Bogotá — Gerardo Hernández, who has been at the helm of Grupo Aval’s Banco Av. Villas for two months, spoke publicly for the first time in that role in an exclusive interview with Bloomberg Línea. The banker, part of one of the largest financial institutions in Colombia, called for the government to be more transparent during Congress’s discussions regarding the 2025 budget, while he also criticized the proposal to forced investments by lenders.
The bank’s president also said that increasing the 4 x 1,000 tax, on debits made from checking and savings accounts, is not what the financial sector needs.
B.L.: In the second quarter of the year, the only loans that grew in Colombia were housing and payroll loans. What did you come across at Banco Av. Villas, and how is the sector overall?
Gerardo Hernández: The financial sector had a very difficult year last year. Most financial institutions were affected, with losses and low growth, except for a few entities. We all hoped this year would be better, but the Bank of the Republic’s interest rate cuts have been slower, inflation has been more persistent, and the loan portfolio hasn’t improved as quickly as we expected.
At Av. Villas, I found a bank with a well-known brand, a large and stable customer base, and a strong desire from shareholders to grow again. We’re working to increase our market share, supported by a capital increase of around COP$150 billion (US$36,497,910), while maintaining the bank’s strength and carefully managing loan risks.
I found a bank ready to get started; we’re warming up the engines, waiting for the economy to allow us to grow.
B.L.: Where will this capital increase come from?
Gerardo Hernández: It will be a subordinated bond. We’re discussing with shareholders who will subscribe to it. We’ll have it in the second half of the year, which is great news for the bank and the activities we plan for the rest of the year.
B.L. The Ministry of Finance has called for more aggressive rate cuts from the Central Bank, but the Board has been cautious. What will happen if rates aren’t cut further, and the banks feel that impact?
G.H. Every time there’s a Board meeting, we’re told that decisions are made based on the available information. There isn’t a set target rate; they adjust based on economic data, which includes international conditions, economic activity, and inflation trends.
As long as these factors allow them to do so, the Board will likely continue lowering rates. As one co-director said this week, it’s important not to rush rate cuts if inflation or economic data later suggests stopping or even raising rates again, as seen in other countries.
The Board’s credibility is in its decisions. The signal that rates will continue to fall is clear, and this will likely solidify in the second half of the year. However, rate cuts haven’t lowered funding costs quickly enough, partly due to fiscal uncertainty and market conditions driven by TES (Treasury securities), affecting the banking sector’s margins and lending capacity.
B.L.: You mentioned a key factor: where does this uncertainty come from?
G.H. There’s significant fiscal uncertainty, which analysts have warned about. Let me step back a bit. Macroeconomic management is like a three-legged table: monetary policy, fiscal policy, and financial system stability. Monetary policy is clear, as we’ve discussed; the financial system has withstood tough years, maintaining solvency and liquidity, though profitability has been affected. The fiscal side, however, has been a problem since the pandemic.
We’re now at a crucial point with the budget discussion. Most people don’t pay attention to the budget law, but it’s the foundation of all democracies, setting public policy goals, spending priorities, and how we’ll be taxed and funded.
Currently, the budget is underfunded, with a difficult discussion on how to finance the shortfall, which is estimated at COP$12 trillion to COP$20 trillion (US$2.920 - 4.864 billion). We need to consider medium- and long-term planning with more realistic budgets and better execution.
B.L. The government is scraping the barrel, with budget cuts, expanded debt limits, and another tax reform—the second under Petro in two years. Do you think this is what’s needed right now?
G.H. Frankly, I believe the country needs a real discussion on what our goals are and what we want to achieve. I’m not saying it’s unnecessary. The Constitution allows for an underfunded budget and a financing law to raise revenue for these programs. But the current budget execution is very low, and policies aren’t being fulfilled.
So, we need to question the need for such an ambitious budget. I think we should make the budget more realistic, assessing the government’s ability to execute resources effectively. Otherwise, constant reforms and efforts to raise revenue won’t be used properly.
B.L. Let’s talk about some of the measures Petro has proposed. Bankers and the Ministry of Finance are negotiating an agreement on forced investments. Would this proposal raise borrowing costs, and is it viable?
G.H. It’s a completely misguided discussion based on the idea that we need to stimulate the economy—a goal everyone agrees on. We’re coming out of a low-growth period, and we’re still far from potential growth. What we should focus on is consolidating the current growth momentum.
Forced or strategic investments aren’t designed to stimulate the economy. In fact, by the time the law is passed and implemented, it will likely be July next year, and there won’t be much use of those resources yet. Secondly, in my professional experience, especially with microfinance institutions, I’ve learned that popular economies need good policies for credit access and follow-up. Small entrepreneurs don’t just need one loan; they need continuous access to credit, which makes a huge difference.
Moreover, Banco Agrario alone can’t provide all the necessary credit for popular economies. This must be a joint effort between the public and private sectors, as it always has been. Banks have expressed their willingness to lend to special sectors because that’s what they do. Each bank has its interests, objectives, and scale, and they’ll see how they can align with their strategies and capacities. But thinking that public banks alone can do this is completely wrong.
This idea contributed to the late 20th-century crisis, which wasn’t just about mortgage loans but a major problem with public banks, leading to the liquidation or sale of banks like Ganadero and the transformation of Caja Agraria into Banco Agrario. This happened because, constitutionally, the agricultural sector is supposed to have a special credit system.
Using this tool for other sectors like tourism, from a constitutional and legal perspective, has some flaws that need careful consideration.
B.L. So, increasing the 4 x 1,000 tax isn’t appealing to you either?
G.H. No. The tax is very effective in collection but has negative effects on financial inclusion, cash usage, and economic informality. It’s not what the financial sector needs right now.
B.L. The financial system has traditionally driven Colombia’s economy, but sectors like construction and manufacturing, which were also key, are now struggling. Considering mortgage loans, for example, are you worried about a ripple effect, especially regarding the economic recovery the government talks about?
G.H. The financial sector remains very solid, with high solvency levels. We haven’t faced liquidity problems, which were a major issue last year due to the Bank of the Republic’s rate hikes. This created difficulties, but financial institutions have navigated these turbulent waters well.
However, the country’s main concern should be how we return to growth, with sustainable tools that allow the economy to grow consistently, rather than starting and stopping with stimulus programs. These programs help a bit, but without a solid foundation, they fall short. Some sectors are concerning, and much depends on how they’re treated, which also ties into fiscal issues.
In construction, for example, the solution is well-known. If we want to revive construction, which has a direct impact on about 34 other sectors, we need to reuse proven tools like demand subsidies and address bottlenecks in the industry.
In healthcare, a similar situation arises. A group of former ministers and economists has asked for healthcare funding to be secured. If not, the sector will deteriorate, just like services, and recovering those sectors will become even harder.
So, we’re at a crucial moment. If handled properly, we could have a calmer year ahead. As former Finance Minister Roberto Junguito used to say, historically, Congress has been fiscally responsible. I believe that’s what all citizens should demand in this budget discussion—a technical, clear debate where decisions are made responsibly. The approval of the budget and financing law will be crucial for next year’s economic situation.