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Colombian Banks:  Better Positioned?

Are Colombia's banks better positioned than others to face the global crisis? Four experts share their insights.

Inter-American Dialogue 

Last month, Colombia's largest bank, Bancolombia, upped its dividend by nearly 10 percent although the bank's president, Jorge Londono, warned that 2009 would be a tough year due to the current economic climate. What is the outlook for Bancolombia in 2009? Will Colombia's banking sector fare better in the crisis because of what some have called its strict regulation and a focus on credit-worthy investors, or is it as susceptible to the economic downturn as other banking sectors in the region?

Diego Alcazar, director of financial institutions at Fitch Ratings in New York: After several years of steady growth and sound performance, the economic deceleration will likely hinder Bancolombia's growth in 2009. Margins should come under pressure given its rising funding costs and an expected slower growth in higher margin segments that contributed to its past results. Slower growth combined with maturing portfolios—in particular consumer lending—should cause a deterioration of asset quality ratios, hence creating the need for higher provisions for loan losses. As a result, profitability should decline from the flattering levels of the past few years but, we expect—absent a severe deterioration of the current economic scenario—that the bank will still produce moderate profits and sustain its capital levels. As expected, given the rapid economic deceleration, Colombian banks' year-end indicators show some deterioration of consumer and commercial lending from its strong levels of asset quality; further deterioration should be expected during 2009 as growth prospects remain dimmed. This is somewhat mitigated by lower household indebtedness and by conservative mortgage loan to value figures when compared to the last crisis. However, reserves provide decreasing coverage of rising impaired loans and much of the recent growth in regulatory capital came in the form of 'plain-vanilla' subordinated debt which, in our view, has little loss absorption capacity; the quality of capital is further affected by often significant levels of goodwill. Thus, we view the loss absorption capacity of Colombian banks as tight relative to regional peers, leaving the banks more exposed to potential pressure on asset quality.

Jorge Lara Urbaneja, senior counsel at Baker & McKenzie in Bogota: The Colombian banking sector is probably in the best shape possible to face the difficult times ahead in 2009 for two structural reasons. The sector already had difficulty at the beginning of the century when emblematic names such Bancafe, Granahorrar and Banco Superior disappeared from the market. At that point, the tax for financial transactions was created with the main purpose of strengthening Fogafin. The tax was enacted, on a temporary basis, at 2 per thousand on financial transactions taking place in the country. Then it was raised to 4 per thousand and now this tax is here to stay. The second reason is of regulatory nature and refers to strict compliance measures imposed by the Financial Superintendency on the banking system. All these measures remain in place today. On the other hand, we should note that there has not been a 'credit democratization policy' promoted in Colombia, as has happened in other countries. Thus, Colombian banks have remained under a very conservative line of business under the strict supervision of the Finance Superintendency ahead of the crisis. Bancolombia is possibly foreseeing a reduction in credit demand for the remainder of 2009. This being the case, it may reduce the net worth vis-a-vis active credit ratio thereby strengthening the share profitability rather than keeping unused resources in its balance sheet. Also, the dividend increase should help the price of the Bancolombia stock, which has decreased substantially.

Felipe Carvallo Mendoza, banking analyst at Moody's Investors Service in New York: Moody's has a positive outlook on the financial strength rating for Bancolombia reflecting its strong franchise in all areas of commercial and retail banking and its leading market shares in Colombia. Its broad and deep customer base has provided an important platform for growth and improvement of its financial fundamentals during the past few years. The Colombian banking system is nevertheless challenged as are most banking systems in the region by tough credit and market conditions across the globe as well as a declining domestic economy. Though the uncertainties surrounding the decaying global economic outlook should stress the banks' asset quality, it should be manageable based on an ample capital cushion, supported by high pre-tax earnings and strong reserve coverage for problem loans. Colombian banks may however also be challenged by their more aggressive tier-one capital levels than those of their Latin American peers particularly when goodwill is deducted and government securities are risk-weighted at Basel II levels. Continued strong expansion of loan portfolios could thus put pressure on capital levels. The Colombian banking system has certainly benefited from a focus on credit-worthy clients, evidenced by adequate asset quality ratios and credit costs thus far. The regulator has comprehensive knowledge of the banking system, with established checks and balances, as well as prudent standards for provisioning and loan classification. During 2008, the regulator sent a wake-up call to the banking system by increasing the policy rate by almost 100 basis points, which, among other things, curbed portfolio expansion, especially for riskier consumer loans.

Carlos Urrutia Valenzuela, managing partner at Brigard & Urrutia in Bogota: Unlike banks in the United States and Europe, Colombian banking institutions are in a strong financial position and are well-prepared to weather the potential backlash that the global financial crisis may inflict upon the Colombian economy. To begin with, Colombian banks learned a hard lesson from the near-meltdown of the Colombian economy that occurred between 1998 and 2001. That crisis was likewise triggered by a real estate bubble. Banks engaged in lending to borrowers unable to service their loans. During that period, the Colombian government was forced to step in and provide liquidity to financial institutions. More than half a dozen commercial and mortgage banks were taken over and wound-up, while many others received liquidity facilities provided by FOGAFIN. Additionally, a government-owned institution acquired non-performing credits that were subsequently sold to investors, in many cases at a substantial profit. The Superintendency of Finance, Colombia's financial and securities market regulator, has made a significant effort toward ensuring that its regulations are sound and focused on strengthening the balance sheets of local institutions. The regulations did not permit financial institutions to invest in the types of toxic products that currently plague banks all over the developed world. Colombian banks have recovered from past mistakes. They have built a strong capital base to support aggressive growth and maintained healthy lending and investment practices. Thanks in good measure to the impressive performance of the Colombian economy, local banks have had their best-ever results in terms of profits and solvency ratios. Bancolombia is certainly is a good example. During 2007, it raised more than $670 million in capital in the international markets, by issuing ADR's and subordinated notes due in 2017. The bank's performance in the preceding years supports the decision to distribute 10 percent of its 2008 profits, without compromising its ability to face any difficulties that the Colombian economy might face during 2009.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.

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