Company Note – Multibank Transaction Economic, Sector and Market Research October 2019

ANALYST CERTIFICATIONS AND REQUIRED DISCLOSURES BEGIN ON PAGE 5 Grupo Aval Expands Analysts Andrea Atuesta Meza Financial Sector Analyst aatuesta@.com.co Exposure in (+57) 1 746 4329

Banco de Bogota Marketweight, TP 76,800 Juliana Aguilar Vargas, CFA Cement & Infrastructure Analyst Grupo Aval announced the acquisition of Multibank Financial Group through its [email protected] (+57) 4 604 7045 subsidiary Banco de Bogota, in Panama. According to the company, the P/BV

of the operation was 1.3x with a ROE of 11.1%, for a transaction value of Table 1. Ke Panama USD726 mn. Variables 2019 When comparing the multiple with the average of transactions in the region of Country risk 1.43% 1.7x and ROE of 15.5%, it looks like a transaction at market prices, because of Risk-free rate 2.45% the lower multiple paid is due to the lower return generated vs. peers. Our Ke Beta 1 for Panama is 9.54%, which is why we believe that the operation generates Risk premium 5.66% value for the shareholder. Ke 9.54%

However, when comparing the multiple of the transaction with market multiples for comparable , the P/BV vs. ROE ratio would place the transaction

below the regression line in graph 2, pointing to a purchase with discount Figure 1. Market share Panama 2018 without premium payment for control. Banco General Banistmo BAC Multibank – Expansion in Panama with potential improvement in Multibank Global Otros profitability

At the end of 2018 Multibank had a 5.3% market share while BAC had a 6.1%, rd thus after the transaction they will become the 3 player in the country with an 18.60%

11.4% share, behind Banco General (18.6%) and Banistmo (12.9%). 46.20% 12.90% Multibank shows an important evolution of the business with a CAGR (2014 - 2018) of the gross loan portfolio of 8.7% and a 2.2-pp growth in market share 6.10% since 2013. However, in 1H19 gross loan portfolio growth slowed to 0.44%, net 5.30% income (12 months) showed a variation of 2.6% and ROE was 11.1%. When 10.90%

comparing the latter with BAC’s (14%), there is a great opportunity for Banco Source: Multibank, Grupo Bancolombia. de Bogota to look for efficiencies and improve the profitability of Multibank.

Figure 2. P/B vs. ROE (Latam banks) Figure 3. Comparable transactions (Latam)

4.0x PBV ROE 3.5x Multibank 1.3x 11.1% Banco de 3.0x Chile Average 1.7x 12.4% 2.5x Median 1.6x 14.4%

P/BV 2.0x Banco Cred Inver Source: Capital IQ, Grupo Bancolombia. Bancolombia Grupo Aval Grupo F Banort-O 1.5x Multibank Banco de Bogotá Gentera Sab Banco do Brazil 1.0x Grupo Fin Inbursa Itau Corpbanca 0.5x 0% 4% 8% 12% 16% 20% 24% ROE

Source: Bloomberg, Grupo Bancolombia. About Multibank

Grupo Aval, the leading financial in and Central America, signed an agreement to acquire Multibank Financial Group (MFG), of Multibank Panama. This transaction will be made through Leasing Bogota, a subsidiary of Banco de Bogota, so that it will be part of the investments they have in the region with the banking group BAC Credomatic. The closing of the transaction is expected to take place in 2Q20, after completing the required regulatory approvals.

It is important to highlight that Grupo Aval is reviewing what the financing structure of the purchase will be, we’re yet to learn whether it will be done only with own resources or if they will go to some type of funding. However, whatever the scenario is, Banco de Bogota will continue to comply with all the solvency requirements demanded by Basel 3.

Multibank is a bank with presence in mainly in Panama and at the end of 2Q19 total assets amounted to USD4,954 mn with a gross loan portfolio of USD3,443 mn, representing 69% of assets, where 47% corresponds to corporate banking and 41% to retail banking. Within corporate banking, the company features a diversified portfolio, in which construction and business represent 28%, corporate 25% and agriculture 12%. This is in line with Grupo Aval’s strategy that seeks to further diversify its portfolio and enter new segments such as SMEs, agribusiness, and construction.

As mentioned earlier, the assets of this operation are close to USD5 bn, which represents approximately 6% of Grupo Aval and 9% of the consolidated assets of Banco de Bogota. In this vein, the exposure of Banco de Bogota’s loan portfolio in Panama would increase from 12% to 17.1%, exceeding the 13% exposure in .

