including indebtedness with our banking subsidiaries. As of December 31, 2017, our banking subsidiaries have recorded provisions for 12.9% (Ps 121.3 billion) of our credit exposure to the Concessionaire. See “Item 8. Financial Information—A. Consolidated Statements and other financial information—Other Litigation.”

Electrificadora del Caribe S.A. E.S.P. (“Electricaribe”), a provider of electricity to 2.6 million individual and industrial clients in the northern region of Colombia and an 85.4% owned subsidiary of Gas Natural Fenosa (Spain), is also one of our largest borrowers. Electricaribe was intervened by the Superintendency of Public Utility Services on November 14, 2016. Subsequently, on March 14, 2017, the Superintendency determined that the liquidation of the company required a period of temporary management to ensure uninterrupted electricity services to the company´s clients.

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As of December 31, 2017, Electricaribe had outstanding loans and guarantees in the amount of Ps 626.0 billion (U.S.$209.8 million) with our banking subsidiaries and Corficolombiana. Two major electric utility operators have recently expressed an interest in Electricaribe. They expressed a desire to operate Electricaribe, a conviction to be able to make the company financially viable and to eventually take on the company with its financial obligations. However, the liquidation process, the chance of either of these electric utility operators taking over the operations and obligations of Electricaribe and the expected value of the assets could differ from our expectations. Accordingly, at year-end, our banking subsidiaries and Corficolombiana had recorded provisions of nearly 68.8% (Ps 430.7 billion) of their loan exposure to Electricaribe.

Downgrades in our long-term credit ratings or in the credit ratings of our banking subsidiaries would increase the cost of, or impair access to, funding and may impact our ability to maintain regulatory capital ratios.

Our credit ratings and those of our banking subsidiaries are an important component of our and their ability to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on numerous dynamic, complex and inter-related factors and assumptions, including our financial strength, conditions affecting the financial services industry generally and the sovereign credit rating of Colombia and the jurisdictions we operate in.

Our banking subsidiaries may be required to raise additional capital in the future to maintain regulatory capital ratios and provide liquidity to meet commitments and business needs, particularly if asset quality or earnings were to deteriorate. For example, if regulatory capital ratios of a banking subsidiary decline as a result of decreases in the value of the loan portfolio or otherwise, such bank subsidiary will be required to improve its capital ratios by either raising additional capital or disposing of assets. Commencing in September 2018, we will be regulated as a financial conglomerate and might be required in the future to raise additional capital to comply with new regulatory adequacy rules applicable to us at the consolidated level. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation. For a summary of our and our banking subsidiaries current credit ratings and outlook , see “Item 5. Operating and Financial Review & Prospects—Liquidity & Capital Resources—Funding.”

Adverse changes in credit ratings or outlooks could increase the cost of funding in the capital markets or borrowings, or reduce the feasibility of refinancing existing debt or issue new debt required to finance our future projects. In addition, lenders and counterparties in derivatives transactions are sensitive to the risk of a ratings or outlook downgrade. Our ability to raise deposits may also be impacted by a change in credit ratings or outlooks, which could make us less successful when competing for deposits.

Any occurrence that may limit our and our banking subsidiaries’ access to funding, such as a downgrade in credit ratings or outlook, or a decline in the confidence of debt purchasers, depositors, or counterparties in the capital markets may adversely affect capital costs, ability to raise capital, and liquidity. Moreover, we and our banking subsidiaries may need to raise capital when many other financial institutions are also seeking to raise capital which, in turn, would require us to compete with numerous other institutions for investors. An inability to raise additional capital on acceptable terms, when needed, or a downgrade in our or our banking subsidiaries’ credit ratings or outlook could have a materially adverse effect on our and our banking subsidiaries’ financial conditions and results of operations.

Our banking subsidiaries’ loan portfolios are subject to risk of prepayment, which may result in reinvestment of assets on less profitable terms.

The loan portfolios of our banking subsidiaries are subject to prepayment risk, which results from the ability of a borrower to pay a loan prior to maturity. Generally, in a declining interest rate environment, prepayment activity increases with the effect of reducing weighted average lives of interest-earning assets and adversely affecting results. Prepayment risk also has an adverse effect on credit card and collateralized mortgage obligations, since prepayments could shorten the weighted average life of these portfolios, which may result in a mismatch in funding or in reinvestment at lower yields.

The credit card industry is highly competitive and entails significant risks, including the possibility of overindebtedness of customers, which could have a material adverse effect on us.

The credit card business is subject to a number of risks and uncertainties, including the possibility of overindebtedness of our customers, despite our focus on low-risk, middle- and high-income customers.

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The credit card industry is characterized by higher consumer default than other segments of the credit markets, and defaults are highly related to macroeconomic indicators that are beyond our control. Part of our current growth strategy is to increase volume and number of cards in the credit card portfolio, at the same or a higher rate than the market, which may increase our exposure to risk in our loan portfolio. If Colombian and Central American economic growth slows or declines, or if we fail to effectively analyze the creditworthiness of our customers (including the targeting of certain sectors), we may be faced with unexpected losses that could have an adverse effect on our results of operations and financial condition.

Changes in banking laws and regulations in Colombia and the other countries in which we operate could adversely affect our consolidated results.

Banking and financial services laws and regulations are subject to ongoing review and revision, including changes in response to global regulatory trends. As a result, governments have been actively considering new banking laws and regulations, and reviewing and revising existing laws and regulations, particularly in relation to capital adequacy and accounting standards. In addition, various international developments, such as the adoption of risk-based capital, leverage and liquidity standards by the Basel Committee on Banking Supervision in December 2010, known as “Basel III,” will continue to impact us in the coming years. To prepare for the implementation of the Basel III accords in Colombia, the Ministry of Finance, in consultation with the Superintendency of Finance, effected an internal review of regulations applicable to financial institutions. Decree 2555 of 2010 was amended in 2012 and 2015, modifying certain capital adequacy requirements for Colombian credit institutions. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation.”

Moreover, Congress, through the enactment of Law No. 1735 of 2014, created a new type of financial institution with the sole purpose of offering electronic deposits and payments (Sociedades Especializadas en Depósitos y Pagos Electrónicos or “SEDPEs”) in order to promote financial inclusion. Regulation of the operations of the SEDPEs as well as know-your-customer requirements, were included by the Colombian government in Decrees 1491 of 2015 and 2076 of 2017. SEDPEs’ activities may create a new competitive environment that could adversely affect our consolidated results of operations.

On September 21, 2017, the Colombian Congress passed Law 1870 to strengthen the regulation and supervision of financial conglomerates, also known as Law of Financial Conglomerates (Ley de Conglomerados Financieros). This law sets out the principles for supervising and regulating financial conglomerates. The regulation establishes criteria for identifying members of the Financial Conglomerates, as well as their controlling Financial Holding Companies, and provides the Colombian government and Superintendency of Finance with tools to regulate and supervise financial conglomerates with respect to capital adequacy, corporate governance standards, financial risk management and internal control framework and criteria for identifying, administering, monitoring and revealing conflicts of interest. Law 1870 also includes powers and faculties enabling the Superintendency to require changes in the structure of the financial conglomerate when the existing structure does not allow sufficient disclosure of information and a comprehensive and consolidated supervision, conduct on-site visits and withdrawal of operating licenses. It is not yet possible to assess the actual implications of this Law because it provides a six-month period during which the government (Ministry of Finance) must enact certain regulatory decrees regarding the foregoing and Law 1870 will be in force and effective six months after the enactment of such decrees and accordingly we cannot assure you that such Law will not have a material impact on us. Accordingly, the Law of Financial Conglomerates is expected to become effective in September 2018. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation—Regulatory framework for Colombian Financial Conglomerates.”

Central America has also been impacted by regulatory changes regarding banking laws and regulations. In Honduras, the National Commission of Banks and Insurances (NCBI) has enacted a new regulation with respect to capital adequacy, capital conservation buffer and leverage ratio requirements applicable to Honduran financial institutions, which has been effective since March 2017. Such regulation requires, among others, that in a three-year-period financial institutions maintain a capital conservation buffer ratio equivalent to three per cent (3%) above the minimum capital adequacy ratio of 10% or above the minimum capital adequacy ratio defined by the NCBI for a financial institution in an individual basis. Financial institutions are also required to maintain a minimum leverage ratio of four per cent (4%). Minimum leverage ratio is calculated by dividing the primary capital (as defined in those regulations) by the sum of the total assets and the unweighted contingent assets (net of impairment, depreciation, and amortization estimates). Financial institutions with a minimum leverage ratio below such limit are required to gradually adjust it within the timeframe stated in the regulation.

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During recent years, legislators in Central America have unsuccessfully attempted to enact regulation to impose maximum interest rates for all or certain types of loans. Although the scope of these legislative initiatives has varied, these initiatives have primarily focused on personal loans and, particularly, on credit card loans. The enactment of any of these bills or similar regulations in the countries where we operate could have an adverse effect on the results of the operations and financial condition in such jurisdiction.

The regulation of credit cards in other Central American countries, such as in Costa Rica, continues to be a matter of discussion with ongoing initiatives to regulate the interest rate and other conditions related to the issuance of credit cards.

In Costa Rica, there have been changes regarding capital requirements. On June 28, 2017, the Central Bank of Costa Rica increased the minimum capital requirement for commercial private banks to 14,758 million colones (Ps 77.3 billion or U.S. $25.9 million). The General Superintendency of Securities also increased such requirement on March 9, 2017 for securities stock exchange companies and investment fund management companies to 194 million colones (Ps 1,018 million or U.S.$341,440) and 132 million colones (Ps 693 million or U.S.$232,320), respectively. Even though our subsidiaries were already in compliance, these recent changes evidence the growing focus of the Costa Rican authorities to regulate capital requirements.

In Costa Rica, Act Number 9449, which modified the “Money Laundering Act,” was passed in May 2017. This reform creates new duties for financial institutions regarding the identification process and control that such institutions need to have in relation with certain clients. The General Superintendency of Financial Institutions may sanction institutions for non-compliance of these new requirements with a fine of 0.5% to 2% of their capital.

In Nicaragua, a new countercyclical capital buffer was established on September 19, 2017 by the “Anti-cyclical provision regulations” (No. N° CD-SIBOIF-1016-1-SEP19-2017) issued by the Superintendency of Banks and Other Financial Institutions (SBOFI). The purpose of this regulation is to mitigate macro-prudential credit risk by establishing new reserves in addition to the ones required by the “Credit Risk Management Regulations” in order to strengthen the financial system. The SBOFI also issued new rules for the distribution of dividends in financial institutions by modifying the “Dividend Distribution Regulations.” Among other requirements, it stipulated that no distribution of dividends can be made unless the “capital conservation reserve” and the “extraordinary capital reserve” (both defined therein) are satisfied.

On December 8, 2015, the Guatemalan congress passed Decree 7 of 2015, also known as the Credit Cards Act, establishing a limit in the interest rate that may be charged to cardholders. However, in March 2016, the Guatemalan Constitutional Court found such decree unconstitutional.

Additionally, there have been relevant changes in Guatemala, regarding rules for collection and information on bank’s customers. First, on May 26, 2016 Decree 28 was passed to modify Article 46 of the Banks and Financial Groups Act which creates certain rules relating the collection process in order to avoid harassment by debt collectors. Such regulation may reduce the current levels of collection. Second, in February 2017 when Guatemala Decree 37 of 2016 took effect, it modified articles 63 and 113 of the Banks and Financial Groups Act and included new articles to the Guatemalan Tax Code regarding bank secrecy. Such change allows the Superintendency of Tax Administration of Guatemala to lift the bank secrecy and require certain customer information to banks, through a judicial procedure in which neither the bank nor the customer are parties. In addition, banks will be required to comply in a short period (i.e. 8 days maximum) subject to certain sanctions.

In Honduras, in October 2017, the amendment to a credit card act was approved by the congress by Legislative Decree N° 57-2017. Such reform regulates the interest rate for credit cards to a maximum of 54% annually, restricts penalties to credit card loyalty programs and limits: a) the POS (pin pads) processing fees to a maximum of 4%; b) offering products and/or services without authorization; and c) service charges. It also regulates the credit card holder indebtedness limits.

In El Salvador, some relevant changes regarding social security legislation were implemented. As of January 2017, the minimum wage applicable to the sector increased by 19%, representing an additional annual expense for our consolidated operations in El Salvador. Furthermore, a reform in the Salvadorian pension system was also approved in September 2017, which involved an increase of 1% on employer and employee contributions, to take effect beginning from November 2017. This reform increases the costs of our operations in El Salvador.

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The adoption of new laws or regulations, or changes in the interpretations or enforcement of existing laws or regulations may have an adverse effect on our results of operations and financial condition.

Our financial results may be negatively affected by changes to accounting standards.

We report our results and financial position in accordance with IFRS as issued by the IASB and prepare consolidated financial statements for publication in Colombia under Colombian IFRS. Changes to IFRS or interpretations thereof may cause our future reported results and financial position to differ from current expectations, or historical results to differ from those previously reported due to the adoption of accounting standards on a retrospective basis. Such changes may also affect our regulatory capital and ratios. We monitor potential accounting changes and when possible, we determine their potential impact and disclose significant future changes in our financial statements that we expect as a result of those changes. Currently, there are a number of issued but not yet effective IFRS changes, as well as potential IFRS changes, some of which could be expected to impact our reported results, financial position and regulatory capital in the future. In particular, IFRS 9, commencing January 1, 2018, will require us to record credit losses on loans at inception net of expected loss basis instead of recording credit losses on an incurred loss basis. For further information about developments in financial accounting and reporting standards, see Note 2 to the Consolidated Financial Statements, “Note 2 – Basis of Preparation of the Consolidated Financial Statements and Summary of Significant Accounting Policies.”

Regulatory actions may result in fines, penalties or restrictions that could materially and adversely affect our businesses and financial performance.

Our Colombian banks, as well as Corficolombiana, Porvenir and our international banking operations, are subject to regulation and supervision by financial authorities. These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of our subsidiaries’ organization and operations, including, for example, the imposition of anti-money laundering measures and the authority to regulate the terms and conditions of credit that can be applied by Colombian banks. Failure to comply with applicable regulations could subject our banking subsidiaries to fines or sanctions or even revocation of licenses or permits to operate. In the event that any of these subsidiaries encounters significant financial problems, are in danger of insolvency or become insolvent, or are otherwise deemed to not be viable, the financial authorities would have broad powers to intervene in our management and operations, including suspending or removing management and, in extreme circumstances, putting our banks, Corficolombiana, Porvenir and our international banking operations, into conservatorship or receivership or taking control of our banks, Corficolombiana, Porvenir and our other subsidiaries. Currently, Grupo Aval is not considered to be and is not regulated as a financial institution; however, as an issuer of securities in Colombia, we are required to submit information to the Superintendency of Finance and comply with corporate governance requirements. Commencing in September 2018, we will be subject to the supervision and regulation of the Superintendency of Finance as a financial conglomerate holding company and will be required to comply with capital adequacy and additional regulations applicable to financial conglomerates that have yet to be issued. As a result, we may become subject to more stringent regulation. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation.”

We may face legal and other challenges to maximizing revenue from credit card fees and other fees from customers.

As part of their credit card business, our bank subsidiaries face pressures related to the fees and commissions charged to merchants (merchant discounts) and the pricing of bank interchange fees charged by issuer banks to acquiring banks. Banks and card processors in Colombia have been subject to administrative investigations regarding the fees and commissions that are charged to the merchants by the acquiring banks and in respect to the banking interchange fees.

In the past, the Superintendency of Industry and Commerce (Superintendencia de Industria y Comercio) has conducted investigations on the practices of the Asociación Gremial de Instituciones Financieras Credibanco (the Visa franchisee in Colombia) and Redeban Multicolor S.A. (the MasterCard franchisee in Colombia), the entities used by most Colombian banks to manage the credit card system in Colombia, relating to alleged price fixing schemes among Colombian banks relating to fees and commissions charged to merchants. The Superintendency of Industry and Commerce has also conducted investigations into certain Colombian banks in the past, including our Colombian banking subsidiaries, for alleged price fixing of bank interchange fees charged during the period from May 2007 to October 2008.

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It is possible that similar investigations may be carried out by the relevant authorities in the future, which may result in lower fees charged to merchants and bank interchange fees, and/or lead to changes in commercial strategies that may adversely affect our results of operations and financial condition. We may also be subject to financial penalties in connection with such future investigations. In addition, fees charged for other banking services may continue to be reduced in the future as a result of regulatory measures and/or pressure from retailers and interest groups.

Failure to protect personal information could adversely affect our reputation and our business.

Our banks manage and hold confidential personal information of customers in the normal course of their banking operations. Although our banks have procedures and controls to safeguard personal information in our possession, unauthorized disclosures or unauthorized access to privileged information, fraud or interfering with regular banking and other services could subject our banks and us to legal actions, administrative sanctions and damages. Any failure to protect personal information could result in reputational damage and have an adverse effect on our results of operations and financial condition.

Risks relating to our merchant banking business

Difficult market conditions can adversely affect Corficolombiana’s business.

Corficolombiana may be adversely affected by lower than expected returns on investments, reduced opportunities to realize value from investments, and failure to find suitable investments so as to deploy capital effectively. During periods of difficult market conditions (which may span across one or more industries, sectors or geographies), portfolio companies may experience adverse operating performance, decreased revenues, financial losses, difficulty in obtaining access to financing or increased funding costs. Negative financial performance of portfolio companies may materially and adversely affect Corficolombiana’s results of operations and cash flow. If the operating performance of those portfolio companies (as well as valuation multiples) does not improve following any such downturn or other portfolio companies experience adverse operating performance, Corficolombiana may be forced to sell those assets at values that are less than projected or even at a loss. Portfolio companies may also have difficulties expanding their businesses and operations or meeting debt service and other obligations as they become due. Furthermore, negative market conditions could potentially result in a portfolio company entering bankruptcy proceedings, thereby potentially resulting in a complete loss of the investment Even if such conditions improve broadly and significantly over the long term, adverse conditions and/or other events in particular sectors may cause our performance to suffer further.

Corficolombiana’s due diligence process for evaluating prospective investments may not identify all risks or ensure investment returns.

Before making investments, Corficolombiana conducts the due diligence that it deems reasonable and appropriate based on the facts and circumstances applicable to each investment. When conducting due diligence, it may be required to evaluate important and complex business, financial, tax, accounting, environmental and legal issues. Outside consultants, legal advisors, accountants and investment banks may be involved in the due diligence process to varying degrees depending on the type of investment, but we may be unable to engage these third parties in a timely manner, or at all. Nevertheless, the due diligence investigation carried out by Corficolombiana with respect to any investment opportunity may not reveal or highlight all relevant risks of such investment opportunity. Moreover, such an investigation will not necessarily result in the investment being successful.

A significant part of Corficolombiana’s investments are in relatively illiquid assets, and Corficolombiana may fail to realize any profits from these investments for a considerable period of time or lose some or all of the principal amount of these investments.

At December 31, 2017, 63.5% of Corficolombiana’s investments were in securities of privately held companies. There are often no readily ascertainable market prices for such securities or for those investments of Corficolombiana in listed companies with low or medium trading volumes. As a result, there may be limited or no marketability for these investments, and they may decline in value while Corficolombiana is seeking to dispose of them. Because there is significant uncertainty as to the valuation of illiquid investments, the stated values of such investments may not necessarily reflect the values that could actually be realized by Corficolombiana. In addition, in some cases, Corficolombiana may be prevented by contract from selling such securities for a period of time. Corficolombiana’s ability to dispose of investments may also be dependent on factors beyond its control. Thus, it is possible that investments in privately held companies may only be disposed of over a substantial length of time, if at all, exposing the investment returns to risks of declines in market prices during the intended disposition period. Accordingly, under certain conditions, Corficolombiana may be forced to either sell securities at lower prices than it had expected to realize or defer—potentially for a considerable period of time—sales that it had planned to make.

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As mentioned above, Episol, a wholly-owned affiliate of Corficolombiana, is a minority (33%) non-controlling shareholder in Concesionaria Ruta del Sol and Odebrecht is the majority controlling and operating shareholder with a 62% stake. In connection with the Termination Agreement for the termination and liquidation of the Concession Contract, Episol and Corficolombiana recorded an impairment adjustment in 2016 on its investment in Concesionaria Ruta del Sol in the amount of Ps 102.3 billion (approximately U.S.$34 million). On February 8, 2018, Episol and Corficolombiana carried out a second impairment analysis regarding their investment in Concesionaria Ruta del Sol reflecting an additional adjustment in December 2017 of Ps 140.7 billion (approximately U.S.$47 million).

The balance of this investment after both impairments is Ps 111.8 billion (approximately U.S.$37.5 million), equivalent to the present value of the cash equity contributions made by Episol in Concesionaria Ruta del Sol as of December 31, 2017, and is yet to be recovered. In order to defend its interest as shareholder of Concesionaria Ruta del Sol on October 3, 2017, Episol requested and was later admitted as a party to the Arbitration Proceedings expected to resolve the differences between the Concessionaire and the ANI regarding the termination and liquidation of the toll road concession Ruta del Sol Sector 2 and related matters. These proceedings could determine a liquidation value and as a result of this or other actions, there is a risk that Episol may not recover all, or any of, its remaining investment in the Concessionaire. See “Item 8. Financial Information—A. Consolidated Statements and other financial information—Other Litigation.”

Corficolombiana makes minority investments in companies that it does not control.

