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October 16, 2013updated 28 Apr 2022 2:25pm

Winning among winners

Colombian financial stability has been highly supported by its profitable banking system and sound regulatory framework. Exploring Latin America's fourth largest economy, Valentina Romeo takes a closer look at the country's fast growing wealth and the need for the industry to satisfy a new emerging class of clients.

By Valentina Romeo

Colombian financial stability has been highly supported by its profitable banking system and sound regulatory framework. Exploring Latin America’s fourth largest economy, Valentina Romeo takes a closer look at the country’s fast growing wealth and the need for the industry to satisfy a new emerging class of clients.

Colombia’s economy has been resilient to the adverse global shocks of recent years, maintaining a financial stability and making its well capitalised and regulated banking system very attractive internationally.

Between 2000 and 2010 Colombia’s GDP growth was the highest in Latin America, increasing consistently at an average of 4.5%, and forecast to grow 4.3% in 2013, according to the latest figures by WealthInsight.

Colombia, alongside Chile and Peru, is experiencing the fastest growing wealth management in all Latin America.

“What we see is that wealth management in Colombia has been growing in the past years and is planned to expand further at roughly 10% by 2017, which is slightly higher than the rest of Latin America, now at 8-9%,” says Jean- Werner, partner and managing director at Boston Consulting Group (BCG), who oversees wealth management globally and locally in Colombia.

Despite the relatively small figures regarding the size of the Colombian wealth market, its value is forecast to grow robustly by 2017. Juan Bacerra, senior partner at BCG comments: “After the crisis there have been so many challenges regarding both risk management and margins. But wealth management in Colombia is still a very attractive industry in terms of size, in terms of margin, and in terms of growth.”

With the recent oil and mining boom, lower debt levels compared to its neighbours, and a relatively weak peso against the dollar, Colombia is benefiting from increased wealth creation. According to BCG’s latest report, between 2012 and 2017 wealth development in Colombia is expected to increase by 7.6%, reaching $400 billion.

Jean-Werner also explains that, while lower-tier millionaires are the largest wealth band by volumes in Colombia (90%), the affluent segment experienced the highest growth of 20-25% in the last few years with a huge room for improvement. During the review period 2012-2017, the number of UHNWIs in Colombia increased by 49% from 292 individuals in 2007 to 435 in 2012, according to WealthInsight.

“The rate at which millionaires are created is an influential indicator of the wider economy” says WealthInsight’s analyst Oliver Williams. “And, contrary to perceptions, there is a bourgeoning wealth class in Colombia, particularly in Bogota”.

Williams explains: “Equality is extremely important in a country where there is still a large segment of the population below the poverty line”, says Williams. “But, looking at the distribution of wealth in the country, it is well below the global average: Colombia’s 35,900 millionaires control 22% of total individual wealth in the country which is below the worldwide average of 29% and far off some other emerging nations,” he observes.

New needs for a new class

In Latin America, the decrease in interest rates puts pressure on wealth managers to continue generating returns for clients. Opening to a more globalised market, Colombia HNW clients trends and expectations are strongly rising and, as for many other clients worldwide, their service demands are increasingly sophisticated.

In addition to that: “There is an emergence of a new middle class – or the upper middle class in this economy- in their openness and propensity to start managing their financial liquid assets more professionally,” Bacerra explains.

Bacerra says the segment between $100.000 and $1 million has historically not been professionally served or by retail banks only, is now expecting a much more professional offering and service model. “They are more willing to be exposed not only to their local economies investment opportunities but to international markets as well,” he also adds.

Sticking to traditional

When asked about investment trends in Colombia, Bacerra revealed: “In other developed markets such as the UK, you have equities or other more sophisticated investments and type of assets. In the case of Latin America and Colombia, they are still more traditional.”

According to Bacerra, of the total mix of asset classes, there is still a heavy weight on bonds and cash, amounting to 50-60% and 30%of the Colombian investments respectively.

Bacerra also says that, although Colombian investments are moving towards a more ‘developed market’s typo’, this process is actually really slow, especially post-crisis.

“In the Colombian UHNW segment, investors look for value added and opportunities,” says Genaro Poulat, global market manager at Citi Private Bank’s Latin America. In Colombia, Citi Private Bank focuses on traditional investments, but also provides some alternatives, such as global access and M&A opportunities.

