|Item 1. Identity of Directors, Senior Management and Advisers|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. Unresolved Staff Comments|
|Item 5. Operating and Financial Review and Prospects|
|Item 6. Directors, Senior Management and Employees|
|Item 7. Major Shareholders and Related Party Transactions|
|Item 8. Financial Information|
|Item 9. The Offer and Listing|
|Item 10. Additional Information|
|Item 11. Quantitative and Qualitative Disclosures About Risk|
|Item 12. Description of Securities Other Than Equity Securities|
|Item 13. Defaults, Dividend Arrearages and Delinquencies|
|Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15. Controls and Procedures|
|Item 16. [Reserved]|
|Item 16A. Audit Committee Financial Expert|
|Item 16B. Code of Ethics|
|Item 16C. Principal Accountant Fees and Services|
|Item 16D. Exemptions From The Listing Standards for Audit Committees|
|Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F. Change in Registrant's Certifying Accountant|
|Item 16G. Corporate Governance|
|Item 16H. Mine Safety Disclosure|
|Item 17. Financial Statements|
|Item 18. Financial Statements|
|Item 19. Exhibits|
|Note 1 - Reporting Entity|
|Note 2 - Basis of Preparation of The Consolidated Financial Statements and Summary of Significant Accounting Policies|
|Note 3 - Judgments and Critical Accounting Estimates in Applying Accounting Policies|
|Note 4 - Risk Management|
|Note 5 - Estimation of Fair Value|
|Note 6 - Classification of Financial Assets and Financial Liabilities|
|Note 7 - Cash and Cash Equivalents|
|Note 8 - Trading Assets and Liabilities|
|Note 9 - Investment Securities|
|Note 10 - Hedge Accounting|
|Note 11 - Loans|
|Note 12 - Other Accounts Receivable, Net|
|Note 13 - Non - Current Assets Held for Sale|
|Note 14 - Investments in Associates and Joint Ventures|
|Note 15 - Tangible Assets|
|Note 16 - Concession Arrangements Rights|
|Note 17 - Goodwill|
|Note 18 - Other Intangible Assets|
|Note 19 - Income Tax|
|Note 20 - Customer Deposits|
|Note 21 - Financial Obligations|
|Note 22 - Employee Benefits|
|Note 23 - Legal Related and Non Legal Related Provisions|
|Note 24 - Other Liabilities|
|Note 25 - Equity Attributable To Owners of The Parent|
|Note 26 - Non - Controlling Interest|
|Note 27 - Commitments and Contingencies|
|Note 28 - Income From Contracts with Customers|
|Note 29 - Net Trading Income|
|Note 30 - Other Income and Expense|
|Note 31 - Analysis of Operating Segments|
|Note 32 - Unconsolidated Structured Entities|
|Note 33 - Transfers of Financial Assets|
|Note 34 - Related Parties|
|Note 35 - Business Combination|
|Note 36 - Subsequent Events|
|Note 37 - Parent Company Information|
|Balance Sheet||Income Statement||Cash Flow|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 001-36631
GRUPO AVAL ACCIONES Y VALORES S.A.
(Exact name of Registrant as specified in its charter)
Republic of Colombia
(Jurisdiction of incorporation)
Carrera 13 No. 26A - 47
Bogotá D.C., Colombia
(Address of principal executive offices)
Jorge Adrián Rincón
Chief Legal Counsel
Grupo Aval Acciones y Valores S.A.
Carrera 13 No. 26A - 47
Bogotá D.C., Colombia
Phone: (+57 1) 743-3222
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Nicholas A. Kronfeld, Esq.
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
Phone: (212) 450-4000
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Title of each class
Name of each exchange on which
American Depositary Shares, each representing 20 preferred shares, par value Ps 1.00 per preferred share
New York Stock Exchange
Preferred Shares, par value Ps 1.00 per preferred share
New York Stock Exchange*
* Grupo Aval Acciones y Valores S.A.’s preferred shares are not listed for trading, but are only listed in connection with the registration of the American Depositary Shares, pursuant to the requirements of the New York Stock Exchange under the trading symbol(s): AVAL.
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuer’s classes of capital stock or common stock as of the close of business covered by the annual report.
Preferred shares: 7,149,819,407
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
⌧ Yes ◻ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
◻ Yes ⌧ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
⌧ Yes ◻ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
⌧ Yes ◻ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer ⌧
Accelerated filer ◻
Non-accelerated filer ◻
Emerging growth company ◻
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ⌧
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
US GAAP ◻
International Financial Reporting Standards as issued by the International Accounting Standards Board ⌧
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow.
◻ Item 17 ◻ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
◻ Yes ⌧ No
All references herein to “peso”, “pesos”, or “Ps” refer to the lawful currency of Colombia. All references to “U.S. dollars”, “dollars” or “U.S.$” are to United States dollars. This annual report translates certain Colombian peso amounts into U.S. dollars at specified rates solely for the convenience of the reader. The conversion of amounts expressed in pesos as of a specified date at the then prevailing exchange rate may result in the presentation of U.S. dollar amounts that differ from U.S. dollar amounts that would have been obtained by converting Colombian pesos as of another specified date. Unless otherwise noted in this annual report, all such peso amounts have been translated at the rate of Ps 3,432.50 per U.S.$1.00, which was the representative market rate published on December 31, 2020. The representative market rate is computed and certified by the Superintendency of Finance on a daily basis and represents the weighted average of the buy/sell foreign exchange rates negotiated on the previous day by certain financial institutions authorized to engage in foreign exchange transactions. Such conversion should not be construed as a representation that the peso amounts correspond to, or have been or could be converted into, U.S. dollars at that rate or any other rate. On April 8, 2021 the representative market rate was Ps 3,634.07 per U.S. $1.00.
