September 13th, 2013 FIXED INCOME RESEARCH

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1 COMPANY REPORT BANCOLOMBIA Investment Thesis is the leading bank in Colombia and has presence in Central America through Banagrícola. It has a sound balance sheet with better-than sector asset quality and healthy capitalization ratios. The bank s main shareholder is a large holding company in Colombia, Grupo Sura, and we consider positive to have such large player backing the bank s operations. The recent acquisition of HSBC Panama for USD2.1bn could have potential negative effects on liquidity and profitability, however, we highlight that it has successfully integrated other banks into its operations in the past. Valuation- USD Denominated Bonds September 13th, 2013 BCOLO 21- OVERWEIGHT The bond s current z-spread of 334bps has widened and it is now trading +77bps above its own historical spread, +38bps above the average spread with the sovereign COLOM21, and +62bps above the CEMBI IG. Besides the current attractive spreads, in the last month, BCOLO21 s price has fallen more than the CEMBI IG which increases its attractiveness in relative terms. Additionally, the bond s Senior Ranking, liquidity (USD1.0bn outstanding) and carry (5.8%) makes us favor this bond. The risk on this recommendation for the short term comes from a stronger tapering by Fed than discounted by the market. BCOLO16, BCOLO17, BCOLO20, & BCOLO22: NEUTRAL- BCOLO16 is currently trading very close to the average spread with the CEMBI IG and the sovereign COLOM17. The bond s duration of 2.2 is the most attractive within, however current spreads are not attractive enough and it has the lowest YTW rate (2.73%) among s universe. BCOLO17 offers the best coupon (6.875%) giving the bond an attractive carry, specially taking into account its short duration. However, given current spreads we believe there is no room for further strong appreciation, as its spread has tightened to the sovereign COLOM17, the CEMBI and its comparable, BANBOG17. BCOLO20 s spread has widened when compared to its own historical spread, and is trading very close to the LTMs average against the sovereign COLOM21 and the CEMBI. It offers an attractive coupon of 6.125%, however its subordinated status makes us cautious given current market volatility. This security could be a good investment option once global markets price in fully the likely future path of monetary policy by Fed in coming months and volatility gets lower. BCOLO22 is trading at a z-spread of 387bps, which is 68bps above the LTMs average and above the average spread with its sovereign comparable and CEMBI. However, its duration (6.8) is not attractive under the current environment. Positive sentiment due to an expanding banking sector in Colombia and a strong balance sheet We believe will continue to grow at healthy rates, given its strong fundamentals and the context of a developing banking sector in Colombia. Throughout the years, the bank has shown an adequate asset quality and healthy capital adequacy ratios. In Feb-13, it announced the acquisition of HSBC Panama, which could put pressure on credit metrics, however we highlight that it has prepared its capital through the issuance of debt, equity issuance for COP1.7tn and re-investment of more than half of its net income every year. After the acquisition announcement, Fitch maintained its BBB rating with a stable outlook and Moody s maintained its BBB- rating with a negative outlook, highlighting the significant cross-border risks and business management challenges it will face in the process of integrating HSBC Panama into its operations. LTM Relative Performance- Z-Spread USD bonds Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep BCOLO20 BCOLO22 BCOLO17 CEMBI BCOLO21 BCOLO16 CEMBI IG Bond Rating Ranking Coupon Price Callable YTW Z-Spread Duration LTM Financial Ratios Outstanding USD mn BCOLO22 BB+ Subordinated N ,425 BCOLO20 BB+ Subordinated N BCOLO21* BBB Sr Unsecured N BCOLO16* BBB Sr Unsecured N BCOLO17 BB+ Subordinated N (*) Make-w hole option provision NPL Ratio ROAE Equity/ Assets Loans / Deposits LATAM Median Source: Credicorp Capital, & Bloomberg. Data as of Sept 12th,

