Grupo Aval Acciones Y Valores S.A. (AVAL) Q2 2019 Earnings Call Transcript

Grupo Aval Acciones Y Valores S.A. (NYSE: AVAL)
Q2 2019 Earnings Call
Aug. 21, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to Grupo Aval's 2nd Quarter 2019 consolidated results conference call. My name is Hilda, and I will be your operator for today's call. Grupo Aval Acciones Y Valores S.A. is an issuer of securities in Colombia and in the United States, registered with Colombia's national registry of sharers 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 to the inspection and supervision of the Superintendency of Finance as a result of law 1870 of 2017. Also known as the law of financial conglomerate, which came into effect in February of 2019.

Grupo Aval, as the holding company of its financial conglomerate, is responsible for the compliance with capital adequacy requirements, corporate governance standard, risk management, and internal control and criteria for identifying, managing and reviewing conflicts of interest applicable to its financial conglomerate.

The consolidated financial information included in this document is presented in accordance with IFRS as currently issued by the IISB. Details of the calculations of non-gap measures, such as ROAA and ROAE, among others are explained when required in this report. Grupo Aval has offered IFRS-16 retrospectively from January 1st, 2019 but has not restated comparatives for the 2018 reporting period as permitted under the specific transitional provisions in this standard. The reclassifications and adjustments arising from the new leasing rules are therefore recognized in the opening condensed consolidated statement of financial position on January 1st, 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 recognized right to use assets representing its rights to use the underlying assets and 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 as a present value basis. The lease payments are discounted, using the interest rate implicit in the lease if that rate 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, expect, plans, anticipates, believes, estimates, predicts, potential, or continue, or the negative of these and other comparable words. Actual results and events may differ materially than 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 FCC. 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 material 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 development 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.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Thank you, Hilda. Good morning and thank you for joining us in our 2nd Quarter 2019 conference call. Once again, it is my pleasure to share with you our strong financial results for the quarter that ended on June 30. As with previous calls, I will cover the following subjects. An overview of our macro scenario, highlights or our results, and a brief update regarding the legal processes of Ruta del Sol.

Colombia's economy, where 70% of our business resides, grew at 3% during the first half of 2019. Seasonally adjusted GDP growth during the first quarter was revised from 2.3% to 2.7% or 3.1% unadjusted. And seasonally adjusted growth during the 2nd Quarter came in at 3.4% or 3% unadjusted. Notably, during the 2nd Quarter, several sectors grew faster than the average economic growth, including retail, financial services, communications, and professional services. Lagging sectors included construction, industry and oil, and mining.

These sectors are traditionally the main generators of jobs. Consequently, low growth in these sectors is in part responsible for the deterioration of our unemployment rate, which is currently averaging 10.1%. As I've mentioned before, we believe that two other significant factors contributing to the current unemployment level are the inflow of Venezuelan migrants with legal work permits and the consistent minimum wage increases and excessive inflation.

Our current view on growth is still somewhat more conservative than the governments. We believe the GDP will grow between 3 and 3 and a quarter percent for the year. We prefer to believe that unemployment will only start to improve once the construction and industry sectors pick up momentum. Commercial loan demand uses a proxy to detect acceleration in the growths of these sectors does not yet point in that direction.

The latest inflation number of 3.79% for the 12 months ending in July, where a percent of the largest increment in monthly data of 12-month inflation since December 2017. This number also comes closer to the 4% cap of the Central Bank's acceptable range. However, the two drivers that fuel such pick up lead us to believe that inflation will correct downward and will end close to 3.5% for 2019.

The first driver that accelerated inflation was food prices, mainly due to a short-lived el Niño weather phenomena. Secondly, inflation for July 2018 was atypically low, and thus the base for comparison magnifies the effect of July's number and the overall measurement. Data also suggests that there's still a moderate passthrough of the recent devaluation of the currency associated with more costly imports when converted to Colombian pesos.

Consequently, the Central Bank is sort of in a tough spot. On the one hand, it needs to make sure inflation expectations remain controlled, and that might lead it in the direction of tightening monetary policy. Especially if it feels that the exchange rate is affecting internal prices in a material way. But on the other hand, it also knows that the economy's recovery is still sluggish, and as such an early tightening of the cycle could be harmful. As of now, we believe that the Central Bank will continue with a stable interest rate throughout the remainder of 2019. Even if inflation stays at current levels, it is difficult to envision more than 225 basis point hike in the remainder of the year.

