Net interest income for BanColombia (CIB, Financial)(BOG:BCOLOMBIA, Financial)(BOG:BFCOLOM), the largest bank in Colombia, grew despite matching growth in overall expenses including a 63% climb in total net provisions to 2.73 trillion Colombian pesos ($926.854 million) in 2016.
BanColombia also generated good profit growth in its banking and other services to offset operation-related deductions.
It recorded an impressive 34.1% increase in total net interest income to 9.69 trillion pesos and 13.75% profit growth to 2.87 trillion pesos in its fourth quarter and fiscal 2016 results in February.
Valuations
BanColombia's ADR shares are mildly undervalued compared to peers. According to GuruFocus data, the Colombian-based bank had a trailing price-earnings (P/E) ratio of 10.2 times vs. the industry median of 14.6 times, a price-book (P/B) value of 1.4 times vs. 1.2 times and a price-sales (P/S) ratio of 2.24 times vs. 3.4 times.
BanColombia also had trailing dividend yield of 3.08% with a 34% payout ratio.
Average fiscal 2017 sales and earnings-per-share expectations would indicate multiples of 1.9 times and 10.5 times.
Total returns
According to Mornignstar, BanColombia ADR has outperformed the broader Standard & Poor's 500 index this year with 8.6% total gains vs. 7.2% total gains. In the past five years, though, the bank failed to generate any positive returns to its shareholders with 7.12% total losses vs. the S&P 500’s 13.7% total gains.
BanColombia
According to filings, BanColombia was incorporated in Colombia in 1945 under the name Banco Industrial Colombiano S.A. or BIC.
BanColombia is Colombia’s leading financial institution with a presence in other jurisdictions such as Panama, El Salvador, Puerto Rico, Guatemala, the Cayman Islands and Peru. As of 2015, BanColombia was a full-service financial institution that offers a wide range of banking products and services to a diversified individual and corporate customer base of nearly 11 million customers.
In 2015*, BanColombia generated 80.5% or 9.3 trillion of its revenue from Colombia, 12.7% from Panama, 6.3% from El Salvador and the rest from other countries.
(*figures specifically for 2016 were not observed in the recent press release, and the 20-F was not available at the time of writing.)
BanColombia manages its business through 10 main operating segments: Banking Colombia, Banking Panama, Banking El Salvador, Leasing, Trust, Investment Banking, Brokerage, Off Shore and All other (1).
All segments showed growth in their corresponding businesses in 2015 except for Trusts, Brokerage, Off Shore – specifically Bancolombia Panama operations and All other.
- BanColombia’s Trust segment experienced a 95% decline in total interest and valuation yet delivered a 36.2% profit before tax growth brought by significant increase in other income.
- BanColombia’s Brokerage segment suffered a 76.8% decline in profit before tax mainly due to higher costs of securities exchange services and deposit and custody of securities.
- BanColombia Panama experienced a 34.4% decline in profit before tax due to the growth of labor and administration and general expenses.
- All other’s profits before tax declined by 87.5%.
Other metrics (fourth-quarter 2016; earnings report)
Net interest margin
Net interest income is the difference between the revenue that is generated from a bank's assets and the expenses associated with paying out its liabilities (Investopedia).
In fiscal 2016, BanColombia’s net interest margin was at 5.96% vs. 5.25% in 2015.
Efficiency ratio
For a bank, an efficiency ratio is an easy way to measure the ability to turn assets into revenue. Since a bank's operating expenses are in the numerator and its revenue is in the denominator, a lower efficiency ratio means that a bank is operating better (Investopedia).
For BanColombia, the bank used operating expenses to net operating income as one of its ratios for calculating efficiency. In fiscal 2016, BanColombia’s efficiency ratio was 51.02% vs. 54.57% in 2015.
Return on equity
Return on equity (ROE) is the amount of net income returned as a percentage of shareholders' equity. Return on equity measures a corporation's profitability by revealing how much profit a company generates with the money shareholders have invested (Investopedia). In fiscal 2016, BanColombia’s ROE was 14.52% vs. 13.62% in 2015.
