Description

Thesis: Long CIB US, Bancolombia, Colombia’s largest bank.

Concerns over Colombia’s New President/administration overblown, and risks are now more than priced in. Country is a beneficiary of Russia-Ukraine war. Economy outpacing on GDP growth, and will continue to be more resilient vs other EM peers during this downturn given favorable commodity exposure Oil + Coal + Food/Coffee + Gold (i.e. more OPEX commodities than capex commods).

Colombian equities and CIB have both significantly underperformed YTD and post COVID. CIB trades at ~5x earnings and below 0.9x P/B. This is cheap relative to Latam peers which trade at ~7-8x P/E and ~1.3-2.0x P/B, and extremely cheap relative to CIB’s own historical avg (~50% discount vs historical avg fwd P/E). Bancolombia has a relatively liquid ADR for the preferred (CIB US, trades ~$8m a day, 1 receipt = 4 shares of PFBCOLO CB).

With leftists taking control in rest of continent and poised to take over Brazil, Colombia is no ugly duckling. Colombian equities should narrow their discount vs Latam peers given political landscape will be much more even. CIB well positioned to narrow valuation gap here, and collect >10% yield in meanwhile.

Valuation: Colombian equities trade at a wide discount to both peers and historical lvls, while CIB trades at an even greater discount to Latam banking peers

• Colombian Equities have underperformed peers since COVID and trade at ~half historical P/E lvls.
• In USD terms, GXG/Colombia ETF down -37% vs preCovid/YE19, vs Brazil/EWZ down -26%, Mexico/EWW +3%, Chile/ECH -8% and Emerging Mkts/EEM -9.5%
• A lot of this underperformance is due to FX and each index’s underlying mix of sectors
• COP very weak post election, as investors were disappointed and wanted leftist Petro to lose.
• COP down -9% YTD vs BRL up +6%, MXN up +2% and CLP down -5%
• EEM more Asia tech heavy, Brazil and Colombia more cyclical weighted w/commods and financials
• Colombia/MXCO Index trades at 4.8x ’22e consensus EPS and 4.6x ’23e  (vs historical 5-10 Avg NTM P/E of ~10-12x)
• Brazil/MXBR Index trades at ~5.3x ’22e and ~5.9x ‘23e (vs historical 5-10 Avg NTM P/E of ~11x)
• Brazil trades closer to ~7x once you exclude VALE and Petrobras which are ~35% of index and trade at only ~3x
• Mexico/MXMX Index at ~12x and 11x respectively (vs historical 5-10 Avg NTM P/E of ~14-16x)
• Chile/MXCL index at ~6.0x and ~7.5x respectively (vs historical 5-10 Avg NTM P/E of ~14-15x)
• EM overall/MXEF Index at ~11.4x and ~10.8x respectively (vs historical 5-10 Avg NTM P/E of ~12x)

• Banco Colombia: CIB US is much cheaper than Latam peers on both P/E and P/B basis. CIB also trades at ~half historical avg P/E lvls, a much wider discount relative to peers.
• In USD, CIB -45% down vs preCovid/YE19, vs Brazil’s ITUB -29% and BBD -42%, Chile’s BCH up +4% and Mexico’s GFNORTEO up ~16%
• CIB trades at ~5.4x ’22e consensus EPS and ~4.5x ’23e EPS. This well below Latam banking peers at closer ~8x and CIB’s historical 5-10yr Avg NTM P/E of ~9-10x (note, CIB averaged ~9x Fwd P/E in the ~7yrs prior to COVID, and saw prior trough lvl of ~6x in late 2015)
• ITUB4 BZ trades at ~8x and ~7.3x respectively (historical 5-10yr Avg NTM P/E of ~7-8x)
• BBD trades at ~7.5x and ~6.5x respectively (historical 5-10yr Avg NTM P/E of ~7.5-8.5x)
• Chile’s Banco Chile/CHILE CI trades at ~8x and ~9x respectively (historical 5-10yr Avg NTM P/E of ~10.5-12x)
• Mexico’s GFNORTEO MM trades at ~7.5x and ~7x respectively (historical 5-10yr Avg NTM P/E of ~8.5-9.5x)
• CIB trades just below 0.9x Book vs historical 5-10yr avg P/B of 1.1-1.2x
• ITUB4 BZ trades at ~1.6x book (historical 5-10yr avg P/B of 1.4-1.6x)
• BBD trades at ~1.3x book (historical 5-10yr avg P/B of 1.5-1.6x)
• Banco Chile/CHILE CI trades at  ~2x book (historical 5-10yr avg P/B of 2.2x)
• Mexico’s GFNORTEO MM trades at ~1.5x book (historical 5-10yr avg P/B of 1.5-1.6x)
• CIB div yield of 10.8% vs Latam bank avg of ~5.5%

