Improving economic conditions prepare Colombia's banking sector for stable growth


Despite Colombia’s subdued economic performance over recent years and slowing growth across all major lending segments, the banking sector has remained relatively resilient. Measures taken by the national government and the Central Bank of Colombia (Banco de la República de Colombia, BRC) appear to have enabled the sector to weather the storm, and improving economic conditions should pave the way for a positive performance from the financial sector. Results for the first few months of 2019 show stable gains across all major segments, with interest rates continuing their downward trend.


As of June 2019 there were 26 private banks in operation, of which 10 were fully or partially foreign-owned, according to the Financial Superintendency of Colombia (Superintendencia Financiera de Colombia, SFC), the industry regulator. Of these, Serfinansa, which is linked to supermarket chain Olímpica, was the latest to join the market, in April 2019. Three large economic groups – Grupo Aval, Grupo Empresarial Bolívar (GEB) and Grupo Empresarial Antioqueño (GEA), a business conglomerate of companies based in Medellín – dominate the banking sector. Bancolombia, which is part of GEA, was the single largest banking entity at end-2018, with a 24.9% share of banking assets in the country.

In terms of market share, however, Grupo Aval was slightly larger, with its four constituent banking entities (Banco de Bogotá with 14.6%, Banco de Occidente with 5.7%, Banco Popular with 3.9% and Banco AV Villas with 2.2%) comprising 26.4% of total assets. Davivienda, which is part of GEB, also made up a large share of private bank lending, accounting for 13.7% of total assets. Combined, these three economic groups controlled almost two-thirds of bank assets in Colombia. The remaining one-third was divided between Spanish-owned BBVA, which had a market share of 10%, and other banks in the country, which each accounted for less than 6%.

Foreign Entities

Although the banking sector mainly comprises large, domestic entities, there are several leading global lenders present in Colombia thanks to the low level of restrictions on foreign entrants. Foreign banks accounted for 26.8% of total assets at the end of 2018.

In addition to BBVA, leading foreign entities in the country include Canada’s Scotiabank Colpatria, with 5.1% of total assets; Brazil’s Itaú CorpBanca (4.8%); US-based Citibank (1.3%); and Spain’s Santander (0.4%). Most of the foreign banks tend to operate in niche segments rather than open large branch networks or try to compete with the country’s largest lenders across all business lines.

Market Moves

The most recent high-profile merger and acquisition was Scotiabank’s purchase of Citibank’s Colombian consumer and small and medium-sized enterprise portfolio in July 2018, following the Canadian bank’s acquisition of local Banco Colpatria in 2012. The 2018 procurement, which was given the green light from the SFC, follows Citibank’s strategic decision in 2016 to sell its consumer operations in South America and focus on institutional clients. Strong prospects in Colombia’s consumer market have prompted an influx of retailers into the sector and an increase in credit cards. The first retail entrant to the market was Chile’s Falabella, which opened its banking arm in 2011, followed by Barranquilla-based Olímpica’s Serfinansa bank.

Other Lending Insitutions

In addition to private banks, which provide more than 96% of credit and leasing products in the country, there are a number of other lending institutions. As of the beginning of 2019 there were 15 special official financial institutions and five financial cooperatives, of which two were foreign, including US-headquartered JPM organ and French international banking group BNP Paribas. The country also has a number of development banks, including Financiera de Desarrollo Territorial, Banco Agrario de Colombia, Fondo Nacional del Ahorro, Bancóldex and Financiera de Desarrollo Nacional, which was established in 2011 to help bridge the financing gap for large infrastructure projects. The financial system also consists of a large number of entities engaged in lending or credit allocation yet do not fall under the jurisdiction of the SFC. Some of them operate within the law, often receiving support from the government, as is the case with a number of microcredit institutions in more remote areas. However, a number of high-profile cases of non-SFC-regulated lenders engaged in fraud and mismanagement have tarnished the reputation of the sector over the years.

