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Grupo Aval Acciones Y Valores S.A. (NYSE:AVAL)
Q1 2019 Earnings Call
May 21, 2019, 10:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the First Quarter 2019 Consolidated Results Under IFRS Conference Call. My name is Hilda, and I will be your operator for today's call. Grupo Aval Acciones Valores S.A. is an issuer of securities in Colombia and in the United States, registered with Colombia's National Registry of Shares and Issuers, Registro Nacional de Valores y Emisores, and the United States Securities and Exchange Commission, SEC. As such, it is subject to compliance with securities regulation in Colombia and applicable U.S. securities regulation. All of our banking subsidiaries, Banco de Bogota, Banco de Occidente, Banco Popular, and Banco AV Villas Porvenir and Corficolombiana, are subject to inspection and supervision as financial institutions by the Superintendency of Finance. Grupo Aval is now also subject in the inspection and supervision of the Superintendency of Finance as a result of Law 1870 of 2017, also known as the Law of Finance Conglomerates, which came in effect on February 6, 2019.

Grupo Aval, as the holding company of its financial conglomerate, is responsible for the compliance with capital adequacy requirements, corporate governance standards, risk management and internal control, and criteria for identifying, managing, and revealing conflicts of interest applicable to its financial conglomerate. The consolidated information included in this document is presented in accordance with IFRS as currently issued by the IASB. Details of the calculations of non-GAAP measures, such as ROAA and ROAE, among others, are explained when required in this report.

Grupo Aval has adopted IFRS 16 retrospectively from January 1, 2019, but it has not restated comparatives for the 2018 reporting period, as permitted under the specific transitional provisions in the standard. The reclassifications and the adjustments arising from the new leasing rules are therefore recognized in the opening Condensed Consolidated Statement of Financial Position on January 1, 2019. Consequently, quarterly results for 2019 are not fully comparable to previous periods. IFRS 16 introduced a single on balance sheet accounting model for lessees. As a result, Grupo Aval, as a lessee, has recognize right of use assets representing its rights to use the underlying assets and the lease liabilities representing its obligation to make lease payments.

Lessor accounting remains similar to previous accounting policies. Assets and liabilities arising from a lease are initially measured on a present value basis. The lease statements are discounted using the interest rate implicit in the lease, in that grade can be determined or the group's incremental borrowing rate.

This report includes forward-looking statements. In some cases, you can identify these forward-looking statements by words such as may, will, should, expects, plans, anticipates, believes, estimates, predicts, potential, or continue, or the negative of these or other comparable words. Actual results and events may differ materially from those anticipated herein as a consequence of changes in general economic and business conditions, changes in interest and currency rates, and other risks described from time to time in our filings with the Registro Nacional de Valores y Emisores and the SEC. Recipients of this document are responsible for the assessment and use of the information provided herein.

Matters described in this presentation and our knowledge of them may change extensively and materially over time, but we expressly disclaim any obligation to review, update, or correct the information provided in this report, including any forward-looking statements, and do not intend to provide any update for such material developments prior to our next earnings report. The content of this document and the figures included herein are intended to provide a summary of the subjects discussed rather than a comprehensive description. When applicable, in this document, we refer to billions as thousands of millions.

At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I will now turn the call over to Mr. Luis Carlos Sarmiento Gutierrez, Chief Executive Officer. Mr. Sarmiento Gutierrez, you may begin.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Thank you, Hilda. Good morning, all, and thank you for joining our First Quarter 2019 Conference Call. It is my pleasure to share with you our strong financial results for the quarter that ended on March 31st. As on previous calls, today I will cover several subjects, including a few financial highlights, which Diego Solano will discuss in detail; an update of our digital strategy; possible regulatory changes; an update on legal issues surrounding the Ruta del Sol project; macroeconomic results; and our economic guidance for 2019.

To a great deal, this quarter's numbers, our attributable net income for the quarter was COP764 billion, or COP34.2 per share, an increase of 28% versus 2018's first quarter results of COP 598 billion, or COP26.8 per share. And our return on average equity for the quarter rose to 17.4%. These results were mainly driven by positive trends, such as increases in net interest margin and in net fee income, both from banking and pension fund management, and improvement in cost of risk, supported by better consumer loan vantages and by the apparent end of the deteriorating credit cycle. We continued to excel in keeping costs under control and strong performance from our nonfinancial sector investments, especially Corficolombiana's three toll roads under construction, and Dromigas.

Our romper total grew by more than 7% in the last 12 months ending March 31st. However, growth during the quarter in absence of foreign exchange FX was a modest 0.2%. This was especially noticeable in our Central American loan portfolio, which contracted during the quarter because of slow economic growth exacerbated by the Nicaraguan crisis, which has resulted in a loan portfolio decrease in that country of 23% in the last 12 months, about a third of which took place during this first quarter.

January and February were also months of no growth in our Colombian loan portfolio. However, I am pleased to say that average loan portfolio growth in Colombia, up between 0.8% and 1% per month, both in commercial and consumer loans, during March, April, and May, puts us on track to meet our guidance of growth for the year. Even better news is that we have started to detect a loan pricing environment which we believe places us in a good position to increase profitably our loan volume. And, as the economy slowly accelerates, we expect that the pickup in loan growth will be sustainable. Furthermore, as we expect a year of stable interest rates, growth should contribute to an increase in our net interest income. The above-mentioned trends and figures, which will be discussed in further detail throughout the presentation, continue to show the sustainability of Grupo Aval's results, and the benefits derived from our business diversification, both in sectors and in geographies.

