20-F 1 t1601148_20f.htm FORM 20-F
 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

 

Washington, D.C. 20549

FORM 20-F

 

(Mark One)two

 

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

OR

xANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2015

OR

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

OR

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

 

Commission file number: 001-36631

 

GRUPO AVAL ACCIONES Y VALORES S.A.

(Exact name of Registrant as specified in its charter)

Republic of Colombia

(Jurisdiction of incorporation)

Carrera 13 No. 26A - 47

Bogotá D.C., Colombia

(Address of principal executive offices)

Jorge Adrián Rincón

Chief Legal Counsel

Grupo Aval Acciones y Valores S.A.

Carrera 13 No. 26A - 47

Bogotá D.C., Colombia

Phone: (+57 1) 241-9700

E-mail: jrincon@grupoaval.com

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

 

Copies to:

Nicholas A. Kronfeld, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017

Phone: (212) 450-4000

 

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

None
(Title of Class)

 

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

 

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

 

 

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

 

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

None
(Title of Class)

 

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

Preferred shares: 7,014,053,500

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

x Yes      ¨  No

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

¨ Yes    x  No

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

x Yes      ¨  No

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

¨ Yes      ¨  No

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

Large accelerated filer  x Accelerated filer  ¨ Non-accelerated filer  ¨

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

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

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

¨ Item 17      ¨  Item 18

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

¨ Yes      x  No

 

   

 

 

table of contents

  

    Page
     
PRESENTATION OF FINANCIAL AND OTHER INFORMATION 1
FORWARD-LOOKING STATEMENTS 4
PART I 6
ITEM 1.  IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS 6
A. Directors and senior management 6
B. Advisers 6
C. Auditors 6
ITEM 2.  OFFER STATISTICS AND EXPECTED TIMETABLE 6
A. Offer statistics 6
B. Method and expected timetable 6
ITEM 3.  KEY INFORMATION 6
A. Selected financial data 6
B. Capitalization and indebtedness 12
C. Reasons for the offer and use of proceeds 12
D. Risk factors 12
ITEM 4.  INFORMATION ON THE COMPANY 36
A. History and development of the company 36
B. Business overview 45
C. Organizational structure 123
D. Property, plants and equipment 123
ITEM 4A.  UNRESOLVED STAFF COMMENTS 123
ITEM 5.  OPERATING AND FINANCIAL REVIEW AND PROSPECTS 124
A. Operating results 124
B. Liquidity and capital resources 186
C. Research and development, patents and licenses, etc. 190
D. Trend information 190
E. Off-balance sheet arrangements 190
F. Tabular disclosure of contractual obligations 191
ITEM 6.  DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 191
A. Directors and senior management 191
B. Compensation 198
C. Board practices 198
D. Employees 200
E. Share ownership 201
ITEM 7.  MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 201
A. Major shareholders 201
B. Related party transactions 202
C. Interests of experts and counsel 205
ITEM 8.  FINANCIAL INFORMATION 205
A. Consolidated statements and other financial information 205
B. Significant changes 206
ITEM 9.  THE OFFER AND LISTING 207
A. Offering and listing details 207
B. Plan of distribution 207
C. Markets 207
D. Selling shareholders 209
E. Dilution 209
F. Expenses of the issue 209
ITEM 10.  ADDITIONAL INFORMATION 209
A. Share capital 209
B. Memorandum and articles of association 209
C. Material contracts 217
D. Exchange controls 217

 

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E. Taxation 218
F. Dividends and paying agents 223
G. Statement by experts 226
H. Documents on display 226
I. Subsidiary information 226
ITEM 11.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT RISK 226
ITEM 12.  DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 240
A. Debt securities 240
B. Warrants and rights 240
C. Other securities 240
D. American depositary shares 241
PART II 243
ITEM 13.  DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 243
A. Defaults 243
B. Arrears and delinquencies 243
ITEM 14.  MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 243
A. Material modifications to instruments 243
B. Material modifications to rights 243
C. Withdrawal or substitution of assets 243
D. Change in trustees or paying agents 243
E. Use of proceeds 243
ITEM 15.  CONTROLS AND PROCEDURES 244
A. Disclosure controls and procedures 244
B. Management’s annual report on internal control over financial reporting 244
C. Attestation report of the registered public accounting firm 245
D. Changes in internal control over financial reporting 245
ITEM 16.  [RESERVED] 245
ITEM 16A.  Audit committee financial expert 245
ITEM 16B.  Code of ethics 245
ITEM 16C.  Principal accountant fees and services 246
ITEM 16D.  Exemptions from the listing standards for audit committees 246
ITEM 16E.  Purchases of equity securities by the issuer and affiliated purchasers 246
ITEM 16F.  Change in registrant’s certifying accountant 247
ITEM 16G.  Corporate governance 247
ITEM 16H.  Mine safety disclosure 248
PART III 249
ITEM 17.  Financial statements 249
ITEM 18.  Financial statements 249
ITEM 19.  Exhibits 249
APPENDIX A. SELECTED FINANCIAL AND STATISTICAL DATA PREPARED UNDER COLOMBIAN BANKING GAAP A-1
SIGNATURES

 

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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. See “Item 3. Key information—A. Selected financial and operating data—Exchange rates” for ‎information regarding exchange rates for the Colombian currency. This annual report translates certain Colombian peso amounts ‎into U.S. dollars at specified rates solely for the convenience of the reader. The conversion of amounts expressed in ‎pesos as of a specified date at the then prevailing exchange rate may result in the presentation of U.S. dollar amounts ‎that differ from U.S. dollar amounts that would have been obtained by converting Colombian pesos as of another specified ‎date. Unless otherwise noted in this annual report, all such peso amounts have been translated at the ‎rate of Ps 3,149.47 per U.S.$1.00, which was the representative market rate calculated on December 31, 2015. 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 28, 2016, the representative market rate was Ps 2,943.23 per ‎U.S.$1.00.‎

 

Definitions

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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 an issuer in Colombia of securities registered with the National Registry of Shares and Issuers, and in this capacity, we are subject to oversight by the Superintendency of Finance. We are not a financial institution in Colombia. We are required to comply with corporate governance and periodic reporting requirements to which all issuers are subject, but we are not supervised or regulated as a financial institution or as a holding company of banking subsidiaries and, thus, are not required to comply with the capital adequacy regulations applicable to banks and other financial institutions. All of our banking subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas, and their respective financial subsidiaries, including Porvenir and Corficolombiana) 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, 2015 and 2014 and January 1, 2014 and for the years ended December 31, 2015 and 2014 have been audited, as stated in the report appearing therein, by KPMG Ltda., and are included in this annual report and referred to as our audited consolidated financial statements. Our historical results are not necessarily indicative of results to be expected for future periods. We have prepared the audited consolidated financial statements included herein in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (“IFRS”). These are the first financial statements prepared under IFRS, and therefore the opening statement of financial position was prepared as of January 1, 2014, the date of our transition to IFRS, as required by IFRS 1—“First Time Adoption of International Financial Reporting Standards”. The comparative figures at and for the year ended December 31, 2014 reflect adjustments and reclassifications made as a result of our adoption of IFRS. Previously, our consolidated financial statements were prepared in accordance with the regulations of the Superintendency of Finance applicable to financial institutions (Resolution 3600 of 1988 and External Circular 100 of 1995) and, on issues not addressed by these regulations, generally accepted accounting principles prescribed by the Superintendency of Finance for banks operating in Colombia (which we refer to in this annual report, collectively, as “Colombian Banking GAAP”). See Note 38 to our audited consolidated financial statements included in this document for a discussion of the main differences between IFRS and Colombian Banking GAAP. We have included certain information prepared under Colombian Banking GAAP at and for the years ended December 31, 2013, 2012 and 2011 in Appendix A — “Selected 2013, 2012 and 2011 Financial and Statistical Data Prepared under Colombian Banking GAAP” to provide information for prior years. Colombian Banking GAAP is not comparable to IFRS.

 

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

 

Colombian IFRS is based on IFRS as of December 31, 2013, and certain Colombian regulation. As a result, certain rules subsequently issued by the IASB are not applicable under Colombian IFRS and our financial statements for local purposes differ from our financial statements under IFRS in the following principal aspects:

 

1.Under Colombian regulations, wealth tax, created by the Colombian congress in 2014 and to be paid by companies during 2015, 2016 and 2017, calculated based on the tax equity method can be recorded against equity reserves. However under IFRS, according to IFRIC 21, wealth tax liabilities must be recorded against the statement of income.

 

2.Under Colombian IFRS, allowances for loan losses are calculated based on specific rules of the Financial and Accounting Basic Circular (Circular Básica Contable y Financiera) issued by the Superintendency of Finance for the separate financial statements; and according to the criteria set forth in International Accounting Standard (“IAS”) 39 for consolidated financial statements. Under Colombian IFRS, the difference between both methodologies in the consolidated financial statements is recorded in other comprehensive income, whereas under IFRS, allowances for loan losses are calculated according to the criteria set forth in IAS 39 and recorded in the statement of income of each period.

 

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3.Consolidated financial statements prepared under Colombian IFRS classify debt securities into one of two categories: fair value through profit or loss or amortized cost. Entities with non-controlling or non-significant influence in equity securities must record fair value changes in other comprehensive income, in accordance with the guidance set out in IFRS 9.

 

Non-IFRS financial measures

 

We have included in this annual report non-IFRS measures such as return on average assets, or “ROAA,” and return on average equity, or “ROAE”. These measures should not be construed as an alternative to IFRS measures and should also not be compared to similarly titled measures reported by other companies, which may evaluate such measures differently from how we do. For Non-IFRS measures to IFRS measures, see “Item 3-Key Information—A. Selected financial and operating data—Non-IFRS measures.”

 

Market share and other information

 

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

 

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

 

Banks, financing companies and finance corporations 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. Finance corporations invest directly in the economy and thus are the only credit institutions that may invest in non-financial sectors. Banks are permitted to invest in finance corporations. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation.” In Colombia, we operate four banks, one financing company and one finance corporation, and our market share is determined by comparing our banks to other banks reporting their results to the Superintendency of Finance. However, if financing companies and finance corporations are included in the calculation of market share data, our market shares would generally be lower than in a bank-only comparison, and the gaps between our market shares and those of our competitors would be smaller, but our market leadership in most market categories would be unaffected.

 

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

 

The principal competitors of Porvenir, our pension and severance fund administrator, include Administradora de Fondos de Pensiones y Cesantías Protección S.A., or “Protección,” Colfondos S.A. Pensiones y Cesantías, or “Colfondos,” and Old Mutual Administradora de Fondos de Pensiones y Cesantías S.A., or “Old Mutual,” We have

 

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included in this annual report competitive market position data for Porvenir as compared to its principal competitors. Corficolombiana, our merchant bank, is a financial corporation, and its competitors include Banca de Inversión Bancolombia S.A., J.P. Morgan Corporación Financiera S.A., BNP Paribas Colombia Corporación Financiera S.A. and Itaú BBA Colombia S.A. Corporación Financiera.

 

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

 

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, and operational efficiency and asset quality indicators, among others. Certain of these ratios are also used in this annual report to compare us to our principal competitors.

 

Other conventions

 

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

 

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

 

“Central American acquisitions” refers to the acquisitions by Banco de Bogotá of (i) a 98.92% equity interest in Banco BAC de Panamá on December 19, 2013 through its subsidiary LB Panamá and (ii) 100.00% equity interest in Grupo Financiero Reformador de Guatemala on December 23, 2013 through its indirect subsidiary Credomatic International Corporation (a subsidiary of LB Panamá). On December 9, 2014, Banco BAC de Panamá was merged into BAC International Bank, Inc. and on December 12, 2015 Grupo Financiero Reformador de Guatemala´s operation merged with Banco de América Central S.A. (Guatemala).

 

FORWARD-LOOKING STATEMENTS

 

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

 

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

 

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

 

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

 

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

 

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

 

·increases in defaults by our customers;

 

·increases in goodwill impairment losses;

 

·decreases in deposits, customer loss or revenue loss;

 

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·increases in provisions for contingent liabilities;

 

·our ability to sustain or improve our financial performance;

 

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

 

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

 

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

 

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

 

·movements in exchange rates;

 

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

 

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

 

·decreases in our level of capitalization;

 

·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 and internal security issues affecting countries where we operate;

 

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

 

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

 

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

 

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

 

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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, 2015 and 2014 and January 1, 2014 and for the years ended December 31, 2015 and 2014 have been derived from our audited consolidated financial statements prepared in accordance with IFRS that are included in this annual report. Our historical results are not necessarily indicative of results to be expected for future periods.

 

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

 

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Statement of income

 

   Grupo Aval 
   For the year ended December 31, 
   2015   2015   2014 
   (in U.S.$ millions,
unless otherwise
indicated)(1)
   (in Ps billions, except share and per share data) 
Interest income   4,469.2    14,075.6    11,421.8 
Interest expense   (1,826.2)   (5,751.5)   (4,498.7)
Net interest income   2,643.0    8,324.1    6,923.1 
Impairment loss on loans and accounts receivable   (675.6)   (2,127.7)   (1,697.5)
Impairment loss on other financial assets (1)   (10.2)   (32.2)   (12.0)
Recovery of charged-off assets   69.8    219.7    189.6 
Net impairment loss on financial assets   (616.1)   (1,940.2)   (1,519.9)
Net income from commissions and fees   1,162.8    3,662.3    3,037.2 
Net trading income   77.9    245.2    369.9 
Total other income (expense) (2)   807.2    2,542.4    2,269.0 
Total other expenses   (2,416.0)   (7,609.1)   (6,273.5)
Income before income tax expense   1,658.9    5,224.7    4,805.8 
Income tax expense   (596.6)   (1,879.0)   (1,808.3)
Net Income   1,062.3    3,345.7    2,997.5 
Net income attributable to :               
Controlling interest   648.2    2,041.4    1,815.0 
Non-controlling interest   414.1    1,304.3    1,182.5 
                
Earnings per 1,000 shares (basic and diluted earnings):               
Common and preferred shares (in pesos)        91,619.0    86,853.8 
Common and preferred shares (in U.S. dollars) (3)        29.1    36.3 
Dividends per 1,000 shares (4):               
Common and preferred shares (in pesos)        58,800.0    61,733.7 
Common and preferred shares (in U.S. dollars) (3)        18.7    25.8 
                
Weighted average number of common and preferred fully paid shares outstanding (basic and diluted):               
Outstanding shares in thousands        22,281,017.2    20,897,356.4 

 

 
(1)Includes impairment loss on non-current assets held for sale and investments in debt and equity securities.

 

(2)Includes net income from financial instruments designated at fair value.

 

(3)Translated for convenience only using the representative market rate as computed and certified by the Superintendency of Finance of 3,149.47 and 2,392.46 per U.S.$1.00 at December 31, 2015 and 2014, respectively.

 

(4)Dividends are declared semi-annually in March (for the six-month period ended December 31 of the previous year) and September (for the six-month period ended June 30 of the current year) of each year. We do not declare dividends on a quarterly basis.

 

 7 

 

Statement of financial position

 

   Grupo Aval 
   For the year ended December 31,   January 1, 
   2015   2015   2014   2014 
   (in U.S.$ millions,
unless otherwise
indicated)(1)
   (in Ps billions, except share and per share data) 
                 
Assets:                    
Cash and cash equivalents   7,075.8    22,285.0    17,269.8    14,599.3 
Financial assets held for trading through profit or losses   1,780.7    5,608.2    5,864.5    7,090.4 
Other financial assets at fair value through profit or losses   600.6    1,891.7    1,738.6    1,565.7 
Available for sale financial assets   6,250.2    19,684.9    18,758.8    14,815.7 
Investments held to maturity   760.5    2,395.3    2,665.8    3,040.4 
Total Financial assets   9,392.1    29,580.1    29,027.7    26,512.2 
Loans and receivables   45,032.2    141,827.7    114,400.7    98,920.7 
Other accounts receivables   1,016.7    3,202.2    2,233.4    1,768.8 
Hedging derivatives   10.7    33.7    64.8    17.1 
Non-current assets held for sale   63.3    199.5    211.2    303.7 
Tangible assets   2,068.3    6,514.0    5,886.7    5,467.7 
Goodwill (2)   2,240.4    7,056.0    5,867.2    5,130.5 
Concession arrangements rights   759.1    2,390.7    1,842.7    1,759.2 
Other intangible assets   194.6    612.9    388.1    212.0 
Intangible assets (2)   953.7    3,003.6    2,230.8    1,971.2 
Income tax assets   471.6    1,485.2    440.0    229.9 
Other assets   473.8    1,492.3    1,209.6    937.2 
Total assets   68,798.6    216,679.3    178,842.2    155,858.2 
                     
Liabilities:                    
Derivatives instruments held for trading   363.0    1,143.2    1,183.1    214.5 
Customer deposits   43,167.5    135,954.6    113,528.5    100,553.0 
Interbank borrowings and overnight funds   3,008.4    9,474.9    4,964.4    5,340.4 
Borrowings from banks and others   5,953.6    18,750.6    13,685.8    10,753.0 
Long-term debt (bonds)   5,260.3    16,567.1    14,130.1    12,747.6 
Borrowings from development entities   795.9    2,506.6    2,108.5    2,108.8 
Hedging derivatives   107.2    337.7    559.5    47.4 
Provisions   190.6    600.2    744.7    749.0 
Income tax liabilities   600.8    1,892.1    1,691.3    1,702.7 
Employee benefits   324.6    1,022.3    975.7    954.1 
Other liabilities   1,753.8    5,523.5    3,914.7    3,848.1 
Total liabilities   61,525.6    193,773.0    157,486.2    139,018.8 
                     
Equity                    
Controlling interest                    
Subscribed and paid-in capital:                    
Common and preferred shares   7.1    22.3    22.3    20.2 
Additional paid-in capital   2,637.8    8,307.8    8,311.9    5,784.5 
Retained earnings:                    
Appropriated   2,722.6    8,574.8    6,205.6    4,510.8 
Unappropriated   (1,514.8)   (4,770.9)   (2,889.9)   (958.2)
First time IFRS adoption   249.8    786.7    786.7    786.7 
Net income for the year   352.1    1,108.9    859.1    0.0 
Accumulated other comprehensive income   170.9    538.1    372.3    120.1 
Controlling interest   4,625.4    14,567.6    13,668.0    10,264.1 
Non-controlling interest   2,647.6    8,338.7    7,687.9    6,575.4 
Total  equity   7,273.1    22,906.3    21,356.0    16,839.4 
Total liabilities and equity   68,798.6    216,679.3    178,842.2    155,858.2 

 

 
(1)Translated for convenience only using the representative market rate as computed and certified by the Superintendency of Finance at December 31, 2015 of Ps 3,149.47 per U.S.$1.00.