Current account deficit is still an issue. Internal demand growth continues to boost the importation of goods while the devaluation of the peso has not been a clear promoter of more and diverse exports. Latest figures show that while imports are growing close to 10% year on year, exports are flat. Government is pushing for better use of the signed free-trade agreement and for a strengthening of our tourism. But the reality is that our trade partners are not doing great, that international markets are not strong, and the tourism, despite growing, is far from contributing significantly to shrinking the current account gap.

Finally, on the fiscal front, we still believe that this year's deficit will be in line with the fiscal rule requirement of 2.7%. Consequently, we do not see probable the government's own estimation of a 2.4 deficit for 2019. The reasons for our assertion are that, first, GDP growth will probably fall short of the government's estimation of 3.5% included in the medium-term fiscal plan. And secondly, the peso's weaker than anticipated, which has resulted in increasing debt service in pesos and an increase in income from our revenues has not offset this debt service increase.

As we have said before, a decoupling has occurred between FX and the price of oil. The exchange rate is more associated with a global deceleration and a flight to quality reaction. If this situation continues, the government might be forced to cut spending even more or even to privatize a portion of its assets, an idea that has started to make some public waves.

The exchange rate is up to 3400 pesos per dollar, and it seems that this is the new norm. Several pressures are in play. The strongest driver, in our view, continues to be a widening trade deficit. Additionally, as of August, dollar flows into fixed income local currency portfolios had decreased by 25% as compared to 2018, from $1.2 billion to $900 million. These pressures have been somewhat mitigated by an increase in remittances which have grown by approximately $900 million in the last year, and by a 21% increase as of July, in structural foreign direct investment.

Central America's growth has slightly decelerated, although we still believe that the region's economy will grow upwards of 3% during 2019, the reality is that this growth is closely linked to the performance of the U.S. GDP. And as the U.S. economy slows down, so does Central America's. However, the macroeconomic fundamentals and the strength of our business in Central America, continue to prove our strategy of sustainable results based on diversification.

To highlight a few of this quarter's numbers, our attributable net income for the quarter was 813 billion pesos or 36.5 pesos per share, an increase of 19.3% versus 2018's 2nd Quarter result of 681.5 billion pesos or 30.6 pesos per share. And our return on average equity for the quarter rose to 18.3%.

Our results were mainly driven by loan portfolio growth, just shy of our 8% estimation for the year, but very profitable in nature. With faster growth in our retail portfolio than in our commercial portfolio. Net interest margin of approximately 6%, driven by a disciplined loan pricing strategy, controlled cost of funds, and better yields from our fixed income portfolios.

Overall, the cost of risk apportions 2%, resulting from an improvement in our consumer portfolio's cost of risk, partially upset by a deterioration of our commercial portfolio's cost of risk. Cost of risk will increase in the remainder of the year as our banks fully prevision our remaining exposure in Ruta del Sol. Strong net income growing significantly faster than our loan portfolio due to solid banking and pension fund fees. Sustained contribution from our non-financial sector during the quarter, which as you are all aware, mainly comes from our operation in Corficolombiana. Continued focus on efficiency resulted in controlled operating expenses in general and specifically in slow growth of personal expenses even below the minimum wage increase.

A strong balance sheet as reflected by our deposited loan, liquidity, and tangible equity ratios. Diego will refer to each of these points in a few minutes.

On the digitalization front, we continue to work at digitalizing products and processes in order to become more productive. But also, to access segments of the population that were un-bankable to us in the past. We expect to launch Dale, our FinTech in the next couple of months. Dale is an ecosystem that will allow clients and non-clients to conduct P2P, P2C, and C2C money transfers at zero cost in one click. We share the government's goal to decrease the use of cash, and we also want to increase banking penetration. We will share with you more details of Dale in our next call.