As we have reported in the past, all our banks in Colombia and Central America are focused on executing our digital strategy. One of the necessary end results of this strategy is presenting to our clients a viable omnichannel solution. By doing so, we will be able to continue the shrinkage in our footprint, but at the same time, we will upgrading and investing in our resulting branch network, both from client experience and operational standpoint. In the meantime, we continue to increase the number of our digital clients, which currently surpasses three million in Colombia and Central America, and to migrate transactions to digital channels. We now have more than two million active users on our mobile banking platforms, a figure that rises exponentially every year. Finally, through the implementation of customized content and automated processes, we were able to sell close to 200,000 digital projects online in 2019, representing growth of 50% versus the previous year. Our goal is to surpass this figure in 2019.

On the regulatory front, we're keeping ourselves well-informed of a specific proposed bill of law as it journeys through Congress. This bill considers eliminating some fee in come on credit cards and debit cards, and it limits fees charged on savings accounts. In theory, the bill suggests that the elimination of such charges would increase banking penetration of low-income individuals. As we have tried to explain through representatives and senators alike, the truth is completely the opposite. Cost of risk and cost to serve this stratum of the population is higher. Therefore, when faced with revenue-limiting restrictions, banks will have no option but to stop serving certain segments of clients. This is exactly the opposite of what the bill intends to achieve.

The bill has already passed the second mandatory debate in the lower chamber of Congress. It has moved on to the Financial Committee of the Senate, where it is being discussed. If it passes that in the committee, it will be presented to the Senate in full for their consideration and approval. If it is approved by the full Senate exactly as redacted by the lower chamber, it must be sanctioned by the president, who could challenge it before the bill becomes a law. There is no clear timeline for the Senate debates, as other political matters might be on its agenda before this topic. In fact, if debates are delayed, the bill might move on to the next legislature, as the second semester of this year is a period of electoral debate. Aso Bancadia, the Association of Colombian Banks, is representing the financial system in front of Congress in an effort to drive across the bank's message with regard to the inconvenience of the proposed bill. Banks are also discussing more efficient ways to penetrate all client segments in order to present to Congress alternatives to this bill. In our estimation, if this bill becomes law, the impact to evolved net income post-taxes and minority interest is approximately COP220 billion, or 8% of our yearly results. Although not as severe an impact to net income as compared to some of our peers, we are giving this matter all our attention.

As the year progresses, we're also expecting multiple changes and additions to existing banking regulations by the Superintendents of Finance in the Ministry of Finance regarding required levels of liquidity, Basel III norms, and operational risk, capital consumption laws, to name a few. At the holding company level, more regulations will be published with specific requirements related to the application of the Conglomerates law. We have started to strengthen our risk area to make sure that we comply with all requirements in a timely manner.

Regarding legal matters related to the Ruta del Sol legal proceedings, let me try to summarize some of the most important developments in the last couple of months. Since the filing of our 20-F on April 29th, a judge of first instance found Jose Elias Melo guilty of having knowledge of the Odebrecht bribes in 2009 and sentenced Mr. Melo to almost 12 years in prison. Mr. Melo has appealed this decision before the Tribunal Superior de Bogota. As explained by the judge in his sentence, by law, he's obligated to refer to the Attorney General's office for possible investigation, certain matters that came up at trial. As such, the judge referred a list of 16 individuals, all of whom were mentioned in one way or another during Mr. Melo's trial, three of which are current employees of Grupo Aval or its subsidiaries, including myself, Gustavo Ramirez, and Mauricio Millan.

Secondly, I would just remind you that the CRDS arbitration tribunal is expected to rule on or before August 20th this year, and the expert opinion of Forrest Partners, Estrada Associados, a Dufenkel subsidiary, was submitted to the arbitration tribunal yesterday. The tribunal should now formally share this opinion with the parties through this proceeding and allow some days for their review and comments. As you may recall, this is an opinion on technical and financial issues regarding CRDS that should serve as the basis for the arbitration tribunal to establish the liquidation value of the Ruta del Sol 2 contract.

Finally, last week, the constitutional court ruled in favor of the legality of most of Law 1882 of 2018. That establishes the procedure to liquidate concession contracts judged as null. On a positive note, this law protects the interest of creditors, including banks, in cases of nullity of concession contracts. The constitutional legality of the law had been questioned by some politicians.

Finally, let's address the most relevant macroeconomic results of the Colombian and Central American economies. GDP growth in Colombia during the first quarter of 2019 was 2.3% when seasonally adjusted and 2.8% without adjustments for seasonality, both shy of our own estimates. Our expectation for GDP growth during 2019 is still in the range of 3 to 3.25%, somewhat more conservative than the government's. We see inflation for 2019 between 3 and 3.25%, with eventual pressures coming from the El Nino weather phenomenon, and from a relatively cheap peso affecting the value of imported goods and being transferred into higher prices of consumer goods. Because we see a controlled inflation scenario in our base case, we continue to see a stable monetary policy for the next two quarters, with maybe one or at most two hikes of 25 basis points, each by the end of the year. In inflation starts to increase because of the value of devaluation or weather, hikes might happen sooner.

