Ladies and gentlemen, welcome to Grupo Aval Third Quarter 2017 Conference Call, under full IFRS. My name is Jason, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. Luis Carlos Sarmiento Gutiérrez, President and CEO of Grupo Aval. Mr. Sarmiento, you may begin.

Good morning, Jason, and thank you. And good morning all, and thank you very much for joining our 2017 third quarter results call. Allow me to start by providing an update in reference to 2 recurring items in the agendas of our quarterly calls: Ruta del Sol and Electricaribe, and then I will also refer to our exposure to SITP. Regarding Concesionaria Ruta del Sol 2, CRDS, first, I will briefly recap where we left this tortured story during our last quarterly call. As you may recall, I was excited to report that the creditor banks were close to receiving a first partial payment at CRDS had just about fulfilled their 2 required obligations for that payment to be effected, stipulated under the agreement signed with DIAN on February 22 and modified on March 27 of this year. I did also mention that in the August 3 arbitration proceeding, where we had expected to settle with DIAN to receive the arbitrator's ratification of the concession liquidation formula, established under the terms of the agreement, DIAN stated its unwillingness to abide by the formula they had agreed to in the binding document. DIAN has since taken this stance to a new level and has proceeded to ignore the rest of its obligation under the agreement, including the obligation to effect the mentioned first payment. The arbitration tribunal, which was expected to meet again on September 1, has failed to reconvene since due to several postponements. In contrast, with the lack of progress in the arbitration tribunal, there has been significant movement on two other fronts: first, in the administrative state court, which is handling the class action suit to which I have referred in the past; and secondly, in Congress. A couple of days after our last call, the state court…

Thank you, Luis Carlos. I will now move to the consolidated results of Grupo Aval under IFRS starting on Page 9 with our asset evolution. As mentioned by Luis Carlos, growth was low during the quarter consistent with the poor GDP cycle. In absence of the effect of a Colombian Peso fluctuations in Central America, as it were stable during the quarter and grew 4.8% during the last 12 months. In Peso terms, total assets decreased by 1.2% during this quarter and increased 5.4% over the last 12 months. Asset dynamics, excluding FX during the quarter resulted from a 0.9% or COP 1.4 trillion increase in gross loans and a 2% or COP 0.5 trillion increase in total financial assets held for investments. These were offset by a 21.5% or COP 1.3 trillion decrease in interbank and overnight funds, mainly in Colombia, and a 3.6% or COP 0.8 trillion decrease in cash, mainly in Central America. Over the quarter, our Colombian assets slightly increased 0.5% during the quarter, while our Central American assets grew at 0.9% in dollar terms, a 2.9% decrease when translated into Colombian Pesos. As mentioned before, reductions in the interbank and overnight funds, particularly in Banco Bogotá and [ ROAE ] determine the growth dynamics of our assets in Colombia. Over the 12-months period ended on September, our Colombian assets increased 3.8% while our Central American assets grew 7.5% in dollar terms, a 9.6% increase when translated into Colombian Pesos. Consolidated balance sheet structure remained substantially stable. Net loans and fixed income investments accounted for 68% and 9.6% of total assets respectively at end of this period. Given the 3.7% appreciation of the Colombian Peso during the quarter, our Colombian operation slightly increased its share of assets by 51 basis points to 71.2%. On page 10,…

[Operator Instructions ] The first question is Gabriel Nobrega from UBS.

My question -- my first question is regarding your loan growth. We saw that it was growing close to 9% in this quarter, and I just want to understand what lines you are expecting to contribute to this contraction to reach your target of [ 6 to 7% ] this year? And moreover, as we go into 2018, which signs do you expect to show a stronger growth? And my second question is regarding asset quality. We have seen NPL ratios increasing once again in this quarter, and I just want to get a bit more color of where you believe we are in the asset quality cycle? And what should we expect going into 2018?

