Nequi And Grupo Cibest Will Strengthen Future Profitability

Key Takeaways

• The growth of Nequi enhances Bancolombia's future revenue potential and net margins through increased digital payments and scalable operations.
  
• New corporate strategies, like share repurchase programs, and macroeconomic improvements are set to boost Bancolombia’s earnings per share and credit demand.
  
• Economic uncertainties, currency fluctuations, and fiscal pressures could challenge Bancolombia’s net interest margins, profitability, and revenue growth amidst competitive and regulatory pressures.

Catalysts

Provides banking products and services in Colombia and internationally.

• The establishment of a new holding company, Grupo Cibest, aims to mitigate financial inefficiencies and enable more efficient capital allocation, which is expected to positively impact Bancolombia’s net margins and earnings in the future.
  
• Nequi, Bancolombia's digital neobank, is expanding rapidly, with user engagement and transaction volume increasing significantly. Its growth trajectory in digital payments and low-cost financial services indicates potential future revenue streams and improved net margins through scalable operations.
  
• Anticipated improvements in Colombia’s macroeconomic environment, with inflation under control and GDP growth expected to increase in 2025, should enhance credit demand, particularly for consumer loans, potentially boosting revenue.
  
• Planned share repurchase programs, facilitated by the new corporate structure, can lead to enhanced earnings per share (EPS) and return on equity (ROE) as they effectively decrease the number of outstanding shares.
  
• A continued focus on cost management, with operating expenses growing below Colombia’s inflation rate, alongside improved asset quality and declining cost of risk, supports a stronger financial position and could improve overall net margins over time.

Bancolombia Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bancolombia's revenue will grow by 16.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 28.2% today to 19.6% in 3 years time.
• Analysts expect earnings to reach COP 6566.4 billion (and earnings per share of COP 6678.21) by about December 2027, up from COP 6052.3 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.5x on those 2027 earnings, up from 6.0x today. This future PE is lower than the current PE for the US Banks industry at 12.9x.
• Analysts expect the number of shares outstanding to grow by 0.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 16.01%, as per the Simply Wall St company report.

Bancolombia Future Earnings Per Share Growth

Risks

• Uncertainty in economic conditions, changes in currency exchange rates, and fiscal pressures in Colombia could impact the bank's credit-related expenses and net interest margins.
  
• Increased competition for deposits could exert pressure on Bancolombia’s ability to maintain low funding costs, affecting net interest margins and overall profitability.
  
• The anticipated compression of net interest margins due to interest rate cuts by the Central Bank of Colombia and market-driven rate reductions could impact earnings.
  
• Underperformance of tax revenues and the fiscal challenges faced by Colombia's government could lead to greater economic strain and affect Bancolombia’s revenue growth prospects.
  
• The bank's reliance on maintaining strong consumer loan growth amidst cautious economic recovery signals a risk, as slower-than-expected credit demand or increased provisioning needs could impact loan growth and net margins.

Valuation

• The analysts have a consensus price target of COP 36300.67 for Bancolombia based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of COP 47000.0, and the most bearish reporting a price target of just COP 30604.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be COP 33443.8 billion, earnings will come to COP 6566.4 billion, and it would be trading on a PE ratio of 8.5x, assuming you use a discount rate of 16.0%.
• Given the current share price of COP 37680.0, the analyst's price target of COP 36300.67 is 3.8% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.