We continue to feel that the expected fiscal deficit target for this year will be met, and believe that the recent announcements from the government to privatize some companies or a portion of them could help them fund the hopefully temporary resources needed to control the Venezuelan migration. The current account deficit might deteriorate in the short-term if the price of oil drops and if we're to grow additional revenues from oil and other exports.

On the FX front, our view is that the current level of peso-dollar rate is at above the level it should be. There has been a recent decoupling between the oil price and the FX rate, driven by the market turmoil that is impacting the majority of the emerging market's currencies, and by certain foreign players unwinding their portfolio positions and government fixed income peso-denominated securities. As such, as we expect the exchange rate to return to the 3,100 pesos per dollar area, assuming oil prices remain at approximately $70.00 per barrel.

Finally, unemployment continues to deteriorate, resulting from a larger supply of employees and a stable at best demand for additional workforce. On the supply side, Colombians are competing for jobs with Venezuelans entering the workforce with lower salary expectations. And on the demand side, we feel that companies are not yet demanding expanding workforces, as can be derived from somewhat weak volume in new pension affiliations. This is a scenario we will monitor closely, as it might have an eventual impact on our consumer loan portfolios.

Our Central America outlook for 2019 is similar to the IMF's, which estimates 3.3% growth for 2019 versus 2.8% in 2018. This estimate could be threatened by a U.S. economic slowdown taking a toll in remittances slow or by a sharp increase in oil prices. We are encouraged by a better-performing Costa Rican economy and by an improving fiscal situation in El Salvador, as well as by strong levels of monetary international research in other regions, except in Nicaragua, where the political situation, although better, is still distant from being permanently resolved. We hope to continue beating your expectations.

And I'll leave you with Diego Solano. And thank you for your attention.

Diego Solano -- Chief Financial Officer

Thank you, Luis Carlos. We'll now move to a consolidated results of Grupo Aval and YFRS, and wrap up with our guidance for 2019. As mentioned by Luis Carlos, the first quarter of 2019 was a strong quarter for Grupo Aval. Our net interest margin benefited from the robust results of our investment portfolio. Cost of risk fell, in spite of the burden of Nicaraguan provisions, mainly driven by a continuing improvement of our Colombian consumer portfolio. The benefits of our cost control efforts deployed during 2018 have enabled us to continue improving our efficiency. And finally, our nonfinancial sector continues to strongly contribute to our results.

Starting on page nine, assets grew 11.2% over the year and decreased 0.5% during the quarter. Colombian assets grew 8.8% over the year and remained stable during the quarter. Rights of use of visas and contracts associated with the adoption of IFRS 16, the growth of the investments offset by lower interbank and overnight assets through the volume dynamics for the quarter in Colombia. Central America, which weighs close to 30% of our book, delivered 2.8% annual and 0.5% quarterly growth in dollar terms, affected by Nicaragua. Nicaragua, which represents 6% of our Central American assets, contracted 23.6% and 1.8% over a 12-month and three-month period ended on March 31, 2019. Central America, excluding Nicaragua, grew 5.8 and 0.7% respectively during the same periods.

On page 10, loans, excluding repos, grew 7.3% over the year and decreased 0.5% during the quarter. Quarterly performance reflected seasonality and the effect of our current currency assets of 2.3% depreciation of the Colombian peso. In Colombia, commercial remained stable during the quarter, showing a slow dynamic, particularly in U.S.-denominated loans. Even though not yet reflected in our figures, internal strengthening of our portfolio growth started to emerge since March. Our Colombian corporate loan portfolio remained stable during the quarter and contracted 1.2% over the year. Commercial peso-denominated laws showed an early growth of 0.7%, a price increase since first quarter of 2018.

Commercial U.S.-denominated loans decreased 4% in peso terms quarter-on-quarter. Strong growth of our Colombian retail portfolio partially compensated the soft dynamics of our corporate portfolio. Colombian consumer and mortgage businesses expanded 10.1% and 18% respectively over the 12 months. Quarterly growths were 2.2% and 2.8% respectively. Central America expanded 3.1% in dollar terms over the year and contracted 1.1% during the quarter. Nicaragua contracted 23% and 10.2% during these periods, while the rest of the region expanded 5.4% over the year and contracted 0.7% during the quarter. As in Colombia, recent performance in Central America hints as to the recovery of growth rates.

On pages 11 and 12, we present several loan portfolio quality ratings. 30 days PDLs showed a slight deterioration during the quarter, driven by Nicaragua, a seasonal behavior of the consumer portfolio and the rest of Central America, and by a slight deterioration of the commercial loan portfolios around the region.

We continue reducing the burden of the three corporate cases. Coverage for Ruta del Sol went up to 45%, given the approximately $100 million payment received in January that reduced the outstanding net balance to $124 million. Our coverage for SITP companies reached 39% on average, with company-specific ratios rating from 100% down to 13%, depending on quality. Transit is now fully provisioned.

In Colombia, improving trends in [inaudible] consumer loans persisted, with 30-day PDLs falling five basis points for the quarter to 5.1%, accumulating a reduction of 90 basis points since its peak in first quarter 2018. Similarly, 90-day PDLs fell 10 basis points during the quarter to 3%, accumulating 53 basis points drop since peaking in second quarter 2018.

