Colombian loan quality has worsened significantly in recent months as central bank interest rate rises bite, according to the head of the nation’s biggest banking group.
(Bloomberg) — Colombian loan quality has worsened significantly in recent months as central bank interest rate rises bite, according to the head of the nation’s biggest banking group.
The trend is particularly affecting consumer borrowers, according to Luis Carlos Sarmiento Gutierrez, chief executive officer of Grupo Aval Acciones y Valores S.A.
“I expected a deterioration,” Sarmiento said Friday, in an interview in Cartagena. “What’s happened is that it has accelerated a lot, especially in April and May. And in June we’ve started to see a significant worsening.”
The drop in loan quality has led Aval to increase its provisions for expected bad loans, particularly for consumer lending, Sarmiento said. The group expects provisions to rise to the equivalent of 2% of its loan book by year end, from 1.7% in 2022, he said.
This is often a leading indicator that points to a rising jobless rate, he said. Commercial credit hasn’t yet seen an equivalent weakening, he added.
Sarmiento’s comments echoed those of Bancolombia CEO Juan Carlos Mora, who on Thursday said that his bank is also facing worsening credit quality.
Most-Attractive Stock
Colombia’s stock market is currently so inexpensive that the potential profits it offers make this a “spectacular moment to enter the market,” he said.
Corporacion Financiera Colombiana S.A., of which he is chairman, is the most attractive stock in this cheap market, he said.
The company, which has investments in infrastructure, energy, gas and agribusiness and financial services, currently trades at just over three times earnings, and less than half of book value, according to data compiled by Bloomberg.
“If I had my own money, I’d buy the whole company,” Sarmiento said.
Aval, a suite of financial companies including Banco de Bogota SA, currently trades at 7.4 times earnings. The company was founded by Sarmiento’s father, Luis Carlos Sarmiento Angulo, Colombia’s wealthiest resident with a fortune of $6.3 billion, according to the Bloomberg Billionaires Index.
Market Incentives
Aval’s former Central American unit BAC Credomatic, which it span off last year, is now doing better than its Colombian counterparts, Sarmiento said. The company took the decision to spin off BAC when it grew to become as big as Banco de Bogota, the largest of Aval’s Colombian banks, he said.
“Central America is not seeing the same deterioration as here,” Sarmiento said. “There is much less uncertainty, which helps improve performance”.
The falling liquidity on Colombia’s stock market is partly due to a lack of incentives for companies to list there, Sarmiento said.
“There are not enough tax incentives to get people interested in buying and selling stocks, and there are not enough incentives for people to want to list their companies,” Sarmiento said,
Private pension fund mangers such as Aval’s Porvenir are the biggest players in the local equity market. If the pension reform bill currently being debated in congress were to pass in its current form, that would dramatically cut the amount these funds have to invest, potentially depressing the market still further, he said.
The bill, being promoted by the government of President Gustavo Petro, would boost the role of the state in pension provision, and slash the role of private funds.
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