Costa Rica’s banks adapt to new role for Bancrédito

The Costa Rican government’s decision to convert state-owned retail bank Banco Crédito Agricola de Cartago (Bancrédito) into a development bank won’t lessen the strong competitive position of the pubic banks in the country, according to Esteban Bonilla the Financial Manager of BAC San José.

Moody’s says the transfer of Bancrédito presents some headline risks to the system as the bank winds down its balance sheet by selling loans and fixed assets to pay creditors. The government ordered the bank to cease all financial intermediation by June this year as it aims to establish itself as a development bank by the end of this year. The decision followed Bancrédito reporting recurrent net losses due to impaired loans and a poor efficiency ratio, which had weakened the bank’s fundamentals.

Meanwhile Bonilla, who heads the largest private bank in the Costa Rican market (with a 13% share of system assets), says the competitive impact will be minimal: “The disappearance of Bancrédito has had some impact on local liquidity – and on the liquidity of the other state-owned banks in particular since they have been helping the government in dissolving the bank. But the longer-term structural effect shouldn’t be important.”

Bonilla points to the fact that two other local banks (Banco Nacional de Costa Rica and Banco de Costa Rica) will still dominate the system – with a combined share of system assets of 43%. Meanwhile Banco Popular, which is a bank that was created by the state and is owned by its employees, has a further 14% market share, meaning the private banks operating in Costa Rica face significant public sector competition.

Moody’s says the high concentration of market share from the public sector creates an uneven playing field for the country’s predominantly foreign-owned private banks, reflected in more fickle funding and higher funding costs for the private sector.

The report states that “state-owned banks have a significant competitive advantage in attracting inexpensive retail deposits because they benefit from a state guarantee on their liabilities (in liquidation). The system’s average loan-to-deposit ratio is approximately 100%, indicating banks’ limited overall reliance on market funding, which accounts for 20% of total liabilities. However, the loan-to-deposit ratio varies widely between state-owned banks (85%) and private lenders (116%).”

Bonilla agrees that the competitive environment is skewed to the public sector: “The public banks have a state warrant and also they are the oldest banks in the system and they benefit from certain restrictions, such as state-owned companies are required to keep deposits at state-owned institutions, which provides them an advantage in terms of local currency lending,” he says.

However, the private banks have been able to grow quickly in recent years by focusing on dollar lending, digital platforms and other customer service-oriented measures.

Bonilla says BAC San Jose is also targeting local currency lending as an opportunity: “We are aiming to increase our market share in colones [lending] through better service and digital solutions. We address our disadvantage against the state banks in terms of regulation by offering clients more competitive products and being more agile than the state-owned banks.”

BAC San Jose has been growing at roughly twice the rate of GDP in recent years and Bonilla thinks that this rate could improve further, with a prediction of around 12% nominal growth while GDP is expected to be between 4% and 5%.

The healthy macro-economic environment – the economy is well diversified and has a large services and tourism base that generates large foreign currency revenues – has been a strong positive factor in recent years. However, a growing fiscal challenge and a political deadlock in terms of tackling the country’s growing financing deficit are a looming issue for the entire country. There is little prospect of a solution before the country’s general elections in February 2018.

With no structural solution in sight, President Luis Guillermo Solís plans to switch the government’s funding to the international markets to ease pressure on the local markets. The high fiscal deficits – averaging 5.2% of GDP since 2010 – have increased government funding needs and pushed rates higher. After holding steady for 15 consecutive months at 1.9%, short-term interbank lending rates rose sharply to 5.8% in July. Moody’s notes that this added to the government’s already strained fiscal metrics: “Although overall expenditures increased by 3.6% during the first four months of this year, interest payments on domestic debt grew by 8.6%.”

An international debt transaction would be the first for the country since 2015.

Bonilla agrees that the chance of a swift resolution to the economy’s major challenge is slim. “We have no expectations for a solution in the next 12 months as we will be seeing a transition of government. The next government will definitely have to prioritize fixing the situation and it will probably require some unpopular measures to create a solution in a coherent and structured way,” he says.

“However, we still believe the situation is very manageable and one of the good things the last government did was to extend the debt maturity profile. We don’t have huge debt concentrations maturing for some time so we don’t expect a market-driven crisis.”