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

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2019

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) 743-3222

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

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 under the trading symbol(s): AVAL.

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

None

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: 7,143,227,185

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

☒ 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   ☒ 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.

☒ Yes   ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 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:

Large accelerated filer ☒ 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 whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.     ☒

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 ☒ 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   ☒ 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		48
A.	History and development of the company	48
B.	Business overview	61
C.	Organizational structure	136
D.	Property, plants and equipment	136
ITEM 4A. UNRESOLVED STAFF COMMENTS		136
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS		136
A.	Operating results	136
B.	Liquidity and capital resources	239
C.	Research and development, patents and licenses, etc.	243
D.	Trend information	243
E.	Off-balance sheet arrangements	246
F.	Tabular disclosure of contractual obligations	247
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES		247
A.	Directors and senior management	247
B.	Compensation	252
C.	Board practices	253
D.	Employees	254
E.	Share ownership	256
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS		256
A.	Major shareholders	256
B.	Related party transactions	257
C.	Interests of experts and counsel	260
ITEM 8. FINANCIAL INFORMATION		260
A.	Consolidated statements and other financial information	260
B.	Significant changes	264
ITEM 9. THE OFFER AND LISTING		264
A.	Offering and listing details	264
B.	Plan of distribution	264
C.	Markets	264
D.	Selling shareholders	265
E.	Dilution	265
F.	Expenses of the issue	265

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ITEM 10. ADDITIONAL INFORMATION		265
A.	Share capital	265
B.	Memorandum and articles of association	265
C.	Material contracts	273
D.	Exchange controls	274
E.	Taxation	274
F.	Dividends and paying agents	283
G.	Statement by experts	287
H.	Documents on display	287
I.	Subsidiary information	287
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK		287
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES		314
A.	Debt securities	314
B.	Warrants and rights	314
C.	Other securities	314
D.	American depositary shares	314
PART II		316
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES		316
A.	Defaults	316
B.	Arrears and delinquencies	316
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS		316
A.	Material modifications to instruments	316
B.	Material modifications to rights	316
C.	Withdrawal or substitution of assets	316
D.	Change in trustees or paying agents	316
E.	Use of proceeds	316
ITEM 15. CONTROLS AND PROCEDURES		316
A.	Disclosure controls and procedures	316
B.	Management’s annual report on internal control over financial reporting	317
C.	Attestation report of the registered public accounting firm	317
D.	Changes in internal control over financial reporting	317
ITEM 16. [RESERVED]		318
ITEM 16A. Audit committee financial expert		318
ITEM 16B. Code of ethics		318
ITEM 16C. Principal accountant fees and services		318
ITEM 16D. Exemptions from the listing standards for audit committees		318
ITEM 16E. Purchases of equity securities by the issuer and affiliated purchasers		319
ITEM 16F. Change in registrant’s certifying accountant		319
ITEM 16G. Corporate governance		319
ITEM 16H. Mine safety disclosure		320
PART III		321
ITEM 17. Financial statements		321
ITEM 18. Financial statements		321
ITEM 19. Exhibits		321

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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. 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 3,277.14 per U.S.$1.00, which was the representative market rate published on December 31, 2019. 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 24, 2020 the representative market rate was Ps 4,020.94 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;

· “Multi Financial Group” or “MFG” means Multi Financial Group Inc. 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 individuals 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, as well as inspection and supervision authority over the holding companies of financial conglomerates in Colombia.

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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.

Financial statements

We are a financial holding company and an issuer in Colombia of securities registered with the National Registry of Shares and Issuers (Registro Nacional de Emisores y Valores), and in this capacity, we are subject to inspection and surveillance by the Superintendency of Finance and required to comply with corporate governance and periodic reporting requirements to which all financial holdings and issuers are subject. We are not a financial institution in Colombia and we are not supervised or regulated as a financial institution. Since February 6, 2019, we are subject to the inspection and surveillance of the Superintendency of Finance as the financial holding company of the Aval Financial Conglomerate and we are 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, 2019 and 2018 and for the years ended December 31, 2019, 2018, and 2017 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 (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).

Grupo Aval adopted IFRS 16 using the modified retrospective approach with the cumulative effect of initial adoption being recognized on January 1, 2019. Grupo Aval has not restated comparatives for prior reporting periods, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening Consolidated Statement of Financial Position on January 1, 2019. For more information on the effects of the adoption on Grupo Aval, please refer to “Note 2.4 Changes in Accounting Policies—A. IFRS 16 Leases” of our audited consolidated financial statements.

For comparative purposes, following the adoption of IFRS 9 on January 1, 2018, Grupo Aval adjusted the presentation of financial instruments in the consolidated statement of financial position for prior reporting periods. In addition, following the adoption of IFRS 15 on January 1, 2018,  Grupo Aval adjusted the presentation of revenue from contracts with customers within the consolidated statements of income for prior reporting periods.

We and our Colombian subsidiaries prepare consolidated financial statements for publication in Colombia under IFRS 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, 2131 of 2016, 2170 of 2017, 2483 of 2018 and 2270 of 2019 (which we refer to as “Colombian IFRS”). Prior to January 1, 2018, Colombian IFRS differed from IFRS as issued by the IASB in certain material respects. Starting on January 1, 2018, Grupo Aval’s consolidated financial statements for publication in Colombia do not differ from the consolidated financial statements prepared under IFRS as issued by the IASB.

Separate financial statements under Colombian IFRS are based on IFRS issued by the IASB in Spanish as of December 31, 2018, and requirements pursuant to certain Colombian regulations. As a result, rules subsequently issued by the IASB are

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not applicable under Colombian IFRS. Our separate financial statements for local purposes, differed from IFRS as issued by the IASB 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 in the statement of income.

· Loss allowances are 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, loss allowances were calculated according to the criteria set forth in IAS 39 and recorded in the statement of income until December 31, 2017 and under IFRS 9 beginning on January 1, 2018.

· Financial instruments under Colombian IFRS are classified and measured under specific rules of the Financial and Accounting Basic Circular, whereas under IFRS, financial instruments were classified and measured according to the criteria set forth in IAS 39 until December 31, 2017 and under IFRS 9 beginning on January 1, 2018 (with the exception of hedge accounting which is still treated under guidelines set forth in IAS 39).

