Slide Deck

1. Executive Summary & Core Investment Thesis

Grupo Aval Acciones y Valores S.A. (NYSE: AVAL) is the largest financial holding company in the Republic of Colombia. Through a deeply entrenched multi-brand architecture encompassing four commercial banking institutions, a dominant private pension fund manager (Porvenir), and a diversified merchant bank (Corficolombiana), the conglomerate commands a 25.1% market share in gross loans and a 25.2% share of system deposits as of the third quarter of 2025.¹

When evaluated through a rigorous framework demanding a sustainable competitive advantage, structural growth, and disciplined capital allocation, the investment merit of Grupo Aval severely deteriorates. The foundational premise of fundamental analysis dictates that a truly exceptional business must demonstrate a widening economic moat, evidenced by superior Return on Equity (ROE), highly efficient unit economics, and an entrenched, low-cost deposit franchise. A business lacking these characteristics cannot compound capital intrinsically and must be categorized as a structurally disadvantaged enterprise.

Presently, Grupo Aval is experiencing a violent, cyclical earnings recovery. Net income for the twelve months ending September 2025 surged 103.1% year-over-year, driving Return on Average Equity (ROAE) from a value-destroying 4.5% in 2023 to 11.5% in Q3 2025. However, an intellectually honest dissection of this profitability inflection reveals that it is not the byproduct of an expanding competitive advantage, but rather a mechanical consequence of macroeconomic relief. As the Colombian Central Bank (Banco de la República, or BanRep) executes a prolonged rate-cutting cycle, the conglomerate’s short-duration wholesale funding liabilities are repricing downward faster than its longer-duration corporate and payroll loan assets, artificially inflating Net Interest Margins (NIM).³

Beneath this cyclical tailwind, Grupo Aval suffers from three profound structural weaknesses that categorize it as a low-quality business masquerading as a value stock:

1. A Value-Destroying Brand Architecture: The strategic decision to operate four distinct banking entities (Banco de Bogotá, Banco de Occidente, Banco Popular, and Banco AV Villas) creates immense operational friction. This structure mandates the maintenance of duplicative core banking systems, fragmented physical branch networks, and redundant compliance frameworks, resulting in a consolidated efficiency ratio (50.7% in Q3 2025) that systemically lags unified peers like Bancolombia.²
2. Strategic Defeat in the Digital Paradigm: The future of emerging market banking is dictated by digital customer acquisition costs (CAC) and closed-loop payment ecosystems. Competitors Bancolombia and Davivienda have established impenetrable digital moats via their respective platforms, Nequi (18 million users) and DaviPlata (15 million users).⁶ Grupo Aval’s internal alternative, Dale!, remains a distant laggard, leaving the conglomerate structurally outflanked in the race for next-generation, low-cost retail deposits.⁵
3. Existential Regulatory Cannibalization of Fee Income: The Petro administration’s 2024 pension reform, effective July 2025, represents a catastrophic legislative blow to the private pension industry. By mandating that all formal workers contribute retirement savings on their first 2.3 minimum wages to the state-run Colpensiones, the reform effectively severs the capital inflow pipeline to Aval’s highly profitable subsidiary, Porvenir.⁷ This guarantees a permanent, secular decline in the conglomerate’s highest-quality fee revenue stream.

At a trailing Price-to-Earnings (P/E) multiple of 11.8x and trading near its tangible book value, Grupo Aval is statistically inexpensive. However, the equity’s current pricing accurately reflects a necessary “complexity discount,” severe corporate governance risks stemming from an 81.2% controlling shareholder, and an expected ROE that struggles to clear the country’s elevated Cost of Equity.⁹ Consequently, Grupo Aval lacks the requisite economic moat to qualify as a long-term compounding vehicle.

2. Business Model & Competitive Position

2.1 Corporate Structure and the Multi-Brand Architecture

Grupo Aval operates as a financial holding company rather than a monolithic banking entity. The conglomerate was engineered by its founder and Chairman, Luis Carlos Sarmiento Angulo, who consolidated his various financial interests under the Aval umbrella in 1994 and currently maintains an 81.2% beneficial ownership stake.⁹

The company extracts economic value through three primary operational pillars: Commercial Banking, Pension and Severance Fund Management, and Merchant Banking.¹ The commercial banking operations are uniquely fragmented across four subsidiary institutions, each theoretically targeting distinct market segments:

