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Bancolombia: Model Update – BUY

A well-capitalized leader with positive outlook; upgrading to BUY

Price: COP 29,640; 2015E T.P.: COP 35,000

August 11, 2014 ( newswire) We are fine-tuning our valuation model of Bancolombia after strong 2Q14 results on the back of an expansion on loan NIM and better cost of credit. We consider that Bancolombia still offers value to shareholders given the strong macro outlook for Colombia, lower exposure to fixed-income securities, better asset quality and positive pressures for NIM, which will mitigate opex growth driven by the consolidation of Banistmo. Our 2015E T.P. at COP 35,000 implies 1.9x 2015E P/B and 12.5x 2016E P/E. We upgrade to BUY based on attractive upside potential.

  • Our investment thesis is constructive. Bancolombia is the leading banking franchise in Colombia (2nd largest conglomerate after Grupo Aval), and will lever on the attractive macro outlook of the country, recording an average loan growth of 12% in the next three years. This, coupled with a more conservative risk management and the expected effects of the monetary tightening in NIM, results in an appealing investment thesis.
  • The main challenge is efficiency. The cost-to-income ratio will remain relatively high as a result of opex from the consolidation of Banistmo, a large payroll, and some accounting policies that impair the ratio (i.e. amortization of Goodwill). Nonetheless we expect improvements in this front, with a cost-to-income ratio of 54% in 2015 (47% excluding D&A) due to a stable headcount and network size.
  • ROAE is in the lower end of our banking space, but shares still offer value. We expect ROAE to close at 13.7% and 14.3% in 2014E and 2015E respectively, in the lower end of our banking space. However, trading at 11.6x 2015E P/E and 1.7x 2014E P/B, Bancolombia could still generate value to shareholders despite the recent rally of the shares.
  • Risks to our outlook. Main downside risks include a lower-than-expected loan growth on the back of strong competition or negative surprises in economic activity; a surge on cost of credit risk, and further issues preventing the bank from improving its efficiency ratios. Although Tier 1 ratio at 9% looks healthy, further M&A activity (not likely in the mid-term) could reflect on dilution going forwards. There are risks regarding regulatory changes, including the effects of the adoption of IFRS.

Credicorp Capital

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