Relations between Ecuador’s private banks and left-wing president Rafael Correa – who is widely expected to win a second term in office in next February’s election – are increasingly at odds.
factbox
Microfinance boom
Private sector bankers and the administration of Ecuador president Rafael Correa disagree on just about everything. But one thing they both agree on – and which is a government policy priority – is the need to greatly increase Ecuador’s financial inclusion.
In terms of microfinance, the figures are somewhat misleading. In the past eight years, Ecuador’s microfinance sector – led by Banco Pichincha’s subsidiary Credi Fé and including the Dutch-German bank Procredit, the Norwegian-funded D-Miro and US-owned Finca – has been booming. There has been an average annual growth of microloans to micro-entrepreneurs of 414% (from $73,258 to $2.5m), while the number of covered micro-entrepreneurs has increased from 59,507 to 1.1 million.
But according to the Inter-American Development Bank, the country still has a very low level of financial depth. For example, of the Andean region, Ecuador has the fewest ATMs and bank branches per 100,000 adults, and a total public and private banking system credit-to-gross domestic product ratio of 21.8% in March this year, compared with 24.1% in the other Andean countries.
The country’s financial system has been slow, compared with others in Latin America, to introduce regulations and invest in technology to develop banking correspondent networks and mobile phone banking, despite a mobile phone penetration rate of 100% of the population, according to the International Finance Corporation.
Indeed, only Banco de Guayaquil, through its microfinance operation Banco del Barrio, has established a banking correspondent network with more than 2000 points of access. And only Banco Pichincha so far is involved in a mobile banking project, led by the International Finance Corporation-backed Yellow Pepper company, a leading mobile phone financial provider in Latin America, and including Claro, an América Móvil of Mexico subsidiary, with control over 70% of Ecuador’s mobile phone market.
Meanwhile, another important impediment to financial inclusion is the lack of a modern payments system, which is needed if financial transactions are to be carried out efficiently on a large scale and with adequate coverage. Because of the shortcomings of the existing national payments system – managed and operated by Ecuador’s central bank – transaction costs are high and current technology does not allow for mass transactions from mobile devices.
Pedro Delgado, the president of Ecuador’s central bank (and President Correa’s cousin) is acutely aware of the challenges facing the sector.
“In Quito, it is possible to use international credit and debit cards in certain supermarkets and shops. But incredibly in other areas of the capital or just 20 minutes outside cities such as Quito or Guayaquil, all the transactions are done in cash because there are no connections between the financial system and these places,” says Mr Delgado.
Mr Delgado emphasises the relationship between economic growth and financial inclusion: “We want people to have more confidence in the financial system and to bring it nearer to where they live and work. This is not so much because we would like to reduce the informal economy [estimated at 45% of the labour market, including the underemployed]. It’s more a question of incorporating people in the financial sector so that in addition to providing them with less expensive and improved credit options than are available to them now, small farmers, micro-entrepreneurs, men and women can also start a credit history.”
The Inter-American Development Bank recently approved a $10m loan to expand the supply of financial services in areas of Ecuador characterised by limited financial access and low-income levels. The project has two parts. First, it will help the government develop the technology and the capacity of intermediate financial institutions, principally the country’s 40-odd small co-operative banks or credit unions, so they are able to handle 2.8 million new financial transactions by 2016. This will benefit about 200,000 new low-income financial service users in remote areas. Second, the loan will help the central bank implement a national payment system with investments in infrastructure and improvements in transactional efficiency.
When Mr Correa was elected president of Ecuador more than five years ago, the country’s banking system was weak and underdeveloped, largely as a result of the country’s banking crisis of 1998-99. The introduction of the US dollar as the official tender in 2000 restored macroeconomic stability to the country, but banks were again hit by the global financial crisis of 2008-2009.
Necessary reforms?
Since 2009, Mr Correa’s government has introduced sweeping reforms for banking which, officials say, are needed to rebalance the relationship between banks and customers, and make the system stronger and more efficient. Private banks, however, are up in arms over the effects of government interventions on their profits, with the latest bone of contention being an order of Ecuador’s Superintendencia de Bancos y de Seguros (the banking and insurance superintendency) preventing private banks charging fees for the issuance and renewal of credit cards, and for bank statements.