Regarding ongoing legal matters related to Ruta del Sol, in the last few weeks two proceedings have advanced. On the one hand, the arbitration tribunal ruled on August 6th and then confirmed its ruling on August 16th after declining to respond to multiple reflects for clarifications from all the parties involved. First, and as expected, the Ruta del Sol contract was declared null. Importantly, this part of the ruling allowed the tribunal to base its calculation of the liquidation value of the contract on law 1882 of 2018 and had no other implication that the project was reversed to the government almost two years ago. Secondly, the tribunal ruled that on top of the payments that have been made to employees, suppliers, and banks, since the contract ended in February 2017, which had up to approximately 1.5 trillion pesos, the government should pay an additional 211 billion pesos to CRDS's creditors, among which the banking system is owed approximately 1.2 trillion pesos.

We have been studying very closely, and in painful detail the text of the 700-page ruling and have several leashes as to how the judges applied the law to reach the liquidation value number. We don't know what all the parts affected by this ruling are going to do in terms of looking for legal recourses, but we will consider all the avenues afforded by the law.

Since the final resolution might take some time, we foresee that our banks will have to provision their current exposure to CRDS before this year ends. In our case, as of June 30, we had a net exposure of 380 billion pesos, equivalent to 23 basis points of our current average loan portfolio. We estimate in 170 billion pesos, the impact after taxes of this additional provision expense on our own attributable net income or about 5% of our yearly result.

The other front that showed some advances was the antitrust process at the Superintendence of Industry of Commerce, the SIC. As part of this proceeding, all the parties to this investigation had officially requested that the SIC included certain documents and called certain witnesses to support the investigation. In a recent decision, the SIC granted most of these requests. That investigation continues, and we will report any material advances once they occur. We have no further information regarding Ruta del Sol legal proceedings.

To end, allow me to summarize our macroeconomic guidance for 2019. GDP growth between 3 and 3.5%. Inflation around 3.5%, with an upward bias due to the passthrough effect of the devaluation. Unemployment, not improving. Exchange rate of around 3400 pesos per dollar for the remainder of the year. The fiscal deficit on target for this year at 2.7%. Next year, the government will have to face the decision of either cutting costs or disposing of some assets.

On the current account front, the vulnerability will persist until we find a strong source of alternative exports or reduce imports. And growth in Central America of upwards of 3%.

And now I pass the presentation on to Diego who will explain in further detail our business results.

Diego Fernando Solano Saravia -- Chief Financial Officer

Thank you, Louis Carlos. I will now move to a consolidated result of Grupo Aval and TFRS and wrap up with our guidance for 2019. As mentioned by Louis Carlos, the 2nd Quarter of 2019 was a strong quarter for Grupo Aval, due to an improvement in loan dynamics during the quarter, particularly in Colombia, stronger net interest margin in loans, and solid performance of our fixed-income portfolio. Robust fee income during the quarter, mainly attributable to pension fund management and banking fees. A sustained contribution of a non-financial sector, and strict cost control discipline.

Starting on Page 9, assets grew 12.8% over the year and 2.5% during the quarter. Colombian assets increased 12.7% over the last 12 months and 3% in the quarter, driven by net loans, cash, and intangible and financial assets from our concessions and right of use assets. In spite of an annual and quarterly contraction of 19.5% and 1.6% of the Nicaraguan assets, Central America delivered 3.5% and 0.2% 12 month and 3-month growths in dollar terms.

Moving to Page 10, loans including repos were 6.5% over the year, and 1.3% from the quarter. Loan dynamics in Colombia continued trending positively, while loans in Central America remained under by the dynamics of Nicaragua. Our Columbian corporate loan portfolio increased 0.9% over the quarter and 0.8% over the year.

Commercial peso-denominated loans grew 0.9%, the second consecutive positive quarter over the year since first quarter 2018. Colombian consumer and knowledge business expanded 9.9% and 16.3% respectively over 12 months. The quarterly growths were 2% and 3.4% respectively. Central American operations, excluding Nicaragua, expanded 4.4% in dollar terms over the year. Nicaragua, which weighs approximately 6% of our Central American loans contracted by 27.7%.

On Pages 11 and 12, we present several loan portfolio quality ratios. 30-days PDLs showed a slight intervention during the quarter. Slow growth continues to affect PDL ratios in commercial loan portfolios in Colombia. We recorded an 18 basis points increase in 30-days commercial PDLs and 27 basis points in 90-days PDLs in the Quarter in Colombia.

