Ever since creating Colombia’s largest bank in a 1997 merger, Jorge Londoño, the president of Bancolombia, always knew the time would come for a major capital-raising operation.
True to that plan, Bancolombia has raised $176 million through an equity offering on local markets, selling more than half the shares to international investment funds. Unfortunately, instead of using all this fresh capital to prepare for expansion, Bancolombia – stuck with heavy losses and non-performing loans caused by Colombia’s economic crisis – will use much of its new capital to wipe the slate clean.
Relieved of the need to make further heavy provisions for bad loans, and with improved capital ratios, the bank believes it is now better positioned than its domestic rivals to take advantage of Colombia’s tentative economic recovery.
Londoño says, “in the second half of last year we concluded that capitalization was indispensable, after looking at the impact of the crisis on the financial sector and on this institution. We wanted and needed to make significant provisions.”
The share sale was a considerable achievement given the barrage of negative news from Colombia as its civil conflict escalates. The country is emerging from a steep recession and is struggling to find its way back on to radar screens of international investors.
But Londoño recognizes that the bank’s “biggest weakness is obviously that [it is] losing money. This is going to be a very high-cost clean-up. We know the economy is going to recover but this is not going to happen overnight.”
The influx of foreign capital is a vote of confidence in Bancolombia’s post-merger strategy, which involves reaping the benefits of economies of scale, increasing its retail presence and range of products, as well as betting on Internet banking.
“This is important because it is the first time there has been this kind of participation. It sends a very good message,” says Gaia De Dominicis, an associate in investment banking at JP Morgan, which advised Bancolombia on the capitalization. She points out that many other under-capitalized Colombian banks had to resort to the government’s financial guarantee fund for a bailout or have shut down.
Most of the new equity came from funds managed by Capital International Inc. Around 40% of the bank’s shares are now in foreign hands, although the controlling Grupo Empresarial Antioqueño – an enormous network of around 120 companies with sales equivalent to 8% of Colombia’s GDP – owns around 63% of voting shares.
Colombia’s financial sector has been through a tough period as the country plunged into its most severe recession in two generations and GDP fell 4.5% in 1999. But for Bancolombia, the crisis came at an especially difficult time, since it also had to work through the inevitable post-merger reorganizations.
Bancolombia’s difficulties can be traced to its very origins in the merger, after Banco Industrial de Colombia bought the much larger Banco de Colombia in 1997. BIC was regarded as a well-run institution with a strong corporate client base. But it was penned into the country’s heartland around the industrial city of Medellín and had failed to break out and establish a strong national retail presence, especially in Bogotá.
At the same time, the arrival of new foreign competitors such as Spain’s rival banks – at that time Banco Bilbao Vizcaya and Banco Santander – was making it all the harder for BIC to execute its expansion plans. When the chance came to buy a majority stake in recently privatized Banco de Colombia – the country’s second bank by assets, with a nationwide base – BIC jumped in and created Bancolombia.
This deal more than trebled BIC’s branch network to 350 and raised the number of customers to 1.25 million from 250,000. The trouble, though, is that Bancolombia has yet to turn a profit. A small loss in 1998 escalated to 197 billion pesos (equivalent to around $100 million) in 1999, as asset quality deteriorated. The losses were caused in part by 262 billion pesos in provisions, giving the bank 78% coverage of past-due loans at year-end.
Over the year, non-performing loans have risen to 8.4% from 6.6%, slightly more than the average ratio for private banks. Although BIC and now Bancolombia have a cautious reputation on lending, the old Banco de Colombia had a relatively high exposure to the public sector and lower net worth borrowers.
BIC’s conservative provisioning standards considerably eroded the merged bank’s capital. While Bancolombia was the country’s largest bank by assets with over 6.5 trillion pesos at the end of 1999, two other banks – Banco de Bogota and BBV Banco Ganadero – had more capital.
Hence the need to raise capital. A Bancolombia shareholders’ assembly in May was due to approve the bank’s accounts for the first four months of the year and Londoño’s plan to deploy the fresh capital.
Rather than closing its accounts at the end of the calendar year as is normal, Bancolombia is closing accounts every four months. This means it will register a loss to April because of its provisions, and offset these losses with the capitalization proceeds. Then it can begin posting profits for the rest of the year and possibly start paying dividends. By law, banks cannot pay dividends after registering a loss.
Jaime Velásquez, a Bancolombia vice-president, says the capital injection should give the bank a capital to assets ratio of around 11.5%, a comfortable cushion over the required 9%. “Growth in the financial sector comes in waves. In the first half of the 1990s, credit grew three times more quickly than the economy as a whole.” He says Bancolombia does not want to miss growth opportunities as the economy recovers: “We want to have the capital available.”
Building A National Presence
So where is Bancolombia headed? The bank, which still operates out of the old BIC headquarters in down-at-heel downtown Medellín, now claims a 14% market share and has a solid nationwide branch network: its 100 or so branches in the Bogotá area alone are more than BIC used to have in the whole country. “One of the priorities of the merger was to have a strong national presence,” says Londoño. “Colombia is strongly regionalized: you have to be present in many out of the way places. We are in 112 different towns and cities.”
Another aim is to deepen customer relationships. “Banco de Colombia clients did not use many products – it offered savings mostly,” says Velásquez. “Our challenge is to take that large client base and introduce them to more products.”
Bancolombia is increasing its presence in retail outlets such as supermarkets, and taking a lead in Internet banking in Colombia. Its Internet ‘branch’ has 50,000 accounts and processes 360,000 transactions a month. Velásquez says: “that compares well with bricks and mortar [branches].”
Gladys Vélez of Medellín brokers Suvalor, says BIC and now Bancolombia always had a reputation for effective use of technology: “The bank has taken a step ahead of the competition in this field. It has worked very well.” With 800,000 monthly telephone banking transactions, Londoño says half of transactions are now done outside of branches.
And the bank has still to reap all the synergies of the merger. The first stage of its reorganization included the closing of 45 superfluous branches in 1999. It cut staff numbers by 18%. This year, the bank has embarked on internal reorganization. In the first quarter this year the bank responded to analysts’ doubts over a fat middle-management layer, by cutting 250 jobs.
Even the caterers who bring staff their regular infusions of coffee are now outsourced. “We have to improve efficiency. It is not just about staff costs. The bank’s general costs are very high,” says Londoño, who joined BIC’s board in 1993 and became president in 1996.
“One of the biggest challenges for banks in Colombia is to become more efficient. Our banks are very inefficient by international standards and even by Latin American standards.” Londoño says his campaign is having an effect: “total costs in the first quarter only rose 1.8% in nominal terms – a fall in real terms.”
Bancolombia’s ADRs have responded well to recapitalization, rising from a low of $21/8 in February, to $3½ in May. However, its domestic share price has fallen by half from its 52-week peak in May 1999 and so far the capital increase has not moved the share price on Colombia’s bolsas. Bancolombia voting shares are traded only in Colombia and preferred stock trades in New York, hence the difference in price movements between the two markets. Bancolombia trades at about half book value, well below the Latin American average.
Still, the illiquid Colombian stock market has been going through a bad patch, with political uncertainty and doubts over the progress of economic reforms. Suvalor rates Bancolombia as one of the market’s best prospects, a long-term buy with plenty of upside.
And Colombia’s chronic political risks? Londoño takes an optimistic view: “We recognize there are difficulties, but when you look at history, opportunities often have a sweet and sour taste. The window of opportunity may stay open a little longer.”