There is something striking about Colombia's second city, Medellín. Surrounded by green hills, its centre is adorned by Fernando Botero’s sculptures and basking in almost constant sun, Medellín used to be known as the town of eternal Spring due to its mild climate.
Colombians look at 'the paisa', as the citizens of Medellín are colloquially known, as natural businessmen and among the hardest workers in the country. It is not unusual for business meetings in the city to start at 7am, and lectures at the its university often commence at 6am.
Indeed, Medellin has achieved much in the past few years. Until recently controlled by drag traffickers and ruled by violence, the city has transformed itself from one of the most dangerous places in the world to an appealing location for foreign investors, which now include Peugeot, Hewlett Packard and Unisys.
A major Colombian business group, Grupo de Inversiones Suramericana, is based in Medellín too, and incorporates leaders in the country’s cement, food and insurance industries, as well as Bancolombia, the contry’s largest bank, which has recently opened its state-of-the-art headquarters in the city.
Uribe's legacy
The credit for this hard-fought turnaround, not just in Medellín but throughout the whole country, largely belongs with one man: former president Alvaro Uribe. During his eight-year term, Mr Uribe - a native of Medellín - fought against the guerrilla armies, re-established the rule of law and reclaimed vast tracts of land from the hands of the drug trafickers, allowing the country to grow into an open economy, capable of attracting foreign investment.
Colombia still suffers from drug-related trafficking and violence but on a much lower scale. Current president and former defence minister Juan Manuel Santos is expected to push on with the progress made by the previous administration.
Previously, the activities of the Revolutionary Armed Forces of Colombia, or FARC, which controlled Colombia's drug markets, as well as vast swathes of its countryside, made it impossible for foreign investors to consider coming to Colombia. Even Colombians were reluctant to travel across the country by car for fear of being assaulted or kidnapped. However, showing one’s wealth - such as driving an expensive car - is no longer considered dangerous in Colombia, a point demonstrated by luxury car maker Ferrari opening a showroom in Bogota last year.
“Colombia is in a pretty good position right now, and it has been in a pretty good position, economically, for the past decade,” says Luis Carlos Sarmiento, chief executive of the country’s largest banking group, Grupo Aval. “What counted negatively against the country was drugs and the drugs trafficking business. If you added that to the guerrilla conflict, you had two negatives that made it too hard for people to realise what [positive] was going on with the economy.”
With a GDP set to grow at between 5% and 6% in 2011, above the Latin American average, Colombia is indeed in a good economic position. As the economy grows, so do opportunities for its banks. Mr Sarmiento knows this well. The banking empire he heads was founded by his father, Luis Carlos Sarmiento senior, and the Sarmientos are one of the wealthiest families in Colombia. Passing the various security checks and the gated premises of one of the bank’s building, one is reminded of the severe threat that people in his position were subjected to in the country’s recent past. In the eyes of Colombia's aspiring young capitalists, Mr Sarmiento embodies the success that a new generation of entrepreneurs can aspire to. “He is more famous than [pop star] Shakira,” says a particularly enthusiastic young businessman.
A tough baptism
Colombia’s current strong economy was developed during the country’s dark years, when the country had no choice but to create domestic demand rather than rely on foreign investments. Because of this, the vast majority of its banking sector is in Colombian hands, and the top two banking groups - Grupo Aval and Bancolombia - between them own 50% of both the deposits and loans markets.
“The resurgence of Colombia didn’t happen overnight, it happened over 10 years,” says Mr Sarmiento, whose group includes Banco de Bogota, Banco de Occidente, Banco Popular, Banco AV Villas and pension fund Porvenir. “Colombia was forced into a low-profile position, which worked in its favour, as it had to get used to life based on its own resources and not to depend on its ability to attract foreign investment. In that respect, Colombia developed a very strong local economy.”
Colombia's leading banks are in such a dominant position domestically that expansion for its banks by acquisitions at home is unlikely and might be vetoed by regulators. For the smaller players, there is a lack of opportunities.
Expanding outwards
But there are alternatives. Banks with sufficient financial muscle have been looking outside of Colombia for opportunities. Last year, Grupo Aval bought BAC Credomatic, the largest regionally owned credit-card franchise in Central America, in a move that lays the foundations for a possible new regional player.
BAC Credomatic has 65% of the acquiring business - ie, the credit card network - in Central America and about 33% of the region's card issuance business. It adds 15,000 employees to Grupo Aval’s existing 47,000 workforce, has about $900m in equity and about $200m in net income. “We think that it has a nice future,” says Mr Sarmiento. “We are very strong in commercial banking and corporate lending but we figured that we could take that to Central America and we could probably learn from [BAC] in the credit-card business.”
Bancolombia is another bank that has been looking abroad in recent years. At the end of 2006, the bank bought Banagricola in El Salvador, the leading bank in the Central American country. The Colombian bank also has operations in Panama and Puerto Rico, on top of start-up leasing and trust companies in Peru. Expanding abroad does not come without its challenges, however. “In Peru, the big banks are in the hands of people who are not willing to sell,” says David Bojanini, chairman of Bancolombia and CEO of Grupo de Inversiones Suramericana. “In the near future, we will go to Central America. But it is not easy to buy banks or insurance companies [there], you have to be very careful. The due diligence in that kind of company has to be very thorough.”
Restricted ambitions
For all lenders growth opportunities lie in the country’s limited level of bank penetration. By some estimates the number of active banking clients in the country is about 19 million, or 40% of the population. Most banks say they are enacting policies and creating products to try to reach the other 60%.