Corficolombiana’s investments include non-controlling equity interests, and it may also dispose of a portion of its majority equity securities in portfolio companies over time in a manner that results in Corficolombiana retaining minority investments. Those investments will be subject to the risk that the company in which the investment is made may make business, financial or management decisions with which we do not agree. Similarly, the majority stakeholders or the management of the company may take risks or otherwise act in a manner contrary to our interests. If any of the foregoing were to occur, the values of these investments could decrease or we may not be able to dispose of them, which would adversely affect Corficolombiana’s results of operations and financial condition.

Corficolombiana’s new investment projects depend on its ability to access financing.

Corficolombiana may directly, or through its operating subsidiaries, enter into new investment projects such as infrastructure projects including toll-road fourth generation concessions that require significant financing. Corficolombiana or its operating subsidiaries may experience difficulties in accessing debt and equity financing resources required to fund such projects and/or may obtain them at higher costs and/or lower tenors than initially expected. As a result, Corficolombiana’s investment objectives may attain lower returns due to higher financing costs, delays in the investment schedule or any eventual stoppage of the investment project, which could also result in the payment of penalties to its counterparties, including the government entities in the case of development of new highways and toll-roads. If Corficolombiana is unable to obtain adequate financing on terms satisfactory to it, its ability to continue to grow or support its business and respond to business challenges could be significantly limited.

Most of Corficolombiana’s investments are concentrated in five industries.

The majority of Corficolombiana’s investment portfolio was concentrated in the energy and gas, infrastructure, agribusiness, hotels division and financial services. Energy and gas and infrastructure account for 80.0% of Corficolombiana’s total investment portfolio. During periods of difficult market conditions or slowdowns in these sectors, Corficolombiana may experience decreased revenues, difficulty in obtaining access to financing and increased funding costs.

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A variety of issues outside of Corficolombiana’s control could affect the timing and performance of its investments, which may result in additional costs and reputational harm to Corficolombiana, reductions or delays in revenues or the payment of liquidated damages.

Many of Corficolombiana’s investments, including in the energy and gas and infrastructure sectors, involve challenging engineering, permitting, procurement and construction phases that may occur over extended time periods, sometimes several years. These investments may also encounter difficulties as a result of delays in design, engineering information or materials to be completed or procured by them, the customer or a third party; delays or difficulties in equipment and material delivery; schedule changes; delays due to failure to timely obtain permits or rights of way or meet other regulatory requirements or permitting conditions; accidents and catastrophic events, weather-related delays; protests, legal challenges or other political activity; and other factors. In the energy and gas sector, Corficolombiana, through Promigas, is exposed to a variety of inherent hazards and operating risks in gas distribution such as leaks, explosions and mechanical problems which could cause substantial financial losses.

If any of Corficolombiana’s investments or projects fail to comply with the applicable professional standards or contractual requirements, Corficolombiana or its subsidiaries could be exposed to significant monetary damages or violations. A catastrophic event at one of the investments could also result in significant professional or product liability, and warranty or other claims as well as reputational harm, especially if public safety is impacted.

On January 15, 2018, the Chirajara bridge, which was under construction and located on KM64 Bogotá – Villavicencio, partially collapsed, causing several casualties and injured workers. Concesionaria Vial de los Andes S.A, or "Coviandes,” of which Corficolombiana owns 59.8%, and Infrastructure Construction S.A.S, or “Coninvial,” of which 60% is owned by Episol, a Corficolombiana wholly-owned subsidiary, are involved in the construction of this road infrastructure through a concession agreement. While the construction of the bridge was sub-contracted to other unrelated construction companies and the sub-contractor has insurance protection “deemed adequate,” there is no certainty as to what possible contingencies could accrue against us. The cause of the collapse is being investigated and the implications and costs related to this incident cannot yet be determined.

Many of these difficulties and delays are beyond Corficolombiana’s control and could negatively impact its ability to achieve its anticipated return from its investments. Delays and additional costs may be substantial and not recoverable from third parties, and in some cases, may cause substantial financial losses. Failure to meet any of their schedules or performance requirements could also result in additional costs or penalties, including liquidated damages, and such amounts could exceed profits from these projects. In extreme cases, the above-mentioned factors could cause project cancellations, and Corficolombiana may not be able to replace such projects with similar projects or at all. Such delays or cancellations may impact Corficolombiana’s investments, its reputation or relationships with customers and could have a material adverse effect on Corficolombiana’s business, results of operations or financial condition.

Risks relating to our pension and severance fund management business

Porvenir operates in a highly regulated market, which limits its flexibility to manage its businesses.

Porvenir’s operations are regulated by Law 100 of 1993, as amended, the Organic Statute of the Financial System (Estatuto Orgánico del Sistema Financiero), or “EOSF,” issued by the Ministry of Finance, Decree 2555 of 2010, as amended, and regulations issued by the Superintendency of Finance and, to the extent applicable, Colombian Corporation Law. These regulations limit the range of assets in which pension fund administrators, or “AFPs,” can invest and also set investment limits, depending on the type of mandatory pension or severance fund managed by each AFP. AFPs can manage four types of mandatory pension funds (i) Lower Risk Funds (“Fondo Conservador”), (ii) Mid-Risk Funds (“Fondo Moderado”), (iii) High Risk Funds (“Fondo de Mayor Riesgo”) and (iv) Planned Retirement Funds (“Fondo Especial de Retiro Programado”), and two types of severance funds (i) Short Term Funds (“Portafolio de Corto Plazo”) and (ii) Long Term Funds (“Portafolio de Largo Plazo”). In addition, each AFP is legally required to provide a minimum return on investment for each of its pension and severance funds. This minimum return is determined pursuant to specified formulas established in Decree 2555 of 2010, as amended, which vary according to the type of fund. If a fund’s return for any month is lower than the minimum return, the AFP must cover the difference within a period of five days. To do so, the AFP must first apply funds from a stabilization reserve (a portion of the AFP’s capital invested in the fund equal to 1% of the value of each pension fund under management). If the stabilization reserve is insufficient to cover the difference, the AFP must provide resources from its own capital. If the AFP does not have enough resources to cover the difference, the Superintendency of Finance may order the capitalization of the AFP. If, notwithstanding the above, an AFP fails to observe either the minimum return or the stabilization reserve requirements or fails to comply with the order of capitalization, the Superintendency of Finance may take possession (tomar posesión) of the AFP, in which case the Colombian Deposit Insurance Fund (Fondo de Garantías de Instituciones Financieras), or “FOGAFIN,” must supply funds to cover the shortfall. Although Porvenir has never failed to meet the minimum requirements, failure to do so could require us to increase our investment in Porvenir, seek capital from alternative sources or forfeit our investment, or lead to the dissolution of the AFP and the transfer of the fund to another AFP. If Porvenir is unable to fulfill the minimum return or the stabilization reserve requirements, or if new laws or decrees impose more onerous requirements, Porvenir’s business may be materially adversely affected.

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On December 6, 2013, the Colombian government issued Decree 2837 of 2013 to establish a group of financial experts to discuss and review the minimum return definition methodology. The group is led by the Minister of Finance and includes the Financial Superintendent, a representative of the Colombian Central Bank, the Director of the Unit of Financial Regulation and five financial experts appointed by the Ministry of Finance. Since there has been no definition issued by the group of financial experts, we are uncertain about the way in which the minimum return definition methodology will be changed, more onerous requirements may be imposed on Porvenir, which may materially adversely affect its business, financial condition and results of operations. In addition, there are regulatory limitations on the commissions that Porvenir may charge for its services.

In 2009, the regulatory system began to shift the management of mandatory pension funds from a single-fund pension system to a multi-funds system, allowing pension funds to be more specifically tailored to the individual needs of customers according to their risk profiles. The Colombian government has for several years now announced that it is considering presenting to the Colombian Congress a bill to amend current pension fund regulation to improve access to coverage, reduce inequality, and consolidate the financial sustainability of the system. As a result of the accession process of the Colombian government to become a member country of The Organization for Economic Co-operation and Development (OECD) further regulation amending the current pension fund regulation may be expected. The future regulation may not provide a favorable business environment and may adversely affect our results of operations and the financial condition of our pension and severance fund management business.

A significant amount of debt securities in pension and severance funds managed by our pension and severance fund businesses are issued or guaranteed by the Colombian government.

Our pension and severance fund management business, like our banks and other participants in the banking industry, is subject to the risk of loss in value of sovereign debt securities. A significant decline in the value of the securities issued or guaranteed by the Colombian government could adversely affect the debt securities portfolio of our pension and severance fund management business and, consequently, our pension and severance fund management business’s results of operations and financial condition.

Other risks relating to our businesses

We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect our results of operations and financial condition.

Market risk refers to the probability of variations in income or in the market value of assets and liabilities due to changes in markets, including variations in market rates of interest and foreign currency exchange rates. Changes in interest rates affect the following areas, among others, of our banks’ businesses: net interest income, the volume of loans originated, market value of securities holdings, asset quality, and gains from sales of loans and securities. We do not manage market risk on a group-wide basis and are not subject to regulation or supervision of market risk on a group-wide basis.

Changes in short-term interest rates may affect interest margins quickly and, therefore, net interest income, which is the most important component of our revenue. Increases in interest rates may reduce the volume of loans originated by our banking subsidiaries. Sustained high interest rates may discourage customers from borrowing and may result in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may reduce the value of our assets, including the financial assets of our banks, the investments of Corficolombiana and the assets managed by Porvenir. Our banking subsidiaries hold a substantial portfolio of loans and debt securities that have both fixed and floating interest rates. In addition, we may incur costs (which, in turn, will affect our results of operations) if our banking subsidiaries implement strategies to reduce future interest rate exposure. Increases in interest rates may reduce gains or require our banking subsidiaries to record losses on sales of their loans or securities.

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High interest rates have historically been common in many countries in Latin America. We have regional exposure to fluctuations in interest rates. If there are significant increases in such rates in any of the countries in which BAC Credomatic operates, our operating margins may be adversely affected and our results of operations may experience significant adverse consequences.

We face exposure to fluctuations in the rate of exchange between local currencies and the U.S. dollar, particularly given the fact that the currencies in countries where we and BAC Credomatic operate have historically experienced significant devaluations and depreciations. Fluctuations in the rate of exchange rate between the value of the Colombian peso or other local currencies where we operate, and the U.S. dollar, may also negatively affect our leverage ratios as measured by regulators or by rating agencies. The types of instruments exposed to foreign exchange rate risk include, for example, investments in foreign subsidiaries, foreign currency-denominated loans and securities, foreign currency-denominated debt and various foreign exchange derivative instruments whose values fluctuate with changes in the level or volatility of currency exchange rates or foreign interest rates.

We may be adversely affected by fluctuations between the value of the Colombian peso or other local currencies where we operate, and the U.S. dollar as a result of U.S. dollar-denominated indebtedness and as a result of our Central American operations.

We are subject to impacts on our statement of income and/or statement of financial position derived from fluctuations of the Colombian Peso, in particular, against the U.S. dollar, where most of our foreign long-term debt is denominated, and the Colombian peso, and between the U.S. dollar and each of the currencies in our Central American operations, as 38.6% of our average consolidated assets for the year ended December 31, 2017 and 41.4% of our average consolidated liabilities for the year ended December 31, 2017 are foreign currency-denominated.

On a consolidated basis we have U.S.$3.6 billion (Ps 10.7 trillion) of long-term debt denominated in U.S. dollars as of December 31, 2017. Our significant dollar-denominated investments in Central America can affect our business. Fluctuations in the exchange rate between the Colombian peso and the U.S. dollar may affect the value of these debt and investments on our statement of financial position and cause us to recognize gains or losses in our statement of income. Any substantial fluctuation in the U.S. dollar relative to the Colombian peso could affect our results of operations and our ability to meet our future payment obligations and increase or decrease the peso value of our risk-weighted assets and goodwill, thereby affecting capital ratios of our banking subsidiaries.

The exchange rate fluctuation between the Colombian peso and U.S. dollar also affects our results as the functional currency of LB Panama, which consolidates BAC Credomatic, is the U.S. Dollar. See “Item 5. Operating and financial review and prospects—Results of operations for the year ended December 31, 2017 compared to the year ended December 31, 2016—Banco de Bogotá Subsidiary Analysis—LB Panamá” for a description of the effect of such fluctuation on LB Panama’s results.

A substantial portion of BAC Credomatic’s earnings, assets and liabilities are in Costa Rican colones, Guatemalan quetzals, Honduran lempiras, Nicaraguan córdobas, Panamanian balboas and U.S. dollars. As a result, our Central American operations are subject to risks relating to foreign currency exchange rate fluctuations between these currencies and pesos.

We are exposed to changes in the values of current holdings and future cash flows denominated in other currencies. The types of instruments exposed to foreign exchange rate risk include, for example, investments in foreign subsidiaries, foreign currency-denominated loans and securities, foreign currency-denominated debt and various foreign exchange derivative instruments whose values fluctuate with changes in the level or volatility of currency exchange rates or foreign interest rates. Hedging instruments used to mitigate this risk include currency swaps and deposits as of December 31, 2017.

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The foreign exchange rate risk associated with this U.S. dollar-denominated liability is hedged with the net investment that Grupo Aval maintains in BAC Credomatic through Banco de Bogotá. The difference between the U.S. dollar-denominated debt and the net investment in BAC Credomatic (including any goodwill associated with the acquisition) may result in a net U.S. dollar asset position which Grupo Aval, through Banco de Bogotá and LB Panamá may hedge with forward contracts.

In accordance with its market risk policies, BAC Credomatic maintains a U.S. dollar net asset position (long U.S. dollar position) which is intended to hedge up to 60% of its shareholders’ equity against possible devaluations of each of the local currencies in the countries where it operates against the U.S. dollar.

We are subject to trading risks with respect to our trading activities.

Our banking subsidiaries, Corficolombiana, Porvenir and our other subsidiaries engage in proprietary trading, and we derive a portion of our profits from such trading activities. As a result, any reduction in trading income could adversely affect our results of operations and financial condition. Our trading income is volatile and dependent on numerous factors beyond our control, including, among others, market trading activity, interest rates, exchange rates and general market volatility. A significant decline in our trading income, or large trading losses, could adversely affect our results of operations and financial condition.

Declines in the market price for securities could result in our recording impairment losses as well as increased unrealized losses on other securities. Losses in the Colombian equity markets could result in further losses from impairment or sale of these securities. Any significant increases in exposure to any of these non-traditional risks, or a significant increase in credit risk or bankruptcy of any of the counterparties, could materially and adversely affect our results of operations and financial condition.

Colombian law imposes limitations on interest rates, and future additional restrictions on interest rates or banking fees could negatively affect our profitability.

The Colombian Commercial Code limits the amount of interest our Colombian subsidiaries may charge on commercial transactions, including transactions of our banking subsidiaries. In the future, regulations in Colombia could impose increased limitations regarding interest rates or banking fees. Law 1430 of December 2010, as amended, authorizes the Colombian government to impose or place limits on tariffs and fees charged by banks and other financial institutions where the government has determined that there is insufficient competition in a relevant market. Additionally, the law requires the Superintendency of Finance to implement a monitoring scheme of the tariffs and fees charged by the financial institutions in their relevant markets and to report the results of this evaluation semi-annually to the Colombian government. The Colombian government issued Decree 4809 of 2011 and Decree 1854 of 2015, which (1) requires banks to provide each of their clients with statements of all fees charged to such clients on an annual basis, (2) sets a limit on the fees that banks may charge to their clients for withdrawals from automated teller machines of other banks and (3) establishes that transactions through the internet may not cost more than those made through other channels. Accordingly, the Superintendency of Finance has issued External Circular 012 of 2012, setting the rules and principles that must be followed by banking and financial institutions at the time of establishing, publishing and promoting their tariffs and fees. A significant portion of our banks’ revenues and operating cash flow is generated by credit services and any such increased limitations would materially and adversely affect our results of operations and financial condition.

The Colombian Central Bank may impose requirements on the ability of Colombian residents, including us, to obtain loans denominated in foreign currency.

Under Colombian exchange control requirements, the Colombian Central Bank may impose certain mandatory deposit requirements in connection with foreign currency-denominated loans obtained by Colombian residents, including us. When the Colombian peso appreciated against foreign currencies in 2008, such mandatory deposit requirement was set at 40% of the amounts to be disbursed under any credit facility denominated in a foreign currency. Future measures or requirements imposed by the Colombian Central Bank, such as mandatory deposit requirements, may adversely affect our and our clients’ ability to obtain loans in foreign currency.

We face uncertainty regarding consumer protection laws.

Law 1328 of 2009 as amended by Law 1748 of 2014, also referred to as the “financial reform law,” created a new customer protection regime with respect to financial institutions. The financial reform law provides a bill of rights for consumers of financial services and products, including the right to receive clear, complete and reliable information about the services and products offered by financial institutions. The law also contains specific obligations for financial institutions, including a duty to maintain a financial ombudsman in charge of consumer protection and procedures regulating the responsibilities and functions of the ombudsman, a duty to create a financial consumer attention center pursuant to terms set by the Superintendency of Finance, an obligation to provide services and products under the same conditions offered to the general public, and a prohibition on the inclusion of predatory or abusive clauses in contracts with consumers. Any violation of this law and its implementing regulations by our banking subsidiaries could result in monetary or administrative sanctions or restrictions on our operations.

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Decree 4809 of 2011 regulates certain fees charged by Colombian financial institutions. The most salient of these regulations include a cap of 20 Unidades de Valor Real or “UVR” (an inflation indexed unit) for ATM fees charged to clients for transactions conducted through ATMs owned by a third party, the requirement that ATM fees be disclosed to clients with the possibility to opt out of the transaction before it takes place, and the prohibition of charging higher fees for internet transactions than for non-internet transactions as well as charging fees for failed internet transactions. These restrictions could affect the profitability of our business by decreasing our fee income.

Law 1555 of 2012 allows consumers of financial services to prepay obligations denominated in pesos owed to financial institutions, without incurring any penalty. The law also requires that financial institutions disclose the possibility of such prepayment to borrowers prior to the extension of any loan. Although this law does not apply to loans having a balance that exceeds 880 times the legal monthly minimum wages, nor to financial obligations acquired prior to its effective date (July 9, 2012), its application may substantially affect our banking business profits.

On July 7, 2016, the Colombian Congress enacted Law 1793 regarding costs charged to customers of financial entities and as a result customers are now able to use the total balance in their savings accounts and electronic deposits without having the obligation to preserve a minimum amount of deposits. Moreover, financial entities are prohibited from charging financial costs on savings accounts following 60 days of inactivity and have the obligation to recognize a minimum positive rate return in savings accounts.

Our businesses face constitutional actions, class actions and other legal actions involving claims for significant monetary awards against financial institutions, which may affect our businesses.

Under the Colombian Constitution, individuals may initiate constitutional actions (acciones populares), or class actions (acciones de grupo), to protect their collective or class rights, respectively. Individuals may also initiate constitutional actions for the protection of their fundamental rights. These actions are known as tutelage actions. Colombian financial institutions, including our banking subsidiaries, Corficolombiana and Porvenir, have been, and continue to be, subject to these actions with regard to fees, financial services, mortgage lending and interest rates, the outcomes of which are uncertain. In addition, the number of such actions could increase in the future and could significantly affect our businesses.

Acquisitions and strategic partnerships may not perform in accordance with expectations, may fail to receive required regulatory approvals or may disrupt our operations and adversely affect our credit rating and profitability.

A component of our strategy is to identify and pursue growth-enhancing strategic opportunities. As part of that strategy, we have acquired interests in various financial institutions in recent years. We regularly evaluate strategic acquisitions and alliances, inside and outside of Colombia. Strategic acquisitions and alliances could expose us to risks with which we have limited or no experience, as in the case of any significant acquisition outside of Colombia. In addition, potential acquisitions in Colombia and elsewhere may be subject to regulatory approval. We may be unsuccessful in obtaining any such approval or we may not obtain approvals on terms that are acceptable for us particularly in view of our subsidiaries’ and our combined significant market share in the Colombian banking industry.

We must necessarily base any assessment of potential acquisitions and alliances on assumptions with respect to operations, profitability and other matters that may subsequently prove to be incorrect. Future acquisitions and alliances, as well as other investments, may not produce anticipated synergies or perform in accordance with our expectations and could adversely affect our operations and profitability. In addition, new demands on our existing organization and personnel resulting from the integration of new acquisitions could disrupt our operations and adversely affect our operations and profitability.

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We may not be able to manage our growth successfully.

We have been expanding the scope of our operations over the past few years and we expect that this expansion will continue. As we continue to grow, we must improve our operational, technical and managerial knowledge and compliance systems in order to effectively manage our operations across the expanded group. Failure to successfully integrate, monitor and manage expanded operations could have a material adverse effect on our reputation and financial results. Our future growth will also depend on our access to internal and external financing sources. We may be unable to access such financing on commercially acceptable terms or at all.

We are subject to operational risks.

Our business depends on the ability of our banking subsidiaries to process large numbers of transactions efficiently and accurately. Operational risks and losses can result from fraud, employee error, failure to properly document transactions or to obtain proper internal authorization, failure to comply with regulatory requirements, breaches of conduct of business rules, equipment failures, natural disasters or the failure of external systems, among others. Our, and our banking subsidiaries’ currently adopted procedures may not be effective in controlling each of the operational risks faced by our banking subsidiaries.

