Financial Services Sector Report May 2018 Activity of Credit Establishments Shows Mixed Signals According to the most recent figures published by the Financial Superintendence of , in February the activity of credit institutions maintained a stable dynamic. On the one hand, the loan portfolio expanded at a rate similar to that observed in January, while profitability indicators improved. However, the behavior of past due loans resulted in a deterioration in the quality of the loans. In our opinion, this is one of the main challenges the financial system faces in the current situation.

Evolution of the Loan Portfolio

In February, the balance of the gross loan portfolio was close to COP433bn, increasing by about COP3bn compared to January. This implies that the annual Figure 1 – Loan portfolio quality index (% of nominal growth stood at 5.9%, down 30bps against January. However, in real terms, past-due loans over total gross loans by segment the annual variation went from 2.4% in January to 2.5%, mainly explained by the – includes leasing) decreases in inflation. As happened in recent months, the expansion of the loan portfolio was explained by consumption and mortgages, with readings of 9.2% and 10.3% nominal annual, respectively. Meanwhile, business credit still shows no sign Feb-17 Jan-18 Feb-18 of reactivation and maintains an incipient expansion rate of 3.3%. 3.80% Total Portfolio 4.59% On the other hand, the balance of the overdue loan portfolio was close to 4.83% COP21bn. Thus, in absolute terms, delinquent loans increased COP1bn compared to 3.13% January, mainly explained by an increase of COP962,000mn in the overdue business Commercial 4.04% loan portfolio. In this way, the annual variation was 34.7%, up about 5pps vs. 4.39% January. Again, this dynamic was explained by an acceleration in the business 5.40% segment, which reached an annual expansion of 45%. On the other hand, the past Consumer 5.98% due loan portfolio for consumption credit slowed down (23.8%), while for 6.12% mortgages remained stable (44.3%). 2.38% Household 3.22% Quality and Coverage 3.11% 7.62% The balance of the gross and past due loan portfolio in February resulted in a Microcredit 7.99% deterioration in the quality of loans. Specifically, the traditional quality indicator 8.02% (overdue loan portfolio and leasing/gross loan portfolio and leasing) increased from 4.59% in January to 4.83% in February, a level not seen since the most recent Source: Financial Superintendence of Colombia financial crisis, when the deterioration of loans reached 4.85%. In particular, the business and consumer loan portfolio showed the greatest deterioration. In fact, the quality indicator of the business loan portfolio reached a reading not seen since 2002. On the contrary, the indicator of mortgages decreased by 11bps, and remains as the segment with the best quality.

However, the level of provisions of credit establishments shows that these maintain adequate coverage to face the risks of financial intermediation. In fact, in February, the coverage indicator (provisions/past due loans) was 124%. Analysts Profitability Name: Andrea Patricia Atuesta Meza Phone: (571) 7464329 Regarding the profitability of credit institutions, in February there was a significant E-mail: aatuesta@.com.co increase. In particular, the ROE stood at 9.32%, up almost 1pps compared to Name: Juan Camilo Meneses Cortés January. However, it's worth noting that this level is lower than that observed a Phone: (571) 7463994 year ago, when the reading was 10.6%. E-mail: [email protected]

Name: Juliana Aguilar Vargas Phone: (574) 6047045 E-mail: [email protected] Bank’s Credit Portfolio Maintained a Moderate Dynamic Profitability Affected by Increase in Provisions Figure 2 – Banks vs Colcap (Base 100) The net income of the banking industry was COP613,191mn during February, down PF Bancolombia PF Davivienda PF Aval Bogota Colcap 3.6% YoY, while the provision expense increased 27.1% YoY. This performance 130 made the ROE, which stood at 9.25%, decrease 2.24pps YoY. On the other hand, the average NIM (12 months) of the banks was at 6.12%, up 20.7bps. On the upper side 120 were Banco de Occidente (6.28%), followed by Davivienda (6.16%), while Bancolombia was on the lower side (5.73%), followed by Banco de Bogota (4.26%). 110 Performance of the Loan Portfolio – Moderate Growth Showing Less Deterioration Compared to 2017 100

