US embassy cable - 04BOGOTA9243

UNCLAS SECTION 01 OF 04 BOGOTA 009243 
 
SIPDIS 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, ELAB, PGOV, CO 
SUBJECT: STRONG PERFORMANCE IN THE COLOMBIAN BANKING SECTOR 
 
 
1.   (U) SUMMARY. The Colombian banking sector appears to 
have finally recovered after struggling through a crisis from 
1999 through 2003.  Banks recorded record profits in the 
first semester of 2004 and the GOC continues to take steps to 
further strengthen the sector, such as fulfilling IMF 
commitments to privatize state-owned banks and strengthening 
regulations to meet international standards (septel).  The 
sector seems to be evolving into a multi-banking system and 
competition between national private banks (with over 50% of 
the market) and foreign banks (with 20% of the market) is 
intensifying.  However, only 35% of Colombians participate in 
the banking sector, the rate of non-performing loans is high, 
and the industry is heavily reliant on volatile securities. 
End Summary. 
 
THE SECTOR EVOLVES 
 
2.  (U)  Some Colombian economists note that the Colombian 
banking sector has moved from specialization to integration 
of banking activities since the 1990,s banking crisis 
(septel), which has helped Colombia strengthen its banking 
sector against future crisis. The Vice President of the 
Association of Colombian Banks, ASOBANCARIA, recently 
described the Colombian system as a multibanking system (a 
system in which banks have the capacity to participate in a 
variety of banking activities, thus diversifying against 
risk); however, in a separate meeting the senior economist of 
ASOBANCARIA, Caroline Baron, said the Colombian banking 
system is not technically a multibanking system because 
individual banks cannot fully perform a variety of services. 
One of Colombia's central bankers who criticized the 
Colombian banking system for being a patchwork of distinct 
financial entities in 2000 and blamed much of the crisis on 
this patchwork of services now says it is a multibanking 
system de facto and that, except for insurance and long-term 
investment operations, the Colombian Banking system can 
perform any kind of financial service. In his view, this 
movement toward multibanking has helped stabilize the 
Colombian banking sector. While there seems to be some 
disagreement about whether the Colombian banking sector has 
already become a multibanking system, all experts agreed that 
the steps to diversify banking activities has strengthened 
the industry post crisis. 
 
3.   (U)  The banking sector, as a whole, has shown record 
profits for the first quarter of this year, and profitability 
more than doubled (102 percent) in 2003. Recent reports show 
that banks (excluding those specializing in mortgages) earned 
629 billion pesos (USD 241 million) between January and July 
2004. Banks specializing in mortgages increase profits, as 
well.  Mortgage banks earned 217 billion pesos (USD 83 
million) between January and July 2004. In addition to 
increased profits, management and transparency are improving; 
39.7 percent of banks (up from 17.6 percent in 2001) achieved 
high management rankings when measured against 
Superbancaria's risk ratings (evaluating capital, assets, 
management, profit and liquidity). Financial institution 
portfolios grew 7.4 percent in 2003, with the largest growth 
in mortgage loans (28.1 percent).  February 2004 saw a 
non-performing loan to gross loan ratio of 9.4 percent. This 
is down from 11.2 percent a year earlier, but the numbers are 
still a concern to many bankers. 
 
STRUCTURE OF THE COMMERCIAL BANKING SECTOR 
 
4.   (U) Banks in Colombia, as described in the Organic 
Statute of the Financial System, are financial institutions, 
which receive deposits from the public through checking 
accounts, as well as time deposits, with the purpose of 
lending such deposits to the public.  Bankers in Colombia 
further classify commercial banks as mortgage, foreign-owned, 
and national.  Banks are the largest financial entities in 
Colombia, holding 84 percent of the value of total assets of 
credit establishments. 
 
5.    (U) From 1997 to 2000, 42 financial institutions merged 
in Colombia due to internal financial difficulties. Weak 
mortgage and commercial banks merged, with the resulting 
banks called commercial banks but continuing to operate as 
mortgage banks.  Mortgage defaults contributed significantly 
to Colombia's financial crisis of the 90,s because they were 
not well diversified; accordingly, the GOC passed a law in 
2001 designating all mortgage banks as commercial banks, 
allowing them to diversify their portfolios as an important 
hedge against risk.  Regulators said that these previously 
named mortgage banks have recovered; however, the mortgage 
banking business, itself, has not recovered. 
 