• Banco de Bogotá (68.9% ownership): The flagship institution and Colombia’s third-largest bank by assets. It is heavily weighted toward corporate and commercial lending, which constitutes approximately 62.8% of its gross loan portfolio.¹¹
• Banco de Occidente (72.3% ownership): Positioned as the conglomerate’s secondary corporate and commercial engine, with a specific historical strength in vehicle financing and leasing operations.¹¹
• Banco Popular (93.7% ownership): A highly specialized niche lender dominating the Colombian payroll loan (libranzas) market, specifically targeting government employees and the “silver economy” (pensioners).¹
• Banco AV Villas (79.9% ownership): The group’s consumer-focused retail franchise, targeting the mass market and middle-income demographics.⁵

Beyond traditional banking, the holding company derives substantial non-interest income from two critical entities:

• Porvenir AFP (25% direct ownership by Aval, with remaining stakes held via the banks): Colombia’s absolute leader in private pension and severance fund management, controlling roughly 45.4% to 46.3% of total industry Assets Under Management (AUM).¹
• Corficolombiana (Aval controls directly and via Banco Popular): A massive merchant bank functioning as Colombia’s premier infrastructure investor. It holds monopolistic or oligopolistic stakes in toll road concessions, gas transportation (Promigas), and hospitality (Hoteles Estelar).¹

2.2 Market Position and Scale Advantages

A primary competitive advantage in the banking sector is scale, which facilitates the absorption of fixed regulatory costs and enables access to lower-cost funding pools. On a consolidated basis, Grupo Aval’s scale is formidable. As of the third quarter of 2025, the conglomerate maintained:

• Gross Loans: COP 203.4 trillion, representing a 25.1% total market share.²
• System Deposits: COP 212.6 trillion, representing a 25.2% market share.¹

Within specific product verticals, Aval exerts outsized dominance. It controls 43.5% of the highly lucrative, low-risk payroll lending market, 27.4% of all commercial loans, and 28.1% of corporate lending in Colombia.¹ This massive asset base is funded by an interoperable network of 996 physical branches, 2,833 ATMs, and over 120,000 banking correspondents.¹

2.3 Competitive Disadvantage: The Burden of Complexity

The analytical framework of competitive advantage demands that a company’s structural choices manifest in superior unit economics. Grupo Aval’s multi-brand strategy unequivocally fails this test.

While management defends the four-bank architecture as a mechanism for precise market segmentation, the financial reality is that it imposes a severe structural tax on profitability. Maintaining four separate commercial banks requires the duplication of core banking IT systems, parallel human resources and compliance departments, overlapping branch networks, and fractured marketing budgets.⁵

This systemic inefficiency is laid bare when examining the conglomerate’s cost-to-income (efficiency) ratio. In Q3 2025, Grupo Aval reported an efficiency ratio of 50.7%, which, while an improvement from the 54.2% reported in 2024, remains stubbornly high for an institution of its aggregate size.² When technology budgets are divided by four, the holding company cannot achieve the absolute dollar scale required to build world-class digital infrastructure.

2.4 The Digital Pincer Movement: Losing the Moat

The concept of a banking moat has fundamentally shifted over the past decade. Historically, branch density and localized brand trust formed the barrier to entry. Today, the moat is defined by digital customer acquisition, embedded payment ecosystems, and the network effects of peer-to-peer (P2P) platforms.

Grupo Aval is currently caught in a strategic digital pincer movement executed by its primary competitors:

• Bancolombia (CIB): Successfully incubated and spun out Nequi, a digital wallet that now boasts over 18 million users. Nequi functions as an impregnable, zero-cost customer acquisition funnel that captures the unbanked and younger demographics before they ever require a traditional branch.⁴
• Davivienda: Operates DaviPlata, an embedded digital wallet with over 15 million active users, achieving similar dominance in the lower-income and state-subsidy distribution segments.⁶

In stark contrast, Grupo Aval’s attempt at a proprietary digital wallet, Dale!, has languished, serving only 3.5 million clients as of late 2024.¹ Recognizing that it has definitively lost the proprietary wallet war, Aval pivoted in September 2025, launching “Gou Payments”.¹⁹ Gou is an instant payment infrastructure designed to leverage the Central Bank’s new interoperable “Bre-B” system, attempting to commoditize the very P2P transfers that Bancolombia monetizes.¹⁹ While Gou processed 10 million transactions (COP 2 trillion) in its inaugural month, this represents a defensive capitulation rather than an offensive competitive advantage.¹⁹ Aval’s failure to capture digital mindshare early translates to structurally higher long-term customer acquisition costs.

2.5 Peer Comparison: A Substandard Return Profile

The ultimate arbiter of a competitive advantage is the Return on Equity. When compared to Bancolombia, Grupo Aval’s structural flaws are quantified.