Failure of our information systems could materially and adversely affect the effectiveness of our risk management and internal control processes as well as our results of operations and financial condition.

We and our subsidiaries are highly dependent on the ability to collect and process, on a timely basis, a large amount of financial and other information, and services and products, at a time when transaction processes have become more complex with increasing volumes. A partial or complete failure of any of these systems could materially and adversely affect our decision-making process, risk management and internal control systems as well as our ability to respond on a timely basis to changing market conditions.

In addition, our and our subsidiaries’ ability to remain competitive will depend in part on their ability to upgrade their information technology infrastructure on a timely and cost-effective basis. We and our subsidiaries must continually make significant investments and improvements in our and their information technology infrastructure in order to ensure the proper functioning of financial control, accounting and other data collection and processing systems and to remain competitive. In addition, as our banking subsidiaries open new branches and channels, they will need to improve their information technology infrastructure, including maintaining and upgrading their software and hardware systems and their back-office operations. If there are technological impediments, unforeseen complications, errors or breakdowns in implementing new systems, our business, financial condition or results of operations may be adversely affected.

We are subject to cyber security threats.

We and our subsidiaries rely on information systems to operate websites, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. We and our subsidiaries may experience operational problems with our information systems as a result of system failures, viruses, ransomwares, computer “hackers” or other causes. Cyber security risks for financial institutions have significantly increased because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, hacktivists, terrorists and other external parties. We have experienced cyber threats and incidents in the past, such as malware and ransomware infections, which have required the immediate attention of the incident response teams (CSIRT), which caused some temporary disruptions in non-operational areas. We outsource certain services and although we require our services providers to adhere to our standards, we cannot assure you that any of our service providers will not experience cyber incidents that will affect us. We also cannot assure that our insurance coverage or where applicable, that of our third party providers, will be sufficient to cover any liabilities for data loss. As we seek to further develop digital channels, the implementation of technological changes and upgrades to maintain existing systems and integrate new systems, including usage of third party service providers, could increase our risk of cyber security attacks. Any material disruption or slowdown of our or our subsidiaries’ systems could cause information, including data related to customer requests, to be lost or to be delivered to our customers with delays or errors, which could reduce demand for our services and products and could materially and adversely affect our results of operations and financial condition.

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Our policies and procedures may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to fines and other liabilities.

We and our subsidiaries are required to comply with applicable anti-money laundering laws, anti-terrorism financing laws, anti-bribery and other regulations. These laws and regulations require us, among other things, to adopt and enforce “know your customer” policies and procedures and to report suspicious or large transactions to the applicable regulatory authorities. While we and our financial institutions have adopted policies and procedures aimed at detecting and preventing the use of banking networks for money laundering activities and by terrorists and terrorist-related organizations and individuals generally, such policies and procedures may not completely eliminate instances where they may be used by other parties to engage in money laundering and other illegal or improper activities. If we or any of our subsidiaries fail to fully comply with applicable laws and regulations, the relevant government authorities to which they report have the power and authority to impose fines and other penalties. In addition, our businesses and reputation could suffer if customers use our financial institutions for money laundering or illegal or improper purposes.

Competition and consolidation in the Colombian and Central American banking and financial industry could adversely affect our market position.

We operate in a competitive market. Since the 1990s, when the Colombian financial system was deregulated, there has been an ongoing process of consolidation that has included foreign bank participants entering the Colombian market. We expect that consolidation will lead to the creation of larger local financial institutions, including additional foreign banks, presenting the risk that we could lose a portion of our market share in the industry, adversely affecting our results of operations.

Various banking institutions, which have recently been incorporated in Colombia, target the microcredit and small and medium enterprises segments. Local subsidiaries of international financial institutions, have entered the market targeting corporate clients. The businesses of these new credit institutions may affect our market position in the individual, small and medium enterprises and our merchant banking operation. To a lesser extent, we also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

In addition, the pace of consolidation in the Colombian and Central American financial services industry has increased, which may also increase competition in the markets where we operate. See “Item 4. Information on the Company—B. Business overview—Competition.”

Furthermore, our banking subsidiaries may face challenges as new competitors enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. New entrants could take advantage of regulatory arbitrage to compete with substantially lower cost structures. Non-traditional providers of banking services, such as Internet based e-commerce providers, mobile telephone companies, internet search engines and crowd-funding websites may offer and/or increase their offerings of financial products and services directly to customers. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. Technological advances and heightened e-commerce activities have increased consumers’ accessibility to products and services which has in turn intensified competition among banks and nonbanks in offering loans. Existing competitors and market entrants may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected.

Our ability to maintain our competitive position depends mainly on our ability to anticipate and fulfill the needs of new and current customers through the development of innovative services and products, and our ability to offer adequate services and strengthen our customer base through cross-selling. Our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets which would in turn have an adverse effect on our competitive position and business.

Our efforts to offer new services and products may not succeed if product or market opportunities develop more slowly than expected or if the profitability of these opportunities is undermined by competitive pressures. As we expand the range of our products and services, some of which may be at an early stage of development in the Colombian and Central American market, we will be exposed to new and potentially increasingly complex risks and development expenses. Our employees and our risk management systems may not be adequate to handle such risks. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

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We depend on our senior management and our Board of Directors, and the loss of their services could have an adverse effect on our business.

We are highly dependent on our senior management teams and Board of Directors at both the group and subsidiary levels, all of whom possess considerable experience and expertise and have strong relationships with customers, participants of the Colombian business.

The loss of the services of any of these members of our, or our subsidiaries’, senior management and members of the Board of Directors, could have an adverse effect on our business. Accordingly, our success is dependent on appropriately managing the risks related to executing a succession plan for senior management and members of the Board of Directors on a timely basis.

We are subject to reputational risk, and our reputation also is closely tied to that of our controlling shareholder, our senior management and members of the Board of Directors, and that of our subsidiaries.

Damage to our reputation may limit our ability to attract customers, employees and investors. Harm to our reputation can arise from employee misconduct, legal and regulatory non-compliance, ethical issues, allegations of money laundering, and failing to deliver minimum standards of service and quality, among others. In particular, our success has been attributable, in part, to the high esteem in which our controlling shareholder Mr. Sarmiento Angulo, our president, Mr. Sarmiento Gutiérrez and our and our subsidiaries’ senior management and members of the Board of Directors are held in Colombia. Reputation plays an integral role in our business operations, which are based on customer confidence and trust. If the public image or reputation of any of the foregoing is damaged as a result of negative publicity or otherwise, business relationships with customers of the entire group may deteriorate, which would adversely affect our results of operations and financial condition. Any perceived or real difficulties experienced by any one of our subsidiaries would harm the reputation of Grupo Aval as a whole, which would also have an adverse effect on our results of operations and financial condition.

We are controlled by Mr. Sarmiento Angulo, whose interests could differ from the interests of other preferred shareholders and ADS holders.

Mr. Sarmiento Angulo beneficially owns 97.3% of our common shares outstanding and 42.9% of our preferred shares outstanding, as of April 20, 2018, and, accordingly, controls our group. See “Item 7. Major Shareholders and Related Party Transactions—A. Major shareholders.” The preferred shares do not have any voting rights and thus will not affect such control of our group. Mr. Sarmiento Angulo will continue to have the right to control decisions, regardless of how our minority shareholders may vote on these issues and regardless of the interests of such shareholders, including holders of ADSs and underlying preferred shares. In addition to Mr. Sarmiento Angulo’s beneficial ownership through Grupo Aval, as of April 20, 2018, he beneficially owns 8.3% of Banco de Bogotá, 13.3% of Banco de Occidente, 15.5% of Banco AV Villas, 0.8% of Banco Popular and 0.3% of Corficolombiana.

Circumstances may occur in which Mr. Sarmiento Angulo may have an interest in pursuing transactions that, in his judgment, enhance the value of his several investments in the banking sector. These transactions may not necessarily be in Grupo Aval’s interest or that of its shareholders even if holders of the ADSs or the underlying preferred shares disagree. Due to his control, Mr. Sarmiento Angulo has, and will have, the power to:

· elect a majority of our directors and appoint our executive officers, set our management policies and exercise overall control over our company and subsidiaries;

· agree to sell or otherwise transfer his controlling stake in our company; and

· determine the outcome of substantially all actions requiring shareholder approval, including transactions with related parties, corporate reorganizations, acquisitions and dispositions of assets, and dividends.

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In addition, the concentration of ownership may have the effect of delaying, preventing or deterring a change of control of our company, could deprive our shareholders of an opportunity to receive a premium for the ADSs or underlying preferred shares as part of a sale of our company and might ultimately affect the market price of the ADSs and the underlying preferred shares.

We may engage in additional transactions with our controlling shareholder in the future.

In the future we may engage, as we have done in the past, in business and financial transactions with our controlling shareholder and other shareholders that may present potential conflicts of interest between our company and these shareholders. For example, we may incur indebtedness, or acquire shares in Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana that are not owned by us from entities that are beneficially owned by Mr. Sarmiento Angulo. While we believe that these transactions will be carried out on an arm’s-length basis, commercial and financial transactions between us and our controlling shareholder could create the potential for, or could result in, conflicts of interests between us and our other shareholders. To the extent that the price we pay for any assets acquired from our controlling shareholder exceeds the market value of such assets or is not as productive a use of our cash as other uses, our results of operations and financial condition could be adversely affected.

Certain risks relating to our Central American operations

We may be unsuccessful in addressing the challenges and risks presented by our operations in countries outside Colombia.

We conduct banking businesses outside our historical home market of Colombia primarily through BAC Credomatic. Our Central American operations may involve risks to which we have not previously been exposed. Some of these operations are in countries that may present different or greater risks than those in Colombia. For example, BAC Credomatic has a significant consumer finance business, including credit card operations, in the Central American countries in which it operates. At December 31, 2017, BAC Credomatic’s consumer loan portfolio totaled U.S.$ 6.2 billion (Ps 18.5 trillion) (including mortgages, vehicles and other personal loans), which represented 40.1% of BAC Credomatic’s total loan portfolio, and US$ 2.8 billion (Ps 8.3 trillion) in credit card loans, which represented 18.0% of BAC Credomatic’s total loan portfolio. We may face delays in payments by customers and higher delinquency rates in these countries, which could necessitate higher impairments for loan losses and, consequently, have a negative effect on our financial performance.

We depend on BAC Credomatic’s current senior management, and the loss of their services could have a material adverse effect on BAC Credomatic’s business.

We have retained most of the senior management of BAC Credomatic, who have worked on average over 15 years at BAC Credomatic. The loss of services of any of BAC Credomatic’s senior officers could have an adverse effect on BAC Credomatic’s business.

Changes in credit card regulations may adversely affect BAC Credomatic’s business.

The credit card business is an important business segment for BAC Credomatic, representing 18.0% and 17.8% of its total loan portfolio for December 31, 2017 and 2016, respectively. The adoption of new laws and regulations or the revision of the current regulatory regime for credit cards in any of the jurisdictions in which BAC Credomatic operates may have an adverse effect on BAC Credomatic’s results of operations and financial condition.

BAC Credomatic and our Central American operations are subject to significant compliance risks in connection with a multi-jurisdictional regulatory regime.

BAC Credomatic’s businesses are subject to regulation under Bahamian, Costa Rican, Guatemalan, Grand Cayman, Honduran, Nicaraguan, Panamanian, Salvadoran and U.S. federal, state and other foreign laws, regulations and policies. BAC Credomatic thus is subject to a multi-jurisdictional regulatory regime. In addition, any changes to the regulatory regime of one of the Central American countries may lead to corresponding changes to the regulatory regime of other countries in the region. BAC Credomatic’s businesses are regularly reviewed or investigated by regulators, which could lead to enforcement actions, fines and penalties or the assertion of private litigation claims and damages.

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Regulation of financial institutions varies across the different Central American jurisdictions in which we operate. These differences are particularly pronounced in the assessment of credit risk and investments. These asymmetries may affect the expected results of our operations in each jurisdiction, and as a consequence could adversely affect our consolidated results of operations in Central America.

Risks relating to our preferred shares and ADSs

Exchange rate volatility may adversely affect the Colombian economy, the market price of the ADSs and the dividends payable to holders of the ADSs.

Pursuant to Colombian law, the Colombian Central Bank has the power to intervene in the exchange market in order to consolidate or dispose of international reserves, as well as to control any volatility in the exchange rate, acting through a variety of mechanisms, including discretionary ones. During recent years, the Colombian Central Bank has employed a floating exchange rate system with periodic interventions. From time to time, there have been significant fluctuations in the exchange rate between the Colombian peso and the U.S. dollar. For example, the peso appreciated 0.6% against the U.S. dollar in 2017, appreciated 4.7% in 2016, depreciated 31.6% in 2015, depreciated 24.2% in 2014 and depreciated 9.0% in 2013. Unforeseen events in international markets, fluctuations in interest rates, changes in capital flows, political developments or inflation rates may cause exchange rate instability that could, in turn, depress the value of the Colombian peso, thereby decreasing the U.S. dollar value of the dividends paid to holders of the ADSs.

Restrictions on purchasing our preferred shares may affect the market liquidity of our preferred shares and ADSs.

Under Colombian securities regulations, as a general rule, any transaction involving the sale of publicly traded shares of any Colombian company, including any sale of our preferred shares for the equivalent of 66,000 Unidades de Valor Real, or “UVRs” (approximately U.S.$5,582.1), or more, must be effected through the Colombian Stock Exchange. UVR is a Colombian inflation-adjusted monetary index calculated by the board of directors of the Colombian Central Bank and generally used for pricing home-mortgage loans (one UVR = Ps 252.4 (U.S.$ 0.08) and 66,000 UVRs = Ps 16,656,862.2 at December 31, 2017). Any transfer of preferred shares underlying the ADSs may be required to be sold through the Colombian Stock Exchange, which could limit their liquidity or affect their market price.

The relative illiquidity of the Colombian securities markets may impair the ability of preferred shareholders and holders of ADSs to sell preferred shares underlying the ADSs.

Our preferred shares are listed on the Colombian Stock Exchange, which is relatively small and illiquid compared to securities exchanges in major financial centers. In addition, a small number of issuers represent a disproportionately large percentage of the market capitalization and trading volume on the Colombian Stock Exchange. A liquid trading market for the preferred shares or ADSs may not develop on the Colombian Stock Exchange or New York Stock Exchange, respectively. A limited trading market could impair the ability of a holder of preferred shares or ADSs to sell preferred shares (in the case of an ADS holder, obtained upon withdrawal of such shares from the ADR facility) on the Colombian Stock Exchange in the amount and at the price and time desired by such holder, and could increase the volatility of the market price of the preferred shares and the ADSs.

An active market for our preferred shares and the ADSs may not continue to develop or be maintained and the market price of our preferred shares and the ADSs may fluctuate in response to numerous factors.

The market price of our ADSs and preferred shares may fluctuate significantly in response to numerous factors, many of which are beyond our control, including actual or anticipated fluctuations in our operating results, economic downturns, political events in Colombia, Central America or other jurisdictions where we operate, developments affecting the banking industry, exchange rates, changes in financial estimates by securities analysts or our failure to perform in line with such estimates, departures of key personnel, and sales of our preferred shares in the future, including by our banking subsidiaries who may have to sell our preferred shares obtained from investors who entered into loans with them to acquire our preferred shares in our offering of 1,600 million preferred shares on May 12, 2011, or the “Preferred Shares Local Offering.” Furthermore, common shares may be converted into preferred shares on a 1-1 basis provided that our preferred shares do not exceed 50% of our total subscribed share capital. Preferred shares are available for deposit into the ADS Program.

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Our banking subsidiaries extended credits through loans to finance the acquisition of preferred shares in the Preferred Shares Local Offering of which 24 loans representing Ps 87.3 billion (U.S.$29.3 million) were outstanding at December 31, 2017. The final loan will mature in 2021. Depending on the characteristics of the borrower, our banking subsidiaries may have required collateral, which may have included a pledge of the preferred shares that were subject to the financing. Such a pledge would permit our banking subsidiaries through a court procedure to seek the sale of the preferred shares if the borrower defaults. Our banking subsidiaries had, on an aggregate basis, pledges over 67,135,906 preferred shares related to loans made to third parties at December 31, 2017. All the loans are full-recourse loans. Under the terms of the pledges, each borrower is limited from selling the pledged shares until the loan is repaid. Under Colombian law, our banking subsidiaries must seek to sell any repossessed shares as banks are not permitted to hold shares issued by their parent. If changes in general economic conditions or other factors cause these borrowers to default on their loans, our subsidiaries will have to sell our preferred shares into the market, or alternatively, upon repayment of the loans, these borrowers will not be restricted from selling such shares in the market. As a result, the market price of our preferred shares and ADSs may decline.

Holders of ADSs and underlying preferred shares may face difficulties in protecting their interests because we are subject to different corporate rules and regulations than those available in other jurisdictions, and our preferred shareholders have limited rights.

Holders of ADSs will not be direct shareholders of our company and will be unable to enforce the rights of shareholders under our by-laws and Colombian law. Under Colombian law, holders of our preferred shares may have fewer rights than shareholders of a corporation incorporated in the United States. Even if a holder of ADSs surrenders its ADSs and becomes a direct shareholder, a holder of our preferred shares under Colombian law may have fewer alternatives to protect its interests relative to actions by our board of directors or executive officers, and these alternatives may be less well-defined than under the laws of those other jurisdictions.

The Colombian securities markets are not as highly regulated or supervised as the U.S. securities markets or the markets in some other jurisdictions. In addition, rules and policies against self-dealing or for preserving shareholder interests may be less well-defined and enforced in Colombia than in the United States and certain other countries, which may put holders of our preferred shares and the ADSs at a potential disadvantage. Corporate disclosures also may be less complete or informative than for a public company in the United States or in certain other countries.

Our by-laws contain an arbitration clause that provides for the exclusive jurisdiction of an arbitral tribunal to be seated at the Bogotá Chamber of Commerce. The arbitration provision provides that any conflict arising among shareholders, or between shareholders and Grupo Aval, in connection with the by-laws must be resolved by an arbitral tribunal. In addition, holders of the ADSs and our preferred shares are not entitled to vote for the election of directors or to influence our management policies. Under our by-laws and Colombian law, holders of preferred shares (and, consequently, holders of ADSs) have no voting rights in respect of preferred shares, other than in limited circumstances.

Our ability to pay dividends on the ADSs or underlying preferred shares may be limited by Colombian law and because we are a holding company dependent on dividends from subsidiaries.

Under Colombian law, a company may only distribute dividends to the extent such distribution is fully supported by accurate financial statements demonstrating the financial condition of the company. Any dividends distributed in violation of this provision may not be reclaimed from shareholders who received such payments in good faith, and any subsequent distribution of profits may be suspended. In addition, dividends may not be distributed until losses from previous fiscal years have been absorbed. Dividends must be approved at the ordinary annual shareholders’ meeting upon the recommendation of the board of directors.

Our ability to pay dividends on the preferred shares represented by ADSs will be contingent upon the financial condition of our subsidiaries. Any of our banking subsidiaries may be restricted from paying dividends to us if such subsidiary does not meet its required technical capital ratios or does not have sufficient retained earnings. In addition, we conduct substantially all of our operations through subsidiaries and are dependent on dividends from our subsidiaries to meet our obligations.

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Holders of ADSs may encounter difficulties in the exercise of dividend rights and in the limited voting rights of our preferred shares.

Holders of ADSs may encounter difficulties in exercising rights with respect to the preferred shares underlying ADSs. If we make a distribution to holders of underlying shares in the form of securities, the depositary is allowed, in its discretion, to sell those securities on behalf of ADS holders and instead distribute the net proceeds to the ADS holders. Also, under some circumstances, you may not be able to exercise your limited voting rights by giving instructions to the depositary.

Our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE, which may limit the protections afforded to investors.

We are a “foreign private issuer” within the meaning of the NYSE corporate governance standards. Under the NYSE rules, a foreign private issuer may elect to comply with the practices of its home country and not to comply with certain corporate governance requirements applicable to U.S. companies with securities listed on the NYSE. We currently follow Colombian practices concerning corporate governance and intend to continue to do so. Accordingly, you will not have the same protections afforded to shareholders of companies that are subject to all NYSE corporate governance requirements. For example, Colombian law requires that at least 25% of our board of directors consist of “independent” directors within the meaning of Colombian law, whereas NYSE rules generally require that a majority of a domestic U.S. company’s board consist of “independent” directors within the meaning of NYSE rules. In addition, NYSE rules require non-executive directors of domestic U.S. listed companies to meet on a regular basis without management being present. There is no similar requirement under Colombian law, and our non-executive directors do not meet formally without management present. See “Item 6. Directors, senior management and employees—C. Board practices—Principal differences between Colombian and U.S. corporate governance practices.”

Preemptive rights may not be available to holders of preferred shares or ADSs.

Colombian law and our by-laws require that, whenever we issue new common shares, we must offer the holders of common shares the right to subscribe a number of shares of such class sufficient to maintain their existing percentage ownership of our aggregate share capital. On the other hand, holders of preferred shares, including holders of ADSs, are entitled to preemptive rights only when so declared at a meeting of holders of our common shares. Our common shareholders may decide not to provide for such preemptive rights. Also, U.S. holders of ADSs may not be able to exercise their preemptive rights through JPMorgan Chase Bank, N.A., which acts as ADR depositary for our ADR facility, unless a registration statement under the Securities Act is effective with respect to such rights or an exemption from the registration requirement thereunder is available. Although we are not obligated to do so, we will consider at the time of any preemptive rights offering the costs and potential liabilities associated with any such registration statement, the benefits to us from enabling the holders of the ADSs to exercise those rights and any other factors deemed appropriate at the time, and will then make a decision as to whether to file a registration statement. Accordingly, we might decide not to file a registration statement in some cases.