In this annual report, unless otherwise indicated or the context otherwise requires, the terms:
|●||“BAC Credomatic” or “BAC” means BAC Credomatic Inc. and its consolidated subsidiaries;|
|●||“Banco AV Villas” means Banco Comercial AV Villas S.A. and its consolidated subsidiary;|
|●||“Banco de Bogotá” means Banco de Bogotá S.A. and its consolidated subsidiaries;|
|●||“Banco de Occidente” means Banco de Occidente S.A. and its consolidated subsidiaries;|
|●||“Banco Popular” means Banco Popular S.A. and its consolidated subsidiaries;|
|●||“banks” and “our banking subsidiaries” mean Banco de Bogotá S.A., Banco de Occidente S.A., Banco Popular S.A. and Banco Comercial AV Villas S.A., and their respective consolidated subsidiaries;|
|●||“Corficolombiana” means Corporación Financiera Colombiana S.A. and its consolidated subsidiaries;|
|●||“Grupo Aval”, “we”, “us”, “our” and “our company” mean Grupo Aval Acciones y Valores S.A. and its consolidated subsidiaries;|
|●||“LB Panamá” means Leasing Bogotá S.A., Panamá and its consolidated subsidiaries;|
|●||“Multi Financial Group” or “MFG” means Multi Financial Group Inc. and its consolidated subsidiaries.|
|●||“Porvenir” means Sociedad Administradora de Fondos de Pensiones y Cesantías Porvenir S.A. and its consolidated subsidiary; and|
|●||“Superintendency of Finance” means the Colombian Superintendency of Finance (Superintendencia Financiera de Colombia), a supervisory authority ascribed to the Colombian Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público), or the “Ministry of Finance”, holding the inspection, supervision and control authority over the individuals or entities involved in financial activities, securities markets, insurance and any other operations related to the management, use or investment of resources collected from the public, as well as inspection and supervision authority over the holding companies of financial conglomerates in Colombia.|
In this annual report, references to “beneficial ownership” are calculated pursuant to the definition ascribed by the U.S. Securities and Exchange Commission, or the “SEC”, of beneficial ownership for foreign private issuers contained in Form 20-F. Form 20-F defines the term “beneficial owner” of securities as referring to any person who, even if not the record owner of the securities, has or shares the underlying benefits of ownership, including the power to direct the voting or the disposition of the securities or to receive the economic benefit of ownership of the securities. A person is also considered to be the “beneficial owner” of securities when such person has the right to acquire within 60 days pursuant to an option or other agreement. Beneficial owners include persons who hold their securities through one or more trustees, brokers, agents, legal representatives or other intermediaries, or through companies in which they have a “controlling interest”, which means the direct or indirect power to direct the management and policies of the entity.
We are a financial holding company and an issuer in Colombia of securities registered with the National Registry of Shares and Issuers (Registro Nacional de Emisores y Valores), and in this capacity, we are subject to inspection and surveillance by the Superintendency of Finance and required to comply with corporate governance and periodic reporting requirements to which all financial holdings and issuers are subject. We are not a financial institution in Colombia and we are not supervised or regulated as a financial institution. Since February 6, 2019, we are subject to the inspection and surveillance of the Superintendency of Finance as the financial holding company of the Aval Financial Conglomerate and we are required to comply with capital adequacy and additional regulations applicable to financial conglomerates. See “Item 4. Information on the Company—B. Business overview—Supervision and regulation”. All of our Colombian financial subsidiaries, including Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas, Corficolombiana, Porvenir, and their respective financial subsidiaries, are entities under the direct comprehensive supervision of, and subject to inspection and surveillance as financial institutions by, the Superintendency of Finance. In the case of LB Panamá’s financial subsidiaries, BAC and MFG, and their respective financial subsidiaries are subject to inspection and surveillance as financial institutions by the relevant regulatory authorities in each of the countries where BAC and MFG operate.
Our consolidated financial statements at December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019, and 2018 are included in this annual report and referred to as our audited consolidated financial statements. Our historical results are not necessarily indicative of results to be expected for future periods. We have prepared the audited consolidated financial statements included herein in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”).
Grupo Aval adopted IFRS 16 using the modified retrospective approach with the cumulative effect of initial adoption being recognized on January 1, 2019. Grupo Aval has not restated comparatives for prior reporting periods, 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 Consolidated Statement of Financial Position on January 1, 2019. For more information on the effects of the adoption on Grupo Aval, please refer to “Note 2.4 Changes in Accounting Policies—A. IFRS 16 Leases” of our audited consolidated financial statements.
We and our Colombian subsidiaries prepare consolidated financial statements for publication in Colombia under IFRS as adopted by the Superintendency of Finance in accordance with Decree 1851 of 2013 and 3023 of 2013, as modified by Decrees 2420 and 2496 of 2015, 2131 of 2016, 2170 of 2017, 2483 of 2018 and 2270 of 2019. Prior to January 1, 2018, this accounting standard differed from IFRS as issued by the IASB in certain material respects. Starting on January 1, 2018, Grupo Aval’s consolidated financial statements for publication in Colombia do not differ from the consolidated financial statements prepared under IFRS as issued by the IASB.
Separate financial statements for us and our financial subsidiaries in Colombia are based on IFRS issued by the IASB in Spanish as of December 31, 2018 (which we refer to as “Colombian IFRS”), and pursuant to certain requirements under Colombian regulations. As a result, rules subsequently issued by the IASB are not applicable under Colombian IFRS. Our separate financial statements for local purposes, differ from IFRS as issued by the IASB in the following principal aspects:
|●||Loss allowances are calculated based on specific rules of the Financial and Accounting Basic Circular (Circular Básica Contable y Financiera) issued by the Superintendency of Finance (which is applied in the local separate financial statements), whereas under IFRS, loss allowances are calculated according to the criteria set forth in IFRS 9 beginning on January 1, 2018.|
|●||Financial instruments under Colombian IFRS are classified and measured under specific rules of the Financial and Accounting Basic Circular, whereas under IFRS, financial instruments are classified and measured according to the criteria set forth in IFRS 9 beginning on January 1, 2018 (with the exception of hedge accounting which is still treated under guidelines set forth in IAS 39).|
Ratios and Measures of Financial Performance
We have included in this annual report ratios and measures of financial performance such as return on average assets, or “ROAA”, and return on average equity, or “ROAE”. These measures should not be construed as an alternative to IFRS measures and should not be compared to similarly titled measures reported by other companies, which may evaluate such measures differently from how we do. For ratios and measures of financial performance, see “Item 3. Key Information—A. Selected financial data”.
Market share and other information
We obtained the market and competitive position data, including market forecasts, used throughout this annual report from market research, publicly available information and industry publications. We have presented this data on the basis of information from third-party sources that we believe are reliable, including, among others, the International Monetary Fund, or “IMF”, the Superintendency of Finance, the Colombian Banking Association (Asociación Bancaria y de Entidades Financieras de Colombia) or “Asobancaria”, the Colombian Stock Exchange, the Colombian National Bureau of Statistics (Departamento Administrativo Nacional de Estadística), or “DANE”, the World
Bank, the Superintendency of Banks in Panama (Superintendencia de Bancos de Panamá), the Superintendency of Financial Institutions in Costa Rica (Superintendencia General de Entidades Financieras), the Superintendency of Banks in Guatemala (Superintendencia de Bancos de Guatemala), the National Commission of Banks and Insurances in Honduras (Comisión Nacional de Bancos y Seguros), the Financial System Superintendency in El Salvador (Superintendencia del Sistema Financiero) and the Superintendency of Banks and Other Financial Institutions in Nicaragua (Superintendencia de Bancos y Otras Instituciones Financieras). Industry and Government publications, including those referenced herein, generally state that the information presented has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Unless otherwise indicated, gross domestic product, or “GDP”, figures with respect to Colombia in this annual report are based on the 2015 base year data series published by DANE. Although we have no reason to believe that any of this information or these reports is inaccurate in any material respect, we have not independently verified the competitive position, market share, market size, market growth or other data provided by third parties or by industry or other publications. We do not make any representation or warranty as to the accuracy of such information.
