Publish in Perspectives - Tuesday, September 6, 2016
The Medellin headquarters of Bancolombia, Colombia's largest bank. (Photo: Petruss)
Slower growth hurts Colombia’s banking sector, but it remains strong.
BY LATIN AMERICA ADVISOR
Though it has navigated the global slump in oil prices better than some of its neighbors, Colombia’s economy has still not been immune, as shown by indicators including slowing business volumes. How are Colombia’s current economic conditions affecting the country’s financial services sector? How has the central bank’s interest-rate tightening cycle affected banks? What are the biggest challenges Colombian banks face, and what strategies should the CEOs of Colombia’s banks be considering in order to thrive in the years ahead?
Jorge Lara Urbaneja, partner at Arciniegas, Lara, Briceño & Plana in Bogotá: Colombia’s financial services sector is stagnant. Financial entities do well when the economy does well. But today, the Colombian economy is shrinking with overwhelming inflation. The 3.5 percent growth forecast for this year is now being reassessed at 2.5 percent. Inflation reached 8.5 percent, the highest figure in years. But this change in the economy was expected in 2014 when taxes were raised with the promise that a ‘structural tax reform’ would come later. Besides, a steep reduction in oil and mining revenues, along with a lack of long-term productive investments in the country, accounted for a remarkable foreign trade deficit and, naturally, for a large local currency devaluation. Treating this as an inflationary environment, the central bank has been raising the interbank interest rate throughout the year, now set at 7.75 percent. Banks and credit institutions have reoriented active credit transactions to the short term with a variable rate, and are mainly directing them to existing and most-reliable clients. Prospects are more optimistic on the passive side, as interest rates on deposits have become very attractive. Thus, banks and other financial entities are generally strong financially. Pension and investment funds remain strong, and satisfy their client expectations. Those entities have been largely using their legal ability to invest in foreign assets. In general, Colombian banks have been growing their foreign facilities to serve local investors who operate abroad through their foreign subsidiaries. Indeed, the number of Colombians investing and operating outside the country is growing more than ever before.
David Olivares, senior credit officer for Latin America banking at Moody’s Investors Service: We have a negative outlook for Colombia’s banking system, reflecting our expectation that through 2017, business volumes will slow and asset risks will rise as low oil prices continue to be a drag on the economy. The economic deceleration will lead to a rise in unemployment while the peso’s significant depreciation over the past year will continue to fuel inflation, notwithstanding recent increases in the central bank’s benchmark interest rate. As a result, credit demand will decline and debt service capacity will weaken, especially among consumers and corporate borrowers. Banks have significant exposure to the oil and gas sector, and though the majority of these are to state-owned oil company Ecopetrol, which has weathered the oil shock reasonably well, negative surprises could yet emerge in other parts of these portfolios. Other asset risk drivers include large exposures in Central America, which is a riskier operating environment than Colombia. Although banks have prepared to manage the expected rise in loan delinquencies by building up reserves, capital remains a key weakness, stemming largely from banks’ reliance on capital instruments that do not meet international standards, keeping Colombian banks with the weakest core capitalization in Latin America. Slower loan growth and rising provisions associated with increased past-due loans will drive a decline in profitability, albeit from currently very high levels. Interest margins will also decline, though operating efficiency will remain strong as banks keep costs under control. Positively, funding profiles remain stable and liquidity is adequate, based on banks’ large holdings of Colombian government securities.
Marcela C. Blanco, associate attorney at Diaz, Reus & Targ LLP: Despite the current economic conditions, Colombian financial institutions remain sound with regulatory capital adequacy and persistently solid supervision. Recent advances in financial regulation and supervision have further expanded their ability to respond to changing conditions. However, if the problem concerns real economic externalities, the solution is perhaps to intervene in the real economy. A financial system needs to be harnessed to deliver the transition to sustainable development. A sustainable financial system is able to integrate environmental, social and governance criteria into the investment or credit decision-making processes, and to allocate resources in projects, financial assets or portfolios with a positive impact on sustainable development challenges. Integrating sustainable financing innovation into the Colombian banking sector improves the efficiency, effectiveness, competitiveness and resilience of the system itself. In this regard, the Colombian government has implemented three kinds of long-term development policies for green growth: strategic policies, operational policies and specific incentives. The strategic policies include the OECD Declaration on Green Growth and the National Development Plan 2014-2018, which defines a crosscutting strategy of sustainable development. The operational policies include the Institutional Strategy for the Articulation of Policies and Actions Related to Climate Change, which creates the National System for Climate Change (Sisclima) and the Sisclima Financial Committee. This category also comprises the Intended National Determined Contributions (INDC) and the National Green Business Plan at the Ministry of Environment. Finally, the government has developed specific incentives for green investments, such as economic incentives, tax-related incentives and research and development incentives.