Latin American bank management: CEOs focus on home improvement

Focus: The big banking exclusives in Euromoney

How has your bank been affected by the credit crunch?

FC, Banco de Chile Inevitably, the cost of foreign funding has increased while internal credit demand has suffered a slowdown, especially in consumer loans. In addition, it has started to negatively affect – although in isolated cases – some debtors that used to export to the markets most affected by the credit crunch.

AR, Banorte The effects of the global credit crunch on Banorte have been minimal so far.

Financial penetration in Mexico is still very low, having not yet fully recovered from the collapse of financial intermediation that followed the Tequila crisis of the mid-1990s. Even though lending by the banking sector has been growing at double-digit rates for the past five years after a full revamp of the financial system, there is still plenty of pent-up demand for mortgage, consumer and commercial loans. We believe the Mexican economy will grow in the 2% range in the next 18 months, which, although not robust, is solid in light of the US environment.

There has been a sharp slowdown in lending by banks that were focusing solely on providing commercial and corporate loans – those without a retail presence in Mexico. Some of these international players were forced to pull out of Mexico because of liquidity issues abroad. As a result, Banorte’s loan portfolio has expanded at an annual rate of 28% in the first six months of 2008, well above average in the industry.

The outlook for the next 12 to 18 months is challenging. Lending will undoubtedly slow down in Mexico as a result of credit-quality issues in the consumer loan portfolios of many banks, higher reserve requirements by the authorities and tighter monetary policy due to rising inflation. In addition, a sharp slowdown or recession in the US over the coming quarters will dampen economic growth in Mexico.

CP, First Caribbean Our bank has not been directly affected by the credit crunch. However we are indirectly affected because the associated global credit spread widening adversely affects the value of our dollar investments, with the mark to market largely coming through P&L as these are mostly held in trading portfolios; the associated reduction in dollar interest rates affects returns on our dollar assets; and the resulting US/global slowdown is filtering through into Caribbean economies.

However, our core businesses are performing very well; we announced underlying profits up 12% in our half-year results to April 30.

MC, Bradesco We have not been affected in the slightest. There has been no rise in default, disparity between assets and liabilities, or depreciation of the securities that make up the loan portfolio. The fundamentals are balanced and profitability has been maintained. You only have to compare Bradesco’s net income of R$4.1 billion [$2.5 billion] in the first quarter of this year with the R$4 billion it obtained in the same period of last year to see this. Our financial solidity and ability to generate new business remain intact. Obviously our shares were affected by the global crisis, but even so, the effect was positive since our market value has risen in relative terms and we have become one of the 20 largest banks in the world by market capitalization.

JL, Bancolombia As regards Colombia’s capital market flows, the interest in and availability of debt denominated in dollars has decreased and the government and private sector have been net payers of their dollar obligations. Even with higher local rates the main activity has been towards financing projects in local currency since the credit crunch started. Even if local asset markets have seen less liquidity and more pressure on local rates, we have a mix that has played for better margins on credit assets and nice profits.

Higher local rates are acting on the appetite for local credit as well as more cautious risk assessments made by banks when lending.

In Colombia and other countries we see that the lack of capital of US and European banks has meant they cannot increase their new lending capacity. That will play against the growth of US-denominated loans for regional banks.

WB, Banco de Crédito del Peru The cost of the funds we obtain offshore has increased. Fortunately the funds are available, but at a higher margin.

RS, Banco Itaú First, although we have significant investments in Chile, Argentina and Uruguay, we are primarily interested in Brazil, which has been supported by a good economic environment and strong development, especially when you consider the increased credit demand. That’s why we think that the global credit crunch that began in the US will have less impact on our main market. The second thing is that the Brazilian central bank started a process of interest rate tightening to prevent commodity-price inflation spreading to other parts of the economy. As a consequence, the rates of growth of the global credit portfolio in Brazil will fall, but we believe the pace will still be sufficient to give us have a good performance in 2009. I must emphasize that we are changing our mix of credit, aiming to increase our commercial activities in segments where we have traditionally kept a low profile, such as consumer credit and loans to micro, small and mid-sized companies. This strategy has shown results: the rate of credit portfolio increase is higher than the market average.