 

(2)Goodwill attributable to Grupo Aval was Ps 3,854.9 billion, Ps 3,063.9 billion and Ps 2,947.6 billion at December 31, 2015 and 2014 and January 1, 2014, respectively. Our attributable tangible equity (calculated as total equity attributable to

 

 8 

 

controlling interest minus goodwill and intangible assets attributable to Grupo Aval) was Ps 10,216.6 billion, Ps 10,330.5 billion and Ps 7,168.4 billion at December 31, 2015 and 2014 and January 1, 2014, respectively.

 

Other financial and operating data

 

   Grupo Aval 
   At and for the years ended December 31, 
   2015   2014 
   (in percentages, unless otherwise indicated) 
Profitability ratios:          
Net interest margin (1)   5.5%   5.4%
ROAA (2)   1.7%   1.8%
ROAE (3)   14.5%   15.2%
           
Efficiency ratio (4):   47.6%   46.2%
Capital ratios:          
Period-end equity as a percentage of period-end total assets   10.6%   11.9%
Tangible equity ratio (5)   7.3%   8.7%
Credit quality data:          
Charge-offs as a percentage of average gross loans (6)   1.3%   1.3%
Delinquency ratio loans past due more than 30 days (6)   2.7%   2.8%
Non-performing loans (6) (7)   1.7%   1.7%
Allowance for loans as a percentage of past due loans more than 30 days   98.9%   96.7%
Allowance for loans as a percentage of non-performing loans   157.9%   157.0%
Allowance for loans as a percentage of gross loans (6)   2.6%   2.7%
Operational data (in units):          
Number of customers of the banks (8)   13,678,194    12,950,374 
Number of employees   76,095    74,211 
Number of branches (9)   1,785    1,769 
Number of ATMs (9)   5,623    5,429 

 

 
(1)Net interest margin is calculated as net interest income divided by total average interest-earning assets. If net interest margin was calculated as net interest income plus net trading income from securities held for trading through profit or loss divided by total average interest-earning assets plus investment securities held for trading through profit or loss it would be 5.4% and 5.5% for the years ended December 31, 2015 and 2014, respectively.

 

(2)For the years ended December 31, 2015 and 2014, ROAA is calculated as net income divided by average assets. Average assets for 2015 is calculated as the sum of assets at December 31, 2015 and 2014 divided by two. Average assets for 2014 is calculated as the sum of assets at December 31, 2014 and January 1, 2014 divided by two.

 

(3)For the years ended December 31, 2015 and 2014, ROAE is calculated as net income attributable to controlling interest divided by average equity attributable to controlling interest. Average equity attributable to controlling interest for 2015 is calculated as the sum of equity attributable to controlling interest at December 31, 2015 and 2014 divided by two. Average equity attributable to controlling interest for 2014 is calculated as the sum of equity attributable to controlling interest at December 31, 2014 and January 1, 2014 divided by two.

 

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

 

(5)Tangible equity ratio is calculated as total equity minus intangible assets (calculated as goodwill plus other intangible assets excluding those related to concession arrangements rights) divided by total assets minus intangible assets (calculated as goodwill plus other intangible assets excluding those related to concession arrangements rights). If tangible equity ratio is calculated as total equity minus intangible assets (calculated as goodwill plus other intangible assets) divided by total assets minus intangible assets (calculated as goodwill plus other intangible assets) tangible equity ratio would be 6.2% and 7.8% for the years ended December 31, 2015 and 2014, respectively.

 

See “Item 3. Key Information—A. Selected financial and operating data—Non-IFRS measures.”

 

(6)Gross loans excludes Interbank and overnight funds

 

(7)Non-performing loans are loans with more than 90 days past due.

 

(8)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.

 

 9 

 

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

 

Non-IFRS measures

 

The tables in this section and elsewhere in this annual report provide the calculation of certain Non-IFRS measures. The Non-IFRS financial measures as determined and measured by us should not be construed as an alternative to IFRS measures and should also not be compared to similarly titled measures reported by other companies. Other companies may calculate and report such measures differently.

 

ROAA and ROAE

 

ROAA, which is calculated as net income divided by average assets, provides a measure of return on assets. We believe ROAE, which is calculated as net income divided by average equity, provides a measure of the return generated for our shareholders.

 

The following table sets forth ROAA and ROAE using end of period consolidated information under IFRS for average assets and average equity for Grupo Aval for the indicated years.

 

   Year ended December 31, 
   2015   2014 
   (in Ps billions, except percentages) 
Grupo Aval (consolidated):          
Average assets(1)   197,760.7    167,350.2 
Average equity attributable to controlling interest (2)   14,117.8    11,966.0 
Net income   3,345.7    2,997.5 
Net income attributable to controlling interest   2,041.4    1,815.0 
Net income attributable to non-controlling interest   1,304.3    1,182.5 
ROAA(1)   1.7%   1.8%
ROAE(2)   14.5%   15.2%
Net Income attributable to non-controlling interest divided by net income   39.0%   39.4%

 

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

 

The following table sets forth ROAA and ROAE using end of period consolidated financial information of our banking subsidiaries under IFRS for average assets and average equity for the year ended December 31, 2015.

 

   Year ended December 31, 2015 
   Banco de Bogotá   Banco de
Occidente
   Banco
Popular
   Banco AV
Villas
 
   (in Ps billions, except percentages) 
Average assets(1)   135,953.6    34,191.9    18,000.9    11,258.5 
Average equity attributable to controlling interest (2)   12,376.2    3,991.0    2,503.4    1,249.6 
Net income   2,639.0    473.1    349.3    175.6 
Net income attributable to controlling interest   1,894.0    471.8    348.5    175.6 
Net income attributable to non-controlling interest   745.1    1.3    0.8    0.0 
ROAA(1)   1.9%   1.4%   1.9%   1.6%
ROAE(2)   15.3%   11.8%   13.9%   14.0%
Net Income attributable to non-controlling interest divided by net income   28.2%   0.3%   0.2%   0.0%

 

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

 

 10 

 

Tangible equity ratio

 

The following table sets forth the tangible equity ratio on a consolidated basis in accordance with IFRS of Grupo Aval and each of its subsidiaries at December 31, 2015.

 

   Grupo Aval entities 
   Banco de
Bogotá
   Banco de
Occidente
   Banco
Popular
   Banco AV
Villas
   Grupo Aval
consolidated
 
   (in Ps billions, except percentages) 
Total Equity   17,433.6    4,035.2    2,567.3    1,265.7    22,906.3 
Total assets   152,269.3    35,649.9    19,109.4    11,547.2    216,679.3 
Total Equity / Assets   11.4%   11.3%   13.4%   11.0%   10.6%
Intangible assets (1)   6,445.3    145.1    18.4    20.9    7,668.9 
Total Equity – Intangible assets   10,998.3    3,890.2    2,548.9    1,244.8    15,237.4 
Total assets – Intangible assets   145,824.0    35,504.8    19,091.0    11,526.3    209,010.4 
Tangible equity ratio (2)   7.5%   11.0%   13.4%   10.8%   7.3%

 

 

Source: Company calculations based on Grupo Aval’s IFRS consolidated information and each banking subsidiary’s consolidated financial statements for the period indicated.

 

(1)Intangible Assets are: goodwill and other intangible assets (excluding intangible assets related to concession arrangements rights).

 

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

 

Exchange rates

 

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

 

The Superintendency of Finance calculates the representative market rate based on the weighted averages of the buy/sell foreign exchange rates quoted daily by certain financial institutions, including certain of our banking subsidiaries, for the purchase and sale of U.S. dollars. On April 28, 2016, the representative market rate was Ps 2,943.23 per U.S.$1.00, and on December 31, 2015, the representative market rate was Ps 3,149.47 per U.S.$1.00. The Federal Reserve Bank of New York does not report a noon buying rate for pesos/U.S. dollars.

 

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

 

Recent exchange rates of pesos per U.S. dollar  Low   High 
Month:          
November 2015   2,819.63    3,108.70 
December 2015   3,131.95    3,356.00 
January 2016   3,149.47    3,375.80 
February 2016   3,287.31    3,434.89 
March 2016   3,022.35    3,319.80 
April 2016 (through April 28, 2016)   2,899.92    3,109.60 

 

 

Source: Superintendency of Finance.

 

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

 

Pesos/U.S.$1.00
representative market rate
  Average   Year-end 
Period:          
2011   1,854.02    1,942.70 
2012   1,798.72    1,768.23 
2013   1,879.53    1,926.83 
2014   2,017.85    2,392.46 
2015   2,771.55    3,149.47 

 

 

Source: Superintendency of Finance.

 

 

 11 

 

 

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

 

B.Capitalization and indebtedness

 

Not applicable.

 

C.Reasons for the offer and use of proceeds

 

Not applicable.

 

D.Risk factors

 

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

 

Risks relating to Colombia and other countries in which we operate

 

Adverse economic and political conditions in Colombia and other countries in which we operate, including variations in the exchange rates, in particular in the Central American region, may have an adverse effect on our results of operations and financial condition.

 

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

 

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

 

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

 

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

 

BAC Credomatic’s results of operations and financial condition depend on economic, political and social conditions in the countries where it operates, primarily in Central America. The political, economic and social environments in such countries are affected by many different factors, including significant governmental influence over local economies, substantial fluctuations in economic growth, high levels of inflation, exchange rate movements, exchange controls or restrictions on expatriation of earnings, high domestic interest rates, drug trafficking and other forms of organized crime, wage and price controls, changes in tax policies, imposition of trade barriers, changes in the prices of commodities and unexpected changes in regulation. The results of operations and financial condition of our Central American operations could be affected by changes in economic and other policies of each country’s government, which have exercised and continue to exercise substantial influence over many

 

 12 

 

aspects of the private sector, and by other social and political developments in each such country. During the past several decades, El Salvador, Guatemala, Honduras, Nicaragua and Panamá have experienced civil strife and political instability that have included a succession of regimes with differing economic policies and programs. Previous governments have imposed, among other measures, controls on prices, exchange rates, local and foreign investment and international trade, and restricted the ability of companies to dismiss employees, expropriated private sector assets and prohibited the remittance of profits to foreign investors.

 

Adverse economic, political and social developments in Central America may adversely affect demand for banking services and create uncertainty regarding our operating environment, which could have a material adverse effect on BAC Credomatic and, consequently, on our company. In addition, changes in political administrations may result in changes in governmental policy, which could affect BAC Credomatic and, consequently, our business.

 

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

 

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

 

Pension funds, such as those managed by Porvenir, are global investors and thus are affected by regional and global economic factors. Lower economic growth of Colombia’s major trading partners or a contagion effect in the region or globally may lead to lower pension fund returns, which may in turn result in decreases in assets under management and impair our business, results of operations or financial condition. In recent years, pension fund returns have been subject to increased volatility in international financial markets. Foreign investments represented 27.8% and 20.1% of Porvenir’s total assets under management at December 31, 2015 and 2014, respectively.

 

Even though exports from Colombia grew at accelerated rates through 2014 in recent years, fluctuations in commodity prices and volatility in exchange rates have led to a deceleration in recent years. In particular, the oil industry remains an important determinant of the country’s economic growth. Substantial or extended declines in international oil prices or oil production falls may have an adverse effect on the overall performance of the Colombian economy and could have an adverse impact on the results of operations and financial condition of oil industry companies, which could have an adverse impact on our loans to oil industry companies. Our banking subsidiaries do not maintain a significant overall exposure to oil industry clients and have not been materially impacted by the decrease in international oil prices, however, continuing falling market prices, such as the one experienced during the recent year, 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, 2015, our combined exposure to the oil sector is 3.8% of the combined loan portfolio (including BAC and excluding contingencies and derivatives) with the principal exposure being to Empresa Colombiana de Petroleos S.A. “Ecopetrol,” (1.0%) and to oil pipelines (1.7%) in which Ecopetrol is the majority shareholder. While the fall in international oil prices will affect Ecopetrol, the Colombian national oil company, we do not expect its credit quality to deteriorate materially. As of December 31, 2015, our exposure to oil service companies and suppliers to the oil sector (0.6% and 0.4%, respectively) is not material. While the credit quality of the companies participating in these sectors has been affected and additional allowances for loan losses will be required, we do not believe that they will materially affect our results. Unemployment continues to be high in Colombia compared to other economies in Latin America. Furthermore, recent political and economic actions in the Latin American region, including actions taken in Argentina before a new government took office in December 2015 and by the Venezuelan government, may negatively affect international investor perception of the region. We cannot assure you that the growth achieved by the Colombian economy over the past decade will continue in future periods. A reversal of the rate of growth of the Colombian economy, a slowdown in the growth of customer demand, an increase in market competition, or changes in governmental regulations, could adversely affect the rate of growth of our loan portfolio and our risk index and, accordingly, increase our required allowances for loan losses. All of these conditions could lead to a general decrease in demand for borrowings.

 

In addition, the effect on consumer confidence of any actual or perceived deterioration of household incomes in the Colombian or Central American economies may have a material adverse effect on our results of operations and financial condition.

 

 13 

 

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 and continues to experience internal security issues, primarily due to the activities of guerrilla groups such as the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia), or “FARC,” and the National Liberation Army (Ejercito de Liberación Nacional), or “ELN”, paramilitary groups and drug cartels. In remote regions of the country with minimal governmental presence, these groups have exerted influence over the local population and funded their activities by protecting, and rendering services to drug traffickers. Even though the Colombian government’s policies have reduced guerilla and criminal activity, particularly in the form of terrorist attacks, homicides, kidnappings and extortion, such activity persists in Colombia, and possible escalation of such activity and the effects associated with them have had and may have in the future a negative effect on the Colombian economy and on us, including our customers, employees, results of operations and financial condition. The Colombian government commenced peace talks with the FARC in August 2012, which are still ongoing and negotiations with ELN are also expected to take place in near future. Despite these efforts, 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 current peace negotiations which may result in legislation that increases our tax burden, or that of other Colombian companies, which could, in turn, impact the overall economy.

 

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

 

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

 

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

 

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

 

Government policies and actions as well as judicial decisions in Colombia 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 governmental policies and actions, and judicial decisions, involving a broad range of matters, including interest rates, exchange rates, exchange controls, inflation rates, taxation, banking and pension fund regulations and other political or economic developments affecting Colombia. The Colombian government has historically exercised substantial influence over the economy, and its policies are likely to continue to have a significant effect on Colombian companies, including us. The president of Colombia has considerable power to determine governmental policies and actions relating to the economy, and may adopt policies that could negatively affect us. Future governmental policies and actions, or judicial decisions, could adversely affect our results of operations or financial condition.

 

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

 

New tax laws and regulations, and uncertainties with respect to future tax policies, pose risks to us. In recent years, Colombian tax authorities have imposed additional taxes in a variety of areas, such as taxes on financial transactions and taxes to fund Colombia’s war against terrorism and taxes to fund the post-conflict related to the peace negotiations with guerrilla forces. Changes in tax-related laws and regulations, and interpretations thereof, can affect tax burdens by increasing tax rates and fees, creating new taxes, limiting tax deductions, and eliminating tax-based incentives and non-taxed income. In addition, tax authorities or courts may interpret tax regulations differently than we do, which could result in tax litigation and associated costs and penalties. In order to avoid double taxation, our Colombian subsidiaries usually distribute dividends from profits that have already been subject to income tax at the corporate level. These dividends are 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 are usually not taxable, in each case provided that such profits have been taxed at the subsidiary level. This tax treatment may not be maintained in the future, and any change could have a material adverse effect on our results of operations and financial condition.

 

Currently, according to Article 36-1 of the Colombian Tax Code, capital gains obtained in a sale of shares listed on the Colombian Stock Exchange are not subject to income tax in Colombia, provided that the shares sold by the same beneficial owner during each fiscal year do not represent more than 10% of the issued and outstanding shares of the listed company. The Colombian government may implement changes in the tax rules applicable to the sale of the offered securities which 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, are not applicable to ADSs.

 

The Colombian government publicly announced that a new tax reform may be required and approved in 2016 to take effect in 2017, in addition to the one approved in December 2014, in order to obtain additional funds and close potential deficits, especially considering the more challenging medium-term outlook for the oil sector and implementation of the post-conflict agreements resulting from peace talks with guerrilla groups. The new tax reform may expand the number of individuals required to pay income tax, increase VAT rates and create taxes on dividend income. This eventual new tax reform may result in higher levels of taxation than we currently expect which can significantly affect our results of operations or financial condition.

 

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

 

Pursuant to Decree 1966 of 2014, as amended by National Decree 2095 of 2014, 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. As a result, some of our clients with financial products offered by our banking subsidiaries in such countries may experience, among other effects, an increase in their withholding tax rates, transfer pricing regulation, increased likelihood of being found in violation of tax regulations by the Colombian authorities and elevated information disclosure requirements which could have a negative impact on our business, financial condition and results of operations.

 

In order to avoid Panama’s designation as a tax haven, Colombia and Panama signed a memorandum of understanding establishing that both countries will negotiate a treaty in order to avoid double taxation. The treaty is expected to include provisions regarding the exchange of information between Colombian and Panamanian tax authorities. Failure to execute this treaty or the designation of Panama as a tax haven could have a negative impact on our customer base and on our business, financial condition and results of operations.

 

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

 

We are exposed to natural disasters, such as earthquakes, volcanic eruptions, tornadoes, tropical storms and hurricanes. Heavy rains or abnormally low rainfall in Colombia, attributable in part to the La Niña and El Niño weather patterns, have resulted in severe flooding and mudslides and prolonged droughts in the past. These are recurring weather phenomena that may contribute to flooding, mudslides, droughts or other natural disasters on an

 

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equal or greater scale in the future. In addition to severe weather and natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business and may, among other things, affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral securing loans, cause significant property damage, cause us to incur additional expenses and/or result in loss of revenue. In the event of such circumstances, our disaster recovery plans may prove to be ineffective, which could have a material adverse effect on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised. Natural disasters, acts of war or similar events could also result in substantial volatility in our results of operations for any fiscal quarter or year.

