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AmericasFebruary 24 2020

Colombia eyes a sustainable and digital future

Colombia’s financial sector is seeking to prolong its upward growth curve through a combination of sustainability financing and digital products, as Lucien Chauvin discovers.
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Banco Colombia

Colombian banks are positioning themselves to be at the forefront of sustainable finance and digital banking, two major trends likely to reshape Latin America’s financial sector in the coming decade.

Local banks and their subsidiaries in Central America have started carving out important niches in social financing, which has gained a new urgency since inequality was exposed during widespread protests in the country, as well as in Chile and Ecuador, in the final months of 2019. 

They have, at the same time, been launching digital products not only to streamline existing services, but also to attract clients with products that target hard-to-reach customers outside the traditional financial world, such as on small-scale farms in rural areas. 

This combination, together with Colombia’s expanding economy and falling inflation, has prepared the way for strong growth in 2020, with the country’s banks expected to see a second consecutive year of double-digit expansion in consumer lending and stronger growth in corporate loans and mortgages.  

Bond optimism

Initial numbers from Colombia’s central bank put economic growth in 2019 at 3.2%. It forecasts a 3.3% expansion for 2020 and 2021. Inflation in January 2020 was 0.42%, lower than expected. Annualised inflation to January 2020 fell to 3.62%, trending toward the 3% the central bank forecasts for the year.  

The only rough spot in an overall rosy outlook has been the unemployment rate, which reached 10.5% in 2019, although its growth rate slowed in the final quarter of the year. 

The country’s leading banks are taking advantage of the positive mood and followed the sovereign’s $1.84bn bond issuances in January 2020. Banco de Bogotá’s owner, Grupo Aval, a key financial group in the country, issued a $1bn bond on January 28, its first cross-border action since 2012. Bancolombia issued $950m in new paper on January 23, the day after the government’s launch. 

Bancolombia is the largest bank in the country by assets, according to the Superintendecia Financiera de Colombia, with more than $49bn. It is followed by Banco de Bogotá with $29.6bn, and Davivienda with $27.8bn. 

Raul Moreno, director of market strategies at Colombian brokerage Global Securities, believes 2019 was a good year for Colombia’s banks and 2020 should be better. “We are coming off one of the best years in the past decade for Colombia’s financial sector in general. We expect growth to be even stronger this year,” he says, adding that banks are offering “new services, new benefits and new experiences, allowing them to reach broader sectors of the population”. 

 

Colombia stats

Scandal aftermath

Mr Moreno says the sector will also do better in 2020 as it regroups following an unexpected hit in August 2019, when a Colombian arbitration tribunal handed down a smaller-than-expected award to banks exposed in the corruption scandal involving Brazilian engineering firm Odebrecht and the construction of the Ruta del Sol highway. Banks wanted $1.36bn to cover losses from cancellation of the highway project, but the tribunal decided on $61.2m. Bancolombia had an exposure of $115m, while the banks in Grupo Aval had an exposure to the project of $203m. 

“The tribunal’s decision required banks to make adjustments to their provisions, which affected financial metrics. The important thing is that this is now behind them,” says Mr Moreno. 

Fitch Ratings predicts a ‘stable’ outlook for the country’s banking sector and forecasts a slight improvement in financial indicators in 2020 thanks to economic growth.

Green and social lending

While not new to Colombia, sustainable lending is expanding globally with green financing, loans based around the 17 Sustainable Development Goals (SDGs) set by the UN and, most recently, a bond through one of Bancolombia’s subsidiaries, Banistmo in Panama, earmarked for women. 

Bancolombia was the first bank in Colombia to issue a sustainable bond and the first to issue a bond specifically for women, both carried out through IDB Invest, the private sector arm of the Inter-American Development Bank (IDB). 

“We are promoting sustainable economic development with the goal of improving quality of life,” says Cipriano López, Bancolombia’s vice-president for innovation. “We were the first to launch a ‘gender bond’, and we are leaders in energy transition and loans for farmers. We have made more loans to farmers than the state agrarian bank.”   

The bond for women through Banistmo is seen as a key moment for Bancolombia and Latin America in general, according to Gema Sacristán, chief investment officer of IDB Invest. It is not only the first gender bond in the region, but only the fifth worldwide in the private sector. Two others were issued in Australia, and one each in Canada and Turkey. 

“This was the first gender bond and it is a milestone for the region and the world because it provided an example of this kind of instrument,” says Ms Sacristán. “It follows the social principles of the International Capital Market Association, but it is a bond that looks to advancing gender equality and [it is not concerned with] just guaranteeing financial return.” 

The $50m bond will be used to provide financing to female-run small and medium-sized enterprises (SMEs). Banistmo has approximately 6000 female-led SMEs as clients. 

A trend setter

Possibly as important as the bond itself is its ripple effect. IDB Invest is working on three others in the region, in Brazil, Colombia and the Dominican Republic. A fourth is in its early stages in Ecuador. Ms Sacristán forecasts that the first three will be completed within the first half of 2020. 

