Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AmericasJuly 3 2007

Making a profit during a crisis

Local medium-sized banks have used the risky times of Argentina’s financial crisis to put their growth and expansion strategies into action. Karina Robinson reports from Buenos Aires.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

“Business is about the successful exploitation of risk, not the avoidance of risk,” Douglas Flint, group finance director of UK-headquartered bank HSBC, told The Banker in an interview a few months ago.

The problem for large global banks such as HSBC is shown by the market reaction to its exposure to the troubled US sub-prime mortgage market: acres of negative press coverage amid a share price fall. Investors of the highly rated behemoths, such as HSBC and Citi, are not looking for high risk when they buy their shares.

That is why, despite their hefty balance sheets and presence in emerging economies, they are not always best placed to take advantage of the opportunities thrown up by crises.

Mr Flint was not talking about Argentina – he was making a larger point about strategy – but he might as well have been.

Argentina provides a good example of the nimbleness of medium-sized banks owned by domestic capital. Although HSBC Argentina, the bank’s Buenos Aires-based bank, bought Banco Nazionale de Lavoro’s Argentine banking operations for $155m in January 2006, it did so quite a few years after some of the local banks had already made their acquisitions as the country emerged from the economic crisis of 2001-02. That is despite HSBC’s pride in buying banks at reasonable prices, when competitors are wary of acquisitions in a country or sector.

The canniest banks in post-crisis Argentina, instead, have been the medium-sized local ones, such as Banco Macro, Banco Patagonia and Banco Hipotecario. Like HSBC, they went through the horrors of a crisis in which bank accounts were frozen, and the ‘pesofication’ of dollar accounts and a host of other measures were taken that damaged both the banks and their clients.

But while HSBC Argentina executives were busy justifying to their far-away London headquarters being caught out by the crisis (in 2001, HSBC Group took a $600m provision for its Argentine exposure) amid the end of the convertibility regime (where one peso was exchangeable for one dollar), Macro and Patagonia were planning their longer term Argentine strategy.

Banco Macro

Banco Macro now has 430 branches, the second largest network in Argentina behind the much larger Banco de la Nación Argentina, which has 723. In 2001, it had only 70 branches but in January 2002, in the middle of the crisis, it acquired Banco Bansud and in later years Nuevo Banco Suquía and Nuevo Banco Bisel, among others.

“In Argentina, it is good to have a bank with liquidity because history shows that without it, you will have problems. This bank has grown because analysts always thought we had too much liquidity,” says Jorge Brito, president of Banco Macro. The bank still keeps 30% of its assets in liquid government and central bank paper.

Banco Macro listed on the New York Stock Exchange in March last year; the first Argentine company in almost a decade to conduct an international equity offering. It was seven times oversubscribed as investors realised the potential of the bank and of the economy, which has expanded 40% in the past four years while loans to the private sector grew 42% in 2006.

The effect of Argentina’s decision not to pay its debts, allied to the devaluation and a boom in the price of food such as soya on the back of Chinese demand, is likely to continue, with gross domestic product (GDP) growth forecast at more than 7.5% for 2007. With real wages up, a consumer-led boom is set to continue, boosting the personal loans and credit card businesses of all banks.

“You will consume, you won’t save, as you remember what happened before,” notes Alejandro Henke, an executive director at Banco de Córdoba, referring to the freezing of bank accounts and the devaluation during the crisis.

Macro’s strategy, says Mr Brito, is exactly the opposite of that of the foreign banks established in Argentina, which focus on growth in the capital city. About 95% of Macro’s branch network is outside Buenos Aires, in what Mr Brito calls the “real economy, which is in the interior [of Argentina]”. He adds: “We want to be in all the cities of the country.”

However, he denies market rumours that he is planning to take over Banco de Galicia, the second largest bank in the country by assets. “It is not true. Our growth is going to be organic. We are going to double the profit from our branches,” he says. He insists that the bank can increase its return on equity (22% in 2006) through better performance of more recent acquisitions (such as Banco Bisel) and that it would be a strategic error to buy a big bank because Macro does not have the extensive top staff needed to manage another acquisition.

Mr Brito, along with other Argentine investors, owns a significant stake in the bank.

Funding formula

Part of the Macro formula includes cheap funding at 4.95%, according to Mr Brito. As Deutsche Bank Securities said in a recent note: “Macro benefits from exclusive contracts with provincial governments that provide a great source of stable low-cost funding.”

Provincial governments pay their employees through the banks. These banks do not pay interest on current accounts. As a result, the cost of funding is cheap, while the banks receive about 9% if they put their funds into central bank bills. Mr Henke points out that the cheapest two-year loans carry a rate of about 20% once fees and commissions are included.

Macro has a 52% average market share in the four provinces of Salta, Misiones, Jujuy and Tucuman, with contracts in each that are due to run for between two and nine years.

