Colombian Banks Rare Bright Spot in Americas’ Worst Stock Market

Colombia’s stock market and currency, the worst-performing in Latin America, are creating the best opportunity in years to snap up shares of the nation’s banks on the cheap.

Oil prices have dropped by half over the past year, sending the country’s benchmark stock index barreling toward its biggest loss since 2008 and leaving Colombian lenders trading at valuations significantly below the average for the past three years. Banco Itau BBA and Goldman Sachs Group Inc. say it’s a great time to buy the stocks as the banks post the region’s biggest increases in interest income and gear up to finance Colombia’s biggest ever infrastructure program.

“We really think they are worth the risk,” Itau analyst Johanna Castro said in a July 22 phone interview from Bogota. “The way to get into Colombia, and get something that is regionally cheap, would be via the banks.”

The country’s benchmark stock index has sunk 51 percent in dollar terms over the past 12 months, the worst performance in the world after Ukraine. Even in Brazil, which is sinking into recession and engulfed by a corruption scandal, the main stock index has fallen by just 44 percent.

The Colombian peso has lost 35 percent in the past year, also the worst in Latin America.

Castro expects a boost in the lenders’ multiples, which have suffered as the Colombian banks underperformed peers after selling shares and bonds to finance expansion in Central America. The idea is that as Colombia embarks on an unprecedented program to construct 5,000 miles of highways and better connect cities with ports on its Pacific and Caribbean coasts, lenders can thrive even as the economy slows.

Rough Roads

Castro cites what happened in South Korea after the 1990s, when banks there returned more than 20 percent a year as the government overhauled its road network. A similar pattern should take hold for Colombia’s biggest lenders, including Bancolombia SA, which is a recommended stock at both Itau and Goldman, and Banco Davivienda SA, the third biggest, which Itau also recommends. Goldman has a buy rating on banking group Grupo Aval Acciones y Valores SA and sees a shift in accounting unlocking value for the banks.

The Colombian financial stocks are trading significantly below their historical valuation, based on the ratio between stock prices and book value per share.

It will come as no surprise to anyone who has traveled in the South American nation that Colombia ranked 126th out of 144 economies for the quality of its roads on the World Economic Forum’s global competitiveness index.

To address this, and cut travel time and costs between the nation’s industrial centers and its coastal ports, the government of President Juan Manuel Santos is planning a $17.5 billion highway-building program known as 4G, and has promised to build 1,300 kilometers of new roads by 2018.

Falling Poverty

The banks are expected to fund about half of the $15 billion in financing required for the first phases of the 4G projects, with their exposure to the projects reaching 12 percent to 15 percent of total loans disbursed over the medium term, according to a May report from Fitch Ratings.

Even before the infrastructure program gets fully underway, Colombian banks already had the region’s fastest growth in interest income over the past three years, increasing 68 percent compared with an average of 27.5 percent for Latin American peers, according to Bloomberg data.

Goldman Sachs analyst Carlos Macedo says banks will benefit as a growing number of Colombians take out mortgages and use credit cards. While the number of Colombians in poverty has fallen to 28.5 percent from more than 40 percent five years earlier as more people joined the middle class, the country’s mortgages are still under 10 percent of gross domestic product.

Mortgages are equal to about 9 percent of gross domestic product in Colombia, according to Titularizadora Colombiana SA, the nation’s biggest issuer of mortgage-backed securities. That compares with 19 percent in Chile and 25 percent in Panama.

“It’s a market that’s still developing on many fronts,” Macedo said in a July 22 phone interview. “Mortgages are growing fast, and there will probably be a lot of development in the consumer business, credit cards and whatnot.”

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