Banking, insurance and financial stocks have become a dirty word for U.S. and European investors, who have been shunning the sector since the 2008 financial crisis and the continuing fallout created by the 2011 European sovereign debt crisis. The financial crisis saw some industry participants spectacularly collapse, while others were brought to the verge of collapse and required government bailouts to remain solvent and continue operating. This included some of the largest banking and insurance companies in the world including; Citigroup (C), Bank of America (BAC), American International Group (AIG), Banco Santander (STD), the Royal Bank of Scotland (RBS) and the Lloyd's Banking Group (LYG). Yet the economies of Latin America weathered the financial crisis well and in fact their banking and financial sectors suffered little if any damage as a result. This can be attributed in many cases to the relatively conservative nature of prudential regulation in Latin America combined with the very conservative risk appetites of many of the regions financial institutions. In fact many of those financial institutions have grown during the crisis as major U.S. and European based competitors have shrunk.
During 2010, while developed economies were still dealing with the fallout of the financial crisis, the overall economy of the Latin American and Caribbean region grew by 5.9% compared to U.S. GDP growth of 3% in 2010 and for 2011 growth was expected to be at around 4.4%. This has seen investment opportunities abound in the Latin American finance sector as growing middle class populations drive greater demand for consumer goods, credit and other banking, financial and investment services. In this article I am going to analyze what I believe is one of the standout performers in the financial sector in Latin America, Bancolombia (CIB). Bancolombia is dual listed, on the Colombian Stock Exchange the Bolsa De Valores De Colombia, and the NYSE as American Depositary Receipts (ADRs). In fact Bancolombia is one of two Colombian companies listed in the U.S, the other being Ecopetrol (EC). In my opinion at its current price Bancolombia represents a solid growth investment opportunity for 2012.
Bancolombia has delivered some very strong and impressive financial results for both the fourth quarter 2011 and the full year 2011, which indicate that it is well positioned to continue on its growth trajectory. For the fourth quarter 2011 Bancolombia reported a 6% rise in earnings to $848 million and a 19% increase in net income to $259 million. For this period Bancolombia's balance sheet remained steady with total assets rising by 6% to $44 billion and total liabilities growing by 6% to $39 billion. These solid fourth quarter results confirmed the banks solid financial performance for 2011, which saw it report cumulative net income for 2011 of $857 million, which was a 16% increase on 2010's net income.
There are also a number of key takeouts from the fourth quarter 2011 results that I believe bode exceptionally well for Bancolombia's future growth. These relate to the growth in the size and quality of its loan portfolio, which directly reflects Bancolombia's earnings potential. This loan portfolio grew in size, with net loans and financial leases growing by 9% in the fourth quarter 2011 to $8.5 billion, while the quality of these facilities were retained at a high level. This is exemplified by Bancolombia's loan portfolio continuing to show a solid positive trend, with loan deterioration during fourth quarter 2011 of $45.8 million and past due loans as a percentage of total loans being 2.2%. For the fourth quarter 2011 Bancolombia's net provisions for past due loans and foreclosed assets totaled $168.8 million, which is only 5% of the value of the total loan portfolio.
These solid financials are further enhanced by Bancolombia's strong performance and valuation measures, which in comparison to its competitors bode well for it being a standout performer in 2012 as highlighted in the table below.
Debt to Equity Ratio
Banco Bilbao Vizcaya Argentaria (BBVA)
Bank of America
Bancolombia's low PEG of 0.54 bodes well for future growth and it is better than Citigroup's, Banco Santander's, Banco Bilbao's and Bank of America's. Furthermore, it has a solid double digit profit margin, which is superior to Citigroup's, Banco Santander's, Banco Bilbao's and Bank of America's. When this is combined with its solid return on equity of 20% it can only bode well for future income growth and an increasing valuation.
Like most banks Bancolombia has a heavily leveraged balance sheet with a debt to equity ratio of 2.73, although this is in the ballpark of three of the four banks compared in the table above. Overall, it indicates that it's reliant upon using wholesale debt markets to source funds for lending rather than relying predominantly upon its deposit base. This does increase the degree of risk associated with the stock but when you consider the debt to equity ratios of the major U.S banks like Bank of America and Citigroup, it is not that different.