Return on assets
Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets (Investopedia).
In fiscal 2016, ROA was at 1.49% vs. 1.53% in 2015.
Loan loss provision
Loan loss provision is an expense set aside as an allowance for uncollected loans and loan payments (Investopedia).
Loan loss provisions climbed 55.46% to 2.93 trillion pesos in 2016 compared to 2015.
NPL ratio
A nonperforming loan (NPL) ratio is the ratio of the amount of nonperforming loans in a bank's loan portfolio to the total number of outstanding loans the bank holds (eHow).
NPL is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default (Investopedia).
In BanColombia, mortgage loans in particular are identified as overdue loans that were calculated for past due loans for 120 days instead of 90 days.
The ratio of past due loans to total loans in 2016 for BanColombia was 3.31% vs. 2.98% in 2015.
Capital adequacy in Tier 1 and revenue per risk weighted assets
Tier 1 capital
Tier 1 capital consists of shareholders' equity and retained earnings. Tier 1 capital is intended to measure a bank's financial health and is used when a bank must absorb losses without ceasing business operations (Investopedia).
In 2016, BanColombia’s Tier 1 ratio was 9.02% vs. 7.51% in 2015.
Cash, debt and book value
As of December, BanColombia had 16.22 trillion pesos in cash and balances at the central bank and 18.91 trillion in borrowings from other financial institutions with a ratio to total stockholder equity of 0.89 times vs. 1.02 in 2015.
As observed, BanColombia did not issue any additional shares; instead it reduced its borrowings by a rate of 4.1% thus leading to lower leveraged balance sheet.
Of BanColombia’s 196.3 trillion in assets 3.41% were identified as goodwill and intangible assets having a book value of 22.5 trillion pesos vs. 20.4 trillion pesos in 2015.
Cash flow*
(*Cash flow figures were not observed in the recent press release nor form 20-F [annual filing] for fiscal 2016 were available at the time of writing.)
(2015 20-F)
In fiscal 2015, BanColombia’s cash flow from operations turned positive to 1.86 trillion pesos. Capital expenditures for the period were 961.8 billion leaving BanColombia with 894.9 billion pesos in free cash flow compared to 7.44 trillion pesos in free cash (out)flow in 2014.
Despite the negative free cash flow in 2015, BanColombia was able to provide dividend payouts to its shareholders. That year, the bank issued 2.63 trillion in preferred shares. In 2016, BanColombia allocated 88% of its free cash flow in dividend payouts.
In 2015, BanColombia took in 1.48 trillion in borrowing proceeds net repayments.
Conclusion
Identifying a less appreciated foreign bank stock embedded with moat is a challenging task. Nonetheless, further dissection of recent fiscal 2016 operations revealed that BanColombia, in particular, had some challenges pursuing business growth in all of its numerous business units.
Accompanied by climbing nonperforming loans despite improved profitability should increase a little cautiousness when thinking of the bank as a potential investment.
Nonetheless, BanColombia has kept an impressive less leveraged balance sheet in fiscal 2016 while maintaining its dividend payouts to its shareholders.
(BanColombia ADR share price and price-book value, GuruFocus)
Using five-year averages of book value growth and book value multiples followed by a 25% margin application would indicate $36 per ADR share – an 8.6% decline from the share price of $39.49 (at the time of writing).
In summary, BanColombia is undervalued but a pass as of this time.
Notes
(1) 20-F:
This segment includes results from the operation of particular investment vehicles of Bancolombia: Valores Simesa S.A., BIBA Inmobiliaria S.A.S., Inversiones CFNS S.A.S., CFNS Infraestructura S.A.S., Sistema de Inversiones y Negocios S.A. Sinesa, Vivayco S.A.S., BanagrĂ Âcola, Inversiones Financieras Banco AgrĂ Âcola S.A., Fondo Inmobiliario Colombia and others.
Disclosure: I do not have shares in any of the companies mentioned.
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