The growth of the bank's loan portfolio maintained a moderate dynamic, up 5.86% 90 YoY (+0.7% MoM). On the other hand, past due loans showed a growth of 36.1% Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Apr-18 YoY and an increase of 5.86% MoM, with the business loan portfolio and mortgages Source: Bloomberg. presenting the greatest deteriorations during this month. However, if we compare with FY2017, past due loans showed a higher average growth of about 43% this year, so the results to February reflect a slight recovery in this area. Table 1 – Multiples This supports the fact that the loan portfolio quality indicator has increased COMPANY P/E P/BV YIELD ROA ROE Total Assets substantially, going from 3.70% in January 2017 to 4.76% in February 2018, where BANCO DAVIVIENDA 12.0x 1.4x 2.6% 1.3% 12.3% $ 100,771,288 Bancolombia stands at 5.13%, followed by Banco de Occidente (4.62%), Davivienda BANCO BOGOTÁ 11.2x 1.3x 4.5% 1.4% 12.2% $ 149,405,125 (4.72%), and Banco de Bogota (3.88%). BANCOLOMBIA SA 12.3x 1.4x 2.9% 1.3% 11.8% $ 203,908,211

Coverage – In February Banks Maintained Adequate Coverage Source: Bloomberg. Banks maintain an adequate coverage that in February stood at 123.9%, with a negative variation of 5.5pps MoM. Bancolombia stands out with the highest level (137.9%), followed by Davivienda (106.1%), Banco de Bogota (122.6%), and Banco Table 2 – Market Share de Occidente (108.4%).

Solvency Level – Healthy

The level of solvency of banks has remained relatively stable since 2016, standing at 25,9% 14,7% 15.40% in February. Banco de Bogota stands out with the highest level (20%) and Banco de Occidente with the lowest (13.7%), both above the 9% regulatory. The foregoing indicates that banks in Colombia maintain adequate capital support. Outlook 12,8% 6,2% We reaffirm our expectation of more favorable credit dynamics, particularly in the second half of the year. In particular, we believe that once the electoral uncertainty Source: Financial Superintendence of Colombia, Bancolombia. dissipates and the rebound in business and household confidence consolidates, investment decisions that during these months may have been postponed will be reactivated in greater magnitude. In addition, the outlook in terms of purchasing power and an environment of low and stable interest rates would set the right conditions for this to happen.

In addition there's a better outlook regarding the quality of credit. In particular, we believe that the deterioration seen in recent months would have peaked in March, from where we anticipate that the greater expansion of income will allow businesses and households to more easily comply with financial obligations. Figure 3 – Loan Quality Figure 4 – Loan Coverage

Banks Bancolombia Davivienda Banco de Bogotá Banco de Occidente Banks Bancolombia Davivienda Banco de Bogotá Banco de Occidente 4.6% 190%

4.1% 171%

3.7% 152%

3.3% 133%

2.9% 114%

2.5% Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 95% Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Source: Financial Superintendence of Colombia, Bancolombia. Source: Financial Superintendence of Colombia, Bancolombia.

Figure 5 – Provisions Expenses Figure 6 - Variation Gross loans Y/Y

Bancolombia Davivienda Banco de Bogotá Banco de Occidente 10%

120% 9% 8.38% 8% 7.05% 100% 7% 5.9% 6% 80% 5% 3.7% 60% 4% 3% 40% 2% 1% 20% -0.89% 0% 0% -1% Jun-17 Dec-17 Feb-18 Total Banks Bancolombia Davivienda Banco de Banco de -20% Bogotá Occidente

