Intelligence Series: What next for consolidation in Central America?

After a flurry of M&A activity in Central America which saw a number of Colombian banks in particular execute aggressive expansion strategies, the latest BNamericas Intelligence Series asks what opportunities remain for further consolidation in the region.

Taking advantage of the exit strategies of international banks such as UK-based HSBC ​ (NYSE: HSBC) and Spain's BBVA (NYSE: BBVA) in the wake of the 2008 financial crisis, Colombian banks Bancolombia (NYSE: CIB)​, Grupo Aval and Banco Davivienda have been responsible for seven acquisitions in Central America over the last few years, worth a total of US$7.02bn.

Bancolombia closed the purchase of HSBC's Panama operations in October for US$2.3bn, the bank's third largest acquisition after snapping up El Salvador's Banco Agrícola for US$900mn in 2006, and a 40% stake in Grupo Financiero Agromercantil in Guatemala in December 2012 for US$216mn.

In July, Grupo Aval announced plans to buy BBVA's Panama unit for US$490mn, only a month after acquiring Grupo Financiero Reformador of Guatemala for US$411mn through its Central America unit BAC-Credomatic.

And in 2012, Davivienda, part of Grupo Bolívar, Colombia's third largest financial group, paid US$800mn for HSBC's assets in Costa Rica, El Salvador and Honduras.

Central America has been an enticing and affordable alternative to other markets in Latin America, with Colombian banks able to acquire market leaders in the region at comparatively low prices.

The strategy has also been a necessary one for the Colombian companies, whose large market share at home has left little room for M&A activity domestically.

However, as the dust settles after the spate of Central American acquisitions, the Colombian banks are now more likely to focus on integrating their newly acquired assets rather than seeking further expansion in the region.

The window of opportunity may also be narrowing, as BBVA and HSBC were the last of the international players in Central America looking to offload non-core assets.

Some large, international banks are still present, such as US-based Citigroup and Canada's Scotiabank, but none has expressed a desire to exit the region. But, this does not mean that there is no further scope for M&A activity in Central America.

"I think that opportunities [for acquisitions] are always going to be there," said Arturo Sánchez, a credit analyst at Standard & Poor's (S&P).

So where are these opportunities going to come from? The most likely candidates are locally owned groups, specifically a number of large banks in Guatemala and a couple in Honduras, which may yet appeal to potential buyers, said René Medrano, senior director for financial institutions at Fitch Ratings.

"I'm not saying that they will sell, but there are some locally controlled banks that could eventually be bought," he said, without naming specific banks.

Guatemala is also appealing from an organic growth perspective, as its low banking penetration means there is plenty of room to expand in the region's largest country.

So where is future interest in the region likely to come from, if not Colombia?

"Colombia has occupied a solid place in Central America that should have naturally been filled by Mexico," said Miguel Urrutia, an economics professor at the Universidad de Los Andes in Bogotá and former central banker.

Indeed, Mexico would seem the most likely candidate for future acquisitions due to its geographic and cultural proximity, but with a massive economy and one of the lower banking penetration rates in Latin America, Mexican banks may already have their hands full at home.

More information on recent activity in Central America, as well as an overview of the banking and insurance sectors in the region and a look to the future can be found in the latest BNamericas Financial Services Intelligence Series, here.