In Central America, consumer loans PDLs increased 27 basis points to 4.5% on a 30-day basis, and 16 basis points to 1.8% on a 90-day basis a compared to a year earlier. Nicaragua accounted for 25 basis points and 11 basis points of this increase respectively during the same period.

PDL ratios for commercial loan portfolios deteriorated in both geographies, partially affected by the slow growth. Even though deterioration in the quality of our corporate portfolio persists, the speed at which it is happening has moderated. 12-month accumulation in 30-day PDLs as of end of quarter was 45 basis points, while the same metric reported a quarter ago was 68 basis points. We recorded a 10 basis points increase in 30-day PDLs and 12 basis points improvements in 90-day PDLs in Colombia.

Commercial 30-day and 90-day PDLs deteriorated 24 and 21 basis points respectively during the quarter in Central America. When excluding Nicaragua, increases were 14 and 12 basis points, on 30 days and 90 days basis respectively. Our PDL for mortgages deteriorated during the quarter, mainly driven by Central America. Having said so, our ratios continue to be notably better than those reported by our peers.

Our quarterly cost of risk decreased 106 basis points, with Colombia improving 128 basis points and Central American improving 56 basis points. Cost of risk of the three corporate cases that have been followed over the last calls. [Inaudible] and Ruta del Sol accounted for 83 basis points of our overall improvement, and 100 basis points of that in Colombia. Improvement in Central America was explained by a lower, although still high, burden of the Nicaraguan retail portfolios.

PDL coverage for 90-day PDLs remained stable at 1.6%. Seasonality and deterioration in Central America, including the effect of Nicaragua, affected quarterly new PDL formation. In Colombia new 30-day PDL formation was 6% less than a year earlier. In Central America, new 30-day PDL formation was over 30% higher in dollar terms.

On page 13, we present funding and deposit evolution. Funding dynamics were consistent with loan growth. The funding structure remained materially stable, with deposits representing 76% of total funding, and our deposits to net loans improving to 99%. Liquidity position was slightly higher than normal for a first quarter, with cash to deposit ratios at 16.5%. Deposits decreased 0.7% in the quarter, reflecting yearend seasonality and exchange rate movements, and increased 7.6% over the last 12 months. Colombia remained stable, and Central America grew 0.2% in dollar terms during the quarter. Over a 12-month period, Colombia grew at 4.2% in peso terms, while Central America grew at 1.8% in dollar terms.

On page 14, we present the evolution of our total capitalization for our total shareholders equity, and the capital to equity ratio of our banks. Our total in accrued equity fell through the quarter as dividends were declared. Total equity contracted by COP516 billion pesos, while our total equity fell close to COP455 billion pesos. Dividends of COP1.3 trillion were declared at the [inaudible] level during the quarter, affecting our total equity.

As of first quarter 2019, our banks show a profit Q1 in solvency ratios. During this period, most of the banks increased their tier one ratio as a result of the accounting of retained earnings after dividends were declared. Regarding Basel III, relevant regulations from the Superintendency of Finance and Solvency Calculation is still pending. We're thus unable to provide estimates at this point. We'll provide the market preliminary figures once regulation is completed.

On page 15, we present our yield on loans, cost of funds, spread, and the interest margin. Our net interest margin increased 11 basis points, driven by a strong quarterly performance of our net interest margin on investments, partially offset by a decline of net interest margin on loans in Central America. Moving forward, we might see a slight expansion of the net interest margin on corporate loans, subject to increase in the Central Bank rates by the end of this year.

With regard to the consumer portfolio, we might see increased pricing competition as improvement in quality of consumer loans persists and dynamic growth increases the share of newly priced loans in our midst.

On page 16, we present net fees and other income. Gross fee income performance was consistent with balance sheet growth, led by banking fees. Gross fees in Colombia increased by 3.1% in pesos and 3.5% in Central America in U.S. dollar terms in first quarter 2019 compared to first quarter 2018.

Nonfinancial sector over the quarter reflects a better performance from the energy and gas sector, and a smaller contribution from infrastructure companies. The decline in income from infrastructure is explained by the one-time impact of the initiation phase of [inaudible] in fourth quarter 2018. This explains around one-third of the difference. In addition, a slower progress of confusion during first quarter of 2019 as compared to the strong performance during fourth quarter 2018 explains the remainder of the difference. We expect our infrastructure business to continue contributing to our overall performance during these and the following years as [inaudible] advance in their construction activity.

Other operating income was high during the previous quarter, given that it included COP373 billion from our property, plant, and equipment optimization. Increasing income from nonconsolidated investments mainly reflects higher dividends from Empresa de Energia de Bogota and Gas Natural. Derivatives and effects gains declined, mainly in Central America, due to the appreciation of the Costa Rican colon.

On page 17, we present some efficiency ratios. IFRS 16 was adopted on January 1, 2019. Even though the adoption of IFRS 16 implied changes in certain line items, the net impact on equity and net income was not material. Here is some color in how it affected our financial statements. The impact of first-time adoption of our accrual equity was COP5 billion. Rights of use and financial liability for rights of use were materially the same at COP2.2 trillion. The first quarter 2019 total expenses associated with rents increased by COP7.7 billion pesos to COP138 billion pesos, compared to rent expenses recorded during the previous quarter, Under IFRS 16, these expenses are broken down into COP28 billion in interest expense, COP70 billion in depreciation of rights of use, and COP40 billion in rents on short-term and low-value leases.