DP, Banco Industrial Our investment policies didn’t allow us to invest in high-risk markets such as the sub-prime mortgage market. That is why the credit crunch crisis has not affected us as directly – our funding from international sources has remained stable. Nevertheless, our lenders have implemented stronger credit policies such as reductions in country limits, increased margin and collateral requirements and other restrictions. However, as a key player in the central American financial market and because of our healthy financial position, we have not suffered as other, smaller banks in the region have. At the same time, the supply of funds has diminished and we have been forced to seek alternatives and new mechanisms of funding.

Unusually for a credit crunch, interest rate levels have been low. Banco Industrial has benefited from this because it has allowed us to restructure and pick up debt at a low cost.

Are you worried that your bank will be facing growing non-performing loan rates over the next 12 months?

CP, First Caribbean I am not worried about rising NPLs because our bank has good control systems and our lending book is conservatively positioned. However it is certain that NPLs will rise as Caribbean economies weaken.

MC, Bradesco We have seen no change in the default curve so far and I see no reason to expect it. Bradesco’s loan portfolio increased by 38% in the 12 months to the end of June and default levels remained unchanged at about 3.5% every month. Obviously, we are concerned and we are vigilant, regardless of the economic background. However, there are no signs to date that the risk to the loan portfolios has risen.

FC, Banco de Chile We have seen no significant impact so far. But if economic activity continues to decelerate and inflation remains high, the natural course will be higher levels of non-performing loans.

JL, Bancolombia We feel that tightening monetary policy in Colombia since April 2006 has been already incorporated in the current slowdown and that during 2009 monetary policy should become less restrictive. The main risks are wage negotiations and the way investors react to inflation expectations because they could hurt the cost of capital. Investment has been the key driver of recent growth and a setback could harm it and the labour market. We feel that the floating exchange rate and inflation targeting policies will last and therefore we are optimistic. We believe that there will be little deterioration in the labour market and that the outlook is for a soft landing; lower food inflation will increase the disposable income of low-income households and that should curb any rise in NPLs over the next 12 months.

DP, Banco IndustrialGuatemala’s central bank strategy has been targeting inflation control by increasing the main interest rate, the tasa lider. This has forced local banks to increase their rates as well, increasing the risk of a rise in NPLs. However, the redefinition of our credit policies and risk assessment procedures means we can maintain a healthy NPL rate.

WB, Banco de Crédito del Peru Undoubtedly we will face growing NPLs over the next 12 months. We believe, nevertheless, that the current level of provisioning and capitalization will allow us to go through this without major consequences.

RS, Banco Itaú We are not afraid about the possibility of growth of NPLs in the next 12 months. The Brazilian economy is in good shape and our credit risk models will detect early any change in the market’s mood. The market is far from living in a speculative bubble. We believe that unemployment will stay low despite the squeeze on interest rates by the central bank. I cannot see any material deterioration in our credit portfolio.

AR, Banorte Banorte’s asset quality has remained stable and is among the best in Mexico. The past due loan (PDL) ratio has been ranging from 1.5% to 1.7% over the past 12 months, the lowest in the Mexican financial sector, although we have seen some deterioration in the consumer portfolio, especially in credit cards. This has been offset by an improvement in asset quality of the mortgage book. Also, commercial loans have a stable PDL ratio and lower net credit losses, and the corporate and government loan books have zero delinquencies.

For our credit card portfolio – 7% of our total loan book versus the 30% average for the two largest players in the industry – the recent deterioration is a result of Banorte’s strategy to increase its presence here. The PDL ratio increased from 3.6% in the second quarter of 2007 to 6.7% in the second quarter of 2008 because of the maturing of the bank’s two largest vintages, 2006 and 2007, which can take 18 to 24 months to peak.

