NOTE 17 – GOODWILL

The following is the roll-forward of the goodwill balance during the years ended December 31, 2019 and 2018:


	December 31, 2019		December 31, 2018
Balance at the beginning of the year	Ps.	7,318,594	Ps.	6,901,056
Impairment charge		(13,041)		—
Effect of movements in exchange rates (1)		43,034		417,538
Balance at the end of the year	Ps.	7,348,587	Ps.	7,318,594

⁽¹⁾

The foreign exchange adjustment is attributable to Leasing Bogotá Panamá

The following is the detail of goodwill assigned by cash generating units (CGU) representing the lowest identifiable level within Grupo Aval and monitored by management. In addition the values of goodwill are not greater than the identified business’ segments:


Goodwill carrying amount
	December 31,		December 31,
CGU	2019		2018
Leasing Bogotá Panamá (2)	Ps.	5,148,935	Ps.	5,105,901
Banco de Bogotá S.A. over Megabanco (1)		465,905		465,905
Promigas S.A. and Subsidiaries		169,687		169,687
Concesionaria Panamericana S.A.S.		106,874		119,915
Concesionaria Covipacífico S.A.S.		102,376		102,376
Hoteles Estelar S.A.		6,661		6,661
Banco de Occidente S.A. over Banco Unión (1)		22,724		22,724
Banco Popular S.A.		358,401		358,401
Banco de Bogotá S.A.		301,222		301,222
Banco de Occidente S.A.		127,571		127,571
Sociedad Administradora de Pensiones y Cesantías Porvenir S.A.		538,231		538,231
	Ps.	7,348,587	Ps.	7,318,594

(1) Goodwill recognized as a result of mergers into these entities.

(2) The change presented corresponds to the foreign exchange adjustment attributable to Leasing Bogotá Panamá.

The recoverable amount of each cash generating unit was determined based on market values of banks, listed in stock exchanges and a recoverable amount is determined by a study for those not listed in stock exchanges. Such calculations used cash flow projections, covering periods from 5 to 20 years. Cash flows subsequent to these periods were extrapolated using estimated growth rates for such flows, not exceeding the average of the economic sector where the cash generating unit operates.

Impairment

At date of completion, the carrying amount of Concesionaria Panamericana S.A.S’s valuation was Ps. 190,567 and its recoverable amount of Ps. 177,526 which generates a recognition of impairment of Ps. 13,041 attributable to goodwill on this concession. The main assumptions and circumstances taken into account, for the recognition of this impairment were:

• The valuation horizon of the model is given by the remaining term of the concession, which has an end date in May 2035.

• Because the concession has a certain period of execution, the goodwill has a “determined useful life” and in that sense it was expected that in the last years of the administration and operation of the concession the paid goodwill began its deterioration process.

• The Concessionaire's income is made up of tolls, as well as future validity for additional works executed. Tolls revenue was updated by verifying the traffic study (actual traffic validation), considering the category of vehicles and incorporating the percentage of growth expected for each year of the concession. Additionally, tolls rates were updated due to the variation observed in the CPI (in some cases additional growth is incorporated). Revenues for the future validities, agreed in constant pesos in the concession contract, are updated with the variation of the CPI corresponding to the period in which they are received by the concessionaire.

• About administration and operation costs and expenses, internal projections were used, considering compliance with contractual obligations, as well as service level indicators.

• Under the above assumptions, the recoverable amount at December 31, 2019 was less than the carrying amount of the investment cost including goodwill.

Below is a detail of the most significant values that comprise Goodwill, representing more than 80% of the Goodwill balance detailed above:

A. Leasing Bogotá S.A. Panamá

On December 9, 2010, Banco de Bogotá S.A. acquired control of BAC Credomatic Inc (BAC COM) through its subsidiary Leasing Bogotá S.A. Panamá (LBP), which is the Panamanian company that executed the purchase agreement. BAC Credomatic Inc. (BAC COM), a company incorporated to do business under the laws of the British Virgin Islands, is the owner of Banco BAC International Bank, Inc. and the operations of BAC Credomatic Inc. (BAC) in Central America.

