As domestic banks look abroad, foreign entities eye investing locally

International investors are looking at Colombia with growing confidence thanks to several political and economic improvements. Colombia’s economy has registered an average 4.3% GDP growth rate and 2.7% GDP per capita growth rate since 2000, according to World Bank figures. This has resulted in a growing middle class and a decrease in the percentage of the population falling under the national poverty line, which has gone from 42% in 2008 to 32.7% in 2012.

Political stability and improved security conditions have also helped improve the attractiveness of the country. A sustained effort to confront armed groups has reduced their capabilities and allowed the government to regain control over large regions of the national territory. As a result, murder rates have practically halved since 2000. An agenda of economic liberalisation pushed by pro-business politicians has resulted in deregulation and the signing of several free trade agreements aimed at attracting foreign investment.

Sector Facts

The banking sector is led by local groups, which control more than three quarters of the market, while the remaining 25% is controlled by foreign institutions. However, Colombia presents a number of opportunities within the financial sector, with banking penetration still low both in terms of population and percentage of GDP, a growing middle class that requires financial services, vast natural resources with untapped potential and an extensive infrastructure development programme that will require investment and financing for years to come.

Foreign participants can contribute either through one of the permits for these institutions or through a representative office, which is the simplest and least expensive way to attain presence in the market. Once they are established in the country, they must obtain a banking licence or certify themselves as a finance corporation. The dominance of local banks makes it difficult for foreign banks to gain significant market share, so many prefer to act as financiers for local banks and industrial groups, or focus on specific market niches.

Foreign Banks

Spanish group Banco Bilbao Viscaya Argentaria (BBVA) controls 10.9% of deposits and 10% of gross loans in the market, making it the largest foreign player. BBVA entered the local market in 1996 through the acquisition of a 40% share of Banco Ganadero in a transaction valued in $328m. It obtained majority control and 95% ownership in 2001. In 2005 BBVA consolidated its presence when it won a bid for the state-owned bank Granahorrar for $481.65m. BBVA Colombia employs 5359 people and operates through 344 office branches and 1218 banking correspondents. The bank reported growth in its return on equity from 16.90% in 2012 to 17.82% in 2013, while its return on assets rose from 1.17% to 1.26% during this period.

In 2012 Bank of Nova Scotia (Scotiabank), the third-largest financial entity in Canada, announced it had bought a 51% share of Colombia bank Red Multibanca Colpatria, the fifth-largest bank at the time, which belonged to the Colombian group Mercantil Colpatria. The operation was valued at $1bn and included the option of acquiring the remaining 49% at book value within seven years. Colpatria currently accounts for 5.1% of credit allocation and 4.6% of total deposits.

The second-largest foreign bank is Chilean group CorpBanca. CorpBanca has been involved in several mergers and acquisitions since 2011, entering the market after it acquired a 97.85% interest in Spanish group Banco Santander Colombia for $1.2bn, which included the bank’s insurance, trading and trust operations. CorpBanca continued its consolidation in the Colombian banking sector when it acquired Helm Bank for $1.28bn in 2013. With this acquisition, CorpBanca’s presence grew to a 6.5% share of the market, becoming the sixth-largest standalone bank in the country.

Early in 2014, Brazilian banking group Itau Unibanco Holding announced that it would become the largest shareholder in CorpBanca. Itau will own 33.58% of the new entity while Alvaro Saieh’s family, which currently controls CorpBanca, will hold an additional 32.92%. The new entity will be named Itau CorpBanca. Through this operation, Itau will merge its operations with CorpBanca’s units in Chile and Colombia. Brazilian investment bank BTG Pactual also recently announced its interest in obtaining a banking licence in Colombia, where it already operates as a broker-dealer.

The Colombian banking sector remains attractive and still offers growth opportunities for those foreign banks that are already established. BBVA announced in 2013 that it was ready to invest $2.5bn in its Latin American operations, from which $500m would be assigned to Colombia. These funds are earmarked for the expansion of infrastructure, increasing the number of employees and investing in research and development for segments such as mobile banking. BBVA has also considered further acquisitions as a way to further consolidate its presence in Colombia.

Even though the market is still attractive, opportunities for non-organic growth are diminishing. Santiago Muñoz, principal economist at BBVA Research explained: “If [foreign banks] want to enter Colombia, they now have to acquire a large bank. The last small bank that remained was Helm Bank. Therefore, an entrance now implies a large investment and a very aggressive proposal. There may still be purchase opportunities in consumption banks, though.”

Finance Corporations

Finance corporations are entities designed to grant both medium and long-term funding and provide financial services to developing businesses. Private equity funds, investment banks and corporate banks belong to this specific sector. JP Morgan and BNP Paribas are among the financial institutions that operate in Colombia under this legal form.

Financing Institutions

Financing institutions have the objective of financing the commercialisation of products and services through credit or leasing. This sector includes auto loans, microcredit and credit cards issued by retailers. When Chilean retail group Falabella entered the Colombian market it began providing its financial services under this structure, but decided to obtain its banking licence in 2011 to accept deposits.

Leasing is a very dynamic segment in Colombia, occupying first place in Latin America based on size in relation to GDP, and second after Brazil for absolute value of the portfolio. Most banks offer leasing services within their product portfolios, but some global entities like GMAC also provide services. The market is still highly concentrated, with the top two companies controlling almost 60% of the finance leasing market.

By the end of 2013, the Financial Superintendence of Colombia reported 51 representative offices in Colombia. Several international banks open these offices as a strategy to enter the market and offer cross-border financial and securities-related services to local banks and large corporate groups. An office carries out promotional activities and is required to comply with certain reporting obligations, but it does not require substantial investment. Under this scheme, loans are issued and registered in the foreign offices’ books.