Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/bancolombia-sa" target="_blank" data-smartkarma-citation="entities:24412:1" rel="noopener">Bancolombia SA (CIB US)</a> To date, FY20/19 PH Scores™ out of LATAM have been far from rosy versus other jurisdictions. Colombia is especially weak with a burgeoning Asset Quality imbroglio.Scores have not been helped by the challenging macro picture. Unemployment is now 17.3%. COVID-related expenditures have contributed to a swollen fiscal deficit of 8.9% of GDP while debt levels are around 60% of GDP. Rating agencies will be monitoring Colombia closely in the coming months and looking for a palliative Tax Reform strategy. The country can ill afford to lose its IG status again despite low rates and ample Liquidity.Forceful consumer lending (much of it unsecured) pre-pandemic and winding down relief packages are filtering through the system now in the form of impaired assets. (At the peak of the Pandemic a remarkable 45% of all banking loans to the private sector were under some form of relief). CIB’s NPL ratio is now 8.56%. Impaired Loans stand at an elevated (versus peers) 44% of Tangible Equity and Reserves. LLPs have soared as NCOs and profits have contracted. Antioquia-based CIB dedicates itself to mainly corporate lending (2/3rds of loan book) and to a lesser extent the consumer segment (1/3rd of portfolio), backed by a reasonably robust source of funding from CASA deposits (65%). We note that about a third of credit is related to real estate (CRI plus mortgages) which strikes us as unbalanced – there is an excessive dependence on CRI. About a third of loans are originated in USD. FY20/19 results show subpar fundamental momentum and trends with erosion in Profitability, in NIM/Spread, in headline Asset Quality, and in Capital Adequacy (Equity/Assets) though Efficiency (CIR), Liquidity, and Provisioning were more positive. Other Efficiency measures were in fact less favorable while most Capitalization ratios were actually better. “Core Income” was down YoY, helped by reduced Funding Costs from Interest-bearing Liabilities, broadly in line with OPEX change, while “non-core Income” streams (hefty “other Noninterest Income as well as trading gains) exerted a forceful pull on the contracting bottom-line, raising questions about earnings quality. A sizeable increase in LLPs exerted a negative impact on Comprehensive Income which fell by 94% YoY.<div class="content-highlight">A FV of 15%, a PBV of 1.1x, a Dividend Yield of 0.86%, and an Earnings Yield of 1.0% are unappealing. The bank commands a subpar PH Score™ (4.5) which captures value-quality trends.</div>We appreciate that there are C-19/relief distortions but the glass looks more “half empty” than “half full” going forward.

Bancolombia SA (CIB US) To date, FY20/19 PH Scores™ out of LATAM have been far from rosy versus other jurisdictions. Colombia is especially weak with a burgeoning Asset Quality imbroglio.Scores have not been helped by the challenging macro picture. Unemployment is now 17.3%. COVID-related expenditures have contributed to a swollen fiscal deficit of 8.9% of GDP while debt levels are around 60% of GDP. Rating agencies will be monitoring Colombia closely in the coming months and looking for a palliative Tax Reform strategy. The country can ill afford to lose its IG status again despite low rates and ample Liquidity.Forceful consumer lending (much of it unsecured) pre-pandemic and winding down relief packages are filtering through the system now in the form of impaired assets. (At the peak of the Pandemic a remarkable 45% of all banking loans to the private sector were under some form of relief). CIB’s NPL ratio is now 8.56%. Impaired Loans stand at an elevated (versus peers) 44% of Tangible Equity and Reserves. LLPs have soared as NCOs and profits have contracted. Antioquia-based CIB dedicates itself to mainly corporate lending (2/3rds of loan book) and to a lesser extent the consumer segment (1/3rd of portfolio), backed by a reasonably robust source of funding from CASA deposits (65%). We note that about a third of credit is related to real estate (CRI plus mortgages) which strikes us as unbalanced – there is an excessive dependence on CRI. About a third of loans are originated in USD. FY20/19 results show subpar fundamental momentum and trends with erosion in Profitability, in NIM/Spread, in headline Asset Quality, and in Capital Adequacy (Equity/Assets) though Efficiency (CIR), Liquidity, and Provisioning were more positive. Other Efficiency measures were in fact less favorable while most Capitalization ratios were actually better. “Core Income” was down YoY, helped by reduced Funding Costs from Interest-bearing Liabilities, broadly in line with OPEX change, while “non-core Income” streams (hefty “other Noninterest Income as well as trading gains) exerted a forceful pull on the contracting bottom-line, raising questions about earnings quality. A sizeable increase in LLPs exerted a negative impact on Comprehensive Income which fell by 94% YoY.A FV of 15%, a PBV of 1.1x, a Dividend Yield of 0.86%, and an Earnings Yield of 1.0% are unappealing. The bank commands a subpar PH Score™ (4.5) which captures value-quality trends.We appreciate that there are C-19/relief distortions but the glass looks more “half empty” than “half full” going forward. 

Bancolombia: Run a Mile Down the Streets of Antioquia