Executive Summary / Key Takeaways

• Grupo Aval (AVAL) is demonstrating strong financial recovery, with Q2 2025 net income reaching COP 494.9 billion, its highest in three years, and H1 2025 net income 1.7 times higher than H1 2024. This resurgence is driven by improving asset quality, expanding net interest margins (NIM), and controlled operational expenses.
• The company is strategically diversifying its financial services and enhancing operational efficiency through initiatives like Aval Valor Compartido (AVC), which has already delivered quantifiable savings and streamlined processes. Digital transformation, including AI integration and instant payment systems, is a core focus to improve customer experience and operational agility.
• AVAL maintains a disciplined approach to loan growth, particularly in higher-yielding retail segments, while navigating intense price competition in commercial lending. Its robust portfolio structure, concentrated in lower-risk payroll loans and with less SME exposure, underpins a more predictable credit quality cycle compared to peers.
• Despite macroeconomic headwinds such as persistent fiscal challenges in Colombia, political uncertainty, and a slower-than-anticipated pace of Central Bank rate cuts, AVAL projects a 2025 return on average equity (ROE) in the 10.5% area, with a long-term aspiration to exceed 15%.
• The company's competitive advantage lies in its strong localized expertise, extensive multi-bank network, and comprehensive service offerings, which are being further strengthened by targeted technological investments and a focus on sustainable finance.

Grupo Aval: A Colombian Financial Powerhouse Adapting for Growth

Grupo Aval Acciones y Valores S.A. (AVAL) stands as a dominant financial services provider in Colombia and Central America, offering a comprehensive suite of products from traditional deposits and commercial loans to specialized microcredit and mortgage solutions. Incorporated in 1994, AVAL has built a foundational strength through its multi-bank structure, exemplified by its "BREVE Aval" interoperability system, which has facilitated seamless transactions among its entities for over three decades. The company's strategic evolution, particularly through an intense transformation in 2024, has positioned it to capitalize on a recovering economic landscape while addressing persistent challenges.

AVAL operates within a highly competitive financial ecosystem, contending with major regional players such as Bancolombia (CIB), Itaú Unibanco (ITUB), and Credicorp (BAP), alongside emerging fintech disruptors. AVAL's market positioning leverages its deep roots and localized expertise in Colombia and Central America, which provides a distinct advantage in accessibility and customer trust, particularly in niche areas like microcredit and public sector financing. While competitors like Itaú Unibanco may possess broader international scale and potentially faster technological adoption, AVAL counters with notably quicker local decision-making and a diversified portfolio across various banking segments, offering operational resilience. Its disciplined pricing strategy, even in the face of aggressive competition for high-quality commercial loans, underscores a commitment to profitable, sustainable growth. AVAL's consistent market share gains, reaching 25.3% in loans and a historical 16.6% in mortgages by Q1 2025, demonstrate its ability to outpace the system through a more predictable growth pattern and superior credit quality management.

Technological Edge and Digital Transformation

AVAL is actively investing in technological differentiation to enhance its competitive standing and operational efficiency. The company's digital transformation initiatives are multifaceted, aiming to consolidate a culture of innovation and leverage cutting-edge technology. A key partnership with Microsoft (MSFT) is boosting the usage of artificial intelligence (AI) in everyday operations, which is expected to enhance customer experience, operational efficiency, and data-driven decision-making.

In the realm of payments, AVAL has been a strong proponent of the Central Bank's real-time payment system, "BREVE." The company has made significant strides with its alphanumeric key system, "Aval," enabling 8.9 million keys—a 15% increase since December of the previous year—to facilitate over 2.1 million near real-time transactions, marking a 70% increase compared to January. This initiative, alongside the launch of "TAC Aval" for payment interoperability, underscores AVAL's commitment to providing efficient and instant payment solutions. Furthermore, the expansion of ATH into Aval Valor Compartido (AVC) serves as a centralized platform for subsidiary business support processes. This strategic move aims to unlock value by capturing synergies and efficiencies, with a procurement synergy center already implemented. This center, operating on a COP 4.3 trillion spending base, is projected to achieve initial savings of over 10% from a COP 2.1 trillion manageable spending base and reduce contracting time by 40%. These quantifiable benefits highlight AVAL's proactive approach to leveraging technology for tangible operational improvements and a stronger competitive moat.

