Snapshot: What now for Colombia’s banks?

Ratings agency Moody’s expects Colombian bank asset risk to materialize in 2021, as loan repayment relief measures are phased out.

But high loan loss reserves built through 2020 should help mitigate the impact.

Provisioning – which dented profits last year – is expected to continue through 2021 amid sustained asset pressure.

Moody’s said: “Ample loan loss reserves strengthened in 2020, reaching 7.7% of gross loans on average across the banking system by year-end. 

“This provides an adequate protection to profitability and capital, but reserve coverage varies widely between banks, and hence, certain banks will likely need to step up provisions in 2021.”

Credit relief measures have been extended until June, Moody's said in a Colombian banking report.

Colombia started to implement Basel III capital requirements in January. 

Last year, Canadian giant Scotiabank said the biggest chunk of its provisions corresponded to unsecured consumer loans in Colombia and Peru. 

The Colombian banking system's problem loan/gross loan ratio was 3.7% in 2020, up from 3.2% in 2019. 

Economic recovery is expected to support improvements in the operating environment. Moody’s forecasts that Colombia's economy will grow 4.8% this year and 4.0% next, after a 6.8% decline in 2020, supporting stable operating conditions and business volumes. “However, growth is still subject to a modest and uneven recovery,” it said.

Earnings have been pressed by provisioning and low interest rates, but economic recovery is projected to support interest and fee income growth.

In 2020, the earnings of Colombia’s domestically owned commercial banks fell 53.6% to 4.10tn pesos (US$1.13bn), according to data from regulator Superfinanciera. Foreign commercial players posted a drop of 107%, which translated into a loss of 121bn pesos. Scotiabank Colpatria, Pichincha and Itaú Corpbanca each posted triple-digit drops in earnings as provisioning bit.

 2020 earnings of Colombia's domestic and foreign commercial banks. Source: BNamericas with Superfinanciera data.