Executive Summary / Key Takeaways

• Three-Year Margin Inflection Finally Arrives: After struggling since 2022, Grupo Aval's net interest margin hit 4% in Q2 2025 and 4.3% in Q3, the highest quarterly levels in three years. This recovery isn't just monetary policy normalization—management is actively restructuring asset and liability mixes to reduce dependence on central bank cycles, suggesting structural improvement in earnings power.

• Record Market Share Amid Macro Headwinds: The company achieved its highest historical mortgage market share at 16.6% and maintained 25.3% of Colombia's loan market despite aggressive price competition and a high-rate environment. This demonstrates competitive strength that transcends cyclical pressures, positioning Aval to capture disproportionate upside when macro conditions ease.

• Strategic Diversification Beyond Traditional Banking: The launch of Gou Payments (45% merchant market share in instant payments) and the creation of Aval Fiduciaria (set to become Colombia's largest fiduciary with COP 201 trillion in assets) are transforming Aval from a bank holding company into a comprehensive financial ecosystem. These moves diversify revenue streams and create cross-selling opportunities that pure-play banks cannot replicate.

• Operational Leverage Through Aval Valor Compartido: The AVC synergy program has already reduced procurement cycle times by 40% and simplified contracts by 50%. This operational restructuring shows management attacking the cost structure while competitors remain focused on top-line growth, potentially creating a durable cost advantage.

• Key Risk: Fiscal Sustainability and Political Uncertainty: With Colombia's fiscal deficit projected at 7.5% of GDP and a contentious 2026 presidential election ahead, macro volatility remains the primary threat. However, Aval's multi-bank structure and geographic diversification through Central America provide resilience that single-bank competitors lack.

Setting the Scene: Colombia's Financial Conglomerate

Grupo Aval Acciones y Valores S.A., incorporated in 1994 in Bogotá, Colombia, operates as a financial conglomerate rather than a traditional bank. This distinction fundamentally changes the risk/reward profile. While most investors view Aval as a proxy for Colombian economic cycles, its structure—four commercial banks (Banco de Bogotá, Banco de Occidente, Banco Popular, and BAC Credomatic), a leading pension manager (Porvenir), and now a payments platform and fiduciary business—creates diversification that single-bank competitors cannot match.

The company generates revenue through three primary channels: net interest income from lending (approximately 75% of revenue), fee income from pensions and asset management (growing to 21% of fee income ratio), and non-financial sector income from infrastructure and energy investments.

This multi-pronged approach means Aval can offset weakness in one segment with strength in another, a crucial advantage in Colombia's volatile macro environment.

Aval sits in an oligopolistic market where the top three players control roughly 65% of banking assets. The company holds approximately 25.3% of loan market share and 16.6% of mortgages—its highest level ever. This positioning provides pricing power and scale economies, but also makes Aval a systemic risk in Colombia's financial system. In November 2024, Banco de Occidente was designated a systemic bank, requiring a phased 100 basis point increase in core equity Tier 1 capital over two years. While this increases capital requirements, it also solidifies Aval's too-big-to-fail status, potentially lowering its cost of funding over time.

The macro backdrop is challenging. Colombia's fiscal deficit is projected at 7.5% of GDP in 2025, inflation remains above the central bank's target at 5.3%, and the policy rate stands at 9.25%. The 2026 presidential election cycle is creating political uncertainty that delays investment decisions. Yet Aval's ability to gain market share in this environment signals that its strategic initiatives are working, not just riding a cyclical wave.

Technology, Products, and Strategic Differentiation

Gou Payments: Capturing the Digital Rails

The September 2025 launch of Gou Payments represents Aval's most significant technological bet. With 8.9 million alphanumeric keys enabled and 45% market share in merchant keys, Gou is positioned as the dominant instant payment platform in Colombia. Instant payments reduce cash usage, increase transaction velocity, and generate valuable data on customer behavior. Brazil's experience suggests cash transactions could fall from 75% to 55% of total payments, creating a massive addressable market.

