Colombia’s banking system is strong and has been enjoying double-digit percentage growth in its loan portfolio. Despite a relative slowdown in economic growth, bank profitability has held up well, as has capital adequacy and return on equity (ROE).
Industry Structure
Data published by the regulatory agency, the Colombian Finance Superintendence (Superintendencia Financiera de Colombia, SFC), shows that in September 2015 there were 25 commercial banks in operation with gross assets of COP343trn ($126.2bn). By total assets the largest banks were Bancolombia (22.8% of the total), Banco de Bogotá (14.2%), Davivienda (13.5%), BBVA (10.2%) and Banco de Occidente (7%). These top five banks dominate the industry, and between them account for two-thirds of total sector assets.
It is notable that four of these five institutions are locally-owned. While global banks are interested in the Colombian market, their loan portfolio market share is lower than in some other Latin American countries, such as Peru and Mexico.
Recently, a number of mergers and acquisitions operations have taken place, which have affected the sector’s composition. In January 2012 Scotiabank of Canada purchased a controlling stake in Banco Colpatria, which at that point was the eighth-largest lender in the country. Locally-owned GNB Sudameris then acquired the local subsidiary of UK-based HSBC in February 2014. CorpBanca of Chile, which arrived to the Colombian market in 2012, bought the local subsidiary of Spain’s Santander and then also acquired Helm Bank in 2013. In 2014, as part of a region-wide realignment, Corpbanca agreed to merge its Colombian operations with Brazil’s Itaú Unibanco, becoming part of Itaú CorpBanca.
According to a study of Colombia’s top 50 brands published in 2015 by consultancy firm Compass-branding, the second and third most valuable brands in the country were Banco de Bogotá and Grupo Bancolombia, respectively. Banco de Bogotá and Grupo Bancolombia brands were each calculated to be worth around $2.5bn. A number of other banks also made the consultancy firm’s “top brands” list, including Davivienda, Banco de Occidente, Banco Popular and Banco Colpatria.
Strong Performance In 2015
According to results published in late 2015, the financial performance of the sector as a whole remains healthy. Banco de Bogotá reported a 30.8% year-to-date increase in profits in June 2015, while Davivienda reported profits of COP1.1trn ($404.8m) for the first nine months of 2015, up by 24.3% on the same period the previous year. Bancolombia’s third-quarter results were a little less encouraging, with consolidated net profit of COP524bn ($192.8m), which was nevertheless down 22.1% from the previous quarter.
More generally, financial sector-wide loan portfolio growth reached 15.5% in 2015, according to the central bank of Colombia (Banco de la República de Colombia, BRC. The SFC reported that non-performing loans rose to 3.08% of the total loan book at the end of August 2015, up from 3.05% at the beginning of the year. The capital adequacy ratio, which is dependent on risk, fell to 15.2% of the total portfolio, but remained comfortably above the minimum legal requirement of 9%. ROE rose to 15.4%, up from 12.3% at the start of the year. Juan Camilo Domínguez, an analyst at Credicorp, said that there has, at different points, been a risk that Colombia’s consumer loans segment might overheat, with excessive lending leading to a fall in loan quality. However, he believes that since 2012 the banks themselves have been taking precautions on this front, and have become a little more conservative in their lending policies. “We have had a credit card boom, but consumer lending has recently shifted a little more towards payday loans because these are backed by salaries. In some ways it can be said that they are safer than credit card lending,” he told OBG. Furthermore, growth in the consumer segment was slower between 2012 and 2015, than the average since the 1999-2001 crisis.
In retail banking, higher-income individuals, representing around 10-12% of the main banks’ customer base in terms of the number of accounts, are reported to be one of the fastest-growing segments in the market. These are generally defined as customers earning over COP20m ($7360) per month. To cater for these customers, institutions offer a wide range of personal banking services and access to related financial products. Banco de Bogotá has created 13 “premium” branches around the country which are dedicated exclusively to this segment of the market. BBVA said it hoped to have a total of 7500 premium banking customers by the end of 2016, representing an annual increase of 50%.
Banking Penetration
The penetration of banking services in Colombia is at a low level compared to the penetration rates in the OECD economies and relative to some of the country’s Latin American peers. According to banking association Asobancaria, the “bankarisation rate”, which is defined as the proportion of adults using at least one financial product, stood at 75.9% in June 2015, lower than in neighbouring countries such as Brazil and Chile. Asobancaria said that its members are aiming to raise the bankarisation rate to 84% by 2018.
Another measure of penetration is the proportion of total bank loans to GDP, which Asobancaria said is around 45%, lower than the 60% achieved in comparable economies. The association attributes this low ratio to the relatively low-level of mortgage borrowing by Colombian households.
According to Santiago Castro, president of Asobancaria, a greater increase in long-term mortgage lending will be the key for Colombia to catch up with its neighbours and deepen its market for financial services. With growth of 11% per annum in 2015, mortgage lending is, in fact, one of the fastest-growing segments of the loan portfolio in the country today.
