Increased lending, greater consolidation and improved regulation drive banking in Colombia


Although the Colombian economy has been affected by a slowdown in recent years, the country’s banking sector has remained resilient. The majority of the impact has been felt in the external sector, particularly due to changes in the foreign exchange rate. Meanwhile, lending growth remained relatively strong until mid-2016, when the combined effects of weak investment and higher interest rates had a noticeable negative impact on commercial lending. Nonetheless, even as GDP growth slowed during 2016, the share of the financial intermediation sub-sector grew from 6% to 6.5%. Lending is expected to pick up as the economy accelerates through 2017, while other indicators – such as non-performing loans (NPLs), profitability and capitalisation – remain relatively robust.

Upward Movement

Since the turn of the century, private sector credit as a share of the economy had been growing strongly until 2014. This upward trend can be expected to reassert itself over the coming years as the economic environment improves, and as efforts to increase financial inclusion – as well as initiatives such as greater investment in digital banking platforms (see analysis) – continue to bear fruit.

Despite limited formal barriers to entry, foreign players have generally chosen to compete in targeted segments rather than open up large branch networks. The competition dynamic has therefore not greatly improved in recent years while the leading incumbents retain their dominant market positions. Local banks, however, have been leading the pack in terms of expanding in Latin America and the Caribbean, having invested some $11bn since 2008 to establish or consolidate market presence across the region, with a particular focus on the Central American assets of European financial institutions exiting those markets. While this expansion has slowed in recent years, these acquisitions are making significant contributions to the parent banks’ bottom line.


According to the Financial Superintendency of Colombia (Superintendencia Financiera de Colombia, SFC), the industry regulator, there were 25 private banks in operation at the beginning of 2017, of which 10 are in full or part foreign ownership. The banking sector is highly concentrated in the hands of the three large and long-dominant economic groups in the country: Grupo Aval, Grupo Empresarial Antioqueño (GEA) – a business grouping of companies based in Medellín – and Grupo Empresarial Bolívar (GEB). The single largest banking entity, with a 25.25% share of all private bank lending in the country, is Bancolombia, part of GEA. However, Grupo Aval is slightly larger in terms of market share, with its four constituent banking entities comprising 26.2% of the total (Banco de Bogotá, 13.05%, Banco de Occidente, 6.66%, Banco Popular, 4.15%, and Banco AV Villas, 2.34%). Davivienda, part of GEB, makes up another large share of private bank lending, accounting for 14.36% of the total.

Together, these three economic groups control nearly two-thirds (65.81%) of private bank lending in the country. Spanish-owned BBVA, also has a significant market share, at 10.04% share of private bank lending, while none of the other banks in the country account for more than 6% of the market.

Foreign Presence

Although the banking sector is dominated by large, domestic businesses, there are few restrictions on foreign entrants and several leading global banks are represented in Colombia. Foreign banks, of which BBVA is the largest, accounted for 25.8% of private bank lending in Colombia at the end of 2016. Other than BBVA, leading foreign players in the country include Banco Corpbanca, Banco GNB Sudameris, Colpatria, Santander, and Citibank, the latter of which announced in November 2016 a reversal of its plan to sell-off its consumer banking operations in the country. Most of these foreign banks tend to operate in niche segments rather than trying to compete with the largest players across all business lines or opening large branch networks.

According to Rafael González, president of BRC Standard & Poor’s, “Foreign banks find it challenging to grow because they are often reluctant to lend at available margins and because local banks are already so dominant in consumer lending.”

Other Credit Institutions

While the private banks extend more than 90% of credit in Colombia, there are also a number of other players. At the beginning of 2017 there were five financial corporations (of which three are foreign), five financial cooperatives, 15 special official financial institutions, and 11 registered development banks. Of these, only the latter group extends a significant amount of credit, accounting for 6.16% of the total. The most important actors are Financiera de Desarrollo Territorial, Banco Agrario de Colombia, Fondo Nacional del Ahorro, and Banco de Comercio Exterior de Colombia. In addition, the Financiera de Desarrollo Nacional, a national development financing institution, was established in 2011 to help bridge the financing gap for large infrastructure projects. Even the largest of these institutions, however, lends less than the smallest bank in the Grupo Aval conglomerate.