Banking Depth

The banking system has become increasingly developed since 2005, with domestic credit to the private sector peaking at 52.3% of GDP in 2014 before contracting to around 46% in March 2019, according to the BRC. However, as the system progressively grew, private sector loans followed suit, with the credit portfolio up 6.5% year-on-year (y-o-y) in March 2019, led primarily by consumer and mortgage loans. Relative to other regional economies, and using the most recent available figures for all markets, Colombia’s private sector creditto-GDP ratio of 49.4% in 2017 lagged behind that of Chile, which stood at 112.6%; Bolivia (64.5%); Brazil (59.8%); and a number of other Central American countries, but comfortably outpaced Mexico (35.5%) and Argentina (16.1%). The penetration rate of consumer loans has increased since 2001, from 3% of GDP to 14% in March 2019, while commercial loans peaked at about 27% in 2016 before dropping to around 24% in March 2019. Meanwhile, mortgages stood at approximately 6.5% of GDP at the end of the first quarter of 2019.


As of March 2019 commercial lending stood at COP248.9trn ($85.1bn), accounting for some 53% of total banking lending. As commercial lending is the most important driver of lending in Colombia, a lack of dynamism across several projects – including the Fourth Generation road infrastructure programme, the Integrated Public Transport System and the electricity distributor Electricaribe – resulted in the decline of overall credit growth.

However, business confidence increased towards the end of 2018 and beginning of 2019. Loans to the commercial segment increased by 3.2% y-o-y in March 2019. With investment picking up during the first half of 2019, particularly across several key infrastructure projects, commercial lending is expected to continue to recover over the short term.


In recent years household consumption has been negatively affected by a number of factors, including the 2016 tax reform, which saw the value-added tax rise from 16% to 19%, and an increase in inflation and tightening monetary policy by the BRC. However, as these factors dissipated in 2018, and interest rates for consumer lending trended downward in line with central bank rates, household consumption picked up by 3.5% that year, and the consumer portfolio regained some dynamism. There was volatility in consumer confidence during the first few months of 2019, but consumer lending broadly continued to improve. Credit allocation to the segment grew by 10.5% y-o-y in March, albeit far behind the historic numbers seen in 2012, when the growth rate reached 25%. After commercial lending, consumer loans are the second-largest segment, accounting for COP138.7trn ($47.4bn), or 30% of total lending in March 2019.


In the wake of the financial crisis in the late 1990s, banks became very reluctant to lend to the housing segment – a trend that has prevailed until recently. While mortgage penetration reached 6.7% of GDP in late 2018, this remains low by regional standards with the penetration rate in Chile standing at 25.7%, Panama (21.9%) and Mexico (9.9%). Nevertheless, mortgage lending has emerged as one of the most dynamic segments, albeit with a small base, growing by 12.2% y-o-y and accounting for 13.8% of total lending in March 2019. Given the segment’s nascent development, there is significant room for growth in mortgage lending over the medium term.


Accounting for COP12.7trn ($4.3bn) in March 2019, or 2.7% of total lending, microlending is by far the smallest segment, and its growth rates tend to be more volatile than others. In March 2019 the segment expanded by 3.7% y-o-y, according to the SFC. There are around 2.5m micro-, small and medium-sized enterprises in Colombia, according to IDB Invest, and approximately 8600 advisers specialised in the segment as of April 2019, according to Asomicrofinanzas, a domestic association promoting microfinanciers. The disbursement of microcredits tends to follow a countercyclical pattern, with the sector experiencing its highest peak in the last decade during the third quarter of 2015, when it grew by 40%. However, lower economic activity also presupposes a rise in non-performing loans (NPLs) in this segment, with the number of clients remaining relatively stagnant in the last four years since 2015.


The NPL ratio has progressively deteriorated from a low of 3% in January 2016 to 5% in June 2018 across all loan portfolios amid the broader economic slowdown and higher interest rates. However, it has remained stable since, dropping only slightly to 4.9% in April 2019. Though NPL ratios in the mortgage segment (3.2%) and the commercial segment (4.9%) are lower than that of the consumer segment (5.4%), the former two did not improve over the 12 months to April 2019, unlike NPLs in the latter segment, which recovered from 6.1% over the period.