I also find Bancolombia's dividend yield of 2.2% and dividend payout ratio of 27% appealing. This indicates that not only as an investor will you receive an ongoing income stream but that Bancolombia will be able to maintain this yield over time.
While these indicators bode well for Bancolombia it is also important to get a feel for its future valuation in comparison to its competitors and some of the major U.S. banks. With a current trading price of around $64, with analysts' forecasting a 2012 EPS of $4.84, it has a forward PE of 13. In addition, Bancolombia's revenues are expected to grow by 19% during 2012.
This compares favorably with its U.S. based competitors such as Citigroup, which is trading at $34 and is forecast to have 2012 EPS of $4.04, giving it a forward PE of 8. On top of this Citigroup's revenues are expected to grow by 298% during 2012. Bank of America, which is currently trading at $8, has 2012 EPS forecast of 70 cents, which gives it a forward PE of 11, and it is expected to grow revenue by 302%.
It is also quite favorable when compared to direct regional competitors including Spanish based Banco Bilbao, which is predicted to have 2012 EPS of $1.05, which with a current trading price of around $9 gives it a forward PE of 9. Banco Bilbao is also projected to experience a 4.5% growth in revenues during 2012. Banco Santander is trading at $8 and has forecast EPS of $1.20, giving it a forward PE of 7 combined with a forecast 6% increase in revenues. Despite Bancolombia having a higher forward PE and appearing to be a little expensive to its competitors I believe that it represents better value due to its stronger financial position.
When considering the overall outlook for the global banking industry, particularly U.S. and European banks, it is quite poor. These banks through 2012 will continue to experience fallout from the European sovereign debt crisis, a softer U.S. housing market combined with a slower than expected economic recovery and increased regulatory requirements that directly impact growth due to higher capital, risk, liquidity and balance sheet constraints.
Yet many of these factors are not having the same effects on the performance of Latin American and Colombian banks in particular. This can be directly attributed to the conservative regulatory environment in Colombia, combined with the conservative lending and investment policies of Bancolombia. These all saw it emerge from the financial crisis in good shape, without large exposure to bad loans or the toxic debt instruments that affected many of the major U.S. and European banks. In addition, it has little exposure to the European debt crisis, which also bodes well for future growth.
The outlook for the banking and finance sector in Colombia is extremely positive and especially so for Bancolombia as it is Colombia's largest bank in South America's second most populous country. This means it is well positioned to take advantage of the growing demand for credit and savings products from Colombia's growing middle class population. Furthermore the degree of sovereign risk associated with investing in Colombia is far lower than many investors perceive. Over the last five years Colombia's security situation has substantially improved and it has seen rapid economic development and foreign investment during that period.
With this surging foreign investment Colombia's economy expanded at its fastest pace since 2006. For the third quarter 2011 Colombia experienced GDP growth in annual terms of 7.7%, which on a quarterly basis was 1.7%, which is the highest seen since 1979. In addition, the country has recently established a free trade agreement with the U.S. which should further support non-traditional export growth. On this I believe that Colombia's economic growth prospects are particularly bright and the degree of sovereign risk is lower than would normally be expected. This can only further assist the growth of Colombian financial institutions such as Bancolombia.
In early 2012 Bancolombia successfully issued through a public offering 64 million preferred shares valued at $886 million, at a price of 26,000 Colombian pesos, which is $13.84. These shares were initially offered to Colombian shareholders and those remaining at the end of the offer were offered outside of Colombia as American Depositary Receipts (ADRs). There were 4,447,002 ADRs offered at $60 each, amounting to a total value of $266.8 million. The proceeds from these offerings were used to consolidate capital adequacy and fund further growth in Bancolombia's lending and finance services.
Finally at current trading prices I believe that Bancolombia has been unfairly discounted by the market. It has an earnings yield of 7%, which is more than triple the current risk free rate of ten year treasuries. For all of these reasons I believe that Bancolombia will continue to grow in value and represents a solid investment opportunity in 2012.