In the second quarter of 2025, Bancolombia generated an annualized ROE of 17.5%, supported by a robust net interest margin of roughly 6.3% and the immense scale of its unified digital platforms.⁴ In the exact same macroeconomic environment, Grupo Aval generated an ROAE of 11.3% in Q2 2025 (rising slightly to 11.5% in Q3).²

Bancolombia’s ability to maintain a superior ROE is directly attributable to its lower cost of funding—driven by the massive, sticky, non-interest-bearing deposit base housed within Nequi and its unified retail network—combined with superior operating leverage. Grupo Aval, conversely, relies more heavily on rate-sensitive commercial term deposits and wholesale funding to support its corporate loan book, exposing its margins to greater volatility and yielding an inferior baseline return on capital.

3. Financial Performance Analysis (2020-2025)

An examination of Grupo Aval’s financial trajectory over the past five years reveals a highly cyclical entity tethered to the macroeconomic maneuvers of the Colombian state, rather than an “all-weather” compounder.

3.1 Profitability Metrics: The Anatomy of a Cyclical Inflection

Metric	2022	2023	2024	Q2 2025	Q3 2025
Return on Average Equity (ROAE)	14.0%	4.5%	6.0%	11.3%	11.5%
Return on Average Assets (ROAA)	1.6%	0.7%	0.7%	1.1%	1.0%
Total Net Interest Margin (NIM)	3.7%	3.4%	3.4%	4.0%	4.35%
Efficiency Ratio (Cost-to-Income)	45.8%	52.1%	54.2%	52.0%	50.7%
Cost of Risk	–	2.7%	2.2%	1.7%	1.9%

(Sources:)

The data presents a narrative of extreme volatility:

• The 2022 Distortion: The reported ROAE of 14.0% in 2022 was heavily inflated by the final contributions of BAC Credomatic, a highly profitable Central American banking subsidiary that generated ROEs in the 16-17% range.¹⁸ The spin-off of this asset in March 2022 permanently lowered the core profitability profile of the remaining Colombian entity.²⁴
• The 2023 Collapse: During 2023, the Colombian economy stalled, growing a mere 0.6%.²¹ To combat runaway inflation, BanRep executed a brutal tightening cycle, raising the policy rate by 900 basis points to 13.25%.¹⁷ Because Aval’s liability structure relies heavily on short-term corporate deposits and wholesale funding, its cost of funds spiked immediately. Conversely, its asset side—anchored by fixed-rate payroll loans and long-duration commercial debt—repriced sluggishly. This duration mismatch caused NIM to compress, destroying earnings and plunging ROAE to a dismal 4.5%.¹⁸
• The 2025 Cyclical Rebound: The current explosion in net income (reaching COP 1.4 trillion YTD in Q3 2025, an 88% YoY increase) is the exact inverse of 2023.¹⁹ As BanRep has aggressively cut rates down toward 10.25%, Aval’s expensive short-term liabilities are rolling off and repricing at lower rates, while the yields on its seasoned loan book remain elevated.³ This dynamic expanded total NIM by 46 basis points year-over-year to 4.35% in Q3 2025.²

Investors must recognize that the 2025 earnings recovery is a low-quality, transient event driven by liability repricing, not a structural improvement in the underlying deposit franchise. Management has prudently guided for a normalized total NIM in the ~4.3% range and an ROAE between 12.0% and 12.5% for 2026.

3.2 Credit Quality and Asset Health

Metric	2022	2023	2024	Q2 2025	Q3 2025
90-Day NPL Ratio	3.3%	4.0%	4.0%	3.5%	3.37%
NPL Coverage Ratio	–	1.25x	1.25x	1.31x	1.31x

(Sources: ¹⁸)

Grupo Aval’s credit metrics reflect a conservative underwriting culture, heavily insulated by its structural overweight in corporate lending and state-backed payroll loans.¹³ During the 2023-2024 macro shock, wherein inflation severely impaired the repayment capacity of Colombian retail consumers, Aval’s 90-day Non-Performing Loan (NPL) ratio peaked at a manageable 4.3% before steadily declining to a cycle-low of 3.37% by Q3 2025.¹⁹

The cost of risk similarly improved from a peak of 2.7% in late 2023 to 1.9% in Q3 2025.² Management expects this to normalize slightly higher at 2.0% in 2026 as loan growth accelerates and portfolios season.¹⁹ The holding company maintains a fortress balance sheet against these localized credit risks, with a 90-day NPL coverage ratio of 131.5%.²⁹

3.3 Capital Structure: The Double Leverage Risk

A critical mechanism in analyzing a financial holding company is assessing “Double Leverage”—the practice wherein a holding company issues corporate debt to downstream as equity into its operating subsidiaries.

