It is hardly news that life has become more challenging for Brazil’s big banks. With economic growth slowing and the Selic benchmark interest rate falling to earthly levels, lenders are waving goodbye to profitability rates above 20%.
Although consumer credit has not brought the bubble many feared, there is still the danger that lenders may have overextended, particularly if the economy – which few can count on any more to grow at the 6% of years past – turns for the worse.
On top of this, the government has been piling pressure on credit providers to lower the rates charged to consumers for loans, credit cards and other products. Private lenders are additionally challenged in that they have to compete with state-owned Banco do Brasil and Caixa Econômica Federal, which enjoy lower-cost federal funding.
Brazil’s larger banks are best equipped to withstand lower profits and an increase in impairments, as well as the new lower interest rate environment. The key will be keeping credit costs low.
“The Selic is in an adjustment phase and is moving towards a normal rate that is compatible with the solid fundamentals the Brazilian economy now has,” Bradesco CEO Luiz Trabuco Cappi tells LatinFinance. “The quality of our economy means there is no longer any reason for double-digit interest rates. Bradesco’s working scenario is one in which Brazil has changed for the better and this change is permanent.”
Bank of the Year
& Best Bank Brazil: Bradesco
For the second year in a row, Bradesco’s diversification and retail focus leave it in a strong position to confront these challenges. Focused on organic retail growth and buoyed by an insurance business responsible for 30% of its profits, the well-capitalized bank has nearly caught up with Itaú – Brazil’s biggest bank since its merger with Unibanco in 2008 – in terms of total assets.
As of June 30, Itaú was Brazil’s largest bank by assets with $888 billion reais ($437 billion), with Bradesco at $831 billion reais. In 2008, the gap was much larger, with Itaú leading by $632 billion reais to $454 billion reais. The growth has been entirely organic. Since the Itaú-Unibanco merger, organic expansion has been the key for all the players, with no remaining large banks left to buy.
While other banks have made small acquisitions abroad, Bradesco still sees plenty of room to grow in Brazil. The bank has been aggressively expanding its retail operations this year, redirecting resources after losing out on the postal bank contract to Banco do Brasil.
“The price in the auction was too high,” says Luiz Angelotti, the bank’s executive managing director, explaining why Bradesco did not continue with the contract. “We had an alternative plan which we decided was better. We made the correct decision. This adds more value for the company.”
The bank opened 1,000 new branches in the second half of 2011. Bradesco reckons it can retain the postal clients who will be reluctant to shift their accounts.
“We don’t expect to invest in retail abroad,” Angelotti. “Our main strategy is to invest in the Brazilian retail business. There is plenty of opportunity for growth in Brazil.”
The bank sees its limited presence abroad solely as a means of supporting Brazilian companies overseas.
“We have a better return here in Brazil and we know the market very well,” says Angelotti. He highlights upward trends in social mobility over the last eight years and points out that 40 million Brazilians have yet to tap banking services.
Its extended presence across the country, its broad range of clients and its insurance business, leaves Bradesco better placed to compete with the other large domestic banks.
Its insurance business also offers plenty of room to expand. Brazil has exceptionally low insurance premiums for such a large country. This stands at about 3.2% of GDP, and compares with 8% in the US and 11% in Japan.
Bradesco also believes there are opportunities to be found in the consolidation of the Brazilian insurance market where there are still many small companies.
Trouble from Brasilia
As the country’s benchmark rate plummets, the government is pressing lenders to charge customers fees closer to international norms. In September, Bradesco lowered its interest rates on credit card products, along with other banks.
Improving efficiency is the key to operating in this new environment. In this regard, Trabucco Cappi says the bank’s prospects are “good.” The main challenge for Bradesco is how to do this while also expanding the scale of its activity, Trabuco Cappi says. As part of this the bank also wants to enlarge the relationships it has with existing clients who are demanding new products and services.
The bank sees ROE in the long term to be in the region of 18%-20%, compared to 20% this year. The spread adjustments should continue in the future, says Angelotti, and there are some factors are not under Bradesco’s control, such as the delinquency ratio, taxation and administrative costs. Angelotti expects delinquencies to reduce in the future, but says the government needs to do its share to reduce taxes and administrative costs.
“We are taking measures to reduce the cost of our credit and credit card operations,” Trabuco Cappi says. “The reduction in interest rates will improve default ratios and expand the loan portfolio. These effects are positive for banking.”
So far, the impact of these reductions in spreads has been mostly marginal – even for state banks, according to Fitch. This is mostly due to asset growth remaining strong and to reductions in deposit rates. The ratings agency expects that the effect on overall margins will become more important over time, as they will more clearly highlight operational inefficiencies.
Lower spreads, increased competition, the outlook for slower GDP growth, and greater capital requirements will limit Bradesco’s future profitability ratios, Fitch says, but they will be at good levels and better than the peer average.
Coping with a new reality
Non-performing loans have been an increasing problem for Brazil’s banks. Bradesco’s delinquency ratios have nudged up this year, though not as much as other banks. Small and medium-sized business lending was affected in 2011, and this year vehicle loans have caused concern, affecting the delinquency ratios for banks including Itaú and Banco do Brasil.
The sector’s NPL rate has reached 6% this year, according to Fitch, compared to 2% in some Latin American countries, and a 4% emerging markets average. Angelotti expects Bradesco’s delinquency ratio to reduce in the second half to around 4% (where it was at the beginning of the year).
“The decrease should continue in 2013,” Angelotti says. “In this area, structurally lower Selic rates are a good thing, as businesses and individuals will find it easier to make payments.”
Solid employment figures will have a positive effect on individuals’ ability to make payments. The bank expects the unemployment rate to improve from an already low 5.6%. Fitch says the bank’s credit quality is in line with its peer average and its loan loss coverage among the highest in the sector.
Bradesco’s large competitors have started to venture into the payroll lending segment, once the focus of the sector’s mid-size banks. Normally, experimentation starts with smaller players and trickles up to the likes of Bradesco and Itaú. This year Itaú formed a $1 billion reais joint venture with mid-sized lender Banco BMG for payroll lending. The deal allows Itaú access to the fast-growing payroll lending segment while keeping the risks at arm’s length. If it goes well the joint venture could be a model for other large players to follow.
Itaú has also moved this year to bring credit card processing in-house, spending more than $5 billion to buy up all of the shares in Redecard. Though seen as an expensive acquisition, the synergies created are expected to be positive for the bank.
With inflation threatening to rise in 2013 – possibly forcing the central bank to lift rates next year— this may not yet be the time to experiment. Still the steady expansion seen for Brazil’s economy ahead should provide ample room for Brazil’s large banks to keep growing.
Bradesco plans to continue to expand organically to keep pace with its large public and private competition. At the same time lower funding costs and continued government pressure to lend more to stimulate the economy should help Banco do Brasil and Caixa continue to grow stronger.
“The greater participation by the federal banks on the market is positive and creates a challenging situation,” Trabuco Cappi says. “However, challenges have always been part of banking activity in Brazil. The current situation is motivating us to redouble our efforts and overcome these challenges once again.” LF
Best investment bank: Itaú BBA
Although investors’ expectations for Brazil have cooled, the domestic investment banking landscape continues to invite competition. For the moment, the larger Brazilian institutions still claim a lion’s share of the business.
The offerings should grow next year, as lower interest rates force investors to diversify –with implications for both local fixed income and equities. The domestic corporate bond market is set to expand as investors need more non-government bonds. Infrastructure financing will also require more bonds and bank lending. Brazilians have issued in the cross-border markets this year along with the rest of the region and the brisk pace looks set to continue.