If holders of ADSs are unable to exercise these rights because a registration statement has not been filed and no exemption from the registration requirement under the Securities Act is available, the ADR depositary may attempt to sell the holders’ preemptive rights and distribute the net proceeds from that sale, if any, to such holders, provided that, the meeting of holders of our common shares decides that holders of preferred shares are entitled to preemptive rights. The ADR depositary, after consultation with us, will have discretion as to the procedure for making preemptive rights available to the holders of ADSs, disposing of such rights and making any proceeds available to such holders. If by the terms of any preemptive rights offering or for any other reason the ADR depositary is unable or chooses not to make those rights available to any holder of ADSs, and if it is unable or for any reason chooses not to sell those rights, the depositary may allow the rights to lapse.

Whenever the rights are sold by the ADR depositary or such rights lapse, or if the common shareholders’ meeting does not grant preemptive rights to the holders of preferred shares, the equity interests of the holders of ADSs will be proportionately diluted.

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Our ability to make payments on the ADSs may be adversely affected if we become unable to convert Colombian pesos to U.S. dollars or to transfer U.S. dollars abroad.

The Colombian government does not currently restrict the ability of Colombian persons or entities to convert Colombian pesos to U.S. dollars. However, the government may impose foreign exchange controls on dividend payments and remittances of interest and principal if the foreign currency reserves of the Central Bank fall below a level equal to the value of three months of imports into Colombia. Colombian law also allows the imposition of a deposit requirement with the Central Bank in connection with any foreign exchange transaction that may increase the cost of foreign exchange transactions or limit the amount of such transactions for a particular time. No such foreign exchange controls are currently applicable. Nevertheless, such restrictions may be imposed in the future, and any such restrictions could prevent, restrict or increase the price of our access to U.S. dollars, which we need to pay our foreign currency-denominated obligations.

We are traded on more than one market and this may result in price variations; in addition, investors may not be able to easily move shares for trading between such markets.

Trading in our ADSs on the NYSE or preferred shares on the Colombian Stock Exchange take place in different currencies (U.S. dollars on the NYSE and pesos on the Colombian Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Colombia). The trading prices of our shares on these two markets may differ due to these and other factors. Any decrease in the price of our preferred shares on the Colombian Stock Exchange could cause a decrease in the trading price of our ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the shares available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying preferred shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs.

If holders of ADSs surrender their ADSs and withdraw preferred shares they may face adverse Colombian tax consequences.

Although Colombian tax law does not specifically refer to the tax consequences applicable to an ADS holder withdrawing the underlying preferred shares, we believe, based on the advice of our Colombian counsel, that such a transaction should not result in a taxable event under Colombian law in the case of non-resident entities and non-resident individuals given the nature of the transaction. Nevertheless, this issue is not free from doubt, and the Colombian tax authorities may have a different interpretation of the law, or the law may change and the Colombian tax authorities may assess taxes on the conversion of ADSs into preferred shares based upon the difference between the market value of the preferred shares and the adjusted tax basis of the ADSs. Furthermore, an investor who surrenders ADSs and withdraws preferred shares will be subject to income taxes on any gain associated with the sale of such preferred shares if such sale exceeds 10% of the issued and outstanding shares of the listed company during a taxable year.

Banking regulations, accounting standards and corporate disclosure applicable to us differ from those in the United States and other countries.

Colombian banking regulations may differ in material respects from regulations applicable to banks in other countries, including those in the United States. For example, in Colombia, we are not subject to regulations applicable to financial institutions, although our banking subsidiaries, Corficolombiana, Porvenir and certain of our other subsidiaries are subject to such regulations. In addition, capital adequacy requirements for banks under Colombian regulations differ from those under U.S. regulations and may differ from those of other countries.

Colombia and other countries in which we operate have different corporate disclosure and accounting standards for our industry than those applicable in the United States. Financial reporting disclosure requirements in the jurisdictions in which we operate differ in certain significant respects from those required in the United States. There are also material differences among IFRS (as issued by the IASB) and Colombian IFRS. Accordingly, the information about us available in such jurisdictions may not be the same as the information available to holders of shares issued by a U.S. company. Furthermore, since January 1, 2015 we began preparing our financial statements in accordance with IFRS as issued by the IASB and, as a result, some of our financial data may not be easily comparable from period to period.

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Judgments of Colombian courts with respect to our preferred shares will be payable only in pesos.

If proceedings are brought in Colombian courts seeking to enforce the rights of holders of our preferred shares, we will not be required to discharge our obligations in a currency other than Colombian pesos. Under Colombian law, an obligation in Colombia to pay amounts denominated in a currency other than Colombian pesos may only be satisfied in Colombian currency at the exchange rate, as determined by the Colombian Central Bank and published by the Superintendency of Finance, also known as Tasa Representativa del Mercado, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then-prevailing exchange rate may not afford non-Colombian investors with full compensation for any claim arising out of or related to our obligations under the preferred shares, or indirectly, the ADSs.

U.S. investors in our preferred shares or the ADSs may find it difficult or impossible to enforce service of process and enforcement of judgments against us and our officers and directors.

We are incorporated under the laws of Colombia, and all of our subsidiaries are incorporated in jurisdictions outside the United States. In addition, our executive offices are located outside of the United States. All of our directors and officers reside outside of the United States, and all or a substantial portion of our assets and the assets of most of our officers and directors are, and will most likely continue to be, located outside of the United States. As a result, it may be difficult or impossible for U.S. investors to serve legal process within the United States upon us or any of these persons or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that courts in the countries where we or our subsidiaries are incorporated or where our or our subsidiaries’ assets are located (1) would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions of applicable U.S. federal and state securities laws or (2) would enforce, in original actions, liabilities against us or our subsidiaries based on those laws.

There is also substantial doubt that the courts of Colombia would enter judgment in original actions brought in those courts predicated on U.S. federal or state securities laws. We have been advised by our Colombian counsel that there is no legal basis for original actions to be brought against us or our directors and executive officers in a Colombian court predicated solely upon the provisions of the U.S. federal or state securities laws. In addition, certain remedies available under provisions of the U.S. securities laws may not be admitted or enforced by Colombian courts.

Grupo Aval’s by-laws contain an arbitration provision that provides for the exclusive jurisdiction of an arbitral tribunal to be seated at the Bogotá Chamber of Commerce. The arbitration provision provides that any conflict arising among shareholders, or between shareholders and Grupo Aval, in connection with the by-laws must be resolved by the arbitral tribunal. See “Item 4. Information on the Company—B. Business overview—Service of process and enforcement of judgments.”

ITEM 4. INFORMATION ON THE COMPANY

A. History and development of the company

Our company

We are Colombia’s largest banking group based on total assets and we are also the largest banking group in Central America based on total assets as of December 31, 2017. We provide a comprehensive range of financial services and products ranging from traditional banking services, such as making loans and taking deposits, to pension and severance fund management.

As of December 31, 2017, 70.3% of our assets originated in Colombia, and 29.7% in Central America. In terms of businesses, 89.9% of our total assets were banking assets, 8.9% were assets from Corficolombiana, and 1.2% were on-balance sheet assets of our Pension Fund Manager, Porvenir. On a consolidated basis, Grupo Aval manages Ps 236.5 trillion of on-balance sheet assets, and Ps 231.4 trillion of off-balance sheet assets (assets under management).

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Colombian operations

Our operations in Colombia currently consist of four commercial banks (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas), the largest merchant bank (Corficolombiana) and the largest pension and severance fund manager (Porvenir). Our Red de Grupo Aval (Grupo Aval network) is one of the largest networks of ATMs and branches in Colombia and has been a key element of our competitive positioning in the Colombian market. Customers of any of our banks may access Grupo Aval’s other bank branches to carry out basic banking transactions throughout our Red de Grupo Aval (Grupo Aval network). On June 21, 2016, Grupo Aval, Banco de Bogotá, Banco de Occidente and Banco Popular entered into the Amended Shareholders’ Agreement, as a result of which Grupo Aval became the direct controlling entity of Corficolombiana.

Under our multi-brand strategy, each of our banks focuses on particular types of customers, geographic regions and products. Our banks are encouraged to compete among themselves and with other market participants, while operating within central strategic guidelines established by our management. We believe that this strategy has contributed to our strong financial performance and allowed us to provide an integrated service network to our customers. Underlying Grupo Aval’s competitive strengths are group-level policies focused on comprehensive brand management, strategic planning, general procurement, risk management, convergence of technologies and cost controls that we believe promote best practices, realization of synergies and efficiency across our subsidiaries.

The following table show ROAA, ROAE, efficiency ratio and Colombian market share information of us, our Colombian banking subsidiaries and our principal competitors in accordance with Colombian IFRS on an unconsolidated basis.

	At and for the year ended December 31, 2017
	Grupo Aval entities
	Banco de Bogotá		Banco de Occidente		Banco Popular		Banco AV Villas		Grupo Aval Aggregate (1)		Bancolombia		Davivienda		BBVA Colombia
	(in percentages)
ROAA(2)		2.4		1.0		0.6		1.0		1.7		1.7		1.5		0.9
ROAE(3)		11.9		8.3		5.4		8.8		10.5		11.0		12.3		11.5
Efficiency ratio(4)		39.2		49.8		62.3		57.8		46.3		46.7		44.8		45.3
Market share in Colombia:
Net income		25.2		4.3		1.7		1.6		32.9		29.3		14.5		6.0
Deposits		14.2		6.2		4.4		2.8		27.5		23.4		13.1		12.0
Gross loans and leases		12.7		6.2		4.1		2.4		25.4		26.5		14.5		10.3
Assets		14.4		5.9		3.8		2.1		26.2		25.2		13.5		9.9
Branches		12.2		3.9		3.9		5.2		25.3		13.0		10.4		8.1
ATMs		11.1		2.2		7.0		3.8		24.1		29.0		12.3		8.6

Source: Calculations for ROAA, ROAE and efficiency ratio are based on each entity’s respective unconsolidated financial statements in accordance with Colombian IFRS that are publicly available on the Superintendency of Finance website. Colombian market share information is based on unconsolidated data filed with the Superintendency of Finance, except for figures relating to branches and ATMs from Grupo Aval entities, which are derived from Grupo Aval data. Colombian market share data for Grupo Aval is based on aggregate figures. For market share information on each of our banking subsidiaries see “—B. Business overview—Our operations.”

(1) Ratios and market share data reflect aggregated unconsolidated data of Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas.

(2) ROAA is calculated as net income divided by the average of month-end total assets.

(3) ROAE is calculated as net income divided by the average of month-end total equity.

(4) Efficiency ratio is calculated as personnel expenses plus administration expenses divided by total income. Total income is the sum of net interest income, net fees and other services income and other income (excluding dividends and other).

Central American operations

Through our BAC Credomatic operations, we are the largest banking group in Central America based on consolidated assets. We have a leading Central American presence with operations that are complementary to our Colombian businesses and a leading position in the consumer and credit card banking businesses in the region.

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We have operations in six Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panamá). We are the leading credit card issuers and merchant-acquiring franchises in Central America and have the only network that processes all major credit card brands in the region. At December 31, 2017, BAC Credomatic’s credit card portfolio totaled U.S.$2.8 billion (Ps 8.3 trillion), which represents an 8.9% increase from U.S.$2.6 billion at December 31, 2016 (Ps 7.6 trillion). At December 31, 2017, 80.8% of BAC Credomatic’s credit card portfolio was distributed across Costa Rica, El Salvador, Guatemala and Panamá. The remaining 19.2% was distributed among Honduras and Nicaragua. On December 16, 2016, Credomatic de Mexico S.A. de C.V., a subsidiary of BAC International Bank, Inc., entered into an agreement with Banco Invex S.A. Institución de Banca Múltiple, Invex Grupo Financiero for the transfer of its Mexican credit card portfolio and the eventual sale of Credomatic de Mexico S.A. de C.V., as part of BAC International Bank, Inc.’s strategy to focus its presence in the banking and credit card businesses in the six Central American countries. The transfer of the Mexican credit card portfolio transaction closed on June 23, 2017 and the sale of Credomatic de Mexico S.A. de C.V. is expected to happen during the first semester of 2018.

Through a network of 350 branches and 1,993 ATMs at December 31, 2017, BAC Credomatic has more than 3.4 million customers and serves a region with a total population of approximately 47 million at December 31, 2017. Our Central American operations represented 29.7% of our assets at December 31, 2017. For the years ended December 31, 2017, December 31, 2016 and December 31, 2015, the efficiency ratio for BAC Credomatic was 51.7%, 54.9% and 54.4%, respectively.

We continue working to improve our performance in Central America and continue to improve BAC Credomatic’s efficiency ratio. The efficiency ratio of our Colombian operations was 43.9% for the year ended December 31, 2017, while the efficiency for our Central American operations was 52.0% for the same period. We also believe we can leverage Grupo Aval’s expertise to increase BAC Credomatic’s share in corporate lending within Central America.

The following table shows the market shares of our Central American operations and that of our principal competitors in Central America.

	At December 31, 2017
	BAC Credomatic		Bancolombia Central America		Banco General		Banco Industrial		Scotiabank Central America
	(in percentages)
Central American market share:
Loans and leases, net		10.1		9.0		7.6		5.8		4.8
Assets		9.2		7.8		7.3		6.8		4.0
Deposits		9.1		8.0		6.9		6.2		4.4
Liabilities		9.1		7.7		7.3		7.0		4.1
Total equity		10.3		8.5		8.0		5.6		3.5
Net income		12.9		7.7		15.1		8.2		1.4

Source: Calculated based on data aggregated from the local superintendencies of Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panamá.

Our business strengths

We believe that we have achieved our leading positions in the Colombian and Central American financial services industry through the following competitive strengths.

Strong track record of growth and resilient profitability

We believe that our leading position in the Colombian market, cross-bank synergies, economies of scale, low-cost funding and operating efficiencies have helped us achieve stable profits. Despite recent declines mainly due to the economic cycle in Colombia, the resilience of our returns, both on our unconsolidated and consolidated financial statements results from the diversified loan portfolio provided by our multi-brand banking subsidiaries, a lower and more stable cost of funding structure and solid net provisions. Our consolidated assets have grown at a CAGR of 11.0% from January 1, 2014 to December 31, 2017. During the same period, our total liabilities have grown at a CAGR of 11.0% and our total equity has grown at a CAGR of 11.3%. We have historically accomplished our growth through organic expansion and strategic acquisitions.

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Largest banking and financial services operator in most financial sectors in Colombia

We are the largest participant in the Colombian banking market with a market share of 26.2% of total assets and second largest market share of loans, 25.4%, at December 31, 2017. As of the same date we also have the largest market share of deposits, 27.5%. Our Red Grupo Aval, which is the largest ATM and banking network in the country and has been a key element of our competitive positioning in the Colombian market. At December 31, 2017, our ATMs and branches represented 24.1% and 25.3% of total ATMs and branches in Colombia, respectively.

Leading banking operations in Central America

BAC Credomatic is the leading financial group in Central America with a record of strong financial performance. Its ROAE was 15.5% for the year ended December 31, 2015, 15.1% for the year ended December 31, 2016 and 15.2% for the year ended December 31, 2017. BAC Credomatic is a full-service financial institution with one of the leading card-issuing and acquiring businesses in the region. Its Credomatic brand has key alliances with major credit card networks, such as Visa, MasterCard, American Express and Diners Club, and has the only network in the region that processes all major credit card brands. BAC Credomatic’s market share in terms of net loans varies in the different countries as follows, as of December 31, 2017: 14.1% in Costa Rica, 13.6% in El Salvador, 10.6% in Guatemala, 14.4% in Honduras, 25.7% in Nicaragua and 5.7% in Panamá. As a regional player, excluding Panamanian operations, we hold the largest share with 13.7% of the total Central American market.

Diversified and competitive sources of funding

We have access to diverse sources of funding, including deposits and debt securities placed in Colombian and international capital and credit markets, which results in a competitive cost of funding for our operations. At December 31, 2017, our market share of total customer deposits in Colombia was 27.5%, supported by a 37.7% market share in checking accounts and a 28.4% market share in savings accounts. Our consolidated deposits represented 77.4% of our total funding at December 31, 2017 compared to 76.0% at December 31, 2016, which provides us with a stable and cost-effective funding base. Furthermore, the ratio of deposits to net loans, which was 96.3% as of December 31, 2017, 95.4% as of December 31, 2016 and 95.9% as of December 31, 2015, among the best of our peers. We believe that this funding base supports our initiatives to expand our businesses.

Sound risk management

We believe we have asset quality that is better and less volatile than that of our principal competitors. In accordance with Colombian IFRS, Grupo Aval’s aggregate ratio of loans past due more than 30 days over total loans was 3.8% at December 31, 2017, the lowest among our principal competitors on an unconsolidated basis, Bancolombia’s ratio was 4.9%, Davivienda’s was 5.0% and BBVA Colombia’s was 4.8%. We have maintained our relative consolidated asset quality, as demonstrated by our ratio of more than 90 days past due loans to total loans of 2.8% at December 31, 2017 and our ratio of charge-offs to average outstanding loans of 1.7% at December 31, 2017, in accordance with IFRS. In addition, we believe that our reputation as a banking group that pursues conservative policies has allowed us to consistently retain and attract new customers. Each of our banking subsidiaries has a comprehensive risk management system, which we view as fundamental to their long-term stability and viability, which enables them to identify risks and resolve potential problems on a timely basis. In addition, we have established upward loan reporting processes, and our risk management staff meets on a weekly basis to discuss the loan portfolio, risks, opportunities and developments in the industry.

Each of our banks and Grupo Aval on an aggregate basis are well-capitalized above the minimum capital adequacy mandatory ratios as calculated under Colombian capital adequacy regulations.

Multi-brand business model

Our differentiated multi-brand business model builds on the individual strengths of our banking subsidiaries and the market-wide recognition of their brands. Each of our banks has developed a focus on particular and, to a degree, overlapping market sectors, geographic regions, services and products. We believe that this specialization has contributed to the individual success of our banks and the diversity of Grupo Aval as a whole. Our banking subsidiaries in Colombia operate as four independent banks that are encouraged to compete among themselves and with other market participants, while operating within central guidelines established by us in the areas of internal control, credit risk management, brand management, strategic planning, general procurement and information technology. These guidelines, together with group support services, are designed to allow each bank to achieve economies of scale and benefit from cross-bank synergies and group-wide best practices without inhibiting individual competition and the decision-making abilities of each bank’s management. We may, in the future, consider merging one or more of our subsidiaries in our group or additional business we may acquire if meaningful improvements in efficiencies, revenue or other benefits could be achieved.

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Focus on group-wide best practices

We apply group-wide best practices and corporate policies and procedures to all of our operating subsidiaries. These practices are designed to encourage a consistent approach with respect to effective risk management, efficient use of capital, cost control, brand management, general procurement and integration of information technology. We believe that these practices have helped us achieve economies of scale and synergies to reduce operating and administrative costs. For the year ended December 31, 2017, we had a consolidated efficiency ratio of 46.5%, and our banking subsidiaries had efficiency ratios ranging from 44.8% (Banco de Occidente) to 59.7% (Banco Popular).

Experienced management teams

Our qualified and experienced management teams, both at the group and operating subsidiary levels, have played a key role in guiding our growth. Our chairman, Mr. Sarmiento Angulo, has over 60 years of business experience, including over 45 years in the banking and related financial services industry. Our president, Mr. Luis Carlos Sarmiento Gutiérrez, has over 20 years of experience in the banking and related financial services industry and over 30 years of business experience as an executive in Colombia and the United States. Our and each of our operating subsidiaries’ management teams are dedicated to formulating and executing business strategies through a culture of excellence, innovation and cooperation, which has served as our guiding vision throughout the various acquisitions and initiatives undertaken by Grupo Aval.

Our strategy

Our overall objectives are to build upon our competitive strengths to pursue opportunities for growth and to enhance our long-term financial performance. To achieve these objectives, we intend to pursue a strategy with the following key elements:

Further penetrate the Colombian market

Despite the recent slowdown in the growth of the economy driven by the drastic decline in oil prices, we believe that after the necessary fiscal adjustments, Colombia is a country with strong fundamentals that has the ability to return to a path of higher growth rates. In such a scenario we can benefit from an increase in GDP per capita and thus in banking penetration. As part of Colombia´s leading group, and drawing upon Grupo Aval’s multi-brand business model, we believe that we are very well positioned to adjust to the current conditions and take advantage of a stronger economic growth.

Continue capitalizing on synergies and improving efficiencies

We are pursuing opportunities to create synergies among Grupo Aval affiliates and at BAC Credomatic and leverage their combined strength. We intend to work with Grupo Aval on group-wide projects, mainly on digital banking and process digitization through our digital labs (Aval Digital Lab and BdB Digital Lab), information technology, network integration (such as Red Aval) and procurement of goods and services, which, should allow us to achieve economies of scale by involving all of our subsidiaries under a single umbrella. We believe that these efforts have contributed and will continue to contribute to improve our efficiency.

