Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Event-Driven

<ul>
<li>For Grupo Gilinski to achieve shareholder control of BanColombia seems increasingly unlikely, and there increased opposition from Grupo Sura and the Grupo Empresarial Antioqueño (GEA)</li>
<li>Nonetheless, Gilinski is effectively creating shareholder value by behaving like an activist investor putting pressure on management teams, particularly in BanColombia and in the other core components of the GEA</li>
<li>BanColombia is delivering improved fundamental performance, as seen in 1Q22 and 2Q22 results, with 2022E ROE guidance of c20% yet to be reflected in its modest PBV ratio of 0.9x</li>
</ul>


For Grupo Gilinski to achieve shareholder control of BanColombia seems increasingly unlikely, and there increased opposition from Grupo Sura and the Grupo Empresarial Antioqueño (GEA)
Nonetheless, Gilinski is effectively creating shareholder value by behaving like an activist investor putting pressure on management teams, particularly in BanColombia and in the other core components of the GEA
BanColombia is delivering improved fundamental performance, as seen in 1Q22 and 2Q22 results, with 2022E ROE guidance of c20% yet to be reflected in its modest PBV ratio of 0.9x


Grupo Gilinski – Grupo Sura; Focus on BanColombia (CIB US)

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

Grupo Aval Acciones y Valores / Equity Bottom-Up

Colombia is recovering from a traumatic bout of civil unrest, fuelled no doubt by frustrations with a tough Lockdown. Similar to Chile’s protests awhile back, there was an eruption of popular protest against what was perceived to be unfair government policy. Similar to South Africa, unemployment is way too high. However, there are signs that the economy is gradually on the mend (judging by GDP pickup at Q121) and that Colombia, like Chile, still remains a less unstable proposition, though still far from ideal, when compared to populist jurisdictions elsewhere in the region such as Brazil, Peru, and Argentina and to some extent Mexico. There is though a real risk that Colombia will lose its Investment Grade status (as it did in the Samper-Pastrana years) as attempts to “fix” its burgeoning Fiscal Deficit, the result of C-19, are politically challenging.NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.Colombia accounts for 64% of Aval Assets while Central America contributes 36% of the total. Colombian operations generally show better Profitability and Efficiency though Asset Quality and CoR, growth of Deposits, Income Diversification, and NIM are more advantageous in Central America. While once seen as a weak link in the Sarmiento chain, Central America is progressively showing its merits within the Group and adding value to the Group.In terms of trends and value-quality, a PH Score™ of 5.6 understates the fundamental momentum of the Group. Liquidity, Provisioning, and Efficiency are all moving in the right direction while well above-average Profitability has not eroded greatly. Common Equity/Assets is broadly stable: with Basel 111 Solvency rules, now implemented, key Capitalisation ratios are improving.  NIM (still relatively elevated versus Asia or Europe for example) and Asset Quality (controlled) showed some softness.While Earnings Quality looks optically poor, it rather reflects the weight of the contribution of hotels, gas, and energy holdings plus non-controlling interest in Grupo Aval (the minority stakes that third party shareholders hold in each of its direct consolidated subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana), and the minority stakes that third party shareholders hold in the consolidated subsidiaries at the bank level (mainly Porvenir pension fund)).<div class="content-highlight">A FV of 11%, a PBV of 1.15x, an Earnings Yield of 11.9%, a Dividend Yield of 5.1% and a Total Return Ratio of 1.6x should raise animal spirits somewhat. While the bank commands moderate fundamental momentum, the combination of an oversold trading position and a quite attractive valuation all place Aval in the the top global quartile by VFM (Valuation, Fundamentals, and Momentum).</div>