 

Risks relating to our businesses and industry

 

Risks relating to our banking business

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our banking subsidiaries make loans that are secured by collateral, including real estate and other assets that are generally located in Colombia and the countries where we operate. The value of collateral may significantly fluctuate or decline due to factors beyond the control of our subsidiaries, including, for example, prevailing economic and political conditions in the relevant jurisdiction. At December 31, 2015, 32.2% of total past due loans (including our foreign operations) were secured. An economic slowdown may lead to a downturn in the Colombian

 

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or Central American real estate markets, which may, in turn, result in declines in the value of real estate securing loans to levels below the principal balances of these loans. Any decline in the value of the collateral securing these loans or any other collateral securing these loans may result in reduced recoveries from collateral realization and have an adverse effect on our results of operations and financial condition. We may also not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment for impairment losses of our loans secured by such collateral. If this were to occur, we may need to make additional impairments to cover actual impairment losses of our loans, which may materially and adversely affect our results of operations and financial condition.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our Colombian banks’ portfolio of securities primarily consists of sovereign bonds, mainly securities issued or guaranteed by the Colombian government. LB Panamá’s securities portfolios primarily consist of securities issued by corporate and sovereign issuers. We are exposed to significant credit, market and liquidity risks associated with sovereign debt. At December 31, 2015 and 2014, debt securities represented 11.3% and 13.5%, respectively, of our consolidated total assets; approximately 55.4% and 57.5%, respectively, of these securities were issued or backed by the Colombian government, and 8.2% and 6.1% of these securities, respectively, were issued or backed by Central American governments during each period. A significant decline in the value of these government securities could materially and adversely affect our debt securities portfolio and, consequently, our financial condition and results of operations. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation—Mandatory investments.”

 

We are subject to market risk in our banking business.

 

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

 

We are subject to counterparty risk in our banking business.

 

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

 

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

 

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

 

The principal sources of funding for our banking subsidiaries are savings deposits, time deposits and checking accounts, which together represented 69.9% and 71.9% of consolidated total liabilities at December 31, 2015 and 2014, respectively. Because our banking subsidiaries rely primarily on short-term deposits for funding, a sudden or unexpected shortage of funds in the banking systems in which we operate and overnight money markets may prevent our banking subsidiaries from meeting their obligations or obtaining necessary funding without incurring

 

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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.

 

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

 

The aggregate outstanding loans to our banks’ ten largest borrowers represented 5.5% of our consolidated total loan portfolio at December 31, 2015. Default on loans by one or more of these borrowers may adversely affect our results of operations and financial condition.

 

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.

 

Our credit ratings and those of our banking subsidiaries are an important component of our and our banking subsidiaries’ ability to obtain funding. Our banking subsidiaries’ ability to compete successfully in the marketplace for deposits depends on various factors, including their financial stability as reflected by their credit ratings. A downgrade in credit ratings may adversely affect perception of their financial stability and ability to raise deposits. On March 9, 2016, Moody’s downgraded Banco de Bogotá’s standalone baseline credit assessment to “Baa1” from “Baa3” and its long-term foreign currency subordinated debt rating to “Ba2” from “Ba1”. As a result of the downgrades on Banco de Bogotá, Moody’s also downgraded Grupo Aval’s Long term local and foreign currency issuer ratings to “Ba2” from “Ba1” and Grupo Aval Limited’s long term foreign currency issuer to “Ba2” from “Ba1”. Such ratings were assigned in consideration of the decrease in Banco de Bogotá’s adjusted capital ratio. Moody’s have also placed Banco de Bogotá and us on review for further downgrade invoking a decrease in Banco de Bogotá’s adjusted capital ratio driven by the deprecation of the Colombian peso in 2015. Moody’s stated that Banco de Bogotá’s core capital adequacy provides limited capacity to continue to support its historically robust loan growth or absorb losses in the event of stress making it more vulnerable to any determination in asset risk or earnings performance. On April 28, 2016, Fitch placed certain of our and Banco de Bogotá’s ratings on negative watch for downgrade noting a decrease in Banco de Bogotá’s capital ratios resulting from the depreciation of the Colombian peso in 2015 which boosted its U.S. dollar denominated risk-weighted assets. Fitch also reasoned that the change in our accounting standards to IFRS contributed to a decrease in the bank’s capital ratios. Adverse changes in credit ratings could also increase the cost of funding in the capital markets or borrowing funds for our and our subsidiaries’ operations. In addition, lenders and counterparties in derivatives transactions are sensitive to the risk of a ratings downgrade. Any downgrade in our credit ratings or in any of our banking subsidiaries’ credit ratings could materially and adversely affect our results of operations and financial condition.

 

Our banking subsidiaries may not have the ability to attract capital necessary to maintain regulatory ratios and fund growth.

 

Our banking subsidiaries are subject to regulations that require them to maintain certain capital ratios. If their regulatory capital ratios decline as a result of decreases in the value of their loan portfolio or otherwise, they will be required to improve such ratios by either raising additional capital or disposing of assets. Our banking subsidiaries may need to raise additional capital in the future to obtain sufficient capital resources to maintain capital ratios and provide liquidity to meet their commitments and business needs, particularly if their asset quality or earnings were to deteriorate. 

 

The ability to raise additional capital will depend on several  things, especially conditions in the capital markets, which are outside of our and our banking subsidiaries’ control, as well as our and our banking subsidiaries’ financial performance. Adverse changes in our, and our banking subsidiaries’ credit ratings could increase the cost of funding in the capital markets. Economic conditions and the loss of confidence in financial institutions may increase cost of funds and limit access to some customary sources of capital. 

 

We cannot provide assurances that such capital will be available on acceptable terms or at all. Any occurrence that may limit our and our banking subsidiaries’ access to the capital markets, such as a decline in the confidence of debt purchasers, depositors, or counterparties participating in the capital markets may adversely affect capital costs, ability to raise capital, and liquidity. Moreover, 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 could have a materially adverse effect on 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.

 

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

 

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

 

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

 

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

 

Banking and financial services laws and regulations are subject to ongoing review and revision, including changes in response to global regulatory trends. As a result, governments have been actively considering new banking laws and regulations, and reviewing and revising existing laws and regulations, particularly in relation to capital adequacy and accounting standards. In addition, various international developments, such as the adoption of risk-based capital, leverage and liquidity standards by the Basel Committee on Banking Supervision in December 2010, known as “Basel III,” will continue to impact us in the coming years. To prepare for the implementation of the Basel III accords in Colombia, the Ministry of Finance, in consultation with the Superintendency of Finance, effected an internal review of regulations applicable to financial institutions. Decree 2555 of 2010 was amended in 2012 and 2015, modifying certain capital adequacy requirements for Colombian credit institutions. Although Decree 2555 of 2010 maintained the requirement for a credit institution’s technical capital to be at least 9.0% of that institution’s total risk-weighted assets, it also introduced a new measure of “core solvency” for Common Equity Tier 1, which requires higher quality capital and is set at a minimum of 4.5% of risk-weighted assets. The adoption of new laws or regulations, or changes in the interpretations or enforcement of existing laws or regulations, may have an adverse effect on our results of operations and financial condition.

 

Moreover, Congress enacted 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 Decree 1491 of 2015. SEDPEs’ activities may create a new competitive environment that could adversely affect our consolidated results of operations.

 

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

 

As part of a legislative effort to narrow the current fiscal deficit, in 2014 the Salvadorian congress enacted Decree No. 764 contemplating certain tax reforms that include the introduction of a new withholding tax of 0.25% or “2.5 per 1000” on financial transactions made by check or wire transfer and on cash transactions made through the Salvadorian financial system in excess of U.S.$5,000 on a single or monthly aggregate basis. Even though Decree No. 764 exempted certain financial transactions, this new withholding tax, which has been effective since September 2014, has had an adverse in the results of our banking, credit card and brokerage operations in El Salvador. An increase in the withholding tax established by Decree No. 764 and further or similar regulation in El Salvador or elsewhere in Central America may adversely impact the result of our subsidiaries in such countries.

 

Additionally, on December 8, 2015, the Guatemalan congress passed Decree 7 of 2015, also known as the Credit Cards Law. Among others, Decree 7 of 2015 established a limit in the interest rate that may be charged to cardholders which in no case can exceed two times the compounded interest rate of the Central Bank of Guatemala. Decree 7 of 2015 additionally established the obligation for card issuers to refinance cardholders’ obligations in

 

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cases where the amount outstanding on credit cards exceeds 150% of the credit limit assigned to such cardholders or in cases where the cardholder argues not to be able to continue paying its credit card obligations. In case of refinancing, the card issuer will not be allowed to charge monthly installments in excess of 20% of the cardholder’s total income. Even though Decree 7 of 2015 will not become effective until March 8, 2016, it is expected to adversely affect the credit card business in Guatemala. The adoption of new laws or regulations, or changes in the interpretations or enforcements of existing laws or regulations, may have an adverse effect on our results of operations and financial conditions.

 

In the future, we may be subject to supervision as a bank holding company.

 

The Colombian government has announced that it is considering presenting to the Colombian Congress a bill to submit controlling entities of financial institutions to banking supervision and oversight (Ley de Conglomerados Financieros). In this regard, the Ministry of Finance and the Superintendency of Finance have initiated an internal review in order to propose a new model of consolidated supervision applicable to controlling entities of financial institutions and financial conglomerates with respect to integrated risk management, prudential requirements and cooperation and information exchange, among others. Although the content of such future regulations has not been made available for comments to the public, in the future, we may be subject to banking supervision and oversight as the controlling entity of our banking subsidiaries.

 

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

 

Our Colombian banks, as well as Porvenir, Corficolombiana and our international banking operations, are subject to regulation and supervision by financial authorities. These regulatory authorities have broad powers to adopt regulations and other requirements affecting or restricting virtually all aspects of our subsidiaries’ organization and operations, including, for example, the imposition of anti-money laundering measures and the authority to regulate the terms and conditions of credit that can be applied by Colombian banks. Failure to comply with applicable regulations could subject our banking subsidiaries to fines or sanctions or even revocation of licenses or permits to operate. In the event that any of these subsidiaries encounters significant financial problems, are in danger of insolvency or become insolvent, or are otherwise deemed to not be viable, the financial authorities would have broad powers to intervene in our management and operations, including suspending or removing management and, in extreme circumstances, putting our banks, Porvenir, Corficolombiana and our international banking operations, into conservatorship or receivership or taking control of our banks, Porvenir, Corficolombiana and our other subsidiaries. Grupo Aval is required, as an issuer of securities in Colombia, to submit information to the Superintendency of Finance and comply with corporate governance requirements; however, we are not regulated as a financial institution or as a bank holding company, and we are not required to comply with capital adequacy regulations applicable to banks and other financial institutions. We may, however, become subject to more stringent regulation in the event that our status as a non-financial entity is not maintained by Colombian authorities in the future.

 

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

 

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

 

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

 

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The previously mentioned investigations have been legally terminated by the Superintendency of Industry and Commerce, and we were not subject to any fine or penalty as a result of these investigations. However, it is possible that similar investigations may be carried out by the relevant authorities in the future, which may result in lower fees charged to merchants and bank interchange fees, and/or lead to changes in commercial strategies that may adversely affect our results of operations and financial condition. We may also be subject to financial penalties in connection with such future investigations. In addition, fees charged for other banking services may continue to be reduced in the future as a result of regulatory measures and/or pressure from retailers and interest groups.

 

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

 

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

 

Risks relating to our merchant banking business

 

Difficult market conditions can adversely affect Corficolombiana’s business.

 

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

 

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

 

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

 

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

 

At December 31, 2015, 52.8% of Corficolombiana’s investments were in securities of privately held companies. There are often no readily ascertainable market prices for such securities or for those investments of Corficolombiana in listed companies with low or medium trading volumes. As a result, there may be limited or no marketability for these investments, and they may decline in value while Corficolombiana is seeking to dispose of them. Because there is significant uncertainty as to the valuation of illiquid investments, the stated values of such investments may not necessarily reflect the values that could actually be realized by Corficolombiana. In addition, in

 

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some cases, Corficolombiana may be prevented by contract from selling such securities for a period of time. Corficolombiana’s ability to dispose of investments may also be dependent on factors beyond its control. Thus, it is possible that investments in privately held companies may only be disposed of over a substantial length of time, if at all, exposing the investment returns to risks of declines in market prices during the intended disposition period. Accordingly, under certain conditions, Corficolombiana may be forced to either sell securities at lower prices than it had expected to realize or defer—potentially for a considerable period of time—sales that it had planned to make.

 

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

 

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

 

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

 

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

 

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

 

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

 

Risks relating to our pension and severance fund management business

 

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

 

Porvenir’s operations are regulated by Law 100 of 1993, as amended, the Organic Statute of the Financial System (Estatuto Orgánico del Sistema Financiero), or “EOSF,” issued by the Ministry of Finance, Decree 2555 of 2010, as amended, and regulations issued by the Superintendency of Finance and, to the extent applicable, Colombian Corporation Law. These regulations limit the range of assets in which pension fund administrators, or “AFPs,” can invest and also set investment limits, depending on the type of mandatory pension or severance fund managed by each AFP. AFPs can manage four types of mandatory pension funds (i) Lower Risk Funds (“Fondo Conservador”), (ii) Mid-Risk Funds (“Fondo Moderado”), (iii) High Risk Funds (“Fondo de Mayor Riesgo”) and (iv) Planned Retirement Funds (“Fondo Especial de Retiro Programado”), and two types of severance funds (i) Short Term Funds (“Portafolio de Corto Plazo”) and (ii) Long Term Funds (“Portafolio de Largo Plazo”). In addition, each AFP is legally required to provide a minimum return on investment for each of its pension and severance funds. This minimum return is determined pursuant to specified formulas established in Decree 2555 of 2010, as amended, which vary according to the type of fund. If a fund’s return for any month is lower than the minimum return, the AFP must cover the difference within a period of five days. To do so, the AFP must first apply funds from a stabilization reserve (a portion of the AFP’s capital invested in the fund equal to 1% of the value of each pension fund under management). If the stabilization reserve is insufficient to cover the difference, the AFP must provide resources from its own capital. If the AFP does not have enough resources to cover the difference, the Superintendency of Finance may order the capitalization of the AFP. If, notwithstanding the above, an AFP fails to observe either the minimum return or the stabilization reserve requirements or fails to comply with the order of

 

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capitalization, the Superintendency of Finance may take possession (tomar posesión) of the AFP, in which case the Colombian Deposit Insurance Fund (Fondo de Garantías de Instituciones Financieras), or “FOGAFIN,” must supply funds to cover the shortfall. Although Porvenir has never failed to meet the minimum requirements, failure to do so could require us to increase our investment in Porvenir, seek capital from alternative sources or forfeit our investment, or lead to the dissolution of the AFP and the transfer of the fund to another AFP. If Porvenir is unable to fulfill the minimum return or the stabilization reserve requirements, or if new laws or decrees impose more onerous requirements, Porvenir’s business may be materially adversely affected.

 

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

 

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

 

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

 

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

 

Other risks relating to our businesses

 

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

 

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

 

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

 

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

 

We face exposure to fluctuations in the rate of exchange between local currencies and the U.S. dollar, particularly given the fact that the currencies in countries where we and BAC Credomatic operate have historically experienced significant devaluations and depreciations. The types of instruments exposed to foreign exchange rate risk include, for example, investments in foreign subsidiaries, foreign currency-denominated loans and securities, foreign currency-denominated debt and various foreign exchange derivative instruments whose values fluctuate with changes in the level or volatility of currency exchange rates or foreign interest rates.

 

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

 

We are subject to impacts on our statement of income and/or statement of financial position derived from fluctuations of the Colombian Peso, in particular, against the U.S. dollar, where most of our foreign long-term debt is denominated, and the Colombian peso, and between the U.S. dollar and each of the currencies in our Central American operations, as 38.5% of our average consolidated assets for the year ended December 31, 2015 and 42.6% of our average consolidated liabilities for the year ended December 31, 2015 are foreign currency-denominated.

 

On a consolidated basis we have U.S.$3.1 billion (Ps 9.7 trillion) of long-term debt denominated in U.S. dollars as of December 31, 2015. Our significant dollar-denominated investments in Central America can affect our business. Fluctuations in the exchange rate between the Colombian peso and the U.S. dollar may affect the value of these debt and investments on our statement of financial position and cause us to recognize gains or losses in our statement of income. Any substantial fluctuation in the U.S. dollar relative to the Colombian peso could affect our results of operations and our ability to meet our future payment obligations and increase or decrease the peso value of our risk-weighted assets and goodwill, thereby affecting capital ratios of our banking subsidiaries.

 

The exchange rate fluctuation between the Colombian peso and U.S. dollar also affects our results as the functional currency of LB Panama, which consolidates BAC Credomatic, is the U.S. Dollar. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Results of operations for the year ended December 31, 2015 compared to the year ended December 31, 2014—Banco de Bogotá Subsidiary Analysis-—LB Panamá” for a description of the effect of such fluctuation on LB Panama’s results.

 

A substantial portion of BAC Credomatic’s earnings, assets and liabilities are in Costa Rican colones, Guatemalan quetzals, Honduran lempiras, Nicaraguan córdobas, Panamanian balboas and U.S. dollars. As a result, our Central American operations are subject to risks relating to foreign currency exchange rate fluctuations between these currencies and pesos. Nevertheless, as described in “Item 4. Information on the Company—B. Business overview—BAC Credomatic—Foreign exchange rate risk related to BAC Credomatic,” BAC Credomatic maintains a U.S. dollar net asset position, which is intended to hedge at least 60% of its shareholders’ equity against the possible devaluations and depreciations of each of these local currencies.

 

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

 

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

 

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

 

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

 

The Colombian Commercial Code limits the amount of interest our Colombian subsidiaries may be charged on commercial transactions, including transactions of our banking subsidiaries. In the future, regulations in Colombia could impose increased limitations regarding interest rates or banking fees. Law 1430 of December 2010, as

 

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

 

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

 

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

 

We face uncertainty regarding consumer protection laws.