Nevertheless, NPLs are more than 100% covered through provisioning, with coverage running as high as 142.8% in consumer, 123% in commercial, 109% in mortgages and 100.1% in microcredit. It is worth mentioning, however, that provisioning has been on the decline, particularly among the commercial and mortgage segments in the last couple of years.


In February 2019 return on assets stood at 1.8%, improving on the levels experienced during 2017 and 2018, while return on equity also recovered to 12.4%. Enhanced performance across the sector can primarily be explained by the drop in spending on provisions. In this context, the solvency indicator dropped 0.31 percentage points and total solvency by 0.34 percentage points to stand at 11.1% and 16%, respectively – seven percentage points above the minimum requirements. Furthermore, in late 2018 the rating agency Fitch noted that the country’s banking system should remain adequately capitalised in the coming years and that local banks had some of the highest levels of capitalisation as a percentage of liabilities in the region.

Monetary Policy

After reaching a peak interest rate of 7.75% in August 2016, the central bank implemented an easing cycle as inflationary pressures decreased, progressively lowering the key interest rate and maintaining it at 4.25% since May 2018. While analysts had expected a progressive increase to 4.75% in 2019 and 5% in 2020, economic indicators from February 2019 changed those expectations. According to the BRC, stable inflation during the first months of 2019 at around 3% and a forecast of around 3.5% GDP growth in 2019 means there will likely be no substantial changes in the central bank’s interest rate policy for the 2019-20 period, assuming no adverse situations arise.


Colombia has traditionally been considered a conservative country in terms of its regulatory framework for banking, but it will still need to ramp up efforts to ensure that it meets Basel III guidelines by the 2022 deadline. To that end, the Financial Conglomerates Law came into effect in April 2019; it intends to increase regulatory oversight of 13 financial conglomerates – of which eight are international and five are local groups.

Among other measures, local and international entities with operations in other countries will need to engender a process of mutual equivalence with Colombian standards, enabling the SFC to oversee their operations and that of their subsidiaries regardless of whether or not they provide financial services. The law also facilitates the regulator’s ability to restructure these conglomerates, authorise their investments across other financial service providers and revoke licences. Stricter capital requirements will also be imposed. This is the first step to implementing Basel III standards, which will improve both the credit profiles and capital adequacy of banks. A roadmap for the implementation of the new requirements has been ongoing since 2011, and in 2018 the Ministry of Finance and Public Credit outlined a five-year transition period for banks to comply with specified capital requirements.

The regulator has also been moving towards relaxing regulation regarding the use of new technologies across the financial services industry. Following a change in the rules in 2018 that allows financial institutions to invest in early-stage start-ups, the SFC launched a sandbox to provide space for financial technology (fintech) projects to be piloted in a controlled environment. The sandbox is part of the regulator’s broader InnovaSFC programme, which also includes eHub, a service that directly connects the SFC with fintech developers; and RegTech, a project aimed at leveraging innovative solutions to further develop the SFC’s internal processes.

Going Digital

Operators have increasingly providing services online, and the value and volume of operations conducted online exceeded those made through physical stores in the second half of 2018. According to the SFC, 50% of all operations between clients and their financial service providers in 2018 were made over the internet, 13% through ATMs, 10% via point-of-sale machines, 9% at an office, 8% via mobile phones and 10% through other means.

The growth in digital banking parallels a significant increase in investment. In March 2018 Juan Carlos Mora, CEO of Bancolombia, announced plans to invest COP320bn ($109.4m) in domestic digital banking services, technology and security. This builds on investments the bank has invested in since 2016, which include $19.5m pledged to develop cybersecurity, $10.3m for analytics and big data, $5.6m for artificial intelligence and $1.2m to build synergies with fintech firms. Meanwhile, in a further effort to improve innovation, in February 2018 Bancolombia signed a partnership agreement with Plug and Play, a Silicon Valley-based platform designed to connect start-ups and entrepreneurs in specific industries.

Elsewhere, in September 2018 Scotiabank made an undisclosed investment in Colombian fintech start-up Zinobe as part of plans to boost digital investment by 63% in 2019, while BBVA Colombia pledged to invest COP150bn ($51.3m) per year in its own digital policy for the five years to 2023. Wit only 42% of banking clients utilising online services, the potential for growth in this segment is significant.