In Central America, 30-days, and 90-days commercial PDLs remained relatively stable, both during the quarter with 30-day PDLs increasing 7 basis points and 90-days PDLs, stable. We continue reducing the burden of the three corporate cases coverage, which closed June at 47%. We expect to prevision the remainder the rest of the year. Our coverage for SITP companies stands at 40% during the quarter. A slight increase in the delinquency ratio of our consumer loan portfolio was driven by Central America. In Colombia, the improving trend in delinquency in consumer loans persisted, with 30-days PDLs falling 9 basis points in the quarter to 5%, accumulating a reducing of close to one percentile point to the big inverse quarter, 2018. 90-days PDLs remained stable at 3%, relative to 1st Quarter 2019, and were 51 basis points lower than the year earlier.

In Central America, 30-days PDLs consumer loans increased 34 basis points to 4.8%, while 90-daysPDLs increased 11 basis points to 2%, both compared to a year earlier. Our PL for mortgages increased during the quarter driven by Central America. Despite all that, the quality of our mortgage portfolio continues to be substantially better than the market average.

Cost of risk was 2.2% with a quarterly increase of 20 basis points, driven by Colombian commercial loans, with stability in Central America, and improvement in the Colombian consumer portfolio. PDL coverage for 90-days PDLs was 1.53 times.

On Page 13, we present funding and deposits evolution. Funding dynamics were consistent with the strengthening of our balance sheet as we position ourselves for upcoming growth. The funding structure remained maturely stable with deposits representing three quarters of our total funding, and our deposits to net loans ration reaching 1. Our liquidity position continues to be strong with our cash to deposit ratios at 18%. Deposits increased 1.7% in the quarter, and 9.2% over the last 12 months. Colombia increased by 1.2%, and Central America grew 1.8% in dollar terms, respectively during the quarter. Over a 12-month period, Colombia grew at 7.4%, while Central America grew at 3.9% in dollar terms.

On Page 14, we present the evolution of total capitalization, of our closed shareholder's equity, and the capital adequacy ratio of our banks. Our total attributable equity increased during the quarter in line with net income. Total equity increased by 1.6 trillion pesos, while our actual equity increased by 976 billion pesos. As of 2nd Quarter, 2019, our banks show a proper tier 1 and total solvency ratios to enable adequate growth.

On Page 15, we present our yield on loans, cost of funds, spreads, and net interest margin. Our net interest margin increased 14 basis points, mainly driven by a stronger net interest margin on loans in Central America. Our net interest margin on investments continues to be solid. As anticipated, pricing on consumer loans in Colombia became more aggressive during the quarter with an improvement in quality. We continue to expect some pressure on net interest margin on consumer loans, as growth increases the share of newly priced loans in our mix.

On Page 16, we present net fees and other income. Gross income dynamics was particularly strong during the quarter. Pension funds management fees posted strong results coming from fees charged on return basis. Gross fees increased 8.7 in Colombia and 1.4% in dollar terms, in Central America compared to 2nd Quarter 2018.

Our non-financial sector continued to deliver strong results and remained relatively stable over the quarter with better results from our energy and gas and sector, and a slight decline in income from infrastructure explained by slower progress in construction due to weather conditions. Our other operating income was substantial at the same level as in the previous quarter. Seasonal decreasing in income was upset by a 41 billion pesos income from Bank Bogota's one time change in five-year benefit plans for non-unionized employees with a 24 billion pesos effect on Aval's attributable income.

On Page 17, we present some efficiency ratios. Year to date, other expenses grew 5.7% relative to a year earlier. Total dollar expenses, 12.7% in Colombia and 2.4% in Central America in dollar terms during this period. Year to date, personal expenses increased 4.1%. Year to date, administrative expense increased 0.5%. And when adding IFI-16 related depreciation and administration to administrative expenses, the figure was 7%. Improvement in year to date efficiency measured as cost to income resulted from tightening expenses, a higher net interest margin, and a higher income from our non-financial sector.

Finally, on Page 18, we present our net income and profitability ratios. A total net income for 2nd Quarter 2019 was $813 billion pesos or 36 pesos per share. Return on average assets and return on average equity for the quarter were 2.1% and 18.3% respectively.

Before moving into questions and answers, I will now summarize our general guidance and financial performance. We expect loan growth to be the 8% area in 2019. We expect our cost of risk net of recoveries to be in the 2.3% area in 2019, incorporating full previsioning Ruta del Sol by year-end. We expect full-year net interest margin to be in the 5.7% area. Finally, we expect return on average equity to be in the 16% area during the year.