“With rates going down and perhaps staying low, investors are looking to shift resources to other asset classes,” Jean-Marc Etlin, head of investment banking at Itaú, tells LatinFinance. “In fixed income, investors are hungry for yield and there is growing demand for credit across the ratings spectrum.”
Itaú led the league tables in the awards period for DCM for Brazilian clients, including international and local market deals, with $9.69 billion of issuance in the year to June 30, according to Dealogic data. This included a $5.9 billion local market portion, also the largest during the period.
Establishing a liquid secondary market will be key to deepening the local fixed-income markets, Etlin says. The introduction of fixed coupons as opposed to the existing inflation-linked instruments will be central to this effort, he adds.
The growing demand for credit is already having a salutary effect on Brazil’s local fixed-income market. Infrastructure spending, bringing banks such as Itaú the opportunity to lend as well as raise funds through new asset classes such as infrastructure debentures, should continue to provide opportunities.
M&A activity will continue to be characterized by foreign interest in Brazil. Itaú advised EBX on its $2 billion sale of a 5.63% stake to Mubadala in March. Latin America remains a source of appeal to global players, Etlin says. Ongoing consolidation in the key industry sectors alongside continued, private equity activity should also prove a boon.
The equity capital markets, however, have been a poor source of revenues for all players in Brazil. Itaú booked $1.22 billion in ECM deals from Brazilian clients, the most during the awards period. Bankers are hopeful there will be a pick-up in issuance in 2013, following two years of disappointing volumes, as investors that once found the country expensive may now be motivated by falling valuations to return.
In the meanwhile, ECM attention has shifted this year to LatAm’s ex-Brazil markets, which debt investors have also focused on. This is a fact not lost on Itaú or its largest Brazilian competitor BTG Pactual. Already established in Chile, Itaú hopes to diversify its activity across Latin America. This year, it was a bookrunner on Santander Mexico’s $4 billion IPO.
“We have been quietly expanding beyond Brazil’s borders,” Etlin says. “Investment banking activity outside of Brazil is real and growing.” LF
Best bank: Banorte
Mexico’s banking sector is in good shape with the country’s largest lenders largely isolated from global turmoil and well poised to capitalize on the economy’s expected growth. Output is likely to get a boost in the coming years thanks to favorable global trends, with promised reforms from a new government possibly adding a further fillip.
All of Mexico’s big banks should benefit from the improving conditions. While not the system’s largest by assets, Banorte has used its integration following the 2011 merger with Ixe Financial Group to gain ground on foreign-owned players.
“OECD discussions are about deleveraging, while the story in Mexico is about leveraging,” Banorte chief executive Alejandro Valenzuela tells LatinFinance.
Mexico’s strengthened fundamentals and economic growth have successfully lifted the country’s financial sector after a prolonged phase of intermittent financial crises, Valenzuela says. With stronger Mexican economic growth forecasted, Banorte sees itself in a position to cater to the growing business lending market.
The bank has been integrating operations that resulted from its merger with Ixe in 2011 – a deal that has made it the third-largest financial institution in Mexico, surpassing Santander. This has brought size as well as a stronger investment banking operation. With no overhang from concerns of a foreign parent, the bank is in a strong position to grow.
It has also been expanding non-bank assets. In January, the bank merged its Afore Banorte pension operation with Afore XXI, one of the country’s other large operators, becoming a 50% partner in Afore XXI Banorte with the Mexican Social Security Institute. Banorte’s pension assets under management reached $225 billion pesos ($17.8 billion) at mid-year, up from just $86 billion pesos in 2010.
Banorte’s strategy for the next 12 months will focus on continued integration, says Valenzuela. It will center on increasing profitability by extracting synergies from mergers. The bank also wants to take advantage of opportunities for banking penetration that exist in Mexico, and by cross-selling consumer products to its increasing client base.
Additional acquisitions could play a role here, particularly those that would allow it to achieve greater scale in the pension and retirement fund business. Valenzuela says Banorte is analyzing opportunities to scoop up the BBVA pension assets in Mexico, part of a package the Spanish bank is looking to unload that also includes assets in Chile, Colombia and Peru.
“We want to look and see if those assets could generate value and if we can afford them,” Valenzuela says, noting that the bank is in the early stages of analysis. “We will have a clearer picture of where it stands within three to four months.”
Banorte’s banking assets increased to $890 billion pesos as of June 2012, which represents 14% growth from the first half of 2011. The real growth in its total assets under management – up to $1.4 trillion pesos at mid-year from $1.3 trillion pesos the year before and from $712 billion pesos two years before – has come from the pension and broker-dealer growth.
Banorte still sits third behind BBVA Bancomer and Banamex is most credit categories, but has seen stronger growth in several areas in the last 12 months, most notably credit cards and government-related lending. It says it has the second largest market presence in commercial and SME lending following the integration of the Ixe operations. The bank has seen an overall increase in market share over the past 12 months to 13% from 12% in deposits and to 14% from 13% in loans.
The bank has one of the lowest non-performing loan rates in the Mexican financial system. NPLs also remain low in the second half of 2012, at 1.8% of total loans versus the Mexico average of 1.9% and smaller than the 2.4% reported during the same period last year.
Banorte will continue to work in partnership with the IFC to support small and medium-size enterprise financing with special guarantees, as well as other priority sectors such as agribusiness, low and middle income housing and infrastructure financing. SME lending does not yet match the SME’s contribution to GDP.
Profitability has also been strong. The bank’s 14% and return on assets of 1.2% at mid-year were among the system’s highest. LF
Best investment bank: Banamex
If Mexico is truly the place to be in Latin America in the next few years, there will be no shortage of investment banking and capital markets opportunities. So far this year there have already been signs of increased equity and debt capital markets activity.
This will mean greater competition for the largest banks, particularly Banamex, which has again shown itself able to offer the widest range of options for Mexican clients.
“In the last year we’ve seen tremendous activity compared to what we had two or three years ago,” says José Antonio González, Citi’s head of global banking for Mexico. (Citi bought the Banamex Financial Group in 2001.)
Mexico benefited from a strong banking sector during the 2008-2009 crisis and has built on that. So, with Mexico’s GDP growing at around 4% annually — at a faster pace than Brazil — it is ready with a full slate of services for the uptick in activity.
Citi and Banamex led the league tables in total DCM volume for Mexican issuers, counting both domestic market and cross-border transactions, with $5.43 billion. This year, the bank lead managed a $2 billion 2044 note for the Mexican sovereign and a ¥80 billion ($1 billion) three and five-year Samurai that was the first from the region without a Japan Bank for International Cooperation guarantee.
Citi also brought large offerings to the international buy-side from corporate issuers including the CFE, Bimbo and Pemex.
Mexico’s local debt capital market has remained active while many of the region’s other local markets have only seen sporadic activity. With some $70 billion pesos issued — year to date (through late September), González says around $130 billion pesos could be issued in 2012 — this is up from around M$100 billion pesos last year.
Banamex, headed up by chief executive Enrique Zorilla, booked just over $2 billion-equivalent in domestic bond transactions over the past twelve months. Large transactions on the local side have included a $7 billion peso 2015 and 2021 bond sale from government development bank Banobras, deals from corporate heavyweights Mexichem and Grupo Carso, and a $4 billion peso sale from retailer Liverpool.
“In the local market we’ve seen spread tightening,” says González . “Issuers have taken advantage of lower rates. Everyone is still bullish on rates. The macroeconomic conditions of the country are favorable. It is a dream come true for an economist and certainly also for an investment banker.”
