THE COLOMBIAN BANK MIRACLE
Banks in the midst of the worst global financial crisis in the past 80 years, Colombian banks are doing very well. How did they manage it? Will they be able to avoid the difficult international climate?
March 10, 2009
While the most powerful banks in the world are in intensive care waiting for a miracle to save them from bankruptcy, the Colombian financial system enjoys good health. That is surprising, because most would think that everyone would be suffering during this crisis. But it isnīt so. Financial results from 2008 show an enormous contrast. Unlike what is happening in the United States where bank losses have totaled 367 billion USD (2.6 percent of the GDP) and shareholders have lost big. In Colombia the 18 banks that operate in the market earned 3.8 trillion pesos (1.5 billion USD), 30 percent more than in 2007 and out of that amount about half will be returned over to shareholders via dividends.
Credit that has been scarce in many countries continues to be available in Colombia, as the banks have sufficient liquidity to provide loans. Last year, despite the economic slow-down, loan portfolios grew almost 18 percent and overdue debts are still at low levels, or at least are not worrying.
The Colombian government didn´t have to get involved in order to save banks, as is happening in almost every country because local banks have sufficient capital.
Although the Colombian financial shares have also been punished by the stock market, the impact has been worse in the case of the big U.S. and European institutions, whose share prices have collapsed. While the international markets lost confidence in the big international banks, in Colombia several financial institutions this year have issued bonds that have been snatched up by investors.
Another surprising fact has to do with employment in the banking sector. While colossuses such as Citibank, Bank of America and HSBC have no choice but to cut thousands of jobs, in Colombia banks such as Bancolombia, the country´s largest, is looking for personnel to continue its technological modernization plan. The bank president, Jorge Londoño, says that he doesn´t see the need to cut staff.
But how can it be explained that Colombian banks are doing so well during the worst global crisis in 80 years?
There are several reasons. María Mercedes Cuéllar, president of Asobancaria, the association of banks, thinks that Colombia is a very conservative country whose banking regulations do not allow for the development of the complex financial products that caused havoc on Wall Street and spread to the rest of the banking system. For example, banks here did not have in their balance sheets the so-called toxic stocks (mortgage-backed securities), which affected large banks in other countries.
For Sergio Clavijo, director of ANIF, the model of regulation undertaken by the Superintendencia Financiera, Colombia’s financial watchdog, is worthy of praise internationally. This regulation has allowed for 160 percent of the portfolio to be provisioned, which means that the banking entities have a large cushion to cover credits in the case that they aren´t paid back. Also, banks are obligated to maintain reserves during good time for the difficult ones. Also the Fondo de Garantías de Instituciones Financieras (Fogafín), the deposit insurance fund, has increased coverage from15 to 20 million pesos (about $8,000 USD).
Bankers who learned the lesson that put them in crisis ten years ago have also contributed to the Colombian financial systems´s good health. Today they are much more prudent and cautious in risk management. Julián Cárdenas, an analyst with Corredores Asociados, a stock brokerage firm, points out that at this time bankers are playing their cards well. “They are seeking protection in the government bonds that have increased in value,” he says. This allows them to make gains in their investment portfolios until demand for credit reactivates when the economic conditions improve.
But will the banks continue to successfully put up with the external turbulence? In the financial sector there is faith that it will. For Santiago Montenegro, head of ASOFONDOS, the association of pension funds, “There are many reasons to be optimistic. Loans to companies are flowing, interest rates are falling and creditworthiness indicators are positive.
Of course, bankers are optimists. Jorge Londoño, of Bancolombia, a bank that earned a trillion pesos last year, believes that the financial system will be able to escape unharmed from this situation and sees this occasion with a different eyes and full of opportunities. “Prices have fallen to very low levels. This is a very attractive moment to make acquisitions.”
Alejandro Figueroa, president of the Banco de Bogotá has similar expectations. His banks earned 650 billion pesos ($250 million USD) last year. “I don´t believe that the situation for the Colombian banks will get complicated this year.” He says that despite knowing that the economy, in the best of scenarios, will grow at around 2 percent. Figueroa believes it is possible that loan portfolios will deteriorate a little, but not so much to sound off alarms.
If national banks are healthy, can the same be expected from foreign banks here in Colombia? According to the experts, yes, because here the branches are independent with their own capital and they follow local regulations.
Some of the big International banks that arrived in Colombia will have to put the brakes on their plans of expansion due to the difficulties that they face abroad. The Royal Bank of Scotland, which had the worst results in business history in the United Kingdom, told the Superintendencia Financiera that it would continue to operate as normal, but said that in the next three to five years it may divest from several businesses and in some countries, including perhaps the Colombian operation.
For Citibank, who in the United States had to be partially nationalized, earnings in Colombia were good last year as they reported income of 156 billion pesos (60 million USD). It remains to be seen what will happen with their global expansion plans.
The other global giant, HSBC is also in Colombia and was the only bank that had a loss last year (10 billion pesos / 3.8 million USD). This bank announced internationally that it would have to close branches in the United States and lay off 6,000 employees. Although they have not made any statement about their Colombian operations, they will probably be cautious in the future.
Spanish banks in Colombia are calm, making profits and find themselves in a good market position. President of BBVA in Colombia Óscar Cabrera says that people can be absolutely sure with this bank.
As it is seen, Colombian bankers are looking at the external crisis from afar. Although nobody can claim victory, exports do believe that Colombian banks are far from a collapse. For Sergio Clavijo, director of ANIF, the country has a solid banking sector, one that is prepared to face the economic conditions of 2009 and 2010.
That opinion is shared by the head economist of BBVA bank Group, José Luis Escrivá, who says that Colombia holds a strong financial system, well-managed and with liquidity, that is just what lacks in banks internationally. For the first time, it can be said that while abroad it is raining, in Colombia the sun is shining.