As of September 2025, Grupo Aval’s unconsolidated double leverage ratio stood at a moderate 1.09x (expanding to 1.21x when factoring in subordinated loans and AT1 investments).²⁹ While Fitch Ratings considers this level stable, it introduces structural subordination. If a subsidiary like Banco de Bogotá or Banco de Occidente suffers a severe capital impairment, the dividend upstream to the holding company ceases, instantly threatening the holding company’s ability to service its own external debt.

3.4 Growth Trajectory

Organic growth parameters are highly constrained by the maturity of the Colombian banking sector and sluggish macroeconomic expansion. Consolidated gross loans reached COP 203.4 trillion in Q3 2025, representing a meager 4.6% year-over-year growth.²

Management’s guidance for 2026 anticipates 8% total loan growth, stratified by a 9% expansion in retail and 7% in commercial portfolios.¹⁹ However, given that Colombia’s nominal GDP is projected to expand by roughly 7% in 2026 (2.9% real GDP + ~4.2% inflation) ¹⁹, an 8% loan growth target indicates that Grupo Aval is merely pacing the economy rather than capturing meaningful, organic market share from competitors.

4. Addressing Market Misconceptions: The Banco de Occidente Restructuring

A prevalent market rumor—and a specific prompt requirement for this analysis—suggests that Bancolombia acquired Banco de Occidente from Grupo Aval in 2023. This premise is factually false and must be entirely disregarded in any investment thesis.

A forensic review of corporate actions, regulatory filings, and debt issuance memorandums confirms that Grupo Aval continues to retain a dominant 72.3% controlling ownership stake in Banco de Occidente.¹¹ Banco de Occidente continues to operate as an independent entity within the Aval ecosystem, maintaining its own balance sheet and actively accessing capital markets independently, evidenced by its US$175 million international subordinated debt issuance in August 2024.¹⁸

The confusion stems from a complex intra-group restructuring executed in November 2023. Prior to this date, the ownership of Corficolombiana (the merchant banking arm) was fractured among Grupo Aval, Banco de Bogotá, and Banco de Occidente. On November 22, 2023, a shareholder agreement was formalized whereby Banco Popular (another Aval subsidiary) acquired the direct controlling interest in Corficolombiana.¹⁷

Bancolombia’s relationship with Banco de Occidente is strictly competitive. In instances where the two institutions appear in the same documentation, it is exclusively in the context of syndicated lending, third-party investment banking advisory roles (e.g., advising infrastructure firm El Condor), or routine industry market share comparisons.³² There has been no divestiture of Banco de Occidente to any external party.

5. Macroeconomic Context & Industry Dynamics

To analyze a Colombian banking conglomerate is to analyze the sovereign health of Colombia itself. The banking industry operates as a highly concentrated oligopoly, with the top four entities controlling between 75% and 80% of total system assets.¹³ This concentration theoretically protects industry ROE, but it provides no shelter from sovereign volatility.

5.1 The Petro Administration and Regulatory Hostility

The election of President Gustavo Petro in August 2022 ushered in a period of severe regulatory and fiscal uncertainty.²¹ The administration’s ideological pivot away from the extractive industries—oil and coal historically account for roughly 35% of Colombia’s total exports—has structurally increased the country’s sovereign risk premium and forced downgrades from major rating agencies.²¹

Furthermore, the government views the concentrated banking sector as an easily accessible reservoir of capital to plug widening fiscal deficits. The administration passed a tax reform in 2022 that introduced temporary financial sector surcharges.²¹ More alarmingly, current fiscal reform proposals circulating in late 2024 and 2025 seek to triple the permanent tax surcharge on banking institutions from 5% to 15%. Independent analysis indicates that if this legislation passes, it would instantaneously destroy approximately 15% of the net profit generation capacity of entities like Grupo Aval and Bancolombia.³⁵

5.2 The Credit Cycle and Economic Stagnation

The Colombian economy is mired in a period of sluggish growth, expanding by only 0.6% in 2023 and 1.7% in 2024.²¹ Projections for 2025 and 2026 estimate GDP growth will hover between 2.3% and 2.9%.²⁹

Private non-mining investment remains highly depressed, contracting sharply in 2023 and showing only a fragile 1.7% annual growth in mid-2025.³⁶ This lack of gross fixed capital formation directly impairs the loan demand pipeline for Banco de Bogotá and Banco de Occidente, which rely on corporate expansion and infrastructure development to drive balance sheet growth. Consequently, the banking system’s current profitability is entirely reliant on the central bank’s easing cycle reducing the cost of liabilities, rather than a resurgence in genuine economic productivity.