...

We now are available for your questions.

Questions and Answers:

Operator

Thank you. We will now begin the question and answer session. If you have a question, please press * and then 1 on your touchtone phone. If you wish to be removed from the queue, please press the #. If you are using a speakerphone, 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 Andres Soto from Santander.

Andres Soto -- Santander Investment Securities -- Analyst

Good morning. Thank you for this presentation. I would like to understand better your views on asset quality. Over in Nicaragua's microenvironment and Colombia's loan growth doesn't help. But I would like to see, going forward, what are you seeing in terms of quality performance? When are you expecting this to peak? And in this context, what are your views of cost of risk over the medium term after the full coverage of the corporate cases this year?

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Okay, Andres. Regarding asset quality, I think you need to break it down to pieces. We have three different forces, one in Central America, as you mentioned. And the other in Colombia is consumer and corporate. I'll go slightly back in history just to show how the cycles are working, to refer to Colombia.

Colombia, what we saw was a consumer cycle starting earlier than the corporate cycle. Therefore, the consumer cycle has already peaked and is already recovering for the past 3 quarters. We expect that performance to continue, and the reason, in spite of our view on unemployment, is that the customers that we serve are mainly concentrated in segments that are not yet affected by that kind of effect. So, we could expect to continue to see that positive performance as has been demonstrated not only in our numbers but in the system as a whole.

Regarding the corporate cycle, the corporate cycle began with a lag of a few quarters to the cycle. And even though it hasn't peaked yet, we haven't highlighted in the call because it's not yet absolutely positive news. But we have started to see a slower deterioration in corporate loans. But that points to the numbers end up consolidating is we could be one or two quarters away from peaking in I would say the statistical part of the corporate portfolio. This should be flattening pretty soon. And we would be very happy to be able to give you much better news in our next call.

Then finally, the large corporate cases, what all the numbers look like, we're in the process of cleaning those up. We already got that done for Electribe a few quarters ago. And as we mentioned, we expect to see that happening during the remainder of the year. And the SITP plant, we believe that we are properly previsioned, so we do not expect a lot of changes there.

So, wrapping up, we are positive on how the cost of risk should evolve. As always, we'll be prepared to be able to talk about this with numbers that have already been delivered. But our sentiment is positive. Regarding Central America, you pointed out Nicaragua, you're right on that. And then, the region as a whole, we've mentioned in the past has had ups and downs. But we are positive on how that region is evolving as well. We mentioned in the past, other countries different from Nicaragua. But we believe that the things that happen there were already delivered, and the market is already picking up.

So, for your last question, cost of risk, we do believe our cost of risk should break 2% once those things are delivered. So, for next year, although we do not want to give guidance on that at this point, we do expect to see the trends continue. As I mentioned, we should be there in a range that should have broken 2%. So, I believe with that, I wrap up your question.

Operator

The next question comes from Jason Mollin from Scotia Bank.

Jason Mollin -- Scotia Bank -- Analyst

Hi. My first question is on the outlook for return on equity that you cited around 16%. You closed this quarter with 18%. The 1st Quarter, around 17%. You did mention the impact of the Ruta del Sol provisioning and what that represents. So, it seems like the 2nd half of the year, even including the Ruta del Sol, that you're looking for much softer returns. If you could comment a little bit on the drivers there because it seems like there's some upside to beat that expectation.

And my second question is just on the outlook for long-term rates. You mentioned the dynamics of inflation and the policy rate in Colombia. But if we look at the Colombian 10 year, we're definitely at the lows in the last 5 years. I just wanted to see your view on how that's impacting your view on returns for new investments, should your cost of equity be a bit lower in this construct. Or do you think this is just short-term phenomena in Colombia or globally? Thank you.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Well, I think regarding the outlook for return on equity, you're right. We're looking perhaps on the safe side. And the reason to do that is, 1.) as you mentioned, Ruta del Sol. Ruta del Sol is actually quite impactful on our numbers. And then something to bear in mind is the way in which we are generating revenue; therefore, equity. So, there's also a denominator effect there. Finally, through this quarter we had many things that went right. So, there could be somethings that might change in the future. For example, the interest rate environment has favored us in fixed income. So, there's some space for changes there.