Strategic Pillars Driving Performance

AVAL's strategic framework is built upon several interconnected pillars designed to foster sustainable growth and enhance stakeholder value. These initiatives are crucial in a dynamic market characterized by evolving customer expectations and intense competition.

The company is deeply committed to customer experience, utilizing metrics like Net Promoter Score (NPS) across its entities to gauge satisfaction and loyalty. Initiatives such as "Aval experiences" loyalty programs and the "Augusta" integrated customer database aim to provide personalized services and strengthen client relationships. A group-wide committee has been established to standardize NPS measurement and embed a customer-centric culture throughout the organization.

Financial diversification is another core priority, focusing on optimizing the balance sheet and expanding revenue streams. AVAL is actively working to improve its deposit mix towards lower-cost, stable retail funding, with peso-denominated deposits from individuals increasing from 16.7% in Q1 2025 to 18.2% in Q2 2025. Concurrently, three of its four banks are strategically shifting their commercial focus towards higher-yielding and faster-breakeven products, such as personal loans and credit cards. The acquisition of Aval Fiduciaria and Aval Casa de Bolsa from Corficolombiana, along with the creation of Aval Banca de Inversion, further strengthens its non-banking fee generation capabilities.

On the synergies and efficiencies front, Aval Valor Compartido (AVC) is central. Following the successful migration of Banco de Bogotá's processes in Q1 2025, AVC is set to centralize procurement, facility and property management, accounting, cybersecurity, payroll, and recruitment for other Colombian banks in the second half of the year. This centralization is expected to generate significant operational efficiencies and enable data-driven decision-making through integrated talent analytics.

Sustainability remains a core principle, with AVAL making significant strides in its ESG agenda. The company achieved its highest score in the Corporate Sustainability Assessment (CSA) for the Dow Jones Sustainability Index, placing in the 90th percentile. Its sustainable loan portfolio has grown to COP 17.3 trillion, financing critical sectors like sustainable construction, mobility, and renewable energy. AVAL is also committed to social impact through initiatives like "Mision La Guajira," which has provided water and energy solutions to 81 communities, benefiting over 21,000 people. Furthermore, the company is developing a decarbonization roadmap and actively promoting diversity and inclusion, with women holding 35% of management positions and 55% of total employees.

Financial Resilience Amidst Macroeconomic Headwinds

Grupo Aval's financial performance in the first half of 2025 demonstrates a compelling recovery trajectory, underpinned by strategic execution and improving market conditions. The company reported a net income of COP 856 billion for the first half of 2025, a substantial 1.7 times higher than the same period in 2024. For Q2 2025 alone, net income reached COP 494.9 billion, marking its highest quarterly figure in three years, with a robust 37% quarter-over-quarter and 142% year-over-year growth.

This profitability surge is largely attributable to a significant expansion in Net Interest Margin (NIM). The consolidated NIM reached 4% in Q2 2025, a level not seen in three years, with NIM on loans at 4.5%. This improvement was supported by a strong performance in the investment portfolio and the positive contribution from Porvenir's stabilization reserve. While NIM on retail loans expanded, commercial loan NIM faced pressure from aggressive price competition, a dynamic AVAL has managed through disciplined pricing.

Asset quality has also shown marked improvement. The cost of risk, net of recoveries, decreased by 31 basis points to 1.7% in Q2 2025, the lowest level since Q1 2023. This reflects a strengthening loan portfolio, with 30-day Past Due Loans (PDLs) improving by 37 basis points quarter-over-quarter to 4.81% and 90-day PDLs reaching their lowest level in three years at 3.51%. Stage 3 loans have fallen for the third consecutive quarter to 6.1%. This positive trend in asset quality is a testament to AVAL's prudent lending practices and its portfolio structure, which is more concentrated in lower-risk payroll loans and has less exposure to SMEs compared to some peers.

Total assets grew 6% year-over-year and 1.8% quarter-over-quarter to COP 336 trillion in Q2 2025. Gross loans, representing 57% of assets, reached COP 199.4 trillion, growing 3.2% year-over-year. Retail loans, particularly mortgages (up 20% year-over-year) and consumer loans (up 6% year-over-year), have been key growth drivers. Total funding increased 6.3% year-over-year, with deposits growing 6.8%. Operational expenses, while increasing 9.2% year-over-year in Q2 2025, remain controlled relative to revenue growth, contributing to improved efficiency ratios.