He says the Afores (pension funds) are still liquid and there should be little in the way of inflationary pressure. He foresees a pickup in specialized deals in the local market, with real estate transactions and auto loan securitizations likely to appear more frequently in 2013.
More recently, the bank handled more than $2 billion in debt and equity transactions for Mexichem, following M&A work that occurred during the awards period. Mexicans buying abroad – América Móvil has been another notable example – is a theme that has many banks eager to generate business in several product areas.
“I expect a process of internationalization of Mexican companies,” says González. “In the next three years we will see Mexican companies taking advantage of different valuations, mainly in Europe. If these companies explore international expansion they will have access to capital”
South America is also a destination for acquisitive Mexican comapnies, says González. Citi-Banamex advised on more than $5.7 billion in M&A deals involving Mexican corporations in the twelve months to the end of August, the second-highest total.
Banamex’s $374 million Mexican ECM volume made it a leader for the period though historically this figure is not exceptional.
Later in 2012, however, the fortunes for new issuance looked set to pick up, spurred by deals including Santander Mexico’s $4 billion IPO. Bankers expect more opportunities for small and mid-size Mexican issuers.
“We have a number of new issuers,” González says. “There is visible supply getting prepared.” LF
Best bank: Banco Davivienda
Colombia’s banks have been on a roll for the past two years, but they face stiff competition from abroad. The country’s robust growth has buoyed the banking sector and fuelled a diversification of banking activities and lending – a development not lost on foreign institutions eyeing the market. Canada’s Scotia Bank bought control of Colpatria for $1 billion, and Chile’s Corpbanca has taken Santander Colombia for $1.23 billion and Helm Bank, if completed, for $1.28 billion.
Though these moves make headlines, they are still far from shaking up the regional pecking order, where Bancolombia and Banco de Bogotá sit on the top. Colombia’s Banco Davivienda, the system’s third-largest has been steadily growing to diversify its lending away from mortgages, under the watch of its president, Efrain Ferero.
The bank has now has become a regional player following its agreement this year to acquire HSBC’s operations in El Salvador, Honduras and Costa Rica for $801 million – a change in strategy that reflects a strengthening of its position at home. “This acquisition was a surprise because they’ve never gone outside the country,” says Felipe Carvallo, an analyst at Moody’s.
A diversified bank with a 50% commercial lending footprint and the rest split between mortgage and consumer products. Banco Davivienda has evolved since the 1990s from being a mortgage finance company, to achieve a balance sheet for which corporate lending has become increasingly important.
Commercial and mortgage loans have played a large role in recent portfolio growth, with the net portfolio at $25.9 trillion pesos ($14.4 billion), up 18.2% from the year before.
Net income for the first quarter of 2012 was $215 billion pesos, up 9.9% compared to the fourth quarter last year and 25.5% versus the same quarter in 2011. Its SME segment also grew 24% compared to the year before. Its housing portfolio grew some 23% to $4.4 trillion pesos, inclusive of housing leasing.
Davivienda will need to maintain its growth in diverse business areas to keep pace with both foreign and domestic competitors.
As with other large Colombian banks, Davivienda enjoys diverse access to funding. While local mortgage securitization is part of its way of life, Davivienda tapped the international bond markets for the first time this June. Its $500 million 2022 issue attracted some six times demand. The sale followed a $400 billion peso subordinated domestic bond issuance, and was preceded by a $500 million peso domestic sale. LF
Best investment bank: Bancolombia
The race for space in Colombia’s banking sector has been running for some time. In addition to the retail transactions that make headlines, foreign interest has boosted investment banking operations. In theory, this will benefit all bank players but, for the moment, Bancolombia’s unmatched scale across product areas gives it a substantial lead over its competition.
The follow-up business to Grupo Sura’s $3.8 billion purchase of ING’s pension assets offers a strong example for Bancolombia’s case.
“For the Suramericana transaction, the largest that a Colombian company has ever done, we were a one-stop shop for them,” says Jean Pierre Serani, vice president for origination at Bancolombia’s investment banking arm.
“We provided credit, we provided M&A, and we provided the equity capital market access.”
Bancolombia, headed by Carlos Raúl Yepes, undertook evaluations of indicative and binding offers, and helped arrange lines of credit for $1.1 billion credit with three local banks. The process, culminating in a public equity sale, took three months, Serani says.
“More Colombian blue chips are looking to expand abroad,” he says. “Also, there is going to be more local consolidation and global private equity shops coming for acquisitions given the growing consumer base and strong internal demand.”
Inbound M&A, seen most heavily in 2012 in the financial sector, looks set to continue. There is intense international interest in Colombian assets and plenty of scope for consolidation. Serani expects M&A focus will be in the middle market of $30 million-$150 million next year.
The $1.8 billion-equivalent equity follow-on to raise funds for Sura’s purchase was done during a tricky patch in the international markets, and raised less from public investors than had been aimed for. That said, it was still what the issuer described as Colombia’s largest-ever equity raising by a non-government entity. Bancolombia also raised $900 million-equivalent for itself in the international and domestic equity market during the awards period.
“Equity issuance has been a little more quiet his year,” Serani says. “The market is still digesting what they acquired last year. Also, the effects of the crisis in Europe have made portfolio managers more conservative. Next year we will probably see more activity.”
Bancolombia led the domestic DCM and ECM league tables with dollar equivalent figures of $927 million for DCM and $2.05 billion for ECM.
Among the most compelling growth areas is infrastructure finance and in particular its implications for Colombia’s fixed income market. The country’s growth has left its roads below regional standards – something a $25 billion government program aims to address.
However, Serani says funding it will be well beyond the capacity of the local bank market, the traditional source of project finance. Domestic bonds backed by government payment certificates – as have been done in Peru – should be the way forward.
“This is going to trigger the development of the project bond market, but we need to do short-term financings from the banks to take care of the money needed for construction,” Serani says. LF
Best bank: Banco de Chile
In a market peppered with other well-positioned banks, Banco de Chile remains one of the country’s strongest, with a 432-branch network and 1.7 million customers – some 22% of the Chilean workforce – along with a solid funding structure and asset quality.
It is the country’s largest bank by a host of measures including net income, return on average capital, total loans. Though it is not the country’s largest bank by assets, with total assets of $44.9 billion, Banco de Chile is the most profitable, with a return on equity of 23% as of June, and return on assets of 2.1%.
Like many countries in the region, Chile has maintained robust economic growth against the backdrop of slowing global output. GDP expectations of between 4.8% and 5.0% for 2012, and levels of growth seen around 4.5% for the next year paint an encouraging picture says Pedro Samhan, Banco de Chile’s CFO.
Cooling economic growth, will mean that “the banking sector will continue growing, but at a slower pace than it has grown during the last four months,” Samhan says.
Banco de Chile is focused on expanding its retail business via new product offerings, a new internet delivery platform and updated mobile banking application. Meanwhile, the small and medium enterprise segment has also been an area of competitive advantage for the bank, says Samhan, as it looks to strengthen customer loyalty to maintain market leadership.
In the first half of 2012, Banco de Chile led in development agency-backed Corfo (Chilean Economic Development Agency) guarantees, with 190 billion pesos in funding. Credit cards and retail mortgage loans are an emphasis as well, as they are key to relationship building with customers, the bank says.
Banco de Chile’s commercial strategy is to keep growing its retail business and increasing its profitability in the wholesale segment, while on the retail side, it will continue to expand in consumer loans and fee products, he says. And on the wholesale side, the bank will look to increase cross-selling as it looks to grow in areas such as foreign trade letter of credit, cash management, and treasury products.
