Diego Pulido, head of Banco Industrial, is in a good mood. He runs Guatemala’s largest financial institution, the fourth largest in Central America. The bank is poised to acquire Banco de Occidente, Guatemala’s fifth-biggest bank, which will solidify its domestic market share.
“There’s plenty of room for growth,” Mr Pulido tells The Banker from Banco Industrial’s corporate headquarters in a well-heeled area of Guatemala City. “Plus, our system is in far better shape than it was 10 years ago. We have modernised, with better controls, more transparency. We are now ready to compete, not just locally but regionally.”
Guatemala’s top banking executives share Mr Pulido’s mood. The banking sector has grown steadily in recent years, thanks to post-war economic stabilisation, a more modern regulatory environment and consumer activity. Asset levels are climbing steadily and interest rates are down, fuelling demand for loans and credit cards. All of this is generating profits. And chugging along in the background are the money-transfer profits from the billions of dollars remitted from Guatemalans living in the US to their relatives back home.
Potential to unleash
However, Guatemala’s banking system must consolidate if it is to fully exploit its potential. To date, the country houses 25 banks, more than any other Central American country. It is an unwieldy number that does not match the economy’s relatively small size ($32.4bn last year). The bloated sector has some banks operating at low capital levels. Not surprisingly, a small handful of institutions are in the process of liquidation.
“There are too many banks,” says Flavio Montenegro, head of G&T Continental, Guatemala’s second-largest bank. “Too many for an efficient system. A shift is needed.” He expects consolidation to take the standard route, with some banks buying smaller players and others opting to sell to foreign buyers. Which path will G&T Continental take? “We’ll be buying,” says Mr Montenegro.
It is harder to read Banco Industrial’s future. It ended 2005 with $2.17bn in assets and is expected to acquire Banco Occidente later this year. The deal would add 5% to its market share of about 20%. “We are committed to retaining our leadership position,” says Mr Pulido, adding that his bank is the only one in Guatemala to be rated by the US agencies Standard & Poor’s, Moody’s and Fitch Ratings.
Is Banco Industrial preparing itself for a foreign suitor? “You will eventually see banks like BBVA of Spain come here,” says Mr Pulido. “Let’s see how much they offer.”
Sitting next to him is Luís Fernando Prado, head of Banco Industrial’s international division. He would like to see Guatemala’s banking sector go the way of Mexico’s, with a handful of strong players. “But it may take at least five years before we see meaningful change,” he says.
Foreign attentions
Regional and foreign players are studying Guatemala as they aim to build sway in Central America. Executives at Panama’s Grupo Banistmo, which operates in every Central American country except Guatemala, say that in the next two years they will enter Guatemala via acquisitions. This would follow Banistmo’s plan to take a chunk of Inversiones Financieras Bancosal, El Salvador’s third-largest bank.
Canada’s Scotiabank, which bought El Salvador’s Banco de Comercio for $178m last year, is studying Guatemala, and so is UK-based HSBC. General Electric may also be interested. The US-based conglomerate recently paid $500m for a 49.9% stake in Panama’s BAC International Bank, which operates throughout Central America and runs Credomatic, the leading credit-card issuer in the region.
Locals play tough
Local banks that are open to buy-outs may play tough. In 2004, attempts by El Salvador’s Grupo Cuscatlán to acquire Banco del Café, Guatemala’s third-largest bank, fizzled out over a high asking price. Banco del Café was criticised for being too demanding, but bankers in Guatemala say that playing hardball merely reflects their awareness of the country’s pluses.
Guatemala is Central America’s largest economy, accounting for about one-third of the region’s overall gross domestic product (GDP). Although the economy is only expected to grow by 3.2% in 2006, according to the IMF, macroeconomic conditions remain sound. Inflation is under relative control (although high oil prices are a threat). Guatemala also boasts an established tourism industry and neighbours on Mexico, making it close to the US.
“Our economy may be relatively small but we are perfectly suited to compete at the international level,” says Mr Pulido.
The recently agreed US-Dominican Republic-Central America Free Trade Agreement (DR-CAFTA) is another attraction. First it must be implemented, though. Washington hoped to launch CAFTA in January but it has been delayed to March or even later. Anti-CAFTA public protests, fuelled by a backlash against US policies, are creating a negative atmosphere. Washington is insisting on amending the accord so that it further benefits US-based pharmaceutical firms and agribusiness. It seems, however, that the political differences will be smoothed out. Pro-market Central American legislators are so convinced of this that they are talking about striking similar trade agreements in Asia and Europe.
Once in place, CAFTA is expected to push up Guatemala’s export bill as US manufacturers take advantage of the agreement to move their manufacturing facilities to Central America. Guatemala already offers an expansive textile manufacturing industry and could convince foreign companies to pick the country as a location for new operations.
“Everyone is betting that CAFTA will generate more foreign investment and more opportunities for banks,” says Christian Schneider, head of El Salvador-based Banco Cuscatlán’s Guatemala business. Mr Pulido agrees: “We are preparing to offer syndicated loans. The idea is to cater to local and foreign companies in as many ways as possible, to offer everything that a foreign bank can.”
Despite CAFTA and macroeconomic stability, Guatemala offers reason for worry. On the political front, president Oscar Berger, who took power in 2004, and his party, the centre-right Gran Alianza Nacional, only claim a minority in Congress. As a result, the administration has been clashing with the opposition and has been unable to advance structural reforms. Pre-campaigning ahead of the November 2007 presidential elections is already under way. Compounding problems is the slow reconstruction following last October’s Hurricane Stan, which left at least 669 people dead, and washed away bridges, homes and entire villages.
Marred by violence
A more serious problem is a disturbing spike in violence. Guatemala’s civil war, which left 200,000 dead or missing, ended nearly a decade ago. Yet there is hardly a sense of calm among the country’s population of 14 million. The media is filled with news of shoot-outs and robberies. A contributing problem is the country’s vast drug network. It is estimated that Guatemala is a transit point for about 75% of US-bound cocaine. Street gangs and the government’s increasingly aggressive campaign to root them out also lie behind the violence.
“Crime is a major issue,” Mr Schneider tells The Banker. “It threatens to hurt the economy by scaring off tourists and driving up companies’ operating costs. The amount of cash spent on security is mind blowing.”
The crime wave means Guatemala has one of Latin America’s worst per capita murder rates. If crime worsens, multinational companies eyeing CAFTA-related opportunities may reconsider setting up shop in the country.
This, in turn, could limit the banks’ ability to take advantage of their main CAFTA benefit: the chance to cater to deep-pocketed multinationals. The scenario may also force foreign banks to reconsider their Guatemalan investment strategies, which could stymie much-needed mergers. BANCO AGROMERCANTIL: A PROFTABLE VENTURE