Expand our services and product offering and diversify our sources of income

We believe we offer the most comprehensive range of banking services and products in Colombia, and we continually seek to expand these offerings to meet evolving customer needs and enhance our profitability. We think we can continue to capture additional revenue by (i) improving our market share in profitable segments and products where we have potential to grow organically given our existing market position (such as credit cards and mortgage loans, where we have a market share of 20.4% and 12.0% as of December 31, 2017, respectively); (ii) launching new products (such as digital accounts) to serve new segments (such as the underbanked population); and, (iii) improving our product and service offering through their digitization. In addition, we are also expanding our cross-selling efforts to our 11.3 million banking clients and our 12.7 million pension fund clients in Colombia as of December 31, 2017.

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Furthermore, we continue to implement initiatives to increase our non-interest income, which consists primarily of net fee income and income from our non-financial operations. For the year ended December 31, 2017, net fee income accounted for 26.4% of our consolidated total income before net impairment losses. We believe we can increase non-interest income in future periods by, for example, expanding our offering of bancassurance products (i.e., bank-offered third-party insurance products) through our distribution networks and credit card fee income by increasing credit card loan volume across all of our banks. With regards to the income from our non-financial operations, we believe that our equity investments in strategic sectors such as energy and gas, infrastructure and hotels will continue to contribute sustainable income to our bottom line.

We will pursue initiatives to extend our banking services to under-penetrated segments of the Colombian population that have low usage or that do not currently use banking services by developing low cost products such as “Cuentas de Ahorro de Trámite Simplificado,” or “CATS,” which are savings accounts with lighter requirements for the account opening process, which will be offered by our banking subsidiaries in Colombia and by Aval Soluciones Digitales, the first SEDPE created by a financial institution in the country, cost-effective service channels, such as Corresponsales Bancarios and online/mobile banking and risk management tools.

Further penetrate the Central American market

We plan to continue executing our multi-brand business model and maintain the BAC Credomatic brand. We intend to capitalize on the expansion of the Central American market in the current economic scenario. In order to improve operational efficiency and increase market share in key sectors, we intend to continue to share our group-wide commercial and operational standards and best practices with BAC Credomatic, while capitalizing on its regional expertise, brand recognition, customer base, and financial services and products, such as credit card issuance and merchant-acquiring businesses.

Pursue other selected acquisitions and increase our controlling interests in our subsidiaries

We have a proven track record of identifying, acquiring and integrating interests in companies we believe have strategic value to us. We are interested in expanding our businesses in Colombia and Central America and into other regions. We will continue to seek opportunities to further expand into new geographies and will evaluate potential acquisition targets that would enable us to grow and consolidate our franchise through the services and products we offer and the markets we can access. We actively consider additional strategic investments, alliances and acquisitions, principally in Colombia, Central America and other selected Latin American countries, which may materialize, if we believe they will generate value, complement our strategic goals, be accretive and will not hinder our technical capital position. We may also continue acquiring additional shares to increase our controlling interests in our banking subsidiaries as we have done in 2015, 2016 and 2017. During 2013 we expanded our operations in Central America with the acquisitions of BBVA Panamá (now merged into BAC International Bank, Inc.) and Grupo Reformador (now merged into Banco de América Central S.A. (Guatemala)) and in the Colombian Pension Fund business with the acquisition of AFP Horizonte (merged into Porvenir). During 2016, we expanded Banco Popular’s business with the acquisition of the Colombian credit card loan portfolio and users of Ripley – Compañía de Financiamiento Comercial. During 2017 we acquired, through Corficolombiana, an additional 40% stake in both Covipacífico (Concesionaria Vial del Pacífico S.A.S.) and in Covimar (Concesionaria Nueva Vía al Mar S.A.S.); Corficolombiana gained controlling interest in Covipacífico after the transaction. After the transaction, Corficolombiana owns 89.9% of Covipacífico and 100.0% of Covimar. The full price paid for the 40% stakes was Ps 185.1 billion.

Oversight

As the holding company of the group, we closely monitor the performance of our banks, Corficolombiana, Porvenir and BAC Credomatic. We actively participate in developing each banking subsidiary’s long-term business and strategic plan, and we require each of our banking subsidiaries to present a yearly budget, main initiatives and profitability targets. In addition, we make recommendations for setting the compensation of top management in each of our banking subsidiaries annually, and link incentive compensation to achieving budget goals and other financial and strategic performance targets.

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Our banking subsidiaries and Corficolombiana are required to report their financial and commercial performance to us on a regular basis, including monthly detailed information. We monitor the performance of our banks against their respective budgets and the performance of our competitors. This systematic control process is complemented by ad-hoc analyses of key commercial and operational drivers, such as loan growth and the loan portfolio quality of each banking subsidiary relative to the others and our competitors. When a banking subsidiary deviates from its plan or when weaknesses are identified, we meet with the respective bank’s management to discuss remedial measures and a course of action. Similarly, when a banking subsidiary finds itself in a new or unfamiliar situation, such as the mortgage and financial crisis of 1999, we cooperate to assess and respond to these challenges. Our senior management and management of the banking subsidiaries meet at least twice a month to discuss strategy, opportunities and current operations.

Our internal control department regularly performs audits of our banks, Corficolombiana, Porvenir and BAC Credomatic, as well as their operating subsidiaries, to provide objective assurance to our management and board of directors regarding their effectiveness, financial reporting and control mechanisms as well as to monitor compliance with our best practices and guidelines. Any deviations from our best practices and guidelines are monitored by our internal control team, which recommend remedial measures and ensure their implementation.

Strategic focus

From time to time, our banks explore merger and acquisition opportunities and, as part of its equity portfolio management activities, Corficolombiana makes investments in strategic sectors. Through areas such as our vice presidency of finance and our vice presidency of strategy, we provide support to our banking subsidiary management teams in identifying opportunities, negotiating favorable outcomes and implementing acquisitions. We independently assess a prospective target’s strategic fit with the acquiring banking subsidiary and within our group as a whole. In addition, we explore new business initiatives and often recommend new product lines and services to our banks, such as bancassurance, and provide assistance to our banks in evaluating, negotiating and implementing acquisitions such as Banco de Bogotá’s acquisition of Megabanco, Banco de Occidente’s acquisition of Banco Unión, Banco Popular’s acquisition of the credit card loan book and users of Ripley – Compañía de Financiamiento Comercial and the acquisition of AFP Horizonte led by Porvenir. Our acquisitions of BAC Credomatic, BBVA Panamá (merged into BAC International Bank, Inc.) and Grupo Reformador (merged into Banco de América Central S.A. (Guatemala) reflect our approach to identifying and pursuing growth opportunities outside of our existing portfolio.

Credit risk management

Although each banking subsidiary is responsible for its credit decisions and risk management, we oversee the implementation of appropriate risk management controls at our banks and have established upward loan reporting processes. Our risk management staff meets on a weekly basis to discuss our subsidiaries’ loan portfolio, developments in the industry, risks and opportunities. For potential loan transactions that would result in an aggregate exposure to a single issuer in excess of Ps 30 billion on a consolidated basis at the group level depending on the risk rating, our risk management staff will evaluate the transaction and will often make recommendations with respect to the structure of the loan (such as tenor, guarantees, interest rates, commissions and covenants). We also coordinate loan syndications among our banks to effectively leverage the combined equity of our banks and manage any risk issues. For a discussion of our risk management guidelines, see “Item 11. Quantitative and Qualitative Disclosures About Risk—Risk management.”

Marketing and Corporate Image

Our centralized marketing strategy pursues two main objectives: to increase the competitiveness of our banks and to strengthen our corporate image. To achieve these objectives, we negotiate with third parties for the provision of certain marketing services and to design and implement advertising and marketing campaigns for certain services and products from our banking subsidiaries in Colombia. We have set up marketing guidelines and pursue communications that increase the exposure of our brands and those of our subsidiaries. Our service efforts are aimed at achieving customer and shareholder satisfaction.

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Network integration

Each banking subsidiary is responsible for its information technology systems and distribution network; however, we seek to maximize the effectiveness of our distribution network and the levels of customer service and customer retention across all our banks through our Red Aval (Grupo Aval network), which connects all of our banks’ networks. Our network allows each of our banking subsidiaries’ customers to access basic banking services at any ATM or branch office in any of our banks. Although each banking subsidiary maintains its own information technology system, Grupo Aval works to identify potential synergies and assists in the implementation of technology and products developed at the Grupo Aval level within our banks, and the standardization of technology and processes across our banks. For example, we are developing a new technology model based on service-oriented architecture for our institutions. For a discussion of our current technology projects, see “—B. Business overview—Other corporate information—Technology.”

Digital Strategy

Grupo Aval works to identify and capture synergies between our banking subsidiaries that are currently unrealized. In order to contribute to this objective, Grupo Aval has recently created the new position of Chief Digital Officer, who is in charge of aligning our banking subsidiaries with a shared vision for a digital future, capturing operational and strategic synergies across their existing digital platforms and developing and scaling digital best practices across Grupo Aval, particularly in the areas of advanced analytics, flexible methodologies and user-centric design.

While each banking subsidiary will continue developing its own digital strategy by which they aim to digitize their products, channels and processes in order to achieve operational efficiency and create more innovative products and services for their clients, our Chief Digital Officer will supervise the following corporate objectives:

· Development and ownership of all digital products, with focus on the unique strategic priorities of each banking subsidiary and opportunities for synergy;

· End-to-end digitization of the banking experience for our individual and corporate clients spearheaded by Aval Digital Lab, an entity specifically created for this purpose;

· Gathering and understanding big data through advanced analytics across our banking subsidiaries;

· Improvement of digital infrastructure to facilitate an end-to-end banking experience; and

· Optimization of the service models and transactions of our banking subsidiaries, enabling the banks to adapt to the preferences and needs of our clients as efficiently as possible.

Our Markets

Colombia

The majority of our operations are located in Colombia, representing 62.1% and 70.6% of our net income attributable to controlling interest and gross loan portfolio, respectively, and in the six countries in Central America, representing 37.9% and 29.4% of our net income attributable to controlling interest and gross loan portfolio, respectively, in each case as of and for the year ended December 31, 2017.

In the last few years, the Colombian financial system has proven to be resilient despite a difficult macroeconomic scenario. The decline in oil prices that began in 2014 had severe impacts on Colombia. First, as oil represented close to 50% of the exports, the decline in the price of the commodity brought with it a severe current account deficit which peaked at 6.4% in 2015. Second, the currency suffered severely taking the exchange rate from approximately Ps 1,850 per U.S. dollar to more than Ps 3,300 per U.S. dollar in February, 2016. Third, inflation increased from a stable 3% level to close to 9% in July 2016, mainly driven by a pass-through effect, but also affected by a severe drought caused by the El Niño climatic phenomenon and the longest truckers’ strike in the country’s history. Fourth, the government saw a 20% decline of its total revenues originated from oil-related activities (taxes paid by the oil sector and dividends paid by Ecopetrol) which implied a deterioration of the central government fiscal deficit from 2.3% of GDP in 2013 to a recent high of 4% of GDP in 2016. In order to reduce the fiscal deficit, the government passed two fiscal reforms in less than 2 years: Law 1739 in December 2014 and Law 1819 in December 2016. To control inflation and inflation expectations, the Central Bank had to pursue a contractionary monetary policy taking its intervention rate from 4.50% in 2015 to 7.75% in 2016.

Furthermore, the economy decelerated and grew at only 2.0% in 2016 and 1.8% in 2017, the slowest pace since the global financial crisis in 2009. With the deceleration in the economy, the financial system adjusted and decelerated loan growth and saw some deterioration in credit quality metrics.

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However, Colombia’s adjustment to these large external and domestic shocks is well under way, with economic growth outpacing the regional average and achieving further improvements in poverty and inequality. The current account deficit fell to an estimated 3.3% of GDP in 2017, the currency stabilized at an annual average of Ps 2,951 per U.S. dollar in 2017, inflation fell to 3.4% by February 2018 from 9.0% in July 2016, within the Central Bank’s target range of 2% to 4%, the central government fiscal deficit declined to 3.6% of GDP in 2017 and it is expected to decline further to 3.1% of GDP in 2018, and the Central Bank has cut its policy rate by 325 basis points since December 2016 to 4.50% by January 2018.

The 1.8% GDP growth of Colombia for 2017, while low, compares favorably to the Latin American average of 1.2%.

According to data from the IMF, at December 31, 2017, Colombia’s population and economy were the third and fourth largest in Latin America, respectively. According to DANE, in 2017 Colombia’s population was approximately 49.3 million people and its nominal GDP was an estimated Ps 921.2 trillion (U.S.$307.5 billion, using the average exchange rate for 2017), according to the IMF. Colombia’s nominal GDP per capita increased from Ps 7.9 million in 2005 (U.S.$3,418 using the average exchange rate for that year) to an estimated Ps 18.7 million in 2017 (U.S.$6,238 using the average exchange rate for that year), according to the IMF. This increase in nominal GDP per capita has allowed banks to grow at a faster pace than the economy without experiencing severe credit cycles, which suggests that there is still further room for growth.

According to data from the World Bank, banking penetration still remains low in Colombia (47.1% in 2016), when compared to other countries of the region, such as Brazil (62.2% in 2016) and Chile (112.1% in 2016). Higher GDP and increase in GDP per capita can help improve Colombia’s banking penetration.

Central America

Central America, a region of approximately 47 million people, met our expansion criteria in 2010 and is currently serving as a diversifying source of income that stabilizes any potential negative impact derived from a slower growing economy in Colombia. During 2017, Central American GDP growth was 3.9%, more than double that of Colombia, partly as a result the decline in oil prices (given that these countries are net importers of oil) and partly as a result of an increase in productivity.

We continue to view this region as having organic and inorganic growth potential, supported by low banking penetration (ratio of domestic private sector credit to GDP of 55% in 2016 and increasing GDP per capita).

Our history

Grupo Aval Acciones y Valores S.A. is a sociedad anónima, incorporated under the laws of Colombia on January 7, 1994 under the name Administraciones Bancarias S.A. On April 18, 1997, the company changed its name to Sociedad A.B. S.A., and on January 8, 1998, to Grupo Aval Acciones y Valores S.A.

Grupo Aval was created by our chairman, Mr. Sarmiento Angulo, to consolidate his interests in the Colombian financial sector. The milestones in the history of Grupo Aval are the following:

· Mr. Sarmiento Angulo established a real estate development firm in Bogotá in 1956, and in 1959 founded Organización Luis Carlos Sarmiento Angulo, which developed low- and middle-income housing neighborhoods in Bogotá in the 1960s and 1970s;

· In 1971, Mr. Sarmiento Angulo acquired a majority stake in Banco de Occidente, and in 1972 founded Corporación de Ahorro y Vivienda Las Villas to focus on low- and middle-income mortgage financing;

· In 1981, Mr. Sarmiento Angulo purchased a minority stake in Banco de Bogotá, and in 1988 he acquired a majority stake and control, consolidating a major participation in the banking system. Banco de Bogotá acquired a substantial majority of, and absorbed, Banco del Comercio in 1992;

· In 1991, Banco de Bogotá and Banco de Occidente founded Porvenir as a severance fund manager, and following the creation in 1993 of the private pension fund system in Colombia, expanded the business to include pension fund management in 1994;

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· In 1996, Banco Popular was acquired from the Colombian government through a privatization process;

· In 1997, Mr. Sarmiento Angulo acquired Corporación de Ahorro y Vivienda Ahorramas which was later merged with Corporación de Ahorro y Vivienda Las Villas in 2000 and became Banco AV Villas in 2002;

· In 1998, Mr. Sarmiento Angulo contributed a majority of his direct and indirect holdings in the financial institutions into Grupo Aval. The Red de Grupo Aval (Grupo Aval network) was also established in 1998 to provide an integrated service network of branches and ATMs;

· In 1999, we conducted our initial public equity offering in Colombia and listed our common shares on the Colombian Stock Exchange under the ticker symbol “GRUPOAVAL” raising Ps 62.5 billion (U.S.$35.3 million) in gross proceeds. Grupo Aval’s initial public offering was the first large-scale equity offering of a Colombian company to the general public, which allowed several thousand investors to become our shareholders;

· Corficolombiana, which was founded in 1959 as an affiliate of Banco de Bogotá, acquired and merged with several merchant banks between 1997 and 1999, including Corfitolima, Corfiprogreso, Corfes, Corfiboyacá, Corfisantander, Corfiandes and Indufinanciera. In 2005, Corfivalle, also a merchant bank merged with Corficolombiana;

· In 2007, we conducted our second public offering of common shares pursuant to a preemptive rights offering in Colombia, raising Ps 372.0 billion (U.S.$210.4 million) in gross proceeds;

· In 2010, we acquired BAC Credomatic from GE Consumer Finance Central Holdings Corp. and General Electric Capital Corporation;

· In 2011, we registered our preferred shares with the SEC;

· In 2011, we concluded our first offering of our preferred shares pursuant to a preemptive rights offering in Colombia, raising Ps 2.1 trillion (U.S.$1.1 billion) in gross proceeds;

· In February 2012, we completed our first international bond offering, issuing Ps 1,083.6 billion (U.S.$600 million) at the date of the issuance of our 5.25% Senior Notes due 2017;

· In September 2012, we completed our second international bond offering, issuing Ps 1,795.7 billion (U.S.$1.0 billion) at the date of the issuance of our 4.75% Senior Notes due 2022;

· On April 18, 2013, we acquired Horizonte and on December 31, 2013, we completed the merger of Horizonte into Porvenir;

· On December 19, 2013 and December 23, 2013, we expanded our Central America operations with the acquisitions of BBVA Panamá (merged into BAC International Bank, Inc.) and Grupo Reformador (merged into Banco de América Central S.A. (Guatemala)), respectively;

· On January 17, 2014, we completed our third public offering of common shares pursuant to a preemptive rights offering, or the “Common Share Rights Offering,” raising Ps 2.4 trillion (U.S.$1.3 billion); and

· In September 2014, we completed a SEC-registered initial public offering in the United States. We raised Ps 2.6 trillion (U.S.$1.3 billion) in gross proceeds. Our ADSs began to trade on the New York Stock Exchange, or NYSE, under the symbol “AVAL” on September 23, 2014.

· On June 21, 2016, Grupo Aval, Banco de Bogotá, Banco de Occidente, Banco Popular entered into the Amended Corficolombiana Shareholders’ Agreement to provide for Grupo Aval to directly control Corficolombiana. Prior to June 21, 2016, Banco de Bogotá, which held and continues to hold a 38.3% equity interest in Corficolombiana, controlled Corficolombiana.

· During 2017, Grupo Aval issued its sixth bond issuance in the local market. Banco de Bogotá made a Ps 1.8 trillion (U.S.$ 600 million) senior bond issuance due in 2027 in the international market.

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B. Business overview

Our operations

We conduct our operations through our four banks (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas), our merchant bank (Corficolombiana), a pension and severance fund manager (Porvenir) and our Central American banking group (BAC Credomatic).

Source: Company data at December 31, 2017.

(1) Since June, 2016 Corficolombiana is consolidated directly by Grupo Aval and not through Banco de Bogotá. Porvenir and BAC Credomatic are subsidiaries of Banco de Bogotá, whose financial data is consolidated into Banco de Bogotá’s results. Ownership percentages shown include direct and indirect participation.

(2) In addition to Mr. Sarmiento Angulo’s beneficial ownership through Grupo Aval, he beneficially owned 8.3% of Banco de Bogotá, 13.3% of Banco de Occidente, 15.5% of Banco AV Villas, 0.8% of Banco Popular and 0.3% of Corficolombiana, at April 20, 2017.

We believe that each of our banks and Corficolombiana, as well as Porvenir and BAC Credomatic have a strong reputation in the market within their individual sectors. Each of our banks and Corficolombiana are publicly-traded on the Colombian Stock Exchange, and the remaining shares in these companies that are not beneficially owned by Mr. Sarmiento Angulo are held by non-controlling shareholders.

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Colombian Banking Operations

Banco de Bogotá, founded in 1870, is Colombia’s oldest financial institution. As of December 31, 2017, Banco de Bogotá had a market share of 14.2% of deposits and 12.7% of gross loans. At and for the year ended December 31, 2017, Banco de Bogotá had total assets of Ps 149.4 trillion and net income attributable to controlling interest of Ps 1.9 trillion on a consolidated basis in accordance with IFRS. Banco de Bogotá is a full-service bank with nationwide coverage and a comprehensive portfolio of services and products, distributed through a network of 686 branches and 1,740 ATMs in Colombia at December 31, 2017. While Banco de Bogotá serves all market segments, it has a leading presence in commercial loans historically, with a particular focus on large corporations and a market share of 16.7% of commercial loans at December 31, 2017. Following its 2006 acquisition of Megabanco, Banco de Bogotá expanded its consumer banking business and now has a market share of 9.1% of consumer loans in Colombia as of December 31, 2017. In 2012, Banco de Bogotá entered the mortgage business and had a market share of 5.3% at December 31, 2017.

Banco de Occidente is the fifth largest bank in Colombia in loans, with a market share of 6.2% at December 31, 2017. It focuses on corporate customers, state-owned entities and retail customers and has a diversified revenue stream. For the year ended December 31, 2017, on a consolidated basis its loan portfolio was distributed as follows: approximately 32.4% in consumer and auto lending; approximately 55.7% in corporate and public sector lending; and approximately 11.9% in SMEs. Banco de Occidente had market shares of 7.6% of commercial loans and 5.8% of consumer loans at December 31, 2017.