“Our focus will continue to be to expand in the consumer segment, because we still have some room to grow,” Samhan says. “This is the most profitable business.”
The bank will keep looking for new customer segments in retail and wholesale and establish metrics for measuring quality, and seek to provide competitive service, inclusive of best practices.
As it grows, the bank’s funding has become more diversified. It registered a bond line for $720 million-equivalent in Mexican pesos, becoming one of the few foreign banks to tap the Mexican bond market, raising $110 million-equivalent in pesos at the end of last year. It will continue watching the market for the right environment to issue debt, Samhan says. The bank took advantage of international interest in Chilean debt to place $50 million-equivalent in 2027 bonds trading on the Hong Kong market in September.
It recently announced plans for an equity capital increase of $530 million-equivalent, aimed at solidifying the capital structure. LF
Best investment bank: Banchile-Citi
Foreigners, with regional integration in their sights, staked out positions in Chile’s investment banking market in 2012. This is likely to shake up the domestic competition, especially with the welcome the country’s debt and equity issuers have received internationally. Despite the backdrop, the longstanding international partnership of Banchile-Citi, stands out as the most balanced provider of investment banking services.
Chile has seen a relatively high level of equity issuance over the awards judging period, particularly when compared to other markets. Andrés Bucher, managing director at Banchile-Citi, says that total ECM activity in 2012 will be $5 billion, lower than 2011’s $7.2 billion, but still much higher than the $1.5 billion-$2 billion levels seen in prior years. Banchile has worked on several large offerings during the period, including follow-on transactions for Sigdo Koppers, Quiñenco, Aguas Andinas and Essbio and Essval.
The local bond market, however, has proceeded in spurts, but mostly in line with the historical average.
Bucher says the $3 billion expected in Chile’s local DCM is in line with averages in recent years. Banchile-Citi led deals for clients including Inversiones Southwater, Quiñenco and Agrosuper, giving it a league table topping $960 million-equivalent volume during the awards period.
A November 2011 sale for Movistar featured a $66 billion peso tranche that Banchile says is the largest-ever corporate placement of debt denominated in pesos. Local investors are still conservative, a fact that limits the range of potential issuers, with lower-rated borrowers having access to the local bank loan market.
“The local bond market has advantages for local companies,” Bucher says. “Local issuers can always rely on it when the international market closes.”
However, Chilean companies typically enjoy good access to international investment, with this year’s cross-border issuance to date already surpassing last year’s $6 billion total.
Lower rates should attract more issuers. Higher-yielding Chilean names are increasingly welcome, as long as they issue dollar-denominated debt. Also of note is Chile’s emergence as an exporter of capital, with a Santiago stop becoming customary on LatAm DCM and ECM issuers’ roadshows.
“Maybe trading in the MILA platform [the Andean stock exchange] is relatively small, but the concept of the MILA is one that is here to stay,” Bucher says.
Though not the region’s largest market, Chile should continue to attract M&A interest thanks to the perceived quality of the economy and strong credit rating, Buchers says. Strategic and sovereign wealth funds are likely to play a role.
Banchile-Citi advised Morgan Stanley Infrastructure Partners on the sale of 50% of the Inversiones Saesa utility to Canadian pension fund Alberta Investment Management. The sale fetched $550 million, and came at a multiple of more than 16 times Ebitda.
The bank also advised Spain’s Enagas on its purchase of 40% in the GNL Quintero liquid natural gas terminal from BG Group. The deal was seen at the time reaching $352 million, depending on certain milestones.
Chilean companies will continue to expand throughout the Andes and elsewhere in Latin America. although there remains a shortage of quality assets for sizeable M&A deals, Buchers says. Most of the growth should be organic.
In the last six months, local investment banks IMTrust and Celfin have been taken over by foreign investment banks expanding in the region. The key is offering a broad selection of products.
“This is becoming regional. Chile is a very competitive environment, and will become more competitive with the entrance of regional investment banks,” Bucher says. LF
Banco Santander Río
The Argentine government doesn’t make it easy for banks. Although they mostly remain in good shape, a slowing economy has thrown up yet another challenge for the country’s financial institutions.
The government forecasts growth of 3.4% in 2012, down from 8.9% last year, while output in 2013 – as a growing number of forecasters now predict –could be still slower.
Banco Santander Río is the biggest bank in the country and the strongest in retail lending, which remains the largest business line for the country’s banks. Its $10.65 billion in assets as of year-end 2011 grant it a cushion that leaves it well positioned to deal with a deteriorating economic climate.
“In the past two or three years Santander Río has been the best performer in terms of growth, profitability and cost efficiency,” says Santiago Gallo, an analyst at Fitch.
Retail lending has been the focus for the bank’s growth. Commercial lending is growing too, but uncertainties facing the private sector are a challenge.
“In the coming years most of the growth in Argentina will be in retail lending,” Gallo says. “The government’s economic model is based on strong local demand and consumption. That fosters retail lending.”
Santander Río has the largest private-sector loan portfolio (8.8% market share) and deposit base (9.7% market share) in Argentina. During 2011, Santander Río says the bank accounted for 36% of the total system’s expansion in new branches.
The bank’s net income in 2011 was $406 million, up 5% year-on-year. It is also the most profitable with a return on equity of 43%. Santander Río continues to be the most efficient private-sector bank compared to peers with a cost-to-income ratio of 46%.
“Banks in Argentina are in good shape,” Gallo says. “The risk mainly comes from the economy, from the government and the political environment.”
So far there have been no adverse effects from any troubles from its Spanish parent. Santander plans to float part of its profitable Argentine operation – just as it did with its Mexican unit in September in an operation that appears to have been successful so far. Santander Río’s connection to Santander has also allowed it to have one of the top capital markets operations in the country.
Argentina’s economic slowdown could lead to a deterioration in asset quality, though Gallo says Santander Rio’s strengths leave it in a strong position to face these risks, and historically it has always maintained a high asset quality.
Gallo points out there are some factors benefitting the country’s economy, such as a high soy price. Nobody is expecting a crisis, but Santander Río is again the best prepared to face any challenges ahead. LF
Best bank: Banco de la República Oriental del Uruguay
Uruguay, where GDP growth last year hit a five-year average of 6.1%, is the envy of many larger economies in the region. Yet the greater dynamism in its economy reflected in its recent investment grade rating, however, has not yet translated into greater competition in its banking sector. While the likes of Santander and HSBC have units that have gained in size, the government bank still dominates the system.
With a share of assets above 43%, it is hard to ignore Banco de la República Oriental del Uruguay and its place in the country’s system. It continues to dominate most areas of business, and has yet to be seriously challenged by any of the private banks.
The state-owned bank says its main strategy is to extend universal access to financial service offerings to every corner of the country. It is aiming to grow in the microfinance sector. Banco de la República has opened its first microfinance business – República Microfinanzas – a business specializing in products and services in the microfinance sector with operations starting in 2010 and generating since then, adding a large number of clients and volume of credits in the local market.
Assets under management were $12.07 billion pesos at mid-year, up from $11.38 billion pesos the same period last year, and representing 43% of the system. Deposits grew to $10.4 billion pesos versus $9.73 billion pesos. The bank has a 45% of market share in deposits.
The positive trends for Uruguay, and for Banco de la República look set to continue. Banking activity continues to grow along with the economy, Fitch says, and credit quality remains at historically high levels. Banking institutions are characterized by solid levels of liquidity and solvency.