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 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 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 Banking Association (Asociación Bancaria y de Entidades Financieras de Colombia) or “Asobancaria”, the Colombian Stock Exchange, the Colombian National Bureau of Statistics (Departamento Administrativo Nacional de Estadística), or “DANE”, the World Bank, the Superintendency of Banks in Panama (Superintendencia de Bancos de Panamá), the Superintendency of Financial Institutions in Costa Rica (Superintendencia General de Entidades Financieras), the Superintendency of Banks in Guatemala (Superintendencia de Bancos de Guatemala), the National Commission of Banks and Insurances in Honduras (Comisión Nacional de Bancos y Seguros), the Financial System Superintendency in El Salvador (Superintendencia del Sistema Financiero) and the Superintendency of Banks and Other Financial Institutions in Nicaragua (Superintendencia de Bancos y Otras Instituciones Financieras). 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 2015 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.

IMF’s April 2020 World Economic Outlook (WEO) database does not contain all the usual analytical groups and countries and contains only these indicators: real GDP growth, consumer price index, current account balance, unemployment, per capita GDP growth, and fiscal balance. Projections for these indicators are provided only through 2021 due to the high

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level of uncertainty in current global economic conditions. Therefore, some information used herein refers expressly to the October 2019 WEO as the last information available.

Our consolidated statement of financial position and statement of income reflect information prepared under IFRS, while comparative disclosures of our financial and operating performance and that of our competitors are based on separate information prepared under Colombian IFRS as reported to the Superintendency of Finance. We, our banking subsidiaries, Corficolombiana and Porvenir also report separate 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 separate results of our banking subsidiaries, Corficolombiana, Porvenir and BAC Credomatic. “Grupo Aval aggregate” data throughout this annual report reflects the sum of the separate 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 separate 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 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 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 a separate 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.

Throughout this document, unless otherwise noted, references to average consolidated statement of financial position for 2019, 2018, 2017, 2016 and 2015 have been calculated as follows: the average of balances at December 31, at September 30, at June 30, and at March 31 of the corresponding year, and the balance at December 31, of the previous year.

Banks, merchant banks (corporaciones financieras) and financing companies (compañías de financiamiento comercial) 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 real 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 (under voluntary liquidation), 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 Skandia Administradora de Fondos de Pensiones y Cesantías S.A., or “Skandia”. Corficolombiana, our merchant bank, is a merchant bank (corporación financiera), 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 Corporación Financiera GNB Sudameris S.A.

Our principal competitors in Central America include Bancolombia, Banco General, Banco Industrial, Banco Promerica, Davivienda 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.

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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. As such, percentage calculations presented may differ from those of rounded numbers. 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 a subsidiary’s equity or net income, as applicable.

FORWARD-LOOKING STATEMENTS

Some of the matters discussed in this annual report concerning our operations and financial performance include estimates and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 “Reform Act” including such statements contained 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”.

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;

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· 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;

· natural disasters, public health crises or 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” or “Item 5. Operating and Financial Review and Prospects—D. Trend information”.

The words “believe”, “may”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect”, “should”, “could”, “would”, “plan”, “predict”, “potential” and similar words are intended to identify estimates and forward-looking statements. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. Estimates and forward-looking statements are intended to be valid 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.

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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 at December 31, 2019 and 2018 and for the years ended December 31,  2019, 2018 and 2017 have been derived from our audited consolidated financial statements prepared in accordance with IFRS, included in this report. We have derived our selected statement of financial position data as of December 31, 2017, 2016, and 2015 and our consolidated statement of income data prepared in accordance with IFRS for the years ended December 31, 2016 and 2015 from our consolidated financial statements not included in this annual report. For comparative purposes, following the adoption of IFRS 9 on January 1, 2018, Grupo Aval adjusted the presentation of financial instruments in the consolidated statement of financial position for prior reporting periods. In addition, Grupo Aval adjusted the presentation of revenue from contracts with customers within the consolidated statements of income for prior reporting periods.  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 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.

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Statement of income

IFRS

			Grupo Aval
	For the years ended December 31,
	2019	2018	2017	2016	2015
	(in Ps billions, except share and per share data)
Total interest income	19,552.7	18,356.6	18,741.8	17,547.0	14,075.6
Total interest expense	(8,267.2)	(7,484.8)	(8,227.7)	(8,392.4)	(5,751.5)
Net interest income	11,285.5	10,871.8	10,514.1	9,154.6	8,324.1
Impairment loss on loans and other accounts receivable	(4,194.0)	(4,150.0)	(4,119.3)	(3,004.2)	(2,127.7)
Impairment (loss) recovery on other financial assets	60.0	32.5	(0.1)	(70.4)	(6.2)
Recovery of charged-off financial assets	378.9	320.1	264.6	290.4	219.7
Net impairment loss on financial assets	(3,755.1)	(3,797.3)	(3,854.9)	(2,784.2)	(1,914.3)
Net income from commissions and fees	5,455.3	4,839.6	4,579.0	4,259.7	3,662.3
Gross profit from sales of goods and services	2,374.8	2,643.9	757.0	929.3	838.6
Net trading income	761.9	582.7	561.4	724.7	245.2
Net income from other financial instruments mandatorily at fair value through profit or loss	217.6	205.8	209.9	181.0	153.1
Other income	1,283.0	1,358.7	1,151.7	1,676.1	1,550.7
Other expenses	(10,171.3)	(9,371.0)	(9,003.1)	(8,567.3)	(7,635.1)
Income before income tax expense	7,451.7	7,334.1	4,915.2	5,573.8	5,224.7
Income tax expense	(2,086.3)	(2,149.6)	(1,752.8)	(2,056.9)	(1,879.0)
Net income for the year	5,365.5	5,184.6	3,162.4	3,516.9	3,345.7
Net income for the year attributable to:
Owners of the parent	3,034.4	2,912.7	1,962.4	2,139.9	2,041.4
Non-controlling interest	2,331.0	2,271.9	1,200.0	1,377.1	1,304.3
Earnings per 1,000 shares (basic and diluted earnings):
Common shares (in pesos)	136,188.1	130,725.4	88,075.6	96,039.9	91,619.0
Earnings per 1,000 shares (basic and diluted earnings):
Preferred shares (in pesos)	136,188.1	130,725.4	88,075.6	96,039.9	91,619.0
Dividends per 1,000 shares(1):
Common and preferred shares (in pesos)	60,000.0	60,000.0	48,000.0	88,200.0	58,800.0
Weighted average number of shares:
Outstanding common shares in thousands	15,158,004.8	15,169,502.8	15,216,468.6	15,262,660.1	15,309,380.7
Outstanding preferred shares in thousands	7,123,012.3	7,111,514.4	7,064,548.6	7,018,357.0	6,971,636.5
Outstanding common and preferred shares in thousands	22,281,017.2	22,281,017.2	22,281,017.2	22,281,017.2	22,281,017.2

(1) 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. Since March 2017, the Company declares 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, which was paid in twelve equal installments between April 2017 and March 2018.

