Low rural penetration and new technology show growth potential

Economic growth, improving security and macroeconomic stability in the past decade have helped the Colombian banking sector expand. An expanding middle class in need of financial services has also seen banking penetration rise, while financial products such as credit cards and mortgages have shown double-digit growth rates during recent years.

Although accessing financing has often been a struggle for low-income households and micro-businesses, microcredit and mobile banking are helping to provide financial services to new segments of the population. Recent merger and acquisition (M&A) activity has also changed the sector’s structure, bringing in new players, although well-established Colombian groups continue to lead the market.

Regulatory Bodies

The sector is regulated and supervised by a number of government institutions: the Ministry of Finance and Public Credit (Ministerio de Hacienda y Crédito Público, MHCP), the Central Bank of Colombia (Banco de la República de Colombia, BRC), the Financial Superintendence of Colombia ( Superintendencia Financiera de Colombia, SFC) and the Fund of Guarantees of Financial Institutions (Fondo de Garantías de Instituciones Financieras, FOGAFIN). Together, these institutions form the Coordination Committee for Financial Regulation and meet several times a year to set the regulatory agenda, monitor progress towards strategic objectives and manage any crises.

The MHCP defines the general policies and regulations of the financial and securities systems, while FOGAFIN brings confidence to depositors by insuring deposits in credit institutions and by aiding in the solution of solvency problems.

The BRC is in charge of supervising monetary policy with the primary mandate of controlling inflation, done through its main monetary tool, the reference interest rate or intervention interest rate.

The bank provides liquidity to the financial system and acts as a lender of last resort to credit institutions. The central bank is also responsible for monitoring possible risks related to financial and payment systems. Over the past decade, it has achieved economic stability and inflation control, which has helped financial markets place debt with longer terms and lower interest rates. Today, the central bank’s inflation target stands at 3%.

The SFC is responsible for supervising and overseeing the performance of banks, capital markets and insurance companies. It is an entity independent of the MHCP, with its own legal authority as well as financial and management autonomy. The SFC was established in 2005 through the merger of the Colombian Banking Superintendence and the Colombian Securities Superintendence. It is currently in process of adopting a risk-based supervision model according to the Canadian supervision standards through a cooperation agreement established in 2009 with the Toronto Centre, a Canadian non-profit organisation.

Regulation

In recent years, Colombian financial authorities have taken several steps to set stronger controls on the financial sector. The sector went through a regulatory reform in 2009 and several decrees have been issued since then with the objective of reinforcing the sector’s legal framework. Colombia’s financial system is currently moving towards the adoption of International Financial Reporting Standards, which are scheduled to commence in 2015. The year 2014 has been designated as a transition year in which local groups have been moving towards the adoption of such standards. Foreign institutions have had less transition difficulties since they are already accustomed to reporting under international standards.

Changes

August 2013 saw the introduction of new capital requirements as a result of Decree1771, issued by the MHCP in 2012. Due to worldwide concerns on the strength of financial sectors, new standards for the estimation of capital reserves were set in place. The decree introduced a new classification of the technical capital requirements, which must be comprised of basic ordinary equity, additional basic equity and additional equity. The decree maintains the minimum solvency level at 9% but also created a new requirement for Tier 1 capital, which is set at 4.5% Voluntary reserves are recognised as part of Tier 2 capital up to a limit of 10% of total capital.

To stimulate use of the financial system, the government has allowed certain transactions to be exempt from the payment of the tariff on financial transactions, better known as the “four per 1000” tax. This charge has been unpopular since it was introduced and must be paid on all transactions, including withdrawals and transfers. However, beginning on January 1, 2013, monthly withdrawals from savings accounts up to COP9.39m ($4697) have been exempt from this charge. The tariff was created in 1999, and even though there have been efforts to eliminate it, there is no sign of its total abolition in the near future.

Market Structure 

The financial sector is divided into three categories: credit institutions, financial services companies and other financial institutions. Retail banks, corporate banks, leasing corporations and investment banks are among the entities that fall under the first category, whereas pension and trust funds belong to the second category. Insurance companies and official institutions fall under the third category.

