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GRUPO AVAL: CONSOLIDATING TO IMPROVE PROFITABILITY
We are initiating coverage of Grupo Aval with a HOLD recommendation based on our guideline universe, however we are inclined to a more positive bias. Our December 2015 target price of COP 1,385 per preferred share /COP 1,380 per common share /US$ 11.1 per ADR, equivalent to an upside potential of 10.8%, 10.4% and 12.6%, respectively. Besides the macro trends that will benefit the whole financial sector (infrastructure development projects and low loan penetration in Colombia), future value is based on (1) a greater focus on consumer lending in Colombian and commercial lending in Central America (CA), and (2) the development of synergies from recent acquisitions, which will lead to continuous improvements in efficiency and, thus, profitability.
Increase Penetration in New Segments due to Game-Changing Shift in Lending Strategy. Even if Grupo Aval has presence in all loans categories, given its multi-brand strategy, it has the strongest position in commercial loans, due to the corporate focus of Banco de Bogota. However, this corporate focus is shifting to have a stronger position in the consumer and mortgage segments given the new strategy approach in Colombia. From 2011 to 2014, Bogota’s consumer banking expanded by 82% (22.1% CAGR), significantly above the 57.9% increase on total consumer banking in the country, and gained 51 bps of market share in consumer loans and 402 bps in mortgages. We expect this trend to continue, increasing 65 bps and 89 bps of market share, respectively, in the next 5 years, due to the marketing campaigns that the bank has been developing and the know-how acquired from Central American businesses in consumer loans and credit cards.
Synergies Development will Improve Efficiency and ROaE. Despite further acquisitions are not dismissed yet, we believe Grupo Aval will focus its efforts on the development of synergies from recent acquisitions in Central America. On the one hand, cost controls, faster processes, centralized purchases and the implementation of electronic channels and best practices in Central America will drive earnings growth and improve efficiency ratio in this region. On the other hand, Colombian operations will be benefited from the customer oriented know-how that Central American banks have, specially in consumer credit card segments.
Outstanding Operating Performance. Based on historical analysis, Grupo Aval has been always orientated towards profitability and efficiency, becoming the most profitable financial conglomerate in Colombia, until last year, when ROE presented a deterioration mainly due to the capital increase of Grupo Aval during 3Q14 (ADR issuance). Nevertheless, we expect Grupo Aval to recover its first place in profitability versus local peers in the long term propelled by the new customer approach strategies both in Colombia and Central America, the implementation of the mobile banking and best practices in CA, low funding costs, driven by its large deposit base (deposits represent ~81% of Grupo Aval total funding vs. ~78% and ~77% of Bancolombia and Davivienda respectively) and contributions to income from profitable subsidiaries.
Banco de Bogota: The Key Asset of Grupo Aval. Grupo Aval owns 68.7% of Banco de Bogota, the second largest bank in Colombia based on loans, deposits and net income. Banco de Bogota is the main asset of Grupo Aval, as of 1Q15, it represented 67.9% of total assets and 97.2% of the net income, and it (1) has the strongest position in Colombia among the banks in the holding company, (2) gives exposure to Central America, and (3) has control of the merchant bank (Corficolombiana) and the pension fund manager (Porvenir). Our 2015TP for Banco de Bogota is COP 66,100 per share, equivalent to an upside potential of 11.1% (page 11).
Complex Structure and Disclosure. Understand Grupo Aval is not easy because of the poor disclosure of its subsidiaries (only Banco de Bogota reports consolidated results on a quarterly basis), and the shared ownership of Corficolombiana and Porvenir—neither of them provide consolidated results, guidance nor disclose sufficient information about their investment portfolio.
Share Liquidity. Despite Grupo Aval has the second largest market cap among Colombian companies, the preferred share occupies the fourth place in liquidity, with an Average Daily Trading Volume (ADTV) of COP 10.9 billion (US$ 4.4 million), less than half the ADTV of Ecopetrol, the most liquidity company in Colombia.
Currently Grupo Aval is trading at forward (2015YE) multiples of 13.9x P/E and 1.67x P/BV, at our 2015 TP (COP1,385 per share) will be 15.5x and 1.86x respectively.
Grupo Aval Vs Colcap
Stock Data
Jose F. Restrepo, CFA Equity Strategist
[email protected] (574) 3106510
HOLD / TP: Pref. COP 1,385 - Comm. COP 1,380 - ADR US$ 11.1 June 23, 2015
GRUPO AVAL Colombia— Financial Services
Source: Bloomberg and Serfinco S.A.
Natalia Casas Páez Financial Services Analyst
[email protected] (571) 6514646 Ext. 4267
COVERAGE
Source: Serfinco S.A.
Source: Bloomberg and Serfinco S.A.
Ticker BVC; NYSE PFAVAL; AVAL
Closing Price (COP; USD) 1,250; 9.86
Target Price (COP; USD) 1,385; 11.1
Upside (Pref.; ADR) 10.8%; 12.6%
Outstanding shares (Mill.) 22,281
Adj. Beta vs. COLCAP—2 years 0.735
Mkt. Cap. (COP MM; USD MM) 28,423.9; 10,812.4
COLCAP Index weight 5.4%
52-week range (PFAVAL) 1,135—1,455
52-week range (AVAL ADR) 8.50—13.78
Financial Information and Multiples
*At period’s closing Price. Expected multiples at PFAVAL closing price of 23/06/15 (COP 1,250)
75
80
85
90
95
100
105
110
115D
ec-1
3
Jan
-14
Feb
-14
Mar
-14
Ap
r-14
May
-14
Jun
-14
Jul-
14
Au
g-1
4
Sep
-14
Oct
-14
No
v-1
4
Dec
-14
Jan
-15
Feb
-15
Mar
-15
Ap
r-1
5
May
-15
Pref Ord Colcap
2013 2014 2015E 2016E 2017E
ROaA 1.85% 1.53% 1.62% 1.73% 1.71%
ROaE 15.4% 12.4% 12.6% 13.9% 14.5%
P/BV* 2.14x 1.84x 1.67x 1.58x 1.49x
P/E* 15.7x 16.6x 13.9x 11.7x 10.6x
Yield* 4.0% 4.4% 4.7% 4.8% 5.7%
2
Investment Positives
Better operating performance vs. Colombian peers. Increasing penetration in new segments from current marketing
strategy.