Since IFRS 16 changed the accounting method of leases, some of our rent expenses previously accounted under administrative expenses are now accounted under depreciation and interest expenses. To capture this change in accounting rules, we have adjusted our efficiency ratios to total other expenses divided by total income or by average assets as appropriate. Total other expenses grew 4.7% as compared to a year earlier, with personal expenses increasing 4.4 and administrative expenses decreasing 0.8%. Lower income from FX gains in Central America negatively affected cost to income during the quarter. As mentioned before, the progress of our digital effort and cost control initiatives throughout our subsidiaries have been key drivers of our efficiency.

Finally, on page 18, we present our net income and profitability ratios. Total net income for first quarter 2019 was COP763 billion, or COP34 per share. A return on our assets and return on our equity for the quarter were 2.1% and 17.4% respectively.

Before we move into questions and answers, I will now summarize our general guidance for 2019. We expect low growth to be in the 8% to 10% area in the absence of FX movements. We expect our cost of risk, net of recoveries, to be in the 2% area. We expect net interest margin to be in the 5.7% to 5.8% range, with stability in Colombia and some pressure in Central America. We expect total operating expenses to increase in the 6% area. Finally, we expect return on average equity to be in the 15.5% to 15.75% range, incorporating the effect of the 4% temporary tax surcharge for financial businesses.

We are now available to address your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press * then 1 on your touchtone phone. If you wish to be removed from the queue, please press the pound sign or hash key. If you are using a speaker phone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question, please press * and then 1 on your touchtone phone.

We have a question from Jason Mollin from Scotiabank.

Jason Mollin -- Scotiabank -- Analyst

Hello, everyone. My first question is on the implications of rising unemployment in Colombia, as you showed in your presentation. And you said you're monitoring it very closely. You are growing the fastest in the consumer segment for mortgages in consumer. Can you talk about the actual unemployment of your client base in Colombia? Is it showing these same overall trends, or is this impacting individuals that are not clients of the bank, and this is really a concern for the outlook for cost of risk?

Diego Solano -- Chief Financial Officer

Jason, I think that the answer is in your question. Yes, you're right. This unemployment is happening mainly in segments that we are not serving. These are the low-income segments and mostly informal jobs. Having said so, we continue to be very careful and are looking into these figures.

Operator

The next question comes from Gabe Nobrega from Citi.

Gabe Nobrega -- Citi -- Analyst

Hi, everyone. Thank you for the opportunity. Thank you as well for the thorough presentation about the possible impacts from the new regulation on the banking fees. If I understood correctly, it could still take a bit of time for this law to come into effect. So, I'm just trying to understand here, if the 8% impact which we just presented here, if it would be one of those 2020 results, and also, if I could maybe pick your brains and understand if you are already studying strategies in order to mitigate these factors. And I'll make a second question afterwards. Thank you.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Yeah. Well, let me address both your questions. On the one hand, yes, you're right; we're still a ways from having that law passed in the Senate by full, as I said in my presentation. If the Senate changed in any way the wording of the law as it came out of the House of Representatives, then that would even merit an additional debate of the two chambers together to try to find a language that will appease both. After that, it might go to the president for his signature. And little that we know, the government might not even agree with the law as it's been discussed. However, we did go ahead and estimate it in a worst-case scenario, in case the bill was passed exactly as it's being considered right now. And that's where our numbers came from. That would be a full year of decreased revenues, and we would start to see that, yeah, next year, if it passes this year.

As I said, there are so many things on the table in Congress. And on the other hand, the second semester this year, we're gonna have elections. So, that might even push it to the next legislature, in which case, we wouldn't see the results in 2020, but in 2021. We are, in any case, talking to all these congressmen to try to convey to them what we think about the law and to try to come up with alternatives. So, yeah, to try to answer your question, still a ways to go on the one hand. And second, 2020 or 2021 is when we would see the full effect. And your second question? Oh, you said you would ask a second question later. All right.

Operator

The next question comes from Andres Soto from Santander.

Andres Soto -- Santander -- Analyst

Good morning, everyone, and thank you for your presentation. I have two questions, the first one related to cost of risk. If I understood correctly, you are reusing the guidance, or rather, improving your guidance for cost of risk to 2%. It was 2.2% in your previous call. I would like to understand whether this improvement comes from a better outlook from the three large cases, in particular, [inaudible] and Ruta del Sol, or this is related to prior performance that you are seeing in your loan portfolio.

And my second question is regarding some comments you made in your previous calls regarding new regulation in Colombia regarding financial holding companies that will allow Porvenir to buy securities issued by Grupo Aval. I would like to understand -- to have an update on what is the current status of this process, if everything seems in place for Porvenir to buy Grupo Aval shares and other securities, or what is still missing for this to happen. Thank you.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Okay, Andres. For clarity, there hasn't been a substantial change in our guidance on cost of risk. There might be a difference with what the 2.2% stands for. It is the gross number before recoveries. The 2% that we mentioned today is net of recoveries. Having said so, we are positive on the way our consumer portfolio is behaving, and we have started to see, as mentioned, even those still high, the provisions coming from Nicaragua have started to moderate. So, we continue to have that guidance; however, we see those positive factors in the evolution of these numbers.