Highlights:

• Colombian economy outpacing peers on GDP growth
• Benefits from Status quo w/Russia-Ukraine, with exports benefitting from higher commodity prices
• 2022 GDP Growth seen at >6% growth (vs Brazil & Chile both < 2% and Mexico ~2%)
• Exports hit ~$52b in Q2’22 vs ~$40b pre Covid/2019.
• CIB’s Asset quality remained strong in Q2
• Central bank has been aggressive with rate hikes and NIMs healthy
• CIB’s Net interest margin was ~5.5% in 2021 and expected to be around 6.5% at YE’22  (vs Latam peers at ~3.5 – 4.5% currently)
• Concerns over New Regime & Socialism overblown
• New president, Gustavo Petro took office last month but lacks a strong coalition, and has a tenuous alliance for a very slight majority.
• By the time of the final run off election, Petro had basically become the establishment candidate. He had some loony leftist views, but was supported by elites (similar to Biden) and has walked back most of his crazy talk since winning. Also selected market friendly finance minister.
• Limited to only one 4yr term
• Petro is a former Guerrilla who seeks to make peace with rebels. Will look to bribe them instead of fight them. This alienates a lot of voters and limits his ability to form a strong enough consensus to make major reforms (ie hike taxes and target business/elites)
• Drug war over, Drugs won. Petro’s other controversial but still realistic goal is to legalize cocaine.
• Unclear if this is just a negotiating tactic with the US/West for better trade deals, but similar to the Guerrilla peace process, it further divides political factions and weakens his ability to build a coalition domestically.
• Ironically, also seems like a way for corrupt politicians to further enrich themselves (which is still better than stealing from legitimate businesses).
• Tax increases and reforms likely but should be manageable
• Petro looking to reform taxes to address inequality
• Banks and financial services have been largely spared so far from proposed regulatory reforms
• Petro was looking more to target O&G and Mining, but sounds like this has been partly walked back with exports to EU given Ukraine situation.
• New Finance Minister Ocampo very practical and well respected, should help keep administration more grounded in reality
  • Ocampo is well respected in economics world, progressive but still seen as a relative moderate who has practical political experience w/prior administrations over past 2-3 decades.
    • Ocampo has commented signalling openess to reigning in proposed policies/taxes that are overly burdensome on business.
• Colombians have more conservative fiscal mindset, and Venezuela is too close to home to make same mistakes w/Socialism
• Country used to pride itself on IG rating (lost it during covid)
• Most middle class and elites are scared of socialism/communism, (you don’t need an econ degree to know socialism doesn’t work if you have homeless Venezuelans begging on every street corner)
• Recent news out of Chile where voters rejected a proposed socialist constitution is probably a positive sign for region 
• Very Bureaucratic country = good for incumbents in oligopoly
• Top 5 banks have ~2/3rds of assets
• Bureaucracy helps lower risk of disruption from fintech.
• Digital transformation arguably offers some room for streamlining (each bank has too many branches, CIB has >1k branches)
• Favorable demographics
• Country is ~1.5x size of Texas w/population of ~50m, with a poverty rate of ~39% in 2021 (vs ~30% in 2019/preCovid)
• Sets up a rising middle class story (similar to Brazil in early 2000s under Lula), which is favorable for banking sector/financial services

Risks:

• Adverse FX moves
• New Regulations / Taxes
• Concerns around increasing tax on dividends from ~10% currently seen harming Colombian equities.
• Recent comments from finance minister seem to mitigate this.
• Central America is ~27% of CIB's loan portfolio
  • CIB also has operations in Panama, Puerto Rico, El Salvador, Costa Rica, and Guatemala
• Corruption rampant

Catalyst

• Dollar loses momentum
• Political concerns should start to ebb over next 6-12 months, as Petro seen as not as bad as feared / proposals fail to gain traction
• This would help multiples and likely also result in COP strengthening vs dollar
• Few more Q’s of decent results from CIB should give investors more comfort on asset quality / reserves and ability to sustain dividend
• M&A / Activism from Billionaire Gilinski (GEA) may help spur more takeovers, helps bring investor’s attention to region
  • Gilinski was previously the Chairman of CIB and is actively involved in numerous financial services and conglomerates in the region, including Grupo Sura which holds a significant stake in Bancolombia (~24% per CapIQ)