Besides these formal credit institutions, the financial system consists of a large number of entities engaging in lending, such as factoring and payroll lending, but which do not fall under the jurisdiction of the SFC. A number of high-profile cases of fraud and mismanagement have unfortunately tarnished the reputation of this entire segment in recent year, according to Luis Carlos Rodríguez, the president of Covalsa, a local company that offers financial solutions to businesses. “This is a pity, because it can constrain legitimate growth in the financial services sector, including the responsible provision of credit to those unable to access lending from the traditional banking sector,” Rodríguez told OBG. “What we need is sound regulation across the entire financial sector as well as stepped-up efforts to improve financial education, so consumers are more aware of the types of products available,” he added.

As a result, the authorities are making efforts to implement a new regulatory regime, having introduced a draft law in December 2016 to update the existing Law of Payment Orders (Ley de Libranza). Passage of the updated law is anticipated in 2017.

Market Moves

After rapid regional expansion by the leading Colombian banks during the 2009-14 period, this activity has slowed in recent years. Foreign investment has continued at a moderate pace, however, with Bancolombia announcing in January 2016 that it was increasing its stake in Guatemala’s Banco Agromercantil to 60%, two years after taking a minority 40% stake in the lender.

In September 2016 Bancolombia also announced the opening of a $55m operations centre with Banco Agrícola in El Salvador. Merger and acquisition activity has been rather subdued during the 2015-16 period, with smaller deals becoming a more popular means of consolidating local market positions. In early 2016, for example, Davivienda completed its absorption of Bolivar Leasing, which served to extend its market share in this segment. Similarly, in October 2016, Bancolombia and Leasing Bancolombia merged into a single company.

Banking Depth

Having peaked at 37.3% of GDP in 1984, and at 36.5% of GDP in 1997, private sector credit in Colombia then experienced a lost decade. Credit in the private sector fell as low as 21% of GDP in 2000, regaining its 1997 level only in 2007.

The banking system has become increasingly deep over the past decade, with credit peaking at 52.6% of GDP in 2014 before contracting to around 47.1% in 2015. Relative to other economies in the region, Colombia lags behind Chile (111%), Brazil (67.9%), Bolivia (58.1%) and a number of smaller Central American countries, but comfortably outpaces Mexico (32.7%) and Argentina (14.7%).

The combination of improved economic growth and reduced interest rates should spur lending again in 2017 and lead to a further deepening of the financial system over the medium term.

Credit Growth

From nominal levels above 20% in early 2012, growth rates in the bank lending portfolios have since trended lower as the economy has slowed. Lending was growing at double-digit rates even until mid-2016, but this growth slowed significantly over the second half of the year as the central bank raised interest rates to dampen inflationary pressures, and as economic growth slowed further. In the year leading up to January 20, 2017, growth in lending portfolios had fallen to 7%, as the total nominal amount reached COP401trn ($120.3bn). While a moderate rise in lending is expected throughout 2017, particularly as interest rates fall, it is not expected to surge. Camilo Pérez, director of economic research at Banco de Bogotá, has forecast nominal lending growth of just 8% for the year.


Accounting for some 56% of total bank lending, or COP224.6trn ($67.38bn), by late January 2017, commercial lending is the most important driver of overall lending. As such, the sharp slowdown in growth in this lending segment from around 16% at the start of 2016 to 2.7% by late January 2017 – implying a credit contraction in real terms – was the most important driver in the overall decline in credit growth over the period. Weaker investment, which contracted by 2.9% in Q4 2016 (see Economy chapter) was in turn one of the most important drivers in reducing demand for commercial loans. It is expected that investment, particularly in the infrastructure sector, will pick up over the course of 2017, helping the economy as a whole accelerate from 2016 levels. This should spur a recovery in commercial lending.

Consumer Lending

With growth rates of around 25% annually back in January 2012, consumer lending was once the most dynamic borrowing segment. Although it has lost some of this dynamism, with growth rates having halved by early-2014, for example, it has remained among the most resilient lending segments over the past two years.

Despite record-low consumer confidence indicators in January 2017, consumer lending growth had actually started to tick up, reaching 13.4%. After commercial lending, consumer loans are the second-largest lending segment, accounting for COP112.7trn ($33.81bn), or 28% of the total.


