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Venezuela Best Bank: BBVA Provincial

Nov 1, 2012

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.

October¹s 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.

³It is a complicated economic and regulatory environment for banks to operate in,² says Theresa Paiz-Fredel, an analyst at Fitch. ³The cost of inflation weighs on their efficiency.² 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 country¹s 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 Provincial¹s 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 bank¹s 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.

³Banks in Venezuela tend to be highly profitable in nominal terms,² says Paiz-Fredel. ³They have wide interest rate margins which can compensate for credit costs and inefficiency.² Higher margins ­ the net average interest in 2011 was 11% ­ have insulated Venezuela¹s 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 banks¹ overall performance. There has not yet been a deterioration in asset quality, Paiz-Fredel says, and the banks remain adequately capitalized. LF

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