Moody's maintains stable outlook for Colombia's banks

MEXICO: Credit ratings agency Moody's is maintaining its stable outlook for Colombia's banking system, according to a new report, "Banking System Outlook: Colombia," based on its expectations for healthy macroeconomic conditions and improvements to profitability, despite risks associated with rapid lending growth and weak capitalization. "Over the next year or so, Colombian banks will benefit from new business opportunities owing to strong internal demand, major infrastructure investment, and improvements in manufacturing output," says Felipe Carvallo, a Moody's Vice President and Senior Analyst. Moody's expects Colombia's GDP to grow around 4.7% in both 2014 and 2015.In addition, Colombian banks' profitability should increase as rising interest rates help offset intensifying competition. Cost controls will help improve the banks' operating efficiency ratios, and provisioning costs will start subsiding as banks absorb recent acquisitions.

Colombia's banks have expanded aggressively into Central America; their acquisitions provide a measure of geographic diversification that could help maintain asset quality stability should Colombia experience a sharp slowdown, but also expose them to the sometimes weaker and more volatile operating environments of the region. Despite rapid loan growth in recent years, asset quality remains strong, given the banks' focus on lower-risk commercial lending, mortgages and secured consumer credit. Moreover, organic loan growth has slowed this year and will likely remain in the 10%-15% range in 2015, minimizing risks to asset quality and helping capitalization, which is weak in comparison to regional peers, partly because of the recent spate of acquisitions. "We also assess the likelihood of systemic support as high," adds Carvallo. "The system's size is moderate relative to GDP, indicating to us that the government has the capacity to continue to support its banks - Colombian depositors have never suffered losses owing to a bank default." However, a rise in lending for large-scale infrastructure projects scheduled to break ground over the next year and a half will result in higher concentration risk, as well as exposing the banks to tenor mismatches given these projects' longterm financing needs.