6. The Pension Reform Crisis: A Structural Existential Threat

The most critical, unpriced structural risk facing Grupo Aval is the catastrophic impact of the 2024 Colombian Pension Reform (Law 2381 of 2024), scheduled to take full effect on July 1, 2025.⁷

Historically, Colombia operated a unique, parallel pension system where workers could choose between a public pay-as-you-go scheme (Colpensiones) and private Administrators of Pension Funds (AFPs).³⁸ Grupo Aval’s subsidiary, Porvenir, dominates the private market, controlling over 45% of an industry holding roughly $110 billion in assets.¹⁵ Porvenir has historically served as a high-margin, capital-light cash cow, generating massive fee income that smooths the volatility of Aval’s core banking operations.⁹

The Mechanics of Value Cannibalization: The Petro administration’s reform fundamentally dismantles this parallel structure, replacing it with a mandatory “pillar system.” Under the new legislation, every formal worker in Colombia is legally required to direct all pension contributions generated on their first 2.3 monthly minimum wages (approximately COP 3.27 million, or ~$800 USD) exclusively into the state-run Colpensiones fund.⁷ Only income earned above this 2.3 minimum wage threshold is permitted to flow into private AFPs like Porvenir.

Because the overwhelming majority of the Colombian labor force earns less than 2.3 minimum wages, this reform effectively amputates the primary pipeline of gross capital inflows into the private pension system.⁷

While the government is not confiscating existing AFP balances, the terminal growth rate of Porvenir’s mandatory savings business has been legislatively annihilated. Over the coming decade, as the current cohort of contributors reaches retirement age and begins drawing down their balances (which will now be converted into lifetime annuities rather than lump-sum withdrawals) ⁸, the outflows will vastly exceed the restricted new inflows. Porvenir faces a permanent, secular decline in its Asset Under Management base. Consequently, Grupo Aval’s consolidated fee income ratio—which stood at 21.9% in Q3 2025 ²—will face relentless, structural downward pressure that cannot be offset by loan growth.

7. Capital Allocation & Management Track Record

The qualitative assessment of management relies entirely on their capital allocation decisions. The linkage between corporate value and shareholder value is dictated by how cash flows are reinvested or returned. Under the absolute control of Chairman Luis Carlos Sarmiento Angulo and the operational direction of CEO Maria Lorena Gutierrez ⁹, Grupo Aval’s capital allocation track record is highly questionable.

7.1 M&A: The BAC Credomatic Spin-Off

The defining strategic action of the past decade was the spin-off of BAC Holding International (BHI), which operated the BAC Credomatic franchise across Central America. Acquired by Aval in 2010 for $1.9 billion, BAC grew to account for roughly one-third of the conglomerate’s total assets and was its highest-returning entity, routinely generating ROEs of 16-17%.¹¹

In March 2022, Grupo Aval spun off 75% of this asset to its shareholders.²⁴ Management justified the transaction as a maneuver to “sharpen strategic focus and reduce multi-jurisdictional complexities” while shielding the Central American asset from Colombian sovereign risk following the Petro election.²⁴

However, from the strict perspective of business quality, Grupo Aval divested its crown jewel. The transaction hollowed out the conglomerate’s growth profile and eliminated its geographic diversification. The remaining “Stub-Aval” is now entirely captive to the sluggish, highly regulated, and politically volatile domestic Colombian market.

7.2 Domestic Reorganization: Aval Fiduciaria

Management has recently demonstrated a more rational approach to internal capital allocation by finally addressing the systemic inefficiencies of its fragmented architecture. In 2024 and 2025, Aval executed the integration of its disparate trust companies—Fiduciaria Bogotá, Fiduciaria Occidente, and Fiduciaria Popular—into a single entity, Aval Fiduciaria.¹⁹

Slated to commence unified operations in January 2026, Aval Fiduciaria will launch as the largest fiduciary in Colombia, boasting COP 201 trillion in AUM and capturing a 21% market share in fee income.¹⁹ This consolidation is a textbook example of value-creative capital allocation, eliminating redundant back-office expenses and capturing much-needed operational synergies.

7.3 Shareholder Returns: Dividends and the Absence of Buybacks

• Share Repurchases: The most egregious failure in Grupo Aval’s capital allocation framework is its refusal to execute share repurchases. For years, the equity has traded at a persistent discount to its tangible book value (frequently below 0.8x).⁴⁴ For a bank, buying back stock below book value is mathematically the most accretive action management can take to manufacture per-share value. Yet, the holding company has exhibited virtually zero appetite for buybacks, prioritizing the hoarding of capital or distribution via dividends.⁵
• Dividend Policy: Grupo Aval maintains a highly unusual monthly dividend distribution policy. The dividend is highly volatile, functioning more as a variable payout ratio than a steadily compounding yield. Following the earnings collapse in 2023, management ruthlessly slashed the monthly payout from approximately $0.018 per ADR to $0.009 in early 2024.⁴⁷ As earnings recovered cyclically in early 2025, the dividend was hiked by 15% to 2.3 COP per local share (roughly $0.0115 per ADR). While this currently yields roughly 2.5% to 3.1% on a forward basis ⁴⁵, the lack of predictability renders it unsuitable for core dividend-growth mandates.