The profitability of Uruguayan banks has not been as positive as other indicators, Fitch says. This is thanks to low international interest rates reducing margins, exchange rate fluctuations and inflation.
However, Banco de la República posted a return on equity of 28.1% for the 12 months though to June and return on assets of 2.9%, up from 12.5% and 1.4%, respectively from the corresponding period one year before. This compares to a 9.9% ROE and 0.8% ROA average for the system. LF
Best bank: BBVA Continental
BBVA Continental, Peru’s second-largest bank, has positioned itself well to capitalize on Peru’s booming growth.
A surge in output in the Andean economy has seen banking services extend far and wide – a trend that has also meant consumer loans growth at twice the rate as that of corporate loans over the past year.
Loans are growing at roughly 2.5-3.5 times GDP, driven by mortgages, consumer and credit card loans.
BBVA Continental’s CEO Eduardo Torres-Llosa tells LatinFinance it’s a trend he expects to continue. “The number of debtors in the system is pretty low, and we see a lot of opportunities in this segment of the population.” He expects the bank to double in size over the next five years.
Like its other large and successful domestic competitor Banco de Crédito del Perú, the well-capitalized Continental enjoys ready access to funds. In August, it issued a 10-year, $500 million senior bond, which came in around 16 times oversubscribed, Torres-Llosa says.
Challenges ahead for Peru’s banks include making sure credit doesn’t expand too rapidly if the economy shows signs of overheating. Equally, banking authorities are also expected to double up efforts to find skilled professionals to staff the burgeoning sector.
With $12 billion in loans and another $12 billion in deposits, BBVA Continental is the most profitable bank in Peru, Torres-Llosa says, with ROE around 35%. Its efficiency ratio is 36%, and the bank says its past-due loans ratio, at 1.2% is the best in the system; it also has the highest coverage ratio of non-performing loans in the system at 350%.
Torres-Llosa points to mortgage lending as one of the bank’s core strengths. The mortgage sector is growing more than 20% annually – an expansion that’s likely to continue as more of the population gains access to the financial system. Meanwhile, the bank has been aggressively expanding its distribution network, increasing the number of branches and ATMs by some 40%-50% in the last three years.
BBVA Continential has pushed for an increased presence in the payroll segment, where it has continued to grow its market share with new products and services, jumping from 22% to 29% in recent years. It is also number one in the medium enterprise sector, where it has reinforced its market share, while it looks to beef up its small enterprise expertise.
“That’s a very attractive segment,” Torres-Llosa says. “But you have to know how to manage that segment, because there is a lot of risk.”
Though Colombia has been the focus of internationally-driven M&A activity this year, foreigners beyond BBVA and Scotia may be eyeing Peru more closely. Continental expects to see more international competitors enter the country, drawn by its growth prospects and relatively appealing regulatory environment.
“We have to work with a sense of urgency in terms of getting the loyalty of our clients and increasing our presence in Peru,” Torres-Llosa says. LF
Best bank: Banco Mercantil Santa Cruz
Bolivia’s financial system has advanced steadily this past year. A healthy pickup in GDP growth – to 5.1% in 2011 from 4.1% in 2010 – has lifted the economy and allowed total assets in the system to increase by 16.4% in that time, while profits have grown 36%.
The scale of the market’s largest bank, Banco Mercantil Santa Cruz has meant it has no peer in terms of strength and profitability.
“The country is going through a positive economic performance which is tied to the performance of the financial system,” Darko Zuazo BMSC’s president, tells LatinFinance.
The bank has hit two important milestones, he says: its loan portfolio reached $1 billion in the first semester of 2011, and BMSC now has over $2 billion in assets.
The bank has $1.79 billion in deposits – a growth of 17.2% in the second half of 2011, easily maintaining its position as the largest in the country. Profitability for BMSC on an ROE basis was 23.4% in 2011 year-end versus 26.8% as of the same period last year.
Its return on assets increased slightly to 1.53% as of year-end 2011, versus 1.31% at the end of 2010. The increase was in part thanks to a new cash processing area, which the bank says has reduced operating costs.
The bank has reduced its non-performing loans through its special operations division and decreased non-performing loan assets as a percentage of the loans from a NPL ratio of 6% in 2010 to 3.42%.
With its position well established, BMSC’s main strategy is to continue to modernize its technology: this includes implementing the first self-service electronic platform in Bolivia, and new services for customers through ATMs and internet banking.
Its 2013 strategic plan includes increasing the number of branches and ATMs while leveraging technology to grow its assets and loan portfolio, Zuazo adds. The bank has also initiated operations of Empresa de Transporte de Valores, a new company that transports cash and valuables.
One channel for growth in Bolivian banking could be through the country’s growing and profitable microfinance segment. BMSC would like to increase its presence in microfinance, although Zuazo says the bank does not expect a substantial expansion in this area in the short to medium term.
“There is talk there could be entities for sale, but it is not a buyer’s market with only four to five known microfinance entities in the country,” says Zuazo. LF
Best bank: Banco Pichincha
In an increasingly competitive marketplace, one of the chief aims of Ecuador’s Banco Pichincha over the past year was to diversify its services, says Jorge Chiriboga, the bank’s vice president for financial control.
The bank’s total assets grew by 13.6% from December 2011 to August 2012 to $7.67 billion, with consumer credit growing by 19.6% and commercial credit by 18.8%. But the bank’s profitability was down, to give a return on equity of 13.8% from 15% and a return on assets of 1.3% from 2.1%.
In fact, the profitability of the entire financial system declined, as changes to the regulatory environment hit balance sheets and forced banks to become more adaptable.
ROE for the sector dropped from 18.9% in December 2011 to 14.9% in 2012.
This has called for nimble planning and strategy, says Chiriboga. Measures have included price ceilings on interest rates and fees on financial services, as well as tax reforms, and divestment of assets.
“These levels of performance are the result of a strategy that favors efficiency and strict cost control, and whose focus is to generate adequate levels of profitability and solvency,” says Chiriboga.
As part of regulations introduced this April, financial institutions are limited in which services they can charge for. This, added to another layer of restrictions – announced in July 2011 but which came into force this July – has prevented private sector financial institutions from holding stakes in insurance and brokerage companies.
The bank has sold off its Fondos Pichincha, Seguros del Pichincha, Pichincha Casa de Valores and Consorcio del Pichincha units.
Pichincha plans to increase its national presence and to attract more customers to the formal banking sector. It is looking to expand its non-bank network to some 5,000 so it can cover more ground, Chiriboga says.
The bank bought Lloyds Bank’s assets and liabilities for $20 million in 2010. It bought GMAC’s assets in 2011 for $38.5 million. The Lloyds acquisition heightened relationships with corporate clients, and the latter helped Pichincha consolidate in vehicle financing, says the bank.
Further expansion through M&A remains a possibility, though the bank indicates that it “does not rule out the evaluation of opportunities that may be of interest in the country and the region.”
Pichincha is weighing up issuing a dollar bond – possibly for $100 million – in the international markets, though timing has yet to be determined. (The bank has issued shorter-term dollar debt domestically but has yet to sell long-term debt internationally.)
Presidential elections next February will play a large part in determining the future regulatory environment for banks – and analysts say a win by incumbent Rafael Correa could mean yet more controls on financial institutions. LF
Best bank: BBVA Provincial
Venezuela presents a challenging environment for any bank. But high margins tend to make up for problems caused by inflation and an uncertain operating climate.
