The South American company, whose portfolio includes Banco de Bogota and Banco Popular, now forecasts loan growth at 4% to 5% over the year, after guiding a 7% to 8% range last quarter.

Annual cost of risk, net of recoveries, should land at around 2%, it said, after previously guiding 1.6%-1.7%.

Despite soaring net interest income, Grupo Aval's quarterly earnings suffered from a $80 million settlement involving one of its subsidiaries in a U.S. corruption case, which Chief Executive Luis Sarmiento said was now fully closed both in the United States and Colombia.

The appreciation of the peso and rising costs of funds also hit margins at its banking subsidiaries.

"If our views are correct, the cost of funds will begin to subside after the third quarter once the government starts to execute budgets and the central bank starts cutting rates," Sarmiento said in an earnings call.

Grupo Aval expects Colombia's central bank easing cycle to begin by the end of this year, with analysts pegging the first interest rate cut for September or October.

Sarmiento said last year's NSFR disclosure requirements had forced banks to load their balance sheets with "exorbitant costs" compared to government-issued fixed-rate debentures.

"This need for funding could not come at a worst moment," Sarmiento added, saying results from budget execution were not circulating in the economy but instead remained deposited in the country's central bank.

Sentiment the government will be unable to pass its current reform agenda seemed to be driving the appreciation of the volatile Colombian peso, he added.

"Once this process is over, we foresee the peso to reestablish a depreciation path," Sarmiento said.

(Reporting by Sarah Morland and Marion Giraldo; Editing by Valentine Hilaire, Frances Kerry and Alistair Bell)

By Sarah Morland and Marion Giraldo