Strong growth has been in evidence across both the government-subsidised and non-subsidised mortgage subsegments. Overall mortgage lending has been the most dynamic segment, with annual growth of 13.6% by late January 2017.

Although down from levels higher than 20% seen as recently as the middle of 2014, this growth is nonetheless impressive in light of the prevailing macroeconomic environment. Following the financial crisis in the late 1990’s, banks had become very reluctant to lend to the housing segment; a trend that has prevailed until recent years. This means that there remains some significant room for growth in mortgage lending over the medium term.


Accounting for only COP11.2trn ($3.36bn) in January 2017, or 2.8% of total lending, micro-lending is by far the smallest segment, and its growth rates tend to be more volatile than others. In January 2015, for example, it had been the most dynamic segment, with a growth rate around 20%, but this had fallen to around 4% by early 2016. Over the course of 2016 growth improved modestly, reaching 7.2% by the end of January 2017, in line with the aggregate credit growth rate.

Balance Sheets & Results

As of 31 December 2016 Colombia’s financial system had assets of COP524.3trn ($157.29bn), up 8.8% year-on-year. Foreign institutions accounted for 27.3% of the total. Liabilities amounted to COP453.5trn ($136.05bn), of which 28.6% were foreign, while capital totalled COP70.8trn ($21.24bn), of which 19.8% was foreign. Meanwhile, net income for 2016 amounted to COP11.2trn ($3.36bn). of which only 10.4% accrued to foreign-held institutions—up 22% on 2015. This meant that return on equity improved from 14.36% in 2015 to 17.5% in 2016, while return on assets improved from 2.19% to 2.61% over the same period.

Npls Remain Stable

Even amidst the broader economic slowdown and higher interest rates, the increase in NPLs was not particularly significant in 2016, reaching 3.3% across all loan portfolios by November of that year. This was due in part to the domestic economy having been relatively shielded from the worst effects of the slowdown, coupled with the fact that local institutions do not have significant unhedged exposure to debts that are denominated in US dollars or other foreign currencies.

NPLs were somewhat lower in the commercial (2.5%) and mortgage (2.3%) lending segments, with the trend relatively flat during 2016. By contrast, NPLs in the consumer (5.1%) and microcredit (7.4%) segments were higher and rising more steeply. With the exception of the microcredit segment (95.4%), these NPLs are more than 100% covered through provisioning. Coverage runs as high as 163.8% in the commercial segment, 136.8% for mortgages, 127.2% for consumer loans, while the aggregate is 142.3% across all lending segments.

NPLs are often regarded as a lagging indicator, deteriorating only some time after macroeconomic developments have begun to weigh, suggesting that further deterioration could be a possibility during 2017. Consumer lending portfolios could come under particular pressure as the unemployment rate ticks up during the year, for example.

However, financial pressures on firms and households may be offset by the Central Bank’s decision to embark on an interest rate easing cycle in December 2016. “The Colombian banking sector has not seen a significant rise in NPLs last year. However, looking ahead we see some macroeconomic challenges, which will have an impact on the sector, especially central bank decisions,” Juan Carlos Mora, the president of Bancolombia, told OBG.


Having reached a peak of 17.3% in February 2013, the capitalisation rate of the banking sector as a whole has declined only moderately since that time. It has fluctuated – for the most part – within a narrow 14-16% band, and stood at 15.3% at the close of 2016, far above the regulatory minimum of 9%. Within the banking sector, however, capitalisation rates vary widely, from a low of 11.02% at Banco Popular to a high of 40.18% at the relatively small Banco Multibank.

Among the leading banks, Banco de Bogotá was operating with the highest capitalisation rate of 20.85%. Bancolombia’s, meanwhile, was a little above the industry average, at 15.92%, and Davivienda’s was somewhat below it, at 13.88%. BBVA, the leading foreign player in the sector, was operating with a lower capitalisation rate of 12.94%, but confident in the knowledge that it could call on the capital of its parent bank in case the need should arise.

A number of rating agencies have signalled their concern about capitalisation levels among Colombian banks, particularly those that have operations in Central America. In July 2016, for example, Moody’s revised its outlook for the sector from “stable” to “negative”, citing slowing business volumes and the challenging economic environment. It is possible that some of the banks will be required to raise fresh equity capital or otherwise restructure their balance sheets over the coming years to meet more stringent capital requirements as the country gradually transitions to the Basel III framework.

