(Bloomberg) -- Luis Carlos Sarmiento, the CEO of Grupo Aval, Colombia’s biggest banking group, spoke with Bloomberg News on May 12 about the pandemic, the economy and the business environment ahead of the May 29 presidential elections. What follows is a transcript that has been shortened and edited for clarity. 

What did you learn from the pandemic? Did it change your views on how to run your business?

There were some lessons to be learned and obviously, aside from the tremendous health crisis and the devastating loss of life which goes without saying. One of the first lessons is that every cent spent on preparing for these very unforeseen events is money well spent. In one day we sent 110,000 people home. We said starting tomorrow, every employee goes home until we figure things out. And, low and behold we all went home and the next morning we’re communicating and we’re communicating adequately. So that was a second big lesson. We are so adaptable as human beings.

A third big lesson: we had to call a moratorium on a very large percentage of our loan portfolios so that people that couldn’t pay wouldn’t have to while the pandemic was happening. And we thought, once people get into a habit of not having to pay for their obligations, it’s going to be very tough for them to get back into the habit. Not so at all. People in Central America, in Colombia- which are the two main places where we do business- showed us quite the contrary, the moment they got back into the rhythm of things, the moment they got back into revenue generation, they paid their obligations.

And other thing that happened was that the results, at least of the group that I manage, were substantially better proportionally to the results that other financial groups showed during the pandemic. And that’s because we administer -especially our credit and investment portfolios- pretty conservatively. And so that turned out to be good policy. Also, this is a pretty diversified group in that we have financial commercial banks and we have a sort of merchant bank. And in that merchant bank, we have investments in the non-financial sectors that proved to be incredibly resilient, gas transportation, infrastructure.

You have a unique view into the health of the Colombian economy. What drivers are you seeing?  

Colombia has been a little different than a lot of other places with respect to growth, which has been pretty strong. And we’ve seen that growth in the businesses that serve our clients. We’ve seen growth in the banks, we are back to full steam on infrastructure. Loan growth is performing very nicely. The tourism business, hotels are back to black. Also agribusiness, which is the other business that we have, is seeing a lot of momentum from the fact that a big chunk of inflation is food inflation. And that’s what we produce in the agribusiness, soybean oil, cattle, fisheries, and what we’ve seen in rubber. There’s a shortage of rubber in the world right now. So we’re seeing commodity prices rising, and with those agribusinesses are doing well.

Most of the growth last year in Colombia, and a big chunk of this year was driven by consumer spending. And so that is a big push to the economy that helps us to make consumer loans, that helps retailers to sell. There’s a whole ecosystem that has been positively affected. But, as we all know, the economy is growing, but inflation is really rising. Central bank rates are rising and when they catch up, and you finally have some sort of positive real interest rate, you’ll see the economy start to succumb. People are talking about a central bank rate of 8.5%. Is it going to slow down the economy? It is going to slow it down, especially in an economy that has been so driven by consumer spending.

Looking forward, what sectors will continue to perform well? 

Anything that is commodity related. Tourism is coming back. Regulated businesses are doing well, gas, gas transportation. Retailers are doing spectacularly well, but those you need to view with some caution because the party isn’t going to last forever. Anything that is dependent on imports is going to be hit hard. I don’t see the exchange rate really coming back down too much and raw materials all over the world are going through the roof and (the issues with) the supply chain are not yet fixed. You’ve got to look at industry by industry and some will be negatively affected.

There’s been a huge influx of fintechs in Colombia. How do you see the growth of those startups influencing the way legacy banks operate and pursue customers?

There are two things that differentiate a lot fintechs from established banking businesses, and I call them the asymmetry. There is an expectation asymmetry and there’s a regulatory asymmetry. And what I’ve worked on is at least on trying to close the gap as much as I can in the regulatory asymmetry. And let’s be frank, when banks have to respond to Basel III, when we have to watch every penny of our capital basis to make sure that we comply with capital ratios, that are ever increasing, it’s very tough to compete with somebody who has absolutely no concern for capital. In a lot of these fintechs the buzzword is what they call the burn ratio, which is how much money you can spend over any revenue every month. I mean, how do you run a business that way? But that’s what’s happening. 