Source: Financial Superintendence of Colombia, Bancolombia. Source Financial Superintendence of Colombia, Bancolombia. Table 3 – Variation by Credit Segments Figure 7 –Annual variation Net Income Y/Y M/M Commercial 3.5% 0.9% Series1 Bancolombia Davivienda Consumption 8.6% 0.4% Banco de Bogotá Banco de Occidente Total Banks Mortgages 10.1% 0.5% 150% Microcredits 7.4% 0.6% Commercial 5.9% 1.5% 100% Consumption 20.1% 0.9% Bancolombia Mortgages 8.7% 0.2% 50% Microcredits -2.7% -1.0% Commercial 3.9% 0.2% 0% Consumption 7.8% -0.1% Davivienda Mortgages 13.5% 0.9% -50% Microcredits -23.1% -3.7% Commercial 1.9% 1.6% -100% Consumption 6.7% 0.0% Banco de Bogotá Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Mortgages 20.2% 1.5% Microcredits 2.9% 0.6% Source: Financial Superintendence of Colombia, Bancolombia. Commercial -1.4% 0.9% Consumption -1.9% -0.7% Banco de Occidente Mortgages 15.2% 1.2% Microcredits - -

Fuente: Financial Superintendence of Colombia, Bancolombia. Figure 8 – NIM 12 months Figure 9 - Solvency

Total Banks Bancolombia Davivienda Total Banks Bancolombia Davivienda Banco de Bogotá Banco de Occidente Banco de Bogotá Banco de Occidente Minimo 6.6% 22

6.2% 20

5.8% 18

5.4% 16

5.0% 14

4.6% 12

4.2% 10

3.8% 8 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Source: Financial Superintendence of Colombia, Bancolombia. Source: Financial Superintendence of Colombia, Bancolombia.

Figure 10 - ROE Figure 11 - ROA Total Banks Bancolombia Davivienda Total Banks Bancolombia Davivienda Banco de Bogotá Banco de Occidente Banco de Bogotá Banco de Occidente 34% 6.2% 31% 28% 5.3%

25% 4.4% 22% 3.5% 19% 16% 2.6% 13% 1.7% 10% 7% 0.8% Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Source: Financial Superintendence of Colombia, Bancolombia. Source: Financial Superintendence of Colombia, Bancolombia.

Figure 12 – Cost of Risk Figure 13 –Industry annual loan growth per segment

Total Banks Bancolombia Davivienda 60% 3.3% Banco de Bogotá Banco de Occidente 50% 3.0% 40%

2.7% 30%

2.4% 20%

10% 2.1% 0% Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 1.8% Feb-17 Apr-17 Jun-17 Aug-17 Oct-17 Dec-17 Feb-18 Commercial Consumption Microcredit Mortgages Source: Financial Superintendence of Colombia, Bancolombia. Source: Financial Superintendence of Colombia, Bancolombia. Figure 14– P/BV and ROE (LATAM Banks )

3.5 Banco de Chile y = 11.034x + 0.2135 R² = 0.5631 3.0

2.5 Banco Cred Inver Grupo F Banorte 2.0

P/BV Davivienda Grupo Fin Ibursa 1.5 Bancolombia B. Bogotá Gentera Itaú 1.0 Banco do Brazil Banco Santander 0.5

0.0 0% 5% 10% 15% 20% 25% ROE

Source: Bloomberg, Bancolombia.