As a result of the maturing of these credit card vintages, along with declining consumer confidence and higher household leverage, we expect NPLs to increase over the next 12 months. Total NPLs could increase to about 1.8% to 2% and credit card delinquencies to about 8% by the end of the year. Nonetheless, we expect them to start levelling off in the first half of next year, since we have been taking proactive measures to tighten our origination standards, improve our risk management tools and collection processes and help clients to face some of their liquidity problems through restructuring.

What do you expect to be your most profitable products over the next 12 months?

DP, Banco Industrial Our most profitable products are our investments in securities. Guatemala’s main interest rate (return on sovereign bonds) has been increased by the Guatemalan central bank. Currently our investments in sovereign bonds have increased.

Other profitable products are credit cards and our retail loan portfolio, since we have been forced to increase rates because of our increase in investments and so have less money to lend.

We also have an important product developments strategy, including new family remittance programmes, internet banking, cell-phone banking and new retail strategies, among others.

MC, Bradesco Credit will remain our main product, against the current Brazilian backdrop of economic stability and a growth cycle. A surprising statistic was published on August 6 that, following three years of constant growth, the Brazilian middle class has become larger than the lower income group. This is quite extraordinary. For this reason, I believe in expanding the process to include more people within the banking system by offering more current accounts, a higher volume of credit, particularly home loans, credit cards, insurance products and investment banking business.

JL, Bancolombia We believe that loans given to the entrepreneurial sector can provide attractive returns with low risk. We have a clear sense that corporate Colombia and mid-sized companies are in general, with few exceptions, better financially positioned. That with modern practices should help to handle the current slowdown.

But mainly we believe that there is willingness and a need for value-added services such as interest-rate derivatives, exchange-rate derivatives and related broker and settlement services.

Similarly, we think that infrastructure projects will not only be attractive for fees under investment banking activities but also that syndicated loans, partnerships and related revenues will be a good source of revenues.

WB, Banco de Crédito del Peru Micro-finance is the most important area of growth for our bank.

FC, Banco de Chile Products and services focused on the retail market will continue to drive profitability, including traditional banking products such as current accounts and the distribution of third-party services, such as insurance. In the corporate market, we expect investment-banking services will be the most profitable.

AR, Banorte Payroll loans, credit cards and SME loans will continue to be Banorte’s most profitable products, delivering the highest risk-adjusted return on equity in the loan book. The main advantage of these products is that they have high financial revenues, as well as important non-financial income, mainly fees. On the consumer side, the expected risk-adjusted ROE for payroll and personal loans will be between 35% and 40%, while credit cards will be between 25% and 30%. All of these products will continue to grow at double-digit rates over the next year, although at a slower pace than in the previous 12 months, as a consequence of tighter credit standards, especially in credit cards.

On the corporate side, loans to small and medium-sized companies will be the most dynamic and profitable part of the portfolio. Banorte is making efforts to increase its presence in this segment, given low banking penetration and high pent-up demand. In addition, the recent regulatory changes that make origination at branch level more efficient, as well as an active government partial guarantee programme provide the right incentives. Even though the yields on these products are lower than in consumer, the expected risk-adjusted ROEs will be around 20% to 25%, since net credit losses are much lower.

How important is regional expansion to the fortunes of your bank?

RS, Banco Itaú Brazil is our first choice. After that, our second choice is Brazil and the third one is also Brazil. We have maintained the Brazilian market as our main option for increasing financial services and making profits. We see room for development and new opportunities such as the mortgage market, which is still small and shows a lot of potential. We are satisfied with the contribution of our operations in Chile, Uruguay and Argentina to our bottom line; we have noticed an important increase in the credit portfolio in Chile. During the last year and a half we have opened 13 new branches in these markets to increase our coverage.