Now, your second question, yes, in fact, the law Conglomerates, in one of the resolutions, which basically dictates how the law is to be applied, allowed Porvenir to start matching what other pension funds that belong to conglomerates actually did in the past, and that is that going forward, all pension fund managers that belong to conglomerates will be able to invest up to 8% of their total funds in their administration in securities issued by members of a conglomerate. In that respect, Porvenir could, if it desired to do so, invest in securities issued by Aval or any of the other companies that form the conglomerate. We obviously can't know what they're gonna do. There is a really strict Chinese wall that we have built and strengthened to make sure that from the holding company and from the other companies of the conglomerate, we cannot tell what Porvenir intends to do with that approval. But the good news is that if Porvenir is to match what other pension plans already own in our securities, it is to be -- I would imagine foreseeing the Porvenir would like to increase a bit their own standing.

The better news is that any investments that Porvenir decides to undertake in Aval securities will have no other -- very many possible potential good consequences, but one of which will be that the liquidity of our share should increase as they do so. So, we are as interested as anybody else to see what Porvenir decides to do. They have put in place investment committees composed of very independent board directors, and of the members of -- the independent members of the board directors. And obviously, our expectations are high. We'll see what happens, and then when we see what happens, we'll be able to report. The greatest thing will be if -- and I don't even know if Porvenir does full recalls, but if they don't, you, as analysts of their results, should ask them what they propose to do, and maybe they'll make it public.

Andres Soto -- Santander -- Analyst

Thank you.

Operator

Your next question from Nicolas Riva from Bank of America.

Carlos -- Bank of America -- Analyst

Yeah, thanks -- this is Carlos [inaudible] -- for taking my questions. Most of my questions have been answered, but just one quick one on Ruta del Sol. Is there any update on the investigation from the U.S. Department of Justice? Thanks.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

No. We continue to cooperate, meaning anything that has been asked of us through our lawyers, we have answered. And the moment we know more, we'll bring it up too in one of these calls.

Operator

Thank you. The next question comes from Yuri Fernandes from JP Morgan.

Yuri Fernandes -- JP Morgan -- Analyst

Thank you for the call, gentlemen. I had a question on your loan interest margin, the decrease you pointed this quarter, if you can provide more color. I understood it came from Central America, but if you can give more details to us in how these will evolve during the year? And my second question is regarding your digital strategy. If you can provide also color on, I don't know, the size of your capex, how you are seeing the different things evolving? I recall that in the past, you had been working through all the banks together in the same kind of platform. But if you can provide also some details on what you have been doing on the digital side would be nice. Thank you.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Okay. Let me take the first one on the loan interest margin. What we saw during this quarter was mainly the impact of changes in currency in Central America in addition to -- changes in currency meaning there has been substantial volatility, and given that net interest margin is calculated as a P&L account that is based on average exchange rates, and then the denominator are balance sheet accounts that are based on dividend exchange rates, you get some distortion there. So, there might be a temporary effect of this volatility.

The recent addition change, when you're taking Nicaragua out, that would mean, as mentioned, we've been contracting our operation in Nicaragua. And Nicaragua had a particularly high net interest margin. So, it was the combination of those, to effect, what was created the burden on our numbers during this quarter.

Your question on moving forward, we have a combination of two horses, one that might generate the expansion. It comes from a more dynamic market, and eventually hiking interest rates that might happen later this year. We see those hikes in rates less probable than we saw them several months ago, but it's still on the table. The higher demand will impact also prices in a favorable way. Then you have the consumer portfolio, where we've been forecasting for a long time that we would have a contraction in margins. And margins have been more benign than what we had expected. But as the economy recovers, that is an event that is feasible to happen, given additional competition.

Let me address a little bit about the digital strategy. We don't really like to throw numbers out there to, especially going forward, more than a year out of how much we'll spend here or there or invest here or there. But if you twisted my arm, I would say right now, our estimation is right now, we will divest in our digital lab about $100 to $150 million over the next two our three years. However, one of the conditions that I put on that digital lab is that the amount that we invest on them depends mostly on the revenues that they are able to generate for us and the cost agencies are able to generate for us. And I've got to make sure that we don't invest too much more than we are revenue generating or cost saving. So, in the sense that we can deliver on additional revenues and cost savings a number similar to that, well, then that's that. But if we are able to generate more revenues or decrease more savings, then we'll definitely invest more.

With what we've done, as you mentioned, we are now functioning out of one digital laboratory rather than two, and all our banks are working through that digital laboratory. Things that we've done -- for example, we have a very active process going on now of data lake management, where we are, for one, for the first time in many, many years, aligning our data regarding all our clients in the same way for all the banks where those client are clients of, and to make sure that our information about each of our clients is identical, regardless of where and how you address the client. Secondly, we continue delivering digital products, and we have now digitized the most important product features of all of our banks, both here and in Central America. Thirdly, we continue to digitalize processes -- for example, collections -- as we move forward.