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Statement of financial position

			Grupo Aval
	At December 31,
	2019	2018	2017	2016	2015
	(in Ps billions)
Assets:
Cash and cash equivalents	30,117.2	28,401.3	22,336.8	22,193.0	22,285.0
Trading assets	9,113.7	7,204.3	5,128.1	4,593.7	5,608.2
Investment securities	26,000.3	23,030.2	21,513.2	20,963.0	22,080.2
Hedging derivative assets	166.6	30.1	55.3	128.5	33.7
Total loans, net	173,942.3	168,685.7	160,754.3	150,898.7	141,827.7
Other accounts receivables, net	11,702.3	9,300.6	6,521.9	5,597.3	5,093.9
Non-current assets held for sale	206.2	186.7	101.4	259.5	199.5
Investments in associates and joint ventures	988.0	982.7	1,043.0	1,146.6	927.6
Tangible assets	8,950.4	6,588.5	6,654.0	6,559.5	6,514.0
Concession arrangement rights	7,521.5	5,514.5	3,114.2	2,805.3	2,390.7
Goodwill	7,348.6	7,318.6	6,901.1	6,824.9	7,056.0
Other intangible assets	1,206.5	1,033.9	848.7	735.0	612.9
Income tax assets	1,141.8	935.2	1,046.9	779.1	1,485.2
Other assets	427.2	462.9	519.8	589.4	564.7
Total assets	278,832.6	259,675.2	236,538.5	224,073.7	216,679.3
Liabilities:
Trading liabilities	962.4	811.3	298.7	640.7	1,143.2
Hedging derivatives liabilities	94.3	195.5	13.5	43.4	337.7
Customer deposits	175,491.4	164,359.5	154,885.2	143,887.1	135,954.6
Interbank borrowings and overnight funds	9,240.5	6,814.1	4,970.4	6,315.7	9,474.9
Borrowings from banks and others	19,803.3	20,610.8	18,205.3	17,906.6	18,750.6
Bonds issued	21,918.3	20,140.3	19,102.2	18,568.2	16,567.1
Borrowings from development entities	3,882.5	3,646.8	2,998.1	2,725.7	2,506.6
Provisions	868.6	695.3	692.6	620.4	600.2
Income tax liabilities	3,258.6	2,574.4	2,027.7	1,651.9	1,892.1
Employee benefits	1,235.0	1,264.9	1,238.2	1,097.6	1,022.3
Other liabilities	8,729.4	9,008.0	6,235.5	5,957.2	5,523.5
Total liabilities	245,484.3	230,120.8	210,667.3	199,414.5	193,773.0
Equity:
Attributable to the owners of the parent
Subscribed and paid-in capital	22.3	22.3	22.3	22.3	22.3
Additional paid-in capital	8,445.8	8,472.3	8,303.4	8,307.5	8,307.8
Retained earnings	10,289.1	8,598.3	7,174.4	6,522.1	5,699.4
Other comprehensive income	1,093.4	696.8	786.9	749.6	538.1
Equity attributable to owners of the parent	19,850.6	17,789.7	16,287.0	15,601.6	14,567.6
Non-controlling interest	13,497.7	11,764.6	9,584.2	9,057.7	8,338.7
Total equity	33,348.3	29,554.3	25,871.2	24,659.2	22,906.3
Total liabilities and equity	278,832.6	259,675.2	236,538.5	224,073.7	216,679.3

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Other financial and operating data

	Grupo Aval
	At and for the years ended December 31,
	2019	2018	2017	2016	2015
	(in percentages, unless otherwise
	indicated)
Profitability ratios:
Net interest margin(1)	5.6%	5.7%	5.8%	5.4%	5.4%
ROAA(2)	2.0%	2.2%	1.4%	1.6%	1.7%
ROAE(3)	16.4%	17.8%	12.6%	14.3%	14.6%
Efficiency ratio(4):	47.6%	45.7%	50.1%	49.0%	49.6%
Capital ratios:
Period-end equity as a percentage of period-end total assets	12.0%	11.4%	10.9%	11.0%	10.6%
Tangible equity ratio(5)	9.2%	8.4%	7.9%	7.9%	7.3%
Credit quality data:
Cost of risk: Impairment loss on loans and other accounts receivable / average gross loans(6)	2.4%	2.6%	2.7%	2.1%	1.7%
Cost of risk, net: Impairment loss on loans and other accounts receivable, net / average gross loans(6)(7)	2.2%	2.4%	2.5%	1.9%	1.5%
Charge-offs as a percentage of average gross loans(6)	2.7%	2.0%	1.7%	1.6%	1.3%
Loans past due more than 30 days / gross loans(6)	4.4%	4.3%	3.9%	3.0%	2.7%
Loans past due more than 90 days / gross loans(6)	3.3%	3.1%	2.8%	2.0%	1.7%
Loans classified as Stage 2 / gross loans(6)	4.5%	4.6%	N.A.	N.A.	N.A.
Loans classified as Stage 3 / gross loans(6)	5.5%	6.0%	N.A.	N.A.	N.A.
Loans classified as Stage 2 and Stage 3 / gross loans(6)	10.0%	10.6%	N.A.	N.A.	N.A.
Loss allowance as a percentage of loans past due more than 30 days(8)	104.6%	113.9%	90.7%	95.0%	98.9%
Loss allowance as a percentage of loans past due more than 90 days(8)	140.1%	158.0%	128.2%	143.9%	157.9%
Loss allowance for Stage 2 loans as a percentage of Stage 2 loans(6)(8)	14.4%	15.5%	N.A.	N.A.	N.A.
Loss allowance for Stage 3 loans as a percentage of Stage 3 loans(6)(8)	52.4%	50.8%	N.A.	N.A.	N.A.
Loss allowance for Stage 2 and Stage 3 loans as a percentage of Stage 2 and Stage 3 loans(6)(8)	35.3%	35.6%	N.A.	N.A.	N.A.
Loss allowance as a percentage of gross loans(6)(8)	4.6%	4.8%	3.5%	2.8%	2.6%
Operational data (in units):
Number of customers of the banks(9)	16,103,141	15,654,858	14,700,386	13,883,370	13,678,194
Number of employees(10)	111,192	91,191	80,565	77,050	76,095
Number of branches(11)	1,692	1,734	1,771	1,789	1,785
Number of ATMs(11)	5,671	5,570	5,774	5,739	5,623

(1) Net interest margin is calculated as net interest income divided by total average interest-earning assets. Average interest-earning assets for 2019, 2018, 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. See “Item 3. Key Information—A. Selected financial data—Ratios and Measures of Financial Performance”.