Synergies between Central American and Colombian operations will boost the efficiency of the bank.
Table 1. Income Statement
Table 3. Financial Ratios Table 4. Stock Data and Multiples
Table 2. Balance Sheet
Source: Grupo Aval and Serfinco S.A. estimations
Investment Negatives
Complex structure and poor disclosure. Regulatory changes.
Low share liquidity.
Source: Grupo Aval and Serfinco S.A. estimations
Source: Grupo Aval and Serfinco S.A. estimations Source: Grupo Aval and Serfinco S.A. estimations
Table 5. Valuation Results
Source: Bloomberg and Serfinco S.A. estimations
Figure 1. Loan Portfolio Composition
* At closing price of 23/06/2015
Source: Grupo Aval and Serfinco S.A. estimations
58%28%
6%8%
56%29%
8%
7%
62%
29%
5%4%
Commercial loans Consumer loans Mortgage loans Financial leases
2011
2019
Valuation results Weight Price
P/B to ROAE regression 20% 1,316
Dividend discount 40% 1,402
Excess returns 40% 1,404
Target price 100% 1,386
Cost of Equity 11.5%
Risk Free Rate 2.3%
Country Risk premium 2.0%
Colombia 1.6%
El Salvador 4.2%
Costa Rica 3.0%
Panama 1.9%
Honduras 4.5%
Guatemala 2.2%
Nicaragua 5.0%
Market Premium 4.6%
Beta 0.75
Devaluation 3.5%
Sustainable Growth Rate 5.5%
COP Billion 2012 2013 2014 2015E 2016E 2017E 2018E
Assets 127,663 154,287 177,615 197,092 221,593 245,448 271,678
Cash and overnight funds 13,399 16,097 18,693 20,980 24,303 27,015 29,907
Net investment securities 23,296 27,299 28,591 29,045 30,188 30,814 31,041
Net loans and financial leases 77,484 93,441 109,342 124,691 142,905 161,706 183,003
Commercial loans 45,514 54,856 62,765 72,091 83,397 95,170 108,256
Consumer loans 23,380 27,801 33,166 37,063 41,555 46,279 51,765
Small business loans 291 342 352 414 455 495 561
Mortgage loans 4,348 6,520 9,035 10,761 12,759 14,606 16,764
Financial leases 6,496 6,995 7,438 8,145 8,990 9,973 11,128
Allowance for loans and leases -2,546 -3,073 -3,414 -3,784 -4,251 -4,817 -5,471
Other assets 13,484 17,451 20,988 22,376 24,197 25,912 27,726
Liabilities and Shareholders' equity 127,663 154,287 177,615 198,069 221,593 245,448 271,678
Deposits 81,463 101,190 114,392 127,442 143,636 160,327 178,741
Non interest bearing 12,803 15,644 17,058 18,524 20,714 23,275 25,957
Interest bearing 68,660 85,547 97,334 108,918 122,922 137,052 152,784
Checking accounts 8,250 10,328 13,192 15,400 17,690 19,597 21,844
Time deposits 26,865 32,739 41,859 47,148 53,534 59,781 66,677
Savings deposits 33,546 42,480 42,283 46,370 51,697 57,674 64,263
Borrowings from banks 10,381 11,954 14,555 16,218 18,771 20,962 23,376
Bonds 9,769 11,180 12,541 13,591 15,029 16,733 18,602
Other liabilities 16,967 18,235 21,030 24,220 26,595 28,835 31,187
Shareholders' equity 9,083 11,728 15,097 16,598 17,563 18,591 19,772
COP Billion 2012 2013 2014 2015E 2016E 2017E 2018E
Interest income 10,205 10,783 11,886 13,595 15,626 17,649 19,771
Interest expense 3,895 3,802 4,328 5,015 5,821 6,592 7,410
Net interest income 6,310 6,981 7,558 8,581 9,805 11,057 12,360
Net provisions 917 1,294 1,538 1,775 2,039 2,320 2,593
Net interest income after provisions 5,393 5,687 6,020 6,806 7,766 8,737 9,767
Fees income, net 2,382 2,814 3,163 3,603 4,167 4,553 4,994
Other operating income 886 1,317 1,125 1,426 1,615 1,801 2,007
Operating expenses 5,300 6,028 6,578 7,333 8,105 8,973 9,858
Net operating income 3,361 3,790 3,730 4,503 5,443 6,118 6,910
Non operating income (expense) 448 236 263 344 373 405 435
Income tax expense 1,372 1,415 1,449 1,810 2,199 2,524 2,875
Minority interest 911 1,011 875 1,045 1,245 1,377 1,539
Net income 1,526 1,601 1,669 1,991 2,373 2,623 2,932
2012 2013 2014 2015E 2016E 2017E 2018E
Asset quality
PDL ratio (90 days) 2.10% 2.30% 2.28% 2.22% 2.25% 2.27% 2.29%
PDL coverage ratio (90 days) 132.2% 122.0% 118.0% 121.0% 123.0% 125.0% 127.0%
Allowances as % of gross loans 3.18% 3.18% 3.03% 2.95% 2.89% 2.89% 2.90%
Cost of risk (prov expense / avg. loans) 1.15% 1.34% 1.36% 1.38% 1.39% 1.39% 1.38%
Efficiency
Operating efficiency (income) 51.3% 50.4% 51.0% 49.5% 48.0% 47.5% 46.9%
Administrative efficiency (assets) 4.11% 3.97% 3.64% 3.60% 3.57% 3.54% 3.51%
Fees and services income
Fee ratio (income) 29.69% 30.23% 31.55% 31.29% 31.59% 30.90% 30.48%
Fee ratio (assets) 2.38% 2.38% 2.25% 2.27% 2.22% 2.19% 2.17%
Rentabilidad
NIM 6.51% 6.13% 5.74% 5.79% 5.88% 5.93% 5.97%
ROE 16.80% 13.65% 11.05% 12.00% 13.51% 14.11% 14.83%
ROaE 17.71% 15.38% 12.44% 12.56% 13.89% 14.51% 15.29%
ROA 2.04% 1.85% 1.53% 1.62% 1.73% 1.71% 1.73%