Gou's strategic value extends beyond fee income. As the platform connecting fintechs, trust companies, and other banks to the central bank's immediate payment system (CENIT), Aval becomes the gatekeeper for digital financial infrastructure. This creates network effects: the more participants join Gou, the more valuable it becomes, reinforcing Aval's ecosystem lock-in. The platform processed COP 2 trillion in transactions in its first month, demonstrating immediate scale.

Aval Fiduciaria: Asset Management Dominance

The integration of three fiduciary businesses into Aval Fiduciaria, set to launch January 2, 2026, will create Colombia's largest fiduciary with COP 201 trillion in assets under management and 21% of fee income market share. This consolidation transforms a fragmented, low-margin business into a scaled, high-margin operation. With over 5,500 trust funds under management, Aval Fiduciaria can spread fixed costs across a larger base and offer more sophisticated products to retail, corporate, and institutional clients.

The cross-selling potential is material. Aval Fiduciaria will coordinate with all four banks, Porvenir, and Aval Casa de Bolsa, creating an integrated commercial model that competitors cannot replicate. This synergy is projected to generate 13.2% fee income growth in 2026, well above the sector's 12.7%, while administration growth of 15.4% versus 7.1% industry average demonstrates superior value capture.

Aval Valor Compartido: The Cost Advantage Engine

AVC is not a revenue segment but a strategic pillar that attacks the cost structure. The 40% reduction in procurement cycle time and 50% simplification of active contracts translate directly to faster time-to-market and lower administrative expenses. In Q2 2025, the procurement synergy center began operating on a COP 4.3 trillion spending base, expecting initial savings exceeding 10% of manageable spending.

This operational leverage shows management building a structural cost advantage while competitors focus on revenue growth. The second wave of synergies launching in 2026 will target back-office banking processes and IT infrastructure, including cloud optimization and physical channel network consolidation. These initiatives could reduce the cost-to-assets ratio from 2.75% to 2.8% while improving service quality, a rare combination in banking.

Financial Performance & Segment Dynamics

Banking Segment: Margin Recovery and Quality Improvement

The banking segment's Q3 2025 performance provides clear evidence of the margin inflection thesis. Consolidated net interest income grew 11.6% to COP 2.9 trillion, driving the NIM to 4.3%—the highest in three years.

More importantly, the banking segment's NIM on loans held stable at 4.88% year-on-year, suggesting that management's mix-shift strategy is working despite high central bank rates.

Loan quality improvement is equally significant. The 90-day past due loan ratio fell to 3.7%, the lowest since Q4 2022, while the cost of risk remained controlled at 1.9%. Aval's conservative underwriting through the cycle—focusing on payroll loans and secured lending rather than unsecured consumer credit—is paying off. When competitors were chasing growth in 2021-2022, Aval maintained discipline; now, as those peers face higher provisions, Aval's cost of risk is improving.

Deposit mix improvement is another key driver. Peso-denominated deposits from individuals grew 22% year-on-year, with the share of individual deposits rising from 16.7% in Q1 2025 to 18.2% in Q2. Retail deposits are stickier and cheaper than corporate funding, providing a more stable liability base that supports NIM expansion.

Pensions and Severance: Porvenir's Resilience

Porvenir contributed strongly to Q3 2025 results, with performance-based management fees benefiting from positive financial market returns. While Q4 2024 saw weakness due to capital market volatility, the full-year 2024 performance was the best on record. The pension reform uncertainty creates near-term risk, but management has prepared for both scenarios. If implemented as planned, the reform would be positive short-term; long-term, while private sector volumes may decrease, Aval's existing customer base is largely in the transition cohort, mitigating impact.

Non-Financial Sector: Temporary Headwind

Income from the non-financial sector (infrastructure, energy, gas, hospitality) was 88% of prior-year levels in Q3 2025, primarily due to infrastructure concessions transitioning from construction to operation phases. This creates a temporary earnings drag, but management's guidance for 2026 projects income at 1.3 times 2025 levels, suggesting a clear recovery path. The energy and gas segment grew 7.1% in 2024, with Promigas increasing gas distribution volumes by 16%, demonstrating underlying strength.