This transaction is seen as an opportunity and diversification strategy in Panama, since in Costa Rica there is a small representation operation (0.1% of the net loan portfolio) and the Colombian operation is not included in the transaction. Table 2. Main indicators Multibank Panama

USD mn 2014 2015 2016 2017 2018 LTM 2T19 Gross Loans 2,452 2,675 2,945 3,172 3,427 3,442 Total Assets 3,619 3,926 4,268 4,691 4,895 4,954 Total Deposits 2,361 2,443 2,708 2,801 2,896 2,903 Total Equity 364 367 438 499 523 560 Net Income 42 50 52 58 57 58 ROE 12.8% 13.8% 13.0% 12.5% 11.1% 11.1% Credit Quality 1.8% 1.4% 1.9% 2.5% 1.3% 1.7% Coverage 78.9% 87.1% 62.9% 41.2% 103.2% 85.7%

Table 3. Main indicators Banco de Bogota Consolidated

COP mn 2014 2015 2016 2017 2018 LTM 2T19 Gross Loans 71,341,210 97,033,427 102,943,186 110,405,468 118,832,410 111,854,023 Total Assets 118,366,641 153,350,464 141,491,431 149,405,125 163,302,509 163,382,960 Total Deposits 73,678,984 92,071,864 93,704,633 100,980,539 108,443,964 107,446,608 Total Equity 16,060,050 17,772,934 17,310,666 18,210,221 19,667,774 20,180,497 Net Income 1,388,620 2,075,685 4,309,390 2,064,130 2,937,262 3,207,098 ROE 12.8% 16.6% 25.2% 12.9% 16.5% 18.5% Credit Quality NA 4.3% 4.1% 5.4% 6.5% 7.2% Coverage NA 51.2% 55.8% 54.0% 66.2% 64.9%

, Table 4. Main indicators BAC International Inc. Consolidated

USD mn 2014 2015 2016 2017 2018 LTM 2T19 Gross Loans 11,622 13,142 14,310 15,525 16,245 16,082 Total Assets 17,077 18,705 20,048 22,018 22,752 22,997 Total Deposits 11,371 12,291 13,183 14,942 15,687 15,995 Total Equity 1,956 2,240 2,373 2,628 2,692 2,951 Net Income 323 320 345 376 405 394 ROE 16.5% 15.6% 15.9% 15.3% 15.1% 14.0% Credit Quality 1.5% 1.3% 1.4% 1.5% 1.8% 2.1% Coverage 94.4% 91.9% 95.7% 101.3% 163.2% 148.0%

Source: Capital IQ, Grupo Bancolombia, Economic, Industry and Market Research Juan Pablo Espinosa Arango Director [email protected] +571 7463991 ext. 37313

Economic research Industry Research Equity Research Diego Fernando Zamora Díaz Jhon Fredy Escobar Posada Jairo Julián Agudelo Restrepo Senior Economist Industry Research Manager Head of Equity Research [email protected] [email protected] [email protected] +571 7463997 ext. 37319 +574 4044649 ext 44649 +574 6047048 Arturo Yesid González Peña Nicolás Pineda Bernal Diego Alexander Buitrago Aguilar Quantitative Analyst Industry Research Manager Energy Analyst [email protected] [email protected] [email protected] +571 7463980 ext 37385 +574 4042985 ext 42985 +571 7463984 Espitia Pinzón Juan Sebastián Neira Orozco Andrea Atuesta Meza Macroeconomic Analyst Industry Research Manager Financial Sector Analyst [email protected] [email protected] [email protected] + 571 7463988 ext. 37315 +571 7464329 Paolo Betancur Montoya Bryan Hurtado Campuzano Industry Research Manager Juliana Aguilar Vargas, CFA International and Regional Analyst [email protected] Cement & Infrastructure Analyst [email protected] [email protected] +571 7463980 ext. 37303 +574 6047045 Juan Manuel Pacheco Perez Ricardo Andrés Sandoval Carrera International and Markets Analyst Oil & Gas Analyst [email protected] [email protected] +571 7464322 ext. 37380 +571 7464596 Juan Camilo Meneses Cortes Valentina Martinez Jaramillo Central Banking and Financial System Junior Analyst Analyst [email protected] [email protected] +574 6048906 +571 7463994 ext. 37316 Alejandro Quiceno Rendón Karen Stefanny Correa Castaño Research Editor Interrn +574 6048904 [email protected] [email protected] +571 7463988 ext. 37310 Ana María Núñez Buriticá Intern [email protected] +571 7464318 Condiciones de Uso This report has been prepared by Analysis Bancolombia a research and analysis department at Grupo Bancolombia. 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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 , 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 20 companies under coverage, distributed as follows:

Overweight Market Weight Underweight Under Review Number of issuers with ratings of: 10 5 3 2 Percentage of issuers with ratings of: 50% 25% 15% 10%