ROaA 1.28% 1.14% 1.01% 1.06% 1.13% 1.12% 1.13%
Regulatory capital
Payout ratio 59.8% 68.9% 76.9% 70.0% 70.0% 70.0% 70.0%
Tier I 11.9% 7.5% 8.0% 8.1% 7.9% 7.9% 7.8%
Tier II 1.2% 3.7% 3.1% 3.0% 2.8% 2.6% 2.4%
Capital adequacy 13.1% 11.2% 11.2% 11.1% 10.7% 10.4% 10.3%
2012 2013 2014 2015E 2016E 2017E 2018E
Number of shares (bill ion) 0.29 20.18 22.28 22.28 22.28 22.28 22.28
Dividend per share (paid) 44 50 54 58 60 72 79
Dividend yield* - Local share 4.66% 4.82% 5.75% 6.31%
EPS (COP) 5,321 79 75 89 106 118 132
Forward P/E per share* 13.93x 11.69x 10.58x 9.46x
Book value per share* 31,667 581 678 745 788 834 887
Forward P/BV per share* 1.80x 1.58x 1.49x 1.4x
3
Grupo Aval: Consolidating to Improve Profitability
We are initiating coverage of Grupo Aval with a HOLD recommendation based on our guideline universe, however we are inclined to a more positive bias. Our December 2015 target price of COP 1,385 per preferred share /COP 1,380 per common share /US$ 11.1 per ADR, equivalent to an upside potential of 10.8%, 10.4% and 12.6%, respectively. Besides the macro trends that will benefit the whole financial sector (infrastructure development projects and low loan penetration in Colombia), future value is based on (1) a greater focus on consumer lending in Colombian and commercial lending in Central America (CA), and (2) the development of synergies from recent acquisitions, which will lead to continuous improvements in efficiency and, thus, profitability.
Grupo Aval is the largest financial group in Colombia, with ~US$76 bn in total assets as of March 31, 2015. It owns four of Colombian Banks (Banco de Bogota, Banco de Occidente, Banco Popular and Banco AV Villas), the largest pension fund manager and merchant bank in Colombia (Porvenir and Corficolombiana, respectively) and one of the largest banking groups in Central America (BAC Credomatic), among other companies.
Its multi-brand banking model has allowed Grupo Aval to reach higher penetration than its peers (25.7% of gross loans market share in Colombia vs. 21.2% of Bancolombia and 12.5% of Davivienda) and better profitability ratios (in Colombia, Banco de Bogota’s ROE, the main asset of Grupo Aval, was 910 bps higher than the average of its main peers).
With the expansion into Central America, Grupo Aval has became the only regionally integrated banking player and the largest by consolidated assets in that region (US$ 19.3 billion –1Q15), and gained experience in credit card and CRM, which match the expansion strategy in Colombia. As of March 31, 2015 Grupo Aval has 9.3% gross loan market share and 8.3% deposit market share in Central America with a ~14% ROaE.
Figure 2. Multi-Brand Banking: Diversified Business Platform
Source: Grupo Aval
4
In the coming years we expect the development of synergies between Colombian and Central American operations in terms of best practices, know how, cost controls, faster processes via reduced paperwork and centralized purchases. Furthermore, education campaigns are in motion aimed to migrate customers towards electronic channels, driving earnings growth and reducing consolidated efficiency ratio, thus, becoming a more profitable institution.
In addition to the synergies development, Grupo Aval will be benefit from the macroeconomic outlook in Central America, which will profit from the slump of oil prices, due to its status as net oil importer, which, consequently, is expected to boost real incomes and accelerate consumer spending in the region. Moreover, it will be benefit from the recovery in the US economy, given the dependence of Central American countries (remittances, imports and exports).
In Colombia, the infrastructure development projects will accelerate commercial loans growth between 2015 and 2022, which is expected to finance ~40% of the projects (~COP 21 trillion—~US$ 8.4 billion). According to our estimations, the commercial loan portfolio growth will expand by 30 bps in 2015, 50 bps in 2016 and 2017, and 20 bps in 2018 due to the Fourth Generation Concession Program (4G). Grupo Aval already announced their intention to provide up to one third of the funding requirements of the infrastructure program. In addition, Grupo Aval has exposure to the Program through the four 4G-Roads that have been awarded to Corficolombiana: Pacifico 1, Bogota-Villavicencio, Mulalo-Loboguerrero and Villavicencio-Yopal, which require a ~COP 7.6 trillion (US$ 3.05 billion) investment.
