COLOMBIAN BANKING SECTOR: REVIEW AND PROSPECTS

UNCLAS BOGOTA 002897 SIPDIS SIPDIS E.O. 12958: N/A TAGS: ECON EFIN SUBJECT: COLOMBIAN BANKING SECTOR: REVIEW AND PROSPECTS REF: BOGOTA 00010564 ¶1. (Summary) 2005 was a year of continued growth and consolidation for the Colombian banking sector, with banks registering a record 2.4 billion USD in profits, an increase of 46 percent over the previous year. Colombia's financial regulatory bodies were also consolidated in 2005 to improve general oversight and ensure compliance with international standards. The GOC is capitalizing on the current economic climate to continue the privatization of state-run banks. During 2005, the sector witnessed a record number of mergers, reducing the number of banks from 41 to 21. The recently concluded FTA will promote significant change in the regulatory environment, and should positively affect penetration rates. (End Summary). -------------- PROFITS GROW -------------- ¶2. The banking sector experienced 8.2 percent growth in 2005 (reaching a total value of USD 32.8 billion),driven by a 46 percent increase in profits. Much of the growth can be explained by an increase in the consumer credit segment, which grew 30.9 percent. Profits derived from consumer credit accounts totaled 1.5 billion USD, almost half recorded by the entire sector. Most experts attribute this spike in consumer credit to a tax-rebate implemented by the GOC to encourage more credit card (therefore traceable) transactions. In 2005, business loan issuances also grew close to 20 percent over 2004 while at the same time micro-credit disbursements grew 70 percent, making Colombia a regional leader in micro-business financing. Other areas of notable growth include foreign bank participation, which registered 38 percent increase, and an increase in gross outstanding loans of 45 percent. The only underperforming segment in 2005 was the agregate national mortgage portfolio, which fell 6.4 percent, despite increased loan issuances. Profits for 2005 by Bank BanColombia (Private bank) 330 USD Banco Bogota (Private bank 176 USD (Grupo Aval) Davivienda (Private bank) 119 USD Banco Agrario (Public bank) 94 USD Banco Popular (Private bank) 81 USD (Grupo Aval) Banco Occidente (Private bank) 80 USD (Grupo Aval) Colpatria (Private bank) 54 USD Granbanco (Public bank) 49 USD (BanCafe) Citibank (Foreign bank) 48 USD BBVA (Foreign bank) 47 USD AV Villas (Private bank) 38 USD (Grupo Aval) Megabanco (Public bank) 29 USD Banco Credito (Private bank) 28 USD BCCS (Foreign bank) 27 USD GNB Sudameris (Foreign bank) 21 USD Superior (Private bank) 16 USD (Davivienda) Santander (Foreign bank) 13 USD Banco Union (Private bank) 7 USD (for sale) Banistmo (Foreign bank) 6 USD ABN Amro (Foreign bank) 2 USD (in millions of dollars - exchange rate 2250=1USD) Privately owned Banks (USD millions) 2004 2005 percent growth Total Assets 67,870 87,163 28 Gross Loans 12,894 17,379 35 Total Deposits 17,533 22,929 31 Total Equity 2,705 4,006 48 Net Income 4,167 4,563 9 Cost/Income 40.7 33.1 Cost/Assets 7.1 5.2 Equity/Assets 11.1 12.4 Gross Loans/Assets 53.1 53.6 Investments/Assets 31.2 33.0 NPL/Gross Loans 3.8 3.3 Publicly held Banks (USD millions) 2004 2005 percent growth Total Assets 6,526 7,832 20 Gross Loans 2,370 2,959 24 Total Deposits 4,247 5,491 29 Total Equity 619 810 31 Net Income 943 854 -9 Cost/Income 39.6 33.6 Cost/Assets 5.8 4.1 Equity/Assets 9.5 10.3 Gross Loans/Assets 36.3 37.8 Investments/Assets 45.4 47.5 NPL/Gross Loans 3.9 3.9 -------------- Mergers and Acquisitions -------------- ¶3. During 2005 more mergers, acquisitions, and consolidations took place than in the previous 5 years combined. Overall the number of independently branded and managed institutions declined from 41 to 21. The most notable mergers were Banco Caja Social's absorption of Banco Colmena to become BCSC, Bancolombia's purchase of Corfinsura and Conavi, in addition to Davivienda's entrance into the consumer credit market via the purchase of BanSuperior. In the last 12 months, the number of credit cards and the volume of credit card transactions has increased 27 and 15 percent respectively. Experts agree the increases indicate at least some improved intermediation rates among previously underserved or untapped client segments. The World Bank recently ranked Colombia 5th among Latin American economies with a 27 percent rate of banking penetration. Colombia ranks above Mexico, which has only a 16.7 percent penetration rate, but lower than Bolivia which boasts a 42 percent penetration rate. -------------- REGULATORS UNITE -------------- ¶5. In late November of 2005 the Commission on Banking and the Commission on Securities merged to become the Finance Commission under the leadership of Agusto Acosta. The new commission monitors the sector along operational lines and by risk-product categories thus allowing commissioners to become experts in product categories or in a particular institutions management and operations. While Gerardo Hernandez, Executive Director of the Central Bank, has expressed concern that the fusion may create a tendency towards overregulation, most experts believe the consolidation of the two regulatory bodies will lead to greater efficiencies and an improved tool to combat money-launderering. -------------- SELLING FAILED BANKS -------------- ¶6. In 2006, Colombia's Fondo de Garantias de Instituciones Financieras (FOGAFIN - www.fogafin.gov.co),plans to administer the sale of 15 of Colombia's 40 state-held financial institutions (including failed stock brokerage firms, insurance companies, fiduciary companies and other lender-like cooperatives). On March 16, FOGAFIN completed the sale of Megabanco, a key provider of services to lower- and middle-income Colombians. Six compnaies, including two foreign companies, participated in the competition. Grupo Aval's Banco de Bogota won the bid, paying 5.2 times the bank's book value. The purchase gives Grupo AVAL a 27 percent market share in the sector and access to Megabanco's extensive national network of branch offices. Other privatizations planned for 2006 include a second auction for Bancafe (which failed to attract a bidder in 2004),the Instituto Fomento Industrial (a small business lender) and Caja Agrario (a traditional agricultural bank with an extensive domestic network). Fogafin expects that with two successful bank privatizations, Granahorrar in 2005 (reftel) and Megabanco this year, Bancafe will finally find a buyer. Other sales planned for 2006 include: - Banco Andino Colombia - Banco Intercontinental - Banco Central Hipotecario - Banco Standard Chartered de Colombia -------------- COMMENT -------------- ¶7. Throughout 2005, critics admonished the sector for colluding on interest rate prices and not aggresively seeking new clients in lower socio-economic groups. A recently published International Monetary Fund report on Latin American banking penetration rates shows that Colombia's banking penetration rate is close to 27 percent. Argentina and Brazil, which are often compared to Colombia each have 50 and 72.2 percent penetration rates respectively. Proponents of the sector disagree with these critics, and argue that the last 6 months of falling loan interest rates along with increases in credit and debt card accounts demonstrate that the sector is expanding its reach into previously untapped client groups. ¶8. The recently negotiated FTA with the United States will bring significant change to the regulatory environment of Colombia's financial sector. In part to meet its FTA committments, the GOC is preparing a comprehensive legislative package to present when the newly-elected Congress convenes in July 2006. The new regulations will allow fully integrated universal/multi-banking, improve lender repossesion rights, and address the sale of off-shore banking products. (End Comment) WOOD