Four is company at Grupo Aval

Banking consolidation is often cited as a challenge in Latin America. In the past, banking crises have led to acquisitive growth opportunities for those banks that have been relatively less stricken, while customers have sought out the strongest banks for fear of the smaller ones failing. These factors have been supplemented by others, such as costs of regulation and technology for smaller entities, to drive an increase in the market share of the leading players.

This has led to some very large banks, such as Itaú in Brazil and BCP in Peru. But the model is slightly different in Colombia.

Consolidation of market share is evident here, too, but less conspicuously. A quick look at the market reveals banking plurality, but this is something of an illusion. Grupo Aval has majority holdings in four of Colombia’s banks. Banco de Bogotá (68.7%), Occidente (72.3%), Popular (93.7%) and AV Villas (79.9%) – quite apart from its 100% holding of BAC Credomatic, the leading central American bank.

According to Maria Francisca Barriga, financial analyst at Davivienda Corredores, the bank is the leader in the consumer and commercial portfolios. As of February, Grupo Aval had 26.5% of net loans in the Colombian financial system ($33.1 billion) and 27.6% of deposits ($31.5 billion). It had 26.6% of all assets ($48.7 billion), while its $1.7 billion of net income for 2016 was 44.6% of that for the whole Colombian financial system.

There are historical reasons for the multi-brand strategy – they had all been standalone banks and to this day each bank has a different sector and strategy. For example, Banco de Bogotá, the third-largest bank in Colombia, is a commercial bank (76% of its loan portfolio), whereas Banco Popular operates mainly in consumer and public-sector business and is heavily concentrated on payroll loans. AV Villas is the smallest of Grupo Aval’s banks and is mostly focused on mortgages. However, each bank is evolving its strategy. AV Villas has broadened into commercial and consumer loans. Banco de Bogotá’s main strategic aim is to win market share in mortgages.

As each of the banks broadens its business mix, analysts increasingly question the utility of operating independent banks, with the replication of senior management and other costs. Would it not make sense to pull down the internal walls within Aval?

“It is important to remember that we currently operate under four banks that are the result of multiple mergers,” says Luis Carlos Sarmiento Gutiérrez, who has been president of Grupo Aval Acciones Y Valores since 2000. “We still operate them separately because from a strategic standpoint it works as they focus on different segments with distinct products.”

However, Sarmiento says that the bank is still chasing operational efficiencies and he can see a point where the value generated by operating multiple brands is exhausted. “We have been working behind the scenes to have all the banks running in the same core system and with the same ERP [enterprise resource planning]. We have made advances, but it is a multi-year project. We are not in a rush to merge, and if the decision of merging is taken, it will be done after we have completely minimized the potential risk of value destruction.”

This cautious approach sometimes frustrates analysts who argue that it will be hard to reduce the cost-to-income ratio to the industry standard by back-office simplification. Frederic de Mariz, banking analyst at UBS, initiated coverage on Grupo Aval in January this year with a buy rating, but highlighted that the group’s “efficiency is worse than Colombian peers”, saying he does “not expect Aval to merge its four banking subsidiaries into one [and that] we expect the cost-to-income ratio to remain around 51% in the coming years [versus 44% for Davivienda and 47% for CIB].”

“Our cost-to-income ratio is actually well below 51% and currently stands between 47% and 48%,” responds Sarmiento. “So I guess we have proved analysts wrong on that. But to be fair, there will be cost synergies that we will not be able to achieve with our current structure. In the meantime, however, we will continue to work on implementing strategies to control cost increases while we continue to expand our business. We expect to be below 45% on a cost-to-income basis in two to three years.”

Sarmiento is more in agreement with the analysts who point out that it will be tough to maintain its current level of profitability – the last few years have seen returns on equity of around 15%.

“This is a tough challenge as capital regulation constantly requires financial institutions to retain more capital,” says Sarmiento. “Having said this, we will have a boost in returns thanks to the fiscal reform, which will help us improve, or in the worst scenario, maintain our returns. On a more strategic discussion, the ability of banks to remain profitable will depend on how fast are they able to migrate to cost-efficient channels and how good they are at defending their products versus new ways of doing banking.”

‘Cost-efficient channels’ and ‘new ways of doing banking’ mean, of course, digital banking. And Grupo Aval’s banks are no different to the rest of those in Latin America. The large footprint the bank has (with 1,543 the Group comfortably has the most branches, compared with 817 at Bancolombia and 592 for Davivienda) is both an opportunity and a challenge.

Sarmiento says that digital investment allows the group to completely “re-imagine our processes and operations” to reduce operational costs. “In short, digital should help us to serve our clients more efficiently and, more importantly, the way they want. There’s no trade-off between customer experience and efficiency. Digital should allow us to do both.”

Aval has been redesigning its products and services for digital implantation. For example, AvalPay is a digital wallet that offers benefits to clients in the places they transact, ranging from discounts at restaurants to being able to buy tickets at the exclusive pre-sale of concerts through ‘Experiencias Aval’. The Aval master brand is becoming more visible in the Colombian market. “We’re also working on the efficiency front,” says Sarmiento. “We’re starting to work in the digitalization of the key banking processes – or ‘journeys’ as consultants are now calling them – which should result in faster and more efficient solutions for the banking needs of our clients.”

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