3.6%
1.8%
3.7%
3.1%
4.0%
6.4%
3.8%
2.5%
4.0%
3.3%
4.6%
6.1%
Costa Rica El Salvador Guatemala Honduras Nicaragua Panama
October 2014 April 2015
Figure 3. World Economic Outlook Database: October 2014 vs. April 2015
Source: IMF
14.3%14.2%
13.7%
13.4%13.2%
14.6%
14.7%
14.2%
13.6%
13.2%
13.0%
13.5%
14.0%
14.5%
15.0%
2015E 2016E 2017E 2018E 2019E
Without Infrastructure Development With Infrastructure Development
Figure 5. Y/Y Expected Commercial Loan Portfolio Growth
Source: Serfinco S.A. estimations
Figure 4. Infrastructure Program Investment Schedule
1.1
3.8
7.6
10.5
12.111.3
7.5
2.8
0.4
1.5
2.9
4.04.5 4.1
2.5
0.8
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E
CO
P t
rill
ion
Total Investment Banks Investment
Source: Government and Serfinco S.A. estimations
5
INVESTMENT POSITIVES
Increase Penetration in New Segments due to Game-Changing Shift in Lending Strategy.
Even if Grupo Aval has presence in all loans categories, given its multi-brand strategy, it has the strongest position in commercial loans, due to the corporate focus of Banco de Bogota. However, this corporate focus is shifting to have a stronger position in the consumer and mortgage segments given the new strategy approach in Colombia.
From 2011 to 2014, Banco de Bogota’s consumer banking expanded by 82% (22.1% CAGR), significantly above the 57.9% increase on total consumer banking in Colombia, and changing its loan portfolio composition from 82% corporate / 18% consumer in 2011 to 76.8% corporate / 23.2% consumer in 2014. This change fueled Aval’s consumer banking expansion by 76.2% (20.8% CAGR). Moreover, in the last 3 years Banco de Bogota gained 51 bps of market share in consumer loans and 402 bps in mortgages, and we expect this trend to continue, increasing 65 bps and 89 bps respectively in the next 5 years, due to the marketing campaigns that the bank has been developing and the know-how acquired from Central American businesses in consumer loans and credit cards.
Currently Grupo Aval is the largest player based on loans, with a 25.9% of market share (Bogota: 13.1%, Popular: 4.1%; Occidente: 6.5%; AV Villas: 2.2%), and jumped to the fifth position, from the seventh in 2008, in mortgages market share, due to the consumer oriented strategy of Banco de Bogota, that allowed a 166 bps increase in the market share of the Group in this category, from 7.92% to 9.59% (Bogota: +407 bps, Popular: -40 bps; Occidente: +46 bps; AV Villas: -247 bps).
Synergies Development to Reduce Efficiency Ratio and Increase ROaE.
Despite further acquisitions not having been dismissed just yet, we believe Grupo Aval will focus its efforts on the development of synergies from recent acquisitions in Central America, driving earnings growth and improving efficiency ratio in this region below 50%, as it already occurs in Colombia. Cost controls, faster processes via reduced paperwork, centralized purchases, education campaigns aimed to migrate customers towards electronic channels and implementation of best practices in Central America will drive down the efficiency ratio from now on.
Since 2013 Grupo Aval has been realizing investments in technology in order to improve and standardize different solutions in areas such as CMR (Customer Relationship Management), ERP (Enterprise Resource Planning), MDM (Master Data Management), mobile banking solutions, and credit card. This technological update will enable better service levels, new products and the integration of businesses lines such as leasing and factoring. Moreover, mobile banking is expected to increase electronic transactions, one of the main pillars to expansion strategy in consumer loans and mortgages.
Source: Superintendence of Finance and Serfinco S.A. estimations
Figure 6. Historical and Projected Market Share by Portfolio in Colombia—Banco de Bogota
18.1% 18.2% 18.0% 17.8% 18.0% 18.2% 17.9% 17.7% 17.8% 17.8% 17.9% 17.8% 17.8% 17.9% 17.9% 17.9%
8.6% 8.5% 8.6% 8.6% 8.9% 8.8% 9.1% 9.3% 9.4% 9.6% 9.7% 9.7% 9.8% 9.9% 9.9% 10.0%
0.2% 0.2% 0.2% 0.4%0.9% 3.1%
4.4% 4.7% 4.9% 5.1% 5.2% 5.3% 5.4% 5.5% 5.6% 5.6%6.3%
5.6%4.7%
4.1%3.6% 3.8%
3.7% 3.7% 3.8% 3.8% 3.9% 3.9% 4.0% 4.0% 4.1% 4.1%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%
20
08
20
09
20
10
20
11
20
12
20
13
20
14
20
15
E
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
E
Commercial Consumer Mortgages Microloans
6
Implementation of commercial and operational standards and best practices in Central America, while capitalizing on its regional expertise, brand recognition and customer base will help to improve the efficiency ratio in this region. In addition, the acquired units in CA (BAC, Grupo Reformador in Guatemala and BBVA Panama) offer an interesting synergy potential in CMR experience in the credit card and small and medium enterprise (SME) segments that would contribute in the new consumer approach strategy of Banco de Bogota and Grupo Aval.
The replication of Pymercado, a social network that allows affiliated companies to publish, discover and generate businesses, would set the base for loan and client growth in the SME segment. The website offers free assistance to orientate companies to increase revenues, visibility, quality of processes and, thus, efficiency.
Outstanding Operating Performance.
Based on historical analysis, Grupo Aval has been always orientated towards profitability and efficiency, becoming the most profitable financial conglomerate in Colombia, until last year, when ROE presented a deterioration mainly due to the capital increase of Grupo Aval during 3Q14 (ADR issuance).
We expect Grupo Aval to recover its first place in profitability versus local peers in the long term propelled by the new customer approach strategies both in Colombia and Central America, the implementation of the mobile banking and best practices in CA, low funding costs, driven by its large deposit base (deposits represent ~81% of Grupo Aval total funding vs. ~78% and ~77% of Bancolombia and Davivienda respectively) and contributions to income from profitable subsidiaries.
For further years, we expect a significant improvement in the efficiency ratio of both, Banco de Bogota and Grupo Aval, which should contract by 602 bps to 43.7% and 658 bps to 44.4%, respectively, by 2023. This will be accomplished through the development of synergies and new commercial strategies both in Colombia and Central America. In consequence, ROaE will expand by 521 bps in Banco de Bogota to 17.8% and 661 bps in Grupo Aval to 19% in 2023.