So, at this point, we're looking to a 16% area. There is an improvement compared to what we set last time. And we're also dependent on what's happening with the global environment, particularly its effect on a fixed income.

I'm tying that with your question on long-term rates. What's happening with long-term rates is not a Colombian specific event. If you look around the world, curbs have become quite flat. Therefore, there is some room for changes there. I'm not an expert in global fixed income, but I would say that the risks that you might see around the world could also affect Colombia. So, the shape of the curve is something I wouldn't say is idiosyncratic to Colombia, but something where we are also being affected by what's happening in the rest of the world.

Operator

Thank you. Our next question comes from Jorg Friedemann from Citi Bank.

Jorg Friedemann -- Citi Bank -- Analyst

Hi, appreciate the opportunity. Just an additional clarification or explanation in terms of the Ruta del Sol exposure. If I got it right, your pending exposure to the project amounts to 380 billion Colombian pesos. And if I got it right, you still have to provision 170 billion. Just wondering if I know these numbers are correct. And if I am right, also, looking into what you guided for the year in terms of cost of risk. You told us 2.3%. Looking into what was happening in the first half. It would have been implicitly that you could have cost of risk between 2.4% to 2.5% in the second half, is that right?

And the second question, if you could give us a bit more color about what should be the effective tax rate for the year? I noted that last year you got an increase in the 2nd half. Just wondering if this is expected to happen again or not. Thank you.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

All right, Jorg, let me take the first question, and Diego will take the other one. In Ruta del Sol, our net exposure today is about 380 billion pesos exactly as you said. That is because we have previsioned already about 47% of the gross exposure. Then, so our banks will have to prevision 380 billion pesos between now and the end of the year and they have started to do so. The effect in the holding companies owned attributable net income of that additional prevision is 170 billion pesos, and that's what I was referring to. And that's, as I said, about 5% of our total income for the year.

Regarding your questions on taxes and cost and risk, what we're building, and let me tie this to my first answer. But we're building into why not 2.4% but 2.3%, that is what I believe you said. We're incorporating Ruta del Sol. We're also projecting how our consumer portfolio, particularly, should continue improving, and taking away some of the deteriorations that we saw over this quarter. So, it does reflect around 2.5 costs of risk for the second quarter, that is quite high. 2nd half, I'm sorry, which is quite high for what we believe cost of risk for us should be. But with some improvement compared to what we're seeing now.

Finally, on taxes, what is incorporated in our guidance is something in the order of magnitude of 30% for effective tax rate. And as I mentioned in the past, that is a blend of 70% Colombia and 30% in Central America with lower tax rates in Central America.

Operator

The next question comes from Guillermo Hernandez from JP Morgan.

Guillermo Hernandez -- JP Morgan -- Analyst

Hi, gentlemen. I had a question on the pension plan thing. It was a very strong quarter, and I just would like to know more details on what is driving the big growth in that line. Thank you.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Okay. On the pension funds, I mentioned that where we are generating high fees is a portion of the funds that we manage that are related to returns obtained in the portfolios. Some of the fees, particularly those for the compulsory pension plans where people are not adding funds to their pension fund, are compensated to us based on returns. Other pension funds are also managed in that way. In addition, we have some part of the seasonality of how fees are obtained affecting us positively.

Operator

Our next question comes from Sebastian Gallego from Credicorp Capital.

Sebastian Gallego -- Credicorp Capital -- Analyst

Hi, good morning, everyone. Thanks for the presentation. I have three questions. The first one, you talked about the cycle on the commercial and the consumer segment in Colombia. But I guess you didn't talk about the mortgage cycle. We have seen some upward pressure, but clearly on the 90-days NPL ratio on the mortgage segment. Could you comment on that and what's the outlook for the mortgage portfolio?

Second question, probably a fold-up or a new question on Ruta del Sol, too. Given the ruling on Ruta del Sol, what's the long-term outlook of Corficolombiana in terms of appetite for new infrastructure projects?

And the third question is regarding Dale. I know you mentioned that you'd probably comment a bit more in the upcoming conference call. But can you provide a bit more detail on what you're intending to do and how that is comparable to peers or other products from peers? Thank you.