But you have to learn how to live with these new businesses. So what we’ve been able to do, and we’re doing pretty successfully, is that we’ve talked to some of these kids and engage them in a different way. We’ve been able to say, your interest should really not be to a amass a large amount of borrowers on your books. You should really be out to make sure that you can produce, you can originate as much as you can without having to really fund yourself. And that’s especially true in these moments when funding rates are going up. So we’re saying, let us fund you not as investors, because we probably won’t ever agree on the price of your business, but let us fund your business in the sense you originate -because honestly you’re becoming better originators- and we’ll buy everything as long as you underwrite using our criteria. And it’s working out nicely. It’s still a small portion of our origination, but it’s growing.

Colombia is getting ready for elections in the next few weeks. How is the uncertainty affecting the business climate?

There are basically two candidates that seem are going to go on to the second presidential round. You hear one and you hear the other and definitely they’re talking about different things. But, you know, Colombia has always been so rational when it comes to that, when you look at the way the country has been managed. Congress has always been a big part of making things stay rational. And I don’t think this will be the exception. 

And I think both candidates are very smart. From what I can tell, they’re incredibly smart. And I think that when you’re that smart, you have to act accordingly. And so one of them can talk about oil is bad and, it’s not green. Absolutely, I totally agree with him. I think anybody would agree, but is it exactly now the moment to stop all exploration or stop refining? I have a tough time believing that, regardless of what his convictions are -and his convictions I think are spot on- you have to also see your reality. The economy’s growing and everybody rides the growth of the economy, regardless of what they say. The economy is growing, businesses are growing, they’re doing well, they’re profitable. So I think that as long as that keeps happening, we’ll see more or less the same that is happening today. Times of uncertainty? Of course, because we are a country accustomed to one way of doing things and there’s a probability that we might have to do them in a different way.

What was the reasoning behind the spin off of the Central American operations?

Basically two things were going on. The first thing that happened was that when we bought BAC in 2010, the bank was about 27% of the size of the combined BAC and Banco de Bogota. And last year it was 50%. So BAC is the same size today as Banco de Bogota. A lot of it is BAC is a dollar investment, so depreciation makes the asset size grow more than it’s growing naturally. But the truth is that we found it terribly inconvenient to have two banks of the same size. And we wanted Banco de Bogota to concentrate much more on the Colombian business and not to have to really distract themselves sometimes with managing what was happening in the six countries in Central America and sort of taking their eyes off the ball.

But then the question is, why take it out of Aval? And the reason for that is when you’re profitable, when you have a nice return on your equity, and when you pay adequate dividends, the price of your shares should follow. In our case, they were stuck. They were stuck and we were trading at a discount to our peers. And so we did what a lot of banks have done, which is let’s take the business out of Aval and now let’s run two businesses, both of them with shares trading. And the truth of the matter is that the combined price is up by about 17% since we did it. I honestly, I expect it to be more, I think that it should be about 30 or 40% more.

Jaime Gilinski’s takeover bids of Grupo Empresarial Antioqueno companies has upended the local market. What’s your view?

I think it’s an incredibly sharp move. Just identifying the transaction, I take my hat off. I don’t think that it’s going to add a lot of liquidity to the markets. Really, this is going to withdraw liquidity from the market at the end. When you look at the floats of those companies, after everything is said and done, I think it’s going to be even less than when it was before. It has brought a lot of value to the shareholders. I mean, without a doubt, anybody who sold, I don’t think ever dreamt of being able to sell for those prices.

And it goes to dividend yield, and to how you ought to get your return from valuation and dividends. But if you never pay dividends, it’s tough to get your shares to value because they’re not as attractive.

I tell you one thing, it’s much better to be an observer and not to be in the middle of it. I am so glad we weren’t involved.

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