Regarding Net Interest Margin, we do not expect an important expansion in the long term because we believe intermediation rates in Colombia should contract due to more aggressive competition among financial institutions. We believe Banco de Bogota’s NIM will touch 5.86% in 2023, from 5.38% registered in 2014, meanwhile, Grupo Aval’s NIM will expand 50 bps to 6.24% from 5.74% in 2014.
Figure 7. Consolidated Efficiency
Source: Pymercado.com
7
Banco de Bogota: the Key Asset of Grupo Aval.
Within this coverage initiation, we reinitiate coverage of Banco de Bogota with a HOLD recommendation based on a December 2015 target price of COP 66,100 per share, equivalent to an upside potential of 12.4% (see projections and valuation at the end of this report).
Grupo Aval owns 68.7% of Banco de Bogota, the second largest bank in the Colombia based on loans, deposits and net income. Banco de Bogota is the main asset of Grupo Aval as, as of 1Q15, it represented 67.9% of total assets and 97.2% of the net income, and, it:
(1) has the strongest position in Colombia among the banks in the holding company, as it contributes to more than half of the market share by deposits and loans of Grupo Aval and, as of 1Q15, its operation in Colombia offered the highest ROE and ROA among peers;
(2) gives exposure to Central America: Banco de Bogota owns 100% of BAC Credomatic, one of the largest banking groups in CA that operates in Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama. The Group has strong experience in consumer lending, credit card issuance, electronic channels (it deployed the first mobile banking platform in the region) and merchant–acquiring business. BAC also offers pension plan administration, mutual funds, financial advisory, leasing, private banking and insurance services to its customers in some countries. Bogota is also owner of Banco Reformador in Guatemala and BBVA Panama since 2013.
Figure 8. Historical and Projected ROaE Figure 9. Historical and Projected Efficiency Ratio
Source: Grupo Aval and Serfinco S.A. estimations Source: Grupo Aval and Serfinco S.A. estimations
Figure 10. Historical and Projected NIM
Source: Grupo Aval and Serfinco S.A. estimations
17.8%
19.0%
16.5%
18.1%
10.0%
12.5%
15.0%
17.5%
20.0%
22.5%
25.0%
20
10
20
11
20
12
20
13
20
14
20
15
E
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
EBogotá Grupo Aval Bancolombia Davivienda
43.7%
44.4%
51.0%
46.4%
37.5%
40.0%
42.5%
45.0%
47.5%
50.0%
52.5%
55.0%
57.5%
60.0%
20
10
20
11
20
12
20
13
20
14
20
15
E
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
E
Bogotá Grupo Aval Bancolombia Davivienda
5.9%
6.2%
6.8%
5.0%
5.5%
6.0%
6.5%
7.0%
7.5%
8.0%
8.5%
20
10
20
11
20
12
20
13
20
14
20
15
E
20
16
E
20
17
E
20
18
E
20
19
E
20
20
E
20
21
E
20
22
E
20
23
E
Bogotá Grupo Aval Bancolombia Davivienda
8
And (3) has control of the merchant bank (Corficolombiana) and the pension fund company (Porvenir). Porvenir is the largest private pension and severance fund manager in Colombia, with a 43.7% market share of assets under management as of March 31, 2015. Corficolombiana is Colombia’s largest merchant bank, with business units focused on particular tasks, such as: commercial banking, investment banking, treasury and investments. The company is characterized for having operational income from treasury and financial services that fully covers operational expenses. As a result, Corficolombiana’s income from dividends (recurring and non-recurring) is free to distribute to the company’s shareholders.
INVESTMENT NEGATIVES
Complex Structure and Poor Disclosure.
Grupo Aval is a holding company that consolidates four Colombian banks (Banco de Bogota, Banco Popular, Banco de Occidente and Banco AV Villas) and is owner of other companies through its subsidiaries .
Understand Grupo Aval is not easy because of the poor disclosure of its subsidiaries (only Banco de Bogota report consolidated results on a quarterly basis), and the shared ownership of Corficolombiana and Porvenir—neither of them provide consolidated results, guidance nor disclose sufficient information about their investment portfolio. These two companies gain special importance for Banco de Bogota and Grupo Aval because (1) they offer diversification to the operating income of the Group, (2) impacts positively the bank’s profitability and (3) allows higher than peer dividend yield.
Figure 11. Deposit and Loans Market Share in Colombia (1Q15)
13.1%
6.5%
3.9%2.2%
25.7%
21.2%
12.5%13.6%
7.3%
4.3%3.0%
28.2%
19.4%
12.1%
Bogotá Occidente Popular Av Villas Grupo Aval Bancolombia Davivienda
Gross Loans Deposits
Figure12. ROE and ROA of Colombian Operations (1Q15)
27.4%
11.0%
18.7%17.2%
18.3% 18.3%
4.8%
1.2%2.3% 1.7%
3.0%2.0%
Bogotá Occidente Popular Av Villas Bancolombia Davivienda
ROE ROA
Source: Superintendence of Finance Source: Superintendence of Finance
Figure 13. Organizational Structure
Source: Grupo Aval
9
Share Liquidity.
Despite Grupo Aval has the second largest market cap among Colombian companies, the preferred share occupies the fourth place in liquidity, with an Average Daily Trading Volume (ADTV) of COP 10.9 billion (US$ 4.4 million), less than half the ADTV of Ecopetrol, the most liquid company in Colombia. Despite the ADR issuance helped Grupo Aval to gain visibility among Colombian stocks, it is still considered as a low liquidity share due to its low free float.