Okay. Thank you, Gabriel. Regarding loan growth, we expect to see some pick up from our corporate portfolio. We started to see some reaction that is in line with the seasonality that we usually have around the end of year cycle. As the process of -- or rather the cycle continues to improve on the consumer portfolio, we expect our willingness to lend in this segment to increase. This ties very much your second question and it is around where in the NPL cycle are we? The way to think about it is there's basically a sequence of events that needs to happen. You first need to see GDP starting to grow faster. What follows that, is an improvement in unemployment and you finally start to see a substantial recovery of consumer NPLs particularly. We have already started to see some pick up in the economy of around well moving up to 2%, up from a 1.2% and 1.3% that we saw during the first couple of quarters, and also a very slow quarter at year-end last year. On the unemployment front, signals are not yet that clear. However, we have started to see a pause in the deterioration of our consumer loan portfolio that hints that there could be something already happening in the economy. In that sense, we haven't changed our guidance for this year. We still -- even though we have already seen better performance of the economy during the third quarter, we haven't yet seen the improvement in unemployment that would give us more confidence to see recovery on consumers faster. The other thing that you need to take into consideration is that rates have lowered in a very substantial manner. This is very important, first, for the corporate companies where loans are floating. Therefore, the relief on their cost has already begun to happen from several months ago already. On the consumer front in the absence of rate reductions, rates for consumers should have gone up given the higher cost of risk that we have experienced. Part of the reason why this hasn't reacted faster than perhaps the Central Bank and some government officials would expect, is that we have to price in this, I wouldn't say lower quality, but higher cost of risk. If the process continues and we continue to see this recovery, we expect to see prices on consumer loans to fall as well. And as we pick up in underwriting, the number of young loans that are priced under this environment will be higher than what we have experienced. So the combination of all these will transfer prices as well to the consumers. This is a very long way to tell you that we do expect to see rates impacting in a very favorable way, not only growth but also loan quality.

Next question, Nicolas Riva from Citi.

I guess, my question is -- it's a follow-up on the quality question that Gabriel did. And if I look right now at your cost of risk, clearly you're running well above historical average. You already said that next year, you're expecting to see improvement in the economy, and therefore, a decline in cost of risk. However, if I look at your projection for next year, which I believe you said around 2.2%, 2.3% for cost of risk. That's still quite above that historical average of about 10 years of about 1.6%, especially for a bank which is more focused on commercial loans. So my question is, when do you think you can go back to that more normalized historical level for customer expense?

Nicolas, you're right. We do have a positive bias on the guidance that we gave of 2.25%, but we haven't yet seen some of the facts that we would love to see before we adjust those numbers down. Our main concern of why these numbers shouldn't improve much faster than you would imagine from reverting to historic averages is that GDP is not expected to return to the 4.5% kind of -- 4.5% growth rates that we were accustomed to see. This is a new reality where we might revert to something around a low 3% until a number of things happen in the economy. Under this environment, we prefer to be cautious on our expectations of recovery. We have already seen that happening, but the number where we will stop, we yet need to understand much better. We believe that if 2019 growth starts to pick up or evidence of better growth for 2019 appears, we can become more positive as the year progresses, but you know, we are pretty fact based and we would like to see unemployment figures and other figures also improving. The other event that is built into these numbers is we also have SITP provisions built into our number. As Luis Carlos mentioned, we should be moving up to 50% provisions with the information we have at this point. So we are also cooking that into the number and that's why the number isn't substantially lower.

Next question, Jason Mollin from Scotiabank.

So that -- I mean, you were kind of addressing that question on provisioning, so this includes -- this outlook includes, as you said, cooking in some high provisions. Is that for the full year? Should we be seeing this next year, full year 2018, cooking those in, and if we take that out, what kind of run rate of profitability you're looking for? 13% ROE for next year is still well below where you were operating before this year with the large credit event. So I'm just trying to get a sense of what's behind this limited improvement, but limited improvement in return on equity.

You're absolutely right. This is the main driver of this guidance. Trying to summarize what Luis Carlos said at the very beginning, we have some things that will not help us that much next year, but there is a few that will be quite positive and that's why we come up with 13% at this point. The negatives are, we see some contraction in net interest margin and then we also see growth, even though picking up from this year not yet up to the point we would like to see it. The positive, though not yet as positive as we would see it, moving further into the cycle, is the cost of risk. We see cost of risk still higher than it should be in the longer term and that's the reason why we brought down our estimate for next year to 13%. In absence of this, we should be getting closer to 14% once these issues are cleared up.

Next question, Sebastian Gallego from CrediCorp Capital.

Two questions. The first one, regarding your risk appetite going forward, particularly on the commercial front, and more specific, on infrastructure after you commented on the infrastructure law. What's your view after the law was -- is supposed to be passed and the details you mentioned on Ruta del Sol? And my second question is also related but another question regarding Grupo Solarte. They're having some legal investigations going on, on this group, which is also part of 4G concessions. I just want to know if you could share with us the exposure to this group from above and even from the financial system.