 

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

 

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

 

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

 

Additionally, the Colombian Congress is considering a new regulation regarding the costs charged to consumers of financial entities. If such regulation is approved, consumers will be able to use the total balance in their savings accounts and electronic deposits, without having the obligation to preserve a minimum amount of deposits. Moreover, financial entities will not be able to charge financial costs in savings accounts following 60 days of inactivity and will have the obligation to recognize a minimum positive rate return in savings accounts.

 

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

 

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

 

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

 

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

 

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

 

We may not be able to manage our growth successfully.

 

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

 

We are subject to operational risks.

 

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

 

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

 

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

 

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

 

We are subject to cyber security threats.

 

We and our subsidiaries rely on information systems to operate websites, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. We and our subsidiaries may experience operational problems with their information systems as a result of system failures, viruses, computer “hackers” or other causes. Cyber security risks for financial institutions have significantly increased because of the proliferation of new technologies, the use of the Internet and telecommunications technologies to conduct financial transactions, and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. As we seek to further develop digital channels, the implementation of technological changes and upgrades to maintain existing systems and integrate new systems could increase our risk of cyber security attacks. Any material disruption or slowdown of our or our subsidiaries’ systems could cause information, including data related to customer requests, to be lost or to be delivered to our customers with delays or errors, which could reduce demand for their services and products and could materially and adversely affect our results of operations and financial condition.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We are highly dependent on our founder and chairman, Mr. Sarmiento Angulo (83 years old), our president, Mr. Sarmiento Gutiérrez (54 years old), and members of our senior management teams at both the group and subsidiary levels, all of whom possess considerable experience and expertise and have strong relationships with customers, participants of the Colombian business.

 

Our president has been responsible for our day-to-day management over the last 16 years and has worked in various capacities in companies controlled by Mr. Sarmiento Angulo for the past 26 years. Mr. Sarmiento Gutiérrez, who became president of Grupo Aval in 2000, and our chairman are responsible for the overall strategic direction of the group.

 

In addition, our senior managers at each subsidiary are responsible for implementing strategies and for the day-to-day operations of the companies they run. Although Grupo Aval does not require that its employees mandatorily retire at a certain age, the presidents of some of our banks (who have an average tenure of 30 years with these banks) and other members of the senior management are not obliged to remain employed with us.

 

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

 

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We are subject to reputational risk, and our reputation also is closely tied to that of our founder and chairman, Mr. Sarmiento Angulo, our president, Mr. Sarmiento Gutiérrez, and that of our subsidiaries.

 

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

 

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

 

Mr. Sarmiento Angulo beneficially owns 96.7% of our common shares outstanding and 43.5% of our preferred shares outstanding, as of April 28, 2016, and, accordingly, controls our group. See “Item 7. Major Shareholders and Related Party Transactions—A. Major shareholders.” The preferred shares do not have any voting rights and thus will not affect such control of our group. Mr. Sarmiento Angulo will continue to have the right to control decisions, regardless of how our minority shareholders may vote on these issues and regardless of the interests of such shareholders, including holders of ADSs and underlying preferred shares. In addition to Mr. Sarmiento Angulo’s beneficial ownership through Grupo Aval, as of April 28, 2016, he beneficially owns 8.3% of Banco de Bogotá, 13.3% of Banco de Occidente, 15.5% of Banco AV Villas, 0.8% of Banco Popular and 0.3% of Corficolombiana.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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Certain risks relating to our Central American operations

 

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

 

We conduct banking businesses outside our historical home market of Colombia primarily through BAC Credomatic. Our Central American operations may involve risks to which we have not previously been exposed. Some of these operations are in countries that may present different or greater risks than those in Colombia. For example, BAC Credomatic has a significant consumer finance business, including credit card operations, in the Central American countries in which it operates. At December 31, 2015, BAC Credomatic’s consumer loan portfolio totaled U.S.$5.3 billion (Ps 16.7 trillion) (including mortgages, vehicles and other personal loans), which represented 40.4% of BAC Credomatic’s total loan portfolio, and U.S.$2.3 billion (Ps 7.1 trillion) in credit card loans, which represented 17.2% of BAC Credomatic’s total loan portfolio. We may face delays in payments by customers and higher delinquency rates in these countries, which could necessitate higher impairments for loan losses and, consequently, have a negative effect on our financial performance.

 

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

 

We have retained the current senior management of BAC Credomatic, who have worked on average over 15 years at BAC Credomatic, and most of whom pre-date GE Capital’s 2005 investment in BAC Credomatic. The loss of services of any of BAC Credomatic’s senior officers could have an adverse effect on BAC Credomatic’s business.

 

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

 

The credit card business is an important business segment for BAC Credomatic, representing 17.2% of its total loan portfolio for both, December 31, 2015 and 2014. The adoption of new laws and regulations or the revision of the current regulatory regime for credit cards in any of the jurisdictions in which BAC Credomatic operates may have an adverse effect on BAC Credomatic’s results of operations and financial condition.

 

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

 

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

 

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

 

Risks relating to our preferred shares and ADSs

 

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

 

Pursuant to Colombian law, the Colombian Central Bank has the power to intervene in the exchange market in order to consolidate or dispose of international reserves, as well as to control any volatility in the exchange rate, acting through a variety of mechanisms, including discretionary ones. During recent years, the Colombian Central Bank has employed a floating exchange rate system with periodic interventions. From time to time, there have been significant fluctuations in the exchange rate between the Colombian peso and the U.S. dollar. For example, the peso depreciated 31.6% against the U.S. dollar in 2015, depreciated 24.2% in 2014, 9.0% in 2013, appreciated 9.0% in 2012 and depreciated 1.5% in 2011. Unforeseen events in international markets, fluctuations in interest rates,

 

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changes in capital flows, political developments or inflation rates may cause exchange rate instability that could, in turn, depress the value of the Colombian peso, thereby decreasing the U.S. dollar value of the dividends paid to holders of the ADSs.

 

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

 

Under Colombian securities regulations, as a general rule, any transaction involving the sale of publicly traded shares of any Colombian company, including any sale of our preferred shares for the equivalent of 66,000 Unidades de Valor Real, or “UVRs” (approximately U.S.$4,783.6), or more, must be effected through the Colombian Stock Exchange. UVR is a Colombian inflation-adjusted monetary index calculated by the board of directors of the Colombian Central Bank and generally used for pricing home-mortgage loans (one UVR = Ps 228.3 (U.S.$0.07) and 66,000 UVRs = 15,065,714.4 at December 31, 2015). Any transfer of preferred shares underlying the ADSs may be required to be sold through the Colombian Stock Exchange, which could limit their liquidity or affect their market price.

 

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

 

Our preferred shares have been listed since February 1, 2011 on the Colombian Stock Exchange, which is relatively small and illiquid compared to securities exchanges in major financial centers. In addition, a small number of issuers represents a disproportionately large percentage of the market capitalization and trading volume on the Colombian Stock Exchange. A liquid trading market for the preferred shares or ADSs may not develop on the Colombian Stock Exchange or New York Stock Exchange, respectively. A limited trading market could impair the ability of a holder of preferred shares or ADSs to sell preferred shares (in the case of an ADS holder, obtained upon withdrawal of such shares from the ADR facility) on the Colombian Stock Exchange in the amount and at the price and time desired by such holder, and could increase the volatility of the market price of the preferred shares and the ADSs.

 

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

 

Prior to our initial public offering in the United States, there was no market for our ADSs. A public market for the preferred shares currently exists in Colombia. Although our ADSs have traded on the NYSE since September 23, 2014 and our preferred shares were listed on the Colombian Stock Exchange on February 1, 2011, an active public market for the ADSs or preferred shares may not continue to develop or be maintained.

 

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

 

Our banking subsidiaries extended a total of Ps 654.3 billion (U.S.$363.8 million at the representative market rate on May 12, 2011) of credit disbursed through 14,533 loans to finance the acquisition of preferred shares in the Preferred Shares Local Offering of which 70 loans representing Ps 169.2 billion (U.S.$53.7 million) were outstanding at December 31, 2015. The final loan will mature in 2021. Depending on the characteristics of the borrower, our banking subsidiaries may have required collateral, which may have included a pledge of the preferred shares that were subject to the financing. Such a pledge would permit our banking subsidiaries through a court procedure to seek the sale of the preferred shares if the borrower defaults. Our banking subsidiaries had, on an aggregate basis, pledges over 111,078,082 preferred shares related to loans made to third parties at December 31, 2015. All the loans are full-recourse loans. Under the terms of the pledges, each borrower is limited from selling the pledged shares until the loan is repaid. Under Colombian law, our banking subsidiaries must seek to sell any

 

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repossessed shares as banks are not permitted to hold shares issued by their parent. If changes in general economic conditions or other factors cause these borrowers to default on their loans, our subsidiaries will have to sell our preferred shares into the market, or alternatively, upon repayment of the loans, these borrowers will not be restricted from selling such shares in the market. As a result, the market price of our preferred shares and ADSs may decline.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

Our preferred shares have traded on the Colombian Stock Exchange since February 2011 and our ADSs on the NYSE since September 23, 2014. Trading in our ADSs or preferred shares on these markets will take place in different currencies (U.S. dollars on the NYSE and pesos on the Colombian Stock Exchange), and at different times (resulting from different time zones, different trading days and different public holidays in the United States and Colombia). The trading prices of our shares on these two markets may differ due to these and other factors. Any decrease in the price of our preferred shares on the Colombian Stock Exchange could cause a decrease in the trading price of our ADSs on the NYSE. Investors could seek to sell or buy our shares to take advantage of any price differences between the markets through a practice referred to as arbitrage. Any arbitrage activity could create unexpected volatility in both our share prices on one exchange, and the shares available for trading on the other exchange. In addition, holders of ADSs will not be immediately able to surrender their ADSs and withdraw the underlying preferred shares for trading on the other market without effecting necessary procedures with the depositary. This could result in time delays and additional cost for holders of ADSs.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

We recently adopted IFRS and as a result some of our financial statements are not easily comparable from period to period and the presentation of our financial information may differ materially from information previously reported under Colombian GAAP, as well as with our statutory financial statements issued under Colombian IFRS.

 

In accordance with Colombian regulations, as of January 1, 2015, our consolidated financial statements began to be reported in accordance with Colombian IFRS. For the purposes of this annual report, we further adjusted such financial statements to comply with IFRS (as issued by the IASB).  Until December 31, 2014, for the purposes of this report, we prepared our financial statements in accordance with Colombian Banking GAAP, which differs in certain respects from Colombian IFRS and IFRS.  Accordingly, the presentation of our results of operation and financial condition in this report, are not comparable to prior presentations under Colombian Banking GAAP. The adoption of Colombian IFRS and IFRS for purposes of this report has had relevant effects and changes on the accounting criteria of and information included in our consolidated financial statements for the periods beginning on January 1, 2015.  These are our first financial statements prepared under IFRS (as issued by the IASB) included elsewhere in this document, and therefore the opening statement of financial position was prepared as of January 1, 2014, the date of our transition to IFRS, as required by IFRS 1—“First Time Adoption of International Financial Reporting Standards.”  Note 38 to our consolidated financial statements contains an analysis of the valuation, presentation and disclosure effects of adopting IFRS and a reconciliation between Colombian Banking GAAP and IFRS as issued by the IASB as of January 1 and December 31, 2014 and for the year ended December 31, 2015.

 

ITEM 4. INFORMATION ON THE COMPANY

 

A. History and development of the company

 

Our company

 

We are Colombia’s largest banking group based on total assets. As of December 31, 2015 we were one of the most profitable among our principal competitors in the Colombian market based on an ROAE and the most profitable in terms of ROAA, based on aggregate figures. We are also the largest banking group in Central America based on total assets as of December 31, 2015. We provide a comprehensive range of financial services and products

 

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ranging from traditional banking services, such as making loans and taking deposits, to pension and severance fund management.

 

Colombian operations

 

Our operations in Colombia currently consist of four commercial banks (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas), the largest pension and severance fund manager (Porvenir) and the largest merchant bank (Corficolombiana). Our Red de Grupo Aval (Grupo Aval network) is the largest combined network of ATMs and branches in Colombia and has been a key element of our competitive positioning in the Colombian market. Customers of any of our banks may access Grupo Aval’s other bank branches to carry out basic banking transactions throughout our Red de Grupo Aval (Grupo Aval network).

 

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

 

On a consolidated basis in accordance with IFRS, our ROAA for the year ended December 31, 2015 and 2014 was 1.7% and 1.8%, respectively; our ROAE for the same periods was 14.5% and 15.2%, respectively; and our efficiency ratio for the same periods was 47.6% and 46.2%, respectively.

 

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

 

   At and for the year ended December 31, 2015 
   Grupo Aval entities             
   Banco de
Bogotá
   Banco de
Occidente
   Banco
Popular
   Banco AV
Villas
   Grupo Aval
Aggregate(1)
   Bancolombia   Davivienda   BBVA
Colombia
 
   (in percentages) 
ROAA(2)   3.1    1.6    1.7    1.8    2.5    2.3    2.0    1.3 
ROAE(3)   16.5    13.0    12.9    16.9    15.5    14.0    16.8    16.9 
Efficiency ratio (4)   37.2    48.2    57.4    53.6    43.7    52.4    44.0    45.7 
Market share in Colombia:                                        
Net income   23.8    5.2    3.2    2.1    34.2    25.7    12.6    6.3 
Deposits   14.6    6.5    4.1    2.9    28.2    20.8    12.3    11.5 
Gross loans and leases   13.6    7.3    4.2    2.4    27.4    22.8    13.8    10.5 
Assets   15.2    6.6    3.8    2.3    27.8    23.1    12.5    9.9 
Branches   13.1    3.9    4.2    5.2    26.3    14.7    10.8    8.7 
ATMs   11.8    2.3    7.8    3.8    25.7    27.1    11.7    8.8 

 

 

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

 

(1)Ratios and market share data reflect aggregated unconsolidated data of Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas.
(2)ROAA is calculated as net income divided by average end of month assets.
(3)ROAE is calculated as net income divided by average end of month equity.
(4)Efficiency ratio is calculated as personnel expenses plus administration expenses divided by total income. Total income is the sum of net interest income, net fees and other services income and other income (excluding dividends and other).

 

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Central American operations

 

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

 

We have operations in six Central American countries (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panamá) and Mexico. We are one of the leading credit card issuers and merchant-acquiring franchises in Central America and have the only network that processes all major credit card brands in the region. At December 31, 2015, BAC Credomatic’s credit card portfolio totaled U.S.$2.3 billion (Ps 7.1 trillion), which represents a 13.4% increase from U.S.$2.0 billion at December 31, 2014 (Ps 6.3 trillion) . At December 31, 2015, 76.0% of BAC Credomatic’s credit card portfolio was distributed across Costa Rica, El Salvador, Guatemala and Panamá. The remaining 24.0% was distributed among Honduras, Nicaragua and Mexico.

 

Through a network of 352 branches and 1,815 ATMs at December 31, 2015, BAC Credomatic has more than 3.4 million customers and serves a region with a total population of approximately 46.2 million at December 31, 2015. Our Central American operations represented 29.6% of our assets at December 31, 2015. For the years ended December 31, 2015 and December 31, 2014, the efficiency ratio for BAC Credomatic was 54.4% and 53.6%, respectively.

 

We believe we can further improve our performance in Central America and continue to improve BAC Credomatic’s efficiency ratio. In accordance with IFRS, the efficiency ratio of our Colombian operations was 44.4% for the year ended December 31, 2015. We also believe we can leverage Grupo Aval’s expertise to increase BAC Credomatic’s share in corporate lending within Central America.

 

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

 

   At December 31, 2015 
   BAC
Credomatic(1)
   Banco
Industrial
   Bancolombia
Central
America
   G&T
Continental
   Scotiabank
Central
America
 
   (in percentages) 
Central American market share:                         
Loans and leases, net   12.9    9.9    7.3    6.1    5.5 
Assets   11.5    11.0    6.5    6.9    4.7 
Deposits   11.5    10.7    6.6    7.3    4.5 
Liabilities   11.3    11.3    6.4    7.1    4.7 
Total equity   12.8    8.2    7.3    5.3    5.4 
Net income   15.7    13.5    8.1    7.9    2.1 

 

 

Source: Calculated based on data aggregated from the local superintendencies of Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua. Market share data is determined based on the sum of each bank’s operations in the above-mentioned countries. This comparison excludes Panamá due to the difficulty of differentiating international from local businesses of Panamanian banks. Our market share in deposits and loans and leases in Panamá was 4.8% and 5.2%, respectively, at December 31, 2015.

 

(1)Reflects LB Panamá operations including BAC Credomatic.

 

Our business strengths

 

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

 

Strong track record of growth and resilient profitability

 

We believe that our leading position in the Colombian market, cross-bank synergies, economies of scale, low-cost funding and operating efficiencies have helped us achieve stable profits. In accordance with Colombian IFRS, our ROAE of 15.5% and ROAA of 2.5%, based on aggregate figures, for the year ended December 31, 2015, have been among the highest in the Colombian banking industry. The resilience of our returns, both on our unconsolidated and consolidated financial statements results from the diversified loan portfolio provided by our

 

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multi-brand banking subsidiaries, a lower and more stable cost of funding structure and solid net provisions. Our consolidated assets have grown at a CAGR of 17.9% from January 1, 2014 to December 31, 2015. During the same period, our total liabilities have grown at a CAGR of 18.1% and our equity has grown at a CAGR of 16.6%. We have historically accomplished our growth through organic expansion and strategic acquisitions.

 

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

 

We are the largest participant in most sectors of the Colombian banking market, with market-leading shares of 31.7% of commercial loans and 28.2% of consumer loans, at December 31, 2015. As of the same date we also have the largest market share of deposits, 28.2%. Our Red Grupo Aval, which is the largest ATM and banking network in the country and has been a key element of our competitive positioning in the Colombian market. At December 31, 2015, our ATMs and branches represented 25.7% and 26.3% of total ATMs and branches in Colombia, respectively.