PRIVATE SECTOR COLOMBIAN BANKS 
 
6.    (U) Privately owned Colombian banks did not face the 
dire straits that mortgage banks faced during the late 
nineties, thus this industry continues to see strong profits 
this year.  Prior to the banking crisis, privately owned 
domestic banks held 20 percent of the system's financial 
assets.  In 2003, privately owned domestic banks held over 60 
percent of the total assets in the system.  While state-owned 
banks and mortgage institutions assets declined in the second 
half of the 1990s, the assets of private sector institutions 
actually increased.  The strong performance of these banks 
and the IMF's push to privatize the financial sector have 
been a contributing factors in the GOC's decision to sell off 
the remaining state banks. 
 
Privately-Owned Colombian Banks (Millions of Dollars) 
 
 
                       2001    2002     2003 
Total Assets         43,360   47,981   54,016 
Gross Loans          27,215   29,160   32,011 
Total Deposits       31,628   34,470   38,127 
Total Equity          4,737    5,113    5,973 
Net Income              332      688    1,170 
ROAA                    0.8%    1.5%     2.3% 
ROAE                   7.3%    14.0%    21.1% 
NIM                    5.1%     5.1%     5.5% 
Cost/Income           78.3%    69.5%    63.5% 
Cost/Assets            7.5%     7.2%     7.0% 
Equity/Assets         10.9%    10.7%    11.1% 
Gross Loans/ Assets   62.8%    60.8%    59.3% 
Investments/ Assets   23.9%    27.1%    28.0% 
NPL/ Gross Loans      11.1%    10.4%     7.8% 
LLR/NPL               65.2%    71.7%    84.5% 
 
SOURCE: Superbancaria 
 
STATE-OWNED BANKS 
 
7.    (U) Colombia's process of nationalization and 
privatization began after a banking crisis in 1982.  The GOC 
began nationalizing many failing banks after the 1982 banking 
crisis; however, the GOC then began to privatize these same 
banks in the early nineties.  This process was interrupted by 
the financial crisis of the late 90,s and now another wave 
of privatization is under way.  The GOC has announced it will 
sell or dismantle all state-owned banks except the 
traditional Banco Agrario.  The push for privatization comes 
from Asobancaria and private investors who see privatization 
as a way to foster a more competitive environment. 
 
8.    (U) In a potential setback for the government's 
privatization plan, the GOC failed to sell Bancafe, the 
nation's 3rd largest bank, in an auction in February 2004 
that generated no bidders.  While the failed auction could 
indicate limited international confidence in Colombian banks, 
some sector experts suggest that the GOC set too high of a 
price for the healthy but undercapitalized Bancafe.   An 
official at Asobancaria speculated that Bancafe did not sell 
because of perceived associations with a dependence on the 
agricultural sector and the fact that buyers did not want to 
be associated with a bank that had recently received a large 
government bailout.  Interestingly enough, just after the 
failed sale, the GOC announced in February 2004 that the 4 
largest state-owned banks (Bancafe, Banestado, Banco Agrario, 
and Granahorrar) earned USD 117 million in 2003 after posting 
millions of dollars of losses in 2002.  Carolina Baron noted 
that profits were realized industry-wide due to the increase 
in low interest checking and savings accounts.  Checking 
accounts are &cheap8 ways to obtain funds, so banks have 
been able to increase deposits while keeping costs low. 
 
 
Public Banks (Millions of Dollars) 
 
                     2001     2002     2003 
Total Assets         13,158  14,556   15,584 
Gross Loans           5,906   6,571    6,561 
Total Deposits        8,545   9,247    9,697 
Total Equity            945   1,106    1,249 
Net Income              124     188      305 
ROAA                   0.9%    1.4%     2.0% 
ROAE                  14.0%   18.3%    25.9% 
NIM                    1.0%    1.6%     2.0% 
Cost/Income           86.1%   86.8%    72.8% 
Cost/Assets            7.3%    6.6%     6.4% 
Equity/Assets          7.2%    7.6%     8.0% 
Gross Loans/ Assets   44.9%   45.1%    42.1% 
Investments/ Assets   30.1%   35.7%    42.1% 
NPL/ Gross Loans      15.7%   12.9%    11.1% 
LLR/NPL               81.5%   84.6%    88.5% 
 