Banco Popular is the eighth largest bank in Colombia in loans with a market share of 4.1% at December 31, 2017. Banco Popular operates primarily in the consumer and public sector businesses, with operations across all regions of Colombia. Banco Popular is a premier provider of financial solutions to government entities nationwide with a particular strength in public sector deposits and loans, and a significant part of its portfolio consists of payroll loans to pensioners and public sector employees. Banco Popular achieved better returns on its consumer loan portfolio due to its access to payroll deductions for repayment of loans, which has resulted in consumer loans with a substantially lower-risk profile for consumer loans (consumer past-due loans of 3.6% compared to a banking system average of 5.8% at December 31, 2017).

Banco AV Villas has evolved from being a traditional mortgage lender to a diversified full-service consumer bank targeting middle- and low-income customers. Banco AV Villas has a broad service network throughout central and northern Colombia, including Bogotá. Banco AV Villas had a market share of 2.8% of deposits, 2.4% of loans, 4.5% of consumer loans and 3.4% of mortgages at December 31, 2017.

Generally, following a period of declining interest rates, consumer banks such as Banco Popular and Banco AV Villas see their net interest margin expand as their consumer loan book will be less sensitive to rate cuts than its funding, while corporate banks such as Banco de Bogotá and Banco de Occidente will see their net interest margin contract as their corporate loan book will reprice in line with the declining rates.

Merchant Banking

Corficolombiana is the largest merchant bank in Colombia based on total assets as of December 31, 2017. Corficolombiana focuses on four main lines of business: (1) equity investments in strategic sectors of the Colombian economy, including, in particular, infrastructure, energy and gas, agribusiness and hospitality; (2) investment banking, including services relating to capital markets, mergers and acquisitions and project finance transactions; (3) treasury operations; and (4) financial services such as leasing and trust, among others. Corficolombiana’s ROAE was 16.8%, 10.0% and 6.8% for the years ended December 31, 2015, 2016 and 2017, respectively, based on its consolidated financial statements. Its results for 2016 and 2017 were negatively affected by impairments associated with its indirect investment in Concesionaria Ruta del Sol and loan impairments related to its exposure to Electricaribe. For further detail on CRDS, see Note 14 to our audited consolidated financial statements.

Pension and Severance Fund Management Administration

Porvenir is the leading private pension and severance fund management business in Colombia, based on assets under management, with a 42.9% market share of assets under management as of December 31, 2017. Pension funds provide individual savings for retirement, while severance funds provide temporary income to employees who become unemployed. Based on unconsolidated data prepared under Colombian IFRS, at December 31, 2017, Porvenir was the most profitable and efficient pension and severance fund manager in Colombia, with an ROAE of 25.2% and an efficiency ratio of 35.9%.

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Central American Operations

BAC Credomatic is the leading Central American banking group with operations in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panamá. BAC Credomatic is a full-service financial institution with one of the leading credit card issuance and merchant-acquiring franchises in Central America. It has achieved processing volumes of U.S.$ 19,232.9 million (Ps 57,390.9 billion) for the year ended December 31, 2017 and U.S.$17,457 million (Ps 52,383 billion) for the year ended December 31, 2016, in the merchant acquiring business. BAC Credomatic’s ROAE was 15.5% in 2015, 15.1% in 2016 and 15.2% for the year ended December 31, 2017.

Competition

We operate in a competitive market. Our principal competitors in Colombia are Bancolombia, Davivienda, and BBVA Colombia, which are the three leading banking groups in Colombia following Grupo Aval.

We are the market leader in Colombia in terms of market share of deposits, assets and our distribution network. Recently, we have outperformed one or more of our principal competitors under key operational metrics such as the ratio of loans past due more than 30 days over gross loan portfolio and operational efficiency. We believe that these results have been achieved due to our banks’ historically strong franchises, results-oriented philosophy and the Grupo Aval multi-brand business model.

In addition to our market-leading banking business, we are also, through Porvenir, the market leader in privately managed mandatory pensions and severance funds. Porvenir also has the largest share of individual customers in the private severance fund and mandatory pension fund markets in Colombia.

Corficolombiana is the largest merchant bank in Colombia, with the largest equity portfolio primarily invested in strategic sectors of the Colombian economy: energy and gas, infrastructure, agribusiness, treasuries, hotels and financial services. Corficolombiana complements its core investment management business with treasury and investment banking operations.

Market share and other data from unconsolidated financial information

The following market share and other data comparing us and our banking subsidiaries to our competitors is based on information derived from unconsolidated financial information reported to the Superintendency of Finance by commercial banks based on Colombian IFRS.

Deposits

At December 31, 2017, we had the largest market share of total deposits in Colombia, with a market share of 27.5%. As of the same date our principal competitors—Bancolombia, Davivienda and BBVA Colombia—had market shares of 23.4%, 13.1%, and 12.0%, respectively.

The following table presents a breakdown of market share of deposits by type of deposit at December 31, 2017.

	At December 31, 2017
Colombian IFRS	Grupo Aval aggregate(1)		Bancolombia		Davivienda		BBVA Colombia		Rest of the Colombian market
	(in percentages)
Checking accounts		37.7		21.8		10.7		12.1		17.6
Savings accounts		28.4		25.7		12.0		10.4		23.4
Time deposits		22.8		21.2		15.2		13.9		26.9
Total deposits		27.5		23.4		13.1		12.0		24.0

Source: Company calculations based on unconsolidated information published by the Superintendency of Finance.

(1) Grupo Aval figures reflect aggregated amounts of our unconsolidated banking subsidiaries in Colombia.

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At December 31, 2017, deposits represented a larger share of our total funding than that of most of our principal competitor banks, and we had a higher concentration of checking accounts, which are generally a source of funds with lower cost. The table below presents the total funding mix of the market at December 31, 2017.

	At December 31, 2017
Colombian IFRS	Grupo Aval aggregate(1)		Bancolombia		Davivienda		BBVA Colombia		Rest of the Colombian market
	(in percentages)
Funding:
Deposits		82.2		72.9		72.5		86.3		70.0
Other funding(2)		17.8		27.1		27.5		13.7		30.0
Total funding		100.0		100.0		100.0		100.0		100.0
Deposits:
Checking accounts		19.9		13.6		11.9		14.6		10.7
Savings accounts		47.4		50.5		42.2		39.7		44.9
Time deposits		32.7		35.9		45.8		45.6		44.4
Total deposits		100.0		100.0		100.0		100.0		100.0
Average funding rate: (3)
Average deposit rate		4.5		4.1		4.7		5.1		5.1
Average other funding rate		5.0		5.5		6.0		5.3		4.7
Average total funding rate		4.6		4.5		5.0		5.2		5.0

Source: Company calculations based on information published by the Superintendency of Finance.

(1) Grupo Aval figures reflect aggregated amounts of our unconsolidated banking subsidiaries in Colombia.

(2) Other funding includes interbank borrowings and overnight funds, borrowings from banks, other long term debt and borrowings from development entities and other deposits.

(3) Average balances calculated using end of month unconsolidated information for the year ended December 31, 2017.

Loans

At December 31, 2017, we had the second largest market share of total loans in Colombia, with a 25.4% market share. As of the same date, our principal competitor banks—Bancolombia, Davivienda and BBVA Colombia—had market shares of 26.5%, 14.5% and 10.3%, respectively.

The following table presents a breakdown of the market share of our loan portfolio by category at December 31, 2017.

	At December 31, 2017
Colombian IFRS	Grupo Aval aggregate(1)		Bancolombia		Davivienda		BBVA Colombia		Rest of the Colombian market
	(in percentages)
Commercial and leases		28.6		33.8		12.5		7.6		17.5
Consumer and leases		27.5		16.3		14.4		13.1		28.7
Microcredit and leases		3.2		5.2		0.8		0.0		90.8
Mortgages and leases		12.0		20.7		26.3		18.9		22.1
Total		25.4		26.5		14.5		10.3		23.3

Source: Company calculations based on unconsolidated information published by the Superintendency of Finance.

(1) Grupo Aval figures reflect aggregated amounts of our unconsolidated banking subsidiaries in Colombia.

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The following table shows the breakdown of our loan portfolio and that of our competitors at December 31, 2017.

	At December 31, 2017
Colombian IFRS	Grupo Aval aggregate(1)		Bancolombia		Davivienda		BBVA Colombia		Rest of the Colombian market
	(in percentages)
Commercial and leases		63.6		72.2		48.8		41.4		42.4
Consumer and leases		29.9		17.0		27.4		34.8		33.9
Microcredit and leases		0.4		0.6		0.2		0.0		11.3
Mortgages and leases		6.1		10.2		23.6		23.7		12.4
Total		100.0		100.0		100.0		100.0		100.0

Source: Company calculations based on unconsolidated information published by the Superintendency of Finance.

(1) Grupo Aval figures reflect aggregated amounts of our unconsolidated banking subsidiaries in Colombia.

Loan Portfolio Quality

We believe that the credit quality of our loan portfolio compares favorably against our principal competitors. The following table presents credit quality metrics for our loan portfolio at the dates indicated.

	Loans past due more than 30 days / gross loan portfolio		Loans rated C, D or E / gross loan portfolio(3)		Gross provision expense / average gross loan portfolio(2)		Allowance / loans past due more than 30 days
Colombian IFRS	For the year ended December 31, 2017
	(in percentages)
Banco de Bogotá		3.8		7.0		3.9		121.8
Banco de Occidente		4.3		6.9		4.6		116.1
Banco Popular		2.8		4.3		3.1		164.0
Banco AV Villas		4.0		4.5		4.6		112.5
Grupo Aval aggregate(1)		3.8		6.3		4.0		124.4
Bancolombia		4.9		7.5		4.8		141.3
Davivienda		5.0		6.3		4.9		96.7
BBVA Colombia		4.8		5.2		4.4		110.0
Rest of the Colombian market		5.6		7.2		5.8		115.3

Source: Company calculations based on unconsolidated information published by the Superintendency of Finance.

(1) Grupo Aval figures reflect aggregated amounts of our unconsolidated banking subsidiaries in Colombia.

(2) When calculated as net provision expense / average gross loan portfolio, the ratio for the year ended December 31, 2017 would be 2.7% for Banco de Bogotá, 3.1% for Banco de Occidente, 1.5% for Banco Popular, 3.1% for Banco AV Villas, 2.6% for Grupo Aval aggregate, 3.0% for Bancolombia, 3.1% for Davivienda, 2.9% for BBVA and 3.3% for the rest of the Colombian market.

(3) For further information about loan classification categories, see “Item 11. Quantitative and Qualitative disclosure about risk—Credit Classification and Provisioning.”

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Branches and ATM Network

Through our banking subsidiaries, we have the largest combined banking network in Colombia, with 1,421 branches and 3,781 ATMs at December 31, 2017. The following table presents the distribution of branches and ATMs across the market at December 31, 2017.

	At December 31, 2017
	Branches					ATMs
	# of branches		Market share %			# of ATMs		Market share %
Grupo Aval aggregate(1)		1,421		25.3	%		3,781		24.1	%
Bancolombia		727		13.0	%		4,549		29.0	%
Davivienda		584		10.4	%		1,938		12.3	%
BBVA Colombia		453		8.1	%		1,356		8.6	%
Rest of the Colombian market		2,427		43.2	%		4,088		26.0	%

Source: Company calculations based on unconsolidated information published by the Superintendency of Finance, except for information for Grupo Aval which reflects aggregate data obtained from our banking subsidiaries.

(1) Grupo Aval figures reflect aggregated amounts of our unconsolidated banking subsidiaries in Colombia.

Pension and severance fund management – Porvenir

Porvenir is the leading private pension fund manager in Colombia in terms of assets under management and has the largest share of earnings in the private pension and severance fund management market in Colombia. Porvenir’s principal private competitors are other pension fund managers, including Protección, Colfondos and Old Mutual.

Porvenir also has the largest share of individual customers of privately managed mandatory pension funds and has a higher ROAE than the average of the Private Pension Fund Managers in Colombia in 2015, 2016 and 2017.

The following table presents the market shares of the main market participants with respect to assets under management and individual customers of mandatory pension funds at December 31, 2017, and net income for the year ended December 31, 2017.

	At and for the year ended December 31, 2017
	Porvenir		Protección		Colfondos		Old Mutual
	(in percentages)
Individual customers to pension funds:
Mandatory		57.0		29.6		12.6		0.7
Severance		56.1		33.0		10.3		0.6
Voluntary		26.8		53.9		7.1		12.2
Total		55.9		31.4		11.7		1.0
Assets under management:
Mandatory		44.2		36.3		13.5		6.0
Severance		48.3		38.8		10.6		2.4
Voluntary		22.6		42.3		5.7		29.4
Total		42.9		36.8		12.8		7.4
Net income:		47.4		38.6		6.5		7.5

Source: Information published by the Superintendency of Finance. Information does not include data from third-party pension liability funds, which do not comprise a material portion of the market. Net income calculated under Colombian IFRS.

Merchant banking—Corficolombiana

Corficolombiana was the largest merchant bank in Colombia in terms of assets and equity at December 31, 2017. Corficolombiana faces competition from local and global banks focused on merchant and investment banking. Bancolombia, through its subsidiary Banca de Inversión Bancolombia S.A., is Corficolombiana’s largest local competitor. On an international level, Corficolombiana faces competition from global banks with local investment banking operations. In addition, as an equity investor, Corficolombiana faces competition from other equity investors such as hedge funds, private equity firms and others.

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The following table presents the market shares of Corficolombiana and its principal competitors by assets, liabilities and equity at the dates indicated at December 31, 2017.

Colombian IFRS	Assets		Liabilities		Equity
	(in percentages)
Corficolombiana		76.7		94.2		57.2
Banca de Inversión Bancolombia S.A.		12.8		0.3		26.6
J.P. Morgan Corporación Financiera S.A.		5.7		3.9		7.8
BNP Paribas Colombia Corporación Financiera S.A.		2.0		1.4		2.5
Itaú BBA Colombia S.A.		2.8		0.2		5.8

 Source: Information published by the Superintendency of Finance.

Colombian banking business overview

Our differentiated multi-brand business model builds on the individual strengths of our banks and the wide recognition of their brands. Each of our banks has developed over time a focus on particular and, to a degree, overlapping market sectors, geographic regions and services and products. As a group, we are present in all banking businesses in Colombia, as shown in the following chart.

Through the subsidiaries of our banks, we also offer trust, bonded warehousing and brokerage transactions, real estate escrow services, merchandise and document storage and deposit, customs agency, cargo management, surety bond and merchandise distribution services, bancassurance, payment and collection services, and provide deposit and lending operations in foreign currencies. Through Corficolombiana, we operate as a merchant and investment bank, and, through Porvenir, we participate in pension and severance fund management.

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Corporate Customers

Our banks provide services and products to public and private sector customers. Our banks segment their corporate customers into separate categories based principally on their annual revenues. We believe that these customer classifications, which are specific to each bank, allow our entities to tailor their services and products to the needs of each customer classification sector.

At December 31, 2017, our banks had an aggregate of 288,000 corporate customers, which may include customer overlap among our banks, a slight decrease of 0.6% over 289,800 corporate customers at December 31, 2016.

The following table presents the number of corporate customers that our banks served at the dates indicated.

	Grupo Aval
	Banco de Bogotá		Banco de Occidente		Banco Popular		Banco AV Villas		Grupo Aval aggregate(1)
	(in thousands)
Total corporate customers, as of:
December 31, 2017(2)		186.0		68.5		5.6		27.9		288.0
December 31, 2016(2)		177.8		77.3		6.5		28.2		289.8

(1) Reflects aggregated amounts of our banking subsidiaries, these figures may reflect overlap of customers.

(2) Additionally, BAC Credomatic had approximately 109,900 and 105,000 corporate customers as of December 31, 2017 and 2016, respectively.

Individual customers

Our banks provide services and products to individuals throughout Colombia. Our banks classify their individual banking customers into separate categories based principally on income.

At December 31, 2017, our banks had a total of approximately 10,984,900 individual customers, an increase of 5.8% over approximately 10,381,200 individual customers at December 31, 2016. Customers of more than one of our banking subsidiaries are counted separately for each banking subsidiary.

The following table presents the number of individual customers that our banks served at the dates indicated.

	Grupo Aval
	Banco de Bogotá		Banco de Occidente		Banco Popular		Banco AV Villas		Grupo Aval aggregate(1)
	(in thousands)
Total individual customers, as of:
December 31, 2017(2)		5,757.2		786.9		3,158.9		1,281.9		10,984.9
December 31, 2016(2)		5,444.6		635.9		2,988.8		1,312.0		10,381.2

(1) Reflects aggregated amounts of our banking subsidiaries, these figures may reflect overlap of customers.

(2) Additionally, BAC Credomatic had approximately 3,317,600 and 3,107,400 individual customers as of December 31, 2017 and 2016, respectively.

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Lending activities

In accordance with Superintendency of Finance guidelines, we classify our banks’ loans into the following categories: commercial, consumer, microcredit and mortgages.

The following table presents our gross loan portfolio at December 31, 2017 in accordance with IFRS.

	At December 31, 2017
	Grupo Aval entities
	Banco de Bogotá(2)			Banco de Occidente			Banco Popular			Banco AV Villas			Corficolombiana			Grupo Aval consolidated(3)
	(in Ps billions)
Commercial		66,358.7			20,574.5			7,561.8			3,132.1			2,569.0			99,428.9
Commercial loans		61,292.3			19,090.0			7,551.9			2,810.7			2,172.3			92,149.8
Interbank and overnight funds interbank		5,066.4			1,484.6			10.0			321.4			396.7			7,279.0
Consumer		28,318.6			6,873.7			9,471.2			5,399.9			319.5			50,382.9
Mortgages		12,392.7			1,168.4			659.8			1,919.8			10.7			16,151.3
Microcredit(1)		400.8			-			7.3			1.5			-			409.7
Total		107,470.8			28,616.6			17,700.1			10,453.3			2,899.2			166,372.8
Allowance for loan portfolio		(3,227.0	)		(1,135.7	)		(665.9	)		(475.7	)		(114.1	)		(5,618.5	)
Total, net		104,243.8			27,480.9			17,034.2			9,977.6			2,785.1			160,754.3

(1) Microcredit loans are issued for the purpose of encouraging the activities of small businesses and are subject to the following requirements: the maximum amount to be lent is equal to 25 times the minimum wage (salario mínimo mensual legal vigente) without the balance of one single borrower exceeding such amount at any time, and the main source of payment for the corresponding obligation shall be the revenues obtained from the activities of the borrower’s micro business. The borrower’s outstanding indebtedness may not exceed 120 times the minimum wage.

(2)	Reflects Banco de Bogotá consolidated figures which include Central American operations that accounted for Ps 48,884.7 billion (Ps 21,985.5 billion in commercial loans, Ps 17,471.3 billion in consumer loans and Ps 9,427.9 billion in mortgage loans) as of December 31, 2017.
(3)	Includes eliminations for intercompany or intra-group operations between Grupo Aval subsidiaries.

As of December 31, 2017, the aggregate outstanding loans to our banks’ ten largest borrowers, our 11th to 50th largest borrowers and our 51st to 160th largest borrowers, represented 4.2%, 6.8% and 7.4%, respectively, of our consolidated total loan portfolio.

Commercial loans

Our commercial loan portfolio consists of general purpose loans (loans with a maturity of over one year), working capital loans (loans with a maturity of up to one year), loans funded by development banks, corporate credit cards and overdraft loans. Loans funded by development banks are loans granted to customers and focused on specific economic sectors and are funded by national or international government or government-related institutions.

The following table presents our commercial loan portfolio at December 31, 2017 in accordance with IFRS.

	At December 31, 2017
	Grupo Aval entities
	Banco de Bogotá(1)		Banco de Occidente		Banco Popular		Banco AV Villas		Corficolombiana		Grupo Aval consolidated(2)
	(in Ps billions)
General purpose loans		43,475.6		11,769.7		6,285.3		2,792.8		414.0		63,997.6
Loans funded by development banks		1,612.9		955.9		148.4		4.2		-		2,713.8
Working capital loans		12,248.0		1,615.6		868.4		4.9		-		14,723.5
Credit cards		288.2		93.3		2.6		1.3		-		382.6
Overdrafts		338.3		88.8		5.5		7.5		-		440.0
Leases		3,329.2		4,566.7		241.7		-		1,758.3		9,892.4
Interbank and overnight funds		5,066.4		1,484.6		10.0		321.4		396.7		7,279.0
Total		66,358.7		20,574.5		7,561.8		3,132.1		2,569.0		99,428.9

(1) Reflects Banco de Bogotá consolidated figures which include Central American operations for Ps 21,895.5 billion of commercial loans.

(2) Includes eliminations for intercompany or intra-group operations between Grupo Aval subsidiaries.

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Consumer loans

Our consumer loan portfolio consists of personal loans, automobile and other vehicle loans, credit cards, overdrafts, loans funded by development banks and general purpose loans. Our personal loans consist primarily of payroll loans. A payroll loan is a type of loan where payments are deducted directly from an employer’s salary.

The following table presents our consumer loan portfolio at December 31, 2017 in accordance with IFRS.

