In 2013, Colombia had the fastest growing economy in the whole of Latin America, combined with the lowest inflation. As well as macroeconomic credibility, the country has an improved security situation and abundant natural resources – its principal exports are oil and minerals. And Colombia’s banking system is in rude health, with strong regulation.
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In the opinion of Colombia’s central bank governor José Darío Uribe, who was recently selected for a two-year appointment by Switzerland’s Bank for International Settlements, Colombia’s banks, which account for 60% of the country’s gross domestic product, estimated at $360bn at the end of 2013, have “levels of solvency that are well above those required by Basel III, levels of liquidity that are also significant and high levels of profitability”.
Colombia’s banks had an average return on assets of 13.08% at the end of December 2013, according to Colombia’s private banking association Asobancaria. The average solvency rate at that time was 14.46%.
Market potential
Despite these notable figures, Colombia’s financial services market is relatively underdeveloped. In Colombia there are still opportunities for growth in consumer credits (Colombia’s middle class, which has doubled in a decade, continues to grow), small and medium-sized enterprise lending, and, above all, at the low-income end of the microcredit market.
International and big regional banks are starting to view Colombia not only as an appealing market on its own but also as part of the Pacific Alliance, a regional initiative with Chile, Mexico and Peru, focusing more on the cross-border opportunities between the four countries in their business strategies.
Wendy Hannam, head of Latin American operations at Canada’s Scotiabank, which owns Multibanca Colpatria – a principally retail Colombian bank with about a 5% share of the credit market – is upbeat about the new Pacific Alliance. “Scotiabank has operations in all four countries. So we are very well positioned to support our clients, our Canadian clients and also our Chilean-based clients, companies from Colombia, companies from Peru, in their regional growth along with the growth and expansion of the region,” she says.
Rare and difficult
But because opportunities to acquire banks in Colombia are rare, it is difficult and expensive to access the market and, once there, difficult to increase credit market share. Competition is also intense. Alejandro Figueroa Jaramillo, long-standing chief executive of Banco de Bogotá, Colombia’s second biggest bank by Tier 1 capital, says: “Colombia is a market that is tremendously competitive. And the competition is coming from all directions.”
A striking example is the sudden eruption of Brazil’s Itaú Unibanco on the Colombian scene in January this year. That followed Itaú’s agreement to buy control of Chile’s CorpBanca, in a deal worth at least $2.2bn in cash and stock, and as much as $3.7bn overall, when all financial commitments are included, according to the New York Times.
The acquisition will turn Itaú into the owner of Chile’s fourth largest bank by assets and, simultaneously through CorpBanca’s subsidiaries in Colombia, provide it with control of CorpBanca Colombia and Helm Bank, which together have a 6.5% share of Colombia’s credit market and at the end of 2013 ranked sixth by assets, loans and deposits in the country, according to Asobancaria.
Work around
Gerardo Hernández, the head of Superintendencia Financiera de Colombia (SFC), Colombia’s national financial regulator, says that after obtaining regulatory approval, Itaú intends to merge the Colombian banking entities with its Colombian financial company. A second-tier entity that is not allowed to take deposits, Itaú established this company in 2013 to provide investment banking services, mainly to big Brazilian firms interested in making investments in energy, infrastructure and construction in Colombia.
“Setting up a financial company was a way for Itaú to access the Colombian market and get around the lack of opportunities, at the time, to buy a bank,” says Mr Hernández.
By contrast, Spain’s Banco Santander made a comeback to the Colombian market this year, launching its financial company, which it calls a 'business bank'. Santander had previously sold a Colombian retail bank that had only about a 2.5% share of the credit market to CorpBanca for $2.1bn due to the difficulties of increasing the bank’s market share in Colombia, according to Mr Hernández.
BBVA and Scotiabank were also interested in acquiring Chile’s CorpBanca, and BBVA, it was widely reported, came close in the contest. But, says Óscar Cabrera, chief executive of BBVA Colombia – Colombia’s fourth largest bank by Tier 1 capital and biggest foreign-owned bank – given the difficulties and cost of increasing market share by acquisitions, growing organically “is a good business strategy”.
Organic growth
Other large Colombian banks have also opted for organic growth, and are investing in new technology and more bank branches. But none, it appears, on the scale of BBVA, which started implementing a $1.2bn investment plan between 2013 and the end of 2015 in the Pacific Alliance, where the Spanish bank is the leader in terms of combined assets in all four countries.