Reaching the unbanked is recognised as an area of great potential by Colombia's central bank too. However, it also warns about the risks that wider available credit can bring to both developing and developed economies. Colombia’s central bank governor Jose Dario Uribe says: “The experience of many countries indicates that rapid increases in financial deepening and credit are usually followed by financial crisis.” Bank credit tends to be pro-cyclical and so it amplifies the cyclical movements of the economy, both upwards and downwards, he says.
As with the rest of Latin America, Colombia was not badly hurt by the global financial crisis, but it still was affected, as it was also affected by the increase in tensions with neighbouring Venezuela. This year, economic indicators are much more optimistic. “At the moment, the [Colombian] economy is recovering from the effects of the global crisis and the reduction of exports to Venezuela,” says Mr Uribe. “Credit is picking up accordingly. The challenge for the banks is to expand their services in a way that keeps credit, market and liquidity risks under control, and avoids future financial instability and contraction.”
Not all banks have decided to widen their client base, however, and some have decided to take a different path to growth, focusing on the highest earning segment of the market financing upmarket property purchases and providing wealth management services.
Juan Carlos Álvarez, managing director of Santander’s corporate and investment banking division, says: “[Santander] wants to have a more relevant market share in Colombia; we want to convert into a niche bank, focusing on the higher segments of the retail market. We want to provide universal banking products for those customers, focus on personal service and provide a relationship banker for each customer.” Mr Alvarez also says that the bank is open to acquisitions in the unlikely event that a competitor comes up for sale in the short term.
Beside the growing individual banking needs of the population, it is Colombia’s desire to modernise and grow its infrastructure that perhaps represents the greatest growth opportunities of all. From roads, ports and airports to energy infrastructure, many projects are out for tender and others are expected to go to market in the near future. Although delays and bureaucracy can make the tendering process painful, the sizeable infrastructure projects that form part of the government’s key priorities create appealing business prospects for banks.
“Infrastructure needs are defined and documented,” says Gerardo Hernandez, the head of Colombia’s financial supervisory body, the Superintendencia Financiera. “The government is interested in developing large infrastructure works and, on the other side, the banking system has the liquidity [to finance it]. There are resources available and banks are participating in these projects.”
Commission cap
As the local banking markets develop, much attention is being placed on just how successful and profitable Colombia's banks are. Controversy over how much banks charge for their services has been a hotly debated issue between bankers and the government, to the point where it was feared public officials would put a cap on bank commissions. In an effort to give clarity on what is charged on specific products and services, Colombia's banking regulator has started to collect detailed information on fees and has published its findings, first in October 2010 and then in February this year, on its website and in national papers.
This exercise provided some interesting results, says Superintendencia Financiera's Mr Hernandez. “The objective of publishing banks’ charges is to increase competition [and reduce costs],” he says. “And I think it is working. The first time we published this, nobody cared, but the second time we had banks asking us ‘let us see what you are going to publish; this information is not valid any longer’. It is a sign that the government’s push to reduce fees is having an impact if banks tell you ‘we used to charge this but we’re not going to charge it any more’.”
Although it seems that a cap on banking charges will not be imposed by Colombia's government, the discussions around commissions have put bankers on the defensive. Some say that the banks’ high capital requirements demand higher charges in order to maintain profitability, especially if the level of bank penetration in the country has to be deepened.
“If you have high equity standards, banking is more difficult to expand, especially to people on a lower income,” says Bancolombia's Mr Bajanini. “I would say that the greatest challenge facing the banking industry in Colombia is how to increase the number of people that are clients of the banking business. Most of the small clients that we have are not profitable to us, they wouldn’t be to any bank. But we still want to grow and bring in new clients because, in the near future, these people are going to increase their income,” adds Mr Bajanini.
Capital markets
Such debate around bank charges and levels of bank penetration are not unusual in a fast-growing market. What is exceptional about Colombia is the speed at which progress in the financial arena is taking place.
Colombia’s capital markets are still relatively shallow but the operational merger with Peru’s and Chile’s stock markets means that an investor can access any stock traded on any of those markets from each of those locations, as platforms are unified. According to the BVC, Colombia’s stock exchange, the combined market would see $250m-worth of daily trades and a total market capitalisation (of all listed companies) of $443bn, which is bigger than Mexico’s stock exchange. In addition, Colombia and Peru’s stock exchanges will fully merge to create one single exchange for both countries.
This is just the latest move aimed at deepening the local capital markets to make them a credible option for investors and corporates looking for funding. At the end of 2010, a new regulation was introduced to facilitate foreign capital market investments. Previous rules were very restrictive for foreigners, which were required to set up a local fund, have a certain reporting structure and be subjected to limitations on where they could invest. Now rules have been simplified and foreign investors enjoy the same treatments as domestic ones, says Juan Pablo Cordoba, president of BVC.
“The reasons why international players are not in Colombia used to be, in part, regulation. That’s one reason, the other is that the market is small, and there aren’t many products. There is liquidity but concentrated in few instruments,” he says. “In the past, foreign participation in the market was about 4%, last year it was a bit better at 8%, but it keeps on being very low. We want to get to 15% in five years. Brazil and Chile are about 30%, Mexico is about 60 or 70%, Spain is 70%.”
Starting way behind other capital markets, doubling foreign investors’ participation in the medium term is no small ambition. And Mr Cordoba’s growth plans and enthusiasm about the future of the BVC could easily be applied to may other institutions and markets in Colombia’s economic and financial developments. “The timing is perfect,” says Mr Cordoba. “There is a lot of interest in Latin America but there aren’t many options about where to invest. Colombia wants to become a clear and real option for investors - from inside and outside the region.”
