August 27, 2010 / 6:08 AM / 9 years ago

ANALYSIS - Colombia's bank sector opening to investment

CARTAGENA, Colombia (Reuters) - Developed nations’ banks are still reeling from the global economic crisis, but Colombia’s banking sector looks attractive for foreign players in search of solid returns with safe regulations, solid profits and a robust recovery.

The Andean country is enjoying the benefits after surviving its own banking crisis in the 1990s, which battered the sector but also led to more rigorous regulation and consolidation of banks. Today, it boasts increased solvency and profitability.

“We’ve moved ahead, but we also do not have those sophisticated instruments that sparked the global crisis outside in the first place,” Asobancaria banking association chief Maria Mercedes Cuellar told Reuters.

“In reality, everything they are doing elsewhere outside now, we can say we have already passed through,” she said at the start of a banking industry conference in Cartagena.

Colombia currently has 18 banks with assets totaling more than $120 billion, or the equivalent of 43 percent of the country’s gross domestic product. That is much lower than the banking sectors in countries such as Brazil and Chile.

HIGH POTENTIAL GROWTH

Analysts and industry experts say the potential in Colombia’s banking sector lies in the modest level of penetration, or the population with bank accounts. It grew 10 percentage points in the last three years but is still only 58 percent — very small compared with Mexico, Chile and Brazil.

“We see two strengths: one is the performance of the sector and the other is the quality of supervision in Colombia, for which it is well recognized,” said Jorge Saza, a partner with consultants Sustainable Finance Partners.

“Colombia’s financial sector has a high profitability in Latin America,” he said.

In a move that reflected the sector’s strength, rating agency Moody’s last week marked Colombia’s banking system credit outlook as stable.

Only in 2009, when the country’s economy as a whole slowed to just 0.8 percent growth, Colombia’s banking system reported growth of 12.6 percent with net profits of $2.82 billion.

That profitability and stability are starting to attract foreign investment already flooding into the oil and mining sectors as the country’s long guerrilla war subsides and security becomes less of a worry.

Among new arrivals to the sector is Canada’s Scotia Bank, which purchased a local business of Royal Bank of Scotland and followed in the footsteps of JPMorgan Chase, which entered Colombia’s market earlier.

In the next few months, the sector’s financial watchdog is expected to approve deals to convert other financial institutions into banking entities involving Panama’s Multibank and Chile’s Falabella.

OBSTACLES, BARRIERS

Experts forecast that banking institutions from Brazil, the United States, Chile and Peru will make plays in the Colombian market in areas ranging from investment banking to the lower-end consumer market and eventually end up buying local banks.

“There are foreign banks interested in local markets,” said Leonardo Bravo, another partner at Sustainable. “And while the large banks may not want to sell now, the strategy is to enter into joint ventures, buy small banks and let them grow organically and even buy up mid-sized institutions.”

Still, there are obstacles to stimulating the sector, including a so-called “4-1000” tax on financial transactions that has restricted credit card use, put limits on interest rates and curtailed guarantees on real estate.

“The problem is that they need to remove some large barriers that have blocked development,” the banking association’s Cuellar said. “Larger investors still prefer to go where they don’t have those obstacles.”

While foreign banks look at the advantages of entering Colombia, local banks are also making their presence felt in the region. Banco de Bogota recently purchased Central America’s BAC Credomatic, following Colombia’s bank Bancolombia with its purchase of El Salvador’s Banagricola.

(Writing by Patrick Markey in Bogota; Editing by Dan Grebler)

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