Outlook, Guidance, and Execution Risk

Management's guidance tells a story of cautious optimism grounded in macro realities. For 2025, they project loan growth of 4.5% (commercial 2%, retail 8.5%), consolidated NIM of 4%, and ROE of 10.5%. The 2026 outlook accelerates meaningfully: loan growth of 8% (commercial 7%, retail 9%), NIM of 4.3%, and ROE of 12-12.5%.

These numbers imply a 140-190 basis point ROE improvement in one year, which is aggressive but achievable if the margin expansion thesis holds. The key assumption is that the central bank will begin cutting rates in Q2 2026, ending the year at 8.25%. However, management emphasizes that much of the NIM improvement is independent of monetary policy, driven instead by asset-liability mix changes and AVC cost savings.

Execution risk centers on two areas: digital transformation and political stability. The Gou Payments platform must scale from 8 million keys to become the dominant payment rail, requiring continued investment and customer acquisition. The AVC program must deliver on its second-wave synergies in 2026, targeting back-office processes and IT infrastructure. Any slippage here would delay the cost savings that underpin the ROE improvement.

The 2026 presidential election creates political uncertainty that could delay investment decisions and increase market volatility. Management acknowledges this but notes that Aval's diversified model provides resilience. The company's guidance assumes a neutral scenario on pension reform and a gradual fiscal adjustment, but a more adverse political outcome could pressure loan growth and asset quality.

Risks and Asymmetries

Fiscal Sustainability: The Macro Overhang

Colombia's fiscal deficit, projected at 7.5% of GDP in 2025, represents the single largest risk to Aval's thesis. If the government cannot implement credible fiscal consolidation, the central bank may be forced to keep rates higher for longer, delaying the NIM recovery. Worse, a fiscal crisis could trigger a sovereign rating downgrade, increasing funding costs across the banking system and compressing margins.

The asymmetry here is that Aval's multi-bank structure and Central American diversification provide a buffer that single-bank competitors lack. While a fiscal crisis would hurt all players, Aval's scale and systemic importance could allow it to gain market share as weaker competitors retreat. The company's 109% deposits-to-loans ratio provides ample liquidity to weather a funding squeeze.

Price Competition in Commercial Loans: The Margin Squeeze

Aval lost 77 basis points of market share in commercial loans year-on-year as of Q3 2025, reflecting aggressive price competition for high-quality corporate clients. Management has maintained pricing discipline, sacrificing volume for profitability, but this dynamic pressures NIM on the commercial side. If competitors continue to underprice risk, Aval could face a choice between margin compression or further market share loss.

The asymmetry is that Aval's retail deposit growth and consumer loan expansion (gaining 56 basis points in consumer loans and 188 basis points in mortgages) offset commercial weakness. As the economy shifts toward consumer-led growth, Aval's product mix is well-positioned. The Gou Payments platform also provides a new revenue stream that is less susceptible to corporate loan pricing wars.

Execution Risk on Synergies: The Cost Savings Promise

The AVC program's second wave, launching in 2026, targets operational synergies that are more complex and harder to capture than the initial administrative savings. If management cannot deliver on the promised cost-to-assets ratio improvement, the ROE expansion thesis fails. Restructuring costs could also delay net results, creating near-term earnings volatility.

The asymmetry is that Aval has already demonstrated tangible progress: 40% procurement cycle reduction, 50% contract simplification, and successful payroll centralization at Banco de Bogotá. These early wins suggest the organization can execute on more complex initiatives. The phased implementation also allows for course correction, reducing the risk of a large-scale failure.

Competitive Context and Positioning

Versus Bancolombia (CIB): The Market Leader

Bancolombia commands 27.8% of assets and 24.7% of gross loans, with a ROE of 17.42% versus Aval's 9.25%. This gap reflects Bancolombia's superior digital capabilities, particularly its Nequi fintech platform, and more efficient capital deployment. However, Aval's recent net income growth of 25.3% in Q3 2025 outpaces Bancolombia's more modest expansion, and Aval's multi-bank model provides diversification that Bancolombia's unified structure lacks.

Aval's mortgage market share gains (188 basis points year-on-year) are particularly notable because they come at the expense of competitors like Bancolombia. While Bancolombia leads in digital onboarding and user adoption, Aval's strength in pensions and asset management creates stickier customer relationships. The Gou Payments platform also positions Aval to compete directly with Nequi in the instant payments space, potentially eroding Bancolombia's fintech advantage.