We have been pretty successful in improving our collections processes, especially around consumer lending, to digital processes. We have, for example, created, and we are changing all our transactional web pages for our banks with a product that we created in-house. Same in the future, I think, our mobile banking transactional page will be -- or mobile banking platform will be an in-house production. And among all that, we have been able to continue to reduction in our physical footprint, and we will continue to do so. And from the digital labs, we're also coming out with ideas on how to make the remaining physical footprint much more accessible and likeable, I would say, from our clients' standpoint.

Operator

Your next question comes from Silas Sandiego from Credit Corp Capital.

Silas Sandiego -- Credit Corp Capital -- Analyst

Hi, good morning, everyone. Thanks for the presentation. I have three questions, actually. The first one is, can you comment on the commercial loan portfolio, particularly in Colombia? I know you mentioned that your strategy is oriented toward the retail portfolio. But still, we have seen a very weak performance overall on the commercial front. Second question is regarding Corfi and its contribution on the income for revenues at the Aval level. We saw definitely a slowdown compared to previous quarters. And my question is, what can we expect throughout 2019? What's the kind of contribution we will expect to have in that line or you guys expect?

And the third question is, regarding Nicaragua, can you comment -- you mentioned all the effects it's having on that operation. But can you comment on a medium-term strategy, what are you guys planning to do within this operation? Thank you so much.

Diego Solano -- Chief Financial Officer

Okay. Regarding the commercial loan portfolio, as the figures of GDP growth have come out, it is evident that the economy is still moving slowly. We mentioned that we've seen some hints of improvement, particularly because of two reasons. One, even though January and February were very slow, March and the following months have been much more dynamic. This dynamic is not only based on leads, but on actual loans that have been placed. In addition, there is a landmark, and it says we have been contracting for the previous fourth quarter, quarter by quarter. This is the first quarter where the tendency has been broken. And even though it's still shy, we see some growth during the period.

Something to add to that is part of the -- not the market, but the Aval-specific contraction, I think related to the way we were pricing our loans, where we found that loans were being placed at prices that were not generating value. So, we gave away intentionally part of that market share. We've seen some of -- I think it's been coming back to market, and that has allowed us to regain some of the market share that we had forgone.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Yeah. I'll take some of that blame. As Diego was saying, as I say often, grow, yes, but profitable growth. And commercial lending is obviously still a huge, huge part of our strategy, at about 60-something percent or 60% of our total loan portfolio is in commercial lending sales. So, no, we will not look away from it. We will obviously keep working on it. But we needed to make sure that whatever we kept lending would be profitable for the group. And so, what we did is we sort of shied away from just following the crowd, and decided to set standards that we have obliged ourselves to meet. And that's why we stayed out of it for a little while. But as I said in the presentation, we're also seeing, I think, more sensible pricing now, and hopefully, we will continue growing, as Diego was saying, as we've seen in the last three months.

With respect to Corficolombiana, let me see. In the first quarter of 2019, the revenues from around the concessions in Corficolombiana gave us about COP6 per share. As you said, in the fourth quarter of 2018, that number had been closer to COP11 per share. But you have to remember that every time that a toll road starts construction in earnest, it receives a boost in income from assets that it had booked -- assets and not its income, and that it realizes as earnings once the road gets going. And that happened in the fourth quarter of 2018 in part. As Diego was also saying, in the first quarter of 2019, as expected, weather delayed some of the roads, so the advancement of -- the progress and construction in the first quarter really, as expected, were slower than the progress that we had seen in the fourth quarter of 2018. Going forward, we expect that in 2019, we'll receive about COP26 per share coming from those activities in Corficolombiana.

And with respect to Nicaragua, this is what we've done. The crisis in Nicaragua started around April 19th of 2018. And it's been going on since. Obviously, the first thing that impacted the whole financial system was a large decrease in the deposit base of the financial system. In fact, about 25% of the total deposits of the financial system have been withdrawn from the banks in the financial system. In our case, if you look at our bank in Nicaragua, that is exactly the case. We've lost about 25% of the deposit base. Not in the consolidated bank. Because what we saw was a good part of those deposits just being moved out of our Nicaraguan bank, mostly into our Panamian bank, and sometimes into our Costa Rican bank. So, our net decrease was not 25%. What we have done is obviously, we have started to collect aggressively and in our loans portfolio, so that we would never be faced with any sort of liquidity crunch. In fact, we have decreased, as we mentioned, since the beginning of the crisis, our loan portfolio by about the same amount, by 25%. And Nicaragua was one of those banks where our loans and our deposits were matched.

So, what we've done is we've kept the bank very, very liquid. The bank is still profitable. What we have seen -- and we have decreased both the loan and deposit portfolios by similar amounts. And what we have seen during the last few weeks is that we are seeing a return of deposits of the system into our bank, sort of applied to quality in Nicaragua. So, that's we've done, and we will continue to do so. We unfortunately obviously have to -- we've had to reduce our employment count in Nicaragua. And the good news in the middle of all this bad is that the government has that done, and it's talking to -- a committee's put together by the businessmen, and the church, and education representatives. And they've been talking about a solution of which I'm not privy to, so I don't really know what is going on. But what we see in the newspapers is that everybody's looking for a solution. I think everybody has realized that this is really not good for the country. The country's decreased its GDP last year by about 5%, so you can imagine.

So, we've kept the bank afloat. It's profitable. It's very liquid. And hopefully, it'll remain that way until the country turns a corner and starts moving in the right direction again.

