Bank profitability leverages economic momentum amid persistent challenges

As the country's economy progresses and shows signs of resilience amid uncertainty and market fears of a persistent slowdown, various economic sectors are beginning to assess their results, and one of them is the financial sector, which has been impacted by persistently low interest rates and savings levels.

In this regard, the recent report from Banco de Occidente notes that the Colombian banking system showed signs of recovery in the first two months of this year, with an increase in return on assets, or return on investment, to 0.92%, driven by a reduction in provisioning expenses and a slight improvement in the net interest margin.

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However, he warns that this improvement is overshadowed by structural challenges that continue to affect the sector's profitability, such as the bad debt portfolio and the decline in refunds, which place the country at lower levels than several of its peers in the region.

“In terms of return on equity (ROE), Colombia stood at 7.44%, still well below its regional peers such as Mexico (18.07%), Peru (16.13%), and Chile (15.49%). This difference is due to a lower level of leverage, less efficiency in generating profitability on assets, and bank profitability in Colombia facing structural limitations associated with the competitive dynamics of the market,” the report states.

Analysts added that the reasons for this gap lie in several structural factors, such as the lower level of leverage and low efficiency in generating returns on assets, which limit the performance of the banking system; in addition to a competitive environment that reduces intermediation margins, affecting banks' ability to increase their profits.

"In contrast, countries such as Peru, Mexico, and Chile have managed to consolidate greater stability in their banking profitability, given that Peru has benefited from lower funding costs and a strengthening of credit quality, while Mexico has maintained strong lending momentum, although it faces risks of slowdown given a cooling economic environment, with lower employment growth rates and a latent inflationary risk due to the implementation of tariff measures," they highlighted.

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In Chile's case, they reported that it has managed to improve its risk profile in new loans by reducing provisioning expenses. Based on this, they concluded that the fragility of the Colombian banking system is not only due to macroeconomic factors, but also to the lack of a strategy focused on smaller players.

" There are structural problems that continue to limit full recovery. Although the macroeconomic context in Colombia has become more favorable, with falling inflation and less restrictive monetary policy, the number of financial institutions with negative results remains high," they noted.

To better explain their point, they noted that since 2022, that number has increased from 6 to 29, and despite slight improvements, it remains at alarming levels. Therefore, for them, achieving a sustainable recovery will require advancing measures that strengthen the banking sector's capacity to adapt and grow more robustly in the current context.

"The increase in the number of entities with negative results is a wake-up call for the financial sector and the authorities. Only a comprehensive, long-term strategy can ensure that these advances are not short-lived and that banking profitability in Colombia can stabilize sustainably," they concluded.