Tabla 4 –LATAM Banks Multiples

COMPANY RPG PVL YIELD % ROA ROE TOTAL ASSETS MEDIANA 12.46x 1.41x 3.36% 1.31% 12.50% $ 30,442,456.00 PROMEDIO 15.13x 1.60x 3.72% 1.76% 12.53% $ 65,850,626.01 BANCO DAVIVIENDA 12.0x 1.4x 2.6% 1.3% 12.3% $ 100,771,288 BANCO BOGOTA 11.2x 1.3x 4.5% 1.4% 12.2% $ 149,405,125 GRUPO AVAL SA 12.6x 1.7x 4.6% 0.9% 13.6% $ 236,641,700 ITAU CORPBANCA 42.5x 1.0x 7.2% 0.3% 2.4% $ 28,060,724 GENTERA SAB DE C 9.9x 1.4x 5.2% 6.3% 15.5% $ 43,677 BANCO CRED INVER 16.7x 2.1x 2.3% 1.0% 12.7% $ 33,883,396 BANCO SANTANDER 13.4x 0.9x 4.1% 0.5% 7.3% $ 1,444,305 GRUPO F BANORT-O 12.9x 2.1x 3.5% 1.9% 17.1% $ 1,354,147 BANCOLOMBIA SA 12.3x 1.4x 2.9% 1.3% 11.8% $ 203,908,211 BANCO DE CHILE 17.5x 3.3x 3.1% 1.8% 19.3% $ 32,824,188 BANCO DO BRASIL 9.1x 1.1x 3.3% 0.8% 12.3% $ 1,353,075 GRUPO FIN INBURSA 11.5x 1.5x 1.5% 3.6% 13.9% $ 517,676

Source: Bloomberg, Bancolombia.

Figure 15– NPL ratio Figure 16– NPL ratio vs coverage

6% 5% 160% 5% 5% 4% 150% 4% 4% 3% 3% 140% 3% 2% 2% 130% 2% 1% 120% 1% 0% 1% Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 110% 0% Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Total Banks B. Bogotá Bancolombia Occidente Davivienda Coverage NPL ratio

Source: Financial Superintendence of Colombia, Bancolombia. Source: Financial Superintendence of Colombia, Bancolombia. Fixed Income Equity Research

Manuel Rey Ayala Jairo Agudelo Restrepo MD - International Institutional Head of equity research Investors [email protected] [email protected] +574 6047048 +571 353 5205 Diego Buitrago Aguilar Energy Analyst Economic Research [email protected] +571 7463984 Juan Pablo Espinosa Arango Head of Economic Research Federico Perez Garcia [email protected] Consumption & Industry Analyst +571 7463991 ext. 37313 [email protected] +574 6048172 Egberto Alexander Riveros Saavedra Senior Economist Andrea Atuesta Meza [email protected] Financial Sector Analyst +571 7463997 ext. 37319 [email protected] +571 7464329 Arturo González Peña Quantitative Analyst María Antonia Yarce, CFA [email protected] Oil & Gas Analyst +571 7463980 ext 37385 [email protected] +574 6049821 Rodrigo José Torres Vargas Macroeconomic Analyst Juliana Aguilar Vargas, CFA [email protected] Cement & Infrastructure Analyst + 571 7463988 ext. 37315 [email protected] +574 6047045 Julián Felipe Huertas Espitia Regional Analyst Raúl Hoyos Arango [email protected] Intern +571 7463980 ext. 37303 +574 6046496 [email protected] Juan Manuel Pacheco Perez International and Markets Analyst Gina Paola García Acuna [email protected] Intern +571 7464322 ext. 37380 +571 7464318 [email protected] Juan Camilo Meneses Cortes Central Banking and Financial System Analyst Research Assistant [email protected] +571 7463994 ext. 37316 Claudia Restrepo Research Editor Camila Acevedo Mejía [email protected] Intern +574 404 3809 [email protected] +571 7463988 ext. 37310 Alejandro Quiceno Rendón Research Editor [email protected] +574 6048904 TERMS OF USE