Regulations allow for five kinds of credit organisations: banks, finance corporations, financing institutions, financing cooperatives and official institutions. Banks are the only entities that can manage savings and deposit accounts, as well as grant loans to individuals and companies. Foreign institutions can participate in the sector through representative offices, which act as a commercial establishment that carries out promotional activities and is required to comply with certain reporting obligations, but does not require substantial investment. At the end of 2013, the SFC reported 24 banks, five finance corporations, 22 financing institutions and 51 representative offices.

Credit institutions had assets worth COP427.8trn ($213.9bn) at the end of 2013. Of this, banks accounted for almost 91%, with COP388.6trn ($194.3bn) in 2013, from which local banks represented 76.4% and foreign banks accounted for the remaining 23.6%.

The allocation of investments and gross loans ( including leasing operations) has remained stable for the past two years, close to 19% and 65% of total assets, respectively. The total portfolio of gross loans and leasing operations is worth COP251trn ($125.5bn), of which COP142trn ($71bn) or 56.6% are in commercial credit; COP73.5trn ($36.75bn) or 29.3% in consumer loans; and COP24.4trn ($12.2bn) in mortgages. Leasing and microcredit play a more modest role, accounting for 5.8% and 3.1% of total loans, respectively.

Bank deposits have also remained stable, around 66% of total assets, or COP258trn ($129bn) in 2013. Savings accounts are currently the most demanded instrument, accounting for around 50% of all deposits, followed by certificates of deposit and current accounts with 29% and 18%, respectively.

Financial depth of the system, measured as a percentage of GDP, continues to grow, reaching 40.7% at the end of 2013, a historic peak. Financial penetration, measured as the percentage of population with one or more financial products, also grew from 66.8% at the end of September 2012 to 69.3% the following year.

Performance

Total assets of credit institutions reached COP427.8trn ($213.9bn) by December 2013, growing 14.7% from the previous year’s level of COP372.8trn ($163.9bn). Except for the mortgage segment, which experienced annual growth of 28%, the sector’s gross loans performance marked a slight deceleration. However, total credit still grew at a faster pace than that exhibited by GDP, which translated into an increase in the financial depth index. Other segments that present growth are microcredit and leasing operations, with growth rates close to 17% in 2013, although their proportion of banks’ portfolios remains low.

Even though gross income grew from COP59trn ($29.5bn) in 2012 to COP68.4trn ($34.2bn) in 2013, profitability showed a slight deterioration. Net profit margin decreased from 12.5% in 2012 to 10.5% in 2013. Higher financial costs different from interest expenses reduced gross financial profit from 49.6% to 45.1% and operating profit from 19.7% to 17.2%. Return on assets (ROA) and return on equity (ROE) were therefore affected, ending at 1.7% and 11.9%, respectively, when one year prior they stood at 1.9% and 13.9%.

Provisions

Colombian banks have maintained low leverage levels and adequate asset management. The mortgage crisis of 1998-99 left valuable lessons that the banks’ management and regulatory institutions assimilated. The banks’ aggregate balance sheet remained stable, with deposits representing 64.4% of total assets by the end of 2013 while investment and equity levels, including reserves, accounted for 19% and 14% of total assets, respectively. Non-performing loans (NPL) remained manageable at 3.11%, while the coverage ratio stayed well above legal requirements at 144.2%. NPL levels in the mortgage segment showed an improvement, dropping to 5.44% compared to a level of 6.58% during the previous year.

Leading Players

As of 2013, the banking sector has been led by three groups: Grupo Aval, Grupo Empresarial Antioqueño and Grupo Empresarial Bolivar. Grupo Aval controls 28.6% of all gross loans and 29.1% of all deposits in the market through four independent entities: Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas. Bancolombia, the largest stand-alone bank in the country, belongs to the group of firms known as Grupo Empresarial Antioqueño. The bank has 21.6% of all deposits and 22.6% of gross loans. Davivienda, which is owned by Grupo Empresarial Bolivar, holds 11.2% of all deposits and 13% of gross loans. Between them Bancolombia, Grupo Aval and Davivienda control approximately 64% of Colombia’s total loans and 62% of all deposits. The portfolios of local banks are focused mainly towards commercial loans, which represent 39.1% of their assets, followed by 16% in consumer credit. Microcredit, mortgages and leasing operations have low participation in their total assets.