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Antonio Acosta, deputy president and CEO of Ecuador’s biggest bank, the 200-branch Banco Pichincha, which holds 29% of the Ecuadorian banking system’s deposits and 30% of its loans – says the annual credit card fees affected by the new rule generated $110m of total $380m bank profits in 2011.
And the country’s biggest banks will be hit worst, according to Mr Acosta. These banks are Pichincha, Banco de Guayaquil and Produbanco, as well as state-owned Banco del Pacífico. Together these banks hold two-thirds of Ecuador's total bank deposits and accounted for 69.5% of total profits last year (a high percentage given that Ecuador has about 25 banks).
Profit warning
Ricardo Cuesta, president and CEO of Banco Promerica, which is one of seven medium-sized Ecuadorian banks and part of a regional banking group based in Panama, says that as a result of the reforms, the banking sector’s profits could decline to return-on-equity ratios of 11% to 12% in the second half of 2012, 3% to 4% less than the industry’s 15% profitability rate last year.
“This is problematic,” says Mr Cuesta, who was also head of Ecuador’s Private Banking Association at the time of the interview, and is a former employee of Citi. “Looking back to the year 2000, 85% of bank profits in Ecuador, for large and small banks, were capitalised to make it possible for the banks to grow in a very expansive period of the economy, and to accompany the demand for lending and credit that the country needed.”
“You can have all the deposits, but if you don’t have the right leverage – the capital needed as collateral for loans – you can’t lend.”
Market distortion
Government interventions have also distorted the market, say bankers. While banking regulators have been reducing and eliminating bank fees – fees for 58 services have been scrapped since 2009 – Ecuador’s central bank has been setting interest rate ceilings. The maximum interest rates allowed are for consumer credits (16.5%) and microfinance (20%). Most banks that buy their deposits wholesale, especially medium-sized and small banks, are now lending solely in these areas, where the higher spreads make it possible for them to make a profit.
“It’s become a spread business and you have to survive in it,” says Mr Cuesta.
Banco Pichincha’s profitability is still “not bad”, according to Mr Acosta, because it has foreign operations in Peru, Colombia and Spain that account for 30% of the bank’s total profits. Also, for the past eight years, Pichincha has been the market leader in microfinance, a sector that has been booming in Ecuador (see box).
“But, obviously, there are limits,” says Mr Acosta. “If profitability rates go down to single digits, that is a rate no banker wants to face because of liquidity problems. And if the rates of interest are lowered more by the central bank, it will also be impossible for us to run a banking business.”
Protecting the people
Pedro Solines, head of Ecuador’s bank superintendency, sees matters differently: “I am a regulator. I have to provide mechanisms to make sure banks are liquid and solvent. But I also have to defend the pockets of the 7 million or so Ecuadorians [out of a total population of 14.7 million] who have bank deposits.”
Mr Solines says the government realised that many banks were making their money from commissions and fees for services that were often free in other countries, such as opening a current account or moving money between accounts, or services extraneous to the business of banking.
“Our objective has been to encourage banks away from a fee-based banking business back to making financial intermediation – taking deposits and making loans – the principal source of their profits and growth,” says Mr Solines. “And we have had some success.”
The country’s principal banks could easily make more profit from their services, including their credit card businesses if they administered their services more efficiently, upgrading technology and cutting costs, according to Mr Solines. One sign of improvement in this area, he says, is that in the past year the banks’ average efficiency ratio (administrative costs as a percentage of assets) fell from 5.42% last year to 5.29% at the end of June this year.
Big banks hit hard
While the combined profits of Ecuador’s 25 banks dropped 1.66% to $188.5m in the first half of this year compared with the same period for 2011, the average return on equity ratio in June was still 14%. This is still high compared with many other countries, according to Mr Solines. The decline reflected a drop in the profits of only the big banks (-6.7%).