Regarding the risk appetite, on commercial and infrastructure, it continues to be very strong. I think that as we have mentioned over the past few calls, the appetite for infrastructure has been temporarily hindered because of the delay in seeing payment to Ruta del Sol. As Luis Carlos emphasized at the beginning of this conversation, we are very positive on seeing that payment being done even though it's been delayed, and in that sense, we do not see any impact in our middle to long-term appetite for infrastructure. What we expect to see, as I believe is a expected result for this kind of cycle, is a -- the kind of sponsors that will be able to commit to infrastructure projects moving on after the learnings of this year, should be stronger and larger. That's a change in the profile that we expect to see in sponsors, but we continue to expect infrastructure to be a key piece of our portfolio.

And regarding your question on Grupo Solarte, couple of things. Number one, as you said, there -- Mr. Solarte and his daughter [ apparently ] are having some problems with regard to a previous contract that they had in Bogota. I think it's [indiscernible] in which they participated with other [indiscernible] people and -- but we are not privy to any details, we don't really know what went on there. As you know, Solarte is also a very minority shareholder in Ruta del Sol, and in that capacity, obviously, we're not affected either way by their being -- by the Solarte group being such a minority shareholder in Ruta del Sol. We are -- we do work with the Solarte group as a client and our exposure to that group is a little bit under $50 million and -- but it's fully, fully guaranteed not only in terms of collateral but also in a cash source of repayment. So we are -- the way that we are guaranteeing in those credits almost give us any peace of mind that, number one, the credits that we have granted to Solarte group have nothing to do with the case for which they are being apparently indicted, but we don't know that's going to happen, but apparently so. So the credits that we have to the group are not related to that case. Secondly, he as a minority shareholder in Ruta del Sol, really there is no a problem there. And thirdly, our credits are very well and fully guaranteed. And so we shouldn't have a problem there. We are not counting that as one of our problems. We are, however, very observant of what goes on with the Solarte group.

Next question, Cristina Manotas from Davivienda Corredores.

I just have one question. I would like to know what is your perspective about the new [ indiscernible ] law on financial closures in respect to projects that are [ expected ] for the next year.

Okay, you're referring to the modification of Article 32 of the law of 1508 of 2012, which is what I believe you're referring to. We are very confident that the modification and the way that it was proposed is going to be very beneficial to the 4G projects in terms both of financing being available to them, after, you know, more than -- as well as ourselves there's been a lull in financings and in financial closings of the 4G project. A big reason for that lull is that banks, as you know, we have been included, have stayed out of financings pending the law with the modification to be passed. As we know, the modification passed and the important thing about it is that it clarifies, and more than that, it specifies how to liquidate a concession that is declared null, such as the case of -- or similar to what is happening to Ruta del Sol. The important thing is that banks now know going forward, if a situation like that arises again, now banks will know exactly what money they will get and when they will get it and how it's calculated, and they won't have to go through this, I would call it a torture of what's happened this year and all the situation around trying to decide when this first payment is going to be made and when the rest of the payments are going to be made. So in all, to answer your question, we see very positively the new -- the modification to the law as with respect to Article 32. There are 2 other articles there that we believe are just as important. Number one is, as you know, they have now, by law the documentation required to participate in or to put out a bid will be identical in all cases, and therefore, these are what we call custom bids that have happened in the past will no longer happen. And then thirdly, there is the other article that talks about how banks can step in now in case of a concession being declared null, which is something that is important for banks, because as you know, most of these projects are good projects, are very profitable and banks should not suffer the consequences of the sponsors incurring in some illegal activity as [indiscernible] did. So again, just to summarize, we are very happy with what happened. Obviously, as you can see, the law only now only has to be sanctioned by the President. There are still people raising opinions and after the law had passed, both chambers there are still people raising their voices and trying to get the law to change, but we feel that both the Minister of Finance and the President, they're both very intent on getting this law passed, signed, sanctioned and getting it done with and having the financial system again actively participating in 4G.

We have no further question at this time. Mr. Sarmiento, do you have any closing remarks?

No, I just wanted to thank everybody, as always, for participating in our calls. We're striving to do better, as always. We have a myriad of plans that we will be putting in place to make sure that we do so. And as our quarters go on, we hope to improve every single one versus the previous one. So again, thank you for participating on the call, and we'll see you during the next call.

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