October’s re election of Hugo Chávez as president has re-assured Venezuelans, if nothing else, that there will be political continuity – though the economic outlook remains murky.
“It is a complicated economic and regulatory environment for banks to operate in,” says Theresa Paiz-Fredel, an analyst at Fitch. “The cost of inflation weighs on their efficiency.”
BBVA Provincial stands out in Venezuela, not least for having an ample cushion to deal with the uncertainty.
Its total assets of 82.9 billion Bolívares ($19.3 billion) as of mid-year, are smaller than those of Banesco and state-owned Banco de Venezuela, according to the country’s bank regulator. But it is more profitable, with a return on average assets of 6.5% and a return on average equity of 62.6%.
For the second straight year, BBVA Provincial’s size and strength mean remains best placed in the banking system to face these challenges. In addition to being among the most well capitalized banks, the bank’s risk management and strong asset quality also set it apart from its peers. The bank has higher loan loss reserve levels and capital coverage as well as lower exposure to government assets than most of the sector, which is dominated by public sector banks with, in general, lower asset quality.
“Banks in Venezuela tend to be highly profitable in nominal terms,” says Paiz-Fredel. “They have wide interest rate margins which can compensate for credit costs and inefficiency.”
Higher margins – the net average interest in 2011 was 11% – have insulated Venezuela’s stronger banks. There has also been a shift to less regulated segments, and to retail lending, which has higher margins. Growth was strong in 2012, thanks to loose monetary and fiscal policy in the lead-up to the elections.
Nationalization talk died down before the elections, and the government, despite lingering perceptions that this will not always be the case – has not taken over a financial institution since mid-sized bank Banco Federal in 2010.
Fitch expects 2013 to be more challenging, but not necessarily detrimental to domestic banks’ overall performance. There has not yet been a deterioration in asset quality, Paiz-Fredel says, and the banks remain adequately capitalized. LF
Best bank: Banco de Costa Rica
Costa Rica’s banking system is dominated by three large government-backed banks that are similar in size, and compete in many of the same areas. This year, Banco de Costa Rica stands out from the other two for having weathered an economic environment that still throws up challenges, despite having largely recovered from the 2008-2009 crisis.
Costa Rica’s economy is expected to grow by 3.7% in 2012, down a touch from the rates above 4.0% seen in 2010 and 2011 supported by industry and services and steady recovery in consumer credit. And in general, the economic recovery of recent years has meant an increase in demand for banking services.
BCR is the second largest bank in Costa Rica with $5 billion in total assets, a 24% market share, according to Fitch. Like all state-owned banks, it benefits from an explicit sovereign guarantee; it also possesses the largest branch and ATM network in the country – a fact that’s contributed to an ample and diversified deposits base.
“We are always measuring ourselves internally but also externally,” BCR chief executive Mario Rivera Turcios says.
A reordering of the private banking sector is on-going with greater competition emerging from foreign banks, he says. In January, Colombia’s Davivienda bought HSBC’s assets in Costa Rica El Salvador and Honduras, and so could be in a better position to grow more strongly than HSBC.
That said, little has happened in recent years to disturb the dominant hold that BCR, Banco Nacional de Costa Rica and Banco Crédito Agrícola have on the sector.
Turcios says credit has been BCR’s greatest growth area, in both business and personal banking. The bank’s credit portfolio grew 18% in 2011, thanks to growth in segments including debit and credit card services, internet banking and mobile banking.
BCR’s main focus is to increase its loan portfolio. This includes a focus on growth in residential mortgages and consumer loans, while also striving to increase its lending to small and medium-sized enterprises.
The bank is also planning to diversify its funding sources. Turcios says it plans to issue an international bond early next year. As of late October, Costa Rica’s government – benefitting from ratings upgrades as BCR has – was planning its first sovereign international bond since 2004, which should help set a benchmark. LF
Best bank: Banco Agrícola
Despite an uptick in GDP growth, the competitive balance between El Salvador’s banks is little changed from 2011.
Banco Agrícola remains the largest and strongest bank in the country. Its $3.07 billion in assets at mid-year are up from $3.54 billion 12 months earlier, according to the bank, and are nearly double the second place bank, according to regulatory data.
Banco Agrícola is also the most profitable. It posted a return on average assets of 2.54% as of mid-year, as head of the banking system, and its return on average equity of 17.64% was second highest.
The bank’s financial performance have been driven by declining credit costs, gradually rising margins and a slight growth in its loan portfolio. Banco Agrícola’s market share in terms of assets at year end was 28.2% and deposits 27.2%.
Its business, as of mid-year, is split between its commercial operations, accounting for 46% of its business, consumer banking, 40%, and mortgage lending 14%.
The bank represents a strategic presence for Bancolombia, which acquired the bank in 2007, in the country as well as in Central America. El Salvador has seen little other foreign competition since then.
As with the dominant banks in many of Latin America’s smaller economies, Banco Agrícola’s size leaves it in the safest position to withstand an economic downturn that might threaten asset quality.
This is particularly important in El Salvador this year. The economy, closely tied to that of the US, continues to slow while fiscal pressures and increasing public debt leave it vulnerable to external shocks.
Fitch forecasts GDP growth of 2% for 2012 and 2.3% for 2013. Foreign competitors, such as Citi, HSBC, Banco G&T Continental and Scotia have yet to match Agrícola’s numbers, and should find it difficult to do so given the prospect of continued slow growth. LF
Best bank: Banco de Desarollo Rural (Banrural)
Mergers in the past decade have seen Guatemala’s banking system come to be dominated by its two largest banks, Banco Industrial and Banco G&T Continental. Against this backdrop however, well managed Banco Rural (Banrural) has grown – quietly, but with vigor.
Banrural’s assets stood at 35.48 billion quetzals ($4.53 billion) at mid-year, up from 30.35 billion quetzals the year before and just 24.31 billion quetzals three years ago, according to central bank data. It has nearly caught up to second-placed G&T Continental’s 35.91 billion quetzals, and has become the second largest by deposits. That said, catching Banco Industrial’s 50.11 billion quetzals of assets is still a tall order.
A focus on consumers and micro and small enterprises has served Banrural well. Its profitability compares favorably with the country’s two largest banks. And it posted a return on equity of 23.9% as of mid-year, second only to Continental, which it bested in terms of return on assets of 2.7% to 1.95%.
Banrural efficiency ratio dipped over the awards period – a concern for analysts given the bank’s size and consumer lending concentration – from 40.1% to 39%. Yet despite “weak” efficiency metrics, the bank “compensates with high margins,” says Edgar Cartagena, an analyst at Fitch Ratings.
Still, the focus of its lending, and a more limited revenue diversification than the big banks, could leave it vulnerable to any economic downturns. The bank is mainly geared towards financing consumption, as well as micro, small and medium companies, with a smaller share in corporate lending.
Guatemala’s economy grew at 3.9% in 2011, and the growth rate should average 3.3% between 2012 and 2014, according to Fitch. Among today’s chief sources of concern are the country’s high crime rate and social instability, as well as in the prospect of a downturn in the US economy.
But Banrural’s sound local franchise, high profitability, strong capital metrics and ample deposit base, as well as its improving capital ratios over the past five years (which have stabilized over in the last two fiscal years) have left the bank on a relatively sound footing. The bank’s core capital to risk weighted assets stood at a high of 15.1% this June, well above the average of the Guatemalan banking system. LF
Best bank: Banco General
Panama has a deserved reputation as having Central America’s most dynamic banking sector – and recent economic growth has meant there has been even more room for expansion. But this growth has, as yet, to lead to major changes in market share, with Banco General still the dominant player.