Our consolidated statement of financial position and statement of income reflect information prepared under IFRS. Comparative disclosures of financial and operating performance of our Colombian banking subsidiaries, Corficolombiana, Porvenir and that of our competitors are based on separate information prepared under Colombian IFRS as reported to the Superintendency of Finance. These separate financial statements under Colombian IFRS do not reflect the consolidation of subsidiaries such as Corficolombiana, Porvenir or LB Panamá, are not intended to reflect the consolidated financial results of Grupo Aval and are not necessarily indicative of the results for any other future period. Except where otherwise indicated, comparative disclosures of our financial and operating performance pertaining to our operations in BAC and MFG are presented in accordance with IFRS and based on publicly available information filed with regulators. We include certain ratios in this annual report to compare us to our principal competitors, such as ROAA, ROAE, operational efficiency and asset quality indicators, among others.
“Grupo Aval aggregate” data reflects the sum of the separate financial statements of our four Colombian banking subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas) as reported to the Superintendency of Finance under Colombian IFRS. When referring to comparative figures to our peers in Central America on a national basis (i) data for Panama reflects the sum of the separate financial statements of BAC and MFG and (ii) data for other countries refers to the separate financial statements for BAC in each country where it operates, in each case as reported with the applicable local regulators.
Throughout this document, unless otherwise noted, references to average consolidated statement of financial position for 2020, 2019 and 2018 have been calculated as follows: the average of balances at December 31, at September 30, at June 30, and at March 31 of the corresponding year, and the balance at December 31, of the previous year.
Certain figures included in this annual report have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be an arithmetic summation of the figures that precede them. As such, percentage calculations presented may differ from those of rounded numbers. References to “billions” in this annual report are to 1,000,000,000s and to “trillions” are to 1,000,000,000,000s.
“Non-controlling interest” refers to the participation of minority shareholders in a subsidiary’s equity or net income, as applicable.
Some of the matters discussed in this annual report concerning our operations and financial performance include estimates and forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 “Reform Act” including such statements contained in “Item 3. Key Information—D. Risk factors”, “Item 4. Information on the Company—B. Business overview” and “Item 5. Operating and Financial Review and Prospects”.
Our estimates and forward-looking statements are mainly based on our current expectations and estimates on projections of future events and trends, which affect or may affect our businesses and results of operations. Although we believe that these estimates and forward-looking statements are based upon reasonable assumptions, they are subject to several risks and uncertainties and are made in light of information currently available to us. Our estimates and forward-looking statements may be influenced by the following factors, among others:
|●||changes in Colombian, Central American, regional and international business and economic, political or other conditions;|
|●||developments affecting Colombian, Central American and international capital and financial markets;|
|●||Government regulation and tax matters and developments affecting our company and industry;|
|●||declines in the oil and affiliated services sector in the Colombian and global economies;|
|●||increases in defaults by our customers;|
|●||increases in goodwill impairment losses, or other impairments;|
|●||decreases in deposits, customer loss or revenue loss;|
|●||increases in allowances for contingent liabilities;|
|●||our ability to sustain or improve our financial performance;|
|●||increases in inflation rates, particularly in Colombia and in jurisdictions in which we operate in Central America;|
|●||the level of penetration of financial products and credit in Colombia and Central America;|
|●||changes in interest rates which may, among other effects, adversely affect margins and the valuation of our treasury portfolio;|
|●||decreases in the spread between investment yields and implied interest rates in annuities;|
|●||movements in exchange rates;|
|●||competition in the banking and financial services, credit card services, insurance, asset management, pension fund administration and related industries;|
|●||adequacy of risk management procedures and credit, market and other risks of lending and investment activities;|
|●||decreases in the level of capitalization of our subsidiaries;|
|●||changes in market values of Colombian and Central American securities, particularly Colombian Government securities;|
|●||adverse legal or regulatory disputes or proceedings;|
|●||successful integration and future performance of acquired businesses or assets;|
|●||natural disasters, public health crises or internal security issues affecting countries where we operate;|
|●||loss of any key member of our senior management; and|
|●||other risk factors as set forth under “Item 3. Key Information—D. Risk factors”.|
The words “believe”, “may”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect”, “should”, “could”, “would”, “plan”, “predict”, “potential” and similar words are intended to identify estimates and forward-looking statements. All statements addressing our future operating performance, and statements addressing events and developments that we expect or anticipate will occur in the future, are forward-looking statements within the meaning of the Reform Act. Estimates and forward-looking statements are intended to be valid only at the date they were made, and we undertake no obligation to update or to review any estimate and/or forward-looking statement because of new information, future events or other factors. Estimates and forward-looking statements involve risks and uncertainties and are not guarantees of future performance. Our future results may differ materially from those expressed in these estimates and forward-looking statements. In light of the risks and uncertainties described above, the estimates and forward-looking statements discussed in this annual report might not occur and our future results and our performance may differ materially from those expressed in these forward-looking statements due to the factors mentioned above, among others. Because of these uncertainties, you should not make any investment decision based on these estimates and forward-looking statements.
These cautionary statements should be considered in connection with any written or oral forward-looking statements that we may issue in the future.
The following financial data of Grupo Aval at December 31, 2020 and 2019 and for the years ended December 31, 2020, 2019 and 2018 have been derived from our audited consolidated financial statements prepared in accordance with IFRS, included in this report. Our historical results are not necessarily indicative of results to be expected for future periods.
This financial data should be read in conjunction with our audited consolidated financial statements and the related notes, “Presentation of financial and other information” and “Item 5. Operating and Financial Review and Prospects” included in this annual report.