(2) For the years ended December 31, 2019, 2018, 2017, 2016 and 2015, ROAA is calculated as net income divided by average assets. Average assets for 2019, 2018, 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. See “Item 3. Key Information—A. Selected financial data— Ratios and Measures of Financial Performance”.

(3) For the years ended December 31, 2019, 2018, 2017, 2016 and 2015, ROAE is calculated as net income attributable to owners of the parent divided by average equity attributable to owners of the parent. Average equity attributable to owners of the parent for 2019, 2018, 2017, 2016 and 2015 is calculated as the sum of equity attributable to owners of the parent at each quarter-end during the applicable year end and the prior year end divided by five.

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(4) Efficiency ratio is calculated as Other expenses (see Note 30 of our audited consolidated financial statements) excluding wealth tax for 2017, 2016 and 2015, divided by total income before net impairment losses on financial assets (defined as the sum of net interest income, net income from commissions and fees, gross profit (loss) from sales of goods and services, net trading income, net income from other financial instruments mandatorily at fair value through profit or loss “FVTPL” and other income). Prior to the adoption of IFRS 16 on January 1, 2019 we reported this measure as Personnel expenses plus Administrative and other expenses (excluding wealth tax for 2017, 2016 and 2015), both contained in the Other expenses line in our audited consolidated financial statements, divided by the sum of net interest income, net income from commissions and fees, net income (expense) from sales of goods and services, net trading income and other income (excluding other). However, given the decrease in Administrative expenses that was offset by an increase in Depreciation and Amortization derived from this accounting principle, we decided all expenses (except for impairment loss on financial assets) and all income reflect efficiency in a more comprehensive manner. For the year ended December 31, 2019, efficiency measured under the previous methodology was materially the same as in 2018 at 43.1%.

(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 7,521.5 billion in 2019, Ps 5,514.5 billion in 2018, Ps 3,114.2 billion in 2017, Ps 2,805.3 billion in 2016 and Ps 2,390.7 billion in 2015) divided by total assets minus intangible assets (as defined before). See “Item 3. Key Information—A. Selected financial data— Ratios and Measures of Financial Performance”.

(6) Gross loans exclude Interbank and overnight funds (Ps 2,719.0 billion in 2019, Ps 7,635.2 billion in 2018, Ps 7,279.0 billion in 2017, Ps 3,569.6 billion in 2016 and Ps 4,085.0 billion in 2015) as these are short-term liquidity operations not subject to deterioration. Total gross loan portfolio includes Interbank and overnight funds. Throughout this document charge-offs and write-offs refer to the same concept.

(7) Impairment (loss) on loans and other accounts receivable, net refers to Impairment (loss) on loans and other accounts receivable minus Recovery of charged-off financial assets.

(8) Includes the impact of IFRS 9 adoption on January 1, 2018 of Ps 1,163.0 billion.

(9) 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.

(10) Number of employees is defined as the sum of direct, temporary and outsourced personnel in financial entities (71,269 in 2019, 71,851 in 2018, 73,834 in 2017, 73,041 in 2016 and 71,638 in 2015) and call-centers (8,538 in 2019, 8,081 in 2018, 6,731 in 2017, 4,009 in 2016 and 4,457 in 2015) for 2015 through 2019. Additionally, 2019 and 2018 figures include the number of employees of non-financial entities of Corficolombiana (31,385 and 11,259).

(11) Reflects aggregated number of full-service 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. ROAE, which is calculated as net income attributable to owners of the parent, divided by average equity attributable to owners of the

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parent, provides a measure of the total return generated from our company and our subsidiaries for shareholders. Net income attributable to non-controlling interest divided by net income, provides an indication of non-controlling interest ownership of Grupo Aval’s consolidated subsidiaries net income; where a higher ratio typically implies that higher net income was generated in subsidiaries in which Grupo Aval has lower ownerships and vice versa.

The following table sets forth ROAA, ROAE and Net income attributable to non-controlling interest divided by net income for Grupo Aval for the indicated years.

	Year ended December 31,
	2019	2018	2017
	(in Ps billions, except percentages)
Grupo Aval (consolidated):
Average assets(1)	267,058.8	240,905.4	229,315.3
Average equity attributable to owners of the parent(2)	18,521.1	16,349.5	15,635.9
Net income	5,365.5	5,184.6	3,162.4
Net income attributable to owners of the parent	3,034.4	2,912.7	1,962.4
Net income attributable to non-controlling interest	2,331.0	2,271.9	1,200.0
ROAA(1)	2.0%	2.2%	1.4%
ROAE(2)	16.4%	17.8%	12.6%
Net income attributable to non-controlling interest divided by net income	43.4%	43.8%	37.9%

(1) For methodology used to calculate Average assets and 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 Average equity attributable to owners of the parent and ROAE, see note (3) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data”.

The following table sets forth ROAA and ROAE of our main consolidated subsidiaries for the year ended December 31, 2019.

	Year ended December 31, 2019
	Banco de	Banco de	Banco	Banco
	Bogotá	Occidente	Popular	AV Villas	Corficolombiana
	(in Ps billions, except percentages)
Average assets(1)	167,078.3	40,557.2	25,027.2	14,790.7	28,830.7
Average equity attributable to owners of the parent(2)(3)	19,270.9	4,610.1	2,937.3	1,670.2	6,923.3
Net income	3,073.7	568.1	302.1	236.6	2,004.2
Net income attributable to owners of the parent(3)	2,766.4	563.4	301.3	236.0	1,531.3
Net income attributable to non-controlling interest	307.2	4.7	0.9	0.6	472.9
ROAA(1)	1.8%	1.4%	1.2%	1.6%	7.0%
ROAE(2)	14.4%	12.2%	10.3%	14.1%	22.1%
Net income attributable to non-controlling interest divided by net income	10.0%	0.8%	0.3%	0.3%	23.6%

(1) For methodology used to calculate Average assets and 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 Average equity attributable to owners of the parent and ROAE, see note (3) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data”.

(3) Attributable to the owners of each of the subsidiaries presented in this table. Grupo Aval’s ownership in each subsidiary is described in “Item 4. Information on the company—B. Business overview—Our operations”.

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Tangible equity ratio

The following table sets forth the tangible equity ratio of Grupo Aval and each of its business segments at December 31, 2019.

