As in other countries in Latin America, Colombia's banking sector has expanded exponentially in recent years on the back of strong economic growth, high commodities prices and a growing middle class, as a wealth of new individuals and SMEs entered the formal banking system. As well as organic expansion at home, Colombia's largest banks have also acquired a significant presence in Central America through a string of acquisitions.

Colombian banks are now facing a more challenging scenario, with economic growth in 2015 set to be considerably lower than previous years. Low levels of credit penetration allowed loan growth to remain relatively resilient to the lower economic growth scenario in the first half of this year, but moderate deceleration in loan growth is expected towards the end of 2015. Meanwhile, asset quality levels are expected to undergo moderate deterioration in the coming months, driven predominantly by consumer and SME segments which have both experienced a rapid influx of new customers in recent years. Nevertheless, high levels of loan loss provisions mean that any worsening in NPL ratios is unlikely to have an effect on bank profitability.

This report covers the growth and asset quality outlook for Colombia's banking sector, the possibilities of future M&A activity - both in terms of Colombian banks continuing to expand overseas and consolidation within the local market - and efforts to boost financial inclusion in a country where credit penetration continues to lag considerably behind more mature financial markets in the region such as Chile and Brazil.

Figure: Colombia GDP & Inflation


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