			At December 31, 2017
	Grupo Aval entities
	Banco de Bogotá(1)		Banco de Occidente		Banco Popular		Banco AV Villas		Corficolombiana		Grupo Aval consolidated(2)
	(in Ps billions)
Personal loans		13,222.7		3,479.4		9,171.0		4,361.0		319.3		30,553.6
Automobile and other vehicle loans		3,809.0		1,903.7		4.0		180.0		-		5,896.6
Credit cards		10,989.7		1,328.7		288.6		857.1		-		13,464.2
Overdrafts		77.7		5.7		0.7		1.7		-		85.9
Loans funded by development banks		-		-		0.0		-		-		0.0
General purpose loans		3.8		146.0		6.0		-		-		155.8
Working capital loans		-		-		-		-		-		-
Leases		215.7		10.0		0.9		-		0.2		226.8
Total		28,318.6		6,873.7		9,471.2		5,399.9		319.5		50,382.9

(1) Reflects Banco de Bogotá consolidated figures which include Central American operations for Ps 17,471.3 billion of consumer loans.

(2) Includes eliminations for intercompany or intra-group operations between Grupo Aval subsidiaries.

Credit cards

We provide credit card services to our bank customers in Colombia through the Visa and MasterCard networks. The following table presents the number of activated issued credit cards of our banks in Colombia at the dates indicated.

	Activated Issued Credit Cards
Bank	December 31, 2017		December 31, 2016
Banco de Bogotá		1,076,242		1,069,927
Banco de Occidente		604,947		609,407
Banco Popular		201,668		255,149
Banco AV Villas		439,848		416,594
Corficolombiana		-		-
Total Colombian activated issued credit cards(1)		2,322,705		2,351,077

(1) Additionally, BAC Credomatic had approximately 2,158,555 and 1,968,530 credit card accounts in Central America at December 31, 2017 and at December 31, 2016, respectively. See “—Central American operations—Lending activities—Credit cards.”

Mortgages

In Colombia, Banco de Bogotá and Banco AV Villas are our main originators of loans to customers for the purchase of real estate secured by mortgages, while Banco de Occidente and Banco Popular are increasing their presence in this business. We have implemented strict underwriting standards: we do not offer mortgage loans in amounts greater than 70% of the value of the property to be purchased, and all of our mortgage loans (excluding housing leases) have maturities of up to fifteen years. The average maturity of the mortgage loan portfolio at December 31, 2017 was 158 months. Borrowers must also meet certain minimum income levels, and payments may not exceed 30% of the borrower’s monthly income. The average maturity, for our Central American operations mortgage portfolio at December 31, 2017 was 189 months.

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Deposit-taking activities

Deposits

Our banks offer traditional deposit services and products, including checking accounts, savings accounts, time deposits and other deposits. Checking accounts typically bear low or no interest. Checking accounts and savings accounts are payable on demand, although a significant portion of these accounts tend to be stable in amount over time. Time deposits typically have a maturity up to 12 months and commonly earn interest at a fixed rate.

The following table presents our deposits by product type at the dates indicated.

	At December 31, 2017
	Grupo Aval entities
	Banco de Bogotá(1)		Banco de Occidente		Banco Popular		Banco AV Villas		Corficolombiana		Grupo Aval consolidated(2)
	(in Ps billions)
Checking accounts		27,955.1		6,036.0		1,178.5		927.8		-		36,017.6
Savings accounts		31,206.6		11,449.5		8,652.6		5,195.3		402.5		55,778.7
Time deposits (CDs)		41,435.4		8,624.0		6,109.3		3,960.8		3,659.0		62,616.2
Other deposits		350.2		59.7		28.1		2.2		34.3		472.8
Total		100,947.2		26,169.1		15,968.5		10,086.1		4,095.7		154,885.2

(1) Includes Central American operations for Ps 44,398.4 billion as of December 31, 2017 (made up of by Ps 15,641.0 billion in Checking accounts, Ps 8,524.7 billion in Savings accounts, Ps 19,979.3 billion in Time Deposits, and Ps 253.4 billion in Other deposits).

(2) Includes eliminations for intercompany or intra-group operations between Grupo Aval subsidiaries.

Treasury operations

Our banks’ treasury departments are responsible for managing their proprietary trading activities, liquidity and distribution of treasury services and products to customers and are focused on fixed-income securities, foreign exchange transactions and derivatives. Our banks’ proprietary trading activities include fixed income trading, derivatives and foreign exchange operations. We do not have any proprietary trading activities in equities and each of our banks have implemented trading activities policies. Our banks also take deposits from financial institutions as part of their treasury operations. These deposits are represented by certificates of interbank deposit, or “CDIs,” and earn interest at the interbank deposit rate. Banco de Bogotá and Banco de Occidente have active treasury operations, while Banco Popular and Banco AV Villas have smaller treasury operations.

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Distribution

Our banks provide services and products to their customers through our network. Each of our banks manages its own distribution network. In 1998, we created the Red de Grupo Aval (Grupo Aval network) which allows customers of any of our banks to make transfers, payments and undertake other basic banking functions in the networks of our other banks, through traditional channels and electronic networks, with results posting in real time to the accountholder’s bank with no additional fees. Red de Grupo Aval (Grupo Aval network) services vary for each channel.

The following chart shows the distribution channels of our network in Colombia.

Distribution Channel	Description
Full-service branches	We had 1,421 full-service branches at December 31, 2017. Red de Grupo Aval (Grupo Aval network) service points across our banks allow our bank customers to perform check cashing, deposits, savings account withdrawals, loan and credit card payments, transfers and advances at any of our branches.
ATMs and electronic service points	We had 3,781 ATMs at December 31, 2017. Through our ATMs, all of our bank customers can, among other services, consult their balances, execute loan and credit card payments, transfers and advances, and pay for certain third-party services where we have a payment collection agreement in place (such as utility service companies).
Payment collection centers (Centros de pagos)	We had 106 payment collection centers at December 31, 2017, which allow our customers to pay for certain third-party services where we have a payment collection agreement in place (such as utility service companies).
Banking correspondents (Corresponsales bancarios)	We had 36,882 banking correspondents at December 31, 2017. Our banks enter into agreements with various third parties, including convenience store owners, to provide all of our bank customers with certain services which can include checking and savings account withdrawals, account balance consultation, loan and credit card payments, transfers and advances, and payments for certain third-party services where we have a payment collection agreement in place (such as utility service companies).
Automated telephone banking, mobile banking and online banking	Through our banks’ websites, mobile banking services and automated telephone banking, customers may pay loan and credit card balances, make transfers between accounts and make payments for collection agreements originated in any of our banks.

The following map presents our banks’ points of service across the main regions of Colombia, at December 31, 2017 and 2016.

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Source: Grupo Aval

Note: Other points of service include Banking correspondents (corresponsales bancarios) or “CBs,” electronic service points (agilizadores electrónicos) and payment collection centers (centros de pago).

The following table presents transaction volumes through our branches and ATMs at the dates indicated.

	Transactions at December 31,				% Total Transactions at December 31,
Grupo Aval	2017		2016		2017		2016
	(in thousands)
Branches		221,075		238,268		24.1		26.7
ATMs		162,233		168,014		17.7		18.9
Other		56,410		57,608		6.2		6.5
Total service points		439,719		463,889		48.0		52.0

In addition, the following table presents transaction volumes for online banking, mobile banking and automated telephone banking channels which, pursuant to our growth strategy, are expected to grow on an annual basis relative to total transactions, at December 31, 2017 and 2016.

	Transactions at December 31,				% of Total Transactions at December 31,
Grupo Aval	2017		2016		2017		2016
	(in thousands)
Online banking		343,183		420,221		37.5		47.1
Mobile banking		124,777		2,196		13.6		0.2
Automated telephone banking		8,020		4,950		0.9		0.6
Total		475,981		427,368		52.0		48.0

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Banco de Bogotá Segment

Banco de Bogotá is Colombia’s oldest financial institution. As of December 31, 2017, we had a market share of 14.2% of deposits and 12.7% of loans.

At and for the year ended December 31, 2017, Banco de Bogotá had total assets of Ps 149,389.1 billion and net income attributable to controlling interest of Ps 1,908.0 billion. Banco de Bogotá’s ROAE was 11.5% for the year ended December 31, 2017.

Banco de Bogotá is a full-service bank with nationwide coverage and a comprehensive portfolio of services and products, distributed through a network of 686 branches and 1,740 ATMs in Colombia at December 31, 2017. While Banco de Bogotá serves all market segments, it has a leading presence in commercial loans historically, with a particular focus on large corporations and a market share of 16.7% of commercial loans at December 31, 2017. Following its 2006 acquisition of Megabanco, Banco de Bogotá expanded its consumer banking business and had a market share of 9.1% of consumer loans in Colombia December 31, 2017. In 2012, Banco de Bogotá entered the mortgage business and has a market share of 5.3% at December 31, 2017. Banco de Bogotá’s ROAE for the year ended December 31, 2017 on an unconsolidated basis made it one of the most profitable banks in Colombia.

In December 2010, Banco de Bogotá acquired BAC Credomatic. In December 2011, Banco de Bogotá completed its first international bond offering, raising U.S.$600 million (Ps 1,161.4 billion at the date of issuance). In February 2013, Banco de Bogotá completed its second international bond offering raising U.S.$500 million (Ps 892.7 billion at the date of the issuance) in subordinated notes.

On December 19, 2013, through LB Panamá, Banco de Bogotá acquired BBVA Panamá. On December 9, 2014, Banco BAC de Panamá´s operations were merged with BAC International Bank, Inc.

On December 23, 2013, through Credomatic International Corporation (a subsidiary of BAC), Banco de Bogotá acquired 100% of Grupo Financiero Reformador de Guatemala (whose subsidiaries are Banco Reformador and Transcom Bank (Barbados) Limited). On December 12, 2015, Grupo Financiero Reformador de Guatemala´s operations merged with Banco de América Central S.A. (Guatemala).

In May 2016, Banco de Bogotá completed its third international bond offering raising U.S.$600 million (Ps 1,771.6 billion at the date of the issuance) in subordinated notes, followed by a reopening in November 2016 raising an additional U.S.$500 million (Ps 1,483.3 billion at the date of the issuance).

In August 2017, Banco de Bogotá completed its fifth international bond offering raising U.S.$600 million (Ps 1,778.8 billion at the date of the issuance) in senior notes.

Lending activities

The following table presents Banco de Bogotá’s loan portfolio at the dates indicated.

	At December 31,(1)						Change, December 31, 2017 vs. December 31, 2016
	2017			2016			#			%
	(in Ps billions)
Commercial		66,358.7			61,375.6			4,983.1			8.1
Commercial loans		61,292.3			58,843.6			2,448.6			4.2
Interbank and overnight funds		5,066.4			2,532.0			2,534.4			100.1
Consumer		28,318.6			26,364.8			1,953.8			7.4
Mortgages		12,392.7			11,411.1			981.5			8.6
Microcredit		400.8			389.7			11.1			2.9
Total		107,470.8			99,541.3			7,929.5			8.0
Allowance for loan portfolio		(3,227.0	)		(2,371.8	)		(855.2	)		36.1
Total, net		104,243.8			97,169.5			7,074.3			7.3

(1) Reflects Banco de Bogotá figures including Central American operations which, as of December 31, 2017, accounted for Ps 48,884.7 billion of the total loan portfolio (Ps 21,985.5 billion in commercial loans, Ps 17,471.3 billion in consumer loans and Ps 9,427.9 billion in mortgage loans). As of December 31, 2016, Central American operations accounted for Ps 44,865.2 billion of the total loan portfolio (Ps 19,544.1 billion in commercial loans, Ps 16,363.5 billion in consumer loans and Ps 8,957.6 billion in mortgage loans).

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Deposit-taking activities

Banco de Bogotá offers customers checking accounts, savings accounts, time deposits (CDs) and other deposits as described in the table below.

The following table presents a breakdown of Banco de Bogotá’s deposits by product type at the dates indicated.

	At December 31,(1)				Change, December 31, 2017 vs. December 31, 2016
	2017		2016		#		%
	(in Ps billions)
Checking accounts		27,955.1		27,025.8		929.3		3.4
Savings accounts		31,206.6		27,983.7		3,222.9		11.5
Time deposits		41,435.4		38,444.5		2,990.9		7.8
Other deposits(2)		350.2		222.7		127.4		57.2
Total customer deposits		100,947.2		93,676.7		7,270.6		7.8

(1) Reflects Banco de Bogotá figures including Central American operations which as of December 31, 2017, Central American operations accounted for Ps 44,398.4 billion (Ps 15,641.0 billion in checking accounts, Ps 8,524.7 billion in savings accounts, Ps 19,979.3 billion in time deposits and Ps 253.4 billion in other deposits). As of December 31, 2016, Central American operations accounted for Ps 39,893.4 billion (Ps 14,574.3 billion in checking accounts, Ps 7,781.5 billion in savings accounts, Ps 17,368.3 billion in time deposits and Ps 169.3 billion in other deposits).

(2) Includes active account portfolios, payroll accounts, funds held in trust, banks and correspondents, special deposits and temporary deposits held in connection with collection services agreements.

Distribution

The following table presents Banco de Bogotá’s points of service across Colombia.

	At December 31,
	2017		2016
Branches		686		709
ATMs		1,740		1,758
Other points of service		8,482		7,965
Total points of service		10,908		10,432

Banco de Bogotá had a network concentration of approximately 62.5% in Colombia’s central region, of which Bogotá represents approximately 37.3% of Banco de Bogotá’s total network at December 31, 2017. Banco de Bogotá had a market share of approximately 12.2% of branches and approximately 11.1% of ATMs at December 31, 2017.

Banco de Bogotá Segment includes both our pension fund management operation and our central American operation. Information on these operations is described below.

Pension Fund Management - Porvenir

Porvenir is the leading private pension and severance fund manager in Colombia, with a market share of 57.0% of mandatory pension fund individual customers and 56.1% of severance plan individual customers at December 31, 2017. See “—Competition—Pension and severance fund management—Porvenir.” Porvenir also provides voluntary pension funds and manages third-party sponsored pension funds. Pension funds provide individual savings for retirement, and severance funds provide temporary income to employees who lose their jobs. Through Gestión & Contacto, Porvenir manages social security-related information systems designed to provide employees with efficient payment solutions.

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At December 31, 2017, Porvenir had Ps 129.2 trillion in total assets under management, of which Ps 100.4 trillion was managed under the privately managed mandatory pension fund, Ps 5.1 trillion was managed under the severance fund, Ps 3.9 trillion was managed under the voluntary pension fund and Ps 19.9 trillion was managed as a third-party sponsored pension liability fund.

Porvenir’s strengths include the following:

· Porvenir is the most profitable privately managed pension fund in Colombia, with a ROAE of 25.2%, 25.4% and 21.7% at December 31, 2017, December 31, 2016 and December 31, 2015 based on public unconsolidated figures under Colombian IFRS, respectively;

· Porvenir has the largest and, we believe, one of the most effective sales force in the industry with a nationwide presence. At the same time, it is the most efficient privately managed pension fund in Colombia, with an efficiency ratio of 35.9% for the year ended December 31, 2017 based on public unconsolidated figures under Colombian IFRS; and

· Porvenir has access to Grupo Aval’s banking network. This advantage is particularly relevant in the severance market, as Grupo Aval’s banks provide financing to employers to comply with legally imposed annual severance allowance liabilities for their employees. In addition, the banks of Grupo Aval provide collection services for all of the funds administered by Porvenir.

Business overview

The Ministry of Finance limits the range of assets in which pension and severance fund managers can invest and also sets concentration limits. In addition, each AFP is required by law to provide a minimum return on investment for each of its mandatory pension and severance funds. This minimum return is determined pursuant to certain formulas established by means of Decree 2555 of 2010, which vary pursuant to the type of fund. Prior to the multi-fund scheme, the minimum return was calculated on a 36-month time horizon for mandatory pension funds and 24-month time horizon for severance funds. With the introduction of the multi-fund scheme, a new risk profile system came into effect which differentiates conservative, moderate and aggressive risk portfolios for individual clients of severance and mandatory pension funds. To adjust the minimum return of mandatory pension funds to the new risk profile portfolios, the time horizon for the minimum return will change from 36 months to a range of 36 to 60 months, depending on the risk profile of each portfolio. For severance funds, the long-term portfolio will continue to have a 24-month time horizon, and the short-term portfolio will have a three-month time horizon.

If a fund’s cumulative return for any month is lower than the minimum return, the pension and severance fund manager must supplement the necessary amount to cover the difference within a period of five days. To do so, the pension and severance fund manager must first apply funds from its “stabilization reserve,” which is a portion of the pension and severance fund manager’s capital invested in the fund administered by the pension and severance fund manager and which must represent at least 1.00% of the value of that fund. If the stabilization reserve is insufficient to cover the difference, the pension and severance fund manager must provide resources from its remaining capital. If the pension and severance fund manager does not have enough resources to cover the difference, the Superintendency of Finance may order the capitalization of the pension and severance fund manager. If, notwithstanding the above, a pension and severance fund manager fails to observe either the minimum return or the stabilization requirements or the order of capitalization, the Superintendency of Finance may take possession (tomar posesión) of the pension and severance fund manager, in which case FOGAFIN, the Colombian deposit insurance fund, is required to supply funds to cover the shortfall. In that event, the pension and severance fund manager may be dissolved and the funds transferred to another pension and severance fund manager. See “Item 3. Key Information—D. Risk Factors—Risks relating to our businesses and industry—Risks relating to our pension and severance fund management business.”

For the year ended December 31, 2017, 57.4% of Porvenir’s revenues were derived from mandatory pension funds, 13.9% from severance funds, 6.6% from voluntary pension funds and 1.1% from third-party sponsored pension liability funds. Porvenir derived the remaining 21.0% of its revenues from a combination of its own investment portfolio, stabilization reserves and other income.

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Mandatory pension funds

Mandatory pension funds are independent trusts formed by contributions made by individual customers to the social security pension system.

At December 31, 2017, mandatory pension funds represented 77.7% of Porvenir’s assets under management and constituted its main line of business.

Contributions to these pension funds are mandatory for all employees in Colombia and are jointly funded by the employer and the employee. The base contribution rate is 16.0% (up to 18.0% for employees meeting a certain salary threshold) of an employee’s base salary, whereby the employer contributes 75.0% and the employee 25.0% of the base contribution rate. Contributions are paid on a monthly basis. Of the 16.0%-18.0% total contribution, 11.5% goes to the individual customer’s fund. The pension and severance fund manager retains 300 basis points (3.0%) as compensation, of which Porvenir currently pays 190 basis points (1.90%) to an insurer for life and disability coverage, to which it is required by law to subscribe. The percentage that Porvenir pays for this insurance may increase or decrease depending on market conditions and other factors. The remainder is distributed between the National Solidarity Fund (Fondo de Solidaridad Pensional), depending on the employee’s salary (up to 2.0%), and the National Minimum Pension Warranty Fund (Fondo de Garantía de Pensión Mínima) (at 1.5%).

Employees may freely select their mandatory pension fund, a private pension and severance fund manager of their choice or the government-sponsored defined public benefit plan, administered by Colpensiones, and can change plans after meeting minimum tenure requirements of five years to switch from the public fund to a private plan, and six months to switch between private fund providers. Whenever an employee changes from one pension and severance fund manager to another, his/her entire savings balance at the fund is transferred to the pension fund administered by the new pension and severance fund manager.

Mandatory pension funds cannot be withdrawn prematurely, and they generally expand over the individual’s working years. Porvenir is the market leader in the mandatory pension’s area, with Ps 100.4 trillion of assets under management and 8.5 million individual customers at December 31, 2017.

Severance funds

Severance funds are independent trusts formed by the accumulated severance payment allowance required by Colombian labor law. The severance payment allowance is a social benefit inuring to employees for which employers are responsible under an employment agreement. The allowance consists of the payment of one month’s salary per year of service and pro rata amounts for fractions of a year. This amount is deposited directly with the pension and severance fund manager by the employer.

Severance accounts represented 3.9% of Porvenir’s assets under management at December 31, 2017.

Porvenir and all other pension and severance fund managers in Colombia charge a fee (per year for assets under management) of 1.0% for amounts in the mandatory investments short-term portfolio and 3.0% in the long-term portfolio.

Porvenir is the market leader in the severance area, with Ps 5.1 trillion of assets under management and 4.0 million customers at December 31, 2017.

Voluntary pension funds

Voluntary pension funds are independent trusts formed by contributions from their participants and/or sponsors and their respective yields, for the purposes of complying with one or several voluntary retirement or disability pension plans.

Voluntary pension funds represented 3.0% of Porvenir’s assets under management at December 31, 2017.

Porvenir earns annual management commissions for assets under management that range between 1.0% and 4.0%, depending on the balance of the customer and the selected portfolios (lower commissions for liquidity portfolios and higher commissions for more complex portfolios). At December 31, 2017, Porvenir had Ps 3.9 trillion of voluntary pension assets under management and approximately 167 thousand voluntary pension fund individual customers.

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Third-party sponsored pension liability funds

Third-party sponsored pension liability funds represent approximately 15.4% of Porvenir’s assets under management at December 31, 2017. Third-party sponsored pension liability funds are made up of deposits from different institutions (both private and publicly owned) that require a professional institution to manage a fund that is usually created to finance special pension regimes (i.e., pensions that are paid by the employer; before 1994, companies were allowed to establish their own internal pension systems).

Third-party sponsored pension liability funds in some cases have a minimum guaranteed return pursuant to their terms. Porvenir had Ps 19.9 trillion of such assets under management at December 31, 2017, mostly under contracts of five years. The most important of these contracts is with FONPET which is subject to renewal upon expiration in during 2018. Porvenir retains a percentage of the yearly returns of each third-party sponsored pension liability fund, and in some cases, a portion of assets under management.

