Analysts weigh Banco de Bogota financing options to acquire BAC

Thursday, September 30, 2010

Colombian bank Banco de Bogota's three-part plan to finance the US$1.9bn acquisition of 100% of Central America-based BAC Credomatic from GE Capital Corporation could face execution risk, analysts say, while they also disagree on the benefits from such purchase.

The bank plans to finance the purchase through a US$1bn capital infusion from its main shareholders, a US$450mn plain vanilla senior debt issuance and US$450mn of existing cash held at the bank.

The US$1.9bn price tag implies a 2009 price-to-earnings (P/E) ratio of 12.8x and a 2.3x price-to-book (P/B) ratio over the results of BAC Credomatic's main holding company, BAC International Bank. The purchase will be done through Panama-based leasing subsidiary Leasing Bogota Panama.

According to David Pelaez, equity analyst at Colombian brokerage Bolsa y Renta, Banco de Bogota had 2.8tn pesos (US$1.55bn) in cash as of July, although regulations require keeping a percentage - between 8% and 10% - of deposits in cash to guarantee customer savings. The bank's cash-to-deposits ratio currently stands at 12.5%, he said.

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While loans grew only 0.2% in 2009, the bank's investment portfolio grew 65% last year mainly thanks to improved valuations. Currently, the bank has some 7tn pesos in investments, of which 4.5tn pesos are debt securities. The bank can tap these resources to partly finance the purchase, Pelaez said.

"The bank has enough cash to finance the US$450mn, which represents only 11% of their investment portfolio and 2.6% of total assets. This can come directly from their existing cash. They may also sell some investments in debt securities without affecting significantly these accounts [while] keeping adequate solvency levels," he said.

Banco de Bogota's solvency ratio stood at 14.1% as of July, well above the minimum requirement of 9%, according to the bank's latest figures.

Banco de Bogota chairman Alejandro Figueroa recently stated that the entity expected to close the year with earnings of 770bn pesos, which implies a 5.3% increase compared to 2009 and 2.6% above Bolsa y Renta's estimate.


Banco de Bogota will also need a US$1bn capital infusion from its main shareholders, which should mainly fall on group owner Luis Carlos Sarmiento, one of the richest men in Colombia.

Sarmiento's holding company, Grupo Aval, is Banco de Bogota's largest shareholder with a 65% stake. The group is the country's biggest financial holding and controls about 30% of loans in the Colombian banking system through a chain of four banks.

The group also maintains extensive and dominant holdings, not only in the Colombian financial system, but also in the construction and real estate sectors, and has said it plans to launch an IPO on NYSE at some point in the future.

Analysts agree that debt issuances from both Grupo Aval and Banco de Bogota would be well received in the local markets.

"The Grupo Aval group of banks has profitability indicators above their peers, optimum levels of operating efficiency, good market positioning and healthy asset quality and coverage levels. Investing in the group would be making a bet on Colombia's financial sector," Pelaez said.

However, the issue's attractiveness will depend on the price, which is still unknown. "Grupo Aval's shares do not have a high float and are not in everybody's portfolios, so an issue that raises float and adds liquidity could be positive," Pelaez added.

"If they issue here, it will likely be a success, given the success of such issuances over the past 18 months," Rupert Stebbings, managing director at Celfin Colombia, told BNamericas.

But Felipe Toro, analyst at brokerage InterBolsa, said that while the market has seen successful issues lately, the debt placement will represent a big challenge for the bank.


The acquisition of the BAC Credomatic group is sizeable and would be Banco de Bogota's first major cross-border acquisition or move outside of its home market.

At the end of 2009, BAC had 15.9tn pesos in assets, equal to 54.4% of Banco de Bogota's assets. Its 10tn-peso loan portfolio is equal to 56.7% of the Colombian bank's loans.

As for the value BAC will add to Banco de Bogota, analysts are divided. While some see it as a positive move, since it will add international presence and access to foreign capital markets, others such as Moody's analyst Felipe Carvallo think the transaction may expose the bank to increased credit and market risks in the consumer segment and within six developing Central American markets - Costa Rica, El Salvador, Guatemala, Panama, Nicaragua and Honduras.

"Complicating matters is BAC Credomatic's complex structure of banking and credit card issuing," he wrote in a report. "The transaction also presents significant integration challenges, particularly given management's limited expertise in mergers and acquisitions as well as in consumer credit outside of Colombia."

On September 1, Moody's placed Banco de Bogota's ratings on review for possible downgrade following the purchase announcement.

The Banco de Bogota-BAC deal is expected to close on January 2011, after regulatory approvals come through.