Deutsche has a buy recommendation on the bank, which posted a 62% rise in pre-tax profits to 424 million pesos ($140m) in 2006. However, some investors are less favourably inclined. Hallgarten & Co, an investment research firm, wrote in a recent report: “Compared with big metropolitan banks, Banco Macro still does not rate. From a distance, one might get excited about rural presence in light of the experience of recent years but the bulk of the export wealth is being generated in the pampas district of Buenos Aires province, Córdoba province and Santa Fe province. These areas are fairly well covered by the provincial government-owned banks and Banco de la Nación.” It recommends selling Macro shares.

Banco Patagonia

Banco Patagonia also used the crisis to expand. In 2003, it bought Banco Sudameris Argentina from Italy’s Banca Intesa, and in 2005 it bought the Argentine business of the UK’s Lloyds TSB Bank. It now boasts a 2006 return on equity of 33%, compared with a system average of 16.3%, while its non-performing loans have dropped from 20% of total loans in 2003 to 2.6%. Profits rose 17% to $90m in 2006.

“We who live in Argentina know crises are very deep but very short,” says Banco Patagonia president Jorge Stuart Milne, interviewed at the bank’s headquarters in Buenos Aires’ central Microcentro neighbourhood. “Those who had an appetite for risk took the opportunity to expand.”

Changing face

The nimbleness of some private sector Argentine banks is evident from the changes in the composition of the financial system in the past few years. In 2001, foreign banks held 53% of all deposits and private sector Argentine banks held 15%. In 2006, the foreign bank share fell to 28% and Argentine private sector banks nearly doubled their share to 27%, according to the central bank.

But the growth in banking services needs to be kept in perspective: the ratio of loans to GDP in 2006 was only 11%, severely down from 24% in 1999, before the crisis. And even with mortgages growing at 15% in 2006, they only represented 6% of loans compared with 24% in 1999, according to the central bank.

For bankers, though, these relatively low percentages represent a great opportunity.

Standard & Poor’s (S&P), which expects credit to continue growing strongly, sees two major challenges for the banking system: to increase the level of intermediation in the sector and to extend loan maturities. It sounds a note of caution about the sector in a report, though: “The maintenance of healthy and predictable policies in the fields of economics, legal and regulation continues to be the principal determinant in the development of a healthy banking system.”

The government could increase the level of intermediation if it dispensed with the financial transactions tax. There is a 0.6% tax on money deposited in an account and another 0.6% on money withdrawn. This could result in more of the black economy – which has been estimated to be anything up to 40% of GDP – becoming formalised and would boost the financial sector.

Bankers do not expect this to happen this year due to the autumn elections because the financial transactions tax accounted for a significant part of the tax take in 2006. It was collected by the banks – a help for a government with an inefficient tax collection office.

Banco Hipotecario

Another non-foreign bank that used the crisis to expand was Banco Hipotecario. It started out with one small advantage: in 2001-02 it did not have incensed customers taking out their anger at frozen and devalued accounts, unlike local banks such as Banco de la Nación Argentina or foreign ones like HSBC. At a time when most banks in the Microcentro sported metal barriers, scores of security guards and graffiti, it remained a relative oasis of calm. That was because its business was only in mortgages.

Hipotecario had been planning to expand into other businesses. “Three days before the crisis, the central bank of Argentina authorised us to take deposits, so we had no customers writing nasty things on our walls,” says Clarisa Estol, the bank’s president.

However, that does not mean it was not in crisis: it had foreign liabilities in dollars worth $1.2bn, and its assets and earnings were in devalued pesos. Also, non-performing mortgages rose to 22%.

Nevertheless, the bank grasped the opportunity. It restructured its debts, cut costs and improved efficiency, and was thus well placed to enter the retail markets at a time when other banks were still preoccupied with their recoveries. It now has more than one million retail clients and an admirable cost/income ratio of 41%.

S&P noted in a March report that, with liquid assets of 26%, Banco Hipotecario was able to finance purchases in the local market. In April, the bank announced its acquisition of the brokerage business of BNL from HSBC, part of its aim to become a universal bank.

S&P sees the bank’s main challenges as continuing the diversification of its business and reducing its exposure to the public sector, which currently stands at 35% of unconsolidated assets.

The bank’s controlling shareholders are local conglomerate IRSA and other investors who have 30% of the shares and 50% of the votes. The rest of the shares are owned by the state.

Acquisitive interest

A Buenos Aires-based financial consultant said that four foreign banks had expressed an interest to him in buying a bank in Argentina, and earlier this year South Africa’s Standard Bank bought 77% of the business of BankBoston Argentina from Bank of America.

Meanwhile, HSBC Argentina posted pre-tax profits of $157m in 2006, clear evidence that it is benefiting from the recovery. Foreign banks are far from standing still, but when it comes to taking advantage of the bad times, local banks with local shareholders are winning the race.

Was this article helpful?

Thank you for your feedback!