2 BANCOLOMBIA Long-Term Rating: Baa3 / BBB (Moody s/fitch) COMPANY SUMMARY AND FUNDAMENTALS The bank was incorporated in 1945 originally as Banco Industrial Colombiano and in 1998 it merged with Banco de Colombia, from which was born. Throughout the years it has grown as one of the largest banks in the country as a result of both organic and inorganic growth; In 2005 it merged with Conavi (mortgage bank) and Corfinsura (merchant bank). In 2007, it acquired the Salvadorian bank Banagricola for USD900mn; in 2012 it announced the acquisition of 40% of Grupo Agromercantil de Guatemala for USD216mn and in 1Q13, it announced that it entered into an agreement to buy HSBC Panama for USD2.1bn. Grupo is one of the largest financial conglomerates in the country and is also present in El Salvador through Banagrícola, and it has subsidiaries in Panama, Cayman and Puerto Rico. has a market share of 22% of total loans in Colombia, leading the banking sector based on individual figures. On the other hand, as of May-13, Banagrícola maintained its leading position in El Salvador with a 28.2% market share on loans. s main shareholder is GrupoSura (26.8% stake), which is a large holding company that invests in different sectors in the region. Other shareholders include: Grupo Argos (3.9%), ADR Program (20.1%), Pension Funds (22.0%), other local and international shareholders (27.2%). It is Colombia s most active bank in local and international markets, with its shares (common and preferred) trading in the Colombian Stock Exchange, its ADS trading in the NYSE and numerous debt securities denominated both in COP and USD. Out of LTM total operating income of USD2,922mn, net interest income represents 59%, Net Fee Income 21%, Investment Valuation 10% and Dividend Income 8%. As of Jun-13, net loans totaled USD28,785mn equivalent to a 27.3% YoY growth. Mortgages were the most dynamic segment, with a 36.7% YoY growth, as a result of government subsidies and agreement with the banking sector for new home purchases, followed by commercial loans with a 28.7 YoY growth. Assets totaled USD43,078mn, of which 15% are investments and 67% are net loans. On the other hand, deposits represent 70% of liabilities, debt securities 14%, and interbank loans 11%. NIM of 6.59% is low compared to the sector s average of 7.27% as a result of its focus on commercial lending. However it has a much healthier loan portfolio, with better than average PDLs of 2.32% and NPLs of 1.52% that compare well to the sector s average of 3.01% and 1.79% respectively. The numerous debt securities it has issued in local and international markets demonstrate the accessibility it has to financial markets for sources of funding, representing a competitive advantage. Currently it has debt securities for USD4.8bn (on an unconsolidated basis). From this amount, 21% is denominated in COP and 73% in USD. Additionally, 60% of this amount matures in 2021 or later, which makes its liquidity position strong. Its coverage ratio (Reserves/PDL) of % has historically been above the average, which will allow the bank to absorb losses more easily in case of an adverse economic scenario. Its efficiency of 56.8% is above the sector s average of 52.2%, explained by its significant share in retail lending which demands an expensive payroll. It will invest in technological platform until 2014, which includes investments in its core banking systems, as improving efficiency remains one of the biggest challenges for management. These investments will be amortized in three years, putting pressures on operating expenses until It has one of the strongest capitalization levels in the system, with a BIS ratio of 19.58% as of Jun-13, standing above the sector s 16.20%. During 2012, it strengthened capital adequacy metrics by issuing subordinated bonds for USD1.2bn in Sept-12 and preferred shares for COP1.7tn in Feb-12. Comparable Bonds in LATAM 8% 7% 6% 5% BCOLO 16 4% BANVOR 16 3% 2% 1% Bond Maturity Profile (USD mn) >2023 s Loans and Funding Base 10.1% 17.5% 72.5% Gross Loans BCOCPE 20 BCOLO 21 BRADES 19 GRUPOS 21 DAVIVI 18 BANBRA 20 VOTORA 19 BCOLO 17 CAIXBR 17 SANBBZ 17 BCOCPE 17 SANBBZ 16 BRADES Local Bonds Mortgage Consumer Commercial BTGPBZ 22 DAVIVI 22 LATAM BB+ BRADES 22 BCOLO 22 External Bonds 92 BCOLO % 11% 14% 16% 53% Liabilities 1, 1,500 LATAM BBB 0% Others Interbank Bonds Time Deposits Demand Deposits Source: Credicorp Capital, & Bloomberg. Data as of Sept 12 th,