With the acquisition of BAC COM, through LBP, BAC’s corporate structure now is controlled by Banco de Bogotá S.A., which is controlled, in turn, by Grupo Aval. Goodwill was generated and recognized as a result of that operation. Banco de Bogotá was authorized by the Superintendency of Finance to make this acquisition, through its subsidiary Leasing Bogotá Panamá, as indicated in Official Notice 2010073017‑ 048 dated December 3, 2010.

Afterwards, (98.92%) of the shares of Banco Bilbao Vizcaya Argentaria S.A. Panamá (BBVA Panamá, now BAC de Panamá) were acquired by Banco de Bogotá, through its subsidiary Leasing Bogotá Panamá, under authorization from the Superintendency of Finance, as per Official Notice 2013072962‑052 dated December 12, 2013.

Also, (100.00%) of the shares of Banco Reformador de Guatemala (Reformador) and of Transcom Bank Limited in Barbados (Transcom) were acquired, and both banks were stated as Grupo Financiero Reformador de Guatemala. The Superintendency of Finance authorized Banco de Bogotá to acquire these banks, through its subsidiaries Credomatic International Corporation and BAC Credomatic Inc., as per Official Notice 2013068082‑062 dated December 3, 2013.

Finally, during 2015, Credomatic International Corporation, a subsidiary of the company, acquired 100% of the issued and outstanding shares of COINCA Corporation Inc. (COINCA) and Corporación Tenedora BAC Credomatic S.A., and an indirect subsidiary of the Company, acquired 100% of the issued and outstanding shares of Medios de Pago MP S.A., domiciled in Costa Rica, generating with the latter an additional capital gain of Ps. 853,401 that was included in the consolidated financial statements of the Bank in the first quarter of 2016.

The latest valuation update for the groups of cash generating units to which this goodwill was allocated was done by an external adviser and reviewed by Management in January 2020, based on the financial statements of BAC Credomatic at September 30, 2019. The conclusion was that there are no situations that imply a possible impairment, given that the recoverable amount of the groups of cash generating units associated with goodwill was Ps. 21,490,101 exceeds the book value by Ps. 6,878,995.

The following table shows the averages of the main assumptions used in the reports on impairment of the cash-generating units with allocated goodwill, based on the impairment assessments done on the indicated dates. Although the valuation exercise includes a 10 year projection, the following tables only show the first 5 years as, following the first year of projection, rates are generally stable with no significant variations.


December 31, 2019
	2020		2021		2022		2023		2024
Lending rate on the loan portfolio and investments	11.3	%	11.4	%	11.4	%	11.3	%	11.3	%
Borrowing rate	2.8	%	2.8	%	2.8	%	2.8	%	2.8	%
Growth in income from commissions	(0.2)	%	6.6	%	8.4	%	8.7	%	8.7	%
Growth in expenses	5.9	%	5.5	%	5.4	%	5.7	%	6.2	%
Discount rate after taxes	11.5	%
Growth rate after ten years	3.0	%


December 31, 2018
	2019		2020		2021		2022		2023
Lending rate on the loan portfolio and investments	11.4	%	11.4	%	11.4	%	11.3	%	11.3	%
Borrowing rate	2.9	%	3.0	%	3.0	%	3.0	%	3.0	%
Growth in income from commissions	2.0	%	7.7	%	8.0	%	7.8	%	7.7	%
Growth in expenses	5.3	%	6.2	%	5.8	%	6.0	%	6.3	%
Discount rate after taxes	11.8	%
Growth rate after ten years	3.0	%

A 10-year projection was made to evaluate goodwill impairment, considering the business will have matured and the flow of funds will have stabilized once this period has elapsed. In turn, macroeconomic assumptions as well as those for BAC Credomatic’s business in each of the countries where it operates were used for the projection, so as to reflect the reality that each market provides to the CGUs as a whole. The averages of the main premises used are listed in the foregoing tables, including the variables for all the countries where BAC Credomatic Inc. operates. The following is description of that process:

Lending rates on loans and investments were projected based on historical data and on the expectations of management in each of the countries where BAC Credomatic Inc. operates, considering the competitiveness of the different services in their respective markets and the growth strategies for each segment. The projection on US Federal Reserve rates was taken into account as well, since these rates serve as a basis for international banking rates.