		Grupo Aval entities
	Grupo Aval	Banco de	Banco de	Banco	Banco
	Consolidated	Bogotá	Occidente	Popular	AV Villas	Corficolombiana
	(in Ps billions, except percentages)
Total equity	33,348.3	21,860.0	4,869.1	3,070.0	1,795.1	9,968.1
Total assets	278,832.6	175,019.6	42,577.7	25,117.6	15,207.5	31,809.6
Total equity / Total assets	12.0%	12.5%	11.4%	12.2%	11.8%	31.3%
Intangible assets(1)	8,555.1	6,630.4	293.9	166.0	74.0	498.8
Total equity less intangible assets	24,793.2	15,229.6	4,575.2	2,903.9	1,721.2	9,469.3
Total assets less intangible assets	270,277.5	168,389.2	42,283.8	24,951.5	15,133.6	31,310.8
Tangible equity ratio(2)	9.2%	9.0%	10.8%	11.6%	11.4%	30.2%

(1) Intangible assets for this measure are defined as goodwill and other intangible assets (excluding intangible assets related to concession arrangements rights of Ps 7,521.5 billion for both Grupo Aval and Corficolombiana as of December 31, 2019).

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

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 the 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

13

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.

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 cost of risk and the pricing of, our services and products. Due to the fact that 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 and could reduce returns on “stabilization reserves” and/or performance-based fees.

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. They have also 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 our subsidiaries and, consequently, on our company. In addition, changes in political administrations may result in changes in governmental policy, which could affect our subsidiaries 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 could have a material adverse effect on each country’s trade balance 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 in which we operate. Lower than expected economic growth may result in asset quality deterioration and could negatively affect our business.

Pension funds, such as those managed by Porvenir, invest globally 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 funds returns, which may in turn result in decreases in assets under management and affect 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 31.5% of Porvenir’s total assets under management at December 31, 2019.

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Fluctuations in commodity prices and volatility in exchange rates in the past have led to a deceleration in growth. In particular, the oil industry remains an important determinant of Colombia’s economic growth. Substantial or extended declines in international oil prices or national oil production 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 2014 and 2015, 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, 2019, our combined gross exposure to the oil sector is 1.2% of the consolidated total gross loan portfolio, with the principal exposure being to companies which own or run oil pipelines (0.63%) in which Empresa Colombiana de Petróleos S.A. “Ecopetrol” is a majority shareholder. Ecopetrol is Colombia’s largest oil producer, with a majority ownership by the Colombian Government, and has a BBB- (S&P), BBB (Fitch Ratings), and Baa3 (Moody’s) long-term foreign currency issuer ratings. As of December 31, 2019, our gross exposure to oil service companies and suppliers to the oil sector (0.25% and 0.29% of the consolidated total gross loan portfolio, respectively) was immaterial. We do not believe this exposure will materially affect our results. Although the growth of the Colombian economy is expected to be steady 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 cost of risk and, accordingly, increase our required loss allowances for loans. 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 National Liberation Army (Ejército de Liberación Nacional), or “ELN”, urban militias, paramilitary groups, former members of the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia), or “FARC”, and drug cartels. 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. Under Juan Manuel Santos’ administration, the Colombian government also began negotiations with ELN in October 2016, which had continued under a slower pace during the government of President Duque until January 17, 2019. As a result of an attack made by ELN to a police academy in Bogotá, the Colombian President cancelled peace talks. Any breakdown in peace, 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 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, particularly Venezuela, have experienced and continue to experience periods of political and economic instability. According to figures from the United Nations, more than two million Venezuelans have emigrated amid food and medicine shortages and profound political divisions in their country. Approximately half of those migrants have opted to live in Colombia, and many have arrived with only what they could carry. Providing migrants with access to healthcare, utilities and education may have a negative impact on Colombia’s economy if the Government is not able to respond adequately to legalize migrants, generate programs to help them find formal jobs, and increase tax revenue and consumption.

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Moreover, diplomatic relations with Venezuela and Ecuador have from time to time been tense and affected by events surrounding the Colombian military forces’ confrontations with guerilla groups, particularly on Colombia’s borders with each of Venezuela and Ecuador. More recently, the Colombian government joined an international campaign against Nicolás Maduro, recognizing Juan Guaido, chief of Venezuela’s opposition, as the country’s leader, which has further increased diplomatic tensions with Venezuela.

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. Currently, the Colombian Government is waiting for additional claims to be filed by Nicaragua as part of the first stage process with the International Court of Justice. 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.

Further economic and political instability in Colombia’s neighboring countries 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 United States-Mexico-Canada Agreement. This could have an indirect effect on the Colombian economy and the countries in which we operate.

Changes in government policies and actions, 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, fees, 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.

In 2018, presidential elections were held in Colombia, and Mr. Iván Duque Márquez was elected for the presidential period 2018-2022 with 54% of the votes in the second round. President Duque is a former Senator from the Democratic Center party, and his agenda includes (i) tackling corruption, (ii) fighting against the increase of cocaine production, (iii) increasing focus on rule of law, (iv) entrepreneurship and (v) social equity. However, Mr. Duque’s government has experienced social dissatisfaction and generating social tensions within the principal cities of Colombia. The president of Colombia has considerable power to determine governmental policies and actions relating to the economy, and may adopt policies that negatively affect us.

Moreover, regulatory uncertainty, public dialogue on reforms during Mr. Duque’s presidential period and other countries where we operate, or the approval 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 of 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

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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 due in part to a lack of multiple recourses and/or deficiencies in the access to justice.

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.

Grupo Aval and certain of its subsidiaries and officers are defendants in government enforcement actions and/or subject to ongoing governmental investigations relating to the Ruta del Sol Project Sector 2 that could cause us to incur penalties and other sanctions, impact our ability to conduct our business, harm our reputation and negatively impact our financial results.

On December 21, 2016, the United States Department of Justice (“DOJ”) 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 U.S.$800 million in bribes to government officials in twelve countries around the world, including U.S.$11.5 million in Colombia, where Odebrecht 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 several lines of investigations that have identified and incarcerated Colombian recipients of the Odebrecht bribes; the Fiscalía also established that Odebrecht effected payments through its “division of structured operations”, directly from its Brazilian headquarters, to obtain the contract for the construction of “Ruta del Sol Project Sector 2” toll road concession awarded to Concesionaria Ruta del Sol S.A.S. (“CRDS”) in 2009 and also to obtain the amendment to the contract in connection with the Ocaña-Gamarra addition to the Ruta del Sol II toll road in 2014. The Concession Contract No. 001 of 2010, for the construction of Ruta del Sol Sector 2 (the “Concession Contract”), was entered into on January 14, 2010 and the amendment in connection with the Ocaña-Gamarra addition was entered into on March 14, 2014. Episol S.A.S. (“Episol”), a wholly-owned subsidiary of Corficolombiana and an indirect subsidiary of Grupo Aval, is a minority (33%) non-controlling shareholder in CRDS and Odebrecht is the majority controlling and operating shareholder with a participation of 62%. A third shareholder, CSS Constructores S.A., has a 5% participation in CRDS.

