For many years, Central and South American countries have been enveloped in a political unrest and civil conflict. Thankfully, over the last decade there has been significant progress in this area, with many countries in the region managing to curtail violence and reduce the political tensions that exist. Increased levels of stability within the region have allowed moderate economic growth to occur. Between 2000 and 2011, Panama published average yearly growth of 6.4 percent, one of the region’s best economic performers, while El Salvador managed to achieve 1.9 percent, according to data provided by the World Bank.
The rise in economic prosperity in Latin America, both on a national and household basis, has meant that the region’s financial infrastructure has grown considerably in recent years
The region’s economic performance is bolstered, not only by governments exerting more control over gangs and paramilitaries, but also by a significant improvement in its relationship with the US. In fact, one of the main reasons why growth rates have been so consistent over the last few years and have remained that way in general, is down to the region forging considerably tighter trade links with its neighbour in the north.
According to current World Bank forecasts, Central American growth rates have risen from an average of 3.5 percent in 2014 to 4.2 percent in 2016. This increase, the international financial institution asserts, is the result of broad investment into public infrastructure, including projects like the expansion of the Panama Canal, which will secure long-term growth for that country in particular, as well as having knock-on benefits for the region as a whole.
A major contributor to the economic well being of the region is Colombia. The country is the third largest economy in Latin America due, in part, to it being a net exporter of valuable commodities, which include crude petroleum ($27.7bn), coal briquettes ($7.61bn), refined petroleum ($4.35bn), gold ($2.28bn) and coffee ($2.04bn).
In fact, according to the Observatory of Economic Complexity (OEC), the country exported a total of $61.bn and imported $57.3bn, leaving it with a positive trade balance of $3.85bn. The economic success of the country, though remarkable, is also consistent. This consistency has helped Colombia to obtain postpositive average growth rates of around one percent over the last decade, with the country recording a national GDP of more than $370bn in 2013 and a GDP per capita of $12,400.
The rise in economic prosperity in Latin America, both on a national and household basis, has meant that the region’s financial infrastructure has grown considerably in recent years. It has also facilitated the rise of one banking group in particular, Grupo Aval, which has become Colombia and Central America’s largest financial conglomerate.
In fact, the group now operates in 12 countries in the region, serving more than 13 million customers and 11 million pension and severance fund affiliates. Currently, Grupo Aval boasts four commercial banks in Colombia (Banco de Bogotá, Banco de Occidente, Banco Popular and Banco AV Villas), as well as the largest private pension and severance fund manager (Porvenir) and the largest merchant bank (Corficolombiana) in the country.
In terms of its regional reach, the group acquired BAC Credomatic in 2010, through which it serves more than three million clients across Central America, including Panamá, Costa Rica, Guatemala, El Salvador, Nicaragua and Honduras.
The group’s current position within the various markets that it operates is, according to Tatiana Uribe Beninghoff, Vice President of Financial Planning and Investor Relations at Grupo Aval, the result of both the vision of Luis Carlos Sarmiento Angulo, Founder, Chairman of the Board and majority shareholder of the group, and the leadership skills and tenacity of Luis Carlos Sarmiento Gutiérrez, CEO and President of Grupo Aval.
The latter of whom has led the company into the international arena and now leads the innovation strategy for the group, a key area capable of generating future success at a time when traditional banking is being redefined and the needs of clients evolve – posing a unique challenge that must be met via the implementation of various strategies.
Grupo Aval operates through a multi-brand banking model that allows maximum penetration and profitability. For example, Banco de Bogotá is a full-service bank with nationwide coverage and focuses on commercial lending, while Banco de Occidente focuses its attention on mid-market and affluent segments, and has a leading presence in the southwest region of Colombia, along with boasting niche products such as auto loans and leasing.
“We continue to benefit from the scale and leadership position we hold in Colombia, as growth expectations in the country are among the strongest in the region despite the economic difficulties resulting from the drastic drop in oil prices and its implications on government revenues”, asserted Beninghoff. “One of the main drivers of marginal GDP growth in the coming years in Colombia is the fourth generation concession programme.
“This programme includes the construction of more than 3,000km of new roads and will demand at least $15bn of capital investments. The programme is expected to contribute with more than 100 pbs of GDP each year in the coming years, and will increase the competitiveness of the country as it will decrease the transportation in a material form.”
Grupo Aval aims to take advantage of the fourth generation concession programme in two ways: on the one hand, it expects to participate, with its natural market share and through its four banks, providing funds to the constructors who were granted the concessions. And, on the other, it will participate as an equity investor through Corficolombiana, which has already been granted three concessions that involve the construction of 366km of roads and will require demand CAPEX of approximately $2bn.
“Aside from a positive mid-term GDP scenario, banking penetration will continue to favour financial institutions in Colombia”, continued Beninghoff. “Measured as total loans to nominal GDP, banking penetration stands below 50 percent, suggesting that loan growth can continue to outpace that of the economy. Furthermore, the country’s middle-income class is expected to continue to expand and unemployment is expected to improve in the mid-term, both positive for the financial industry.”
As a region, Central America presents a vast opportunity to banking and the financial services sector because of its sheer size, coupled with its low banking penetration and high rates of return. Having closer ties to the US in recent years, the region’s economy is expected to grow more than Colombia both in 2015 and 2016. Furthermore, being a net importer of oil means that most Central American countries have benefited from the decline in oil prices.
Transforming the group further
Between 2010 and 2014, Grupo Aval was able to double the size of its banking operations in Central America and double its net income. It now serves more than three million customers across the region, on top of the 10 million it already serves in Colombia.
“The internationalisation process of Grupo Aval has surpassed the M&A field”, said Beninghoff. “In 2012, Grupo Aval entered the debt capital markets when it issued two Reg S/144A senior bonds, and in 2014 it entered the equity capital markets when it issued fully registered ADRs in the NYSE.”
What is more, despite a general decline in share prices in all emerging markets, Grupo Aval’s shares have outperformed Colombia’s Colcap, an index that measures the most liquid shares’ performance in the market. In real terms, that means that in the 12 months ending in December 2015, PFAVAL’s price decreased 14.8 percent compared to the Colcap, which dropped 23.7 percent.
“Grupo Aval is working to develop and capture the banking opportunities in the Colombian and Central American financial sectors”, concluded Beninghoff. “The company is looking to capitalise on the strong growth in Colombia’s financial sector, driven by the expansion of the country’s enterprises, including small and medium-sized enterprises, government spending in key strategic areas such as infrastructure, and growth in the retail segment, driven mainly by an emerging middle class and an increase in financial inclusion.”
The future looks bright for Grupo Aval, a banking group that is uniquely positioned to take advantage of the opportunities that the region presents, as well as being more than capable to provide its customers with the specialised financial products and services they need through its four independent banks in Colombia and various institutions it holds throughout Central America.
The last five years have been transformational for the group and new projects are already on their way. In the years to come the group will be hoping it can continue its success and remain true to its core principles. If it does, it is sure to have a bright future and assist Colombia and other Central American countries in achieving their long-term economic goals.