Diego Fernando Solano Saravia -- Chief Financial Officer

Let me take the first question and pass it to Louis Carlos regarding the mortgage performance. You have to bear in mind that our number is a very positive number compared to the market average. We could be around 60% of where market average delinquencies stand. We have seen some deterioration there. But I would say it's part of the process of getting a young portfolio to mature.

In addition, there were some particular glitches in some of our banks that were already solved a couple of months ago. Where we were able to identify some pockets of mortgages that were not performing as we desired, but that's an issue that has already been dealt with.

Regarding the environment as a whole for the rest of the market, I can't really comment much more than what I've said for our portfolio.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Thank you, Diego. And then regarding the other two questions. On the one hand, you asked about Corficolombiana's long-term outlook for infrastructure. So, we'll start with, as you know, Corficolombiana's already building 4G projects that it acquired some years ago. Those 4 projects have different advances, starting with one is already up to like e52% progress, and the other ones are oscillating at between 16 and 23%. So those numbers give you an idea that we still have a long way to go before we finish those. So obviously, our appetite is still very strong because we have to, on the one hand, finish those. We still have maybe 4 or 5 years to go.

There's a 4th 4G project that we haven't even started, that we're still waiting on environmental licenses. So that one still will have its own 5 or 6 years to go. And besides that, Corficolombiana is still the largest toll road operator in the country. So that should give you an idea of how much of an appetite we have for that. And then as new projects come up, we'll look at them. But I would say our plate is pretty full at this point with infrastructure.

And regarding Dale, Dale's different than what anybody else offers, first of all, because Dale is called a company in itself. It's called a set bay. And a sepe here is different from all the other companies, because to start with a sepe is under the direct supervision of the Superintendence of Finance, and a sepe can take in deposits. Secondly, nobody will really have the offer that we will offer through our sepe, Dale. We will cover certain ways of doing business that nobody else can because of the licenses that are afforded to us via the sepe. We will have, not only as I said, P2P that everybody offers, but we will have P2C and C2P transactions. And then we will have some other features that we will announce. And I think they will be interesting to the public in general.

In the end, what we really want to do is deepen the banking penetration. And really, as we said, take out of the market some of the cash transactions that are now being performed. If we can get those two things, I think we'll be very happy with our results.

Operator

Our next question comes from Alonso Aramburu from BTG.

Alonso Aramburu -- BTG Pactual -- Analyst

Hi, good morning and thank you for the call. I have two questions. One, a follow up on Corficolombiana, which was contributing nicely to our earnings. Given the progress you've mentioned and the three projects, how should we expect earnings contribution from Corficolombiana to continue in coming quarters? And second, can you give us the cost of risk excluding the provisions that we're done for Ruta del Sol and it's ATP this quarter?

Diego Fernando Solano Saravia -- Chief Financial Officer

Regarding Corficolombiana, we expect Corficolombiana to continue contributing as it has done over the past quarters for a few years. We've mentioned in the past that the construction period of toll roads takes around 4 to 5 years. So, during that period of time, we've deferred levels of strength, we should be balancing and generating contribution from Corficolombiana. The contribution at this point, at one level, could have been at around 140 billion pesos.

Regarding previsions different from what we've mentioned in the past, there haven't been any real material provisions during the 2nd Quarter. Again, if you referring to Ruta del Sol and SITP, none of those were really material for a 2nd Quarter result.

Operator

Thank you. The next question comes from Niccol from Bank of America.

Niccol -- Bank of America -- Analyst

Yes, thank you for taking my question. Just one more question on Ruta del Sol. I understand that you said that the exposure, worst-case scenario, would be 170 billion pesos. One question, in that scenario, are you assuming that the banks get paid 0% or something that's going to be a third payment, which is going to be 211 million pesos. And about half of that should go to a group. You're assuming that in that case the banks are not going to get paid in that last payment.

Diego Fernando Solano Saravia -- Chief Financial Officer

Correct. We are assuming that we'll prevision 100% of the loans and 211 billion pesos that the arbitration tribunal talked about will be tangled up in suits and counter lawsuits until the end of at least this year.

Operator

Thank you. The next question comes from Carlos Rodriguez from Ultraserfinco.