 

Leading banking operations in Central America

 

BAC Credomatic is the leading financial group in Central America with a record of strong financial performance. Its ROAE was 18.1% for the year ended December 31, 2014 and 15.5% for the year ended December 31, 2015. BAC Credomatic is a full-service financial institution with one of the leading card-issuing and acquiring businesses in the region. Its Credomatic brand has key alliances with major credit card networks, such as Visa, MasterCard, American Express and Diners Club, and has the only network in the region that processes all major credit card brands. BAC Credomatic’s market share in terms of net loans varies in the different countries as follows, as of December 31, 2015: 13.2% in Costa Rica, 11.9% in El Salvador, 10.0% in Guatemala, 14.3% in Honduras, 26.2% in Nicaragua and 5.2% in Panamá. As a regional player, excluding Panamanian operations, we hold the largest share with 12.9% of the total Central American market.

 

Diversified and competitive sources of funding

 

We have access to diverse sources of funding, including deposits and debt securities placed in Colombian and international capital and credit markets, which results in a competitive cost of funding for our operations. At December 31, 2015, our market share of total customer deposits in Colombia was 28.2%, supported by a 35.1% market share in checking accounts and a 27.2% market share in savings accounts. Our consolidated deposits represented 74.2% of our total funding at December 31, 2015 compared to 76.5% at January 1, 2014, which provides us with a stable and cost-effective funding base. We believe that our funding base supports our initiatives to expand our businesses.

 

Sound risk management

 

We believe we have asset quality that is superior to that of our principal competitors. In accordance with Colombian IFRS, Grupo Aval’s aggregate ratio of loans past due more than 30 days over total loans was 2.5% at December 31, 2015, the lowest among our principal competitors on an unconsolidated basis, Bancolombia’s ratio was 3.1%, Davivienda’s was 3.3% and BBVA Colombia’s was 2.8%. We have maintained our relative consolidated asset quality, as demonstrated by our ratio of non-performing loans to total loans of 1.7% at December 31, 2015 and our ratio of charge-offs to average outstanding loans of 1.3% at December 31, 2015, in accordance with IFRS. In addition, we believe that our reputation as a banking group that pursues conservative policies has allowed us to consistently retain and attract new customers. Each of our banking subsidiaries has a comprehensive risk management system, which we view as fundamental to their long-term stability and viability, which enables them to identify risks and resolve potential problems on a timely basis. In addition, we have established upward loan reporting processes, and our risk management staff meets on a weekly basis to discuss the loan portfolio, risks, opportunities and developments in the industry.

 

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

 

Multi-brand business model

 

Our differentiated multi-brand business model builds on the individual strengths of our banking subsidiaries and the market-wide recognition of their brands. Each of our banks has developed a focus on particular and, to a degree, overlapping market sectors, geographic regions, services and products. We believe that this specialization has contributed to the individual success of our banks and the diversity of Grupo Aval as a whole. Our banking

 

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subsidiaries in Colombia operate as four independent banks that are encouraged to compete among themselves and with other market participants, while operating within central guidelines established by us in the areas of internal control, credit risk management, brand management, strategic planning, general procurement and information technology. These guidelines, together with group support services, are designed to allow each bank to achieve economies of scale and benefit from cross-bank synergies and group-wide best practices without inhibiting individual competition and the decision-making abilities of each bank’s management. We may, in the future, consider merging one or more of our subsidiaries in our group or additional business we may acquire if meaningful improvements in efficiencies, revenue or other benefits could be achieved.

 

Focus on group-wide best practices

 

We apply group-wide best practices and corporate policies and procedures to all of our operating subsidiaries. These practices are designed to encourage a consistent approach with respect to effective risk management, efficient use of capital, cost control, brand management, general procurement and integration of information technology. We believe that these practices have helped us achieve economies of scale and synergies to reduce operating and administrative costs. For the year ended December 31, 2015, we had a consolidated efficiency ratio of 47.6%, and our banking subsidiaries had efficiency ratios ranging from 45.2% (Banco de Bogotá) to 59.2% (Banco Popular).

 

Experienced management teams

 

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

 

Our strategy

 

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

 

Further penetrate the Colombian market

 

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

 

Continue capitalizing on synergies and improving efficiencies

 

We are pursuing opportunities to create synergies among Grupo Aval affiliates and at BAC Credomatic and leverage their combined strength. We intend to work with Grupo Aval on groupwide projects, mainly on information technology, and to achieve economies of scale by participating in the procurement of goods and services for our subsidiaries and within Grupo Aval. We believe that these efforts have contributed and will continue to contribute to improvements in our efficiency ratios.

 

Expand our services and products offerings and diversify our sources of income

 

We believe we offer the most comprehensive range of banking services and products in Colombia, and we continually seek to expand these offerings to meet evolving customer needs and enhance our profitability. We believe we can continue to capture additional revenue by improving our market share in segments and products where we have not historically focused in the past (credit cards and mortgage loans, for example). In addition, we

 

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are also expanding our cross-selling efforts to our over 10.3 million banking clients and our over 11.1 million pension fund clients in Colombia as of December 31, 2015.

 

Furthermore, we continue to implement initiatives to increase our non-interest income, which consists primarily of net fee income and income from our non-financial operations. For the year ended December 31, 2015, net fee income accounted for 26.1% of our consolidated total income before net impairment losses. We believe we can expand the contribution of non-interest income to our profitability in future periods by, for example, expanding our offering of bancassurance products (i.e., bank-offered third-party insurance products) through our distribution networks and credit card fee income by increasing credit card loan volume across all of our banks. With regards to the income from our non-financial operations, we believe that our equity investments in strategic sectors such as energy and infrastructure will continue to contribute sustainable income to our bottom line.

 

We also continue studying initiatives to develop cost-effective channels, such as mobile banking and risk management tools to extend our banking services to under-penetrated segments of the Colombian population that have a low use or that do not currently use banking services.

 

Further penetrate the Central American market

 

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

 

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

 

We have a proven track record of identifying, acquiring and integrating interests in companies we believe have strategic value to us. We are interested in expanding our businesses in Colombia and Central America and into other regions. We will continue to seek opportunities to further expand into new geographies and will evaluate potential acquisition targets that would enable us to grow and consolidate our franchise through the services and products we offer and the markets we can access. We actively consider additional strategic investments, alliances and acquisitions, principally in Colombia, Central America and other selected Latin American countries, which may materialize, if we believe they will generate value, complement our strategic goals, be accretive and will not hinder our technical capital position. We may also continue acquiring additional shares to increase our controlling interests in our banking subsidiaries as we have done in 2014 and 2015. During 2013 we expanded our operations in Central America with the acquisitions of BBVA Panamá (now merged into BAC International Bank, Inc.) and Grupo Reformador (now merged into Banco de América Central S.A. (Guatemala)) and in the Colombian Pension Fund business with the acquisition of AFP Horizonte (merged into Porvenir).

 

Oversight

 

As the holding company of the group, we closely monitor the performance of our banking subsidiaries. We actively participate in developing each banking subsidiary’s long-term business plan, and we require each of our banking subsidiaries to present to us a yearly budget and profitability targets. We develop our own independent profitability targets for each banking subsidiary before discussing and recommending any changes thereto with its management team. In addition, we make recommendations for setting the compensation of management in each of our banking subsidiaries annually, and link incentive compensation to achieving budget goals and other financial and strategic performance targets.

 

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

 

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Our internal control department regularly audits our banks, Porvenir, Corficolombiana and BAC Credomatic, as well as their operating subsidiaries, to provide objective assurance to our management and board of directors regarding the effectiveness of our subsidiaries’ financial reporting and control mechanisms as well as to monitor compliance with our best practices and guidelines. Our internal control department also plays an integral part in our corporate governance. When our internal control department discovers deviations from our best practices and guidelines, we recommend remedial measures and enhance our monitoring of the respective entity.

 

Strategic focus

 

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

 

Credit risk management

 

Although each banking subsidiary is responsible for its credit decisions and risk management, we oversee the implementation of appropriate risk management controls at our banks and have established upward loan reporting processes. Our risk management staff meets on a weekly basis to discuss our subsidiaries’ loan portfolio, developments in the industry, risks and opportunities. For potential loan transactions that would result in an aggregated exposure to a single issuer between Ps 20 billion and Ps 30 billion on a consolidated basis at the group level depending on the risk rating, our risk management staff will evaluate the transaction and will often make recommendations with respect to the structure of the loan (such as guarantees, interest rates, commissions and covenants). We also coordinate loan syndication among our banks to effectively leverage the combined equity of our banks and manage any risk issues. For a discussion of our risk management guidelines, see “Item 11. Quantitative and Qualitative Disclosures About Risk—Risk management.”

 

Marketing

 

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

 

Network integration

 

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

 

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Our markets

 

Colombia

 

The majority of our operations are located in Colombia, representing 71.9% and 70.5% of our net income attributable to controlling interest and gross loan portfolio, respectively, and in the six countries in Central America, representing 28.1% and 29.5% of our net income and gross loan portfolio, respectively, in each case as of and for the year ended December 31, 2015.

 

We believe that, despite recent declines in growth resulting from the recent decrease in international oil prices, Colombia’s financial system presents significant growth potential given its favorable economic conditions and low penetration rate for banking and financial services compared to other countries in the Latin American region such as Brazil and Chile. According to data from the IMF, at December 31, 2014, Colombia’s population and economy were the third and fourth largest in Latin America, respectively. According to DANE, in 2015 Colombia’s population was approximately 48.2 million people and its nominal GDP was Ps 800.8 trillion (U.S.$292.1 billion, translated with the average exchange rate of 2015). Colombia’s nominal GDP per capita increased from Ps 7.93 million in 2005 (U.S.$3,417.5 using the average exchange rate for that year) to Ps 16.6 million in 2015 (U.S.$6,060 using the average exchange rate for that year). This increase in nominal GDP per capita has allowed banks to grow at a faster pace than the economy, suggesting that there is further room to increase the penetration of banking services.

 

During the ten-year period ended December 31, 2014, Colombia’s average GDP growth rate outperformed the average GDP growth rate for Latin America by 1.2 percentage points, while reducing the country’s dependence on foreign financing as reflected in the country’s external debt to GDP ratio of 24.2% and 26.8% at December 31, 2013 and 2014, respectively. However, this ratio increased to 37.1% at September 30, 2015, mainly due to the large currency depreciation that took place in the previous 12 months. Unlike other emerging Latin American economies, Colombia has regularly met all principal and interest payments on external debt and has avoided hyperinflation, maintaining a single-digit inflation rate for the 16 years ended December 31, 2015. According to the Central Bank of Colombia, or the “Colombian Central Bank,” Colombia’s annual inflation rate for 2013 was 1.9%, the lowest rate since 1954 and down from 2.4% for 2012. Annual inflation was 3.7% for 2014 and 6.8% for 2015, mainly due to two non-recurring factors: severe droughts caused by the El Niño weather phenomenon (“El Niño”) in 2015, and (ii) the impact of the depreciation of the peso on the price of consumer goods. As El Niño dissipates and the peso stabilizes, it is expected that in the next 12-18 months inflation will settle at levels closer to rates that prevailed in 2014.

 

During the ten-year period ended December 31, 2014, according to the Superintendency of Finance, Colombia’s financial system grew at a compounded annual growth rate, or “CAGR”, of 13.3% in terms of loan balances outstanding and 10.6% in terms of deposits, on an inflation-adjusted basis, compared to 4.7% for the country’s GDP during the same ten-year period ended December 31, 2014. At December 31, 2015, according to the Superintendency of Finance, Colombia’s financial system grew at an annual rate of 8% in terms of loan balances outstanding, on an inflation-adjusted basis, compared to 3.1% for the country’s GDP during the same period (note that as of 2015, this figure includes Colombian IFRS reporting and prior periods were under Colombian GAAP). Despite this recent growth, Colombia’s bank-loans-to-GDP ratio increased slightly, with an approximately 43.9% ratio at December 31, 2015, according to the Superintendency of Finance (note that as of 2015, this figure incorporates Colombian IFRS reporting). Using the ratio of domestic credit to the private sector to GDP, provided by the World Bank, Colombia stands at 52.7% compared to 109.4% for Chile, 69.1% for Brazil and 31.1% for Mexico at December 31, 2014, the most recent date for which such data is available (note that Peru has been excluded from this comparison due to lack of availability in the World Bank Development Indicators’ database).

 

Central America

 

We view Central America as a strategic region that meets our expansion criteria. At December 31, 2015, Central America had a total population of approximately 46.2 million, making it the fourth largest market in Latin America by population. At the same date, Central America was estimated to post a combined GDP of U.S. $227.2 billion, according to the IMF, which would make it the sixth largest economy in Latin America. According to the IMF, Central America’s GDP was expected to grow 4.1% in 2015, above the expected growth rate for Colombia of 3.1%, and is expected to grow at an annual average rate of 4.4% between 2016 and 2018, compared to Colombia’s expected average growth rate of 3.1% during the same period. In terms of banking penetration, Central America had a ratio of domestic private sector credit to GDP of 48.0% as of December 31, 2013 and of 54.1% as of December 31,

 

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2014, mainly driven by Panamá’s 88.3% ratio. This indicator for the other countries in the Central American region ranged from 32.9% to 55.3% as of December 31, 2014, which we believe positions the financial sector to outperform GDP growth. We also see the additional penetration of credit cards in the population as an important growth opportunity in Central America.

 

The recent economic turmoil driven by the decline in oil prices that has slowed down the Colombian economy, has strengthened the economic outlook for Central America. This is because Central American countries are net oil importers and their economies are closely tied to the United States economy via for example remittances.

 

Our history

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·On December 9, 2010, we acquired BAC Credomatic from GE Consumer Finance Central Holdings Corp. and General Electric Capital Corporation;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

B. Business overview

 

Our operations

 

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

 

 

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Source: Company data at December 31, 2015.

 

(1)Porvenir, Corficolombiana and BAC Credomatic are subsidiaries of Banco de Bogotá, whose financial data is consolidated into Banco de Bogotá’s results. Ownership percentages shown include direct and indirect participation.

 

(2)In addition to Mr. Sarmiento Angulo’s beneficial ownership through Grupo Aval, he beneficially owned 8.3% of Banco de Bogotá, 13.3% of Banco de Occidente, 0.8% of Banco Popular, 15.5% of Banco AV Villas and 0.3% of Corficolombiana, at April 28, 2016.

 

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

 

Colombian Banking Operations

 

Banco de Bogotá, founded in 1870, is Colombia’s oldest financial institution, and was the most efficient bank in the Colombian banking system with an efficiency ratio of 37.2% on an unconsolidated basis as of December 31, 2015, in accordance with Colombian IFRS. As of the same date Banco de Bogotá had a market share of 14.6% of deposits and 13.6% of gross loans. At and for the year ended December 31, 2015, Banco de Bogotá had total assets of Ps 152,269.3 billion and net income attributable to controlling interest of Ps 1,894.0 billion on a consolidated basis in accordance with IFRS. Banco de Bogotá is a full-service bank with nationwide coverage and a comprehensive portfolio of services and products, distributed through a network of 711 branches and 1,747 ATMs in Colombia at December 31, 2015. While Banco de Bogotá serves all market segments, it has a leading presence in commercial loans historically, with a particular focus on large corporations and a market share of 18.0% of commercial loans at December 31, 2015. Following its 2006 acquisition of Megabanco, Banco de Bogotá expanded its consumer banking business and now has a market share of 9.4% of consumer loans in Colombia as of December 31, 2015. In 2012, Banco de Bogotá entered the mortgage business and had a market share of 4.5% at December 31, 2015. Banco de Bogotá’s ROAE of 16.5% for the year ended December 31, 2015 on an unconsolidated basis, in accordance with Colombian IFRS, made it one of the most profitable banks in Colombia.

 

Banco de Occidente is the fifth largest bank in Colombia in loans, with a market share of 7.3% at December 31, 2015. It focuses on enterprise customers, state-owned entities and retail customers and has a diversified revenue stream. For the year ended December 31, 2015, on a consolidated basis its loan portfolio was distributed as follows: approximately 29.8% in consumer and auto lending; approximately 53.0% in corporate and public sector lending; and approximately 17.2% in SMEs. Banco de Occidente had market shares of 9.1% of commercial loans and 6.5% of consumer loans at December 31, 2015.

 

Banco Popular is the eighth largest bank in Colombia in loans with a market share of 4.2% at December 31, 2015. Banco Popular operates primarily in the consumer and public sector businesses, with operations across all regions of Colombia. Banco Popular is a premier provider of financial solutions to government entities nationwide with a particular strength in public sector deposits and loans, and a significant part of its portfolio consists of payroll loans to pensioners and public sector employees. Banco Popular achieved better returns on its consumer loan portfolio due to its access to payroll deductions for repayment of loans, which has resulted in consumer loans with a substantially lower-risk profile for consumer loans (consumer past-due loans of 2.4% compared to a banking system average of 4.4% at December 31, 2015).

 

Banco AV Villas has evolved from being a traditional mortgage lender to a diversified full-service consumer bank targeting middle- and low-income customers. It is our most active bank in usage of non-traditional distribution channels (mobile banking, banking correspondents and virtual branches). Banco AV Villas has a broad service network throughout central and northern Colombia, including Bogotá. Banco AV Villas had a market share of 2.9% of deposits, 2.4% of loans, 4.2% of consumer loans and 3.6% of mortgages at December 31, 2015.

 

Pension and Severance Fund Management Administration

 

Porvenir is the leading private pension and severance fund management business in Colombia, based on assets under management, with a 42.9% market share of assets under management as of December 31, 2015. Pension funds provide individual savings for retirement, while severance funds provide temporary income to employees who

 

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become unemployed. Based on unconsolidated data, at December 31, 2015, Porvenir was the most profitable and efficient pension and severance fund manager in Colombia, with an ROAE of 22.3% and an efficiency ratio of 43.6%.

 

Merchant Banking

 

Corficolombiana is the largest merchant bank in Colombia based on total assets as of December 31, 2015. Corficolombiana focuses on four main lines of business: (1) equity investments in strategic sectors of the Colombian economy, including, in particular, infrastructure, energy and gas, agribusiness and hospitality; (2) investment banking, including services relating to capital markets, mergers and acquisitions and project finance transactions; (3) treasury operations; and (4) financial services such as leasing, fiduciary and private banking. Corficolombiana’s ROAE was 18.9% and 16.5% for the years ended December 31, 2014 and 2015, respectively, based on its consolidated financial statements.

