Banks look to their neighbours for further growth

Unlike other Latin American markets, Colombia’s banking sector is led by local financial groups. The three largest are Bancolombia, Grupo Aval and Davivienda, which control almost 64% of all loans (see overview).

Even though banking penetration is growing, and at 69.3% still has an upside potential, according to the Finance Entities and Banking Association (Asociación Bancaria y de Entidades Financieras, Asobancaria), Colombian banks are looking abroad for more growth opportunities. Acquisitions provide banks with the chance to increase their client base more quickly and gain economies of scale by taking advantage of operating synergies. Foreign acquisitions will represent the biggest sources of revenue growth and profitability in the future, while organic growth within Colombia will likely continue to be slower.

The Neighbourhood

Central America is an attractive market for Colombian banks: the entire region, with almost the same population as Colombia, at 44m, according to the World Bank, also has a growing economy. Panama is particularly attractive, since it has one of the fastest growing GDPs in the region, with 10.7% growth in 2012 and 9% estimated for 2013, well above Latin America’s average GDP growth of 3.2%. It also has the most developed financial system in the region with 51 banks, twice as many assets as Costa Rica (the second largest financial system) and a financial depth of 128% of GDP.

Mergers & Acquisitions

Bancolombia, Banco de Bogotá and Davivienda have been actively acquiring banks in Central America; however, after several years of expansion in which Colombian banks have invested more than $7bn, the opportunities may be diminishing. The reasons for a slowdown are the impact that investments have on bank's balance sheets, the time and resources needed to align strategy and operations, and difficulty in finding new investment opportunities at reasonable prices.

Financing of the acquisitions has been done mostly by issuing shares and bonds. Davivienda issued bonds for COP1.1trn ($550m) and COP900bn ($450m) in 2011 and 2012, respectively, and another COP716bn ($358m) in shares during 2011. Bancolombia issued bonds for COP1.4trn ($700m) in 2011 and shares worth COP1.13trn ($565m) the following year.

The first wave of acquisitions, which took place in 2007 and 2010, proved to be quite successful, with Bancolombia and Banco de Bogotá acquiring well-capitalised entities with leading market positions. However, during the second wave in 2012 and 2013, Colombian banks purchased less profitable entities with marginal positions in their markets.

Future acquisitions will prove even more challenging. The withdrawal of foreign banks like HSBC and BBVA from Central America created opportunities for Colombian banks to enter the market at reasonable prices, conditions that will be difficult to maintain. The deployment of resources to finance these acquisitions has also had an impact on the quality of the banks’ capital bases, making it likely that expansion plans will slow down for a while.

However, there continue to be some potential opportunities. International groups like Citibank and Scotiabank are still present in the region, while Guatemala hosts local players with operations in neighbouring countries. Expansion to other regions is also an option, a strategy that GNB Sudameris began in 2012. Santiago Muñoz, main economist at BBVA research, told OBG: “One would believe that [Colombian banks] are going to consolidate. Their investments have been very profitable and many of their disbursements have already been recovered with the profits.”

Bancolombia

Headquartered in Medellín, Bancolombia is the largest bank in Colombia, leading in various segments including retail banking and, through Grupo Empresarial Antioqueño, insurance. To increase business it has focused on new foreign operations.

Bancolombia entered Central America through the purchase of the holding company Banagrícola in 2007, owner of Banco Agrícola, the insurance company Asesuisa and the pension fund manager AFP Crecer, all of them with commercial operations in El Salvador. The acquisition was done in two stages. The first one in May 2007, involved the acquisition of 89.15% of the shares and in a second stage, in December 2007, Bancolombia bought the remaining 9.59%. The value of the operation was closed at $878.8m.

After the successful integration of Banco Agrícola, Bancolombia continued its expansion and consolidated its position in Central America in 2013, through the acquisition of 100% of the ordinary stocks and 90.1% of the preferred stock of HSBC Panama. The operation was valued in $2.1bn, or 2.98 times the book value. With this purchase, Bancolombia gained 15% market share in the Panamanian banking sector. The operation also included the insurance, leasing and trading activities that HSBC held there.

