ROBUST, BUT UNDERPENETRATED

Colombia 2018 | FINANCE | REVIEW

Colombia can expect to sustain a stable economic trajectory, which should reflect positively on its financial services industry, although participation requires addressing.

Colombia's financial sector in toto, mirroring the broader economy, will reap macroeconomic vigor, the (slightly ruffled) peace dividend, and a government commitment to a vast infrastructure program. Investments in the latter have been rather delayed. The local banking universe, thus far, has provided 41% of 4G related funds, with 32% deriving from institutional investors, 16% from abroad, and 11% from Colombia's development bank Financiera de Desarrollo Nacional (FDN).

Galvanizing Growth

Central Bank (Banco de la República) Governor Juan José Echavarría told TBY that while inflation had scaled 9% in June 2016, “we closed 2017 with 4.09%, and the goal is to move to our long-term target of 3% in 2018.” Supportive of commercial investment, this decline in inflation “allowed us to reducepolicy rates by 325 points, from 7.75% to 4.75%.” He remains confident of a growth print of 3.3-3.5% in 2019.

The Banks

The bedrock of financial sector integrity, dating from 2005, was the newly consolidated supervision of the banking, financial, securities, and insurance sectors under the Financial Superintendency (FS). The move maximized checks and balances essential to sustaining investor confidence. To this we may add the ongoing adoption of Basel III capital standards and more extensive regulation of financial conglomerates.

Some Numbers

According to the FS, as of December 2016, in a heavily concentrated sector, the estimated combined assets of Colombia's major banks had reached USD183 billion. Two private financial groups, namely the Sarmiento Group (Grupo Aval) and the Business Group of Antioquia (BanColombia) accounted for over a half of total banking assets, the former around 27% of the sector and the latter at about 26%. At the time, total foreign-owned bank assets claimed roughly 28% of the sector total. Recent data puts the top five banks at around 81% of deposits. This compares with 58% for Argentina, 66% for Brazil, 73% for Mexico, and 78% for Chile, while Peru leads the metric with 92%.

Credit

In The Ascent of Money: A Financial History of the World, historian Niall Ferguson writes that “poverty is not the result of rapacious financiers exploiting the poor. It has much more to do with the lack of financial institutions (than) their presence.” In Colombia, long-term corporate and project finance is essentially the territory of commercial banks, where such loans normally have a maturity of under five years. In contrast, SMEs, which account for 90% of all companies, tend to rely on unofficial private lenders. Deposit credit to the private sector as of 2017 as a percentage of GDP was at just over 47% as contrasting with the US figure of 189%. The local deposit interest rate reached 6.8% in 2016 from 4.6% in 2015, having averaged 17.6% from 1986 until 2016, with a high of 37.23% in 1991 and low of 3.66% in 2010. Consumer credit in Colombia peaked historically at COP124.453 trillion in January 2018, up from COP24.362 trillion a month earlier. Private-sector credit, having peaked at COP574.361 billion in November 1998 and troughed at COP2.536 billion in April 1980, declined to COP216.968 billion in February 2018 from COP224.314 billion in January.

Pursuit of Inclusion

Limited inclusion spells potential for financial sector growth. Around 90% of Colombians regularly opt for cash payments, favoring a traditional bargaining opportunity. World Bank data indicates that of the 15+ age bracket, just 39% hold a bank account, far below the US print of 94%. This is being tackled by lateral means enabled by regulatory reform. For one, legislation in 2015 enables the financial licensing of non-banks, whereby initiatives such as mobile became a supervised reality.

In April 2018 it emerged that the World Bank division, the International Finance Corporation (IFC), is championing an inclusion-related “DigiLab” project to expedite the digital transformation of the financial sector throughout Latin America. Among the banks on the ground, efforts to provide appealing products, plus the knowledge to use them, are in evidence. Luís Enrique Dussán López, the President of Banco Agrario de Colombia, observed that, with education being vital, “we trained around 22,000 people per year up until 2016, but in 2017 we were able to train more than 800,000 people in economic and financial education.” Moreover, among a raft of products and services geared at fostering public trust of formal financial services are cell phone-enabled ATM use and a digital wallet for farmers reliant on biometric identification.

The Capital Markets

The Colombian Stock Exchange (BVC) is a full service, private, and listed company. In 2011 it was among the founders of the Latin American Integrated Market (MILA) with the Lima and Santiago Stock Exchanges, joined in 2014 by the Mexican stock exchange. Launched on August 29, 2011 the S&P MILA Andean 40 index is a measure of Chile, Colombia, and Peru's 40 largest and most liquid stocks traded on the MILA platform. As of April 11, 2018 the index had yielded three-year annual returns of 9.45%, while the one-year print was 27.53%. The YtD return was at 8.58%.

Recent Numbers

Returning to Colombia, we note a market with a dearth of IPOs. BVC data for 2017 points to securities under custody of COP487 trillion. Total operational revenues stood at COP229 trillion on a CAGR for 2013-17 of 12%. Revenue CAGR was at 18%. For the period, securities under custody saw a CAGR of 6%, while the figure for the equity market was -4.3%, for fixed income -2.4%, for FX -1.1%, and derivatives 20.3%. In terms of profitability the 2017 ROE print was at 3.9% with ROA of 17%. BVC Market Capitalization (MCap) stood at USD106.11 billion as of March 2018, with an MCap to GDP ratio of 28.74%. Historically the benchmark COLCAP index, which closed April 6 up 0.39% at 1,521, peaked historically at 1,940.38 in November 2010, with a record low of 1,051.25 in December 2015 and with sentiment in large part dented by the travails of oil. The 52-week range was 1,357.74-1,598.40.

Insurance

Insurance penetration, at around 2.4% of GDP, is less than half of the global average. While a rising middle registers as a familiar growth factor, the government has delayed key infrastructural investments of late. Yet in a cursory glance at the industry, is noteworthy that 15 of the world's key insurers and reinsurers have entered Colombia, boosting the capacity and depth of a market with 25,000 insurance intermediaries. Earlier this year, London-based insurer United Insurance Brokers expanded its Latam footprint with the launch of its Colombian vehicle UIB Seguros.

Awareness Driver

Compulsory auto liability auto insurance (SOAT) is raising general awareness of insurance, despite low penetration. By end-2015 SOAT had accounted for 8.8% of total written premiums. Yet the performance of this branch has been curbed by higher claims, including those resulting from technical fraud, as well as 80% of the public fleet being motorcycles, and currency fluctuations. Additionally, regulated tariffs spell inflexible pricing that commit insurers to aggressive cost control.
Seismic Bond

In February 2018, the World Bank finalized the issuance of a catastrophe bond that in the event of a major earthquake would yield Colombia up to USD400 million of insurance coverage. This formed a component of the historically largest USD1.36 billion bond encompassing seismic risk for the four Pacific Alliance nations of Chile, Colombia, Mexico, and Peru. The bond has proven a popular instrument with investors looking beyond correlation with economic or stock market performance.