The bank, as Panama’s largest locally owned bank, possesses one of the largest branch networks in the country, significant market share and a reputation for consistency and conservative policies.
“Banco General has consistently executed a conservative strategy, building on its strengths and cautiously yet decidedly approaching new business initiatives,” says Diego Alcazar, an analyst at Fitch.
“You don’t see rapid growth such as you see in Peru and Colombia, but Banco General has steady margins, a well diversified portfolio and the largest market share in mortgages. It has been able to solidify its corporate lending and consumer lending with a conservative approach.”
The bank had $9.88 billion in total assets as of mid-year, up from $8.97 billion the year before. Its market share in loans was 17.9% and deposits 24.9% keeping it at the top of the banking system. Profitability remained about the same, with return on assets of 2.77% up from 2.64% the year before and return on equity of 21.48% down slightly from 21.76%.
Because of its slippage as the market leader for loans and deposits, the bank’s strategic plan for 2012-2014 involves bolstering its competitive position, as it bets on sustained economic growth rates.
But the country’s banks need to be careful: while economists are sanguine on growth, inflation is threatening to hit 6% this year – higher than the government would like. Fears that authorities may be overspending have stoked fears of imbalances ahead that could hurt growth.
“There are hiccups, yes, but Panama has a stable economic environment and that consistency is reflected in the overall stability of the country,” says Alcazar.
Banking sector growth is expected to be mainly in the retail sector, where Banco General has been cautiously seeking to increase its market share.
Expansion abroad – albeit organically – also remains a goal, says Fitch. Banco General operates in Mexico, Guatemala, El Salvador, Colombia and Costa Rica. But strategic acquisitions are also possible, the ratings agency says.
The cost of credit should gradually increase as the bank enters riskier markets and promotes riskier products, says Fitch. But given the bank’s risk-averse culture, the dangers of such a move are likely to be limited – with the rewards, ultimately, significant. LF
Best bank: Banco Popular Dominicano
This year has been a challenging one for banks in the Dominican Republic. Despite some growth in retail, mortgage and consumer credit, the story for the country’s lenders has been largely one of less growth and profitability.
The run up to presidential elections this year witnessed a fiscal expansion that has led to a deterioration of the country’s fiscal accounts, according to Barclays. It estimates a fiscal deficit of 4.3% of GDP in 2012, likely to shrink to 3.0% of GDP next year.
Against this backdrop, the central bank was forced to take a conservative stance: interest rates have therefore been higher, leading to a decline in consumer lending. Banks are also investing more in government assets and directing fewer resources to lending. A 1% tax on banks’ financial assets in effect from June 2011 to June 2013 has also made life difficult and challenged growth levels.
In this context, Banco Popular Dominicano –the country’s biggest private bank in terms of assets –has maintained growth above the rest of the system. Its size has served it well in a more challenging environment. Total asset levels rose 15% increase at year-end to $5.3 billion from its $4.6 billion in 2010. It also saw its net loan portfolio rise 16% from the year before to $3.3 billion.
“Compared with its peers, the bank has a wider deposit base, and that’s the source of liquidity to grow,” says Larisa Arteaga, director at Fitch.
The bank’s diversity, retail lending and deposits have all contributed to its maintaining a solid portfolio, she says. The bank’s consumer loan portfolio, meanwhile, aside from credit cards, grew to $35 million, and it is the biggest mortgage lender in the country, with 25.4% of the market in 2011.
Banco Popular Dominicano has, in terms of asset volume, a 33% share in the banking market. Its total deposits grow about 14% to around $4.5 billion.
The bank has 28.2% of the market for commercial loans, which continues to grow. The bank says it is the largest issuer in the Dominican Republic of credit and debit cards.
Its prospects are boosted by a fiscal reform package unveiled this October by the new administration, which analysts say is likely to revive a flagging economy – and, with any luck, create a better environment for the nation’s banks. LF
Best bank: National Commercial Bank
Jamaica’s economic woes have not made life easy for its banks – and conditions are not expected to improve soon.
After struggling through a prolonged recession, last year Jamaica’s real GDP grew by 1.5% and is forecast to grow by just 0.5% this year, according to Fitch, which expects an average growth rate of 1.0% for 2013-2014.
National Commercial Bank of Jamaica, which had total assets of J$379.4 billion ($4.23 billion) as of mid-year – up by J$31.5 billion dollars from the year before – remains the country’s largest player, rendering it best equipped to handle any further economic deterioration.
NCB accounts for nearly a third of the assets in the banking system. At the end of the first quarter, it held the largest market share in loans (38.1%) and deposits (38.4%) in the commercial banking industry, according to the central bank. It also has the largest branch network and capital base.
NCB has concentrated recently on developing its retail operations – particularly consumer credit and unsecured consumer loans, credit cards, mortgages and car loans. Small and medium-sized business (SME) lending is also growing, which is a positive sign for the bank, says Theresa Paiz-Fredel, an analyst at Fitch.
The bank has grown in spite of the country’s poor economic activity. Loans were up by 18.4% compared to June last year, and non-performing loans stand at 7.1% of gross loans, as opposed to 7.3% the year before. Deposits were also up 13.3% from June 2011.
NCB ranks top in loan share, deposits and equity, generally dominating its market ahead of much smaller banks, Paiz-Fredel says, noting that foreign banks’ presence has offered some competition, though not enough to knock NCB from its perch.
As of March this year, NCB was the leader in terms of loan market share, at 38.1%, and deposits 38.4% on the commercial side, according to the bank. Its size means it does not need to rely on any one specific product area.
“Relative to other banks in similar markets, NCB’s income streams are much more diversified,” Paiz-Fredel says.
While NCB’s loan portfolio has been highly concentrated, it is diversifying as corporate lending declines, Paiz-Fredel says. The bank has also invested in technology and IT, so its efficiency should improve down the line. NCB says it plans to continue focusing on deposit portfolio growth.
For the year ahead, it highlights strategic initiatives that include centralizing underwriting and delinquency management functions. LF
Trinidad & Tobago
Best bank: Republic Bank
Trinidad and Tobago, home to four large commercial banks and four smaller institutions, boasts a competitive financial sector. But size and stability give Republic Bank an edge not just over its domestic rivals but over most other Caribbean markets as well.
The bank has the largest market share in terms of deposits and loans, and – in an environment of excess liquidity and low interest rates – profited from increases in credit demand.
Assets at the bank have risen to about $47 billion, from approximately $46 billion in 2010, and net profit after taxes of $1.2 billion is up from approximately $1.1 billion in 2010. Its return on average assets climbed to 2.51% from 2.43% while its return on average equity stands at 16.0%, compared to 15.3% in 2010.
Growth has come from its real estate and vehicle market lending as well as credit card-related technology developments. Banks able to improve their informational systems and curb operational costs can make up for revenues from private operations, says Moody’s analyst Alexandre Albuquerque – a fact that’s also positive for margins.
Mortgage lending continues to thrive, he says , and is the only market segment where the outlook remains solid. The credit system grew 3.1% nationally to March, driven by the real estate market, which went up by 9.8% first quarter. Business lending, by contrast, was 5.7% in June, and was down to 5.1% in July.
But compared to historical standards, overall credit growth is weak, at 2.9% in August on an annual basis. This has led banks to remain conservative in terms of their approach to new and existing business.
“Most of the concern over the economy is due to the fact that prices in the energy sector are still going down,” says Albuquerque. Trinidad and Tobago is seeking to expand its oil and gas output to take advantage of strong demand for gas in South America, Europe and Asia.
