Bancolombia - BUY: Still weak trends on the operating front; we expect a gradual recovery towards 2019
Price: COP 33.960/ 46.53 (ADR) ; Target Price: COP 33,800 / 46.6 (ADR)
August 2, 2018 (Investorideas.com Newswire) Bancolombia reported net earnings of COP 591.7 bn, equivalent to a 9.5% y/y decline; more importantly, 2Q18 results came in slightly below our expectations (4.5% deviation). Profitability, measured in terms of ROAE, was 10.6% compared to our estimate of 10.8%. The lower-than-expected result was mainly driven by a weak result on NII and provision expenses higher than our valuation model. The adoption of IFRS 9 continued to have a negative effect on NII as COP 106 bn were not taken into account. Meanwhile, provision expenses were 11.7% above our forecast as SMEs and corporate clients required further provisioning. On the positive side, OPEX came in 5.2% below our expectations, and this figure was 1.2% lower than 2Q17. Finally, a lower-than-expected effective tax rate (23.8% vs 33.0%) partly mitigated the weak performance on the operating front.
We reiterate that results came in below expectations, while operating trends maintained a weak performance. That said, we reaffirm our positive view and our BUY rating on the stock for the mid term; we expect a recovery in economic activity in Colombia, and profitability should gradually pickup in upcoming quarters. Higher loan growth and lower provision expenses, particularly coming from key corporate cases in Colombia, support our view. Also, recall that we see shares of Bancolombia as a proxy to invest in Colombian equities. We expect to adjust our TP in the short term.
Loan growth remained weak. The bank's gross loan book increased only 3.2% y/y as loans in USD fell 2.4% y/y. On the other hand, growth continued to be driven by the consumer segment denominated in COP (+17.6% y/y).
Asset quality showed initial signs of recovery, but the commercial segment remained a source of concern. The consumer NPL ratio fell 16 bps from 1Q18 (3.34% vs 3.18%), while the indicator within the mortgage segment remained unchanged at 3.65%. That said, the total NPL ratio increased 40 bps q/q, driven by a 65 bps q/q increase in the corporate segment.
Mixed results in Central America. Net earnings in El Salvador increased 132.1% y/y, driven by a 60.3% y/y decline in provision expenses. Panama and Guatemala exhibited annual declines in net earnings. We continue to expect stronger delivery from these operations.
No major changes in capital ratios. Bancolombia reported a solvency ratio of 13.5% with a Tier 1 ratio of 10.0%. The minimum requirement is 4.5%.
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