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Investment bankingNovember 3 2008

Right place, wrong time

Just as the banking industry’s big names turned their attention towards Guatemala, the credit crisis struck, plunging the country’s modernisation plans into jeopardy. Writer John Rumsey.
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Guatemala’s economy had been humming along nicely, if not spectacularly, for the past few years of its post-civil war recovery, with gross domestic product (GDP) accelerating from 2.6% in 2005 to an expected 5.6% this year. The country has been diversifying slowly away from agriculture, which still accounts for 50% of its economy, into service industries, such as call centres, business process outsourcing and tourism.

Recently, Guatemala has been realising a host of new and lucrative opportunities that could substantially increase foreign investment and GDP, says Mario Marroquin, head of the country’s investment bureau Invest in Guatemala. These include a large acceleration in mining for nickel and gold; the exploitation of oil and gas deposits found in the Pacific coast straddling the border with El Salvador; the development of alternative energies; and infrastructure. The expansion plans of Goldcorp in its Marlin silver mine will require a $4bn investment alone.

Growth potential

The potential may be there but growth forecasts are being cut as inflation leaps and the rest of the world wilts. And, these are long-term investments that require institutional stability, better infrastructure and social acceptance. Fears of poor labour standards and environmental destruction in mining, in particular, have galvanised local communities and non-government organisations.

For example, Marlin mine has suffered from power outages, which are blamed on local landowners. Meanwhile, much of the potential for alternative energies lies in the centre and north of the country, where the grid is weakest.

A strong lead from the government is required. The administration of president Álvaro Colom, who has been in power since the start of the year, has prioritised poverty reduction, but is yet to say much of substance on economic policies. The president is trying to steer a path that combines growth with wealth redistribution, and sustainable mining practices with a higher tax take, but, says one banker, until there is more direction, investors are unlikely to commit substantial money, particularly in today’s constrained market.

Regional platform

The size and potential of the economy, population and demographics, and the logic of a regional platform, made Guatemala attractive to foreign banks during boom times. ­Citigroup bought two large banks in the region: Banco Uno and Banco Cuscatlán; and HSBC acquired Panama’s Banistmo.

Juan Miro, country head of Citibank Guatemala, says: “We will be number one in cards, retail and in commercial in most areas. With the three banks together, we will be among the top three banks in Guatemala.” Citigroup plans to bolt on Banco Uno’s credit card business and Cuscatlán’s commercial bank to its merchant banking franchise. The plan is to cross-sell products moving clients up from one or two products up to four or five.

Sceptics wonder how much attention HSBC and Citi are going to give to developing the central American business. They have spent two years focused on integrating management, cultures and systems but now need to deal with global chaos. Mr Miro says he is being told to continue to expand, although the office is keeping a careful eye on expenses and seeking efficiency. “We are being smarter with capital and focusing on monitoring asset velocity,” he says. As a sign of its commitment, Citi recently carried out a $500m, long-term financing for the new cement plant of Cementos Progreso.

The crisis gives local banks more time to upgrade systems and customer services. Local banks have suffered from poor efficiency, low capitalisation and relatively low profitability, says Leonardo Bravo, analyst at Standard & Poor’s. Guatemala’s banks average less than a 1% return on assets compared to 2% in Panama, and 1.5% in El Salvador.

Banco Industrial, the country’s largest bank, has been expanding at home. It has also been moving into southern Mexico and negotiating licences in El Salvador as it focuses on the northern triangle of central America, say managers. At home, the bank aims to attract the 43% of the population that remains outside the banking system and has opened 200 branches in the past seven years, they say. The bank is working on producing a ‘Disney culture’ of excellent customer service and rolling out internet and phone banking. Already, 55% of transactions are carried out electronically.

Banco Agromercantil, recognising that foreign banks will be tough competitors in corporate banking to large corporations and consumer banking, is focused on fast-­growing small and medium-sized enterprises and microfinance, says the bank’s CEO, Rafael Viejo. While large companies are clinching rates of 7% from banks, small companies pay 10% to 12% or more despite low ratios of non-­performing loans and high deposits, which cover 25% of loans. As the bank moves into more rural areas, it is stepping up its insurance offer.

Still, the global crisis is deferring plans for local banks to use long-term financing. “We were working on plans for an initial public offering in Mexico. It is all ready but we do not consider this an appropriate moment to come to market,” say the managers at Banco Industrial. Banco Agromercantil has often looked at securitisation to free up its balance sheet but the cost is too high. “We analyse it every year but it is twice as expensive as funding through branches when you add in the fees from structuring, legal and marketing ex-Guatemala.” Banco Industrial is now working with the International Finance Corporation to increase equity but cannot sell more than 5% of equity to any one outside shareholder.

Guatemala’s banking system is crying out for the modernisation and efficiency that sophisticated international banks can bring. Just as it seemed the country would gain efficient banks, the credit crunch is calling commitment into question.

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