7.4 Corporate Governance and Minority Alignment

The overarching risk in analyzing Grupo Aval’s capital allocation is its ownership structure. Luis Carlos Sarmiento Angulo beneficially owns 81.2% of the voting shares.⁹ In practical terms, minority shareholders (including ADR holders) have zero influence over corporate policy, M&A decisions, or dividend distributions. The holding company operates entirely at the discretion of the controlling family, meaning minority capital is essentially trapped, subject to the whims of related-party transactions and familial succession planning.⁵⁰

8. Valuation Analysis

Statistical cheapness must not be confused with a margin of safety. Grupo Aval is undeniably cheap on traditional metrics, but it is cheap for structurally sound reasons.

8.1 Trading Multiples and ADR Parity

• Price-to-Earnings (P/E): As of February 2026, the trailing P/E ratio is approximately 11.8x. Based on management’s 2026 EPS guidance (implied at roughly $0.48), the forward P/E compresses to a seemingly attractive 9.3x.⁴⁶
• Price-to-Book (P/B): The equity currently trades at roughly 0.75x to 1.1x tangible book value, depending on the specific equity class evaluated.⁴⁴
• ADR Parity: AVAL trades on the NYSE as an American Depositary Receipt, where 1 ADR represents 20 local preferred shares (PFAVAL).⁴²

• As of late February 2026, PFAVAL trades at approximately 825 COP on the Bolsa de Valores de Colombia.⁵³
• 20 shares * 825 COP = 16,500 COP per ADR equivalent.
• Assuming a standard COP/USD exchange rate of roughly 3,700 ⁵⁴, the local equivalent is exactly $4.46.
• With the NYSE ADR trading between $4.46 and $4.50 ⁴⁵, there is strict parity. No arbitrage opportunity or structural discount exists between the US and Colombian listings.

8.2 Absolute Valuation: The Cost of Equity Dilemma

To justify purchasing a banking institution at 1.0x book value, an analyst must have high conviction that the bank can sustainably generate a Return on Equity that exceeds its Cost of Equity (CoE).

Given Colombia’s degraded sovereign credit rating, persistent currency volatility, and the hostile regulatory posture of the Petro administration, a rational buildup method demands a Cost of Equity for a Colombian bank of no less than 14.0% to 15.0%.¹⁰

Management’s own optimistic guidance projects a stabilized ROAE of 12.0% to 12.5% for 2026.¹⁹ Mathematically, if a business generates an ROE (12.5%) that is lower than its Cost of Equity (15.0%), it destroys economic value with every dollar it retains. Therefore, the business must trade at a discount to its book value. The current 0.75x – 1.1x P/B multiple does not represent a massive, mispriced margin of safety; it is simply the market rationally discounting a conglomerate that fails to earn its cost of capital.

Furthermore, a Sum-of-the-Parts (SOTP) framework dictates that a severe “conglomerate discount” be applied. An investor in AVAL is forced to underwrite an opaque blend of four distinct commercial banks, a merchant bank tied to volatile infrastructure construction contracts, and a pension fund entering terminal runoff.

9. Key Risks & Red Flags

The investment profile is dominated by asymmetric downside risks:

1. Regulatory Confiscation (The Tax Surcharge): The Petro administration’s ongoing legislative effort to triple the financial sector income tax surcharge from 5% to 15% represents an immediate, un-hedgeable threat that would permanently rebase the bank’s earnings power downward.³⁵
2. The Porvenir Runoff (Structural Decline): The execution of the July 2025 pension reform guarantees the slow strangulation of the conglomerate’s most profitable fee-generating asset.⁷
3. Fintech Disruption (Competitive Attrition): While Aval expends capital attempting to unify its back-office operations, Bancolombia’s Nequi and Davivienda’s DaviPlata continue to capture the marginal growth in retail deposits, pushing Aval further up the funding cost curve.⁶
4. Currency Depreciation (Macro Risk): The ADR is priced in USD but backed entirely by COP-denominated cash flows. Any deterioration in Colombia’s current account balance—driven by anti-oil policies or fiscal deficits—will trigger peso depreciation, eroding USD returns for foreign investors.⁵⁶
5. Double Leverage Fragility (Credit Risk): The holding company’s 1.09x to 1.21x double leverage introduces structural subordination. In a severe macro shock, subsidiary dividend blockages could trigger liquidity crises at the holding company level.²⁹

10. Conclusion: Answers to Core Investment Questions

1. Does Grupo Aval have a demonstrable competitive advantage? No. A competitive advantage must manifest in superior unit economics. Grupo Aval’s fragmented, multi-brand architecture saddles the holding company with duplicative costs, resulting in a substandard efficiency ratio (50.7%) and an ROE (11.5%) that structurally lags unified peers like Bancolombia (17.5%).² The bank has also lost the critical digital wallet war, surrendering the low-cost deposit moat to agile competitors.

