Ingenuity is the operative word for Colombia’s banks as they face what could be the country’s worst single year since it gained independence two centuries ago.
The banking system had got off to one of its best starts this year, following the lead of the country’s economy and preparing for new opportunities from full membership in the Organisation for Economic Co-operation and Development (OECD), the mark of a mature economy.
Gross domestic product grew by 4.1% in the first two months of the year, retail sales were up by double digits and banks were moving forward with new products and services as consumer confidence grew. Consumer lending was expected to top 10%.
Into reverse
Then March arrived and with it came a reversal of fortunes. First came a crash in oil prices that hammered the country’s main export; then the coronavirus pandemic that effectively shut down the country. While parts of the economy began to reopen in June, important sources of revenue and employment – such as the hotel and restaurant sector – will remain at various levels of lockdown throughout most of the third quarter of this year.
The financial numbers since lockdown have been horrific. Exports plunged by 52.3%, industrial output dropped by 35.8% and unemployment jumped to 19.8% in April, according to statistics agency DANE. The government estimates that its 2020 revenue could drop by more than $6.5bn. The International Monetary Fund states that the current account deficit could be 4.7%, while the fiscal deficit will widen to 6% from 2019’s 2.5%.
The World Bank estimates the economy will contract by 4.9% this year – the most positive number among current predictions. Colombia’s central bank forecasts a decline as steep as 7%, its finance ministry estimates 5.5%, and the OECD says the contraction could be 7.9% if a second wave of contagion happens during the recovery.
The country’s banks recognise that it will not be a good year, and are finding ways to meet the challenge.
“In this new reality, we have to be ready to provide the accompaniment required by individuals and businesses. We have a big responsibility to be creative in the solutions we offer our clients, depending on their particular conditions, to respond to their needs,” says Juan Carlos Mora, president of Bancolombia, the country’s largest bank with $71.7bn in assets.
“The impact on the economy and consumer habits requires us to adapt rapidly, to be there for the country in the transition to recovery,” he adds.
Covid-19 has led the government to work with the financial sector to distribute economic stimulus to the most vulnerable segments of the population that, in many cases, are not bankarised
Help from digitalisation
Colombia’s banks have been innovating for the past several years, using new technology not only to make banking easier for clients, but also to ‘bankarise’ the hard-to-reach segment of the public traditionally outside of the financial sector.
According to Asobancaria, the Colombian banking association, 1.4 million people entered the banking system for the first time in 2019, bringing the total to around 30 million. Now, the coronavirus pandemic, in which the state has relied on banks to channel stimulus payments to the population, has led to an acceleration of citizens taking up formal bank services.
“The health and economic crisis created by Covid-19 has led the government to work with the financial sector to distribute economic stimulus to the most vulnerable segments of the population that, in many cases, are not bankarised,” said a statement from Asobancaria provided to The Banker.
As a result, about 1.5 million people were incorporated into the financial system in the first four months of 2020 and the number is expected to increase to 2 million in the first half of the year. Asobancaria says the goal was 85% by 2022, but this has already been exceeded as a result of the crisis; it will be close to 88% in 2020.
Bancolombia, for example, has witnessed a major jump in its digital footprint. “The preventative lockdown has allowed us to bankarise more people and promote a culture of digital channels,” says Mr Mora.
The numbers speak for themselves. Bancolombia’s App Personas (app for individuals) registered 4.6 million people in April, up 27% from a year earlier; while registrations for Bancolombia a la Mano, its mobile banking app, rose 331% as of April. It had 1.19 million users that month, compared to 276,154 a year ago.
Holding steady
While bullish on digital channels, Mr Mora says Bancolombia’s focus is “strengthening and maintaining the optimal conditions that currently exist”, instead of introducing new options for this year.
Andrés Márquez, a senior director for Latin America financial institutions at Fitch Ratings, says this is the right move and while the crisis has helped with bankarisation overall, banks need to be cautious. “Digital channels are helping with bankarisation, but banks need to be careful about branching into sectors that they do not know, at this point in the crisis. I think it is important to cultivate portfolios they [already] have,” he says.
Colombian banks are upbeat that 2021 will bring recovery, and they offer better forecasts than the World Bank’s projected 3.6% growth; however they recognise that first they have to get through 2020. They have responded with a series of programmes to help individual and business clients survive.
Between mid-March and early June, they extended deadlines and offered grace periods to 10.5 million clients, for a total of $57.6bn, according to Asobancaria. Bancolombia accounted for $16.4bn, while Grupo Aval, with four banks, including flagship Banco de Bogotá, granted $8.5bn in relief.
Banks also provided $14.7bn in new loans to large corporate clients and small and medium-sized enterprises. In addition, banks have worked hand-in-hand with the state in a loan programme to cover payrolls, disbursing another $2.9bn as of early June.
Ratings down
Fitch’s Mr Márquez says this tough operating environment could result in an even greater drag on banks. Fitch lowered its foreign currency ratings for banks it evaluates in Colombia, following its downgrade of the sovereign at the start of April. It dropped Colombia’s rating to BBB-, down a notch, with a negative outlook.
The banks it rates in Colombia, as well as subsidiaries of Colombian banks in Central America, are in line with the sovereign and have negative outlooks. “Colombian financial institutions have been downgraded to reflect a weakened operating environment,” says Mr Márquez. “Fitch does not expect to rate banks in Colombia higher than the respective sovereign rating.”
Colombia’s banking portfolio is expected to contract in real terms by 0.4% in 2020, according to Asobancaria. Total portfolio growth in 2019 was 3.9%.
Fitch expects the consumer segment to contract by 0.1% this year, after expanding 12.3% in 2019. It forecasts a 3.9% drop in the microcredit segment and 0.3% in mortgages. Commercial leading will contract by 0.5%.
Asobancaria estimates that past due loans will increase from 4.3% of the total in 2019 to 9.2% in 2020, and expects the biggest deterioration to be in the commercial and microcredit segments.
Solid fundamentals
Mr Márquez says that while the current crisis is much more complex than the last major financial upheaval in 2008-09, Colombia’s banks are conservative and on a better footing than they were the previous decade, while the state has also improved regulations since the international financial crisis.
“Banks are on more solid ground, and the regulation and management is more consistent,” says Mr Márquez. He adds that Colombia’s formal induction to the OECD and its move to implement Basel III standards are going to play an important role in the recovery next year. Colombia became the 37th country in the OECD in April 2020, having worked on joining for seven years.
Mr Márquez says the authorities are still committed to Basel III in 2021, which will prove to be the right move down the road. “Basel III is important for a banking sector like that in Colombia, which has been growing and consolidating. It is a necessary step that will accompany good internal regulations. It is what international investors want to see,” he says.
Some other elements should also help. Asobancaria points to the recent $2.5bn in 10-year and 30-year cross-border bonds issued by the sovereign, which were oversubscribed at $13bn. “The vote of confidence the market gave the Colombian economy is a sign of the positive expectations that foreign investors have in the country. In addition, the lower cost of internal and external debt implies less pressure on fiscal sustainability,” it says.
Work together
The government’s stimulus package and an expansive monetary policy should also benefit banks. The benchmark interest rate set by the central bank has been at a historic low of 2.75% since May and will stay there for the time being.
The central bank also lowered reserve requirements for banks, but this extra liquidity was used to acquire $2.5bn in special bonds the government issued in April in response to the pandemic.
Bancolombia’s Mr Mora says: “There is not a single formula to resolve this situation. It will require the government, private sector, academics and, of course, Colombian citizens, working together to reactivate the economy as quickly as possible.”