Versus Davivienda: The Regional Challenger

Davivienda holds 12.2% market share in loans with a strong presence in Central America, overlapping with Aval's BAC Credomatic operations. Davivienda's NIM of 5.72% exceeds Aval's 4.3%, reflecting a more focused loan portfolio. However, Aval's diversified revenue streams—pensions, asset management, payments—provide better earnings stability. Davivienda's cost of risk has been higher, while Aval's conservative underwriting has resulted in better portfolio quality.

Aval's Aval Fiduciaria integration creates a scale advantage in asset management that Davivienda cannot match. The projected 13.2% fee income growth in 2026, driven by 20% funds fee growth, demonstrates Aval's ability to capture value in non-interest income where Davivienda is less competitive.

Versus BBVA Colombia (BBVA): The Global Player

BBVA Colombia benefits from its parent's global technology investments and advanced AI-driven analytics, enabling faster risk assessment and superior digital experiences. However, Aval's local market knowledge and entrenched customer relationships provide a defensive moat. BBVA's global compliance requirements create higher operational costs, while Aval's domestic focus allows for more agile decision-making.

Aval's systemic importance in Colombia—two of its banks are now designated systemic—provides a regulatory advantage. While BBVA must balance global and local priorities, Aval can focus entirely on the Colombian and Central American markets, tailoring products to local needs more effectively.

Valuation Context

Trading at $4.24 per share, Grupo Aval carries a market capitalization of $5.06 billion and an enterprise value of $13.36 billion. The stock trades at 11.46 times trailing earnings and 20.98 times book value, with a dividend yield of 3.33% and a payout ratio of 37.8%. The return on equity of 9.25% trails the 12-12.5% guidance for 2026, suggesting the market has not yet priced in the operational improvements.

Compared to Bancolombia's P/E of 7.74 and ROE of 17.42%, Aval appears expensive on earnings but cheaper on growth prospects. Bancolombia's higher ROE reflects mature efficiency, while Aval's lower multiple on forward earnings (implied by guidance) suggests upside if execution delivers. Davivienda's similar capital ratios but slower growth make Aval's diversification premium justified.

The enterprise value-to-revenue ratio of 2.93x aligns with regional banking peers, but Aval's expanding fee income from payments and asset management should command a higher multiple over time. The key valuation driver is whether the company can achieve its 2026 ROE target of 12-12.5%. At 9.25% current ROE, the stock prices in moderate success; full execution would imply 35-40% upside to match Bancolombia's valuation multiple.

Conclusion

Grupo Aval's investment thesis hinges on two interrelated dynamics: the structural recovery of net interest margins after a three-year trough, and the successful diversification into higher-growth, higher-margin businesses like payments and asset management. The Q3 2025 results provide compelling evidence that both trends are materializing. NIM has reached 4.3%, loan quality is improving, and Gou Payments has captured 45% of the merchant instant payment market in just three months.

The company's ability to gain market share—reaching record-high 16.6% in mortgages—while maintaining pricing discipline in a hyper-competitive commercial loan environment demonstrates competitive strength that transcends macro headwinds. The AVC synergy program is not just a cost-cutting exercise but a fundamental restructuring of Aval's operating model, creating a potential cost advantage that will become more visible in 2026.

The primary risk remains Colombia's fiscal sustainability and the political uncertainty of the 2026 election cycle. However, Aval's multi-bank structure, Central American diversification, and systemic importance provide resilience that single-bank competitors lack. The company's guidance for 12-12.5% ROE in 2026 is ambitious but achievable if margin expansion continues and cost savings materialize.

For investors, the critical variables to monitor are NIM progression independent of central bank policy and the pace of AVC synergy realization. If Aval can deliver on these fronts, the stock's current valuation represents an attractive entry point before the market fully recognizes the transformation from a traditional bank holding company to a diversified financial ecosystem. The margin inflection is real, the market share gains are sustainable, and the strategic diversification is creating new avenues for growth that will define Aval's next decade.