JL, Bancolombia We think that regional expansion is a must but we must do it in an orderly way. We see Colombian companies and foreign ones looking for regional growth as we get a more integrated regional economy. We want to be their bank and their partner but we are looking for the right pace and to take on risks we feel comfortable with. As we ask our clients to handle and measure their risks – and believe that by doing so we limit risk – we know that they feel we should handle and measure our own risks; that builds long-term relations and lowers their risks too.

WB, Banco de Crédito del Peru Regional expansion is extremely important, although our domestic market is growing at such a pace and is so attractive that we have postponed our plans so that we don’t lose focus and distract management. The topic will resurface in two to three years’ time.

FC, Banco de Chile We have no plans for regional expansion.

DP, Banco Industrial Regional expansion is very important for Banco Industrial. Our mission statement is to be the preferred bank for the central American people. We plan to expand to areas such as the southeast of Mexico and other central American countries.

AR, Banorte Domestic expansion and a small venture in the US-Mexico border region have been the most important elements in Banorte’s strategy, and will continue to be so in the future. In 2006, Banorte purchased 70% of the Texas-based InterNational Bank; in 2007 and 2008 it acquired the remittances companies Uniteller in New Jersey and Motran Services in California. These acquisitions were mainly to provide services to our Mexican clients, especially in northern Mexico, with different financial needs in the US. Banorte is also seeking to expand its offering of banking services to the US Hispanic market.

CP, First Caribbean Regional expansion is not critical to our bank. We already have wide regional coverage with 17 countries of operation. There are many organic growth opportunities and our focus is to capitalize on these.

MC, Bradesco Our aim is to occupy all possible market segments as the Brazilian economy recovers. The main opportunity in my view is the millions of new consumers interested in banking products and services. Looking further ahead, we will be evaluating our exposure to other markets in the region.

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Will the credit crunch adversely affect the competitiveness of foreign banks in the region?

FC, Banco de Chile I consider that no significant impact will be perceived in the competitiveness of foreign banks. Foreign banks in Chile with a strong position in the retail market are yet to be among those banks most affected by the credit crunch so far.

AR, Banorte It has already started to adversely affect their competitiveness, especially those banks that lack a retail network in Mexico and therefore do not have access to cheap core deposits to fund their lending operations. These banks have either shut down their operations in our country or have been providing loans very selectively to premium clients.
The large global banks that have a retail presence in Mexico are still very competitive and we expect them to remain so. Nonetheless, some of them might face temporary constraints to growth and capital deployment as a result of the difficulties their parent companies are facing abroad.

CP, First Caribbean There will be winners and losers among the foreign banks operating in our region. The differential in short-term fortunes of the two groups will be significant, I think.

MC, Bradesco I don’t think so. They operate under local conditions in Brazil and what goes for the domestic banks goes for them too.

JL, Bancolombia We think that foreign banks have great problems at home that need time and resources to solve. That affects their capability to operate as risk-taking global banks. Bad financial news could hurt their image but we do not think that they are looking to reduce their presence or to give up their clients. Rather, it might work out the other way – Latin America and the Caribbean are so attractive and profitable they can make aggressive bets to get higher returns. The risk perception is constantly evolving and they might look at emerging markets as a high-return area with less risk than historically was the case. Will they feel it difficult to compete with products denominated in dollars or euros? Most probably, yes. Will they still try to get market share in the local markets with products related to the local currency? Most probably, yes.

RS, Banco Itaú Some foreign banks with operations in Brazil have reduced their overall losses through profits made in Brazil. Competitiveness in Brazil is increasing rapidly but I think that foreign banks will try to maintain their stakes here because of the great opportunities.

DP, Banco Industrial Most of the foreign banks in the region have redefined their lending and risk policies. They also expect less help from headquarters that are directly exposed to the credit crisis. It is advantageous to us as a local bank that we have not been directly affected by the credit crisis.

What do you think will be the long-term consequences of the crisis for the finance industry?