Operator

Thank you. The next question comes from Juan Nicolas Pardo from SURA Asset Management.

Juan Nicolas Pardo -- SURA Asset Management -- Analyst

Good morning. Thank you for the presentation. I have two questions. The first one, I would like to know if you have any assessment on how it would impact the results, the approval of this law initiative that looks forward to erase bad debtors' historical records, and if you have any estimate on the timeline to be discussed and approved by Congress. And the second one has to do with Avianca. This company has been recently downgraded now just to CCC+. I would like to know if you have any exposure to that name.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Okay. On your first question, the first impact of that law should -- I mean, I'm in disagreement with the law. I don't think that you should compensate people for not having good payment ethics once they've borrowed. But on the other hand, what that bill proposes is that people will be withdrawn from the credit list once and only once, and when they pay. When they pay off their loans that they are not current on. So, in that respect, it should be positive. I mean, at the end, besides the philosophical issue, if that gets people to pay up, then you probably will see a recovery in provisions. But for us, it's really too early to try to put a number on that. But again, philosophically, I couldn't agree with that law at all. I don't think that -- when that happens, people get into the habit of just letting their loans lag until the next bill is passed to -- a forgiveness bill. So, we'll see. No, and I'm sorry to not have an exact answer to your question. But no, we haven't really made sure how much will be benefited or not by the passing of that bill.

Diego Solano -- Chief Financial Officer

Okay. And regarding your question on Avianca, we do have exposure to the Avianca group, and I'm gonna go into some detail what [inaudible] pay the Avianca group. It is around $250 million. Most of this debt's around $174, $175 million, is a syndicated loan to Taka that is guaranteed by Avianca Holdings and that is secured with credit receivables that are in trust. We see those numbers performing well and expect them to continue performing well. And in addition, we see the covenants theme under that loan. In addition to those $124 million, we have around $29 million that are secured by their main building, which is a great property that well covers these loans. The remainder, which is likely about $10 million, is working capital loans that are unsecured.

Operator

The next question comes from Carlos Rodriguez from Ultrasynco.

Carlos Rodriguez -- Ultrasynco -- Analyst

Good morning, everyone, and thank you for the conference call. Just to follow up regarding your commercial loan group, I want to know, how is your uptime for infrastructure projects, and especially in Bogota? And I'm talking about with the mass transportation system problem with non-performing loans. I mean, are you willing to support the infrastructure plan, infrastructure investment plan in Bogota, or do you prefer to step aside? Thank you.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

In general, we have stepped aside from infrastructure until we see exactly what happens to the Ruta del Sol contract liquidation. We are very, very expectant to see what the message is from the government regarding good faith creditors and the chances they have of being paid, even in the midst of turbulent times like these. And specifically regarding the Bogota transportation system, we will stay away for now and see how it all boils down. And infrastructure in general, as I said, we are also sitting it out until we see what happens. Obviously, we have concessions of our own that to a legal extent, we'll finance and make sure that they get built.

Operator

The next question comes from Ivan Carvez from Credit Corp Capital.

Ivan Carvez -- Credit Corp Capital -- Analyst

Hey. Hi, guys. Thank you very much for the presentation. I actually wanted to do a presentation about the NPLs. And it was thought that the NPLs were going to go down in these years, but they are not. And I wanted to know what is the reason, because it is not only the reason in your bank but in the whole Colombia, and I think it will be systemic, and it will be also a consequence of commercial loans. And I wanted to know if you think that it is going to improve or not, and what are the reasons? Thank you.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Regarding NPLs, there are a few factors to draw in. But the bottom line message, which is the cycle recovering as it's making progress. Two things that are affecting NPLs in short-term are the end of the cycle. As you might have seen, the consumer cycle preceded the commercial loan deterioration cycle. So, it started before and ended before. The corporate cycle, where I'm meaning not the big cases but more the SMEs and midmarket companies, started with a lag, and is expected to end with a lag to what happened with consumer. We've seen some hints of that improving. And there's something in addition to bear in mind when you look at first quarter, and it is, if you take a series of five years in a row, you'll find that systematically, the first quarter brings some additional NPLs than what an average quarter does. So, you need to bear that in mind when you look at the numbers. But we see hints of improvements into the future.

Operator

We have no further questions at this time. I would like to turn the call over to Mr. Sarmiento Gutierrez for closing remarks.

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Well, thank you, Hilda, and thank you very much all for your very, very good questions today. And as I said at the end of the presentation, we'll keep working hard to continue delivering on the numbers. And if anything else comes up, we'll bring it up to the market. And see you next time. Thank you very much.

Operator

Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 59 minutes

Call participants:

Luis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Diego Solano -- Chief Financial Officer

Jason Mollin -- Scotiabank -- Analyst

Gabe Nobrega -- Citi -- Analyst

Andres Soto -- Santander -- Analyst

Carlos -- Bank of America -- Analyst

Yuri Fernandes -- JP Morgan -- Analyst

Silas Sandiego -- Credit Corp Capital -- Analyst

Juan Nicolas Pardo -- SURA Asset Management -- Analyst

Carlos Rodriguez -- Ultrasynco -- Analyst

Ivan Carvez -- Credit Corp Capital -- Analyst

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