Friday, May 27, 2022

Colombian banks spread their wings

Bancolombia headquarters in Medellin
Bancolombia headquarters in Medellin

In December 1993 Pablo Escobar, the notorious drug trafficker, was shot while fleeing across a rooftop in his home town of Medellín, at a time when the city was known for cocaine money and violence.

Twenty years later and Colombia’s second city is more often associated with prosperous companies and impressive architecture, something exemplified by the headquarters of Bancolombia, the country’s largest commercial bank by assets, which is a gleaming $200m building the size of a cruise liner.

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“We make an effort to keep high standards when it comes to taking risks,” Carlos Raúl Yepes, the bank’s chief executive, says. “The confidence we inspire is founded on the security we offer and the guarantee that our management will stay away from financial risks.”

Bancolombia is emblematic of the long-held conservatism of Colombian bankers, but also their new international outlook and recently acquired “multilatina” status – a Latin American company with a presence across the region.

The bank has survived tough times – the city’s drug lords in the 1980s, a national credit crisis in the 1990s, and attacks by Marxist guerrillas in the early 2000s. After cementing their position at home, Colombian banks are now expanding across the region, buying assets sold by European banks.

Bancolombia, for example, snapped up HSBC’s Panama operations in February for $2.1bn. This was its third big central American acquisition, after buying El Salvador’s Banco Agrícola for $900m in 2006, and a 40 per cent stake in Grupo Financiero Agromercantil in Guatemala in December 2012 for $216m.

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Two years ago, Bancolombia’s majority shareholder, the Colombian financial services group Grupo Sura, made one of the region’s biggest deals with the $3.6bn acquisition of Dutch bank ING’s Latin American pension and insurance assets.

“Our companies have been experiencing important growth in the past years,” says David Bojanini, Grupo Sura’s chief executive. Although the Colombian economy has come off the boil, the number of non-performing loans is relatively low, banks’ returns on equity are in the teens and returns on assets are about 2 per cent.

“Most of the companies today are market leaders and we have acquired a market share that does not allow us to do more M&A activity, this means that all the growth we have to do in the future it has to be out of Colombia,” says Mr Bojanini. “Really if we want to use the cash that our companies are generating today, we have to invest overseas”.

Indeed, one of the Colombian banking sector’s biggest economic strengths is a near-oligopolistic grip on the local market. Grupo Sura’s biggest local rival, Bogotá-based Grupo Aval, with $72bn of assets, has nearly a third of local market share alone, while Bancolombia holds nearly 25 per cent of Colombia’s market.

The sector’s concentration has prompted the criticism, even from officials at the finance ministry, that there is still not enough competition in Colombia. There are a few new foreign entrants such as Canada’s Nova Scotia bank and Chile’s Corpbanca, but they have a smaller market share than the locals.

“For many years, international players did not pay too much attention to the country and when they decided to do so, the locals had already taken great advantage,” says Juan Muñoz, who heads JPMorgan’s office in Bogotá.

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“So in Colombia, the difference with other countries in the region is that the leaders are mainly locals. And precisely due to the market share Colombian banks have, and because they are big national players, the opportunities for inorganic growth must come from overseas. And within this context, Central America is a good opportunity.”

This domestic dominance provides a springboard from which to complete deals abroad, and ensures healthy returns. In July 2013, Grupo Aval announced plans to snap up BBVA’s Panama unit for $490m, and that was only a month after buying Grupo Financiero Reformador of Guatemala for $411m, through its Central America wing, BAC-Credomatic, a credit card issuer that the Colombian group bought for $2bn in 2010.

And in 2012, Davivienda, part of Grupo Bolívar, Colombia’s third largest financial group, paid $800m for HSBC’s assets in Costa Rica, El Salvador and Honduras.

“Colombia has occupied a solid place in Central America that should have naturally been filled by Mexico,” says Miguel Urrutia, an economics professor at the University of Los Andes in Bogotá and former central banker.

The focus on regional expansion is shared across the Colombian sector, funded partly through retained profits and partly through occasional capital raisings, such as last year’s move by Bancolombia in which the bank raised $1.2bn on the international debt markets.

In a December report on Andean banks, Fitch Ratings says that although Colombian banks have to “digest their latest acquisitions”, something that could put pressure on capital ratios, they “have sustainable profitability, which, coupled with ample loan loss reserves and adequate capitalization, constitute a cushion against unexpected losses”.

For some, this international diversification is a sign that Colombian financiers believe their golden days at home can only exist for so long before they face greater competition and deepening domestic capital markets that allow local companies to raise bond finance more easily.

Certainly Mr Yepes of Bancolombia is bullish. “We consider the Colombian market to be very attractive for local as well as foreign investors,” he says. “In Colombia, there are still big opportunities for financial activity.”


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