Growth in income from commissions was projected in line with the growth in BAC Credomatic´s active portfolio, which allows for greater income through products and services like insurance, memberships. commissions on foreign currency exchange and also the implementation of new services among others. Competitive markets were also considered in the projected time horizon elapsed.

Although the functional or reporting currency of the business is that of each country in the region where BAC Credomatic Inc´s. subsidiaries operate, the future flows of funds have been converted into nominal U.S. dollars in each projected period, discounted at a nominal rate in U.S. dollars, net of income tax, estimated as "Ke". A discount rate in U.S. dollars is used, given that a consistent discount rate in the respective local currencies cannot be estimated because of the lack of necessary data.

The discount rate has been estimated in light of the risk profile of each of the markets where BAC Credomatic Inc. operates.

To estimate the terminal value, the normalized flow of funds, adjusted according to expectations for its growth, was projected in perpetuity. This projection does not exceed the average long-term rate of growth for the economies in each of the countries where BAC operates. Consequently, an annual growth rate of 3.0% was estimated for the long term.

The discount rate after taxes used to discount the dividend flows reflects the specific risks relative to the CGU and the markets where BAC Credomatic operates, as mentioned earlier. Had the USD denominated estimated 11.5% discount rate been 1.0% higher; it would not have been necessary to reduce the book value of goodwill, since the value-in-use of the cash-generating units associated with goodwill would have been Ps. 18,763,763, still exceeding book value as of December 31, 2019 of Ps. 14,611,105.

B. Cash-generating units inside Banco de Bogotá

Goodwill was generated in 2006 with the acquisition of 94.99% of the shares of Banco de Crédito y Desarrollo Social – MEGABANCO S.A. and later merged with Banco de Bogotá. This operation was authorized by the Office of the Superintendency of Finance in Resolution No. 917 dated June 2, 2006.

That goodwill was allocated to the groups of cash-generating units inside Banco de Bogotá involved in the following lines of business:


	Share (%)		Value
Commercial	32.7	%	Ps.	152,539
Consumer	30.8	%		143,287
Payroll installment loans	27.0	%		125,934
Vehicles	6.7	%		31,304
Microcredit	2.8	%		12,841
Total	100.0	%	Ps.	465,905

The latest valuation update for the business lines of the groups of cash-generating units to which this goodwill was allocated, was performed by an external adviser and reviewed by management. This valuation was conducted on January 2020 and is based on Banco de Bogotá´s financial statements at September 30, 2019. It was concluded that there are no situations that imply a possible impairment, given that the recoverable amount of the groups of cash generating units associated with goodwill was Ps. 11,106,623 exceeds the book value by Ps. 2,867,134.

The following table shows the main assumptions used in the latest impairment tests of the groups of cash-generating units with allocated goodwill.


December 31, 2019
	2020		2021		2022		2023		2024
Lending rate on the loan portfolio and investments	9.0	%	9.4	%	10.0	%	10.3	%	10.4	%
Borrowing rate	3.7	%	3.7	%	4.1	%	4.4	%	4.3	%
Growth in income from commissions	13.0	%	7.8	%	7.8	%	8.4	%	8.6	%
Growth in expenses	0.1	%	5.3	%	5.7	%	5.2	%	4.9	%
Inflation	3.2	%	2.7	%	3.5	%	3.3	%	3.3	%
Discount rate after taxes	13.0	%
Growth rate after five years	3.3	%


December 31, 2018
	2019		2020		2021		2022		2023
Lending rate on the loan portfolio and investments	9.4	%	10.0	%	10.1	%	10.3	%	10.5	%
Borrowing rate	3.5	%	3.8	%	3.9	%	4.2	%	4.3	%
Growth in income from commissions	9.9	%	7.5	%	8.0	%	7.9	%	8.3	%
Growth in expenses	3.7	%	3.9	%	3.1	%	3.5	%	3.6	%
Inflation	2.9	%	3.1	%	2.7	%	3.5	%	3.3	%
Discount rate after taxes	14.0	%
Growth rate after five years	3.1	%

A 5-year projection was made to estimate goodwill, based on macroeconomic assumptions and those related to the businesses listed in the foregoing tables.

