Scandal Or Not, Grupo Aval’s Current Valuation Is AttractiveSeeking Alpha #Grupo_AvalJanuary 13, 2019
Despite the risks facing the company as well as the inherent volatility of emerging market banks, Aval is a well-managed financial conglomerate with dominant market shares in both Colombia and Central America that regularly earns at least a mid-teens return on equity.
Subsidiary contribution to Grupo Aval’s equity and earnings power.
For companies that have relatively similar market shares, as Grupo Aval and BanColombia do, Aval has nearly double the branches at 1,427 versus 727.
That statement is simultaneously true and misleading since the company’s position does not come from being the largest bank in any of the countries in which it operates, but instead from operating in every country in the region.
In total, BAC Credomatic has a 10% share of Central American loans and 9% share of deposits.
Through Corficolombiana the group is exposed to investment banking, and Corficolombiana performs most of the typical functions associated with investment banking such as activity in capital markets, trading, brokerage services, and treasury operations.
Obviously, the investment portfolio is of much greater importance to the company than the financial activities it performs.
Source: Grupo Aval and BanColombia Q3 earnings reports.
In 2020, we will see about a 3% lift in earnings from a lower tax rate, continued efficiency gains, and strong loan growth which should push earnings higher – perhaps to around $0.90 per share, yielding a future value at that time of more than $10 per ADR.
While not being able to assign specific probabilities to each scenario, investors are essentially facing scenario A (which is overwhelmingly likely) that the stock gradually moves back to its historical multiples in the range of 12x earnings and a price of around $9 per ADR (with kickers in future years for efficiency initiatives and a better tax rate) versus an extremely improbable scenario in which the stock re-tests its lows around 10%-15% beneath its current price, in the range of $5.75 per ADR.