Also in 2013, Bancolombia acquired a 40% interest in Guatemala’s financial group, Grupo Financiero Agromercantil, in a transaction valued at $216m. Grupo Financiero Agromercantil is part of BAN Financial Corporation, which has headquarters in Panama, and comprises Banco Agromercantil de Guatemala, the insurance company Seguros Agromercantil, and the offshore bank Mercom Bank. Bancolombia therefore acquired a minority stake of the holding company with $2.23bn in assets, but the agreement establishes that Bancolombia will acquire at least a 51% stake within five years and 75% within seven years.

With the acquisition of HSBC Panama, Bancolombia consolidated its position in Central America, becoming the largest bank in El Salvador with an almost 28% market share, the second largest in Panama with 15% market share, and the fourth largest in Guatemala. Bancolombia’s international exposure acknowledgement accounts for 20% of its total income today.

Grupo Aval

Grupo Aval and its comprising banks together control 29.1% of all deposits and 28.3% of all gross loans in Colombia. The group began its expansion to Central America in 2010 with the acquisition of BAC Credomatic, which was owned at the time by GE Consumer Finance. BAC Credomatic had operations in almost all of Central America, with branches in Guatemala, Honduras, El Salvador, Nicaragua, Costa Rica and Panama. The company offers a wide range of financial products in the region including credit cards. The operation was valued at $1.9bn and was completed through the acquisition of Banco de Bogotá.

In 2013, Grupo Aval, via Banco de Bogotá, continued its expansion in Central America by acquiring 98.92% of BBVA Panama for $490m. With the acquisition, Grupo Aval holds today the second-largest market share in Panama’s financial system.

Late in 2013, Grupo Aval, through Banco de Bogotá, acquired 100% of Guatemalan group Grupo Financiero Reformador, in a $411m transaction. The combined assets of Grupo Financiero Reformador and BAC Credomatic in Guatemala therefore reached $2.9bn.

Davivienda

With 11.2% of deposits and 13% of gross loans, Davivienda is the third largest standalone bank in Colombia. The bank, which belongs to Grupo Empresarial Bolivar, was founded in 1972 and originally focused on providing mortgages and savings accounts for households. In 1997, the organisation obtained its banking licence and began offering a wider portfolio of financial products.

Davivienda began its expansion to Central America in 2007 through a merger with Granbanco Bancafé, which permitted the Colombian bank to gain presence in Panama and Miami. Bancafé was a Colombian group that had mainly provided financing to small and medium size enterprises, as well as agribusinesses, but held some operations in Panama and Miami through its subsidiaries Bancafé Panamá and Bancafé International Miami. The merger also helped Davivienda venture into new banking segments and diversify its portfolio in Colombia.

Davivienda gained further presence in Central America by acquiring HSBC’s units in Costa Rica, El Salvador and Honduras for $801m in 2012, which, at the time, represented 4.6% of the bank’s assets. Davivienda paid a ratio of 1.57 times the book value for the acquisition of the three entities. The operation included the banking, financing and insurance operations of HSBC in the three countries, with 136 branch offices with more than 820,000 clients.

GNB Sudameris

Holding 3.6% of all deposits and 2.2% of all gross loans in Colombia, GNB Sudameris, which belongs to Gilinski Group, among the 10-largest banks in the country. Unlike the other Colombian banks, in looking for acquisition opportunities in Central America, GNB Sudameris turned its focus toward other South American countries by taking advantage of HSBC’s withdrawal from that region.

GNB Sudameris purchased HSBC’s operations in Colombia, Perú and Paraguay in mid-2012, as part of the British finance group’s withdrawal from most Latin American countries. The transaction was valued at roughly $400m. While important, in those four countries, HSBC still maintained a marginal market participation, far below that held by the industry leaders.