Digital Expansion And Integration Risks Will Pressure Margins And Limit Long-Term Earnings Potential

Catalysts

About Banco Davivienda

Banco Davivienda is a Colombian and Central American universal bank that provides retail, commercial and digital financial services through traditional branches and its DaviPlata digital platform.

What are the underlying business or industry changes driving this perspective?

• The rapid expansion of DaviPlata into a full digital bank with NFC cards, nanocredit and broader product suites may require continued heavy technology, marketing and risk investments that outpace revenue monetization, pressuring net margins and delaying earnings growth.
• Planned mid to high single digit loan growth led by consumer credit in an environment of still elevated policy rates and potential additional banking taxes in Colombia could lift funding and credit costs faster than pricing can adjust, capping net interest income and ROE improvement.
• The integration of Scotiabank and Colpatria, while strategically attractive, introduces multi year execution, systems and culture risks that can inflate operating expenses and integration charges, keeping the cost to income ratio structurally high and limiting earnings accretion.
• Growing reliance on transactional and fee income from cards, payments and remittances exposes Davivienda to intensifying competition from fintechs and big tech platforms, which may compress fees and weaken the projected growth in nonfinancial income and total revenue.
• Expansion of unsecured consumer and small business lending based on recent favorable vintages could underappreciate the impact of slower global growth, election related uncertainty and remittance normalization, raising future cost of risk above guidance and eroding net profit.

Assumptions

This narrative explores a more pessimistic perspective on Banco Davivienda compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Banco Davivienda's revenue will grow by 37.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 16.0% today to 14.2% in 3 years time.
• The bearish analysts expect earnings to reach COP 2837.7 billion (and earnings per share of COP 5753.65) by about December 2028, up from COP 1237.7 billion today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as COP4280.5 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 5.5x on those 2028 earnings, down from 10.8x today. This future PE is lower than the current PE for the CO Banks industry at 9.3x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 18.08%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Colombia and Central America are experiencing solid and broad based GDP growth with low and stable inflation and supportive monetary policy. This environment can underpin sustained expansion in consumer, mortgage and commercial lending and drive higher revenue over the medium term.
• DaviPlata is scaling as a carbon neutral, trusted digital banking platform with growing deposits, a rapidly expanding loan book and rising transactional income. This could become a powerful long term engine for low cost funding and fee based revenue growth.
• Structural improvements in funding mix through strong growth in low cost transactional deposits and diversified bond funding are lowering average funding costs and supporting an improving net interest margin and net interest income trend.
• Credit quality metrics are on a clear improving path with declining PDL ratios, higher coverage levels and better performing new consumer vintages. Together, these factors could keep cost of risk contained and support resilient net margins and earnings.
• Management is guiding to rising return on equity into double digits on a stand alone basis by 2026, supported by disciplined cost control, scale benefits and the planned integration with Scotiabank and Colpatria. This may accelerate earnings growth and enhance long term profitability.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Banco Davivienda is COP19500.0, which represents up to two standard deviations below the consensus price target of COP27673.71. This valuation is based on what can be assumed as the expectations of Banco Davivienda's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of COP38896.0, and the most bearish reporting a price target of just COP19500.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be COP19925.2 billion, earnings will come to COP2837.7 billion, and it would be trading on a PE ratio of 5.5x, assuming you use a discount rate of 18.1%.
  
• Given the current share price of COP27400.0, the analyst price target of COP19500.0 is 40.5% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• 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.