Statement of income data
(in Ps billions, except share and per share data)
Total interest income
Total interest expense
Net interest income
Impairment loss on loans and other accounts receivable
Impairment (loss) recovery on other financial assets
Recovery of charged-off financial assets
Net impairment loss on financial assets
Net interest income, after impairment losses
Net income from commissions and fees
Gross profit from sales of goods and services
Net trading income
Net income from other financial instruments mandatorily at fair value through profit or loss
Income before tax expense
Net income for the year
Net income for the year attributable to:
Owners of the parent
Earnings per 1,000 shares (basic and diluted earnings):
Common shares (in pesos)
Earnings per 1,000 shares (basic and diluted earnings):
Preferred shares (in pesos)
Dividends per 1,000 shares(1):
Common and preferred shares (in pesos)
Weighted average number of shares:
Outstanding common shares in thousands
Outstanding preferred shares in thousands
Outstanding common and preferred shares in thousands
Statement of financial position data
(in Ps billions)
Cash and cash equivalents
Hedging derivative assets
Total loans, net
Other accounts receivables, net
Non-current assets held for sale
Investments in associates and joint ventures
Concession arrangement rights
Other intangible assets
Income tax assets
Hedging derivatives liabilities
Interbank borrowings and overnight funds
Borrowings from banks and others
Borrowings from development entities
Income tax liabilities
Attributable to the owners of the parent
Subscribed and paid-in capital
Additional paid-in capital
Other comprehensive income
Equity attributable to owners of the parent
Total liabilities and equity
Other financial and operating data
At and for the year ended December 31,
(in percentages, unless otherwise
Net interest margin(1)
Cost to income
Cost to assets
Period-end equity as a percentage of period-end total assets
Tangible equity ratio(5)
Credit quality data:
Cost of risk: Impairment loss on loans and other accounts receivable / average gross loans(6)
Cost of risk, net: Impairment loss on loans and other accounts receivable, net / average gross loans(6)(7)
Charge-offs as a percentage of average gross loans(6)
Loans past due more than 30 days / gross loans(6)
Loans past due more than 90 days / gross loans(6)
Loans classified as Stage 2 / gross loans(6)
Loans classified as Stage 3 / gross loans(6)
Loans classified as Stage 2 and Stage 3 / gross loans(6)
Loss allowance as a percentage of loans past due more than 30 days
Loss allowance as a percentage of loans past due more than 90 days
Loss allowance for Stage 2 loans as a percentage of Stage 2 loans(6)
Loss allowance for Stage 3 loans as a percentage of Stage 3 loans(6)
Loss allowance for Stage 2 and Stage 3 loans as a percentage of Stage 2 and Stage 3 loans(6)
Loss allowance as a percentage of gross loans(6)
Operational data (in units):
Number of customers of the banks(8)
Number of employees(9)
Number of branches(10)
Number of ATMs(10)
|(1)||Net interest margin is calculated as net interest income divided by total average interest-earning assets. Average interest-earning assets for 2020, 2019 and 2018 are calculated as the sum of interest-earning assets at each quarter-end during the applicable year and the prior year end divided by five.|
|(2)||For the years ended December 31, 2020, 2019 and 2018, ROAA is calculated as net income divided by average assets. Average assets for 2020, 2019 and 2018 are calculated as the sum of assets at each quarter-end during the applicable year and the prior year end divided by five. See “Item 4. Information on the company—B. Business overview—Selected statistical data”.|
|(3)||For the years ended December 31, 2020, 2019 and 2018, ROAE is calculated as net income attributable to owners of the parent divided by average equity attributable to owners of the parent. Average equity attributable to owners of the parent for 2020, 2019 and 2018 is calculated as the sum of equity attributable to owners of the parent at each quarter-end during the applicable year end and the prior year end divided by five. See “Item 4. Information on the company—B. Business overview—Selected statistical data”.|
|(4)||Our cost to income ratio is calculated as Other Expenses (see Note 30 of our audited consolidated financial statements), divided by total income before net impairment losses on financial assets (defined as the sum of net interest income, net income from commissions and fees, gross profit (loss) from sales of goods and services, net trading income, net income from other financial instruments mandatorily at fair value through profit or loss “FVTPL” and other income). Our cost to assets ratio is calculated as Other expenses divided by average assets, as defined under ROAA.|
|(5)||Tangible equity ratio is calculated as total equity minus intangible assets (calculated as goodwill plus other intangible assets, excluding those related to concession arrangements rights, Ps 9,187.6 billion in 2020, Ps 7,521.5 billion in 2019 and Ps 5,514.5 billion in 2018) divided by total assets minus intangible assets (as defined before). See “Item 3. Key Information—A. Selected financial data— Ratios and Measures of Financial Performance”.|
|(6)||Gross loans exclude Interbank and overnight funds (Ps 4,693.7 billion in 2020, Ps 2,719.0 billion in 2019 and Ps 7,635.2 billion in 2018) as these are short-term liquidity operations generally not subject to deterioration. Total gross loan portfolio includes Interbank and overnight funds. Throughout this document charge-offs and write-offs refer to the same concept.|
|(7)||Impairment (loss) on loans and other accounts receivable, net refers to Impairment (loss) on loans and other accounts receivable minus Recovery of charged-off financial assets.|
|(8)||Reflects aggregated customers of our banking subsidiaries. Customers of more than one of our Colombian banking subsidiaries, BAC and MFG (for 2020 only) are counted separately for each banking subsidiary.|
|(9)||Number of employees is defined as the sum of direct, temporary and outsourced personnel in financial entities (68,774 in 2020, 71,269 in 2019 and 71,851 in 2018), call-centers (8,813 in 2020, 8,538 in 2019 and 8,081 in 2018) and employees of non-financial entities of Corficolombiana (27,275 in 2020, 31,385 in 2019 and 11,259 in 2018). Employees in financial entities include 1,222 employees of MFG (for 2020 only).|
|(10)||Reflects aggregated number of full-service branches or ATMs of our Colombian banking subsidiaries, BAC and MFG (for 2020 only), as applicable, located throughout Colombia and Central America.|
Ratios and Measures of Financial Performance
The tables in this section, and elsewhere in this annual report, provide the calculation of certain ratios and measures of financial performance, which are used by our management to analyze the evolution and results of our company. Some of the ratios and measures of financial performance presented by us are either non-IFRS or use non-IFRS inputs. This non-IFRS information should not be construed as an alternative to IFRS measures. The ratios and measures of financial performance as determined and measured by us should not be compared to similarly titled measures reported by other companies as other companies may calculate and report such measures differently.
ROAA and ROAE
ROAA, which is calculated as net income divided by average assets, provides a measure of return on assets. ROAE, which is calculated as net income attributable to owners of the parent, divided by average equity attributable to owners of the parent, provides a measure of the total return generated from our company and our subsidiaries for shareholders. Net income attributable to non-controlling interest divided by net income, provides an indication of non-controlling interest ownership of Grupo Aval’s consolidated subsidiaries net income; where a higher ratio typically implies that higher net income was generated in subsidiaries in which Grupo Aval has lower ownerships and vice versa.
The following table sets forth ROAA, ROAE and Net income attributable to non-controlling interest divided by net income for Grupo Aval for the indicated years.