2. Can Grupo Aval grow meaningfully? No. Organic growth is inherently capped by Colombia’s sluggish GDP expansion (projected at ~2.7% in 2025) and depressed private non-mining investment.²⁹ Management’s target of 8% nominal loan growth merely paces inflation and minor real economic expansion, indicating zero structural market share capture.¹⁹

3. Has management allocated capital wisely? The track record is deeply flawed. While the recent consolidation of the trust business into Aval Fiduciaria is positive ¹⁹, management fundamentally impaired the holding company’s growth profile by spinning off its highest-returning asset (BAC Credomatic) in 2022.²⁴ Furthermore, the absolute refusal to repurchase shares while the stock languishes below tangible book value represents a fundamental failure in capital allocation theory.⁴⁶

4. What is the quality of earnings?

The current 103% YoY surge in net income is of exceedingly low quality. It is entirely a cyclical, transient phenomenon driven by the rapid repricing of short-duration liabilities as the central bank cuts interest rates, artificially expanding Net Interest Margins. It is a mechanical head-fake, not a structural improvement in business health.

5. At current valuation, what margin of safety exists?

The margin of safety is an illusion. While a P/E of 11.8x and a P/B near 1.0x appear optically cheap, this valuation is mathematically appropriate. A business that guides for a 12.5% ROE in an environment demanding a 15% Cost of Equity is destroying economic value and should trade at a discount. Furthermore, this multiple does not fully price in the impending terminal decline of Porvenir’s fee income.

6. Is this a good business or just a cheap stock?

Grupo Aval is decidedly a “bad business” trading as a “cheap stock.” Stripped of its cyclical tailwinds, the conglomerate is a structurally disadvantaged, over-complicated holding company captive to a hostile regulatory regime. While short-term traders may extract alpha as the central bank finishes its rate-cutting cycle and NIM peaks into 2026, long-term investors requiring durable competitive advantages, compounding unit economics, and aligned capital allocation must look elsewhere. The structural rot outweighs the cyclical relief.

Frequently Asked Questions

Cyclicality & Earnings Nature

Are earnings at a cyclical high or low, and what drives them? Grupo Aval is currently experiencing a violent cyclical rebound from a trough, not structural growth. After an abysmal 2023 where Return on Average Equity (ROAE) collapsed to 4.5% due to the Central Bank (BanRep) hiking rates to 13.25%, the bank is now riding a mechanical tailwind. Q3 2025 net income was COP 521.0 billion, up 25.3% year-over-year, bringing year-to-date net income to COP 1.4 trillion (an 88% YoY increase).

This recovery is entirely driven by the external environment, specifically the BanRep’s rate-cutting cycle. Aval relies heavily on short-duration wholesale funding and corporate term deposits. As the central bank cuts rates, Aval’s liability costs reprice downward immediately, while its longer-duration commercial and fixed-rate payroll loans continue to yield higher returns, artificially inflating Net Interest Margin (NIM) to 4.35% in Q3 2025. This is a macro-driven margin expansion, not the result of brilliant internal management.

Business Quality & Competitive Moat

How profitable is the business, and is the moat intact? Through the lens of competitive advantage, Grupo Aval operates a structurally flawed business model. While it boasts massive scale (25.1% market share in gross loans) , the industry is becoming highly competitive on the retail side.

• Profitability: Grupo Aval’s ROAE recovered to 11.5% in Q3 2025. However, this structurally lags its unified peer, Bancolombia, which generated an annualized ROE of 17.5% in the same macroeconomic environment.
• The Moat is Eroding: Banking traditionally benefits from high customer switching costs and the barrier to entry of a physical branch network. However, digital disruption has bypassed this moat. Competitors Bancolombia (Nequi) and Davivienda (DaviPlata) dominate the digital wallet space with tens of millions of users, capturing the cheapest source of non-interest-bearing deposits. Aval’s alternative, Dale!, is a distant laggard. To defensively pivot, Aval launched “Gou Payments” in late 2025 to leverage the central bank’s interoperable infrastructure, but this is a reactive move to prevent further market share loss rather than a source of advantage.
• Complexity Burden: Maintaining four separate commercial banks (Bogotá, Occidente, Popular, AV Villas) creates massive duplication. The group’s cost-to-income efficiency ratio stubbornly sits at 50.7%, indicating poor operating leverage.

