Falabella to enter Colombia's banking system: Will it succeed?

Tuesday, January 25, 2011

Chilean retailer Falabella's announcement that it will become a full-fledged bank in Colombia in 1H11 is the latest step in the conquest of South America that Chilean retailers launched a few years ago in search of new customers and - the most profitable aspect of the business - consumer loans and credit cards.

Falabella, Chile's second largest retailer, recently announced it would open banking locations this year in its 30 department and Sodimac home improvement stores in Colombia. Analysts say the bank can leverage its experience of joining the Peruvian banking system in mid-2007, after having operated as non-bank lender Financiera CMR.

According to Maria Jesus Bofill, analyst at the studies department of Chile's fourth largest bank, BCI, the country's largest retailers - Falabella, Ripley and Almacenes Paris - have found a huge growth opportunity among less mature markets.

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"The key to replicating the bank's success in Chile lies in the company's ability to use its know-how in markets that have similarities with Chile, and the learning process of the local industry that it will have to go through," she said.

Falabella is currently Colombia's fifth-largest credit card issuer. The company's plans to grow its market share in that segment to 3% are achievable, Bofill said. And while the plan represents a fairly minor portion of the company's operations there, it's not a negligible figure to kick off its financial business, as the Colombian financial market is much less developed than the Chilean one, she said.

As of September 2010, Falabella had 637,000 of its credit store CMR accounts in Colombia. Card purchase growth has surpassed the 20% mark over the last few quarters, according to the company's financial statements.


Banco Falabella started operating in Chile in 1998 and is currently the seventh largest bank in consumer loans with a 4.4% market share and is the 10th largest in mortgages.

The bank is undergoing strategic changes in Chile, where it is transforming from a consumer loan bank to a full retail-oriented institution, also offering mortgage loans and time deposits, among other products.

Eduardo Santibañez, senior director at Fitch, told BNamericas that Chilean retailers such as Falabella have been key in developing the Colombian retail financing market.

"In Colombia, Falabella has the commercial network just like it did in Chile when it started expanding. They also have the experience of successfully implementing a plan to finance their Chilean customers' purchases and the necessary risk evaluation tools, which they will now have to adapt to Colombia," he said.

Falabella has operated a consumer finance company in Colombia since 2005, hitting break even in 2008, so its challenge is to develop liability products such as checking accounts and other services to cross-sell to existing customers, Santibañez said.

According to Peter McMenamin, senior analyst at financial services firm Banchile's studies department, the banking and credit businesses have huge potential in Colombia, and the financial business will probably be the fastest-growing segment for Falabella in Colombia thanks to its ongoing department and home improvement stores expansion.

"Although we do not expect the bank to be as relevant as it is in Chile today, we do believe that it will add growth to Falabella's multiformat model in Colombia," he said.

According to Fitch's Santibañez, Falabella will likely begin to target non-store customers, but its largest challenge will be to get default levels under control again and lift provision levels, which were severely affected by the financial crisis.

Becoming a bank will also reduce Falabella's cost of funding, as well as increase the margin from its financial business as Colombia's current ceiling interest rate has been set at 21.3% for 4Q10 (well below the current 50.5% in Chile), financial services firm Celfin said in a report.

But Falabella will also face a significant hurdle with the country's high job informality, as about half of Colombians have informal jobs, Felipe Gomez, portfolio manager at brokerage Compass Group Colombia, told BNamericas.

"The government has outlined plans to lower that figure, but it will take time," he said.

Falabella recently announced its 2011-15 plan, which calls for US$3.51bn in investments to open 215 new stores and 16 new shopping malls. This would double the number of stores Falabella operates in Chile, Peru, Argentina and Colombia.