In terms of capital and liquidity, Grupo Aval maintains a solid position. Total equity increased 6.2% year-over-year in Q2 2025, and solvency ratios showed a slight increase across most banks. The recent COP 50.00 billion (approximately USD 12.9 million) subordinated bond issuance by Banco Comercial AV Villas S.A. in September 2025 further strengthens its capital base. While Banco de Occidente's classification as a systemic bank in November 2024 necessitates a 100 basis points increase in core equity Tier 1 capital requirements over a two-year transition, management is confident in meeting these through internal capital generation and optimized use of Basel III options, without the need for additional external capital raises.

Outlook and Risks: Charting a Path to Double-Digit ROE

Grupo Aval's outlook for 2025 is constructive, with management projecting a return on average equity (ROE) in the 10.5% area, building on a strong first half of the year. This guidance is supported by an anticipated loan growth in the 7% area, with retail loans expected to grow around 9% and commercial loans around 5%. Consolidated NIM is projected to be in the 4% area, with NIM on loans at 4.5%. The cost of risk, net of recoveries, is expected to be in the 1.95% area, reflecting continued improvements in asset quality.

These projections are underpinned by several macroeconomic assumptions. The Colombian economy is expected to grow by 2.7% in 2025, with inflation estimated to close the year around 4.9%, remaining slightly outside the Central Bank's target range. The Central Bank's policy rate is anticipated to end 2025 at 8.5%, although recent information suggests potential upward pressure on this figure. Management acknowledges that a slower pace of Central Bank rate cuts implies a longer adjustment period for NIM expansion, but strategic shifts in deposit and loan mixes are designed to mitigate this impact.

Despite the positive outlook, Grupo Aval faces several pertinent risks. Fiscal sustainability remains the "biggest challenge facing the economy," according to management. The Colombian government's revised fiscal deficit estimate for 2025 of 7.1% of GDP, significantly above the original target, raises concerns about fiscal sustainability and could exert pressure on interest rates. This challenging fiscal environment has already led to credit rating downgrades from Moody's and Standard & Poor's, with the latter maintaining a negative outlook.

Political uncertainty in a pre-election year, coupled with ongoing reforms (labor and health) and a proposed referendum, contributes to market volatility. The exchange rate is expected to remain volatile, with the country risk premium potentially affected by these fiscal and electoral pressures. Furthermore, regulatory pressures, such as changes in interest rate caps for consumer loans, continue to impact NIM, forcing banks to adapt their product offerings and pricing strategies. Intense price competition for high-quality corporate clients also continues to constrain commercial loan growth and margins.

Looking beyond 2025, Grupo Aval has a long-term aspiration for its ROE to return to more than 15%, a target it aims to achieve by the end of 2026 and into the following year. This ambitious goal reflects confidence in its strategic initiatives, particularly the ongoing benefits from financial diversification, operational efficiencies through AVC, and continued digital transformation.

Conclusion

Grupo Aval is demonstrating a compelling investment narrative, characterized by a robust financial recovery and a clear strategic roadmap for sustained profitability. Its strong Q2 2025 results, marked by significant net income growth and expanding NIM, underscore the effectiveness of its disciplined approach to lending and proactive balance sheet management. The company's deep-seated competitive advantages, including localized market expertise and an extensive multi-bank network, are being further fortified by targeted investments in digital transformation and operational synergies through Aval Valor Compartido.

While the macroeconomic landscape presents notable challenges, particularly concerning Colombia's fiscal sustainability and political uncertainty, AVAL's resilient portfolio structure and strategic focus on higher-yielding retail segments position it favorably. The company's commitment to leveraging technology, from AI integration to instant payment systems, is not merely about modernization but about enhancing its competitive moat, improving efficiency, and driving long-term value creation. With a clear path towards double-digit ROE in 2025 and an ambitious long-term target, Grupo Aval presents a compelling case for investors seeking exposure to a financially sound and strategically evolving leader in the Colombian and Central American financial services sector.