Market Leader

Bancolombia is the market leader in retail banking and, through Grupo Empresarial Antioqueño, insurance. With COP90trn ($45bn) in assets, Bancolombia holds the top position in both the mortgage and commercial segments, with almost 27% and 30% of the market, respectively. The bank has more than 28,000 employees, 819 branches, 4310 ATMs and 2162 banking correspondents in Colombia, and it has globalised operations, with a presence in Panama, El Salvador, Guatemala, Puerto Rico, Peru, Honduras, Nicaragua and Costa Rica. It closed 2013 with an ROA of 1.63%, an ROE of 11.81% and an NPL ratio of 2.66% LARGEST GROUP: Grupo Aval, through its subsidiaries Banco de Bogotá, Banco de Occidente, Banco AV Villas and Banco Popular, is the largest financial group in the country. The group leads in the commercial loans, consumer loans and leasing segments, with 31.6%, 28.1% and 41% market share, respectively.

Banco de Bogotá is focused on commercial loans, followed by consumer loans and leasing. It operates in Colombia through 665 office branches, 1532 ATMs and 1454 banking correspondents. The bank also has a presence in all of Central America through its subsidiary, BAC Credomatic. Banco de Bogotá closed 2013 with an ROA of 2.47% and an ROE of 12.28%.

Banco de Occidente began its operations as a regional bank headquartered in Cali and it expanded to the rest of the country in the 1980s. Banco de Occidente is the leading institution in the leasing segment, accounting for 29.4% of the market.

Banco AV Villas began operating in 1972 as a savings and loan specialised in providing financing to the construction sector and mortgages to home buyers. It obtained its banking licence in 2002 to offer a wider variety of financial services. Today, it focuses mainly on providing consumer credit and mortgages.

Banco Popular began as a government institution in the 1950s and was privatised in 1996. Banco Popular specialises in providing consumer credit through payroll loans, which are loans to consumers secured against future income. It is one of the most profitable banks in the sector, with an ROA of 2.40% and an ROE of 16.61% in 2013. At 2.07%, its NPL ratio in 2013 was also lower than the average ratio of the sector.

Standalone

Davivienda, the third largest standalone bank in Colombia, was founded in 1972 and focused on providing mortgages and savings accounts for households. In 1997, it obtained its banking licence and began offering a wider portfolio of financial products. Today, Davivienda has 5.7m clients in Colombia, 11,600 employees, 571 branch offices and 1563 ATMs. It acquired a presence in El Salvador, Costa Rica, Panama and Honduras through the acquisitions of Bancafé and HSBC’s operations in the region. Davivienda ended 2013 with an NPL ration of 3.51%, slightly above the sector’s average, an ROA of 1.56% and an ROE of 12.17%.

Foreign Players

Foreign institutions control 24% of total loans and leasing operations, and 25.5% of all deposits. In absolute terms, the portfolio of foreign banks is focused principally on commercial and consumer loans, which each represent 28.5% of the banks’ total assets. In terms of market share, foreign institutions have made a stronger effort to gain participation in the mortgage and consumer segments, where they have reached a total share of around 35%.

Some foreign banks entered the market in the mid1990s, such as Spanish groups BBVA and Santander, while M&A activity has introduced new international groups in recent years. Major players include BBVA – the largest foreign bank in the market – Chile’s CorpBanca and Falabella; Citibank, from the US; Canada’s Scotiabank; and Brazil’s BTG Pactual (see analysis).

Public Banks 

Bancoldex is a development bank that provides second-floor financing for small, medium and large enterprises. Its portfolio, consisting mainly of commercial credit destined for working capital or for asset acquisition, is valued at COP4.76trn ($2.38bn). Bancoldex also has products aimed at providing financing to companies in their early stages and promoting private equity and venture capital. The bank is trying to change its focus by providing non-financial services through programmes aimed at promoting entrepreneurship and business training.

Mortgage Lending

The mortgage segment has shown great dynamism, growing at a 28% rate between 2012 and 2013 and now representing 5.8% of the financial system’s total assets, surpassing leasing operations and accounting for almost 10% of total credit. The sector is divided into two categories, one focused on high-value housing, and the other on lower-income households through the Social Interest Housing ( Vivienda de Interés Social, VIS) scheme.