Episol, and the former president of Corficolombiana are among the defendants in a class action lawsuit brought by the Procuraduría General de la Nación before the Administrative Tribunal of Cundinamarca (“TAC”) relating to the alleged payment of bribes in connection with the Ruta del Sol Project Sector 2. The TAC ruled in December 2018 that Episol, along with Odebrecht, and other defendants, including the former president of Corficolombiana, were jointly liable for the damages to the Nation caused by the payment of bribes confessed by Odebrecht related to the Ruta del Sol Project Sector 2, ordered the defendants to jointly and severally pay the Ministry of Transportation Ps 715.6 billion, and debarred them from contracting with Colombian state entities and from assuming government positions for a period of 10 years. Episol and the other defendants filed an appeal of this ruling before Colombia’s Supreme Court for administrative law matters (Consejo de Estado).

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Grupo Aval, Corficolombiana, Episol, Grupo Aval’s president and Grupo Aval’s chief financial officer, Corficolombiana’s Vice President of Investments and Corficolombiana’s Vice President of Investment Banking, the former president of Corficolombiana and other defendants have been charged by the Colombian Superintendency of Industry and Commerce (“SIC”) with alleged violations of Colombian antitrust regulations in connection with the Ruta del Sol Project Sector 2. The proceeding is ongoing.

Grupo Aval is also subject to investigations by the DOJ and by the SEC concerning the Ruta del Sol Project Sector 2. Grupo Aval is cooperating with the DOJ’s and SEC’s investigations, as it has done with all prior government inquiries into this matter. 

On April 1, 2019, Jose Elias Melo, the former president of Corficolombiana, was found guilty in a court of first instance of bribery and undue interest in connection with the 2009 bid for the Ruta del Sol Project Sector 2. Mr. Melo appealed the court’s decision.

For further information about the foregoing proceedings and investigations, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings”.

We have not recorded any accrual for the SIC proceeding and the TAC class action, however, there can be no assurance as to the terms of the final resolution and the timing of these matters. At this time it is not possible to predict the scope, duration or likely outcome of the DOJ and SEC investigations. Similarly, it is not possible to predict at this time whether additional investigations or proceedings relating to Ruta del Sol Project Sector 2 may arise. 

We and our subsidiaries are exposed to a variety of potential material negative consequences as a result of the proceedings and investigations noted above, which could result in judgments, settlements, admissions of wrongdoing, criminal convictions, fines, penalties, injunctions, cease and desist orders, debarment or other relief and we and our subsidiaries could be exposed to other litigation as a result of these proceedings and investigations, including actions initiated by shareholders.

Such investigations and proceedings, which are the subject of extensive media coverage and political interest in Colombia, could also have significant collateral consequences for our company and our subsidiaries, including damage to reputation, loss of customers and business, the inability to offer certain products and services, disqualification or losing permission to operate certain businesses for a period, the dissemination of potentially damaging information that may come to light in the course of the investigations and proceedings and other direct and indirect adverse effects. Management will need to continue to direct substantial time and attention to resolving such matters, which could prevent them from focusing on our core businesses. We can provide no assurance that the outcome of any such investigations and proceedings will not be material to our business, financial position, results of operations or our financial position.

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, to fund Colombia’s war against terrorism and taxes created in order to fund post-conflict programs related to the peace negotiations with guerrilla forces. The Colombian government is also obliged by Law 1473 of 2011, also known as Law of Fiscal Rule, to significantly reduce its fiscal deficit and address issues regarding public policy, oil price volatility, migrations, public health events or other events that could require further tax reforms over the following years. This, in addition to pressure from rating agencies, could lead to higher taxation rates on our business and that of our borrowers. Changes in tax-related laws and regulations, and interpretations thereof, can impact 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.

Between 2012 and 2019, the Colombian Congress passed five 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

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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.

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) introducing substantial changes to the then current tax legal framework, including, pursuant to certain rules, (i) taxation on dividends distributed to residents and non-residents from profits taxed and non-taxed at the level of the distributing company generated from 2017 onwards, (ii) a modified corporate income tax regime, and (iii) 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 10. Additional Information—E. Taxation”.

In addition to the tax reform approved in December 2016, the Colombian Congress enacted Law 1943 on December 28, 2018, also known as the Financing Law, introducing changes to the then current tax legal framework, including, pursuant to certain rules, a reduction of the corporate income tax rate from 37% in 2018 to 33% in 2019, to 32% for 2020, 31% for 2021 and 30% for 2022 and onwards. Among others, the Financing Law also introduced an increase in the dividend tax on distributions to foreign nonresident entities and individuals from 5% to 7.5%, as well as a surtax for financial institutions of 4% in 2019 and 3% in years 2020 and 2021.

However, on October 16, 2019, the Constitutional Court declared Law 1943 of 2018 unconstitutional due to procedural faults and the declaration takes effect as of January 1, 2020. As a result of this decision the Colombian Government filed a new bill including the majority of the provisions that were initially included in Law 1943 of 2018, and on December 27, 2019 Law 2010 also known as the Economic Growth Law, was enacted.

Law 2010 of 2019, adopts standards for the promotion of economic growth, employment, investment, strengthening of public finances and the progressivity, equity and efficiency of the tax system, in accordance with the objectives set by Law 1943 of 2018. In general terms, Law 2010 of 2019 replicates most of the tax changes included by Law 1943 of 2018 such as:

(i) the progressive reduction of the corporate income tax rate form 32% applicable for the year 2020 to 30% applicable as of the year 2022;

(ii) in the case of financial institutions, a surtax on the corporate income tax rate of 4% for the year 2020 and of 3% for the years 2021 and 2022. This surcharge should apply to financial institutions that obtain a taxable income exceeding approximately Ps 4.3 billion; and

(iii) an increase in the dividend tax on distributions made to foreign non-resident entities from 7.5% to 10%. Dividend tax for individuals is reduced from 15% to 10%.

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.