Banca de las Oportunidades, a government-backed financial inclusion agency, reported in late 2015 that 75.6% of adults owned some kind of financial product, equivalent to 24.6m people. Of this number, 16.1m owned savings accounts, the most popular financial product. Credit cards were held by around 7.7m people. There were 6.5m people who had taken out consumer loans. These figures may distract attention from the low number of traditional bank accounts held. According to the World Bank’s database on financial inclusion, only 38% of Colombia’s adult population has an individual or shared bank account in a formal banking or financial institution.
Strong Regulation
Colombia is widely seen as having a robust and well-managed regulatory regime, with commercial banking and investment banking governed separately. Two institutions primarily regulate the commercial banking sector. One is the BRC, which was set up in 1923. By law the BRC is required to manage monetary policy so as to guarantee price stability in coordination with economic policies designed to encourage the growth of production and employment. The second is the SFC, which came into being in 2005 as a merger of two separate institutions which had been dedicated to the regulation of the banks on the one hand, and of capital markets on the other.
In October 2014 the SFC published its strategic guidelines for 2015-18. It emphasised the need for strengthening institutional capacity through financial training, better supervision of financial conglomerates, and progress towards incorporating the Basel II and Basel III regulatory frameworks. The guidelines also require the SFC to promote financial inclusion by seeking to extend financial services to low-income segments of the population.
One feature of the Colombian regulatory regime is the cap on interest rates for loans issued by any institution, known as the tasa de usura (usury rate), which is set by the SFC. Any institution exceeding it is subject to a fine. In October 2015 the usury rate was 28.99% for commercial bank loans and 53.13% for micro-credits. The rate is usually set for three-month periods and functions as a reference point for the financial system – for example punitive interest rates on overdue loans can be applied at the usury rate.
Yann Groeger, general manager of Banco ProCredit (part of a Frankfurt-based banking group), said that while some aspects of banking in Colombia are modern, web-based and high-tech, others can be traditional and somewhat slower moving, relying on manual form-filling. There was, nevertheless, high profitability and a greater awareness of the need to improve efficiency. “There is space to work on both interest rates and efficiency,” Groeger told OBG.
Tax Concerns
On the whole, Colombia’s banks share wider private sector concerns over what is seen as a high tax burden. A general view, acknowledged by a number of analysts, is that the tax system is skewed such that it over-taxes companies in the formal sector, while the informal sector of the economy is not taxed at all. With the government committed to considering tax reform proposals from a committee of experts in 2016, Asobancaria has been taking part in the debate on the subject. The association has expressed its opposition to the four-per-thousand (0.4%) financial transactions tax, which the government has in any case said it will phase out by 2019. Speaking in December 2015, Castro said that Colombia’s banks wanted the financial transactions tax to be withdrawn as soon as possible, and opposed its replacement by higher value-added tax rates. To attract more foreign investment the government would need to cut corporate tax rates, which in some cases were as high as 60%, he said.
Financial Inclusion
Given an unequal distribution of income and high levels of poverty, a significant proportion of the Colombian population, particularly in rural areas, has limited access to financial services. According to the World Bank, in 2013, 30.6% of the population was living below the poverty line, an improvement on the 42% poverty rate registered in 2008. The government has been following a series of initiatives to promote financial inclusion. Its efforts were recognised in a 2015 report by the Economist Intelligence Unit, which ranked 55 countries around the world according to the degree of support for financial inclusion. Colombia was ranked second overall, behind Peru and ahead of Chile sixth, Bolivia eighth and Mexico joint eighth.
Colombia did well in a number of categories, including government support and prudential regulation, but there was room for improvement in the geographic coverage of financial services across the country, on financial education and on the reduction of transactional costs. The report praised the incorporation of a bankarisation target (80% of all adults to have access to at least one financial product) in the national development plan as well as the Financial Inclusion Law of 2014, which among other things promotes the introduction of simple savings accounts. The report also called for Colombia to do more to provide financial products for the “bottom of the pyramid” such as micro-insurance policies tailored to the needs of low-income groups.
Better Education
Luis Carlos Rodríguez, a financial consultant, told OBG that to achieve greater banking penetration, financial education and awareness require strengthening. Broadly speaking, he says Colombia has three types of payment system: those operated by the financial sector, those run by the non-financial sector (which includes credit offered by retail chains, service companies and various types of cooperatives) and the unregulated, informal circuit of person-to-person loans and debts, which can also include criminal activities such as loan sharking.
While the financial sector is well regulated by the SFC and the non-financial sector is regulated by the Superintendence of Industry and Commerce (cuál es esta Superintendencia), consumers can have limited awareness of the different regulatory regimes, and of their rights and obligations under each of them. “In some cases there is a low level of understanding of financial products. Some consumers with credit card debt will also buy products from retail chains in instalments and not properly understand the cumulative effect on their total debt, and the need to bring it under control,” Rodríguez said.