Year ended December 31,
(in Ps billions, except percentages)
Grupo Aval (consolidated):
Average equity attributable to owners of the parent(2)
Net income attributable to owners of the parent
Net income attributable to non-controlling interest
Net income attributable to non-controlling interest divided by net income
|(1)||For methodology used to calculate Average assets and ROAA, see note (2) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data”.|
|(2)||For methodology used to calculate Average equity attributable to owners of the parent and ROAE, see note (3) to the table under “Item 3. Key Information—A. Selected financial data—Other financial and operating data”.|
Our business, financial condition and results of operations could be materially and adversely affected if any of the risks described below occur. In such an event, the market price of our preferred shares or our American Depositary Shares, or ADSs, could decline, and you could lose all or part of your investment. We may face additional risks and uncertainties that are not presently known to us, or that we currently deem immaterial, which may also impair our business.
The following summarizes some, but not all, of the risks provided below. Please carefully consider all of the information discussed in this Item 3.D. “Risk Factors” in this annual report for a more thorough description of these and other risks:
|●||Risks relating to Colombia and other countries in which we operate:|
|o||we are exposed to adverse economic and political conditions in Colombia and other countries in which we operate, including variations in the exchange rates or downgrades in credit ratings of sovereign debt securities;|
|o||we are exposed to the vulnerability to external shocks of the Colombian and Central American economies;|
|o||we are exposed to internal security issues that have had or could have a negative effect on the Colombian economy;|
|o||we are exposed to political and economic instability in the region;|
|o||we are exposed to changes in Government policies and actions, as well as judicial decisions in Colombia and other countries in which we operate that could significantly affect the local economy;|
|o||we are exposed to violations of anti-corruption laws and other laws in the jurisdictions in which we operate;|
|o||we are exposed to risks related to our participation in government enforcement actions and/or ongoing governmental investigations;|
|o||we are exposed to changes in tax regulations or the interpretation thereof that could result in new or higher taxes as well as Colombian tax haven regulations;|
|o||we are exposed to natural disasters, acts of war or terrorism, rioting or other external events;|
|o||we are exposed to public health threats such as the coronavirus outbreak and other pandemic diseases; and|
|o||we are exposed to risks related to global climate change and environmental requirements;|
|●||Risks relating to our businesses and industry|
|o||Risks relating to our banking business|
|◾||we are exposed to a deterioration in asset quality, including the loan portfolios of our banking subsidiaries;|
|◾||we are exposed to the inability of our banking subsidiaries to realize on collateral or guarantees of secured loans;|
|◾||we are exposed to limitations on the ability of our banking subsidiaries to collect on monetary obligations and enforce rights against collateral or under guarantees imposed by Colombian and Central American insolvency laws;|
|◾||we are exposed to failures of our risk management processes, including credit and market risk;|
|◾||we are exposed to declines in the value of our banks’ sovereign debt portfolios;|
|◾||we are exposed to counterparty risk;|
|◾||we are exposed to market and operational risks associated with derivatives transactions;|
|◾||we are exposed to liquidity risk;|
|◾||we are exposed to defaults by one or more of our largest borrowers;|
|◾||we are exposed to downgrades in our long-term credit ratings or in the credit ratings of our banking subsidiaries;|
|◾||we are exposed to prepayment risk;|
|◾||we are exposed to high competition in the credit card industry;|
|◾||we are exposed to changes in banking and financial services laws and regulations in Colombia and the other countries in which we operate;|
|◾||we are exposed to changes in accounting standards;|
|◾||we are exposed to regulatory actions that may result in fines, penalties or restrictions;|
|◾||we are exposed to legal and other challenges to maximize revenue from credit card fees and other fees from customer; and|
|◾||we are exposed to the failure to protect personal information.|
|o||Risks relating to our merchant banking business|
|◾||we are exposed to difficult market conditions that could affect Corficolombiana;|
|◾||we are exposed to Corficolombiana’s inability to realize profits from illiquid assets, which represent a significant part of its investments;|
|◾||we are exposed to risks derived from Corficolombiana holding minority interest in other companies;|
|◾||we are exposed to the concentration of Corficolombiana’s investments in five industries; and|
|◾||we are exposed to a variety of other issues outside of our control.|
|o||Risks relating our pension and severance fund management business|
|◾||we are exposed to risks derived from the highly regulated market in which Porvenir operates; and|
|◾||we are exposed to risks derived from the management of a significant amount of debt securities in pension and severance funds issued or guaranteed by the Colombian Government.|
|o||Other risks relating to our businesses|
|◾||we are exposed to fluctuations in interest rates and other market risks;|
|◾||we are exposed to our inability to effectively manage risks associated with the replacement of benchmark indices;|
|◾||we are exposed to fluctuations between the value of the Colombian peso or other local currencies where we operate, and the U.S. dollar;|
|◾||we are exposed trading risks with respect to our trading activities;|
|◾||we are exposed to limitations on interest rates;|
|◾||we are exposed to limitations on the ability of residents to obtain loans denominated in foreign currency;|
|◾||we are exposed to constitutional actions, class actions and other legal actions involving claims for significant monetary awards against financial institutions;|
|◾||we are exposed to risks derived from acquisitions and strategic partnerships not performing in accordance with expectations, failing to receive required regulatory approvals or disrupting our operations;|
|◾||we are exposed to risks derived from our inability to manage our growth successfully;|
|◾||we are exposed to operational risks;|
|◾||we are exposed to risks derived from the failure of our information systems;|
|◾||we are exposed to cybersecurity threats;|
|◾||we are exposed to risks derived from our inability to detect money laundering and other illegal or improper activities fully or on a timely basis;|
|◾||we are exposed to competition and consolidation in the Colombian and Central American banking and financial industry;|
|◾||we are exposed to risks derived from our dependency on our senior management and Board of Directors;|
|◾||we are exposed to reputational risk; and|
|◾||we are exposed to risks derived from conflicting interests between our controlling shareholder and other common, preferred shareholders and ADS holders.|
|●||Risks relating to our Central American operations|
|o||we are exposed to risks derived from our inability to address the challenges and risks presented by our operations in countries outside Colombia;|
|o||we are exposed to our dependency on BAC’s and MFG’s current senior management;|
|o||we are exposed to changes in credit card regulations; and|
|o||we are exposed to compliance risks in connection with a multi-jurisdictional regulatory regime.|
|●||Risks relating to our preferred shares and ADSs|
|o||we are exposed to exchange rate volatility;|
|o||we are exposed to restrictions on purchases of our preferred shares;|
|o||we are exposed to risks derived from the relative illiquidity of the Colombian securities markets;|
|o||we are exposed to risks derived from our inability to continue to develop or maintain an active market for our preferred shares and ADSs;|
|o||we are subject to different corporate rules and regulations than those available in other jurisdictions which may make it more difficult to holders of ADSs and underlying preferred shares to protect their interests;|
|o||we are subject to limitations imposed by Colombian law on our ability to pay dividends on the ADSs or underlying preferred shares;|
|o||holders of ADSs may encounter difficulties in the exercise of dividend rights and in the limited voting rights of our preferred shares;|
|o||our status as a foreign private issuer allows us to follow alternate standards to the corporate governance standards of the NYSE;|
|o||preemptive rights may not be available to holders of preferred shares or ADSs;|
|o||our ability to make payments on the ADSs may be adversely affected if we become unable to convert Colombian pesos to U.S. dollars or to transfer U.S. dollars abroad;|
|o||we are exposed to price variations as a result of being traded on more than one market;|
|o||if holders of ADSs surrender their ADSs and withdraw preferred shares, they may face adverse Colombian tax consequences;|
|o||banking regulations, accounting standards and corporate disclosure applicable to us differ from those in the United States and other countries;|
|o||judgments of Colombian courts with respect to our preferred shares will be payable only in pesos; and|
|o||U.S. investors in our preferred shares or the ADSs may find it difficult or impossible to enforce service of process and enforcement of judgments against us and our officers and directors.|
Risks relating to Colombia and other countries in which we operate
Adverse economic and political conditions in Colombia and other countries in which we operate, including variations in the exchange rates or downgrades in credit ratings of sovereign debt securities, may have an adverse effect on our results of operations and financial condition.
