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Bancolombia: Run a Mile Down the Streets of Antioquia

Banco De Bogota: Value Colombia. Buy on the Negative Noise.

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

Colombia Financials / Thematic (Sector/Industry)

Grupo Aval Acciones y Valores (PFAVAL CB)

Judged by Q221 PH Scores™ , and the positive reaction to quarterly results, Colombian financials may be headed for a period of outperformance.We have been concerned about asset quality weakness in recent quarters, compounded by the Pandemic that has accentuated excessive consumer lending in recent years. At the peak of C-19, some 45% of Loans were under "relief" programmes. This has thankfully subsided.  The social unrest earlier in the year also added to the imbroglio.We had been negative on Bancolombia for some time but recent quarterly results point in the right direction. Bancolombia delivered a Q221 ROE of 16%. The bank expects to end the year with an ROE of between 8% and 10%, as the bank's equity continues to recover from the low point reached in the last quarter of 2020. Pre-pandemic estimates of ROE of between 12% and 14% are still achievable given evolution in digitalisation and fintech. The bank's two digital platforms, which also include Nequi, are supporting its fee generation, with expected combined gross fee income for both entities at about 47 billion Colombian pesos. The bank looks past the worst and on the way to recovery despite lingering C-19 provisioning challenges. Share price reaction to Q221 numbers was highly favourable. Given valuations, it may be worth playing the change in fortunes at Bancolombia via Grupo Sura which incorporates a defensive asset management business with core insurance and other investments.Grupo Aval was always in better shape than its Antioquia peer, and results are also most encouraging. Aval does well in Central America where Colombian banks have extended their tentacles in recent years. Aval trades at 10% of Deposits which is attractive relative to other LATAM lenders while PBV is a shade above 1x, Earnings Yield stands at 15%, and the Total Return Ratio fetches 2.5x. Managed by the conservative Sarmiento family, prospects appear benign. 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.For the more intrepid investor, Corficolombiana catches the eye. Part of Aval, this is a diversified business (energy, hotels, infra, agro) with a focus on credit, investment, and financial intermediation. Delivering a net margin of 20%, a ROA OF 7.2%, and ROE of 24%, shares are too cheap, trading at 1.16 BV. Fundamental momentum is stellar with key variables in the PH Score all improving. As a financial corporation, there are structural positives. In contrast to banks, Capitalization and Liquidity are very strong. This is a lower risk investment in theory though infrastructure can be a complex business at times and palm oil needs to be managed delicately.

Judged by Q221 PH Scores™ , and the positive reaction to quarterly results, Colombian financials may be headed for a period of outperformance.We have been concerned about asset quality weakness in recent quarters, compounded by the Pandemic that has accentuated excessive consumer lending in recent years. At the peak of C-19, some 45% of Loans were under "relief" programmes. This has thankfully subsided.  The social unrest earlier in the year also added to the imbroglio.We had been negative on Bancolombia for some time but recent quarterly results point in the right direction. Bancolombia delivered a Q221 ROE of 16%. The bank expects to end the year with an ROE of between 8% and 10%, as the bank's equity continues to recover from the low point reached in the last quarter of 2020. Pre-pandemic estimates of ROE of between 12% and 14% are still achievable given evolution in digitalisation and fintech. The bank's two digital platforms, which also include Nequi, are supporting its fee generation, with expected combined gross fee income for both entities at about 47 billion Colombian pesos. The bank looks past the worst and on the way to recovery despite lingering C-19 provisioning challenges. Share price reaction to Q221 numbers was highly favourable. Given valuations, it may be worth playing the change in fortunes at Bancolombia via Grupo Sura which incorporates a defensive asset management business with core insurance and other investments.Grupo Aval was always in better shape than its Antioquia peer, and results are also most encouraging. Aval does well in Central America where Colombian banks have extended their tentacles in recent years. Aval trades at 10% of Deposits which is attractive relative to other LATAM lenders while PBV is a shade above 1x, Earnings Yield stands at 15%, and the Total Return Ratio fetches 2.5x. Managed by the conservative Sarmiento family, prospects appear benign. 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.For the more intrepid investor, Corficolombiana catches the eye. Part of Aval, this is a diversified business (energy, hotels, infra, agro) with a focus on credit, investment, and financial intermediation. Delivering a net margin of 20%, a ROA OF 7.2%, and ROE of 24%, shares are too cheap, trading at 1.16 BV. Fundamental momentum is stellar with key variables in the PH Score all improving. As a financial corporation, there are structural positives. In contrast to banks, Capitalization and Liquidity are very strong. This is a lower risk investment in theory though infrastructure can be a complex business at times and palm oil needs to be managed delicately.

Colombian Financials: Turning Around