17,411
10,957
5,4524,712
2,795
1,316516
0
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10,000
15,000
20,000
25,000
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EEB
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C
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om
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CO
P m
illio
n
Figure 14. Colombian Stocks Average Daily Trading Volume
Source: Bloomberg and Serfinco S.A.
Figure 15. Colombian Banks Stocks Liquidity: 30-Days Moving Average
Source: Bloomberg and Serfinco S.A.
0
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Bancolombia (Pref) Davivienda Grupo Aval (Pref)
10
Figure 16. P/E Multiple Evolution vs. History and Peers Figure 17. P/BV Multiple Evolution vs. History and Peers
Source: Bloomberg and Serfinco S.A. Source: Bloomberg and Serfinco S.A.
Figure 18. Relative valuation (P/BV vs. ROAE-LTM)
Source: Bloomberg, Company filings and Serfinco S.A.
Figure 19. Recommendation
Dotted lines show a probable 1-standard deviation confidence interval if returns behave as a t-distribution in a log-lin model
8 x
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-15
PFAval Peers Percentile 25%
Peers Percentile 75% Geometric Median
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-15
PFAval Peers Percentile 25%
Peers Percentile 75% Geometric Median
Source: Bloomberg and Serfinco S.A. estimations
Source: Bloomberg and Serfinco S.A. estimations
Dotted lines show a probable 1-standard deviation confidence interval if returns behave as a t-distribution in a log-lin model
1,385
1,164
1,231
1,306
1,310
1,385
1,469
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Date Recommendation T.P.
(1) 22-June-15 HOLD 1,385
PF Aval (COP)
11.1
9.1
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12.0
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Date Recommendation T.P.
(1) 22-June-15 HOLD 11.1
AVAL - ADR (US$)
11
BANCO DE BOGOTA: IDEAL INVERSION OVERSHADOWED BY LOW LIQUIDITY
We are reinitiating coverage of Banco de Bogota with a HOLD recommendation based on a December 2015 target price of COP 66,100 per share, equivalent to an upside potential of 11.1%. Despite this is an attractive return, we believe a higher upside potential is needed to balance out the low liquidity of the share, which difficult the decision-making process around this investment. Leaving this aside, we consider Banco de Bogota an ideal option to gain exposure to Colombia and Central American financial systems, giving its position in Colombia and Central America (CA) and the profitability of the bank. As the whole financial system, Banco de Bogota will benefit from the infrastructure development projects in Colombia and the significant space to increase loan penetration in countries where the bank has presence.
New Lending Strategy Will Position the Bank in Different Segments in Colombia and CA. Banco de Bogota is moving its corporate lending focus to a stronger position in consumer and mortgages in Colombia and have been increasing its presence in corporate lending in CA. This strategy has shown a faster expansion in consumer banking in this bank compared to the industry (22.1% CAGR vs. 16.4% CAGR in the last three years), positioning as the fourth most important bank in terms of consumer banking (from the sixth place in 2011), and gaining 106 bps of market share, from 6.39% in 2011 to 7.45% in 2014. (Consumer banking is understood as consumer loans and mortgages).
Synergies between Central American and Colombian Operations. Banco de Bogota and BAC Credomatic complement each other perfectly in terms that one has the experience and expertise that the other needs to develop and expand their loan portfolio. On the one hand, Banco de Bogota has a long career being the second largest commercial loan lender in Colombia, controlling ~18% of the market share during the last five years with a controlled ~1.6% 30 days-PDL ratio, complementing BAC’s corporate loan portfolio expansion strategy. On the other hand, BAC Credomatic is one of the leading credit card issuers in CA with ~40% share of cards emitted and more than 15 years of experience in consumer lending, complementing Bogota’s consumer loan portfolio expansion, mainly in credit cards and payroll loans.
Technological Renovation and CA Integration Will Improve Profitability Ratios. Cost controls, faster processes, centralized purchases, education campaigns aimed to migrate customers towards electronic channels, implementation of best practices in CA, as well as mergers of recent acquisitions to BAC will support efficiency ratio under 49% and ROaE around 12% in 2015 (management expects ~47% efficiency ratio and 13% ROaE).
Other Operating Income Diversification. Through Corficolombiana and Porvenir, the largest merchant bank and pension fund manager in Colombia, Banco de Bogota consolidates income from companies in diverse sectors of the economy, ranging from energy & gas, infrastructure and hotels to pension fund, warehouse and fiduciary management. This exposure to high dividend non-financial sector companies distinguish Banco de Bogota from other Colombian banks, allowing higher than peer dividend yield and fee ratio.
Low Liquidity Share. Banco de Bogota has one of the lowest daily trading volumes (COP 1.3 billion vs. peers—COP 17.4 billion of Bancolombia and COP 4.7 billion of Davivienda) among Colombian stocks giving its low free float. We believe this is one of the main concerns for investors, given the liquidity risk it may pose in high volatility junctures. In addition, Bogota´s liquidity could have further downside because Grupo Aval has been increasing its stake in the bank.
Currently Banco de Bogota is trading at multiples of 12.8x P/E and 1.53x P/BV forward and at our 2015 TP both are our forecast is to trade at 14.2x and 1.7x respectively for FY15E (with a target price of COP 65,520 per preferred share).
Adjustments to our model include: Incorporation of 2014 consolidated financial results. The effect of the tax reform. New macro economic perspectives.
Grupo Bogota Vs Colcap
Stock Data
Jose F. Restrepo, CFA Equity Strategist
[email protected] (574) 3106510
HOLD / TP: Pref. COP 66,100 June 23, 2015
BANCO DE BOGOTA Colombia— Financial Services
Source: Bloomberg and Serfinco S.A.
Natalia Casas Páez Financial Services Analyst
[email protected] (571) 6514646 Ext. 4267
COVERAGE
Source: Serfinco S.A.
Source: Bloomberg and Serfinco S.A.