Financial Condition & Balance Sheet

What are the hidden risks and accounting conditions? The bank utilizes standard IFRS accounting. The primary balance sheet risk lies in Double Leverage at the holding company level. As of September 2025, Grupo Aval’s unconsolidated double leverage stood at 1.09x (expanding to 1.21x if you include subordinated loans to subsidiaries). This means the holding company issues debt to downstream as equity to its banks. This introduces structural subordination: if a subsidiary cannot upstream dividends due to a severe macro shock, the holding company’s ability to service its own debt is impaired.

Credit quality is adequate but requires monitoring. The 90-day Non-Performing Loan (NPL) ratio improved to 3.37% in Q3 2025, with a healthy coverage ratio of 131%.

Capital Allocation & Management

How does management allocate capital? Capital allocation is the glaring weakness of this conglomerate, firmly establishing it as a value trap.

• Ownership & Motivations: Chairman Luis Carlos Sarmiento Angulo beneficially owns 81.2% of the voting shares. Minority shareholders have virtually zero voice. Management is motivated by maintaining familial control and extracting dividends rather than maximizing per-share value for public investors.
• Share Buybacks (The Red Flag): Despite the stock trading at a persistent discount to tangible book value (roughly 0.75x to 1.1x P/B) , management refuses to execute meaningful share repurchases. A rational capital allocator would aggressively buy back stock at these levels to compound intrinsic value.
• Recent M&A/Restructuring: Management recently merged its disparate trust companies into a single entity, Aval Fiduciaria, which will manage COP 201 trillion in AUM by January 2026. This is a rare, positive step toward operational synergy. However, this follows the 2022 spin-off of BAC Credomatic (their Central American crown jewel), which permanently lowered the conglomerate’s growth ceiling and ROE profile.

Valuation & Market Data

• Structure: The stock trades on the NYSE as an ADR (Ticker: AVAL), where 1 ADR represents 20 local preferred shares (PFAVAL).
• Valuation: The stock is optically cheap, trading at a trailing P/E of roughly 11.8x. However, this is a “complexity discount.” A bank generating an 11.5% ROE in an emerging market where the Cost of Equity easily exceeds 14% is actively destroying economic value. It should trade below book value.
• Dividend Policy: Aval pays a volatile, variable monthly dividend. It currently yields roughly 3.1% forward. The payout ratio floats, having been slashed during the 2023 earnings trough and slightly raised as earnings recovered.

Risks & Downside

What is the chance of a catastrophic loss or significant decline? While a total wipeout is unlikely given the bank’s systemic importance, the stock faces two immense structural headwinds:

1. Regulatory Confiscation: The Petro administration has aggressively targeted the banking sector. There are active proposals to triple the permanent tax surcharge on financial institutions from 5% to 15%, which would instantly permanently destroy roughly 15% of net profit capacity.
2. The Porvenir Cannibalization: The 2024 Colombian Pension Reform (effective July 1, 2025) forces all workers earning up to 2.3 minimum wages to contribute to the state-run Colpensiones fund instead of private funds. This amputates the primary pipeline of capital inflows into Aval’s highly profitable pension subsidiary, Porvenir, guaranteeing a secular decline in Aval’s highest-quality fee revenue stream.

Recent News & Events

• FCPA Settlement (Corporate Governance Failure): In late 2023, Grupo Aval and its subsidiary Corficolombiana agreed to pay $80.8 million to the U.S. DOJ and SEC to settle Foreign Corrupt Practices Act (FCPA) charges related to a massive bribery scheme involving Brazilian contractor Odebrecht and the Ruta del Sol II highway project. This underscores the severe corporate governance risks embedded in the conglomerate.
• New Leadership at Competitors: It’s worth noting the broader banking leadership is shifting; competitor Banco Popular in Puerto Rico (not Aval’s subsidiary) just announced a CEO change, indicating a regional shift toward younger, digitally focused management teams while Aval remains tightly controlled by the aging Sarmiento family structure.

Analyst Conclusion: Grupo Aval is a bad business masquerading as a cheap stock. Its current earnings surge is a low-quality, rate-driven cyclical illusion. With a bloated multi-bank architecture, a lost digital war, terrible capital allocation regarding share buybacks, and an existential threat to its pension fee income, the equity offers no margin of safety for long-term investors.

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