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Article 260‑7 of the Colombian Tax Code was 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. This legal framework established a higher tax-withholding rate on Colombian source payments to those jurisdictions and entities considered part of such a jurisdiction.

In October 2016, Panamá 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.

Panamá also agreed to enter into a Double Taxation Agreement (DTA) with Colombia, however, such treaty has not been signed yet. The treaty is expected to include provisions regarding the automatic exchange of financial information. On March 9, 2020 the Panamanian Minister of Finance announced that this automatic exchange of financial information with the Colombian Government will begin in September 2020. Failure to execute this treaty or the designation of Panamá as a tax haven could have a negative impact on our customer base and on our business, financial condition and results of operations.

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.

Natural disasters, acts of war or terrorism, rioting 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 and other countries in which we operate, attributable in part to the La Niña and El Niño weather patterns, have resulted in severe flooding, mudslides and prolonged droughts in the past. These are recurring weather phenomena that may occur on an equal or greater scale in the future. In addition to severe weather and natural disasters, acts of war or terrorism, rioting 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 of secured 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.

Our operations and results may be negatively impacted by public health threats such as the coronavirus outbreak or other pandemic diseases

Global and local health concerns, including the outbreak of pandemic or contagious disease, such as the recent coronavirus (COVID-19) outbreak, may disrupt economic activity and adversely affect us.

Since December 2019, novel COVID-19 began to spread in China and promptly expanded to Europe, the United States and more than 200 countries, including Colombia and other countries in which we operate. Such events are causing disruption of regional and global economic activity, which could affect our operations, financial results and the quality of our loan portfolio due to long periods of quarantines, unemployment, reduced household and corporate income, aggregate demand and limitations in the production and commerce of goods and services. The extent to which COVID-19 might affect our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the COVID-19 and the actions to contain it, among others. 

To address the COVID-19 crisis and prevent its spread, the Colombian Government issued Decree 417 of 2020 by means of which the President of Colombia declared a State of Emergency for 30 calendar days. With the declaration of the State

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of Emergency the President was invested with the necessary powers to issue decrees with the force of law, in order to deal with the unforeseen circumstances generated by COVID-19.

Under the effects of Decree 417 of 2020, the Colombian President adopted several measures such as a 19-day nationwide quarantine, which was recently extended for 2 additional weeks and could be further extended, relief for certain annual corporate obligations, extension of tax-return due dates, suspension of international and local travel, guaranteed access to public utilities and loosened customs requirements for the import of medical supplies, among others.

In Central America, Governments have issued sanitary restrictions designed to reduce COVID-19 infections, such as preventive quarantines, suspension of on-site lectures, border restrictions, as well as the suspension of public events and the installment of mandatory social distancing regulations; with the exception of the Nicaraguan government, which has not taken more strict precautions and instead maintains basic epidemiological surveillance and basic hygiene controls. In the case of Costa Rica, Honduras, Panama and Guatemala, partial curfews have been established, to further restrict citizens’ exposure to the virus, along with public and private vehicle circulation restriction policies. 

Furthermore, Central American Governments (excluding Nicaragua) have adopted economic measures aimed at mitigating the negative effects of coronavirus in their local economy, including extension of the filing deadline for tax returns and payments, temporary suspension of bank loan payments, reduction and/or freezing of interest rates, without negative consequences on credit scores or payment records.  Panama, Costa Rica and Guatemala have adopted additional measures such as providing economic aid to individuals directly affected by the economic crisis resulting from the spread of coronavirus in their countries. In addition, the Costa Rican Government (i) allowed private companies directly affected by COVID-19 to temporarily adjust their working hours schedule and reduce workers’ salaries to avoid layoffs, and (ii) permitted, under certain circumstances, the early withdrawal from the Labor Capitalization Fund (part of unemployment benefits in Costa Rica) for workers who suffered job dismissals or a reduction to their working hours.

Prior to the quarantines, we adopted social distancing measures including flexible office schedules and shifts, cancellation of non-essential travel, limitation to the number of participants in meetings held at our offices and facilitation of virtual meetings. Additionally, we implemented communication strategies to keep our employees informed about COVID-19 and the importance of increasing cleaning and disinfection practices. Following the announcement of the quarantines, we implemented a work from home policy for all our employees, which included compliance with business continuity policies and specific information technology protocols. For this purpose, we designed protocols to ensure capacity, availability and security of VPN services, expanded bandwidth in our employees’ homes, strengthened security of email services and remote access to data stored in the internal network, among others. Controls on data encryption of communications, critical files and devices, dual factor authentication, application virtualization, security operations center (SOC) detection reporting, and data loss prevention (DLP) monitoring were also reinforced. Additionally, we strengthened awareness campaigns intended to prevent smishing, phishing and vishing attacks on our employees and customers. We also introduced internal measures to guarantee the safety of our employees, customers and suppliers. Furthermore, we have adopted additional measures including virtual meetings of the Boards of Directors, the establishment of High-level Crisis Committees, and the reinforcement of cleaning and disinfection protocols in corporate buildings and branches, among others. Although we have implemented controls to address remote functioning of our operations, security and other operational risks may arise and consequently may have adverse effects on our results of operations. There is no guarantee that the measures enacted by us or the government restrictions described above will lessen the potential impact of Covid-19 on our business, financial condition or results of operations.

With respect to banking customers, our banking subsidiaries implemented relief policies which included payment extensions and the temporary elimination of charges for all digital transfers and call center transactions. Loan and deposits growth, net interest income, impairment loss on financial assets, net income from commissions and fees, gross profit from sales of goods and services, net trading income and other line items could be adversely affected by these relief policies and the relief measures, quarantines and restrictions implemented by governments in response to COVID-19, and consequently may have adverse effects on our overall business, financial condition and results of operations. COVID-19 developments remain unpredictable in the countries in which we operate, and future developments, including a prolonged slowdown of the economy in such countries, could heighten the impact of the other risks identified in “Item 3. Key Information—D. Risk factors”.

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See “Item 4. Information on the Company—B. Business overview—Supervision and regulation”, “Item 5. Operating and Financial Review and Prospects—D. Trend information”, “Item 11. Quantitative and Qualitative Disclosures About Risk” and “Note 35—Subsequent Events” of our audited consolidated financial statements for further information on credit risk management, relief measures available for customers, additional measures taken by Governments and central banks, and an overall analysis of the possible negative impacts of coronavirus on our business, financial condition and results of operations including the line items referenced above.

