Colombia's well regulated but relatively unsaturated banking sector represents a good growth opportunity, but the dominance of its three largest lenders makes it a difficult market to enter.

With trade agreements signed with many countries, foreign investment and trade in Colombia is expected to increase, further integrating Latin America’s fourth largest economy into the global system and consequently boosting activity in its banking sector. At the same time “the global financial crisis created opportunities [for the Colombian banking sector] to become more international”, says Gerardo Hernandez, head of the Financial Superintendency of Colombia (SFC), the country's financial services regulator.

Recent Colombian acquisitions by Scotiabank, Canada’s third largest bank, are a clear illustration of this. In three successive moves, Scotiabank bought the wholesale assets of the Royal Bank of Scotland in Colombia when they came on sale in 2010. Then, in 2011, it acquired 51% of Banco Colpatria, a mid-size, principally retail Colombian bank, with a 5.5% share of the credit market, in a cash and share deal worth $1bn. Finally, in 2012, Scotiabank bought a majority of Colfondos, Colpatria’s pension fund business.

Dieter Jentsch, Scotiabank’s group head of international banking, says the acquisitions make sense both in terms of the bank's overall Latin American business strategy and in terms of the specific growth opportunities in Colombia. “Scotiabank looks at the opportunities for growth. How fast is the middle class growing? What is the banking penetration like? How can [the bank] get growth in the various platforms?” he says. “Scotiabank also follows its customers where they are doing business.“

Star attraction

Scotiabank is not the only foreign name entering Colombia. In 2011, the holding company of Chile’s fifth largest bank, CorpBanca, became Chile’s first financial company to buy a bank abroad when it acquired the Colombian retail unit of Spain’s Banco Santander for $2.1bn. The following year, the bank strengthened its presence in the country by obtaining 100% of Colombia’s Helm Bank – which focuses mainly on corporate banking and has offshore vehicles in Panama and the Cayman Islands – for $1.3bn. The two Colombian banks, after merging, will account for 7% of local banking loans and deposits, making it the fifth largest lender in the country.

CorpBanca wanted “to stand out as the bank that will service Chilean companies in Colombia”, says Jaime Muñita, CEO of CorpBanca Colombia. “It was a spectacular opportunity: in Colombia there are more than 150 Chilean companies."

Another factor attracting banks to the country is its gross domestic product (GDP), an estimated $366bn as of December 2012. Between 2000 and 2010, Colombia's GDP growth was the strongest in Latin America, increasing by an average of 4.5% per year.

Furthermore, unlike its emerging Latin American counterparts, such as Chile, Colombia's financial services market is still relatively underdeveloped. In Colombia there are still opportunities for growth in small and medium-size enterprise lending, consumer credits (Colombia’s middle class, which has doubled in a decade, is continuing to grow), and above all, at the low and very low income ends of the micro-credit market.

Estimates vary on how many Colombians use, or have access to, financial services. The International Monetary Fund (IMF) believes that about 35% of the 47 million-strong population has access to financial services, while the SFC estimates that 65% of adults use at least one financial product. There is, however, a consensus that more opportunities will be available when the Colombian government starts implementing its $40bn public private partnership (PPP) infrastructure programme, with close to $20bn due to be allocated for transport improvements alone.

Rude health

In the past few years, Colombia has been reaping the benefits of high commodity prices – the country’s principal exports are oil and minerals – strong macroeconomic credibility, good banking regulation and improved security.

Its banking system, which accounts for about 60% of Colombia’s GDP, is well capitalised and profitable: the average return on assets was 15.07% at the end of December 2012, according to private banking association Asobancaria. And while non-performing loan (NPL) ratios vary by portfolio, with consumer and micro-credit loans – the fastest growing segments of the credit market – showing higher average NPL ratios, provisions are adequate covering 156% of total NPLs, according to the SFC.