 

Central American Operations

 

BAC Credomatic is the leading Central American banking group with operations in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua, Panamá and Mexico. BAC Credomatic is a full-service financial institution with one of the leading credit card issuance and merchant-acquiring franchises in Central America. It has achieved processing volumes of U.S.$15,543 million (Ps 48,952 billion) for the year ended December 31, 2015 and U.S.$13,867 million (Ps 43,675 billion) for the year ended December 31, 2014, in the merchant acquiring business, which compares favorably to processing volumes of other leading Latin American issuers. BAC Credomatic’s ROAE was 18.1% in 2014 and 15.5% for the year ended December 31, 2015.

 

Competition

 

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

 

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

 

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

 

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

 

Market share and other data from unconsolidated financial information

 

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

 

Deposits

 

At December 31, 2015, we had the largest market share of total deposits in Colombia, with a market share of 28.2%. As of the same date our principal competitors—Bancolombia, Davivienda and BBVA Colombia—had market shares of 20.8%, 12.3%, and 11.5%, respectively.

 

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The following table presents a breakdown of market share of deposits by type of deposit at December 31, 2015.

 

   At December 31, 2015 
Colombian IFRS 

Grupo Aval
aggregate(1)

   Bancolombia   Davivienda   BBVA
Colombia
   Rest of the
Colombian
market
 
   (in percentages) 
Checking accounts   35.1    25.3    9.9    9.7    20.0 
Savings accounts   27.2    22.8    12.4    12.4    25.2 
Time deposits   26.2    15.2    13.5    11.2    33.9 
Total deposits   28.2    20.8    12.3    11.5    27.1 

 

 

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

 

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

 

At December 31, 2015, deposits represented a larger share of our total funding than that of most of our principal competitor banks, and we had a higher concentration of checking accounts, which are generally source of funds with lower cost. The table below presents the total funding mix of the market at December 31, 2015.

 

   At December 31, 2015 
Colombian IFRS 

Grupo Aval
aggregate(1)

   Bancolombia   Davivienda   BBVA
Colombia
   Rest of the
Colombian
market
 
   (in percentages) 
Funding:                         
Deposits   77.9    69.9    71.6    81.2    72.9 
Other funding (2)   22.1    30.1    28.4    18.8    27.1 
Total funding   100.0    100.0    100.0    100.0    100.0 
Deposits:                         
Checking accounts   20.6    20.1    13.4    14.0    12.2 
Savings accounts   49.4    56.2    51.2    54.8    47.5 
Time deposits   30.0    23.7    35.4    31.2    40.3 
Total deposits   100.0    100.0    100.0    100.0    100.0 
Average funding rate: (3)                         
Average deposit rate   3.23    2.48    3.09    3.76    3.70 
Average other funding rate   4.17    4.70    5.23    4.11    3.60 
Average total funding rate   3.42    3.19    3.68    3.81    3.68 

 

 

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

 

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

 

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

 

(3)Average balances calculated using end of month unconsolidated information for the year ended December 31, 2015.

 

Loans

 

At December 31, 2015, we had the largest market share of total loans in Colombia, with a 27.4% market share. As of the same date, our principal competitor banks—Bancolombia, Davivienda and BBVA Colombia—had market shares of 22.8%, 13.8% and 10.5%, respectively.

 

The following table presents a breakdown of the market share of our loan portfolio by category at December 31, 2015.

 

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   At December 31, 2015 
Colombian IFRS 

Grupo Aval
aggregate(1)

   Bancolombia   Davivienda   BBVA
Colombia
   Rest of the
Colombian
market
 
   (in percentages) 
Commercial and leases   31.7    28.4    12.1    8.0    19.7 
Consumer and leases   28.2    13.4    13.6    12.7    32.1 
Mortgages and leases   10.8    20.7    25.1    20.1    23.2 
Microcredit and leases   3.6    5.6    1.0    0.0    89.7 
Total   27.4    22.8    13.8    10.5    25.5 

 

 

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

 

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

 

The following table shows the mix of our loan portfolio and that of our competitors at December 31, 2015.

 

   At December 31, 2015 
Colombian IFRS 

Grupo Aval
aggregate(1)

   Bancolombia   Davivienda   BBVA
Colombia
   Rest of the
Colombian
market
 
   (in percentages) 
Commercial and leases   67.3    72.4    51.1    44.2    44.9 
Consumer and leases   27.5    15.7    26.4    32.3    33.6 
Mortgages and leases   4.8    11.1    22.3    23.5    11.1 
Microcredit and leases   0.4    0.7    0.2    0.0    10.3 
Total   100.0    100.0    100.0    100.0    100.0 

 

 

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

 

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

 

Loan Portfolio Quality

 

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

 

   Loans past due more
than 30 days / gross
loan portfolio
   Loans rated C, D or E 
/ gross loan
portfolio(3)
   Gross provision
expense / average
gross loan
portfolio(2)
   Allowance / loans past
due more than 30 days
 
Colombian IFRS  For the year ended December 31, 2015 
   (in percentages) 
Banco de Bogotá   2.3    4.0    3.2    139.2 
Banco de Occidente   2.8    4.0    4.4    130.1 
Banco Popular   2.0    2.7    2.6    177.1 
Banco AV Villas   3.7    2.9    4.4    114.0 
Grupo Aval aggregate(1)   2.5    3.7    3.5    137.9 
Bancolombia   3.1    4.0    3.9    159.1 
Davivienda   3.3    3.1    4.3    126.0 
BBVA Colombia   2.8    2.5    3.2    120.1 
Rest of the Colombian market   4.2    5.2    4.9    131.6 

 

 

Source:Company calculations based on unconsolidated information published by the Superintendency of Finance.
   
(1)Grupo Aval figures reflect aggregated amounts of our banking subsidiaries.
   
(2)When calculated as net provision expense / average gross loan portfolio, the ratio for the year ended December 31, 2015 would be 1.6% for Banco de Bogotá, 2.3% for Banco de Occidente, 1.0% for Banco Popular, 2.0% for Banco AV Villas,

 

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1.7% for Grupo Aval aggregate, 2.0% for Bancolombia, 2.4% for Davivienda, 1.5% for BBVA and 2.5% for the rest of the Colombian market.

 

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

 

Branches and ATM Network

 

Through our banking subsidiaries, we have the largest combined banking network in Colombia, with 1,433 branches and 3,808 ATMs at December 31, 2015. The following table presents the distribution of branches and ATMs across the market at December 31, 2015.

 

   At December 31, 2015 
   Branches   ATMs 
   # of branches   Market share %   # of ATMs   Market share % 
Grupo Aval aggregate(1)   1,433    26.3%   3,808    25.7%
Bancolombia   800    14.7%   4,014    27.1%
Davivienda   590    10.8%   1,727    11.7%
BBVA Colombia   475    8.7%   1,302    8.8%
Rest of the Colombian market   2,149    39.5%   3,957    26.7%

 

 

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

 

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

 

Pension and severance fund management – Porvenir

 

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

 

Porvenir also has the largest share of individual customers of privately managed mandatory pension funds and has a higher ROAE than the average of the Private Pension Fund Managers in Colombia in 2014 and 2015.

 

The following table presents the market shares of the main market participants with respect to assets under management and individual customers of mandatory pension funds at December 31, 2015, and net income for the year ended December 31, 2015.

 

   At and for the year ended December 31, 2015 
   Porvenir   Protección   Colfondos   Old Mutual 
   (in percentages) 
Individual customers to pension funds:                    
Mandatory   55.2    30.6    13.4    0.8 
Severance   56.2    32.6    10.5    0.6 
Voluntary   29.4    48.7    7.9    14.0 
Total   54.8    31.7    12.4    1.1 
Assets under management:                    
Mandatory   44.2    36.4    13.7    5.7 
Severance   49.3    37.8    10.6    2.3 
Voluntary   23.0    39.3    5.8    31.9 
Total   42.9    36.7    13.0    7.4 
Net income:   47.7    37.7    6.6    8.0 

 

 

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

 

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Merchant banking—Corficolombiana

 

Corficolombiana was the largest merchant bank in Colombia in terms of assets and equity at December 31, 2015. Corficolombiana faces competition from local and global banks focused on merchant and investment banking. Bancolombia, through its subsidiary Banca de Inversión Bancolombia S.A., is Corficolombiana’s largest local competitor. On an international level, Corficolombiana faces competition from global banks with local investment banking operations. In addition, as an equity investor, Corficolombiana faces competition from other equity investors such as hedge funds, private equity firms and others.

 

The following table presents the market shares of Corficolombiana and its principal competitors by assets, liabilities and equity at the dates indicated at December 31, 2015.

 

Colombian IFRS  Assets   Liabilities   Equity 
   (in percentages) 
Corficolombiana   82.4    88.3    73.0 
Banca de Inversión Bancolombia S.A.   4.6    0.3    11.6 
J.P. Morgan Corporación Financiera S.A.   6.9    6.7    7.3 
BNP Paribas Colombia Corporación Financiera S.A.   2.1    2.1    2.2 
Itaú BBA Colombia S.A.   3.9    2.7    5.9 

 

 

Source:Information published by the Superintendency of Finance.

 

Colombian banking business overview

 

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

 

 51 

  

 

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

 

Enterprise customers

 

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

 

At December 31, 2015, our banks had an aggregate of 282,200 enterprise customers, which may include customer overlap among our banks, an increase of 4.7% over 269,500 enterprise customers at December 31, 2014.

 

 52 

  

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

 

   Grupo Aval 
   Banco de
Bogotá
   Banco de
Occidente
   Banco
Popular
   Banco AV
Villas
  

Grupo Aval
aggregate(1)

 
   (in thousands) 
Total enterprise customers, as of:                         
December 31, 2015 (2)   173.9    74.3    6.2    27.7    282.2 
December 31, 2014   163.4    71.2    7.9    27.0    269.5 

 

 

(1)Reflects aggregated amounts of our banking subsidiaries.
   
 (2)BAC Credomatic had approximately 101,000 enterprise customers as of December 31, 2015.

 

Individual customers

 

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

 

At December 31, 2015, our banks had a total of approximately 10,004,800 individual customers, an increase of 5.6% over approximately 9,471,200 individual customers at December 31, 2014. Customers of more than one of our banking subsidiaries are counted separately for each banking subsidiary.

 

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

 

   Grupo Aval 
   Banco de
Bogotá
   Banco de
Occidente
   Banco
Popular
   Banco AV
Villas
  

Grupo Aval
aggregate(1)

 
   (in thousands) 
Total individual customers, as of:                         
December 31, 2015 (2)   5,139.7    621.6    2,894.7    1,348.7    10,004.8 
December 31, 2014   4,783.6    571.7    2,806.2    1,309.7    9,471.2 

 

 

(1)Reflects aggregated amounts of our banking subsidiaries.
   
 (2)BAC Credomatic had approximately 3,290,000 individual customers as of December 31, 2015.

 

Lending activities

 

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

 

The following table presents our gross loan portfolio at December 31, 2015 in accordance with IFRS.

 

   At December 31, 2015 
   Grupo Aval entities 
   Banco de
Bogotá(3)
   Banco de
Occidente
   Banco
Popular
   Banco AV
Villas
  

Grupo Aval
consolidated(2)(3)

 
   (in Ps billions) 
Commercial   60,609.3    19,324.9    6,826.1    3,246.7    89,498.1 
Commercial loans   57,009.3    19,229.8    6,826.1    2,825.3    85,413.2 
Interbank and overnight funds interbank   3,600.0    95.1    0.0    421.4    4,085.0 
Consumer   24,490.3    6,251.5    7,492.2    3,996.5    42,230.5 
Mortgages   10,627.9    844.4    344.8    1,601.0    13,418.1 
Microcredit(1)   385.6    -    10.6    3.0    399.3 
Total   96,113.2    26,420.7    14,673.8    8,847.2    145,546.0 

 

 

(1)Microcredit loans are issued for the purpose of encouraging the activities of small businesses and are subject to the following requirements: the maximum amount to be lent is equal to 25 times the minimum wage (salario mínimo mensual

 

 53 

  

legal vigente) without the balance of one single borrower exceeding such amount at any time, and the main source of payment for the corresponding obligation shall be the revenues obtained from the activities of the borrower’s micro business. The borrower’s outstanding indebtedness may not exceed 120 times the minimum wage.

 

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

 

(3)Reflects Banco de Bogotá consolidated figures which include Central American operations and accounted for Ps 42,928.6 billion of the total loan portfolio (Ps 19,130.0 billion in commercial loans, Ps 15,139.0 billion in consumer loans and Ps 8,659.7 billion in mortgage loans) at December 31, 2015.

 

As of December 31, 2015, the aggregate outstanding loans to our banks’ ten largest borrowers, our 11th to 50th largest borrowers and our 51st to 160th largest borrowers, represented 5.5%, 6.2% and 6.7%, respectively, of our consolidated total loan portfolio.

 

Commercial loans

 

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

 

The following table presents our commercial loan portfolio at December 31, 2015 in accordance with IFRS.

 

   At December 31, 2015 
   Grupo Aval entities 
   Banco de
Bogotá(2)
   Banco de
Occidente
   Banco Popular   Banco AV
Villas
  

Grupo Aval
consolidated(1)(2)

 
   (in Ps billions) 
General purpose loans   38,112.3    11,648.1    5,654.2    2,791.3    57,728.5 
Loans funded by development banks   1,402.9    705.9    381.7    24.0    2,514.5 
Working capital loans   12,833.4    2,398.6    549.8    0.4    15,782.2 
Credit cards   307.6    84.4    2.4    1.3    395.8 
Overdrafts   454.3    57.7    5.2    8.3    525.6 
Leases   3,898.8    4,335.1    232.7    -    8,466.5 
Interbank and overnight funds   3,600.0    95.1    0.0    421.4    4,085.0 
Total   60,609.3    19,324.9    6,826.1    3,246.7    89,498.1 

 

 

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

 

(2)Reflects Banco de Bogotá consolidated figures which include Central American operations and accounted for Ps 19,130.0 billion of commercial loans.

 

Consumer loans

 

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

 

The following table presents our consumer loan portfolio at December 31, 2015 in accordance with IFRS.

 

   At December 31, 2015 
   Grupo Aval entities     
   Banco de
Bogotá(2)
   Banco de
Occidente
   Banco Popular   Banco AV
Villas
  

Grupo Aval
consolidated (1)(2)

 
   (in Ps billions) 
Personal loans   11,671.2    2,905.8    7,332.9    3,364.3    25,274.2 
Automobile and other vehicle loans   3,177.7    1,937.5    10.8    108.6    5,234.6 
Credit cards   9,382.1    1,198.7    138.5    521.9    11,241.3 
Overdrafts   80.3    7.9    0.7    1.6    90.5 

  

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   At December 31, 2015 
   Grupo Aval entities       
   Banco de
Bogotá(2)
   Banco de
Occidente
   Banco Popular   Banco AV
Villas
  

Grupo Aval
consolidated (1)(2)

 
   (in Ps billions) 
Loans funded by development banks   -    -    0.1    -    0.1 
General purpose loans   2.0    191.0    6.4    -    199.5 
Working capital loans   -    -    0.1    -    0.1 
Leases   177.0    10.6    2.6    -    190.3 
Total(3)   24,490.3    6,251.5    7,492.2    3,996.5    42,230.5 

 

 

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

 

(2)Reflects Banco de Bogotá consolidated figures which include Central American operations and accounted for Ps 15,139.0 billion of consumer loans.

 

(3)Includes microcredit loans.

 

Mortgages

 

Banco de Bogotá and Banco AV Villas are our main providers of loans to customers for the purchase of real estate secured by mortgages, while Banco de Occidente and Banco Popular are increasing their presence in this business. We have implemented strict underwriting standards: we do not offer mortgage loans in amounts greater than 70% of the value of the property to be purchased, and all of our mortgage loans (excluding housing leases) have maturities of between five and fifteen years. The average maturity at December 31, 2015 was 135 months. Borrowers must also meet certain minimum income levels, and payments may not exceed 30% of the borrower’s monthly income.

 

Credit cards

 

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

 

   Activated Issued Credit Cards 
Bank  December 31,
2015
   December 31,
2014
 
Banco de Bogotá   956,279    898,595 
Banco de Occidente   574,988    512,366 
Banco Popular   86,328    81,367 
Banco AV Villas   369,237    326,961 
Total Colombian activated issued credit cards(1)   1,986,832    1,819,289 

 

 

(1)BAC Credomatic had approximately 1,795,730 credit card accounts in Central America at December 31, 2015. See “—BAC Credomatic operations—Lending activities—Credit cards.”

 

Deposit-taking activities

 

Deposits

 

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

 

The following table presents our deposits by product type at the dates indicated in accordance with IFRS.

 

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   At December 31, 
  

Banco de Bogotá

  

Banco de Occidente

  

Banco Popular

  

Banco AV Villas

  

Consolidated(2)(3)

 
  

2015

  

2014

  

2015

  

2014

  

2015

  

2014

  

2015

  

2014

  

2015

  

2014

 
   (in Ps billions) 
Checking accounts   24,877.9    20,250.1    6,341.0    6,255.1    1,246.1    1,329.1    1,017.9    975.9    33,430.7    28,756.7 
Savings accounts   28,165.3    21,554.8    10,081.5    9,358.9    7,222.4    7,236.3    5,102.1    4,561.3    50,298.1    42,253.4 
Time deposits (CDs)   38,739.3    31,705.2    7,347.0    7,420.6    4,075.7    1,921.9    2,834.1    2,847.2    51,777.4    42,147.8 
Other deposits   261.6    142.7    121.4    197.2    61.1    21.7    4.5    12.0    448.5    370.5 
Total(1)   92,044.2    73,652.8    23,890.9    23,231.7    12,605.3    10,509.1    8,958.5    8,396.4    135,954.6    113,528.5 

 

 

(1)Interbank deposits have been excluded.
   
 (2)Includes eliminations for intercompany or intra-group operations between Grupo Aval subsidiaries.
   
 (3)Central American operations and accounted for Ps 39,024.7 billion and Ps 27,410.6 billion of total deposits at December 31, 2015 and 2014, respectively.