3 YTW % Z-Spread UNCONSOLIDATED FINANCIAL STATEMENTS & BOND PERFORMANCE B A LA N C E SH EET (USD mn) D ec-10 D ec-11 D ec-12 Jun-13 A ssets 25,054 32,489 42,501 43,078 Cash 2,037 3,427 3,099 3,948 Investments 3,586 4,255 6,483 6,609 Net Loans 16,888 21,862 28,750 28,785 Liabilities 21,030 27,895 35,996 37,061 Deposits 15,439 19,379 27,086 26,009 Debt Securities 2,096 4,204 5,323 5,065 Equity 4,023 4,595 6,505 6,016 IN C OM E ST A T EM EN T (USD mn) D ec-10 D ec-11 D ec-12 Jun-13 LT M Net interest income 1,091 1,266 1,778 1,737 Net fee income Dividend Income Investment Valuation Total Operating income 2,019 2,298 3,084 2,922 Provision Expenses Operating Expenses 1,159 1,374 1,740 1,659 Net income SELEC T ED R A T IOS D ec-10 D ec-11 D ec-12 Jun-13 NIM 6.93% 6.19% 6.88% 6.59% ROAA 2.62% 2.10% 1.90% 1.79% ROAE 16.31% 14.42% 11.72% 11.75% Efficiency 57.38% 59.80% 56.42% 56.80% PDLs/Gross Loans 2.49% 1.85% 2.17% 2.32% Reserves/PDL % % % % Loans/Deposits % % % % BIS Ratio 18.06% 15.52% 17.85% 19.58% Equity/Assets 16.06% 14.14% 15.31% 13.97% Tier % 9.20% 10.47% 11.66% Loans/Assets 67.41% 67.29% 67.65% 66.82% Ownership Structure Grupo Sura Colombian Pension Funds ADR Program Other International Shareholders Other Local Shareholders Grupo Argos 26.80% 21.60% 20.50% 14.60% 12.60% LTM Z-Spread Levels and Bonds Price Changes BCOLO16 BCOLO17 BCOLO20 BCOLO21 BCOLO22 Yield vs. Average Rating s Main Subsidiaries Banca de Inversión Investment Banking LTM Max LTM Min LTM Avg Current BTGPBZ22 DAVIVI22 Leasing Leasing Factoring Financial Servicies BCOLO22 BCOLO20 GNBSUD18 BCOLO17 S.A Panama Banagrícola Valores Fiduciaria (98.8%) Banking Brokerage Trust Services Banking ITAU21 BTGPBZ20 BINTPE20 GRUPOS21 DAVIVI18 AVALCB17 BTGPBZ16 Price Change 1 w eek 1 month 3 months BCOLO % -1.94% -7.55% BCOLO % -0.42% -4.48% BCOLO % -3.00% -6.28% BCOLO % -0.68% -0.09% BCOLO % -0.28% -2.12% CEMBI 1.13% -1.64% -4.60% CEMBI IG 1.14% -1.72% -4.63% BB BB+ BBB- BBB CAIXBR22 BCOLO21 BCP20 CAIXBR17 SANBBZ16 BCOLO16 BCP16 Source: Credicorp Capital, & Bloomberg. Data as of Sept 12 th

4 APPENDIX: BANCOLOMBIA USD BONDS SPREADS s Subordinated Bonds: Spreads vs CEMBI 50 s Senior Bonds: Spreads vs CEMBI IG Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 BCOLO20-CEMBI BCOLO17 - CEMBI BCOLO22-CEMBI BCOLO21 - CEMBI IG BCOLO16- CEMBI IG s Subordinated vs Senior Notes s Subordinated vs Senior Notes (50) Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 BCOLO17-BCOLO16 BCOLO17 (Sub) BCOLO16 (Sr) Nov-11 Jan-12 Mar-12 May-12 Jul-12 Sep-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13 BCOLO20-BCOLO21 BCOLO20 (Sub) BCOLO21 (Sr) 4

5 BANCOLOMBIA S LOCAL BONDS- COP DENOMINATED View on inflation and monetary policy: Our base case scenario includes an increase of inflation towards the end of the year, along with a gradual normalization of monetary policy from 4Q13 or 1Q13 onwards. However, new available information on consumer confidence, which fell from 25.1% to 13.4% in Aug-13 (as a result of strikes and public order problems) increased the probability of a rate cut in the next Banrep s meeting. Although a rate cut probability has increased, it should be mentioned that GDP figures (to be published next 19-sep) will be determinant to assess the odds of this loosening of monetary policy. Despite the downside risks on our monetary policy view for the short term, it is widely expected a normalization of local interest rates along 2014 as the economy achieves growth rates close to its potential and inflation goes back to the 3.0% target gradually. At current levels we are favoring corporate debt indexed securities such as CPI-linked, DTF and IBR, as their spreads to public debt remain at high levels since the correction that started during May-13. Debt Market Environment: According to the latest poll conducted by Fedesarrollo in Aug-13, for second consecutive month local agents ranked the external environment as the most important factor before investing (75%). This is due to the impact that a change in monetary policy in the U.S would cause in developed and emerging markets. So as the Federal Reserve s September meeting approaches, fixed income volatility has increased. As a result of this volatility, local rates have been affected despite recent donwside corrections. currently holds approximately USD1bn in COP-denominated debt securities, which represent 21% of the total amount. It holds bonds in the four types of references used in the Colombian debt market (Fixed rate, IBR*, DTF* and CPI). CPI-linked bonds: As we mentioned before, the expected upward trend in inflation would favor inflationlinked securities. s CPI-linked bonds maturing in Jul-21, Nov-23 and Nov-26 seem as the most attractive (see next page) as they offer a wide spread against TES curve. However, despite these opportunities in the long end of the curve, we continue to have a low duration preference, given current market volatility. DTF and IBR bonds: On the other hand, bonds indexed to the DTF rate and the IBR rate seem attractive, taking into account that their spreads to public debt remain at high levels. s may-14 and jul- 14 bonds, indexed to DTF offer an attractive spread, whereas in the IBR universe, we favor s jul-14. These bonds are currently trading cheap as they are at higher yields compared to their respective Financial Sector curves (see next page). The decisions of monetary policy by BanRep in coming weeks will be relevant for these securities. In any case, we recommend liquidity as an important part of investment decisions in the short term given the high levels of uncertainty coming from the global markets, expecting attractive entry points. *DTF (Depósitos a Término Fijo) is the weighted average interest rate paid by finance corporations, commercial banks and commercial finance companies for certificates of deposit with maturities of 90 days. *IBR (Indicador Bancario de Referencia) acts as a reference of overnight and one-month interbank loans, calculated by the Central Bank every business day. s Bonds in Pesos (COP ) R eference: C P I M aturity P rincipal (C OP mn) C o upo n C o upo n P ayment Jul-14 51,677 CPI % Annual Dec ,192 CPI % Quarterly Jul-18,563 CPI % Quarterly Aug-18 64,430 CPI+ 6.39% Quarterly Dec ,763 CPI+ 3.89% Quarterly Jul-19 43,759 CPI+ 5.74% Annual Nov ,840 CPI % Quarterly Jul ,630 CPI % Quarterly Nov ,828 CPI % Quarterly Jul ,030 CPI % Quarterly Nov ,050 CPI % Quarterly T o tal C P I 1,504,762 R eference: D T F M aturity P rincipal (C OP mn) C o upo n C o upo n P ayment M ay ,282 DTF % Quarterly Jul-14 53,298 DTF % Quarterly T o tal D T F 180,580 F ixed R ate M aturity P rincipal (C OP mn) C o upo n C o upo n P ayment Aug-18 64, 12.59% Quarterly T o tal F ixed 64, R eference: IB R M aturity P rincipal (C OP mn) C o upo n C o upo n P ayment Dec-13 55,177 IBR % M onthly Jul-14 87,654 IBR % M onthly T o tal IB R 142,831 T OT A L 1,829,273 Source: Credicorp Capital, 5