Risks related to global climate change and environmental requirements

Climate change initiatives, laws or regulations, seeking to protect and adapt the companies to the environment, could be  applicable to us in a non-material way. However, even if the impacts of such dispositions are not related specifically to the core business of Grupo Aval, it could have an effect on some of our affiliates’ financing products. The occurrence of environmental changes in dry seasons, floods, droughts, and others climate variations or changes in the local environmental legislation, could result in decreases of business operations for some of our banking customers due to lower revenues and slower business production. Clients whose productivity and financial conditions could be affected by climate change policies could experience delays on repayment obligations to our banking subsidiaries or lower credit profiles susceptible to downturns in the economy. Moreover, some of our investments related to energy and gas, infrastructure, agribusiness and hotel industries are vulnerable to the environmental changes mentioned above.

Risks relating to our businesses and industry

Risks relating to our banking business

A deterioration in asset quality, including the loan portfolios of our banking 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 loans and accounts receivable or resulting in reduced profitability. In particular, the percentage of past due or impaired 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 past due or impaired loans, which could result in increased impairment losses on loans and other accounts receivable due to defaults by, or deterioration in the credit profiles of, individual borrowers. Past due or impaired loans and resulting impairment 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 past due or impaired loans or a deterioration in the credit quality of loan portfolios. As a result, our banking subsidiaries may be required to increase impairment losses on loans and accounts receivables, which may adversely affect our results of operations and financial condition. Our  exposure  is concentrated in certain economic sectors and large corporations that could also increase our impairment losses.

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

Default rates generally increase with the age of loans, the level of past due or impaired 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 of secured loans, which may adversely affect their results of operations and financial condition.

Our banking subsidiaries originate 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, 2019, 46.3% of consolidated loans past due more than 30 days 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 loss allowance of our loans secured by such collateral. If this were to occur, we may need to incur additional impairments to cover actual 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 and Central American insolvency laws may limit the ability of our banking subsidiaries to collect on monetary obligations and enforce rights against collateral or under guarantees.

Insolvency laws in certain countries in which we operate 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 such creditors are prevented from enforcing their rights against the collateral and other assets of the insolvent debtor.

In some countries in which we operate 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 in accordance with the respective law and with a group (two or more) of creditors that represent the majority of the total amount of the claims will be mandatorily applicable to all relevant creditors. The insolvency law also provides other protections to debtors. 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. In addition, increased difficulties in enforcing debt and other monetary obligations due to insolvency laws in countries in which we operate, 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, our assessment of credit risk associated with a particular customer may not be based on

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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.

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

Our Colombian banks’ securities portfolio primarily consists of debt securities issued or guaranteed by the Colombian government. LB Panamá’s securities portfolios primarily consist of debt securities issued by corporate and sovereign issuers. We are exposed to significant credit, market and liquidity risks associated with debt securities. At December 31, 2019 and 2018, debt securities represented 10.5% and 9.9% of our consolidated total assets, respectively; 47.9% and 49.8% of gross debt securities were issued by the Colombian Central government, and 16.9% and 10.5% were issued or backed by Central American governments at the end of 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 banking 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 situation and results of operations, including but not limited to 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 (IT) 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 71.3% and 71.2% of consolidated total liabilities at December 31, 2019 and 2018, respectively. Because our banking subsidiaries rely primarily on 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 also be impacted 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.

Our exposure is concentrated in certain economic sectors and large corporations that could increase our impairment losses. The aggregate gross balance of outstanding loans to our banks’ ten largest single borrowers represented 3.1% of our consolidated total gross loan portfolio at December 31, 2019. Default on loans by one or more of these borrowers may adversely affect our results of operations and financial condition.

Among our largest impaired exposures, as of December 31, 2019, Concesionaria Ruta del Sol (Ps 762.0 billion) was provisioned at 100.0% and the Sistema Integrado de Transporte Público (SITP) companies, with a combined exposure representing Ps 414.6 billion, was provisioned at 25.4%. While we have undertaken negotiations with these SITP companies, there can be no assurance as to the timing or the terms of the final resolution of these matters, given the inherent uncertainties in such situations, we can provide no assurance that these matters will not be material to our business, financial position, results of operations or cash flows in the future. During the last quarter of 2019 we charged-off Electricaribe and one of the SITP companies (Tranzit S.A.) that were outstanding for Ps 804.3 billion and Ps 103.5 billion, respectively; both exposures were already impaired, since there were no expectations of recovery.

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 overall financial services industry 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 banking subsidiary will be required to improve its capital ratios by either raising additional capital or disposing of assets. Since February 6, 2019, we are subject to the inspection and surveillance of the Superintendency of Finance as the financial holding of the Aval Financial Conglomerate and we might be required in the future to raise additional capital to comply with new regulatory adequacy rules applicable to us at the conglomerate level. Furthermore, Decree 1477 of 2018 modified the capital adequacy requirements applicable to financing entities in Colombia. As a result, our banking subsidiaries will migrate to Basel III capital requirements in 2021. 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 and Prospects—B. Liquidity and 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.

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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 over indebtedness 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 over indebtedness of our customers, despite our focus on low-risk, middle- and high-income customers.

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 rate slows or turns negative, 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 and financial services 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, regulations, reviewing and revising existing laws and regulations, particularly in relation to capital adequacy and accounting standards that may change the perceived strength on our banks, our credit ratings or our ability to grow or pay dividends. 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, 2015 and 2018, 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

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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, risk management, internal control and criteria for identifying, administering, monitoring and revealing conflicts of interest. Law 1870 also enables the Superintendency of Finance to require changes in the structure of a financial conglomerate when the existing structure does not allow sufficient disclosure of information or a comprehensive and consolidated supervision, to conduct on-site visits and withdrawal of operating licenses.

Law 1870 of 2017 came into effect on February 6, 2019. As a result, the Superintendency of Finance now exerts supervision over Grupo Aval as the financial holding company of the Aval Financial Conglomerate. The Ministry of Finance also enacted Decree 246 of February 2018, setting the criteria under which the superintendency may exclude from the scope of its supervision certain entities of investment vehicles of a financial conglomerate. Additionally, the Ministry of Finance enacted Decree 774 of May 2018, regarding capital adequacy of financial conglomerates allowing for an 18 month transition period, coming into effect on November 8, 2019 and Decree 1486 of August 2018 regarding the criteria for the identification of related companies, policies on conflicts of interest and limits of exposure and concentration of risks applicable to financial conglomerates, allowing for an 18 month transition period, coming into effect on February 6, 2020. We cannot assure that such Law and its regulatory decrees will not have a material adverse impact on us. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation—Regulatory framework for Colombian Financial Conglomerates&