Our principal subsidiaries in Colombia are financial institutions (four commercial banks, a pension and severance fund administrator and a merchant bank), and the majority of our operations, properties and customers are located in Colombia. As a consequence, our results of operations and financial condition are materially affected by economic and political conditions in Colombia.
Colombia is subject to economic, political and other uncertainties, including changes in monetary, exchange control and trade policies that could affect the overall business environment in Colombia, which would, in turn, affect our results of operations and financial condition. For example, the Central Bank of Colombia (the “Colombian Central Bank” or “Central Bank”), could sharply raise or lower interest rates, which could negatively affect our net interest income and asset quality, and also restrict our growth. Variations in exchange rates could also negatively affect the foreign currency positions of our borrowers or our or our subsidiaries’ solvency, liquidity or profitability. Any of these events could have an adverse effect on our results of operations and financial condition.
Decreases in the growth rate of the Colombian economy, periods of negative growth, material increases in inflation or interest rates, or high fluctuations in the exchange rate could result in lower demand for, or affect the cost of risk and the pricing of our services and products. Due to the fact that a large percentage of the costs and expenses of our subsidiaries is fixed, we may not be able to reduce costs and expenses upon the occurrence of any of these events, in which case our profitability could be affected.
In the case of our pension and severance fund management business, economic conditions may affect the businesses and financial capacity of employers, which may result in a reduction in employee-contributor head counts or decrease the ability of employers to create new jobs or increase employee incomes and could reduce returns on “stabilization reserves” and/or performance-based fees.
Our results of operations and financial condition also depend on economic, political and social conditions in other countries where our non-Colombian subsidiaries operate, primarily in Central America. The political, economic and social environments in such countries are affected by many different factors, including significant governmental influence over local economies, substantial fluctuations in economic growth, high levels of inflation, exchange rate movements, exchange controls or restrictions on expatriation of earnings, high domestic interest rates, civil strife, political instability, drug trafficking and other forms of organized crime, wage and price controls, changes in tax policies, imposition of trade barriers, changes in the prices of commodities and unexpected changes in regulation. The results of operations and financial condition of our Central American operations could be affected by changes in economic and other policies of each country’s government, which have exercised and continue to exercise substantial influence over many aspects of the private sector, and by other social and political developments in each country.
Adverse economic, political and social developments, including allegations of corruption against the Colombian Government and governments of other countries in which we operate in Central America, may adversely affect demand for banking services and create uncertainty regarding our operating environment, which could have a material adverse effect on our subsidiaries and, consequently, on our company.
The Colombian and Central American economies remain vulnerable to external shocks.
A significant decline in economic growth of any of Colombia’s or Central America’s major trading partners could have a material adverse effect on the trade balance and economic growth of the countries where we operate. In addition, a “contagion” effect, where an entire region or asset class becomes less attractive to, or subject to outflows of funds by, international investors could negatively affect Colombia or Central American countries in which we operate. Lower than expected economic growth may result in asset quality deterioration and could negatively affect our business.
Pension funds, such as those managed by Porvenir, invest globally and thus are affected by regional and global economic factors. Lower economic growth of Colombia’s major trading partners or a contagion effect in the region or globally may lead to lower pension funds returns, which may in turn result in decreases in assets under management and affect our business, results of operations or financial condition.
Fluctuations in commodity prices and volatility in exchange rates in the past have led to a deceleration in growth. In particular, the oil industry remains an important determinant of Colombia’s economic growth. Substantial or extended declines in international oil prices or national oil production may have an adverse effect on the overall performance of the Colombian economy and could have an adverse impact on the results of operations and financial condition of oil industry companies, which could have an adverse impact on our loans to oil industry companies. Our banking subsidiaries do not maintain a significant overall exposure to oil industry clients and have not been materially impacted by the decrease in international oil prices, however, continuing falling market prices, pose significant challenges to Colombia’s near-term outlook and may impair the ability of some of the clients of our banking subsidiaries to repay their debt obligations. Although the growth of the Colombian economy is expected to be steady in the future, there is no guarantee that the past decade’s average growth will be maintained.
A low rate of growth of the Colombian economy, a slowdown in the growth of customer demand, an increase in market competition, or changes in governmental regulations, could adversely affect the rate of growth of our loan portfolio and our cost of risk and, accordingly, increase our required loss allowances for loans. All of these conditions could lead to a general decrease in demand for borrowings. In addition, the effect on consumer confidence of any actual or perceived deterioration of household incomes in the Colombian or Central American economies may have a material adverse effect on our results of operations and financial condition.
Colombia has experienced and continues to experience internal security issues that have had or could have a negative effect on the Colombian economy.
Colombia has experienced internal security issues, primarily due to the activities of paramilitary and guerrilla groups, such as the National Liberation Army (Ejército de Liberación Nacional), or “ELN”, urban militias, former members of the Revolutionary Armed Forces of Colombia (Fuerzas Armadas Revolucionarias de Colombia), or “FARC”, and of drug cartels. These groups have exerted influence over the local population and funded their activities by protecting, and rendering services to drug traffickers. Any breakdown in peace, renewed or continuing drug-related crime and guerilla and paramilitary activities may have a negative impact on the Colombian economy in the future. Our business or financial condition could be adversely affected by rapidly changing economic or social conditions, including any peace negotiation with guerilla, paramilitary or other group, which may result in legislation that increases our tax burden, or that of other Colombian companies, which could, in turn, impact the overall economy.
Political and economic instability in the region may affect the Colombian economy and, consequently, our results of operations and financial condition.