Colombia is recovering from a traumatic bout of civil unrest, fuelled no doubt by frustrations with a tough Lockdown. Similar to Chile’s protests awhile back, there was an eruption of popular protest against what was perceived to be unfair government policy. Similar to South Africa, unemployment is way too high. However, there are signs that the economy is gradually on the mend (judging by GDP pickup at Q121) and that Colombia, like Chile, still remains a less unstable proposition, though still far from ideal, when compared to populist jurisdictions elsewhere in the region such as Brazil, Peru, and Argentina and to some extent Mexico. There is though a real risk that Colombia will lose its Investment Grade status (as it did in the Samper-Pastrana years) as attempts to “fix” its burgeoning Fiscal Deficit, the result of C-19, are politically challenging.NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.Colombia accounts for 64% of Aval Assets while Central America contributes 36% of the total. Colombian operations generally show better Profitability and Efficiency though Asset Quality and CoR, growth of Deposits, Income Diversification, and NIM are more advantageous in Central America. While once seen as a weak link in the Sarmiento chain, Central America is progressively showing its merits within the Group and adding value to the Group.In terms of trends and value-quality, a PH Score™ of 5.6 understates the fundamental momentum of the Group. Liquidity, Provisioning, and Efficiency are all moving in the right direction while well above-average Profitability has not eroded greatly. Common Equity/Assets is broadly stable: with Basel 111 Solvency rules, now implemented, key Capitalisation ratios are improving.  NIM (still relatively elevated versus Asia or Europe for example) and Asset Quality (controlled) showed some softness.While Earnings Quality looks optically poor, it rather reflects the weight of the contribution of hotels, gas, and energy holdings plus non-controlling interest in Grupo Aval (the minority stakes that third party shareholders hold in each of its direct consolidated subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana), and the minority stakes that third party shareholders hold in the consolidated subsidiaries at the bank level (mainly Porvenir pension fund)).A FV of 11%, a PBV of 1.15x, an Earnings Yield of 11.9%, a Dividend Yield of 5.1% and a Total Return Ratio of 1.6x should raise animal spirits somewhat. While the bank commands moderate fundamental momentum, the combination of an oversold trading position and a quite attractive valuation all place Aval in the the top global quartile by VFM (Valuation, Fundamentals, and Momentum).

Grupo Aval: Calm After the Tropical Storm

<ul>
<li>
<a href="https://www.smartkarma.com/entities/bancolombia-sa" target="_blank" data-smartkarma-citation="entities:24412:1" rel="noopener">Bancolombia SA (CIB US)</a> shares have been a clear outperformer to Andean peer <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> year to date</li>
<li>This can be justified by good macro-economics in Colombia and jittery politics in Peru, in our view, as well as a narrowing of the ROE differential between the two banks</li>
<li>We believe, that looking into 2020, we should see a reversal in share performance, as we believe that the worst is over in Credicorp's ROE compression </li>
<li>Credicorp's stock's de-rating is, we believe, overdone relative to its cut in consensus ROE expectations </li>
<li>We expect BanColombia to struggle to improve its efficiency ratio meaningfully; it will be a real challenge to break through the ROE expectations range of 13-14% by 2021, in our view</li>
<li>Credicorp now trades at a narrower PBV ratio premium to its core peer, and is close to its own three year low in PBV ratio terms</li>
<li>Risks to our positive view on Credicorp include increased Peruvian political tension hurting investor sentiment, along with lower than expected Peruvian GDP growth impacting loan growth and credit quality</li>
</ul>



Bancolombia SA (CIB US) shares have been a clear outperformer to Andean peer Credicorp Ltd (BAP US) year to date
This can be justified by good macro-economics in Colombia and jittery politics in Peru, in our view, as well as a narrowing of the ROE differential between the two banks
We believe, that looking into 2020, we should see a reversal in share performance, as we believe that the worst is over in Credicorp's ROE compression 
Credicorp's stock's de-rating is, we believe, overdone relative to its cut in consensus ROE expectations 
We expect BanColombia to struggle to improve its efficiency ratio meaningfully; it will be a real challenge to break through the ROE expectations range of 13-14% by 2021, in our view
Credicorp now trades at a narrower PBV ratio premium to its core peer, and is close to its own three year low in PBV ratio terms
Risks to our positive view on Credicorp include increased Peruvian political tension hurting investor sentiment, along with lower than expected Peruvian GDP growth impacting loan growth and credit quality


Andean Banks: We Prefer Peru's Credicorp (BAP US) To BanColombia (CIB US)

United States

Grupo Aval Acciones y Valores S.A. operates as a holding company of investments in stocks, bonds and other financial instruments in Colombia, primarily in the financial sector.

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Grupo Aval Acciones y Valores (AVAL US)

Grupo Gilinski – Grupo Sura; Focus on BanColombia (CIB US)

Gilinski's activist style is putting pressure on GEA management, especially BanColombia, to improve returns; the higher ROE in 1Q22 and 2Q22 has...

Victor Galliano

Grupo Aval: Calm After the Tropical Storm

Grupo Aval shares look oversold given prospects of a better macro environment in Colombia and continuing progress in Central America.

Paul Hollingworth

Andean Banks: We Prefer Peru's Credicorp (BAP US) To BanColombia (CIB US)

Bancolombia SA (CIB US) shares have been a clear outperformer to Andean peer Credicorp Ltd (BAP US) year to date This can be justified by good...

Victor Galliano

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