Payment Methods

Despite the increase in digital payment methods, the use of cash across the wider economy continues to grow, with the BRC highlighting that the number of bills in circulation grew at a compound annual growth rate of 10% during the last decade. This is in line with findings from the “Trend Report on Means of Payment 2018” by Spain-headquartered IT company Minsait, which noted that, of the people who own a bank account, 93.6% use cash in their monthly expenditure. The study also found that Colombians spend more per transaction with their credit or debit card than their Latin American counterparts, averaging COP270,000 ($92.34) compared to COP130,000 ($44.46). However, the volume of operations in Colombia were lower on average, as exemplified by the fact that most debit card transactions were made as ATM withdrawals instead of direct payments. According to the SFC, the number of credit cards in circulation as of April 2019 was 15.4m, up 2.8% y-o-y from 15m. Over the same period the number of debit cards in circulation rose 30.7m, up 8.3% from 28.3m to 30.7m.

A number of related initiatives are being implemented by different stakeholders. For example, banks are providing incentives for payments across selected points-of-sale, retailers are launching their own cards, and the authorities are debating whether to eliminate quotas on the management of debit, credit and savers cards. Cards have also been receiving a facelift, with banks increasingly including card verification codes with their debit cards so that they can be used across digital platforms.

According to a 2018 report by Americas Market Intelligence in partnership with Visa, 100% of all credit and debit cards in Colombia are expected to feature chip (EMV) technology by 2020. Indeed, the majority of point-of-sales machines are already equipped with the technology to accept these payments. In addition to EMV, the use of contactless payment technology is also gaining ground in Colombia and Latin America. “As is the case in many emerging markets, leveraging the potential of smartphones through the use of quick response codes or contactless scanning technologies could greatly increase the level of financial inclusion across the country,” Humberto Guihur, CEO of Visa Colombia, told OBG. This technology is expected to improve the efficiency of customer payments without compromising their security. “The development of an inclusive and secure digital payment strategy that makes use of new technologies, such as artificial intelligence or advanced analytics, implies the sharing of information across different players within the financial services value chain,” Guihur added. “Visibility over transactions is therefore paramount. Financial services can make use of neutral networks and allow encryption of single transactions.”

Financial Inclusion

According to the latest study on financial inclusion developed by the SFC and Banca de las Oportunidades, the proportion of the population with access to at least one financial product stood at 80.1% by the end of 2017, with the number of adults with active savings accounts growing from 15.3m in 2015 to 18.4m in 2017. While results are substantial, the gap in the access to financial services still varies greatly between urban and rural areas; the rate of access in rural and scattered rural areas stands at 65.1% and 54.7%, respectively.

In order to boost the penetration rate of financial products across the most underserved areas of the economy, a number of initiatives from the public and private sector have been launched, including an economic and financial education strategy that provides support to microfinance institutions, and partnership agreements – the most recent of which was signed between Asobancaria and the Colombian Agriculture Association in February 2019 to promote financial inclusion in rural areas. Nevertheless, most stakeholders agree that the use of new technologies will continue to be the biggest driver of financial inclusion, with President Iván Duque’s administration aiming to increase the number of individuals included in the formal financial system from 43% in 2019 to 50% by 2024, primarily through the use of digital solutions. This forms part of the government’s broader National Development Plan 2018-22.


The banking sector has already begun to show signs of improvement in line with macroeconomic indicators. The progressive drop in interest rates and convergence of inflation as part of the government’s plans are also expected to drive lending growth. In the commercial lending segment the 2018 fiscal reform could bode well for private investment in the coming years, but may have adverse effects on banks’ profitability, while the reinvigoration of major infrastructure projects is also expected to be one of the main drivers. However, new capitalisation requirements could limit the industry’s expansion somewhat. Nevertheless, a number of regulatory changes aimed at improving the sector’s stability and propelling it into the digital age are expected to take centre stage in the coming years and facilitate sector expansion, as the SFC increases its oversight over banks while at the same time seeking to promote the innovative development of its internal operations.

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The Report: Colombia 2019

Financial Services chapter from The Report: Colombia 2019

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