Colombian banks resilient in the face of headwinds

Following years of rapid growth, Colombian banks have seen a significant slowdown in the growth of their loan portfolios in recent months on the back of slower GDP growth, a weaker peso and higher inflation.

Against this backdrop, BNamericas spoke to Francisco Alegrias, analyst at Lusiadum, about the overall outlook for banking sector growth, asset quality levels and profitability.​

BNamericas: What are your projections for loan growth in Colombia this year? Will this be affected by lower GDP growth and higher inflation?

Alegrías: Not only higher inflation and lower GDP growth, but also the monetary policy response to inflation is likely to affect credit growth in Colombia. The annual real growth rate in credit is expected to be around 4-5%.

BNamericas: What is the expected effect of the so-called 4G highway program in the country on the loan portfolio?

Alegrías: The program will bring higher dynamics and competitiveness to the whole economy. It will provide opportunities for lenders but will also increase the complexity of the financial setting in Colombia. In what concerns the loan portfolio, given wide funding needs, lenders can opt for loan syndication or consortium lending to avoid over exposure to infrastructure.  

BNamericas: What is your projection for asset quality levels in Colombia this year, and what will be the main drivers of changes in NPL ratios?

Alegrías: We expect NPLs in Colombia to be at around 3.5% at the end of the year. Overall, inflation eroding purchasing power of wages and higher interest rates are likely to cause difficulties for consumers. In the corporate sector, exporters can benefit from peso depreciation. However, the behavior of the corporate sector is expected to be linked to dynamics on oil-related industries.

BNamericas: What are the main risks for the Colombian banking sector this year? Do you see currency-related risks emerging following the depreciation of the peso during 2015?

Alegrías: Currency related risks could emerge via the debasing effect on capital ratios resulting from the appreciation of dollar-denominated assets when valued in local currency as well as on the quality of loans provided in foreign currency to unhedged borrowers. However, the Colombian banking system presents adequate and comfortable capital ratios and only about 8% of the loan portfolio is denominated in foreign currency, a low proportion when compared to regional peers such as Uruguay and Peru.

BNamericas: What is your projection for bank profitability in the current macroeconomic climate?

Alegrías: The increase in NPLs associated to banks' willingness to maintain coverage ratios above 100% is already affecting profitability. At the same time, tighter monetary policy will compress interest rate margins for lenders, further affecting profitability. Profitability indicators for banks are expected at around 2% ROA and 16% ROE.

BNamericas: Will major Colombian banks benefit from their Central American operations, which are largely dollar-denominated?

Alegrías: Presence in Central America is tricky. In terms of profitability, Colombia's top lenders can benefit, namely in a context of a relatively strong dollar.  

BNamericas: What trends do you see in the short term with regard to M&A and concentration in the sector?

Alegrías: Overall, Colombia's top lenders have a huge presence in the Colombian banking system and even in the whole economic panorama as they are part of large conglomerates, in some cases with activities in other sectors of the economy. Their position, relations and know-how limits the attractiveness of the Colombian banking sector to foreign entrants. Still, the 4G infrastructure program has potential to make the financial system more attractive.