The country’s banking system is already well-regarded and is moving into line with international standards under the new regulation.
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The Dominican Republic’s financial sector has seen rapid growth in recent years. Ten years ago there was virtually no domestic capital markets activity and today it is worth $1 billion a year. In terms of loan growth, the system grew by 12.6% in the past 12 months. A new trust law was passed in 2011 that promises potential securitization financing to drive the country’s many infrastructure projects. Both the IMF and the rating agencies consider the banking system to be well-capitalized and well-regulated. The IMF’s latest report states: “The financial sector remains sound, with banks showing healthy capitalization, profitability and asset quality. The mission welcomed progress made in strengthening banking supervision.”
Despite the relative strength of the financial system, a new law is on the way designed to strengthen it further. The proposals have already gone through eight rounds of public comments and adoption is expected to come in the first years of the next administration. The changes are progressive, rather than dramatic, but should add even greater robustness to the growing capital market’s supervisory authority. When adopted, the new law will also bring the country’s banking regulations into line with international standards.
The banking system itself is solid: following the country’s financial crisis in 2003 there was a drive to quality in the sector. Customers moved deposits and other business to the larger banks. The largest bank on the island capitalized on this trend and Banco Popular became the dominant player. However, in recent years there have been two key developments that have shaken up the Dominican Republic’s banking system. In 2014 the third and fourth largest banks merged to form Banco BHD Léon, creating a true competitor to Popular in the private sector, however, BHD Léon is still 8.7% below Popular’s market share of deposits (26.9%).
The more significant event was the reinvigoration of the government’s wholly-owned bank Banreservas. President Danilo Medina recruited Enrique Ramirez from the private sector, as he did with other top executives to run the state bank. The president’s mission for the new executive team was clear, to build the state bank into a competitive alternative for private sector retail and corporate banking clients.
The change in the bank’s size and business mix has been dramatic. It had long been the leading institution thanks to its public sector business but the new management team has turned this upside down. In 2012 the bank’s portfolio was 80% public sector and just 20% private sector. This ratio has already been reversed.
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Enrique Ramirez Paniagua |
The public sector portfolio on the bank’s balance sheet has been reduced, largely due to a series of securitizations of credits from the ministry of finance that the bank has sold to Citi and Bank of America Merrill Lynch. Meanwhile, the bank has radically reformed its retail proposition, winning market share from the private sector, and has implemented new institutional structures to maximize cross-selling initiatives that boost both revenues and profitability. The bank is working towards reaching the cross-sell index levels of other regional competitors as it is focused on increasing the share of wallet of its existing clients rather than seeking to increase its clients base. The corporate banking segment has also been revamped. While the bank is strict about focusing on profitable business it is also tasked with delivering financial support to the government’s key growth sectors. It has been a strong supporter of construction, tourism and agriculture projects in the Dominican Republic.
“There is no conflict between the bank financing the growth of companies in the industries that are the strategic focus for the government and growing a profitable bank,” says Ramirez. The government also introduced a law to recapitalize Banreservas to the tune of an additional Ps10 billion ($220 million) by the end of 2016. The process uses retained earnings and would-be dividend payments to increase the bank’s capitalization. The bank says the process should be complete in the first half of 2016 but the government is already considering further capitalization (the minister of finance is chair of the bank’s board of directors).
“We are discussing a new organic law for the bank that will outline its mission statement and strategic vision for the bank – and how that interplays with the government’s macroeconomic programme,” says Ramirez. “Fortunately for both the bank and government, recent growth has been above expectations so the government doesn’t need to receive any dividend payments in the near term and we can channel that into increasing the bank’s capital base to enable us to grow even faster.”
The development of Banreservas into a true competitive force in the country’s banking industry has caused concern among its private sector competitors. Privately they concede that the pressure from Banreservas is being felt across different areas, including recruitment, as the the state bank has been able to attract top talented people to fill the management positions of its new retail, corporate and wholesale and investment banking units. The rate of growth has been impressive across the bank’s key metrics. Between 2010 and 2015 total assets grew by 9.9%, total deposits by 8.1%, the total net loan portfolio by 13.3% and total equity by 8.6%.
“It is very hard for the private banks to compete with Banreservas because it has the lowest cost of funding in the system – all government deposits go through the bank,” says Larisa Arteaga, director at Fitch Ratings in Santo Domingo. “Right now, Banreservas is a very big and important player and enjoys pricing power.” Arteaga says some of the banks are increasing their exposure to riskier market segments in response, but the system’s non-performing loans remain low and she is not concerned about any unstable credit bubbles forming in any market segments.
Ramirez at Banreservas is unapologetic about the bank’s pursuit of market share and its current recapitalization. He points to the work the bank is doing on extending financial inclusion to unbanked segments of the economy as evidence that the profitability of the bank is a means to an end – and not an end in itself.
“The government recognises that a strong Banreservas leads to a strong banking system and a strong Dominican Republic,” says Ramirez. “The increasing capitalization is anchor to that strategy.”
Ramirez points to the four initiatives within its financial inclusion strategy: CREE, which brings together entrepreneurs, investors and advisers to help grow SMEs; Prospera, which directs money into investments in the sectors identified as priorities for the country’s economic growth (such as agribusiness); Preserva, a financial outreach and education programme for unbanked individuals; and Cerca, a growing network of correspondent banking agencies that fulfil (often rural) banking services through affiliate businesses.
Technology has been a big driver of greater financial inclusion – for example, through mobile banking and ATMs – as well as driving other digital efficiencies in other areas of the bank’s products and services. However, this investment has raised efficiency issues, with the bank registering a cost-income ratio of 72% as of September 2015. This also reflects the size of the physical network throughout the country that it needs in its role as main state bank.
Capital markets
The local capital markets are dominated by issuance from the ministry of finance. The government now taps the local market regularly and offers tax incentives for investors that make these bonds (typically 10 year tenors with coupons of 9.75%) attractive and relatively liquid. The central bank also issues as part of its monetary governance of the economy – issuing paper to take out liquidity from the system when rates are rising.
So far issuance by the private sector is rare. Bankers say that it is not just a case of the public sector bonds crowding out private supply – especially given high rates and tax incentives. They point out that the level of disclosure required to issue bonds is a disincentive, with many of the largest companies in the Dominican Republic family-owned and unaccustomed to required levels of transparency. However, this is expected to change. Investment bankers report strong private sector interest in issuing domestic bonds and as the buy-side continues to develop. Pension funds and money market funds are growing quickly and the first hedge fund is now registered and raising funds. Originally the trust law was used to cover real estate assets but has been developed to cover tourist projects. As these trusts grow they will provide a source of securitizations for the local market.