This report has been prepared by Analysis Bancolombia a research and analysis department at Grupo Bancolombia. It shall not to be distributed, copied, sold, or altered in any way without the express permission of Grupo Bancolombia, nor be used for any purpose other than to serve as background material which does not constitute an offer, advice, recommendation, or suggestion by Grupo Bancolombia for making investment decisions or conducting any transactions or business. The use of the information provided is solely the responsibility of the recipient. Before making an investment decision, you should assess multiple factors such as the risks of each instrument, your risk profile, your liquidity needs, among others. This report is only one of many elements that you should consider in making your investment decisions. In order to extend the content of this information, we ask you to contact your business manager. We recommend you not to make any investment decision until fully understanding all factors involved in such decisions. Fixed income and equity securities, interest rates, and other information found here are purely informational and are not an offer or firm demand to perform transactions. Also, according to the applicable regulations, our opinions or recommendations do not constitute a commitment or guarantee of return for the investor. The information and opinions in this research report constitute a judgment as of the date indicated and are subject to change without notice. The information may therefore not be accurate or current. Future projections, estimates, and forecasts are subject to several risks and uncertainties that prevent us from ensuring that they will prove correct or accurate, or that the information, interpretations, and knowledge on which they are based will be valid. In that sense, actual results may substantially differ from the forward-looking statements contained here. You should be aware of the fact that investments in securities or other financial instruments involve risks. Past results do not guarantee future performance. The entities that are part of Grupo Bancolombia may have acquired and maintain at the time of preparation, delivery or publication of this report, for their own position or that of their clients, the securities or financial assets to which the reports refers. Grupo Bancolombia has risk policies to avoid a concentration in their own positions and those of their clients, which contributes to avoid conflicts of interest. As regards to conflicts of interest, we declare that (i) Valores Bancolombia S.A. Comisionista de Bolsa and/or Banca de Inversión Bancolombia S.A. Corporación Financiera have participated in structuring or underwriting/placing equity securities for Bancolombia S.A., (ii) Grupo Bancolombia is the beneficial owner of 10% or more of the shares issued by Valores Simesa S.A., and Proteccion S.A., (iii) Bancolombia is one of the biggest shareholders of Fondo Inmobiliario Colombia – FIC, and (iv) Valores Bancolombia S.A. Comisionista de Bolsa is a wholly owned subsidiary of Bancolombia S.A. Nevertheless, it has been prepared by our Analysis Bancolombia department team based on strict internal policies that require from us objectivity and neutrality, as well as independence from our areas of brokerage and investment banking. The information contained in this report is not based, does not include nor has been structured based on privileged or confidential information. Any opinions or projections contained herein are solely attributable to the author and have been prepared independently and autonomously in the light of the information available at the time. The content of this message does not constitute a professional recommendation to make investments according to the terms of article 2.39.1.1.2 of the Decree 2555 of 2010 or the regulations that modify, replace or complement it.

RATING SYSTEM:

The investment recommendation on the issuers under coverage by Analysis Bancolombia is governed by the rating system presented below, subject to the following criteria:

The upside potential is the percentage difference between the target price of securities issued by a particular issuer and their market price. The target price is not a forecast of the price of a stock, but a fundamental independent valuation made by Analysis Bancolombia, which seeks to reflect the fair price the market should pay for the shares on a given date.

Based on an analysis of the relative upside potential amongst the securities of companies under coverage and the COLCAP index, the ratings of the assets are determined as follows:

Overweight: when the upside potential of a stock exceeds by 5% or more the return potential of the COLCAP index. Market Weight: when the upside potential of a stock does not differ by more than 5% from the return potential of the COLCAP index. Underweight: when the upside potential of a stock is 5% or more below the return potential of the COLCAP index. Under Review: the company’s coverage is under review and therefore there’s no rating or target price.

Additionally, at the discretion of the analyst, the speculative qualification that complements the recommendation will continue to be used, taking into account the risks seen in the performance of the asset, its future development and the volatility the movement of the stock may show.

The fundamental potential of the index is determined based on the methodology established by the BVC for the calculation of the COLCAP index, considering the target prices published by Analysis Bancolombia. This will be made with the Colcap basket on the dates of calculation May and November of every year. For the companies part of the index but not covered, the consensus of market analysts will be used.

Currently, Analysis Bancolombia has 15 companies under coverage, distributed as follows:

Overweight Marketweight Underweight Under Review

Number of issuers with ratings of: 9 4 0 3 Percentage of issuers with ratings of: 56,2% 25% 0% 18,8%