In contrast, profits increased 8% at medium-sized institutions (which, as well as Panama’s Promerica, include the US’s Citigroup, which has a big remittance operation in Ecuador) and 10.6% at the country’s 15 small banks (including several foreign-owned firms, such as the Dutch-German Procredit Bank and other specialist microfinance institutions).
Meanwhile, new reserve requirements announced by the central bank in August, raising both banking reserves and liquidity, are also a source of controversy. In one move, the central bank raised bank contributions to a liquidity fund to 5% of bank deposits until September, with further 1% annual contributions to reach 10% total. The liquidity fund, introduced in 2009, is administered by the central bank as a reserve fund and to act as a backstop for private bank deposits, now that the central bank itself, with the introduction of the US dollar as the national currency, can no longer be lender of last resort.
Then, in a second bank rule, the percentage of reserve that banks were required to hold domestically (not counting their contributions to the liquidity fund) was raised to 60%, up from 45% to 55% before.
Tough measures
Promerica’s Mr Cuesta describes the measure as “very tough”. He says: “There shouldn’t be a control on percentages at all in my view. Each bank should follow its own prerogative as to how to take care of its liquidity, especially as a ‘one-shoe-fits-all’ approach doesn’t work. Each bank is different. The mix of deposits is different. So different liquidity arrangements need to be made.”
Head of the banking superintendency Mr Solines, however, says that as a result of this liquidity requirement, Ecuador’s banking system had a liquidity ratio of 27% at the end of June and a solvency ratio of 13%; both high rates.
Despite tough liquidity requirements, domestic credit growth is strong. At the end of June, total private financial sector credit amounted to $14.8bn, a 21% increase on the first six months of 2011 and a 50% increase compared with 2009. Commercial financing accounted for 45.4% of the credit portfolio, while consumer credit represented 36.7%, mortgage credit 9.1% and microcredit 8.8%. The capital adequacy ratio was 8.89% of risk-weighted assets, up from 8.85% last year. The past due portfolio was 2.98% of total private bank credit, with reserve coverage of 202.4%.
Anti-trust law
One more set of interventions that has riled bankers came following a constitutional referendum in May 2011 and the enactment of Ecuador’s first anti-trust law, the New Market Regulation and Competition Law. The law bans financial institutions, their boards of directors, owners and investors with shareholdings of 6% or more from owning other companies or stock in Ecuador outside the banking industry.
President Correa said last year that the new rules would prevent unfair lending practices that favoured affiliated companies at the expense of competitors. But bankers allege that a principal aim of the measures is political: to reduce the size of big economic and financial groups that own the largest banks by forcing shareholders to sell their other businesses and breaking up the groups.
Meanwhile, taking the new rules a step further, the government gave banks a year to a deadline of July 12 this year to divest their shareholdings in mutual funds, brokerage houses and insurance companies. Fortuitously, the forced sales of non-core businesses turned out to be profitable for some banks. For example, Banco de Guayaquil, Ecuador’s second largest bank, completed a deal with ACE, a large Swiss-based insurance company, to buy its insurance unit for $55m.
But Mr Acosta at Pichincha regrets having to sell his bank’s insurance operations, specialising in health and life insurance, which were bought by Peru’s Gruber Financial Group.
“This has hit our profits,” says Mr Acosta. “How does the market benefit from such a move? Is a client in Ecuador now going to receive insurance that is cheaper or better? Is the bank, our bank, more solid than before?”.
Having companies other than the big banks owning mutual funds and brokerages will increase competition and make it possible to speed up stock market development, according to government officials. But Promerica’s Mr Cuesta, who made an arrangement to sell its brokerage to the firm’s employees, says the opposite is true.
“The banks’ treasuries, because of the liquidity rules, have to be invested locally, so bank agents are more experienced in the local capital markets. And they have been bringing big corporate clients to list on the stock market,” says Mr Cuesta. Although not, it seems, medium-sized companies, which is apparently what the government wants.
Finally, as part of an economic policy increasing state control in strategic sectors, including energy, telecommunications and banking, Mr Correa’s administration has developed a public sector banking group, which now accounts for about 30% of total credit in the country, up from just 10% of total credit five years ago.