Porvenir’s investments

Porvenir is required to own at least 1.00% of the funds it manages that are subject to a minimum return, known as the stabilization reserve. This stabilization reserve represents 52.2% of Porvenir’s proprietary investments. In addition, Porvenir holds voluntary investments. Revenues related to Porvenir’s stabilization reserve and its proprietary portfolio represented 17.8% and 14.3% of its total revenues at December 31, 2017 and December 31, 2016, respectively.

Distribution

Porvenir attracts new individual customers mainly through its large direct sales force (approximately 1,224 individuals) that reports to six regional sales managers located in Bogotá, Antioquia, Cali, the Central region, the Coast region and the North region. At December 31, 2017, Porvenir had 54 offices, 14 service modules, 73 electronic service centers and 5 business service centers. It maintains a presence in all regions of Colombia through its service agreements with Grupo Aval’s banks.

Central American operations

We operate in Central America through BAC Credomatic, a wholly-owned subsidiary of LB Panamá.

BAC Credomatic is the leading financial group in Central America with a record of strong financial performance. BAC Credomatic is a full-service financial institution with one of the leading credit card-issuance and merchant-acquiring businesses in the region. BAC Credomatic offers commercial and retail banking, brokerage, insurance, pension fund management and other financial services. Its coverage extends throughout Central America with operations in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panamá. Its Credomatic brand has key alliances with major credit card networks, such as Visa, MasterCard, American Express and Diners Club. This section has been prepared in accordance with IFRS.

The table below shows financial data at LB Panamá’s and BAC Credomatic’s level at and for the year ended December 31, 2017.

	At and for the year ended December 31, 2017
	Net income					Loans					Deposits
	(in U.S.$ millions)			(in Ps billions)		(in U.S.$ millions)			(in Ps billions)		(in U.S.$ millions)			(in Ps billions)
LB Panamá		366.1			1,081.4		16,382.3			48,884.7		14,878.8			44,398.4
BAC Credomatic		337.9			1,008.4		15,481.7			46,197.4		14,941.6			44,585.8
BAC Credomatic / LB Panamá		92.3	%				94.5	%				100.4	%

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The following information for our Central American operation is presented at the BAC Credomatic level to provide more detailed information on a country-by-country basis. Information in pesos in this section has been translated for convenience using the representative market rate as computed and certified by the Superintendency of Finance at December 31, 2017 of Ps 2,984.00.

The table below shows BAC Credomatic financial data on a country-by-country basis at and for the year ended December 31, 2017.

	At and for the year ended December 31, 2017
	Net income								Loans								Deposits
	(in U.S.$ millions)			(in Ps billions)					(in U.S.$ millions)			(in Ps billions)					(in U.S.$ millions)			(in Ps billions)
Costa Rica		162.7			485.5		48.1	%		4,337.3			12,942.6		28.0	%		3,974.8			11,860.7		26.6	%
Guatemala		58.5			174.6		17.3	%		2,755.9			8,223.5		17.8	%		2,427.7			7,244.3		16.2	%
Honduras		68.0			202.8		20.1	%		1,672.6			4,991.1		10.8	%		1,749.9			5,221.8		11.7	%
Nicaragua		60.9			181.9		18.0	%		1,312.8			3,917.3		8.5	%		1,364.1			4,070.3		9.1	%
El Salvador		34.6			103.2		10.2	%		1,597.7			4,767.6		10.3	%		1,589.5			4,743.1		10.6	%
Panamá(1)		42.5			126.9		12.6	%		3,814.8			11,383.5		24.6	%		4,212.8			12,571.1		28.2	%
Mexico(2)		(5.2	)		(15.4	)	-1.5	%		-			-		0.0	%		-			-		0.0	%
Corporate and eliminations		(48.6	)		(144.9	)	-14.4	%		(9.4	)		(28.2	)	-0.1	%		(377.2	)		(1,125.6	)	-2.5	%
Non-controlling interest(3)		(35.6	)		(106.2	)	-10.5	%		-			-		0.0	%		-			-		0.0	%
Consolidated		337.9			1,008.4		100.0	%		15,481.7			46,197.4		100.0	%		14,941.6			44,585.8		100.0	%

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

(1) Panamá loans include operations from BAC Bahamas Bank Ltd., BAC International Bank (Grand Cayman), others BAC Credomatic’s Panamá subsidiaries and certain intercompany adjustments.

(2) On December 16, 2016, Credomatic de Mexico S.A. de C.V., a subsidiary of BAC International Bank, Inc., entered into an agreement with Banco Invex S.A. Institución de Banca Múltiple, Invex Grupo Financiero for the transfer of its Mexican credit card portfolio and the eventual sale of Credomatic de Mexico S.A. de C.V., as part of BAC International Bank, Inc.’s strategy to focus its presence in the banking and credit card businesses in the six Central American countries. The transfer of the Mexican credit card portfolio transaction closed on June 23, 2017 and the sale of Credomatic de Mexico S.A. de C.V. is expected to happen during the first semester of 2018.

(3) BAC International Bank, Inc. is the controlling shareholder of the BAC Credomatic operation in Costa Rica, Guatemala, Honduras, Nicaragua, El Salvador and Panamá. However, non-controlling interest corresponds to the fact that Leasing Bogotá Panama, the parent company of the BAC Credomatic entities, has a direct ownership of 9.467% in BAC International Bank, Inc.

The table below presents BAC Credomatic’s market share of total loans and deposits in each of its main markets at December 31, 2017.

	At December 31, 2017
	Net Loans			Deposits
Costa Rica(1)		14.1	%		13.5	%
El Salvador		13.6	%		13.7	%
Guatemala		10.6	%		7.4	%
Honduras		14.4	%		14.1	%
Nicaragua		25.7	%		24.3	%
Panamá		5.7	%		6.3	%

Source: Superintendency of banks of each country and company calculations. Percentage of total loans and deposits is based on banking operations in each country, as reported to the local financial regulator, which excludes certain credit card data and offshore operations.

(1) Percentage calculation for Costa Rica includes state-owned banks (Banco Nacional de Costa Rica, Banco de Costa Rica, Banco Popular, Banco Hipotecario de la Vivienda and Banco Crédito Agrícola de Cartago), which at December 31, 2017 and December 31, 2016 had a 58.8% and 59.7% market share by loans, respectively, and a 61.0% and 61.3% market share by deposits, respectively.

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Lending activities

The following tables show BAC Credomatic’s gross loan portfolio at the dates indicated. BAC Credomatic’s loan portfolio consists of credit card loans, commercial loans, mortgage loans, automobile and vehicle loans and personal loans.

	At December 31,
	2017		2016		2017		2016
	(in US millions)						(in Ps billion)
Commercial loans		6,489.4		5,900.8		19,364.3		17,607.9
Mortgage loans(1)		3,153.2		2,982.8		9,409.1		8,900.5
Credit card loans		2,779.2		2,552.5		8,293.2		7,616.7
Automobile and vehicle loans		987.4		902.6		2,946.3		2,693.5
Other personal loans		2,072.5		1,985.0		6,184.4		5,923.3
Total		15,481.7		14,323.7		46,197.4		42,741.9

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

(1) Includes loans measured at fair value.

We believe that BAC Credomatic’s customer knowledge, coupled with a centralized risk-management structure, has benefited the quality of the loan portfolio, with an average 90 days and more past due loan ratio of 1.2% from 2013 to 2017.

Credit cards

BAC Credomatic has a leading presence in the credit card-issuing business and a significant presence in the merchant acquiring business in the region. Through its Credomatic brand, BAC Credomatic offers its customers a wide variety of credit and debit cards including Visa, MasterCard, American Express and Diners Club, and is the only network that processes all major brands in the region. Additionally, BAC Credomatic and its customers benefit from co-branding agreements with major airlines (such as American Airlines and Avianca) and major supermarkets (such as Pricesmart and Wal-Mart) present in the region. BAC Credomatic has been a member of Visa and MasterCard for more than 20 years, issuing both national and international credit cards. Moreover, BAC Credomatic is currently the exclusive credit card issuer and merchant acquirer of American Express in the Central American region, including Panamá.

At December 31, 2017, BAC Credomatic had approximately 4.5 million credit card and debit card accounts, of which 2.4 million were debit card accounts and 2.2 million were credit card accounts, an increase of 11.2% and 9.7% compared to December 31, 2016, respectively. For the year ended December 31, 2017, BAC Credomatic’s billed volume by its credit cardholders was U.S.$ 11,506.7 million (Ps 34,335.9 billion), a 10.0% increase over the U.S.$10,459.6 million (Ps 31,211.4 billion) billed volume by its credit cardholders for the year ended December 31, 2016.

At December 31, 2017, BAC Credomatic’s credit card portfolio totaled U.S.$ 2.8 billion (Ps 8.3 trillion) which represents an 8.9% increase from U.S.$2.6 billion (Ps 7.6 trillion) at December 31, 2016. As of the same date, 82.8% of BAC Credomatic’s credit card portfolio was distributed across Costa Rica, Honduras, Guatemala and Panamá. The remaining 17.2% was distributed among El Salvador and Nicaragua. The following table shows the credit card portfolio breakdown by country at the dates presented.

	At December 31,
	2017						2016
	(in U.S.$ millions)		(in Ps billions)				(in U.S.$ millions)		(in Ps billions)
Costa Rica		955.8		2,852.0	34.4	%		775.5		2,314.0	30.4	%
Guatemala		430.2		1,283.7	15.5	%		407.5		1,215.9	16.0	%
Honduras		393.1		1,173.1	14.1	%		363.6		1,085.1	14.2	%
Nicaragua		139.5		416.3	5.0	%		128.8		384.4	5.0	%
El Salvador		339.8		1,014.0	12.2	%		320.0		954.9	12.5	%
Panamá(1)		520.8		1,554.2	18.7	%		505.2		1,507.5	19.8	%
Mexico(2)		-		-	0.0	%		51.9		155.0	2.0	%
Total		2,779.2		8,293.2	100.0	%		2,552.5		7,616.7	100.0	%

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

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(1) Panamá loans include operations from BAC Bahamas Bank Ltd., BAC International Bank (Grand Cayman), others BAC Credomatic’s Panamá subsidiaries and certain intercompany adjustments.

(2) On December 16, 2016, Credomatic de Mexico S.A. de C.V., a subsidiary of BAC International Bank, Inc., entered into an agreement with Banco Invex S.A. Institución de Banca Múltiple, Invex Grupo Financiero for the transfer of its Mexican credit card portfolio and the eventual sale of Credomatic de Mexico S.A. de C.V., as part of BAC International Bank, Inc.’s strategy to focus its presence in the banking and credit card businesses in the six Central American countries. The transfer of the Mexican credit card portfolio transaction closed on June 23, 2017 and the sale of Credomatic de Mexico S.A. de C.V. is expected to happen during the first semester of 2018.

Merchant acquiring

BAC Credomatic’s processing volume of credit and debit card transactions for the year ended December 31, 2017 of U.S.$ 19,232.9 million (Ps 57,390.9 billion) represented an increase of U.S.$ 1,776.1 million (Ps 5,299.8 billion), or 10.2%, from U.S.$ 17,456.8 million (Ps 52,091.1 billion) for the previous year. This increase is primarily due to a recovery in the economic activity compared to 2016 and an increase in credit accounts. BAC Credomatic has the only network in Central America that processes all the major brands including Visa, MasterCard, American Express and Diners Club. Furthermore, BAC Credomatic has exclusive card-issuing and merchant acquiring agreements with American Express for the Central American region.

At December 31, 2017, BAC Credomatic serviced approximately 411,812 merchant locations, with 95.7% of credit card authorizations processed electronically through its 349,321 point-of-sale devices.

Banking

BAC Credomatic’s commercial and consumer banking divisions offer traditional banking services and products. In some jurisdictions, BAC Credomatic also offers pension plan administration, investment fund advice, financial advisory, leasing, private banking and insurance services to its customers. Through its network and deep customer knowledge, BAC Credomatic is able to effectively offer services and solutions to its customers in addition to instant payment processing and funds transfers within the BAC Credomatic regional network.

Commercial banking

BAC Credomatic offers traditional commercial banking services and products. At December 31, 2017, 80.4% of BAC Credomatic’s commercial loan portfolio was distributed across Costa Rica, Honduras, Guatemala and Panamá. The remaining 19.6% was distributed among El Salvador, Nicaragua, and regional offshore operations. The following table displays BAC Credomatic’s commercial loan portfolio by country at the dates presented.

	At December 31,
	2017								2016
	(in U.S.$ millions)			(in Ps billions)					(in U.S.$ millions)			(in Ps billions)
Costa Rica		1,360.4			4,059.4		21.0	%		1,212.5			3,618.1		20.5	%
Guatemala		1,549.6			4,623.9		23.9	%		1,442.7			4,305.1		24.4	%
Honduras		848.4			2,531.6		13.1	%		740.7			2,210.3		12.6	%
Nicaragua		739.7			2,207.3		11.4	%		688.9			2,055.8		11.7	%
El Salvador		537.9			1,605.0		8.3	%		462.3			1,379.5		7.8	%
Panamá(1)		1,459.7			4,355.8		22.5	%		1,360.7			4,060.3		23.1	%
Corporate and eliminations		(6.3	)		(18.7	)	-0.1	%		(7.1	)		(21.2	)	-0.1	%
Total		6,489.4			19,364.3		100.0	%		5,900.8			17,607.9		100.0	%

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

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(1) Panamá loans include operations from BAC Bahamas Bank Ltd., BAC International Bank (Grand Cayman), others BAC Credomatic’s Panamá subsidiaries and certain intercompany adjustments.

BAC Credomatic also offers investment products, supplier and payroll ePayments, Ameritransfer (online transfer of funds among deposit accounts in BAC Credomatic’s network), online banking and foreign exchange services as part of its commercial banking platform in the region. At December 31, 2017, BAC Credomatic had more than 109,800 corporate customers, divided into three main sectors: (1) corporate, consisting of companies with over U.S.$250,000 (Ps 746.0 million) in deposits, more than 100 employees and loans over U.S.$1,000,000 (Ps 2,984.0 million), which represented 85.8% of total commercial loans; (2) midsize companies, composed of companies with deposits of U.S.$50,000 (Ps 149.2 million) to U.S.$250,000 (Ps 746.0 million), between 51 to 100 employees and loans between U.S.$300,000 (Ps 895.2 million) to U.S.$1,000,000 (Ps 2,984.0 million), which represented 8.4% of total commercial loans; and (3) small companies, consisting of companies with deposits of less than U.S.$50,000 (Ps 149.2 million), fewer than 50 employees and loans under U.S.$300,000 (Ps 895.2 million), which represented 5.8% of total commercial loans.

BAC Credomatic’s electronic transfer and payment capabilities allow corporate clients to instantly transfer funds between different commercial and consumer accounts, provided that all parties have a BAC Credomatic account. BAC Credomatic recorded over U.S.$91.3 billion (Ps 272.4 trillion) in electronic payments in 2017.

Electronic transfers are originated mainly from: (1) merchant deposit transfer payments (instant electronic payments to merchants); (2) Ameritransfer (online transfer of funds across the region); (3) supplier ePayments (instant electronic payments from merchants to suppliers); and (4) payroll ePayments (payroll payments from companies to employees). The following table breaks down BAC Credomatic’s electronic transfers by product for the dates presented.

	At December 31,
	2017		2016		2017		2016
	(in U.S.$ billions)				(in Ps trillions)
Merchant deposit transfers		19.2		17.5		57.4		52.1
Ameritransfer		7.2		6.7		21.6		20.1
Payroll ePayments		7.2		6.9		21.6		20.5
Supplier ePayments		24.3		20.4		72.5		60.8
Wire transfers		33.3		31.6		99.4		94.4
Total		91.3		83.1		272.4		247.9

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

Consumer banking

At December 31, 2017, as a proportion of BAC Credomatic’s total consumer loan portfolio (which does not include credit cards), mortgage loans represented 50.8%, automobile and vehicle loans represented 15.9% and other personal loans represented 33.4%. Approximately 78.2% of the total consumer loan portfolio had a maturity greater than five years. At December 31, 2017, consumer loans amounted to U.S.$ 6.2 billion (Ps 18.5 trillion), a 5.8% increase over U.S.$5.9 billion (Ps 17.5 trillion) at December 31, 2016. At December 31, 2017, 86.2% of BAC Credomatic’s consumer loan portfolio was distributed across Costa Rica, Honduras, Guatemala and Panamá. The remaining 13.8% was distributed among El Salvador, Nicaragua and regional offshore operations.

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The following table displays BAC Credomatic’s consumer loan portfolio by country at the dates presented.

	At December 31,
	2017								2016
	(in U.S.$ millions)			(in Ps billions)					(in U.S.$ millions)			(in Ps billions)
Costa Rica		2,021.2			6,031.3		32.5	%		1,965.0			5,863.5		33.5	%
Guatemala		776.1			2,315.8		12.5	%		688.2			2,053.6		11.7	%
Honduras		431.1			1,286.4		6.9	%		402.1			1,199.9		6.8	%
Nicaragua		433.5			1,293.7		7.0	%		413.2			1,233.1		7.0	%
El Salvador		720.1			2,148.7		11.6	%		661.1			1,972.7		11.3	%
Panamá(1)		1,834.9			5,475.2		29.5	%		1,740.9			5,194.9		29.7	%
Corporate and eliminations		(3.7	)		(11.2	)	-0.1	%		(0.1	)		(0.4	)	0.0	%
Total (2)		6,213.1			18,539.9		100.0	%		5,870.4			17,517.3		100.0	%

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

(1) Panamá loans include operations from BAC Bahamas Bank Ltd., BAC International Bank (Grand Cayman), others BAC Credomatic’s Panamá subsidiaries and certain intercompany adjustments.

(2) At December 31, 2017 and 2016, consumer loans include consumer leasing and consumer overdraft.

At December 31, 2017, BAC Credomatic’s mortgage loans had an individual average mortgage loan balance of U.S.$ 70,060 (Ps 209.1 million) with an average loan-to-value ratio of 57.2%. Given that BAC Credomatic’s mortgage loan portfolio has no significant exposure to the higher risk sectors such as vacation homes or second-home mortgages, it maintains a 90 days and more past due loan ratio of 1.5% and a loan loss reserve coverage of 26.1% on 90 days and more past due loans.

Deposit activities

At December 31, 2017, 36.6% of BAC Credomatic’s deposit base was represented by checking deposits. Total deposits increased by 13.3% from December 31, 2016 to December 31, 2017. The following table shows BAC Credomatic’s deposit breakdown at the dates indicated.

	At December 31,
	2017		2016		2017		2016
	(in U.S.$ millions)				(in Ps billions)
Checking deposits		5,461.8		4,858.9		16,298.1		14,498.9
Savings deposits		2,856.5		2,593.0		8,523.8		7,737.5
Time deposits		6,623.3		5,731.2		19,763.9		17,101.8
Total		14,941.6		13,183.1		44,585.8		39,338.2

Source: Consolidated financial statements of BAC Credomatic’s subsidiaries in accordance with IFRS.

Distribution network

BAC Credomatic serves its customers throughout Central America with a diversified distribution network that includes branches, kiosks (non-cash machines which provide online banking capabilities as well as a full keyboard), ATMs, a standardized online banking platform, call centers, and mobile phone banking. Additionally, BAC Credomatic’s strong point-of-sale presence in 411,812 merchant locations in Central America at December 31, 2017 allows clients to perform various transactions, including purchases, using credit or debit cards, payments of credit card balances and loyalty program services.

BAC Credomatic serves its clients through multiple channels to cover the needs of different customer segments across the region.

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The following map shows BAC Credomatic’s branch distribution at December 31, 2017 and 2016.

Source: BAC Credomatic at December 31, 2017

At December 31, 2017 and 2016. Other points of service include 348 self-service kiosks and 7,667 RapiBac (banking correspondents) in 2017 and 325 self-service kiosks and 5,255 RapiBac (banking correspondents) in 2016.

Banco de Occidente Segment

Banco de Occidente is the fifth largest bank in Colombia, with a market share of 6.2% of loans at December 31, 2017.

Banco de Occidente focuses on corporate customers, state-owned entities and retail customers and has a diversified revenue stream. For the year ended December 31, 2017, its loan portfolio was distributed as follows: approximately 32.4% in consumer and auto lending; approximately 55.7% in corporate and public sector lending; and approximately 11.9% in SMEs. Banco de Occidente had market shares of 7.6% of commercial loans and 5.8% of consumer loans at December 31, 2017.

Banco de Occidente had a market share of approximately 10.4% of checking accounts at December 31, 2017. Additional areas of focus for future growth include credit cards, low-risk consumer loan services and products such as payroll loans and loans to government agencies.

At December 31, 2017 Banco de Occidente had total assets of Ps 37,746.9 billion and net income attributable to controlling interest of Ps 376.0 billion for the year ended December 31, 2017.On a consolidated basis in accordance with IFRS, Banco de Occidente’s ROAE was 8.8% for the year ended December 31, 2017.

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Lending activities

The following table presents Banco de Occidente’s loan portfolio at the dates indicated.

	At December 31,				Change, December 31, 2017 vs. December 31, 2016
	2017		2016		#		%
	(in Ps billions, except for percentages)
Commercial		20,574.5		19,539.1		1,035.5		5.3
Commercial loans