Consistent Strategy Leads to Success in Latin America

Grupo Aval is the largest financial conglomerate in Colombia and Central America. In Colombia, it controls four commercial banks, a merchant investment bank, and a pension fund manager. Through the merchant bank, Aval invests in some of the fastest-growing non-financial sectors of Colombia’s Gross National Product. In Central America, it owns six commercial banks, one in each of the six countries that make up the region.

As of December 31, 2019, Grupo Aval had on-balance sheet assets of 85 billion USD and 79 billion USD on assets managed for third parties. Grupo Aval serves approximately 30 million clients composed of banking and pension fund customers, 16 million banking customers and 14 pension fund clients. In this interview, Luis Carlos Sarmiento Gutiérrez, the CEO of Grupo Aval since 2000, provides insight into the company’s success.

When asked what sets Grupo Aval apart from other financial institutions, Mr. Sarmiento Gutiérrez states that consistency of our strategy was key. “Allow me to explain,” he says. “Long ago, we adopted a multi-brand and multi-business approach and we have consistently stuck to it through several economic cycles. That consistency in our approach has also meant that our results tend to be more consistent than those of others. We strive for steady growth, steady net income, and steady value accretion. This has been true throughout all the businesses that we have defined are part of our strategy, such as commercial banking through our four banks in Colombia and our banking group in Central America, pension fund management in Colombia, and investment/merchant banking as a vehicle to invest in the non-financial sector.”

So far, he notes that their strategy has worked as evidenced by their leadership in the markets and the businesses in which they participate. Both in Colombia and Central America, Grupo Aval holds leading market shares– particularly in net income, but also in assets, deposits, and assets under management. The same can be said for the non-financial sector industries where they participate, including construction and operation of toll roads, gas transportation and distribution, hotels, and agro industry.

To support their success, Grupo Aval’s strategy is composed of five pillars: Risk Management, Innovation, Efficiency, Talent, and Sustainability. “With risk management as a core pillar of success,” says Mr. Sarmiento Gutiérrez, “Grupo Aval is able to deliver transparent, reliable, and timely information to our stakeholders. Over the past decade, we have substantially strengthened our operating and compliance risk management teams.”

As an example, Mr. Sarmiento Gutiérrez cites Aval’s discipline in loan pricing. “Once we assess the risk in a credit exposure we price the relationship accordingly. Obviously, client relationships are frequently driven by ancillary businesses (with the client) that help mitigate risk. Appropriate pricing is the result of understanding credit risk management.” According to Mr. Sarmiento Gutiérrez, Aval has similar approaches to other types of operating risk, including liquidity, market, reputational, strategic and concentration.

“Additionally,” says Mr. Sarmiento Gutiérrez, “we have zero tolerance to compliance risk. We have a very large organization and have made enormous investments to constantly assess and guarantee that compliance risk (money laundering, terrorism, etc.) is managed to zero.”

According to Mr. Sarmiento Gutiérrez, Aval delivers value via growth, profitability, and sustainability, noting they would rather slow growth than grow unprofitably. “That is why we are so disciplined after we price according to risk,” he says. “While we do lose credits to our competitors as the market under prices us frequently, we remain focused as we believe that growth must be accompanied by profitability. We do not take undue market risk exposure. We allow less market risk in the building of our portfolios. We grow inorganically only when we are quite sure that the return on our investments amply surpasses our hurdle rates. These all lead to consistent steady results trending in the right direction. That should make it easier for an investor to model our future results. That,” he says, “is how we deliver value.”

Corporate social responsibility has always been important to Grupo Aval, which greatly contributes to Colombia’s social-economic development. “Indeed,” says Mr. Sarmiento Gutiérrez, “for all our entities, CSR has always been a priority in their agendas, albeit their efforts were somewhat dispersed. That is why I decided to make CSR one of our strategic pillars. As a result, all those CSR initiatives that had been implemented in the last decade by our entities to contribute to the economic, social, and environmental development in their markets were aligned and refocused in a concerted effort supervised from the holding company. These strategies were redefined under the premise of excellence and refocused to meet the expectations of our stakeholders. Personally,” he says, “I believe that companies with better ESG strategies deliver better financial results, which leads to better generation of value and we will continue to strive towards excellence in this field.”

With the onset of the COVID-19 pandemic, Mr. Sarmiento Gutiérrez notes that Grupo Aval demonstrated a quick, efficient response. “In March of this year,” he says, “we set three main goals: to protect the health of our employees and our suppliers, to prove the viability of our contingency and business continuity plans, and to design and offer opportune and sensible debt relief packages to our clients. To make this all happen,our CRO and her team have paid special consideration, on a daily basis, to liquidity, market, credit and operational risk at the consolidated group level as well as individually in each of our subsidiaries.”

To elaborate on a few actions that they have taken in the past months, 94% of Aval’s administrative employees are currently working from home and those who support the branch network are following strict social distancing and sanitary protocols, according to Mr. Sarmiento Gutiérrez. “Periodic digital meetings with our CEOs and key executives have allowed me to keep informed on a day to day basis of the company’ operations.We launched a relief program worth 21 billion USD (in Colombia and Central America) for companies and individuals affected by the crisis,including deferral of installments, credit lines at preferential rates for companies to affect payroll payment and protect employment. We reduced fees charged on electronic channels and money transfers.”

Over the last decade, Mr. Sarmiento Gutiérrez has led the Group’s local and international expansion and spearheaded the Aval’s entrance into the international capital markets through bonds and equity issuances. “We have been active on the capital markets in debt, equity, and M&A in the last decade, with the acquisition of five financial entities (BACC redomatic, Banco Reformador BBVA Panama, Multibank and Horizonte), the issuance of 2.6 billion USD in global bonds, and the NYSE IPO of our share where we raised 1.3 billion USD. We have also tapped the Colombian equity markets where we have raised,in the last decade, more than 4.5 trillion pesos (2.4 billion USD)through the issuance of common and preferred shares.”

Looking to the future, Mr. Sarmiento Gutiérrez says he aspires to continue consolidating Grupo Aval as the largest financial conglomerate in their markets and to explore new markets as they become more lucrative. “We will pursue M&A opportunities if we believe that they are attractive and adequately priced and if they are accretive in the medium term to our existing operation. We may keep going back to the capital markets when conditions are favorable and when the use of proceeds support our strategy.”