6 BANCOLOMBIA S YIELD CURVES OF LOCAL BONDS Inflation-linked AAA (Log Curves) IBR indexed, AAA (Log Curves) 5.0% 4.5% Jul'21 Nov'23 Nov'26 6.0% 5.5% 4.0% 3.5% Dec'18 Nov'19 5.0% Jul'14 3.0% 2.5% Jul'14 Dec'14 Finance Sector TES TF UVR 4.5% 4.0% Dec'13 Finance Sector TES TF COP 2.0% 1.5% Years to Maturity 1.0% % Years to Maturity 3.0% DTF indexed, AAA (Log Curves) Fixed Rate, AAA (Log Curves) 7.0% 7.5% Aug'18 6.0% 6.5% 5.0% May'14 Jul'14 5.5% 4.0% Finance Sector TES TF COP 4.5% Finance Sector TES TF COP 3.0% 3.5% Years to Maturity 2.0% % Years to Maturity Source: MEC as of September 9th

7 CONTACT INFORMATION TEAM Heinrich Lessau Head of Research # (562) CHILE COLOMBIA Felipe Lubiano Frank Medrisch FI Analyst FI Analyst Head of Research & Chief Economist FI Analyst fmedrisch@credicorpcapital.com # (562) # (562) # (571) Ext 505 # (571) Ext 9138 PERÚ Alejandro Rabanal Irvin León Verónica Miyagusuku Head of FI Research FI Analyst FI Analyst arabanal@credicorpcapital.com ileon@credicorpcapital.com vmiyagusuku@credicorpcapital.com # (511) Ext # (511) Ext # (511) Ext Fixed Income Sales & Trading CHILE Gonzalo Covarrubias Belén Larraín Guido Riquelme Cristián Fuentes Benjamín DiazHead Head of Fixed Income Trading Head of International FI Trading Head of Local FI Trading Fixed Income Trader Fixed Income Trader gcovarrubias@imtrust.cl blarrain@imtrust.cl griquelme@imtrust.cl cfuentes@imtrust.cl bdiaz@imtrust.cl # (562) # (562) # (562) # (562) # (562) PERÚ Alfredo Bejar Vallerie Yong Lizeth Espíritu Evangeline Arapoglou Head of Fixed Income/FX Trading Fixed Income Senior Trader Fixed Income Trader Fixed Income Trader abejar@credicorpcapital.com vyong@credicorpcapital.com lespiritu@credicorpcapital.com. earapoglou@credicorpcapital.com # (511) # (511) # (511) # (511) # (511) # (511) # (511) # (511) COLOMBIA Carlos Sanchez Christian Jarrin Andrés Valderrama Juan Camilo Murcia Head of Fixed Income Trading RM Fixed Income Offshore Fixed Income Trader Fixed Income Trader csanchez@credicorpcapital.com cjarrin@credicorpcapital.com jvalderramma@credicorpcapital.com jmurcia@credicorpcapital.com # (571) # (571) # (571) # (511) Ext

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