 

Treasury operations

 

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

 

Distribution

 

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

 

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

 

Distribution Channel

 

Description

Full-service branches   We had 1,433 full-service branches at December 31, 2015. Red de Grupo Aval (Grupo Aval network) service points across our banks allow our bank customers to perform check cashing, deposits, savings account withdrawals, loan and credit card payments, transfers and advances at any of our branches.
     
ATMs and electronic service points   We had 3,808 ATMs and 127 other electronic service points (non-cash dispensing teller machines) at December 31, 2015. Through our ATMs and electronic service points, all of our bank customers can, among other services, consult their balances, execute loan and credit card payments, transfers and advances, and pay for certain third-party services where we have a payment collection agreement in place (such as utility service companies).
     
Payment collection centers (Centros de pagos)   We had 117 payment collection centers at December 31, 2015, which allow our customers to pay for certain third-party services where we have a payment collection agreement in place (such as utility service companies).

 

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Distribution Channel   Description
Banking correspondents (Corresponsales bancarios)   We had 31,353 banking correspondents at December 31, 2015. Our banks enter into agreements with various third parties, including convenience store owners, to provide all of our bank customers with certain services which can include checking and savings account withdrawals, account balance consultation, loan and credit card payments, transfers and advances, and payments for certain third-party services where we have a payment collection agreement in place with such third-party (such as utility service companies).
     
Automated telephone banking, mobile banking and online banking   Through our banks’ websites, mobile banking services and automated telephone banking, customers may pay loan and credit card balances, make transfers between accounts and make payments for collection agreements originated in any of our banks.

 

The following map presents our banks’ points of service across the principal regions of Colombia, at December 31, 2014 and 2015.

 

 

 

Source: Grupo Aval

 

Note: Other points of service include Banking correspondents (corresponsales bancarios) or “CBs,” electronic service points (agilizadores electrónicos) and payment collection centers (centros de pago). At December 31, 2015, Banco de Bogotá and Banco AV Villas had closed some of its non-operational banking correspondents from their alliances with Móvil Red and Red Cerca, respectively, due to the low level of transactions held through these points during 2015.  

 

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

 

   Transactions at
December 31,
   % Total Transactions at
December 31,
 
Grupo Aval  2015   2014   2015   2014 
   (in thousands)     
Branches   274,220    301,700    30.6    34.4 
ATMs   165,534    170,890    18.4    19.5 
Other   58,704    59,967    6.5    6.8 
Total service points   498,457    532,557    55.5    60.7 

 

In addition, the following table presents transaction volumes for online banking, mobile banking and automated telephone banking channels which, pursuant to our growth strategy, are expected to grow on an annual basis relative to total transactions, at December 31, 2015 and 2014.

 

   Transactions at
December 31,
   % of Total Transactions at
December 31,
 
Grupo Aval  2015   2014   2015   2014 
   (in thousands) 
Online banking   385,131    330,852    42.9    37.7 
Mobile banking   3,666    4,074    0.4    0.5 
Automated telephone banking   10,121    9,869    1.1    1.1 
Total   398,919    344,796    44.5    39.3 

 

In 2015, a total of 42.8 million messages were sent through our mobile phone banking system, an increase of approximately 19.9% as compared to 35.7 million messages in 2014.

 

Our call centers provide our customers with assistance relating to bank services and products, information updates, service-related complaints, payment or account linkages, and credit card blockage. Our call centers are also used for telemarketing, collection of past-due loans and customer loyalty initiatives. In 2015, the number of inbound calls to our call centers was approximately 10.7 million and the number of outbound calls was approximately 28.7 million. In 2014, the number of inbound calls to our call centers was approximately 11.7 million and the number of outbound calls was approximately 26.3 million.

 

Banco de Bogotá

 

Banco de Bogotá is Colombia’s oldest financial institution, and was the most efficient bank in the Colombian banking system with an efficiency ratio of 37.2% on an unconsolidated basis at December 31, 2015. As of the same date we had a market share of 14.6% of deposits and 13.6% of loans.

 

At and for the year ended December 31, 2015, Banco de Bogotá had total assets of Ps 152,269.3 billion and net income attributable to controlling interest of Ps 1,894.0 billion on a consolidated basis.

 

Banco de Bogotá is a full-service bank with nationwide coverage and a comprehensive portfolio of services and products, distributed through a network of 711 branches and 1,747 ATMs in Colombia at December 31, 2015. While Banco de Bogotá serves all market segments, it has a leading presence in commercial loans historically, with a particular focus on large corporations and a market share of 18.0% of commercial loans at December 31, 2015. Following its 2006 acquisition of Megabanco, Banco de Bogotá expanded its consumer banking business and had a market share of 9.4% of consumer loans in Colombia December 31, 2015. In 2012, Banco de Bogotá entered the mortgage business and has a market share of 4.5% at December 31, 2015. Banco de Bogotá’s ROAE of 16.5% for the year ended December 31, 2015 on an unconsolidated basis made it one of the most profitable banks in Colombia.

 

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

 

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

 

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

 

Lending activities

 

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

 

  

At December 31,(1)

   Change, December 31,
2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions) 
Commercial   60,609.3    47,809.2    12,800.1    26.8 
Commercial loans   57,009.3    46,393.7    10,615.7    22.9 
Interbank and overnight funds   3,600.0    1,415.5    2,184.5    154.3 
Consumer   24,490.3    18,418.7    6,071.6    33.0 
Mortgages   10,627.9    7,610.9    3,017.0    39.6 
Microcredit   385.6    353.0    32.6    9.2 
Total   96,113.2    74,191.8    21,921.3    29.5 

 

 

(1)Reflects Banco de Bogotá consolidated figures which include Central American operations which as of December 31, 2015, Central American operations accounted for Ps 42,928.6 billion of the total loan portfolio (Ps 19,130.0 billion in commercial loans, Ps 15,139.0 billion in consumer loans and Ps 8,659.7 billion in mortgage loans). As of December 31, 2014 accounted for Ps 28,641.7 billion of the total loan portfolio (Ps 12,493.1 billion in commercial loans, Ps 10,011.1 billion in consumer loans and Ps 6,137.5 billion in mortgage loans).

 

Deposit-taking activities

 

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

 

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

 

  

At December 31,(1)

   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions) 
Checking accounts   24,877.9    20,250.1    4,627.8    22.9 
Savings accounts   28,165.3    21,554.8    6,610.6    30.7 
Time deposits   38,739.3    31,705.2    7,034.1    22.2 
Other deposits   261.6    142.7    118.9    83.3 
Total customer deposits   92,044.2    73,652.8    18,391.4    25.0 

 

 

(1)Reflects Banco de Bogotá consolidated figures which include Central American operations which as of December 31, 2015, Central American operations accounted for Ps 39,024.7 billion (Ps 14,921.8 billion in checking accounts, Ps 7,613.2 billion in savings accounts, Ps 16,287.1 billion in time deposits and 202.6 billion in other deposits). As of 2014 Central American operations accounted for Ps 27,410.6 billion of total customer deposits (Ps 10,098.7 billion in checking accounts, Ps 5,302.9 billion in savings accounts, Ps 11,797.7 billion in time deposits and 211.3 billion in other deposits).

 

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Distribution

 

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

 

   At December 31, 
   2015   2014 
Branches   711    704 
ATMs   1,747    1,737 
Other points of service   7,601    10,268 
Total points of service   10,059    12,709 

 

Banco de Bogotá had a network concentration of approximately 65.2% in Colombia’s central region, of which Bogotá represents approximately 44.4% at December 31, 2015. During 2015, Banco de Bogotá closed 2,623 non-operating banking correspondents from its alliance with Móvil Red due to the low level of transactions held through these points. Banco de Bogotá had a market share of approximately 13.1% of branches and approximately 11.8% of ATMs at December 31, 2015.

 

Banco de Occidente

 

Banco de Occidente is the fifth largest bank in Colombia, with a market share of 7.3% of loans at December 31, 2015.

 

Banco de Occidente focuses on enterprise customers, state-owned entities and retail customers and has a diversified revenue stream. For the year ended December 31, 2015, its loan portfolio was distributed as follows: approximately 29.8% in consumer and auto lending; approximately 53.0% in corporate and public sector lending; and approximately 17.2% in SMEs. Banco de Occidente had market shares of 9.1% of commercial loans and 6.5% of consumer loans at December 31, 2015.

 

Banco de Occidente had a market share of approximately 11.4% of checking accounts at December 31, 2015. Additional areas of focus for future growth include credit cards, low-risk consumer loan services and products such as payroll loans and loans to government agencies. On a consolidated basis in accordance with IFRS, Banco de Occidente’s ROAE was approximately 11.8% for the year ended December 31, 2015.

 

Lending activities

 

The following table presents Banco de Occidente’s consolidated gross loan portfolio at the dates indicated in accordance with IFRS.

 

   At December 31,   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions, except for percentages) 
Commercial   19,324.9    16,673.7    2,651.2    15.9 
Commercial loans   19,229.8    16,374.9    2,854.9    17.4 
Interbank and overnight funds   95.1    298.8    (203.7)   (68.2)
Consumer   6,251.5    5,397.2    854.3    15.8 
Mortgages   844.4    624.1    220.3    35.3 
Microcredit   -    -    -    - 
Total   26,420.7    22,695.0    3,725.7    16.4 

 

Deposit-taking activities

 

Banco de Occidente has a relatively low cost of funds as a result of its relatively high proportion of deposits held in checking accounts. At December 31, 2015, 28.9% of Banco de Occidente’s deposits were held by customers in checking accounts, as compared to a national banking system average of approximately 16.6% at December 31, 2015.

 

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The following table presents a breakdown of Banco de Occidente’s consolidated deposits by product type at the dates indicated in accordance with IFRS.

 

   At December 31,   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions, except for percentages) 
Checking accounts   6,341.0    6,255.1    86.0    1.4 
Savings accounts   10,081.5    9,358.9    722.6    7.7 
Time deposits   7,347.0    7,420.6    (73.6)   (1.0)
Other deposits(1)   121.4    197.2    (75.8)   (38.4)
Total   23,890.9    23,231.7    659.1    2.8 

 

 

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

 

Distribution

 

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

 

   At December 31, 
   2015   2014 
Branches   212    206 
ATMs   336    328 
Other points of service   9,650    8,285 
Total points of service   10,198    8,819 

 

Banco de Occidente had a network concentration of approximately 45.4% in Colombia’s central region, of which Bogotá represented approximately 24.3% at December 31, 2015. Banco de Occidente is also active in the southwestern region of Colombia, in which approximately 14.4% of its distribution network is located. During 2015, Banco de Occidente opened 1,365 new banking correspondents through its contract with Baloto. Banco de Occidente had approximately 3.9% market share of branches and approximately 2.3% market share of ATMs at December 31, 2015.

 

Banco Popular

 

Banco Popular is the eighth largest bank in Colombia in loans with a market share of 4.2% at December 31, 2015. Banco Popular operates primarily in the consumer and public sector businesses, with operations across all regions of Colombia. Banco Popular is a premier provider of financial solutions to government entities nationwide with a particular strength in public sector deposits and loans, and a significant part of its portfolio consists of payroll loans to public sector employees.

 

Banco Popular achieved improved returns on its consumer loan portfolio due to its access to payroll deductions for repayment of loans, which has resulted in consumer loans with a substantially lower-risk profile for consumer loans (consumer past-due loans of 2.4% compared to a banking system average of 4.4% at December 31, 2015). At December 31, 2015, on a consolidated basis, Banco Popular had total assets of Ps 19,109.4 billion, 229 branches, and net income attributable to controlling interest of Ps 348.5 billion for the year ended December 31, 2015.

 

Banco Popular’s focus on consumer loans and institutional customers generates a mix of broad and stable sources of revenues. On a consolidated basis, its ROAE was 13.9% as of December 31, 2015.

 

Banco Popular’s strategy for the future is based on four pillars: (1) strengthen its leadership in payroll loans; (2) diversify product offering, such as credit cards and mortgages; (3) further penetrating the medium-size business sector (companies with annual incomes of between Ps 2 billion and Ps 40 billion); and (4) maintaining dynamic credit origination with Grupo Aval’s other banking subsidiaries.

 

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Lending activities

 

The following table presents Banco Popular’s consolidated gross loan portfolio at the dates indicated in accordance with IFRS.

 

   At December 31,   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions) 
Commercial   6,826.1    6,192.3    633.8    10.2 
Commercial loans   6,826.1    6,164.2    661.9    10.7 
Interbank and overnight funds   0.0    28.1    (28.0)   (99.9)
Consumer   7,492.2    6,756.6    735.6    10.9 
Mortgages   344.8    195.0    149.8    76.8 
Microcredit   10.6    12.8    (2.2)   (17.3)
Total   14,673.8    13,156.7    1,517.0    11.5 

 

Deposit-taking activities

 

Banco Popular generates a substantial portion of its deposits through agreements with customers pursuant to which they agree to maintain a certain level of deposits in checking and/or savings accounts in exchange for the performance of services, primarily payment and collection services. These deposits totaled Ps 5,708.7 billion, representing approximately 67.5% of total checking and savings accounts, at December 31, 2015.

 

The following table presents a breakdown of Banco Popular’s consolidated deposits by product type at the dates indicated in accordance with IFRS.

 

   At December 31,   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions) 
Checking accounts   1,246.1    1,329.1    (83.0)   (6.2)
Savings accounts   7,222.4    7,236.3    (13.9)   (0.2)
Time deposits   4,075.7    1,921.9    2,153.7    112.1 
Other deposits   61.1    21.7    39.4    181.6 
Total customer deposits   12,605.3    10,509.1    2,096.2    19.9 

 

Distribution

 

The following table presents Banco Popular’s points of service in Colombia.

 

   At December 31, 
   2015   2014 
Branches   229    230 
ATMs   1,157    1,165 
Other points of service   266    270 
Total points of service   1,652    1,665 

 

Banco Popular had a network concentration of approximately 43.9% in Colombia’s central region, of which Bogotá represented approximately 28.2% at December 31, 2015. Banco Popular had a market share of approximately 4.2% of branches and a market share of approximately 7.8% of ATMs at December 31, 2015.

 

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Banco AV Villas

 

Banco AV Villas has evolved from being a traditional mortgage lender to a diversified full-service consumer bank targeting middle- and low-income customers. It is our most active bank in usage of non-traditional distribution channels (mobile banking, banking correspondents and virtual branches). Banco AV Villas has a broad service network throughout central and northern Colombia, including Bogotá. Banco AV Villas had a market share of 2.9% of deposits, 2.4% of loans, 4.2% of consumer loans and 3.6% of mortgages as of December 31, 2015.

 

As of December 31, 2015, on a consolidated basis in accordance with IFRS, Banco AV Villas had total assets of Ps 11,547.2 billion and 281 bank branches, net income attributable to controlling interest was Ps 175.6 billion, ROAE was 14.0% and efficiency ratio was 52.4%.

 

In the consumer segment, Banco AV Villas focuses on high-margin services and products such as general purpose loans, payroll loans and credit cards, as well as its traditional line of mortgages. It serves customers through a recently expanded sales force and through its traditional retail network, entrepreneurial business centers and instant credit offices, known as “OCIs,” where credit applicants receive the outcome of their credit application within three hours. Banco AV Villas also seeks to continue to expand in the small- and medium-size corporate segment. In order to increase transaction volume through electronic channels and improve efficiency, Banco AV Villas has developed projects, such as the Nearby Network (Red Cerca), that will allow it to increase coverage by banking correspondents and offer a wide array of services to individuals and small- and medium-size businesses through its mobile banking platform.

 

Lending activities

 

The following table presents Banco AV Villas’ consolidated gross loan portfolio at the dates indicated in accordance with IFRS.

 

   At December 31,   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions) 
Commercial   3,246.7    2,943.7    303.0    10.3 
Commercial loans   2,825.3    2,624.4    200.9    7.7 
Interbank and overnight funds   421.4    319.3    102.1    32.0 
Consumer   3,996.5    3,306.3    690.2    20.9 
Mortgages   1,601.0    1,348.1    252.9    18.8 
Microcredit   3.0    6.4    (3.4)   (52.7)
Total   8,847.2    7,604.6    1,242.7    16.3 

 

Deposit-taking activities

 

Banco AV Villas offers customers checking accounts, savings accounts, time deposits and other deposits consisting primarily of transactional accounts. Banco AV Villas’s average savings account rate, one of the lowest in the market, is explained by a significant retail network and a low concentration of corporate and government accounts.

 

The following table presents a breakdown of Banco AV Villas’s consolidated deposits by product type at the dates indicated in accordance with IFRS.

 

   At December 31,   Change, December 31, 2015 vs.
December 31, 2014
 
   2015   2014   #   % 
   (in Ps billions) 
Checking accounts   1,017.9    975.9    42.0    4.3 
Savings accounts   5,102.1    4,561.3    540.8    11.9 
Time deposits   2,834.1    2,847.2    (13.0)   (0.5)
Other deposits   4.5    12.0    (7.6)   (62.9)
Total customer deposits   8,958.5    8,396.4    562.2    6.7 

 

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Distribution

 

The following table presents Banco AV Villas’ points of service in Colombia.

 

   At December 31, 
   2015   2014 
Branches   281    278 
ATMs   568    561 
Other points of service   14,080    15,359 
Total points of service   14,929    16,198 

 

Banco AV Villas had a network concentration of approximately 46.6% in Colombia’s central region, of which Bogotá represents approximately 24.1%, at December 31, 2015. Banco AV Villas had approximately 17.3% of its network in the southwestern region at December 31, 2015. During 2015, Banco AV Villas closed 1,106 non-operational banking correspondents, including some traditional and some from its alliance with Red Cerca, due to the low levels of transactions held through these points. Banco AV Villas had a market share of approximately 5.2% of branches and a market share of approximately 3.8% of ATMs at December 31, 2015.

 

Porvenir

 

Porvenir is the leading private AFP in Colombia, with a market share of 55.2% of mandatory pension fund individual customers and 56.2% of severance plan individual customers at December 31, 2015. See “—Competition—Pension and severance fund management – Porvenir.” Porvenir also provides voluntary pension funds and manages third-party sponsored pension funds. Pension funds provide individual savings for retirement, and severance funds provide temporary income to employees who lose their jobs. Through Gestión & Contacto, Porvenir manages social security-related information systems designed to provide employees with efficient payment solutions.