FC, Banco de Chile Overall, the industry will come out strong. On a global scale, it is likely that it will face new regulations on capital requirements. The risk perception of non-banking companies specialized in housing loans in the US and in Europe will change and its relative importance in those markets will decrease. Finally, credit-scoring models used to supply loans and provisions for abnormal credits will be reviewed.

AR, Banorte Globally, the main long-term consequences will be: the revamping of risk management – financial institutions will have to redesign their risk management tools to cope with the most adverse scenarios and they will have to continually test their exposures to high-stress scenarios, and will be asked by authorities to either unwind risky positions or implement preventive measures; redesign of securitization mechanisms – there will be more scrutiny of securitization, while more risk aversion and higher spreads on these instruments will remain for some time; consolidation, mostly in the US – institutions will be acquired and others will disappear, in that some of the smaller investment and commercial banks could be absorbed by commercial banks with deep pockets that want scale and can take advantage of cheap valuations of troubled institutions; redeployment of capital – institutions that are struggling to maintain their capitalization ratios will continue to tap the debt and capital markets to recapitalize their balance sheets, translating into new ownership structures in some of the major financial institutions, with capital coming from around the world; changes in regulation and financial order – authorities will apply tighter control and disclosure requirements to investment banks, as well as the exposures of major banks to structured vehicles, including closer scrutiny of balance-sheet and off-balance-sheet exposures, as well as liquidity, funding and capitalization; there will be a redefinition of rating agencies’ role in evaluating risk and their relationship with their clients; tighter reserve requirements – authorities will demand higher reserves for instruments that have complex financial structures, as well as riskier loans. Also, institutions will be asked to build up reserves during positive economic cycles as a cushion for downturns.

CP, First Caribbean The long-term consequences of the credit crunch are significant. There will be winners and losers.
Winners will be able to make attractively priced acquisitions when many of their competitors cannot play. Similarly they will be able to capitalize on market share opportunities as losers are constrained in their lending and investments. Talent will gravitate to the winners.
The industry also needs to look hard at how it got into this mess. High on the list for review will be: allocation of capital between retail banks and investment banks; incentive systems and their linkage with risk and long-term return over the cycle; checks and balances – in particular the role and capability of risk functions, boards, regulators and ratings agencies.

MC, Bradesco I believe the market in Brazil will remain firm and do not foresee any upsets. Brazilian banks did not buy sub-prime securities because the spreads at home were more attractive. In world financial markets, I believe we will continue to experience instability because of corporate earnings. Important questions remain. Will we have more write-offs? Is there any more information we do not know about? This uncertain climate doesn’t help.

JL, Bancolombia There seems to be a desire for more regulation, for higher capital requirements and for fewer off-balance-sheet instruments, and less enthusiasm for customized derivatives. Regulators will step on the brake and reduce the speed of financial innovation. It is hard to say if it will dampen financial integration and industry consolidation. It might be an opportunity to play local with more need and availability for local debt but that can also play well for aggressive competition – even from foreign banks with a regional presence.

WB, Banco de Crédito del Peru There will be consolidation in the investment banking business.

RS, Banco Itaú The finance industry will finish this crisis stronger than at its start. The financial companies have to improve their business model to avoid loss of confidence by depositors. We can see a widespread failure of risk management in this crisis and the securitization market needs more transparency to avoid the same error in future. Authorities have an important task to do:, improving and developing a new regulatory environment that strengthens the whole system.

DP, Banco Industrial Guatemala and the central American region have a solid stable macroeconomic position. This is why the crisis has not been as harsh in central America as it has been in other regions of the world. Nevertheless, since the US is the main commercial partner of the central American countries, we can expect a decrease in economic growth, driven especially by a reduction of family remittances coming from the US.
The long-term consequences of the crisis will be stronger lending policies and increased lending restrictions. Central American banks’ main funding sources are US banks. If the US correspondent banks apply stronger lending requirements, some banks in the central American region will not be able to comply. However, this won’t be the case for Banco Industrial because of our market and leading position in the region.