Ticker BVC BOGOTA
Closing Price (COP) 59,500
Target Price (COP) 66,100
Upside (Pref.) 11.1%;
Outstanding shares (Mill.) 331
Adj. Beta vs. COLCAP—2 years 0.636
Mkt. Cap. (COP MM) 19,545.6
COLCAP Index weight 2.65%
52-week range 55,200—73,180
Financial Information and Multiples
*At period’s closing Price. Expected multiples at BOGOTA closing price of 23/06/15 (COP 59,500)
75
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115D
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-15
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-15
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May
-15
Bogota Colcap
2013 2014 2015E 2016E 2017E
ROaA 1.55% 1.27% 1.19% 1.3% 1.3%
ROaE 15.8% 12.6% 12.2% 14.1% 14.6%
P/BV* 1.83x 1.60x 1.70x 1.43x 1.32x
P/E* 13.0x 14.1x 14.2x 10.4x 9.4x
Yield* 3.6% 4.1% 4.1% 4.2% 4.6%
12
Investment Positives Increasing penetration in new segments from current marketing
strategy.
Synergies between Central American and Colombian operations will boost the efficiency of the bank.
Table 6. Income Statement
Table 8. Financial Ratios Table 9. Stock Data and Multiples
Table 7. Balance Sheet
Source: Bogota and Serfinco S.A. estimations
Investment Negatives
Regulatory changes.
Low share liquidity.
Source: Bogota and Serfinco S.A. estimations
Source: Bogota and Serfinco S.A. estimations Source: Bogota and Serfinco S.A. estimations
Table 10. Valuation Results
Source: Bloomberg and Serfinco S.A. estimations
* At closing price of 23/06/2015
COP Billion 2012 2013 2014 2015E 2016E 2017E 2018E
Interest income 5,698 6,226 7,123 8,358 9,856 11,269 12,675
Interest expense 2,189 2,242 2,661 3,182 3,787 4,335 4,910
Net interest income 3,510 3,983 4,462 5,175 6,069 6,934 7,766
Net provisions 515 778 1,000 1,184 1,383 1,588 1,806
Net interest income after provisions 2,995 3,205 3,462 3,991 4,685 5,346 5,960
Fees income, net 1,884 2,249 2,586 3,029 3,596 3,974 4,408
Other operating income 676 1,048 889 1,148 1,306 1,471 1,657
Operating expenses 3,199 3,782 4,235 4,867 5,568 6,227 6,879
Net operating income 2,356 2,720 2,702 3,301 4,019 4,564 5,146
Non operating income (expense) 315 171 182 217 274 292 307
Income tax expense 919 772 993 1,342 1,663 1,937 2,206
Minority interest 426 719 502 650 758 841 936
Net income 1,326 1,400 1,389 1,526 1,872 2,078 2,311
COP Billion 2012 2013 2014 2015E 2016E 2017E 2018E
Assets 80,506 100,669 118,367 134,963 153,444 170,838 190,229
Cash and overnight funds 9,659 12,247 14,716 16,499 19,137 21,333 23,668
Net investment securities 16,900 18,345 17,359 20,150 21,100 21,687 22,320
Net loans and financial leases 44,212 56,583 69,485 80,260 93,548 106,632 121,334
Commercial loans 28,722 36,211 42,838 49,309 57,380 65,595 74,731
Consumer loans 10,862 13,940 17,863 20,527 23,787 26,896 30,439
Small business loans 257 316 333 389 422 454 509
Mortgage loans 3,449 5,392 7,412 8,864 10,642 12,235 14,053
Financial leases 2,175 2,363 2,894 3,257 3,710 4,181 4,722
Allowance for loans and leases -1,253 -1,638 -1,856 -2,086 -2,391 -2,730 -3,121
Other assets 9,736 13,494 16,807 18,055 19,659 21,186 22,906
Liabilities and Shareholders' equity 80,506 100,669 118,367 134,963 153,444 170,838 190,229
Deposits 51,022 64,094 74,303 84,654 96,932 108,513 121,385
Non interest bearing 6,609 8,230 9,615 10,580 12,043 13,655 15,308
Interest bearing 44,413 55,863 64,688 74,074 84,889 94,858 106,077
Checking accounts 7,061 8,980 11,621 13,723 15,860 17,566 19,596
Time deposits 18,557 24,682 31,496 36,087 41,461 46,387 51,851
Savings deposits 18,795 22,202 21,571 24,264 27,568 30,905 34,630
Borrowings from banks 8,950 11,301 14,017 15,644 18,144 20,266 22,606
Bonds 2,050 3,200 3,990 4,465 5,066 5,681 6,367
Other liabilities 10,683 12,177 13,854 17,421 19,591 21,538 23,733
Shareholders' equity 7,802 9,897 12,203 12,780 13,710 14,840 16,138
2012 2013 2014 2015E 2016E 2017E 2018E
Asset quality
PDL ratio (90 days) 1.19% 1.39% 1.46% 1.50% 1.50% 1.51% 1.51%
PDL coverage ratio (90 days) 132.2% 212.9% 192.6% 120.0% 123.0% 125.0% 127.0%
Allowances as % of gross loans 2.76% 2.81% 2.60% 2.53% 2.49% 2.50% 2.51%
Cost of risk (prov expense / avg. loans) 1.13% 1.34% 1.40% 1.44% 1.44% 1.45% 1.45%
Efficiency
Operating efficiency (income) 49.6% 49.0% 49.7% 48.4% 47.4% 47.0% 46.4%
Administrative efficiency (assets) 4.03% 3.94% 3.60% 3.56% 3.60% 3.58% 3.55%
Fees and services income
Fee ratio (income) 35.35% 35.25% 36.60% 36.37% 36.82% 36.05% 35.79%
Fee ratio (assets) 2.87% 2.83% 2.65% 2.69% 2.63% 2.61% 2.60%
Rentabilidad
NIM 5.99% 5.64% 5.38% 5.41% 5.50% 5.58% 5.59%
ROE 17.00% 14.15% 11.38% 11.94% 13.66% 14.00% 14.32%
ROaE 18.11% 15.82% 12.57% 12.22% 14.14% 14.55% 14.92%
ROA 2.35% 2.34% 1.73% 1.72% 1.82% 1.80% 1.80%
ROaA 1.78% 1.55% 1.27% 1.19% 1.30% 1.28% 1.28%
Regulatory capital
Payout ratio 43.9% 52.7% 60.1% 50.0% 50.0% 50.0% 50.0%
Tier I 11.9% 7.5% 8.0% 7.8% 7.6% 7.5% 7.5%
Tier II 1.2% 3.7% 3.1% 2.9% 2.6% 2.5% 2.3%