Carlos Rodriguez -- Ultraserfinco -- Analyst

Good morning, everyone. And thank you for the conference call. Regarding the consumer loan and especially credit cards, we have seen this positive growth. I got a question of what has driven this growth and how much far can you push that growth? And if you can comment on the strategy, it has been current customers increasing loans or buying loans from other banks and adding new customers? Thank you.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

What we've seen is the reason for the growth in consumer has been a combination of many things. Number one, improvement in the quality of the portfolio, it has enabled us to increase our appetite to grow in that area. Second, something that we've been talking about for the last few conferences is the results of our digital effort which have simplified the process of onboarding customers. In that sense, it's not only existing customers but a substantial portion of customers that we wouldn't have had access in the past with the kind of strategy that we were deploying.

So, it's a combination of many things. No. 1, some recovery in the economy. Some improvement in consumer confidence. A much better delivery from our side of onboarding new customers. Plus, a better environment on the quality side that enables us to bring more customers in. so what we're seeing is a very substantial potential to continue growing in consumer if the environment in which we're working continues to be so.

Operator

Thank you. The next question comes from Julian Amaya from Corredores.

Julian Felipe Amaya Restrepo -- Corredores Asociados -- Analyst

Hey, good morning. Some of my questions have already been answered. However, I would also like to know what your strategies in Central America regarding some future deceleration from the U.S. economy are. Thank you.

Diego Fernando Solano Saravia -- Chief Financial Officer

Well, regarding Central America, the way to think about Central America is not as a single country. Central America depends on the dynamics of different countries. We have had a black spot that has been the performance of Nicaragua that has generated some difficulties. But the rest of the region, even though some of the countries have had their own issues, is performing pretty well.

Then we've had something very positive for the region, and that's that it is a net importer of oil. So, what's happening now should continue to help them.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Yeah, and you can't forget that Central America's strongest business is in the merchant acquiring and credit card issuance. So, the whole region does kind of depend on the price of oil, because Central America is a big oil importer. But on the other hand, Central America is a huge receiver of remittances of the state, so it tends to happen when the U.S. economy weakens, remittances seem to drop, and that affects the economy. But as Diego was saying, obviously each economy has its own life. And the lives of all but Nicaragua are doing OK. So, in the end, I don't think we have to really change our strategy. We are looking obviously always looking at growth both organic and inorganic. And we'll see. If things continue the way they are, as I said, Central America's region will grow in excess of 3%. And that suits fine the whole group's strategy.

Operator

Thank you. Our next question comes from Brian Flores from Citi.

Brian Flores -- Citi Bank -- Analyst

Hi, thank you for taking my question. Just a quick question on your net interest margin guidance for 2019. If you could expand on the drives behind it. Thank you.

Diego Fernando Solano Saravia -- Chief Financial Officer

Well, as I mentioned, the net interest margin has had some expansion in some of the countries. In addition, something that has been helping us is the net interest margin of our consumer portfolio. I mentioned we've had some pressure there on rates. But on the other hand, our cost of fund is not increasing. That regarding Neman loans. Then something to add to get the overall interest margin is we've been delivering returns around 2.5% already for a couple quarters on the fixed income side. And that is also helping us to achieve these kinds of numbers.

Operator

Thank you. We have no further questions at this time. Thank you, ladies, and gentlemen. I will now return the call to Mr. Sarmiento for closing remarks.

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Thank you, Hilda, and thank you all for attending our 2nd Quarter call. And we hope to see you soon in the 3rd Quarter call. And as always, we expect to keep delivering.

...

Thank you very much. See you next time.

Operator

This concludes today's conference. Thank you for participating. You may now disconnect.

Duration: 56 minutes

Call participants:

Louis Carlos Sarmiento Gutierrez -- Chief Executive Officer

Diego Fernando Solano Saravia -- Chief Financial Officer

Andres Soto -- Santander Investment Securities -- Analyst

Jason Mollin -- Scotia Bank -- Analyst

Jorg Friedemann -- Citi Bank -- Analyst

Guillermo Hernandez -- JP Morgan -- Analyst

Sebastian Gallego -- Credicorp Capital -- Analyst

Alonso Aramburu -- BTG Pactual -- Analyst

Niccol -- Bank of America -- Analyst

Carlos Rodriguez -- Ultraserfinco -- Analyst

Julian Felipe Amaya Restrepo -- Corredores Asociados -- Analyst

Brian Flores -- Citi Bank -- Analyst

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