However, analysts such as Banco de Bogotá Camilo Pérez argue that these concerns arise from a difference of opinion over the treatment of intangible assets in the calculation of capital reserves. Yet since the SFC is working to resolve this issue, some players argue that the big banks will not necessarily need to raise fresh capital, and could lead the rating agencies to withdraw their alert in due course.

Monetary Policy

As inflation pressures mounted in recent years, the Central Bank of Colombia – Banco de la República – moved to hike interest rates from late 2015 onwards, increasing the monetary policy rate from 4.5% in August 2015 to a peak of 7.75% in August 2016. In December 2016, however, the central bank implemented an easing cycle as inflationary pressures decreased, surprising the markets with a reduction of 25 basis points. After pausing in January 2017, the bank reduced the rate by a further 25 basis points at its February meeting, by April 2017 the nation’s key interest rate was at 6.5%. While analyst opinions differ on the likely pace of further easing, there is a consensus around the trajectory, as inflation pressures continue to ease. For its part, Colombia’s banking association, Asobancaria, projects that the reference rate will fall to 6% by end-2017, while some more bullish analysts foresee even more aggressive central bank action. The shift in Colombia’s monetary policy has had the expected impact on debt markets, with the yield curve on domestic public debt bonds– known as TES bonds – flattening during the early weeks of 2017.


Colombia began transitioning to the Basel III regime as early as 2012, with the revised definition of Tier-1 capital. In 2014 the SFC began using greater instruments to monitor banks’ capital. Ernesto Murillo, the director of operational risk at the SFC, told OBG that reforms will be necessary to bring the regulated institutions up to Basel III standards, but that the transition should be finalised between 2019 and 2021. “For example, we still need to develop and implement capital buffers that are systemic and counter-cyclical,” he said. “We also need to look at other related concepts, such as how to treat intangibles as part of capital calculations. Another important recent reform has been the implementation of IFRS accounting standards in 2015, which became obligatory for all entities in 2016,” he said.

For 2016 and 2017, one of the most important regulatory initiatives rolling out relates to the internalisation of risk by the large financial conglomerates, including the consolidation of group cross-border activities. This is an important step towards the full implementation of Basel III. According to the SFC, this is being phased in over a three-year period, during which stress tests will be carried out on the banks for purposes of internal monitoring, although they will not yet be made public.

As part of these efforts to regulate conglomerates, congress was in the process of revising the Law of Financial Conglomerates (Ley de Conglomerados Financieros) during the first quarter of 2017. It was envisaged that this would beef up and formalise the SFC’s existing powers to regulate bank holding companies in the country.

Financial technology (fintech) is another burgeoning area of the banking and financial sector which is developing quickly, but is not yet well regulated. “Regulators are working to get ahead of the curve in terms of regulating fintech,” Murillo told OBG.

Financial Inclusion

According to the World Bank, 61% of Colombians over the age of 15 do not have a bank account, a figure much higher than the average 49% for the Latin America and Caribbean region as a whole. Nonetheless, the authorities have been making progress in creating a more enabling environment through targeted policy initiatives.

Recent years have seen sharp increases in the number of Colombians making use of internet and digital banking, with strong growth expected to continue (see analysis) as technology expands. This promises to be a boon for financial inclusion.


The banking sector should benefit from an improving macroeconomic environment over the course of 2017. Juan Pablo Espinosa, the director of economic research at Bancolombia, told OBG, “Falling interest rates should spur lending growth without necessarily hitting profitability, as would be the case in many advanced economies, where interest rates and margins are more closely correlated.”

Commercial lending for infrastructure projects is likely to be an important driver of growth in both private sector credit and the economy as a whole over the 2017-18 period. To a certain extent, delays in the execution of such projects could push back the timeline for such effects to become apparent.

Over the longer term, the extent to which private sector credit as a share of the economy lags behind other countries in the region suggests there is still significant room for organic growth. Similarly, the still low rate of bancarisation suggests that financial inclusion efforts should underpin credit growth, as well as continued investment and innovation in digital banking. Moreover, increased formalisation in the labour market and a growing appetite for banks to lend to small businesses is likely to continue to support credit growth throughout 2017 and beyond.

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The Report: Colombia 2017

Banking chapter from The Report: Colombia 2017

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