Capital adequacy 13.1% 11.2% 11.2% 10.7% 10.2% 10.0% 9.8%
Valuation results Weight Price
P/B to ROAE regression 20% 67,362
Dividend discount 40% 65,097
Excess returns 40% 66,466
Target price 100% 66,097
Cost of Equity 12.2%
Risk Free Rate 2.3%
Country Risk premium 2.2%
Colombia 1.6%
El Salvador 4.2%
Costa Rica 3.0%
Panama 1.9%
Honduras 4.5%
Guatemala 2.2%
Nicaragua 5.0%
Market Premium 4.6%
Beta 0.85
Devaluation 3.5%
Sustainable Growth Rate 8.5%
2012 2013 2014 2015E 2016E 2017E 2018E
Number of shares (million) 286.84 307.47 331.28 331.28 331.28 331.28 331.28
Dividend per share (paid) 1,800 2,145 2,430 2,441 2,458 2,695 3,058
Dividend yield* - Local share 4.15% 4.18% 4.58% 5.20%
EPS (COP) 4,623 4,553 4,192 4,607 5,652 6,271 6,976
Forward P/E per share* 14.35x 10.41x 9.38x 8.43x
Book value per share* 27,200 32,190 36,835 38,577 41,384 44,795 48,713
Forward P/BV per share* 1.80x 1.42x 1.31x 1.21x
13
Dotted lines show a probable 1-standard deviation confidence interval if returns behave as a t-distribution in a log-lin model
Source: Bloomberg and Serfinco S.A. estimations
Figure 22. Historic Recommendation
Figure 20. P/E Multiple Evolution vs. History and Peers Figure 21. P/BV Multiple Evolution vs. History and Peers
Source: Bloomberg and Serfinco S.A. Source: Bloomberg and Serfinco S.A.
0.0 x
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Banco de bogotá Peers Percentile 25%
Peers Percentile 75% Geometric Median
8 x
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-11
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Banco de Bogotá Peers Percentile 25%
Peers Percentile 75% Geometric Median
66,100
54,051
57,193
60,553
64,402
68,149
72,155
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ene
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CO
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e
Date Recommendation T.P.
(1) 11-June-14 HOLD 71,750
(2) 19-June-15 HOLD 66,100
Bogota (COP)
14
Bogotá Centro de Negocios Andino Carrera 11 No 82—01. Piso 6 Tel: (571) 6514646
Medellín
San Fernando Plaza—Torre 1 Carrera 43A No 1— 50. Piso 10
Tel: (574) 4443522
Bucaramanga
Metropolitan Bussiness Park Carrera 29 # 45 - 45 of 910
Tel: (577) 6970367
Cartagena Torre Empresarial Protección Carrera 3 No 6A—100 Of. 801 Tel: (575) 6930292
Barranquilla
Centro Empresarial Las Américas Calle 77B No 57—141.
Tel: (575) 3606030
Cali Carrera 100 No 5—169 Torre Empresarial Oasis of 722 B Tel: (572) 4858585
The analyst certifies that the opinions expressed in this report accurately reflect his personal opinion about the company of concern. Also, the analyst certifies that he has
not received, is not receiving and will not receive any direct or indirect payment in exchange for expressing a specific recommendation in this report.
Serfinco S.A. is committed to provide independent and objective research for all the companies in the coverage universe. During the normal course of business, Serfinco
S.A. intends to obtain revenue for banking investment services from all the companies in the coverage universe. The remuneration for the analyst is based, in part, on the
profitability of the firm, which includes investment banking and revenues from sales. The research analyst does not have a position in the fixed positions of this covered
company and does not provide any kind of services to the company. The research analyst has not taken part in any investment banking transaction of the company in
concern. Serfinco S.A. was not making a market in the titles of the company in concern when this report was published. In the last twelve months, Serfinco S.A. did not
receive, nor it is authorized to receive, revenues for investment banking services, services related to the title of non investment banking, or non title services rendered to
the company in concern. that could affect the objectivity of this report. Therefore, investors should consider this report only as a factor for their investment decision mak-
ing. However, Serfinco S.A. intends to do business with the companies covered in this report. Consequently, investors should be aware that the firm might have an inter-
est conflict.
International Equity Trading Desk
Andrés Jimenez Juan P. Vieira Andrés Gómez
Head of Equity Head of Trading Head of Electronic Trading
[email protected] [email protected] [email protected]
(574) 3106553 (574) 3106515 (574) 3106544
Daniel Marín Andrés Felipe Sánchez Jose F. Restrepo, CFA
Equity Trader FX Trader Equity Strategist
[email protected] [email protected] [email protected]
(574) 3106518 (574) 3106587 (574) 3106510
Research Team
Alejandro Isaza Rafael España Natalia Casas
Cement and Construction Consumer Services Financial Services
[email protected] [email protected] [email protected]
(574) 4443522 Ext. 6642 (571) 6514646 Ext. 4228 (571) 6514646 Ext. 4267
Bob Jenney
Enery and Mining Analyst
(574) 4443522 Ext. 6671
