Downside risks to our earnings estimates (and to our target price) may include: 1) if the Colombian economy were to grow below our economists’ expectations, or business confidence declined as a result of higher uncertainty on the outlook for economic growth in Colombia, then our estimates for the bank's loan growth and net interest income growth could prove to be too high; 2) in a scenario where the Colombian economy deteriorates, asset quality could worsen, producing higher-than-estimated loan loss provisions that would negatively affect our earnings estimates; 3) if the interest rate trajectory by the Central Bank of Colombia was significantly different from our expectations, net interest income could suffer and our net income projections could be too high; 4) funding cost pressures that prevent further NIM expansion due to Aval’s change in funding mix after the spin-off. Lastly, amid the change of administration, policy and regulatory changes could create a less favorable environment for the bank’s operations.
In terms of upside risks: 1) better loan demand on the back of favorable economic activity; 2) if the bank is able to keep operating expense (OpEx) growth under control, OpEx could come in below our expectations, and net income could beat our forecasts; 3) cautious loan origination, coupled with better-than-expected delinquency levels, could favor asset quality; 4) faster and more sustained recovery of non-financial income; 5) Aval is able to mitigate funding pressures post spin-off, favoring from higher interest rates.
If the impact on the company from any of these factors proves to be greater/less than we anticipate, we believe the stock will likely have difficulty achieving our target price or could outperform it.
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