Half of BBVA's total investment is allocated to Colombia, where objectives include raising its share of the local credit card lending market from 6.6% to 10% in three years. In the same time frame, the bank plans to open 100 to 130 branches in rural towns, “where personal contact with a bank manager is a must”, says Mr Cabrera, and in towns such as Palma, in central Colombia, which is growing fast because of recent oil developments.
Mr Cabrera says the plan is “very ambitious”. He is convinced, however, that by growing organically it will be possible in five years, when the bank’s new branches are fully functioning, to achieve the equivalent in terms of market share of acquiring CorpBanca Colombia and Helm Bank – that is to say a 6.5% share of the credit market at one-quarter of the price Itaú is paying.
Local dominance
A major obstacle to more market penetration is that Colombia’s three biggest banks by Tier 1 capital, Bancolombia, Banco de Bogotá and Banco Davivienda – which are all locally owned and not for sale – have a combined 50% share of all the banking system’s assets, loans and deposits, according to Asobancaria.
Moreover, following seven years of major expansion, taking the opportunities offered by the international financial crisis to buy banks in central America – a region that has many similarities to Colombia – the country’s three leading banks have diversified their risks, increased their profits and reinforced their positions in the home market through the cross-selling of products and services, and technology transfers, SFC officials say.
One example is the edge obtained by Banco de Bogotá in Colombia’s red-hot credit card market after buying BAC Credomatic – central America’s third largest bank by loans, deposits and assets, and the region’s leading bank in credit card loans – and incorporating the technology into the bank in Colombia. Since the acquisition in 2010, Banco de Bogotá’s share of Colombia’s credit card loan market has risen from 8.6% to 11.5% and its share of the card issuance market has grown from 6.8% to 8.5%.
Mortgage market
Banco de Bogotá, which has traditionally focused on wholesale banking, also started distributing mortgages to middle- and high-income Colombians in the bank’s branches in 190 towns and cities around the country in 2013, increasing its share of the market from just 0.6% to 5.2%.
“We decided to take mortgages on board,” says Mr Jaramillo. “We realised that if we didn’t we could lose market share because there is a big demand for housing loans. Mortgages was the fastest growing segment of the credit market in 2013, increasing 25.7% compared with an overall credit market rise of 11.7%.”
For Juan Manuel Santos, Colombia’s president, banking also has an essential role in the targeted development of energy, infrastructure and low-income family housing.
Informal economy
Banco Davivienda, the youngest of Colombia’s large locally owned banks, focuses on providing financial services to people at the base of the pyramid. It has become the country’s first player in social housing and also has the biggest share of the mortgage market at 25.5%.
Davivienda has developed an innovative product for the market with the biggest growth potential in Colombia – the 36% to 40% of the country’s population of 47 million who have no experience of financial services and belong to the informal economy, says the SFC. Called DaviPlata, it is the first mobile money service in Colombia. In the two years that it has been in circulation it has gained broad acceptance, particularly with businesses, as well as with some 35,000 members of the military stationed in remote locations. But the biggest use of the product by far is for delivering more than one-third, or 1 million, government subsidies in about 500 towns to poor families who qualify for Colombia’s Familias en Acción (Families in Action) programme. The upshot is that DaviPlata now has more than 2 million customers – almost half of Davivienda’s total 4.5 million clients. Of these 2 million people, 1.2 million had no prior experience of banking services.
While customers pay nothing for the service, businesses and the government are charged. But the government is saving on distribution costs estimated at about 20% of the total amount of subsidies. Moreover, the tracking of funds is possible through electronic means. Such information allows people outside the formal economy to slowly build up a credit record and eventually access the banking system.
Efraín Forero, chief executive of Banco Davivienda, says this year he will expand the mobile telephone money service with new micro-insurance and micro-savings products, and also transfer the technology to the three banks Davivienda bought in Costa Rica, El Salvador and Honduras from HSBC in 2012. “DaviPlata is the most profitable line of business at our bank and it is also one of the most relevant businesses for our future customers and growth. I believe many of these customers will see improvements in their incomes and education, and start small businesses. It’s where the future lies,” he says.
Meanwhile, Scotiabank’s Ms Hannam says the bank’s strategy in Colombia is to “continue Colpatria’s leadership position in credit card issuance. We see opportunities for growth in the small and medium-sized enterprises credit segment. And we are also looking at the microfinance opportunities.” Microfinance was the second fastest growing segment of Colombia’s credit market in 2013, rising 15%.
The SFC’s Mr Hernández says: “All the big banks are now working in that small and medium-sized enterprises credit segment. The country has been growing at a good pace in the past [few] years. There is more competition. So banks have to find new customers.”