Some of Colombia’s neighboring countries, particularly Venezuela, have experienced and continue to experience periods of political and economic instability. A significant number of Venezuelans have emigrated amid food and medicine shortages and profound political divisions in their country and a relevant portion of those migrants have opted to live in Colombia, and many have arrived with only what they could carry. Providing migrants with access to healthcare, utilities and education may have a negative impact on Colombia’s economy if the Government is not able to respond adequately to legalize migrants, generate programs to create jobs and help them find formal employment, and increase tax revenue and consumption.
Moreover, diplomatic relations with neighboring countries have from time to time been tense and affected by events surrounding the Colombian military forces’ confrontations with guerilla groups, particularly on Colombia’s borders with each of Venezuela and Ecuador.
Moreover, diplomatic relations between Colombia and Nicaragua involving disputed waters could result in the Nicaraguan Government taking measures, or a reaction among the Nicaraguan public, which would be detrimental to Colombian-owned interests in that country, including those owned by us through BAC.
Further economic and political instability in Colombia’s neighboring countries or any future deterioration in relations with countries in the region may result in the closing of borders, the imposition of trade barriers and a breakdown of diplomatic ties, or a negative effect on Colombia’s trade balance, economy and general security situation, which may adversely affect our results of operations and financial condition.
Finally, political conditions such as changes in the United States policies related to immigration and remittances, could affect the countries in which we operate. Economic conditions in the United States and the region generally may be impacted by the United States-Mexico-Canada Agreement. This could have an indirect effect on the Colombian economy and the countries in which we operate.
Changes in Government policies and actions, as well as judicial decisions in Colombia and other countries in which we operate, could significantly affect the local economy and, as a result, our results of operations and financial condition.
Our results of operations and financial condition may be adversely affected by changes in Colombian and Central American governmental policies and actions, and judicial decisions, involving a broad range of matters, including interest rates, fees, exchange rates, exchange controls, inflation rates, taxation, banking and pension fund regulations and other political or economic developments affecting Colombia and other countries in which we operate.
Colombian and Central American governments have historically exercised substantial influence over their economies, and their policies are likely to continue to have a significant effect on companies, including us.
Moreover, regulatory uncertainty, public dialogue on reforms in Colombia and other countries where we operate, or the approval of reforms, may be disruptive to our business or the economy and may result in a material and adverse effect on our financial condition and results of operations.
We and our subsidiaries are subject to anti-corruption laws and other laws in the jurisdictions in which we operate and violation of these regulations could harm our business.
We and our subsidiaries are subject to numerous, and sometimes conflicting, legal regimes on matters as diverse as anti-corruption, taxation, internal and disclosure control obligations, securities and derivatives regulation, anti-competition regulations, data privacy and labor relations. Compliance with diverse legal requirements is costly, time-consuming and requires significant resources. Violations of one or more of these regulations in the conduct of our business or the business of our subsidiaries could result in significant fines, criminal sanctions against us or our officers, prohibitions on doing business and damage to our reputation. Violations of these laws or regulations in connection with the performance of our obligations to our customers, as well as in connection with the performance of our subsidiaries’ obligations, could also result in liability for significant monetary damages, fines or criminal prosecution, unfavorable publicity and other reputational damage, restrictions on our ability to process information and allegations by our customers that we have not performed our contractual obligations. Because of the varying degrees of development of the legal systems of the countries in which we operate, local laws might be insufficient to protect our rights due in part to a lack of multiple recourses and/or deficiencies in the access to justice.
In particular, practices in the local business community may not conform to international business standards and could violate anti-corruption laws or regulations, including the U.S. Foreign Corrupt Practices Act. Our employees, and joint venture partners, or other third parties with which we associate, could take actions that violate policies or procedures designed to promote legal and regulatory compliance or applicable anti-corruption laws or regulations. Violations of these laws or regulations by us or our subsidiaries, our employees or any of these third parties could subject us to criminal or civil enforcement actions (whether or not we participated or knew about the actions leading to the violations), including fines or penalties, disgorgement of profits and suspension or disqualification from work, including governmental contracting, any of which could materially adversely affect our business, including our results of operations and our reputation.
Grupo Aval and certain of its subsidiaries and officers are defendants in government enforcement actions and/or subject to ongoing governmental investigations relating to the Ruta del Sol Project Sector 2 that could cause us to incur penalties and other sanctions, impact our ability to conduct our business, harm our reputation and negatively impact our financial results.
Grupo Aval and certain of its subsidiaries and officers are defendants in government enforcement actions and/or subject to ongoing governmental investigations relating to the Ruta del Sol Project Sector 2 in Colombia and the United States. For further information about these proceedings and investigations, see “Item 8. Financial Information—A. Consolidated statements and other financial information—Legal proceedings”.
We and our subsidiaries are exposed to a variety of potential material negative consequences as a result of these proceedings and investigations, which could result in judgments, settlements, admissions of wrongdoing, criminal convictions, fines, penalties, injunctions, cease and desist orders, debarment or other relief and we and our subsidiaries could be exposed to other litigation as a result of these proceedings and investigations, including actions initiated by shareholders.
Such investigations and proceedings, which are the subject of extensive media coverage and political interest in Colombia, could also have significant collateral consequences for our company and our subsidiaries, including damage to reputation, loss of customers and business, the inability to offer certain products and services, disqualification or losing permission to operate certain businesses for a period, the dissemination of potentially damaging information that may come to light in the course of the investigations and proceedings and other direct and indirect adverse effects. Management will need to continue to direct substantial time and attention to resolving such matters, which could prevent them from focusing on our core businesses. We can provide no assurance that the outcome of any such investigations and proceedings will not be material to our business, financial position, results of operations or our financial position.
New or higher taxes resulting from changes in tax regulations or the interpretation thereof in Colombia and other countries in which we operate could adversely affect our results of operations and financial condition or generate burdens to our shareholders or lenders.
New tax laws and regulations, and uncertainties with respect to future tax policies, pose risks to us. In recent years, Colombian tax authorities have imposed additional taxes in a variety of areas, such as taxes on dividends, withholdings on debt service, taxes on financial transactions, to fund Colombia’s war against terrorism and taxes created in order to fund post-conflict programs related to the peace negotiations with guerrilla forces. The Colombian Government is also obliged by Law 1473 of 2011, also known as Law of Fiscal Rule, to significantly reduce its fiscal deficit and address issues regarding public policy, oil price volatility, migrations, public health events or other events that could require further tax reforms over the following years. However, on June 2020, the fiscal rule committee announced the suspension of the fiscal rule for 2020 and 2021 due to the economic effects caused by the COVID-19 pandemic in the country. This, in addition to an increase in fiscal deficit and pressure from rating agencies, could lead to higher taxation rates on our business and that of our borrowers. Changes in tax-related laws and regulations, and interpretations thereof, can impact tax burdens by increasing tax rates and fees, creating new taxes or withholdings, limiting tax deductions, and eliminating tax-based incentives and non-taxed income. In addition, tax authorities or courts may interpret tax regulations differently than we do, which could result in tax litigation and associated costs and penalties.
