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Cablegate: Strong Performance in the Colombian Banking Sector

This record is a partial extract of the original cable. The full text of the original cable is not available.

141320Z Sep 04

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

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