The Dominican Republic banking sector is solid, profitable and growing, thanks to the industry of the small local businesses that are driving the loans market. Meanwhile, banks have worked to diversify following the 2003 crisis, leading to greater stability, as Silvia Pavoni reports.

Beauty salon opening hours are not a usual topic of conversation with bankers. But in the Dominican Republic, as in other parts of the Caribbean, the growing activity of these businesses is something lenders are paying attention to.

“Beauty salons are open 24 hours a day; on Saturdays, they are packed,” says Simon Lizardo Mezquita, CEO of Banreservas and former finance minister of the Dominican Republic. “They usually employ five or six people and serve both men and women.” He adds that his bank lends and provides financial education to these entrepreneurs, and that small and medium-sized enterprises (SMEs) will be its biggest growth area.

Leading the market

State-owned Banreservas already dominates the local market, providing more than one-third of total loans to corporate, SME and retail customers as well as to the public sector. Its closest competitors, Popular and BHD Leon, have a 27% and 17% share of the loans market, respectively, leaving the country’s other 15 banks dividing the rest.

DR banks loans

Overall, loans have expanded solidly year after year in the Dominican Republic and still have plenty of room for growth given the high percentage of the population that is unbanked. This is reflected in the low 23.6% ratio of loans to GDP. Between 2010 and 2016, loans grew at an average of 8.9% every year, with the non-performing portfolio almost halving during that time to 1.55%.

Focusing on small businesses will undoubtedly raise concerns over asset quality, but the strength of the economy, which has been a regional outperformer in recent years, will help contain this. According to Moody’s analyst Georges Hatcherian: “After years of rapid loan growth, we’re going to see some natural deterioration in credit quality. We’re already seeing this: non-performing loans reached about 1.8% [this] June from 1.5% at the end of 2016. That would be gradual [however] because economic growth will help [new and expanding customers].”

Improving asset quality

The country’s ongoing revision of know your customer practices to meet the international standards of the Financial Action Task Force of Latin America should also improve asset quality, as well as the ability of lenders to maintain and develop correspondent banking relations and support their clients abroad.

There are other risks to the sector, such as extreme climate events, which threaten tourism clients in particular. However, the resilience of the country’s buildings and infrastructure – as well as luck – prevented Hurricane Irma from causing the level of damage that it did in other Caribbean countries. The financial sector’s exposure to the northern part of the Dominican Republic, which was mostly affected by the most recent catastrophic winds, is limited to about 16% of total loan portfolios, according to Moody’s.

Banking in the Dominican Republic remains a lucrative business, with steadily growing pre-tax profits and returns on assets consistently averaging above 2%. The sector has also become more stable. Since the 2003 banking crisis, which was ignited by a downward economic spiral, lenders have diversified their portfolios and strengthened their capital positions, according to Mr Lizardo Mezquita. With a well-managed economy and appropriate risk management, focusing on beauty salons and other small businesses seem like a natural next step for the banking system.

DR banks by total assets

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