Now let’s take a quick look at bank stock Bancolombia (NYSE: CIB), which is up 1.8% for us this month in StrataGem. It’s the largest bank in Colombia, a country whose stock market is up 50% this year due to a surprising burst of growth in energy and banking.
The Medellin-based bank provides loans and other banking services to 6.9 million customers in Colombia , El Salvador, Panama and Puerto Rico. These services are the grease that allows these Latin American economies to grow.
People need to borrow to buy new cars, houses and finance college educations, and businesses in the country are expanding to keep up with domestic and international demand. Bancolombia specializes in automobile, mortgage, commercial and education loans — all of which are highly leveraged to growth of the Colombian economy. CIB also supplies credit cards, brokerage services, and insurance.
Bancolombia is the dominant player in the Colombian market with a 20% market share of loans. Its $12.7 billion market cap and $2.75 billion in annual revenue make it roughly one-tenth the size of Bank of America (NYSE: BAC).
The financial services industry is one of Colombia’s fastest growing sectors. Banking increased by 12.6% while the overall economy struggled to reach 0.8% growth during the 2009 downturn. Account penetration has risen 10 percentage points in the last three years to 60% and still remains low relative to Mexico, Chile, and Brazil.
Mortgage and consumer loans grew by 22% and 9% compared to the same period last year. Total loans in dollars increased by 6.9% and continue to show signs of improvement, according to Bancolombia officials.
Net income jumped 15% year over year, and, CIB’s net interest margin, the key profit metric for banks, improved to 6.4% from 6.1%.
Chief exec Jorge Humberto Restrepo Londono has done an excellent job of creating value for shareholders since taking the reins in 1996. CIB is up 3,200% over the past seven years and the dividend has grown at a five-year annualized rate of 24%.
While investing in a Colombian bank may seem risky, Bancolombia is significantly better capitalized than its American and European peers. A recent bond issue increased its tier 1 ratio, — its proportion of safe assets to risky assets — to 10.7%, which is well above Basel III regulatory standards. As of June 30, 2010, Bank of America, JPMorgan Chase (NYSE: JPM), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C) all have Tier 1 ratios under 9.7%.
Long-term growth prospects for Bancolombia are promising. The stock may not look cheap at 2.1 times book value but it traded at 3.5x book value in 2005-6 and doubled in price over that period.
Emerging Latin American economies such as Colombia and Chile will lead the global market going forward as OECD countries are saddled with debt. Banco Satander Chile (NYSE: SAN) and Banco de Chile (NYSE: BCH), that country’s two largest banks, trade at 5.1 times and 4.5 times book value.
Those valuations may be a bit steep for Bancolombia but my model expects CIB to trade at 2.5 times at minimum. This yields a price target of $75, or 16% upside from today’s closing. It’s a buy.
For more ideas like this every day, check out Markman’s two daily advisories: Trader’s Advantage for short-term traders and Strategic Advantage for long-term investors.
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