According to Poulat, key investment themes include diversification, value added, real estate and global opportunities. Real estate in Colombia recorded the strongest growth over the last five years, especially driven by a strong local residential market.

In 2012, it was the largest class for HNWIs in the country, accounting for 28% of total HNWI assets, says WealthInsight. Compared to worldwide norms, real estate allocations in Colombia are high (27.7%), whilst equity allocations are low (17.7%).

Wealth planning has also become an important topic in Colombia. Poulat observes: “As new wealth laws are issued in Colombia and some regulations (FATCA) gets implemented in the US, helping families on how to structure, is key.

“We have also observed that as generations progress, families have generations with different nationalities and therefore planning is very important,” he concludes.

poulat

Genaro Poulat, global market manager at Citi Private Bank’s Latin America

Alternative sources of growth

Alternative assets held by Colombian HNWIs decreased from 11.7% of total HNWI assets in 2007 to 9.5% in 2012, WealthInsight reported. This decline was due to the weak performance of hedge funds and private equity holdings, which offset the strong performance of commodity holdings.

Bancolombia president, Carlos Raul Yepes, says: “Just a couple of years ago the commodities sector was seen as Colombia’s choice for future economic growth. This is true to some extent if Colombia’s oil production (almost a million of the GDP), and its well-established coal industry, are taken into account.”

“However,” he explains, “there are also many problems as the government has been unable to approve new mining regulations, and environmental agencies tend to slow down the process of granting licences.”

WealthInsight reported gold performing particularly well for Colombian HNWIs, with prices rising consistently each year and growing by 140% in the last 5 years. Oil prices were more volatile, but still rose by 54%. Other commodities such as coal and iron ore also experienced large gains, with their prices rising by 48% and 58% respectively, driven primarily by demand from China.

Colombian economy and public finances are becoming increasingly dependent on the volatile oil and mining sectors. “Despite Colombia’s ranking fifth in the World Bank’s table of countries that protect investor’s rights, the future of the sector remains uncertain -even though it seemed totally trustworthy until recently,” Yepes concludes.

Keeping a local focus?

In the last 10 years, the private banking and wealth management market in Colombia turned to a local focus, driven by high-value domestic investments and more internal security in the country.

“The wealth management market in Colombia has made a U-turn in the last 10 years, at a time when the market was more concentrated on the international offshore asset management. This has made investors prefer local advisors who are able to understand the needs of Colombian investors without missing opportunities in global markets,” Yepes says.

According to recent sources, Colombia’s wealth is divided approximately into 70% onshore and 30% offshore. From the offshore business, 31% is in the US, 30% in Switzerland and 30% in the Caribbean. Reportedly, Colombian offshore holdings have gone down steadily from 46% in 2007 to 38% in 2012. “It is testament of faith in the economy” says Williams, “that Colombian millionaires are bringing home their offshore assets.”

Nevertheless, Poulat believes that local customers will evolve to have more offshore business in the future. This is also a common seen trend for Chile and Brazil, where managers have begun offering offshore alternatives for higher returns in other emerging markets. WealthInsight’s predictions for 2017 are that 37% of Colombian assets will be offshore, roughly $46 billion.

Colombia finance minister Mauricio Cardenas recently announced an increase in fees to 33% for companies and individuals transferring funds to countries considered by the government as a tax haven.

In the meantime, WealthInsight expects Colombian foreign asset holdings to reach $77 billion, from $60 billion by 2017.

Yepes

Carlos Raul Yepes, president of Bancolombia

Emergency “entry”

With a well regulated but relatively unsaturated banking sector, Colombia has been attracting foreign players, but the solid dominance of local banks, such as Bancolombia and Banco de Bogota’ has made it more difficult and expensive for them to enter.

Bancolombia, with $5.5 billion of AuM in its private banking division, obtained 40% of Grupo Agromercantil of Guatemala in 2012, and in February 2013 it bought HSBC Panama with $7.6 billion of assets in a $2.1billion all cash deal.

According to WealthInsight estimates, Colombian local private banking AuM totalled just over $25 billion at the end of 2012.

Yepes says: “We are sure that levels of HNWI will be on the rise in the next years, as it has happened in many countries with similar record of growth and similar rising in the middle class in Colombia. We’ll continue our efforts to maintain our leadership position. “

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