SOURCE: Superbancaria 
 
 
FOREIGN BANKS 
 
9.   (U) Foreign banks in Colombia hold a smaller share of 
the market than domestic private banks, and their performance 
has not been as impressive.  Foreign banks in Colombia 
operate under the same regulations as private domestic banks 
and state owned banks.  These banks are not subject to 
foreign regulation, and must simply comply with internal, 
Colombian regulations.  However, foreign banks complain that 
they have experienced higher costs than smaller, domestic 
banks because, unlike smaller banks, they are obligated to 
comply with Colombian legislation that other banks simply 
disregard (such as a tax on certain deposited funds). 
Foreign owned banks faired well during the banking crisis, 
but currently the low volume of their business is increasing 
their unit costs due to the small scale.  These banks report 
the weakest efficiency ratios due to the contraction in their 
business volumes following the crisis; however, in 2003 they 
were the most effective in reducing their operational 
expenses when compared to other types of banks.  The ratio of 
non-performing assets to total assets is 58.3 percent below 
the ratio for the entire sector. 
 
 
Foreign Banks (Millions of Dollars) 
 
                     2001     2002     2003 
Total Assets        15,451   14,210   15,370 
Gross Loans          8,325    8,250    8,876 
Total Deposits       9,328    8,938    9,741 
Total Equity         1,569    1,417    1,659 
Net Income               3      -83      128 
ROAA                  0.0%    -0.6%     0.9% 
ROAE                  0.2%    -5.5%     8.3% 
NIM                   2.9%     3.2%     3.7% 
Cost/Income          93.8%    99.8%    83.2% 
Cost/Assets           7.8%     7.6%     7.0% 
Equity/Assets        10.3%    10.0%    10.8% 
Gross Loans/ Assets  53.9%    58.1%    57.7% 
Investments/ Assets  29.9%    26.1%    29.2% 
NPL/ Gross Loans      4.0%     3.4%     2.5% 
LLR/NPL             152.5%   196.6%   213.7% 
 
SOURCE: Superbancaria 
 
NEXT STEPS 
 
10.    (SBU) The Colombian banking sector has seen rising 
profits recently, but continued improvement is necessary.  In 
a speech at a major banking conference, the Dean of the 
Department of Economics at The University of the Andes, Juan 
Carlos Echeverry, mentioned that only 35 percent of 
Colombians utilize the banking sector (compared to 87 percent 
in the US).  In the beginning of the banking crisis in 1998, 
there was a steep drop in the numbers of savings and checking 
accounts.  These numbers began to recover in 1999 with 
savings accounts now having surpassed pre-crisis levels 
(currently 22.9 million); however, checking accounts are 
still lower than pre-crisis levels (from 2.1 million in 1998 
to 1.9 million in 2003).  Echeverry cited two reasons for the 
limited rate of service penetration. First, many see the poor 
(59 percent of the population is beneath the poverty level) 
as a credit risk.  Also, Colombia,s internal conflict has 
made it dangerous and costly for banks to open branches in 
rural areas.  Echeverry pushed for government and industry to 
work together to offer better opportunities for citizens to 
access the nation's banking system and noted that protected 
interest-bearing deposits and access to credit/capital are 
key benefits that should be extended widely to all 
Colombians. 
 
11.    (U) Fitch Ratings and bank regulators expressed 
concern over the banking sector's reliance on volatile 
securities related revenue.  Fitch also highlighted banks, 
need to focus on efficiency.  As the next steps of regulatory 
reform, GOC insiders are pushing for legislation that will 
reduce mandatory investments, eliminate distortionary taxes, 
improve creditors' rights, and increase legal stability. 
 
12.   (U) COMMENT. Regulators said they are pleased with the 
current outlook for the banking sector.  Non-performing loans 
are down (even though many have noted that they are still 
higher than they would like), capital levels look good, and 
there are no liquidity concerns.  The only concern they 
mentioned was that banks, portfolios are highly invested in 
government debt. 
DRUCKER