Furthermore, Jose-Dario Uribe, the governor of Colombia’s central bank, says banks will have little difficulty meeting stricter Basel III criteria for Tier 1 capital when international capital rules are implemented in Colombia in August 2013. The banks’ average solvency rate was almost 16% at the end of 2012, according to Asobancaria, so even allowing for adjustments in capital criteria, it will still be about 11% to 12%, above the minimum 9% required.

No entry

While Colombia represents an attractive opportunity for bankers and investors both say it is a difficult and expensive market for foreign banks to access and to grow organically. These factors are reflected in the fact that the foreign share of Colombia’s banking assets is only about 25%, which is smaller than in, say, Chile, (where it is about 40%) and much less than in Mexico (where it is about 90%).

A principal challenge to more market penetration is that the country’s three largest banks – Bancolombia, Banco de Bogota and Banco Davivienda, which are all locally owned and not for sale – have a combined 60% share of the banking system’s assets, loans and deposits. This figure includes a market share of about 10% for the three mid-size banks, Occidente, Popular and AV Villas, which are brands that form part of Banco de Bogota financial group, Grupo Aval.

Augusto Figueroa, Banco de Bogota’s CEO, says that, excluding the microfinance sector, “it is very difficult for any bank to get any market share now in Colombia. It is possible to deepen a market share [through cross-selling products and services] but it is not possible to increase a market share that exists because [the big local banks] have such big shares already.”

Furthermore, there are two large domestic conglomerates that dominate the wider financial landscape in Colombia. Grupo Aval, which owns Banco de Bogota, and Grupo Empresarial Antioqueña, which owns Bancolombia, are not simply large financial groups but large industrial groups, too.

“This is something that [characterises] the banking market here; it isn’t allowed in Mexico,” says Oscar Cabrera, CEO of the Spanish-owned BBVA Colombia, the fourth largest bank in the country and the only one among the top six that has a purely banking/financial services operation. “It is a delicate matter. The capacity [of these groups] to influence the market is tremendous. It is not easy to find a space. It is also potentially a systemic risk.” 

Spreading out

In its latest annual report on Colombia, published in February, the IMF drew attention to potential risks arising from the "high concentration” of the top three banks’ commercial loan portfolio to large corporate borrowers, with 90% of these banks’ commercial loans extended to 7% of debtors, the IMF noted. In an accompanying Financial Stability Assessment Programme (FSAP), the IMF also recommended that the SFC’s banking supervision could be strengthened by a law extending “its full regulatory and supervisory powers to the holding companies of financial institutions”.

Mr Hernandez, the head of the SFC, agrees with the suggestion. “That was one of the recommendations that came out of the IMF’s FSAP that we think is very important," he says. "And it is even more important now because local banking groups have banks in central America.”

Indeed, after growing strongly and profitably in their home market, many of Colombia's biggest local banks have discovered, in central America, an opportunity to join the league of ‘multilatinas’ – international Latin American companies. And, there is no sign of interest in central America abating.

Take Bancolombia. In December 2012, it reached an agreement to obtain 40% of Grupo Agromercantil of Guatemala. Then, in February 2013, it bought HSBC Panama, with $7.6bn of assets, in a $2.1bn all-cash deal. Banco de Bogota, meanwhile, made one of the most sought-after acquisitions in the area, fending off offers from other contenders, according to Mr Figueroa. The bank bought Banco America Central Credomatic, which has franchises in El Salvador, Guatemala, Honduras, Nicaragua, Costa Rica and Panama, and is the third largest bank in the region by loans and deposits, and the leader in terms of credit cards.

“[Banco America Central Credomatic] is also extremely profitable. In terms of profitability as a percentage of capital, its ratio is 25%. We paid $1.9bn for the bank. Last year it made $265m in profits. So it is an investment we will pay off in seven years, or even less,” says Mr Figueroa, adding that 30% of Banco de Bogota’s profits now come from countries outside of Colombia.


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