Colombian banks’ earnings will grow at a lower rate than loans in 2011, given weak net interest margins (NIMs) in this year’s first half and as lenders have begun increasing provisions since they expect asset quality to deteriorate over the next few months, Juan Camilo Dauder, banking analyst at financial services firm Celfin, told BNamericas.

The system boosted earnings by 15.7% to 3.55tn pesos (US$1.98bn) in January-June compared to the same period in 2010 on strong revenue generation, according to the latest figures released by local financial watchdog Superfinanciera.

Net loans rose 24.3% to 191tn pesos as of end-June compared to the same time last year, the fastest pace in three years, driven by a 26% increase in consumer lending.

While lending is poised to expand at around 20% in 2011, Dauder is expecting loan growth to slow down over the rest of the year mainly as a result of the central bank’s tighter monetary policy.

“NIMs could increase over the rest of the year, but loan growth may somewhat decelerate due to the interest rate hikes, so earnings are likely to end 2011 growing at rates similar to what we have seen over the last few months,” he said.

The central bank has increased the benchmark interest rate by 150 basis points since February, but left it unchanged at 4.5% last week.

Analysts believe the monetary entity will need to make one or two more 25 basis point rate hikes this year, given the country’s rapid economic expansion.

Despite strong loan growth, asset quality in Colombia’s banking system has kept improving. The ratio of non-performing loans (NPLs) came down to 2.8% as of end-June, from 4.0% at the same time a year ago, according to Superfinanciera.

BANKS’ EARNINGS BREAKDOWN

Locally owned banks saw earnings rise 21.2% to 2.31tn pesos in 1H11 compared to the same period 2010, driven by the country’s largest bank, Bancolombia (NYSE: CIB), which increased profits 16.1% to 697bn pesos.

Foreign-owned banks’ profits grew a dim 0.3% to 399bn pesos, dragged down by losses at the local units of HSBC (NYSE: HBC), Frankfurt-based ProCredit and Scotiabank (NYSE: BNS).

Investment banks, foreign banks’ representative offices and cooperatives accounted for the remaining earnings.

Colombian banks had 296tn pesos in assets and 41.9tn pesos in equity as of June 30.

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