Albuquerque predicts GDP growth forecasts ranging from 0.9% to 1.2% for the year ahead following a 1.4% contraction in 2011. But he says that on the positive side, banks are well capitalized, have quality assets and so are cushioned against the worst effects of potential losses. LF
Best regional strategy
Much talk has been made of European, and particularly Spanish, banks’ troubles in recent years. But the effects of the European crisis have yet to have any major impact on their Latin assets.
For international banks such as BBVA and Santander, these regional operations represent their crown jewels. The name of the game has been monetizing assets without pulling out of the region completely.
Santander found itself needing to address a €6.47 billion ($10.08 billion) capital shortfall to meet new requirements imposed by European regulators last year. Its profits were sagging as well, falling from €8.18 billion in 2010 to €5.35 billion in 2011. Profits at the Latin American units have held up well, declining only from €4.73 billion to €4.66 billion.
Santander has raised a large chunk of capital through the sale of parts of its best operating assets in the region. The strategy is still underway, and, when complete, should have resulted in the IPOs of all of its units in the region that have not yet gone public.
In December 2011, the bank raised $949 million by floating an additional 7.8% of its Chilean bank. The sale drew more than $1.95 billion in orders, and was buoyed by a decision to extend the lock-up period for the shares to one year. About 70% of the buyers were international, up from the one-third foreign participation often seen in Chilean equity deals. The bank, considered one of Chile’s two strongest along with Banco de Chile, has a 33% free float.
On the same day of the flotation, Santander made perhaps a bolder move, exiting completely from Colombia.
The Spanish bank was unlikely to do anything in the Colombian market, with its unit there holding $4 billion in total assets, and representing a 2.7% market share in loans and 4.7% in deposits. Financial assets in Colombia have been going for pricey multiples in the past year, so Santander was able to raise $1.23 billion by selling the bank to Chile’s Corpbanca – itself a growing regional player through Andean acquisitions.
These transactions were followed this year by the much anticipated IPO of its Mexican unit, perhaps the most highly regarded of its Latin operations in an economy that has become an investor favorite. The $4.1 billion sale represents Mexico’s largest-ever IPO and analysts expect it to prove a boost for equity activity in the country.
With investors putting in for more than three times demand, the issuer could have priced at the top of the range, but left some breathing room and came at the midpoint. The sale represents a 25% float, valued the bank at $17 billion, and stands out in what has been a poor year for ECM. The shares have gained more than 20% since the IPO as of late October.
The asset sales should continue. An IPO for Santander Rio, the largest bank in Argentina, is reportedly also on the card. Santander has a shelf allowing it to sell an additional 8.2% of its Brazilian unit, which could bring in about $2 billion. Struggles in the Brazilian new issuance market may have compelled the bank to wait.
The outlook for Europe remains uncertain, but Santander has managed to boost its capital while still retaining a dominant hold on its successful operations. BBVA, already putting pension businesses up for sale, is expected to follow suit with a flotation of its Latin American business. LF
Inter-American Development Bank
Typically, multilateral lenders come to the fore in moments of crisis and retreat from the spotlight once better times return.
But this past year, a kind of limbo has descended. No one can argue that all is well: on any day the wrong European headline can freeze up financial markets across the whole of Latin America. But at the same time, many financial institutions have become inured to global uncertainties and, armed with a belief in the region’s inherent stability, have pressed on regardless.
This is the backdrop for multilateral lenders operating in Latin America: they must be ready to intervene in case of crisis, but also continue to find ways to facilitate the flow of capital – even in markets where prospects appear more favorable.
Over the period from the second half of 2011 to the first half this year, the Inter-American Development Bank (IADB) has done both. The bank, led since 2005 by Luis Alberto Moreno, had approved $4.46 billion in the year to August 30, and has disbursed $3.67 billion in that period.
Unsurprisingly, the IADB sees infrastructure as a key growth area, especially as lending capabilities at many of the region’s commercial banks languishes at low levels.
And it has been taking the initative in financing projects: The bank led a $430 million A/B loan for the Empresa Brasileira de Terminais Portuários (Embraport) in Brazil in November 2011, after more than a year of structuring.
The $100 million 15-year ‘A’ loan came directly from the development bank. The $330 million 12-year ‘B’ loan portion pays Libor plus 300bp and counted WestLB, Santander, Caixa Geral, and HSBC as participants. A 633 million reais BNDES loan and $255 million in equity from sponsors Odebrecht Transport, Dubai Port World, and Coimex completed the funding. The new container terminal at Brazil’s Santos port facility can handle 1 million teu.
The deal is a rare project financing for Brazil and the port sector where, in both instances, more balance sheet-oriented financings are the general rule. Embraport is the first major greenfield port transaction in Brazil with full market risk and the deal is notable for having closed during the depths of the European debt crisis.
Also that month, the IDB agreed to lend Sao Paulo’s state government $1.15 billion to support construction of the northern segment of the Rodoanel Mario Covas, also known as the São Paulo ring road. The loan features a five-year grace period and adds to $980 million coming from Brazil’s federal government and $890 million from the state government.
“Infrastructure is more cyclical – the projects take time to develop and it depends on the political cycle to push the projects forward,” says Jean-Marc Aboussouan, head of the bank’s infrastructure division.
He expects a wave of opportunities on the back of legislative advances to public-private partnerships (PPPs) in countries such as Mexico, Uruguay and Colombia. This should begin to materialize in the middle of 2013.
Brazil’s recently announced infrastructure spending also offers a number possibilities. However, it is a trickier environment for multilaterals, despite successes such as Embraport and the Rodoanel. Aboussouan says the bank must work to find its place alongside massive lending from BNDES and other Brazilian government institutions.
The IADB is also keen to promote renewable energy; Aboussouan says the bank has financed nearly 800MW of the 2,000MW of power generation installed in the region.
The bank provided a $76 million equivalent peso-denominated loan for the Macquarie Infrastructure Fund’s Mareña wind project in Oaxaca, Mexico, part of a $950 million total project cost. The IADB is also identifying opportunities – particularly in solar and hydroelectric generation – in other countries, including Uruguay and Peru.
The bank has also sought to aid the development of local markets by supporting financial institutions. In May it partnered Banamex with a $150 million partial credit guarantee facility to back issuance of Mexican local debt securities. This followed a similar facility for corporate issuance by Leasing Operations de Mexico, in a framework agreement with Ixe Casa de Bolsa.
Chile’s Banco BICE and Brazil’s BicBanco became the first financial institutions in the region to tap an IADB credit facility to boost lending to health and education. The banks were lent $50 million each directly, in addition to a syndicated portion for BicBanco.
Looking to the future, bank officials talk about the need to get better access to different pools of liquidity.
In March, the IADB and Export-Import Bank of China announced plans to start a $1 billion fund to invest in Latin America. The fund is on the verge of starting operations, with $150 million contributions initially to be made by each party.
“The trend will have to be finding ways to work with institutional investors, beyond just working with financial institutions,” says Jozef Henriquez, the bank’s head of syndications. “That’s where the liquidity resides right now.”
Henriquez points to the recent Oaxaca II and IV wind project bonds and the bond financing for SBM Offshore’s floating production, storage and offloading vessel (FPSO) as positive developments. He says there should be a role for bank lending alongside institutional investors and to use the IADB’s guarantee products to provide enhancements.
“With Basel III coming up, all of the multilaterals active in Latin America will have to find a way to work beyond with just the banks,” Henriquez says. “You have to find different pockets of liquidity.” LF