The following is a description of that process.

The lending rates on loans and investments were projected based on the Company expected rates and lending rates from independent specialists (The Economist Intelligence Unit "EIU")

The borrowing rates were projected based on the Company expected rates and the money market interest rate from EIU.

Estimated growth in commissions is based on its historical percentage over the gross loan portfolio.

Estimated growth in expenses is based on the inflation’s growth and/or its historical percentage over revenues.

The inflation rate used in the projections is based on reports from outside sources, such as The Economist Intelligence Unit, and Corficolombiana.

The growth rate used for the terminal value was 3.3%, which is the average projected inflation provided by the independent specialists and reviewed by management.

The discount rate after taxes used to discount dividend flows reflects the specific risks relative to each cash-generating unit. If the 13.0% estimated discount rate had been 1.0% higher than the rate estimated in the models, the book value of goodwill would not have to be reduced, since the fair value of the groups of cash-generating units associated with goodwill would have been Ps. 10,030,439, which is above the book value of Ps. 8,239,489 as of December 31, 2019.

C. Sociedad Administradora de Fondos de Pensiones y Cesantías Porvenir S.A.

Porvenir absorbed AFP Horizonte Pensiones y Cesantías S.A. and the goodwill in question was allocated to the groups of cash-generating units that together made up Porvenir later that same year.

The latest valuation update for the business lines of the groups of cash-generating units to which this goodwill was allocated, was done by an external adviser and reviewed by management. This valuation was conducted on January 2020 and is based on financial statements of Porvenir at September 30, 2019. The conclusion was that there are no situations that imply a possible impairment, given that the recoverable amount of the groups of cash generating units associated with goodwill was Ps. 5,731,871, exceeding the book value by Ps. 2,259,084.

The following are the main assumptions used in the impairment test reports taken as the basis for impairment testing on the dates listed, although the valuation exercise includes a 20 years projection, the following tables only show the first 5 years as reates, following the first year of projection, are generally stable with no significant variations.


December 31, 2019
	2020		2021		2022		2023		2024
Interest rate on investments	2.7	%	2.8	%	3.2	%	3.1	%	3.1	%
Borrowing rate	6.3	%	6.3	%	6.3	%	6.3	%	6.3	%
Growth in income from commissions	0.7	%	6.3	%	7.5	%	6.5	%	6.4	%
Growth in expenses	3.4	%	4.8	%	5.5	%	(0.5)	%	3.2	%
Inflation	3.2	%	2.7	%	3.5	%	3.3	%	3.3	%
Discount interest rate after taxes	12.0	%
Growth rate after twenty years	3.2	%


December 31, 2018
	2019		2020		2021		2022		2023
Interest rate on investments	4.6	%	5.7	%	5.7	%	6.5	%	6.3	%
Borrowing rate	6.3	%	6.3	%	6.3	%	6.3	%	6.3	%
Growth in income from commissions	1.0	%	9.4	%	7.5	%	7.8	%	6.8	%
Growth in expenses	4.3	%	4.6	%	5.6	%	6.6	%	0.5	%
Inflation	2.9	%	3.1	%	2.7	%	3.5	%	3.3	%
Discount interest rate after taxes	13.0	%
Growth rate after twenty years	3.1	%

A 20‑year projection was made to estimate goodwill based on macroeconomic assumptions and those related to the business of Porvenir, as indicated in the foregoing tables. The following is a description of that process.

Investments and borrowing rates were projected using historical data and data provided by the Company on the business.

The estimated increases in commissions and expenses are based on business growth and other transactions estimated by the Company.

The inflation rate used in the projections is based on reports from outside sources, such as The Economist Intelligence Unit and Corficolombiana.

The growth rate used for the terminal value was 3.2%, which is the average projected inflation provided by the independent specialists.

The discount interest rate after taxes that was used to discount dividend flows reflects the specific risks relative to each cash-generating unit. If the estimated discount rate of 12.0% had been 1.0% higher than the estimated rate in the valuation done by external experts, there would be no need to reduce the book value of goodwill, since the fair value of the groups of cash-generating units associated with goodwill would be Ps. 5,128,364 and exceeds their book value of Ps. 3,472,787 as of December 31, 2019.