Between 2012 and 2019, the Colombian Congress passed five tax reforms submitted by the Colombian Government and, due to the economic impact of the COVID-19 pandemic, a new tax reform is expected to be filed before the Congress during the first half of 2021. The Colombian Government has announced that this reform will include a decrease in corporate income taxes and the removal or deferral of some special deductions and benefits. Additionally, the announced tax reform may include a value added tax on an extended base of goods, increase the population people subject to income tax and create a special tax applicable to high income retirement pensions and high income public employees. The final text of the tax reform is highly uncertain and its consequences cannot be predicted at this stage.
Colombian Government may implement new changes in the tax rules applicable to our securities, which could have a material adverse effect on our results of operations and financial condition or that may adversely affect our shareholders or holders of ADSs. ADSs do not have the same tax benefits as equity investments in Colombia. Although ADSs represent our preferred shares, they are subject to a different tax regulatory regime. Accordingly, the tax benefits applicable in Colombia to equity investments, in particular those relating to dividends and profits from sale, may not apply or apply differently in the case of our ADSs.
On December 27, 2019, Law 2010 also known as the Economic Growth Law, was enacted. Law 2010 of 2019, adopts standards for the promotion of economic growth, employment, investment, strengthening of public finances and the progressivity, equity and efficiency of the tax system, such as:
|(i)||the progressive reduction of the corporate income tax rate form 32% applicable for the year 2020 to 30% applicable as of the year 2022;|
|(ii)||in the case of financial institutions, a surtax on the corporate income tax rate of 4% for the year 2020 and of 3% for the years 2021 and 2022. This surcharge should apply to financial institutions that obtain a taxable income exceeding approximately Ps 4.3 billion; and|
|(iii)||an increase in the dividend tax on distributions made to foreign non-resident entities from 7.5% to 10%. Dividend tax for individuals is reduced from 15% to 10%.|
For further information, see “Item 10. Additional Information—E. Taxation”.
Colombian tax haven regulations could adversely affect our results of operations and financial condition.
Decree 1966 of 2014, as amended by National Decree 2095 of 2014, put into effect article 260-7 of Colombia’s Tax Code, which regulates applicable rules for tax havens. Accordingly, a number of jurisdictions, including countries in which our banking subsidiaries operate, were either declared tax havens for Colombian tax purposes or temporarily excluded from such list subject to the completion of tax information exchange treaties within a short timeframe.
Article 260-7 of the Colombian Tax Code was reformed by Law 1819 of 2016. This reform establishes a new legal framework and provides criteria pursuant to which certain jurisdictions may be classified as non-cooperative jurisdictions with low or no taxation or as jurisdictions with preferential tax regimes. This legal framework established a higher tax-withholding rate on Colombian source payments to those jurisdictions and entities considered part of such a jurisdiction.
As a result, some of our clients with financial products offered by our banking subsidiaries in such jurisdictions may experience, among other effects, an increase in their withholding tax rates, transfer pricing regulation, increased likelihood of being found in violation of tax regulations by the Colombian authorities and elevated information disclosure requirements which could have a negative impact on our business, financial condition and results of operations.
Natural disasters, acts of war or terrorism, rioting or other external events could disrupt our businesses and affect our results of operations and financial condition.
We are exposed to natural disasters, such as earthquakes, volcanic eruptions, tornadoes, tropical storms and hurricanes. Heavy rains or abnormally low rainfall in Colombia and other countries in which we operate, attributable in part to the La Niña and El Niño weather patterns, have resulted in severe flooding, mudslides and prolonged droughts in the past. These are recurring weather phenomena that may occur on an equal or greater scale in the future. In addition to severe weather and natural disasters, acts of war or terrorism, rioting and other adverse external events could have a significant impact on our ability to conduct business and may, among other things, affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans, impair the value of collateral of secured loans, cause significant property damage, cause us to incur additional expenses and/or result in loss of revenue. In the event of such circumstances, our disaster recovery plans may prove to be ineffective, which could have a material adverse effect on our ability to conduct our businesses, particularly if such an occurrence affects computer-based data processing, transmission, storage and retrieval systems or destroys customer or other data. In addition, if a significant number of our employees and senior managers were unavailable because of a natural disaster, our ability to conduct our businesses could be compromised. Natural disasters, acts of war or similar events could also result in substantial volatility in our results of operations for any fiscal quarter or year.
Our operations and results may be negatively impacted by public health threats such as the coronavirus outbreak or other pandemic diseases
Global and local health concerns, including the outbreak of pandemic or contagious disease, such as the recent coronavirus (COVID-19) outbreak, may disrupt economic activity and adversely affect us.
Since December 2019, COVID-19 began to spread in China and promptly expanded to Europe, the United States and more than 200 countries, including Colombia and other countries in which we operate. Such events are causing disruption of regional and global economic activity, which has affected and may continue to affect our operations, financial results and the quality of our loan portfolio due to long periods of quarantines, unemployment, reduced household and corporate income, laws or regulation that impair our ability to operate, charge fees or interests or collect debt service, aggregate demand and limitations in the production and commerce of goods and services. The extent to which COVID-19 might affect our future results will depend on highly uncertain and unpredictable developments, including information which may emerge concerning the severity of future COVID-19 waves or new strains, and the actions to contain it, among others.
To address the COVID-19 crisis and prevent its spread, the Colombian Government issued Decree 417 of 2020 by means of which the President of Colombia declared a State of Emergency for 30 calendar days. With the declaration of the State of Emergency the President was invested with the necessary powers to issue decrees with the force of law, in order to deal with the unforeseen circumstances generated by COVID-19.
Governments in the countries in which we operate have issued sanitary restrictions designed to reduce COVID-19 infections, such as preventive quarantines, suspension of on-site lectures, border restrictions, as well as the suspension of public events and the installment of mandatory social distancing regulations; with the exception of the Nicaraguan Government, which has not taken more strict precautions and instead maintains basic epidemiological surveillance and basic hygiene controls. In the case of Colombia, Costa Rica, Honduras, Panama and Guatemala, partial curfews have been established, to further restrict citizens’ exposure to the virus, along with public and private vehicle circulation restriction policies.
See “Item 4. Information on the Company—B. Business overview—Supervision and regulation”, “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Risk” for further information on credit risk management, relief measures available for customers, additional measures taken by Governments and central banks, and an overall analysis of the negative impacts of coronavirus on our business, financial condition and results of operations including the line items referenced above.
Risks related to global climate change and environmental requirements
Climate change initiatives, laws or regulations, seeking to protect and