Moving into new markets: An open legal environment and strong currency allow domestic banks to blossom

The country has long been a small, relatively closed economy with a small banking sector. But recently, Colombia has been opening up to the world, particularly by signing multiple free trade agreements. As well, its banking sector is in good health, having escaped relatively unscathed from the worst effects of the global financial crisis. While Colombia is characterised by low penetration of banking services, implying a rich potential harvest for domestic organic growth, in recent years its banks have begun to look to the wider Central American region to fulfil their ambitions for rapid expansion.

With the recent retreat of several international banking groups’ from much of Central America to focus on core markets, Colombia’s banks were given a prime position to take advantage of this opening. They have seized this opportunity, embarking on a series of acquisitions that have seen them make moves to be leading regional players.

SHIFTING FOCUS: Stiff competition for domestic market share among the three largest banking groups has led all three to look to the regional acquisition trail. Motivations are manifold – a strong domestic currency reduces the effective price of acquisitions; other jurisdictions may provide a more accommodating regulatory environment; and foreign acquisitions offer diversification in terms of lending exposure, revenue generation and fundraising. There is also the prestige factor; none of the leading banks want to be left behind in the battle for national supremacy. More specifically, however, expansion in the domestic market through organic growth is a slow process, largely because of the still substantial informal sector, whereas regional acquisitions may harbour the potential for a more rapid improvement in the bottom line. Thus, foreign acquisitions are set to be important drivers of revenue growth and profitability for banking groups in the years to come. In certain instances, foreign subsidiaries may present an opportunity to raise funds by attracting deposits at lower cost than can be done domestically. As Colombian firms increasingly trade with and invest in other countries in the region, it became natural that the banks would seek to provide financial products and services in these markets. To do so, acquiring an existing financial institution is a far more attractive proposition than trying to establish operations from scratch.

SIMILAR MARKETS: The banks adopted a deliberate strategy of dipping their toes in foreign markets by sticking close to home first. Rather than trying to enter large, complex markets characterised by fierce competition, such as Brazil, they have looked to their Central American neighbours, who not only speak the same language but are also seen as being culturally close to Colombians. The legislative framework in the region is relatively open for foreign operators while, similar to the situation in Colombia, weak penetration of banking services means that these markets demonstrate significant scope for future growth. In short, Central America is the ideal environment for Colombian banks to apply business models that have reaped rewards in a market it shares many similarities with.

The banks’ solid track record for dealing with money laundering, crisis management and microcredit are likely to prove particularly advantageous in this regard.

While acquisitions are expected to add handsomely to the bottom line, they have the potential to also bring non-monetary benefits that can improve the banks’ operational capacity in their domestic markets. One acknowledged upside of Banco de Bogotá’s acquisition of BAC, for instance, was newfound access to the know-how and technology platform that underpins BAC’s strong presence in the credit card market across Central America. This is expected to prove useful not only in reinforcing the bank’s position in those regional credit card markets in which it is now a leading player, but also to help build operations in this market segment back in Colombia.

BANCO DE BOGOTÁ: In December 2010 Banco de Bogotá threw down the gauntlet in the first of a series of recent regional acquisitions by Colombian banks in the Central American region. The bank acquired BAC Credomatic and its $5.1bn loan portfolio from US conglomerate General Electric in a deal worth $1.9bn. At the time, this was the largest ever foreign acquisition by a Colombian firm. The deal was partially financed by a blend of $360m in cash and $1.29bn in equityconvertible debt, with the remaining sourced from a bridge loan by a consortium of international banks. With operations in Mexico, Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua and Panama, the acquisition of BAC cemented Banco de Bogotá’s presence across the region, with a particular focus on the consumer segment, into which it had been transitioning domestically since the middle of the last decade. For the reasons outlined above, BAC’s credit card operations were seen by Banco de Bogotá’s management as a particularly valuable prize. The acquisition not only improved the geographic diversification of Banco de Bogotá’s revenues and assets, but also fit neatly with its overall strategic orientation. Management believes that they can improve the profitability of BAC’s operations by applying the successful techniques used at Banco de Bogotá. It also expects to be able to use its know-how to extend BAC’s commercial lending operations across the region.

BANCOLOMBIA: The bank’s first foray into the wider Central American region came in 2006 with its acquisition of a controlling interest in El Salvador’s Banco Agricola for $900m. This deal would set the scene for those to follow insofar as the target bank was a leading player in its domestic market across a range of market segments, including retail banking, insurance and pension fund management. Even at this early stage, senior management signalled their intention to become an established regional player. More recently, Bancolombia concluded two rapid-fire deals that will see it significantly expand its regional footprint. In December 2012 the bank reached a deal to acquire 40% of BAM, the Panamanian holding company that owns Guatemala’s Banco Agromercantil, among others, for $216m. It envisages taking majority control of the holding company with some $2.23bn in assets and is one of the most important financial conglomerates operating in Guatemala. In February 2013 Bancolombia concluded a cash deal to acquire HSBC’s operations in Panama for $2.1bn. Assuming approval is forthcoming in 2013, the acquisition will add $7.6bn in assets, $5.7bn in loans and $5.8bn in deposits to Bancolombia’s operations in a country that saw GDP growth of over 10% in 2011 and 2012, and where it previously had only a small presence. The deal included HSBC’s brokerage, fiduciary and insurance activities, as well as its banking arm, ensuring Bancolombia’s presence across a range of market segments.

While the integration of two acquisitions in quick succession will prove challenging, Bancolombia’s successful track record in integrating Banco Agricola in recent years should ease concerns in this regard. In a few short months, Bancolombia has established itself as a force to be reckoned with across the region with a 52.2% share of the banking market in El Salvador, 13.1% in Costa Rica, 21% in Honduras, 22% in Nicaragua and an upcoming 18.8% in Guatemala. Once the latest acquisitions have been fully integrated, the diversity of the bank’s business will be greatly enhanced in terms of both geography and client base.

DAVIVIENDA: Not to be outdone by its larger competitors, Davivienda got in on the action in 2012 with the announcement of its first major foreign acquisition. In a cash-financed deal worth $801m, the bank acquired HSBC’s operations in Costa Rica, Honduras and El Salvador. The three units comprised 136 branches, $4.3bn in assets and $2.5bn in loans across three countries as well as insurers in El Salvador and Honduras, and a brokerage in Costa Rica. Davivienda’s management is aiming to increase the aggregate return on equity of three units from 10% to 15% over the coming years by improving efficiency and service quality as well as by increasing its focus on the corporate and retail segments. Having secured formal approval, in November 2012 Davivienda completed the takeover of the Costa Rican unit, with the Salvadorian and Honduran units likely to follow in 2013.

AHEAD: If Colombia’s currency remains strong and its interest rates low, there is no reason why its banks’ spending spree cannot continue. They are exceptionally well capitalised, generating significant profits that can be reinvested, and they are in a position to raise debt relatively cheaply if they need it. They are likely to continue to steer clear of large, complex markets like Brazil to focus on Spanish-speaking countries in Latin America and the Caribbean. Mexico, Chile, Peru and Uruguay all offer potential opportunities for future acquisitions. Meanwhile, the apparent need for European banking groups to continue resizing means there will be no shortage of acquisition opportunities. Indeed, the trend of regional expansion continued into the summer of 2013 as well, with Grupo Aval purchasing players in Guatemala (Grupo Financiero Reformador) in late June and Panama (BBVA Panamá) in late July.

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The Report: Colombia 2013

Banking chapter from The Report: Colombia 2013

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