 

At December 31, 2015, Porvenir had Ps 101.3 trillion in total assets under management, of which Ps 73.7 trillion was managed under the privately managed mandatory pension fund, Ps 4.0 trillion was managed under the severance fund, Ps 3.1 trillion was managed under the voluntary pension fund and Ps 20.5 trillion was managed as a third-party sponsored pension liability fund.

 

Porvenir’s strengths include the following:

 

·Porvenir is the most profitable privately managed pension fund in Colombia, with a ROAE of 22.3% and 23.4% at December 31, 2015 and December 31, 2014 based on unconsolidated figures, respectively;

 

·Porvenir has the largest and, we believe, most effective sales force in the industry with a nationwide presence. At the same time, it is the most efficient privately managed pension fund in Colombia, with an efficiency ratio of 43.6% for the year ended December 31, 2015 on an unconsolidated basis; and

 

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

 

Business overview

 

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

 

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depending on the risk profile of each portfolio. For severance funds, the long-term portfolio will continue to have a 24-month time horizon, and the short-term portfolio will have a three-month time horizon.

 

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

 

For the year ended December 31, 2015, 63.7% of Porvenir’s revenues were derived from mandatory pension funds, 14.4% from severance funds, 7.1% from voluntary pension funds and 0.9% from third-party sponsored pension liability funds. Porvenir derived the remaining 13.9% of its revenues from a combination of its own investment portfolio, stabilization reserves and other income.

 

Mandatory pension funds

 

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

 

At December 31, 2015, mandatory pension funds represented 72.8% of Porvenir’s assets under management and constituted its main line of business.

 

Contributions to these pension funds are mandatory for all employees in Colombia and are jointly funded by the employer and the employee. The base contribution rate is 16.0% (up to 18.0% for employees meeting a certain salary threshold) of an employee’s base salary, whereby the employer contributes 75.0% and the employee 25.0% of the base contribution rate. Contributions are paid on a monthly basis. Of the 16.0%-18.0% total contribution, 11.5% goes to the individual customer’s fund. The AFP retains 300 basis points (3.0%) as compensation, of which Porvenir currently pays 185 basis points (1.85%) to an insurer for life and disability coverage, to which it is required by law to subscribe. The percentage that Porvenir pays for this insurance may increase or decrease depending on market conditions and other factors. The remainder is distributed between the National Solidarity Fund (Fondo de Solidaridad Pensional), depending on the employee’s salary (up to 2.0%), and the National Minimum Pension Warranty Fund (Fondo de Garantía de Pensión Mínima) (at 1.5%).

 

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

 

Mandatory pension funds cannot be withdrawn prematurely, and they generally expand over the individual’s working years. Porvenir is the market leader in the mandatory pension’s area, with Ps 73.7 trillion of assets under management and 7.3 million individual customers at December 31, 2015.

 

Severance funds

 

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

 

Severance accounts represented 4.0% of Porvenir’s assets under management at December 31, 2015.

 

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

 

Porvenir is the market leader in the severance area, with Ps 4.0 trillion of assets under management and 3.6 million customers at December 31, 2015.

 

Voluntary pension funds

 

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

 

Voluntary pension funds represented 3.0% of Porvenir’s assets under management at December 31, 2015.

 

Porvenir earns annual management commissions for assets under management that range between 1.0% and 4.0%, depending on the balance of the customer and the selected portfolios (lower commissions for liquidity portfolios and higher commissions for more complex portfolios). At December 31, 2015, Porvenir had Ps 3.1 trillion of voluntary pension assets under management and approximately 160 thousand voluntary pension fund individual customers.

 

Third-party sponsored pension liability funds

 

Third-party sponsored pension liability funds represent approximately 20.2% of Porvenir’s assets under management at December 31, 2015. Third-party sponsored pension liability funds are made up of deposits from different institutions (both private and publicly owned) that require a professional institution to manage a fund that is usually created to finance particular pension regimes (i.e., pensions that are paid by the employer; before 1994, companies were allowed to establish their own internal pension systems).

 

Third-party sponsored pension liability funds in some cases have a minimum guaranteed return pursuant to their terms. Porvenir had Ps 20.5 trillion of such assets under management at December 31, 2015, mostly under contracts of five years. The most important of these contracts is with FONPET which is subject to renewal upon expiration in November 2017. Porvenir retains a percentage of the yearly returns of each third-party sponsored pension liability fund, and in some cases, a portion of assets under management.

 

Porvenir’s investments

 

Porvenir is required to own at least 1.00% of the funds it manages that are subject to a minimum return, known as the stabilization reserve. This stabilization reserve represents 53.8% of Porvenir’s proprietary investments. In addition, Porvenir holds voluntary investments. Revenues related to Porvenir’s stabilization reserve and its proprietary portfolio represented 7.2% and 10.2% of its total revenues at December 31, 2015 and December 31, 2014, respectively.

 

Distribution

 

Porvenir attracts new individual customers mainly through its large direct sales force (approximately 1,234 individuals) who report to six regional sales managers located in Bogotá, Antioquia, Cali, the Central region, the Coast region and the North region. At December 31, 2015, Porvenir had 54 offices, 16 service modules, 66 electronic service centers and 5 business service centers. It maintains a presence in all regions of Colombia through its service agreements with Grupo Aval’s banks.

 

Corficolombiana

 

Corficolombiana is the largest merchant bank in Colombia based on total assets at December 31, 2015. Corficolombiana focuses on four main lines of business: (1) equity investments in strategic sectors of the Colombian economy, including, in particular, infrastructure, energy and gas, agribusiness and hospitality; (2) investment banking, including services relating to capital markets, mergers and acquisitions and project finance transactions; (3) treasury operations; and (4) financial services such as leasing, fiduciary and private banking.

 

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Corficolombiana had total consolidated assets and shareholders’ equity attributable to controlling interest of Ps 19,820.6 billion and Ps 2,760.7 billion, respectively, at December 31, 2015 and net income attributable to controlling interest of Ps 445.9 billion for the year ended December 31, 2015 in accordance with IFRS.

 

Corficolombiana’s business model is based on three premises: (1) investing in businesses in strategic sectors of the Colombian economy; (2) distributing cash flows generated by its equity investment portfolio to its shareholders; and (3) acting as an investment fund and financial advisor that is listed on the Colombian Stock Exchange and regulated by the Superintendency of Finance. Corficolombiana’s equity investment strategy is to acquire and hold majority or substantial stakes in strategic businesses. These investments enable Corficolombiana to exert significant influence or control over these businesses’ operations and to promote revenue growth, operational efficiencies and optimization of the capital structures. Corficolombiana endeavors to achieve a balance between companies with potential to generate cash and companies with capacity to create value.

 

Corficolombiana’s funding strategy seeks to minimize liquidity risk by funding equity investments using its own equity, principally retained earnings. It has not sought to raise equity capital from its shareholders in the last five years.

 

Corficolombiana is regulated as a finance corporation by the Superintendency of Finance. Under Colombian law, a finance corporation is permitted to hold equity ownership positions in both financial and non-financial companies, unlike banks, which may only invest in financial companies. See “Supervision and regulation.”

 

Equity investment portfolio

 

Corficolombiana primarily invests in five sectors of the Colombian economy: infrastructure; energy and gas; financial services; hotels; and agribusiness. It generally seeks to invest in businesses with leading market positions, strong cash flows and growth potential.

 

The following charts provide information concerning Corficolombiana’s investments in sectors of the Colombian economy at December 31, 2015, and for the year ended December 31, 2015,on an unconsolidated basis in accordance with Colombian IFRS, as the case may be.

 

Sector breakdown by book value of
investments(1) at December 31, 2015

 

Sector breakdown by earnings(2)
for the year ended December 31, 2015

 

 

 

(1)Information prepared on an unconsolidated basis in accordance with Colombian IFRS, after provisions, fiduciary rights not included.

 

(2)Information prepared on an unconsolidated basis in accordance with Colombian IFRS, corresponds to the sum of the net income of each of the investments, adjusted to reflect the ownership interest of Corficolombiana. Figures for certain investments are preliminary and subject to change.

 

Corficolombiana’s infrastructure investments are concentrated mainly in highway concession projects, a sector in which it is a leading private investor in Colombia. The main investments of Corficolombiana in the infrastructure sector include Proyectos de Infraestructura S.A. (Buga-Tuluá-La Paila), Concesionaria Vial de los Andes S.A.S. (Bogotá-Villavicencio), Concesiones CCFC S.A. (Fontibón-Los Alpes), Concesionaria Panamericana S.A.S. (Los

 

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Alpes-Villeta and Chuguacal-Cambao), Concesionaria Ruta del Sol S.A.S. (San Roque-Puerto Salgar), Concesionaria Vial del Pacífico S.A.S. (Ancón Sur-Bolombolo or “Conexión Pacífico 1”), Concesionaria Nueva Vía al Mar S.A.S. (Mulaló-Loboguerrero), Concesionaria Vial Andina S.A.S. (Bogotá-Villavicencio) and Concesionaria Vial del Oriente S.A.S. (Villavicencio-Yopal). Corficolombiana’s infrastructure investments totaled Ps 519.5 billion after provisions at December 31, 2015 (on an unconsolidated basis).

 

Corficolombiana’s main investments in the energy and gas sector include Promigas S.A. E.S.P., the second largest natural gas pipeline company in Colombia, Empresa de Energía de Bogotá S.A. E.S.P, or “EEB”, an electricity and gas conglomerate, Gas Natural S.A. E.S.P., the gas distribution company for the city of Bogotá, and a majority stake in a gas distribution company in northern Peru (Gas Comprimido del Perú S.A. (Gascop)). Corficolombiana’s energy and gas investments totaled Ps 1,905.6 billion after provisions at December 31, 2015 (on an unconsolidated basis).

 

Corficolombiana’s principal investments in agribusiness are centered on forestry and woodworking as well as the production of palm oil, rubber, rice and cotton through Organización Pajonales, Pizano and Unipalma. Investments in this sector totaled Ps 261.1 billion after provisions at December 31, 2015 (on an unconsolidated basis).

 

Corficolombiana also has investments in the hospitality sector. These include majority stakes in Hoteles Estelar de Colombia S.A. and Promotora y Comercializadora Turística Santamar S.A., which totaled Ps 158.2 billion after provisions at December 31, 2015 (on an unconsolidated basis).

 

In the financial-services sector, Corficolombiana offers leasing, trust, brokerage and offshore banking services to third-party customers through three subsidiaries: Leasing Corficolombiana S.A., Fiduciaria Corficolombiana S.A. and Banco Corficolombiana (Panamá) S.A. Corficolombiana’s investments in these three subsidiaries totaled Ps 192.4 billion at December 31, 2015 (on an unconsolidated basis and after provisions).

 

Investment banking, treasury and private banking businesses

 

Corficolombiana’s investment banking group provides advice to third-party clients in the Colombian market covering a broad range of transactions, including, among others, capital markets, mergers and acquisitions, project finance and private banking. Corficolombiana has helped to shape the participation of the private sector in infrastructure projects, to develop the domestic capital markets and to expand the resources and operations of local companies in the region. In 2015, Corficolombiana’s investment bank helped secure financing and coordinate projects for its clients totaling Ps 1,552.3 billion.

 

Corficolombiana’s treasury operations are a leading participant in Colombian capital markets, both in sovereign and corporate debt securities and foreign currency denominated securities. It is also an active participant in the derivatives market, and an active market maker for Colombian sovereign debt securities. At December 31, 2015, Corficolombiana had total fixed income assets of Ps 4,243.7 billion (on a consolidated basis in accordance with IFRS).

 

Corficolombiana’s private banking business provides high net worth customers and companies with a wide range of investment services and products. The private banking operations had Ps 1,513.2 billion in assets under management for its customers at December 31, 2015.

 

Central American operations overview

 

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

 

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The table below shows BAC Credomatic financial data on a country-by-country basis at and for the year ended December 31, 2015.

 

   At and for the year ended December 31, 2015 
   Net income   Loans   Deposits 
   (in U.S.$
millions)
   (in Ps 
billions)(3)
       (in U.S.$
millions)
   (in Ps 
billions)(3)
       (in U.S.$
millions)
   (in Ps 
billions)(3)
     
Costa Rica   131.3    413.6    45.5%   3,574.1    11,256.4    27.3%   3,184.9    10,030.7    25.9%
Guatemala   61.8    194.5    21.4%   2,372.5    7,472.1    18.1%   2,123.4    6,687.5    17.3%
Honduras   55.4    174.5    19.2%   1,412.1    4,447.3    10.8%   1,367.1    4,305.5    11.1%
Nicaragua   50.4    158.8    17.5%   1,117.0    3,517.8    8.5%   1,236.2    3,893.4    10.1%
El Salvador   26.8    84.5    9.3%   1,279.3    4,029.3    9.8%   1,261.3    3,972.3    10.3%
Panamá (1)   51.0    160.7    17.7%   3,337.2    10,510.4    25.5%   3,401.4    10,712.5    27.7%
Mexico   (7.6)   (23.9)   -2.6%   50.9    160.4    0.4%   0.0    0.0    0.0%
Corporate and eliminations   (50.2)   (158.0)   -17.4%   (34.7)   (109.3)   -0.3%   (282.7)   (890.4)   -2.3%
Non-controlling interest (2)   (30.3)   (95.4)   -10.5%   0.0    0.0    0.0%   0.0    0.0    0.0%
Consolidated   288.8    909.4    100.0%   13,108.3    41,284.3    100.0%   12,291.4    38,711.4    100.0%

 

 

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

(1)Panamá loans include operations from BAC Bahamas Bank Ltd., BAC International Bank (Grand Cayman), others BAC Credomatic’s Panamá subsidiaries and certain intercompany adjustments.
(2)Leasing Bogotá Panama directly owns 100% of the share capital of BAC Credomatic Inc and 9.467% of the share capital of BAC International Bank, Inc.
(3)Translated for convenience using the representative market rate as computed and certified by the Superintendency of Finance at December 31, 2015 of Ps 3,149.47

 

The table below presents BAC Credomatic’s market share of total loans and deposits in each of its main markets at December 31, 2015.

 

   At December 31, 2015 
   Net Loans   Deposits 
Costa Rica(1)   13.2%   12.1%
El Salvador   11.9%   12.5%
Guatemala   10.0%   7.6%
Honduras   14.3%   13.1%
Nicaragua   26.2%   25.0%
Panamá   5.2%   4.8%

 

 

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

 

(1)Percentage calculation for Costa Rica includes state-owned banks (Banco Nacional de Costa Rica, Banco de Costa Rica, Banco Popular, Banco Hipotecario de la Vivienda and Banco Crédito Agrícola de Cartago), which at December 31, 2015 and December 31, 2014 had a 60.2% and 60.8% market share by loans, respectively, and a 63.0% and 66.9% market share by deposits, respectively.

 

Lending activities

 

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

 

   At December 31, 
   2015   2014   2015   2014 
   (in U.S.$ millions)   (in Ps billion)(4) 
Credit card loans   2,255.3    1,989.7    7,103.0    6,266.4 
Commercial loans(1)(2)   5,560.1    4,850.3    17,511.4    15,275.9 
Mortgage loans(3)   2,748.0    2,564.7    8,654.7    8,077.3 
Automobile and vehicle loans   779.5    683.0    2,454.9    2,150.9 
Other personal loans   1,765.4    1,504.3    5,560.2    4,737.6 
Total   13,108.3    11,591.9    41,284.3    36,508.2 

 

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

(1) Represents loans to businesses.

(2) At December 31, 2015 and 2014, commercial loans include only commercial leasing and commercial overdraw; consumer leasing and consumer overdraw are included in “Other personal loans.”

(3) Includes loans measured at fair value.

(4) Translated for convenience using the representative market rate as computed and certified by the Superintendency of Finance at December 31, 2015 of Ps 3,149.47

 

We believe that BAC Credomatic’s customer knowledge, coupled with a centralized risk-management structure, has resulted in a high quality loan portfolio, with an average 90 days and more past due loan ratio of 1.1% from 2011 to 2015.

 

Credit cards

 

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

 

At December 31, 2015, BAC Credomatic had approximately 3.7 million credit card and debit card accounts, of which 1.9 million were debit card accounts and 1.8 million were credit card accounts, an increase of 4.3% and 16.9% compared to December 31, 2014, respectively. For the year ended December 31, 2015, BAC Credomatic’s billed volume was U.S.$9,214.9 million (Ps 29,022.2 billion), a 15.5% increase over the U.S.$7,975.5 million (Ps 25,118.5 billion) billed volume for the year ended.

 

At December 31, 2015, BAC Credomatic’s credit card portfolio totaled U.S.$2.3 billion (Ps 7.1 trillion) which represents a 13.4% increase from U.S.$2.0 billion (Ps 6.3 trillion) at December 31, 2014. As of the same date, 78.0% of BAC Credomatic’s credit card portfolio was distributed across Costa Rica, El Salvador, Guatemala and Panamá. The remaining 22.0% was distributed among Honduras, Nicaragua and Mexico. The following table shows the credit card portfolio breakdown by country at the dates presented.

 

   At December 31, 
   2015   2014 
   (in U.S.$
millions)
   (in Ps
billions)(2)
       (in U.S.$
millions)
   (in Ps
billions)(2)
     
Costa Rica   613.4    1,931.8    27.2%   498.8    1,570.8    25.1%
Guatemala   417.0    1,313.4    18.5%   369.4    1,163.3    18.6%
Honduras   329.9    1,039.1    14.6%   289.7    912.5    14.6%
Nicaragua   116.4    366.5    5.2%   105.6    332.4    5.3%
El Salvador   294.7    928.2    13.1%   311.8    982.0    15.7%
Panamá (1)   433.0    1,363.6    19.2%   360.5    1,135.4    18.1%
Mexico   50.9    160.4    2.3%   54.0    170.0    2.7%
Corporate and eliminations   -    -    0.0%   -    -    0.0%
Total   2,255.3    7,103.0    100.0%   1,989.7    6,266.4    100.0%

 

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

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