Digital Banking Expansion And Central American Diversification Will Drive Strong Long Term Upside

Catalysts

About Banco Davivienda

Banco Davivienda is a leading Latin American financial institution providing retail, commercial and digital banking services across Colombia and Central America.

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

• The rapid scaling of DaviPlata into a full digital bank, with expanding credit, debit and payments capabilities, is set to deepen customer engagement and drive higher fee and interest income as digital transaction volumes and loan penetration rise, supporting revenue growth and earnings expansion.
• A structural shift toward low cost transactional deposits, fueled by the bank’s money movement ecosystem and digital channels, is lowering funding costs and should sustain a robust net interest margin and expanding net profit even if headline loan yields normalize.
• Ongoing improvement in portfolio quality, with declining PDLs, lower cost of risk and higher coverage, positions Davivienda to release credit pressure on the income statement, directly supporting wider net margins and stronger bottom line results.
• Profitable growth in Central America under a generally stable macro backdrop and rising sovereign credibility is broadening the earnings base beyond Colombia, providing diversified loan and fee growth that should lift consolidated revenues and smooth volatility in return on equity.
• The new Davivienda Group holding structure and upcoming integration of Scotiabank operations are expected to unlock operating synergies, capital efficiencies and scale in retail lending and payments, together driving higher ROE, faster earnings growth and a more attractive valuation profile over time.

Assumptions

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

• The bullish analysts are assuming Banco Davivienda's revenue will grow by 46.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from 16.0% today to 17.9% in 3 years time.
• The bullish analysts expect earnings to reach COP 4333.9 billion (and earnings per share of COP 7822.38) by about December 2028, up from COP 1237.7 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as COP2873.1 billion.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 7.2x on those 2028 earnings, down from 9.9x today. This future PE is lower than the current PE for the CO Banks industry at 9.3x.
• The bullish 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?

• A prolonged environment of high domestic and global interest rates, combined with fiscal uncertainty in Colombia and potential additional sector taxes, could suppress credit demand, compress loan growth below guidance, and erode returns on equity by lifting funding and tax burdens relative to revenue growth and net margins.
• If the expected acceleration in retail and consumer lending coincides with weaker household income due to slower GDP growth, wage pressure, election year policy shifts, or normalization of remittances, recently originated vintages may underperform. This could drive a reversal of the improving cost of risk trend and pressure earnings.
• The strategic bet on DaviPlata as a full digital bank, including rapid expansion of debit and credit cards and new credit products, could face rising competition, slower adoption, or higher than anticipated credit losses. This may reduce fee growth and weaken the contribution of low cost digital deposits to net interest income and consolidated profitability.
• The Davivienda Group corporate reorganization and planned integration of Scotiabank and Colpatria operations may carry execution and technology risks. Integration delays, higher than expected operating and restructuring costs, or slower realization of synergies could dilute ROE improvement and keep efficiency ratios elevated.
• The bank’s diversified presence in Central America, while benefiting from current macro stability, remains exposed to external shocks such as commodity price volatility, trade tensions, and shifts in global rates. These factors could deteriorate local growth and sovereign risk, limit regional loan expansion and fee generation, and increase pressure on consolidated revenue and earnings.

Valuation

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

• The assumed bullish price target for Banco Davivienda is COP38896.0, which represents up to two standard deviations above 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 bullish 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 bullish analyst cohort, you'd need to believe that by 2028, revenues will be COP24168.5 billion, earnings will come to COP4333.9 billion, and it would be trading on a PE ratio of 7.2x, assuming you use a discount rate of 18.1%.
  
• Given the current share price of COP25120.0, the analyst price target of COP38896.0 is 35.4% higher.
  
• 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.