IDB Invest also worked with Bancolombia in July 2019 on a $194m sustainable bond tailored to cover 10 of the UN SDGs. Bancolombia’s Mr López says the bond was launched to finance 26 projects across eight of Colombia’s states. Of these, 18 are green projects, such as sustainable construction, clean production and energy efficiency. The remaining eight are for social projects, such as water and sanitation and affordable housing. 

“We are committed to sustainable development. Financial institutions must be involved if we are going to bring about a transformation in the world,” says Mr López.

Banks respond

Bancolombia CEO Juan Carlos Mora was among 30 corporate leaders who joined the UN-organised Global Investors for Sustainable Development Alliance in October 2019 with the goal of mobilising trillions of dollars to meet the SDGs by 2030. Two other Latin American institutions, Mexico’s Consejo Mexicano de Negocios and Brazil’s SulAmerica, are also involved. 

Elsewhere, Banco de Bogotá has a series of financial products geared toward sustainable businesses. Its newest sustainable development credit line was launched in late 2019 to provide loans starting at $3000 with due dates of between one and 10 years. 

The country’s third largest bank, Davivienda, also has a substantial programme of social lending, and in early January 2020 signed off on a $335m loan from the International Financial Corporation, the private sector arm of the World Bank, for financing sustainable projects, including affordable housing and female-led projects. 

Davivienda president Efraín Forero says that bank’s strategy for sustainable lending is “to support women-led entrepreneurship and sustainable housing, contributing to the dream of Colombian families to have their own home”. 

The idea of financing housing is a response to the low level of home ownership and mortgages in the country, according to Davivienda. Mortgages have been expanding for several years now, growing by 8.7% in 2018, and 5.5% in 2019, and are forecast to expand by 7.1% in 2020, but the overall total is low. Total outstanding mortgages are equivalent to less than 6% of gross domestic product (GDP). 

Digital advance  

Running alongside the expanding sustainable lending programmes in the country is the rapid development of digital products that are changing how Colombians relate to the financial system. 

Global Securities’ Mr Moreno says that the digital products launched by banks, which have been gaining traction since 2018, are key to the country’s growth. “Consumer loans, using digital methods for quick access, have led to important growth. Consumer lending is the most dynamic sector and it will continue growing in double digits,” he says. 

Consumer lending increased by 5.5% in Colombia in 2018, jumping to 12% in 2019. The initial forecast for 2020 is 10.6%, according to banking association Asobancaria. 

While all banks in Colombia have launched digital products in recent years, with virtual wallets now a key component, the top three banks stand out for the scope of products and the number of customers using them. 

Reaching the unbanked

The efforts of banks – and fintechs – have helped to dramatically increase the number of Colombians with at least one financial product. According to the Opportunity Bank, a government programme run through state-owned Bancoldex, 83.3% of the adult population in Colombia had some type of financial product at the end of the third quarter of 2019. This translates to 28.9 million people, an increase of 1.1 million from the same quarter in 2018 and 3.3 million since 2016. Credit cards and consumer loans were the fastest growing segments in the 12 months ending in September 2019. 

Through Aval Digital Labs, which was launched in 2017, Grupo Aval has developed products for its different holdings, including Banco de Occidente, Banco Popular and AV Villas. It has launched 13 products and has about 40 more in the pipeline. 

Grupo Aval’s digital strategy unit wants digital products to represent 25% of total consumer sales by 2021. Digital savings accounts now represent 52% of total savings accounts, while digital cards make up 45% of the total. This shift may be best observed through car loans, with 35% now carried out digitally. Loans that took seven days to process now take just five minutes. 

Rivalling Grupo Aval’s effort is Bancolombia’s digital product Nequi and a host of other products tailored to reach clients traditionally on the fringes of the financial system, particularly in rural areas. Nequi has reached 1.8 million clients, and Bancolombia expects exponential growth in 2020, more than doubling the number of users. 

Nequi is aimed at helping clients save, for education or travel, for example, and it offers loans for people who run out of money before the next pay cheque. 

Rural targets

Bancolombia has also developed products to bring in more rural customers. While 83.3% of the adult population in urban areas is included in the financial system, the number drops to 66.7% in rural areas and 55.5% in remote rural zones, according to Opportunity Bank. 

Bancolombia created Ahorro a la Mano, a savings platform that does not require a smartphone and has a bank branch component. Loans, which usually equal the monthly wage, can be approved in minutes using text messages. 

Global Securities’ Mr Moreno says he expects to see major growth this year regarding Nequi and Davivienda’s DaviPlata, a digital wallet. 

Banks, fintechs and combinations of the two have also been developing digital products for sectors that move a great deal of cash, including digital money exchanges and programmes for remittances. 

Remittances increased rapidly in the second half of the past decade in Colombia, from $4bn in 2010 to $4.1bn in 2014 and then from $4.6bn in 2015 to an estimated $7bn in 2019, according to the World Bank. Remittances are equivalent to 2.1% of Colombia’s GDP. “The issue of remittances is important. The process use to be extremely cumbersome, but with the digital platform it is done in no time,” says Mr López. 

He adds that Bancolombia and the other Colombian banks in the remittances sector will continue moving toward digital products that expand access and reduce time for clients. “The challenge we have, that the sector has, is to become as invisible as possible in facilitating what clients require,” says Mr López.

Colombia green bonds

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