Authorities in the Dominican Republic are doing their best to revive a flagging economy. But for the nation’s banks, the policy measures have not been without their costs.
GDP growth dropped from 7.8% in 2010 to around 4% in 2012. The government reformed the tax system in late 2012, increasing value added tax among other measures. At the same time, it cut spending in the early part of 2013. The economy felt the pinch: preliminary IMF data indicated that GDP growth fell to 1.6% year on year in the first half of 2013.
The economic slow-down, weaker business confidence and lower domestic consumption has hit banks, says Fitch. Yet the ratings agency points to Banco Popular Dominicano, the country’s largest privately-owned commercial bank, as weathering the circumstances well.
Indeed, the bank reduced its rate of bad loans to 1.15% — down more than a point from three years earlier. It has also improved its profitability while at the same time growing its balance sheet. It is those financial improvements that make it LatinFinance’s Bank of the Year Dominican Republic.
The result is particularly noteworthy given the economic backdrop.
In a bid to increase economic activity, and after holding rates for more than a year, the central bank began cutting them in May 2012. Over the following year it reduced rates by 250 basis points, to 4.25% — although it undid most of that with a 200 basis point rate rise in August 2013.
The importance of central bank rates for profitability means the cuts may hit BPD’s performance, says Fitch. The bulk of the bank’s investment portfolio — 92% — is held in central bank debt, a further 6% is in debt sold by other local banks, and the last 2% is in government bonds.
Still, with a granular loan book and careful management of its balance sheet, Fitch expects the bank to continue outperforming the market average.
Banco Popular Dominicano has also made moves to strengthen its balance sheet, with the sale of subordinated capital in the local market. The bank sold a 500 million Dominican peso ($125 million) bond in October 2012. The subordinated note has a 10 year maturity. LF