An interesting feature of Colombia’s banking sector is that a number of “micro-credit” organisations, ranging from cooperatives to NGOs that focused on small-scale lending to the poor or the financially excluded, have grown in size and eventually developed into full-scale banks. One example is Bancamía, which can trace its origins back to an NGO, the Corporación Mundial de la Mujer, which was active in micro-lending to women. In 2008 it merged with the BBVA foundation, and is now the 19th-largest bank in Colombia ranked by total assets, with around 200 branches across the country. Bancamía operates commercially, but retains its focus on lending to low-income groups such as farmers, seeking out the customers that other banks turn down because traditional banks will find it hard to make a profit on such small loans. The need to be present in remote areas of the country, and provide a wider service of advice and support to its customers, means Bancamía has a relatively high cost structure and charges higher interest rates than traditional banks. However, there is a clear demand for this type of loan, which is able to satisfy a real and important need.
Rising Interest Rates
In the context of above-target consumer price inflation, the central bank began a monetary policy tightening cycle starting in September 2015. The BRC seeks to restrict price inflation to a band around a 3% annual rate, but in October 2015 the 12-month inflation rate was running at almost double that at 5.89%, reflecting a number of factors including the inflationary pass-through effect from the depreciation of the Colombian peso against the US dollar. The BRC raised its reference interest rate by 25 basis points (bps) in September to 4.75%, followed by a 50bps hike to 5.25% in late October 2015, by another 25bps to 5.5% in late November and by an additional 25bps to 5.75% in December. The effect of higher interest rates on commercial bank finances is double-edged. In the short term, the interest rate hikes have a positive effect of boosting interest income but in the longer term they can be negative, acting to restrain economic activity and ultimately to limit demand for credit.
Ahead of an expected tightening of US interest rates in late 2015 or early 2016, which raised concerns over possible financial turbulence in Latin America, the Colombian banking system was seen as resilient and in good shape to cope with any such volatility. According to a late-2015 report by ratings agency Standard & Poor’s, Colombian banks enjoyed adequate liquidity, low debt levels and limited exposure to exchange rate risk.
Adapting To The Oil Shock
Speaking in late 2015, Castro said that despite the general slowdown in the Colombian economy triggered by the impact of low oil prices, banking remained a “solid” sector. In the first nine months of the year, banks reported profits of COP7.57trn ($2.79bn), which, Castro noted, were higher than in the same period the preceding year, while ROE had also improved. This increase meant that the negative impact of the oil price shock had been much less than was originally feared. Credit had continued expanding and the overall proportion of overdue loans stood at an “acceptable” 3%, less than in the comparable 2014 period, at 3.1%.
In Castro’s view, the industry faces the challenge of deepening banking penetration. One way of achieving this was to step up mortgage lending, since securing a first mortgage is what drives many consumers to open their first bank account. Mortgage lending was already growing at a faster rate than total consumer lending (11% vs. 9%). Castro did, however, expect the growth of credit to begin to slow in line with the wider economy. According to his calculations (made in real, not nominal terms) credit growth had eased down from 8% in the first nine months of 2014 to 7.7% in the first nine months of 2015. For 2016 he expected a further reduction in loan growth, to around 6.7%. He insisted this was not a “serious” deceleration, and that even at that rate – one percentage point lower – the banking system would still be playing a significant role in funding private companies and households.
The Central American Dimension
An interesting feature of the major Colombian-owned banks is that over the course of the last five years many have made acquisitions in Central America, and those subsidiaries are now making a positive contribution to the financial resilience of the parent groups. A report by the ratings agency Moody’s said that Central American subsidiaries were now contributing up to 35% of the consolidated earnings of three Colombian banks – Banco de Bogotá, Bancolombia, and Banco Davivienda. Moody’s suggested that Bancolombia was positioned to secure most benefits from its October 2013 purchase of HSBC in Panama (now re-named Banistmo) which was showing resumed loan growth, reduced credit costs and improving operational efficiencies. Bancolombia also has a stake in Banco Agromercantil in Guatemala.
Banco Davivienda’s subsidiaries in Costa Rica, Honduras and El Salvador were still showing low ROE rates, but Moody’s expected them to become more profitable as integration costs began to be absorbed. ROE was stronger at Panama’s BAC International Bank, acquired by Banco de Bogotá in 2010, but Moody’s suggested the potential for growth was limited.
Outlook
Colombian banks have a bright future despite the deceleration of economic growth. As the expected macro-economic recovery takes place during the following years, analysts expect the total loan portfolio to continue growing at double-digit rates in nominal terms, although in 2016 the growth rate will be in single digits in real terms, and marginally lower than in 2015. Lending to corporates, trade financing, higher-end consumer loans and the emerging mortgage loan sector hold out the promise of sustainable expansion. Because of the size of the enterprise, lending to companies involved in the 4G highways building programme will enable further growth of loan portfolios (see analysis).
Locally-owned banks are expected to continue to dominate the sector in Colombia, but it is thought that more foreign banks will begin to enter the industry, stepping up competition for the more established domestic players. The larger Colombian banks are also likely to continue their regional expansion plans.
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