Mortgages destined for high-value housing have increased consistently and now represent more than 70% of the market, with the remainder geared to VIS. This trend is a consequence of a growing middle class. As a result of the mortgage crisis of 1998/99, regulations were set in place to prevent banks from lending more than 70% of the value of a house.

VIS mortgages are enabled through various subsidies and government support. A subsidy of up to COP13m ($6500) is offered to families with income below four times the monthly minimum wage. A hedging programme that began in 2009 has been successful in increasing house sales. Through a limited quota, an interest rate hedge of a 400 basis points discount against the mortgage’s interest rate is offered to VIS houses with a value up to COP76.5m ($38,250). In 2013, through the Plan to Boost Productivity and Employment, interest rate hedging was extended to houses with a value of up to COP198m ($99,000). In this case, the government offers a 250-basis-point subsidy while the financial system commits itself to reducing another 250 basis points on the interest rate.

Commercial Lending

Businesses finance themselves primarily through credit and loans granted by credit institutions. Commercial loans constitute the largest lending segment, accounting for 54% of the total loans outstanding in 2013, a proportion that has decreased slowly due to the growth of consumer credit, microloans and mortgages. Commercial loans grew 11.9% between 2012 and 2013, reaching COP145.9trn ($72.95bn). According to Banco de la República, businesses represent 45.6% of credit institutions’ borrowers. The level of indebtedness of the corporate sector with respect to GDP was 27.2% at the end of 2013. Credit from domestic financial institutions is their main source of financing (21.4% of GDP), followed by foreign credit institutions (4.7% of GDP) and bonds (1.1% of GDP). The average indebtedness ratio of the corporate sector in 2013 was 34.5%, with the utility sector having the highest ratio at 66.5%, followed by mining and transport, with 60.4% and 50.8%, respectively.

Consumer Credit

Consumer credit continues to grow at significant rates and now accounts for almost 30% of outstanding loans. A 17.4% growth between 2011 and 2012 slowed to 12.1% in the following year. The total value of consumer loans reached COP78.7trn ($39.35bn) by the end of 2013, while the number of bank clients with a consumer loan grew from 3.8m in the third quarter of 2010 to almost 5m in 2013. With respect to credit cards, the number of holders grew from 5m to 6.5m during the same period. According to Banco de la República, consumer loans represent 69.5% of the average household indebtedness level, with the remaining 30.5% originating from mortgages.

Leasing 

Leasing is a very dynamic segment with Colombia ranking second in Latin America in 2012, according to the total value of its leasing portfolio, and first when measuring the relative size of the leasing market with respect to the country’s GDP. In the past decade, leasing has become an important financing option for the productive sectors, showing an average annual growth rate of 20% between 2001 and 2013.

According to a recent study from the Colombian Leasing Companies Federation and the Centre of Economic and Social Investigations, the leasing portfolio reached almost $14bn in 2012. Bancolombia became the largest entity in the Latin American leasing market that year, with a portfolio of $5bn.

Finance leases account for 88.5% of the total, while operating leases represent the remaining 11.5%. However, operating leases have been growing at faster rates. Real estate leases occupy one third of the market share in both cases, followed by vehicles with 21% market share. The market is still highly concentrated, with the top two companies controlling almost 60% of the finance leasing market in various segments.

Outlook

The banking sector still presents growth opportunities in several segments such as credit cards and mortgages. Its penetration and financial depth are far from the levels reached in developed countries, which means there is ample potential for organic growth.

To achieve ongoing growth, the banks will need to explore beyond their traditional markets, which lie within the big cities. “Colombia needs to create a culture of favouring electronic payments over cash in order to reach its potential,” Gustavo Leaño, president of Credibanco, told OBG. “The first step is to stop discriminating against bank users. Taxes such as the four by 1000 should disappear and the excess bureaucracy faced by shops that want to incorporate electronic means of payments should be minimised.”

The international expansion of Colombian banks is likely to continue, but will depend on the success of recent acquisitions. However, future purchases may be larger and more expensive. The government’s infrastructure programme also presents business opportunities for both domestic and international banks. If the local market continues to provide options, foreign banks may also attempt to increase their participation.