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AmericasSeptember 3 2006

Upheavals whet big banks’ appetites

Banking consolidation, international investment and the new regional free trade agreement are attracting the attention of big hungry banks looking for an acquisition. Brian Caplen reports.
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“There is a big revolution going on in Central America,” says Dr Luis Liberman, CEO of Banco Interfin, the largest non-state owned bank in Costa Rica. But the revolution that Dr Liberman refers to does not involve the masses taking to the streets to protest against dictatorships, as happened in the late 1970s and 1980s in Nicaragua, Guatemala and El Salvador. The kind of upheaval that takes place in today’s Central America consists of banking consolidation, international investment and implementation of the Central America Free Trade Agreement (CAFTA).

“The international banks are looking at Central America intensively and are talking to local banks about acquisitions, as are Central American banking groups that are trying to expand,” says Dr Liberman.

A sale is clinched

Some days after this conversation took place at Interfin’s headquarters in San José, amid rumours about takeovers, came the announcement in June that Scotiabank of Canada is paying C$330m ($293.3m) for Interfin, giving Scotiabank a 13% share of the Costa Rican loan market. Scotiabank has made it clear that it considers Central America to be prime territory. As well as having an existing operation in Costa Rica, it has a presence in Panama, Belize and El Salvador, where it took over the number three player, Banco de Comercio de El Salvador, last year.

For Interfin the sale is a remarkable achievement that mirrors the major changes that have taken place in the region over the past few decades. Interfin was founded only 28 years ago by former World Bank staffers. When it gained a banking licence in 1982, the total amount of private credit in the country’s banking system was a mere 0.5%; today it is 55%. At that time, with much of the region occupied with civil wars (though Costa Rica was a notable exception), few international bankers had much interest in markets that, with the exception of Guatemala, had populations that could not even match those of cities such as New York, Lima or London.

“When we started, everything was concentrated in the state-owned banks. We built the bank from scratch and the fact that today it is being recognised by international institutions as a well run company with a good reputation is a great source of pride,” says Dr Liberman.

New face for the region

Today, Central America looks very different. The region has been stable for a decade, reform programmes have accelerated and in some countries the banking sector is completely private. Now the advent of CAFTA will create a market of nearly 40 million people, roughly the size of Colombia (see table). Add in a healthy remittance business, courtesy of the seven million Central Americans living in the US, and it becomes a market that several international banks might wish to put on their shopping list alongside Mexico and Brazil.

Indeed, at the end of July, HSBC announced that it had agreed to buy Panama’s largest banking group, Grupo Banistmo, for $1.77bn in cash, allowing it to expand in Panama and to enter Costa Rica, Honduras, Colombia, El Salvador and Nicaragua. Banistmo owns 99.39% of Primer Banco del Istmo (Banistmo) as well as Panama’s largest insurance group Compania Nacional de Seguros (Conase).

Making a mark

The Banistmo group has a significant presence across Central America, with 106 branches in Costa Rica, Honduras, Colombia and Nicaragua, and a 56.5% stake in Banco Salvadoreno, which has 72 branches in El Salvador.

“We are delighted to have reached agreement to acquire control of the leading banking group in Central America. This is the culmination of two and half years’ work examining the region and choosing our partner,” says HSBC chairman Stephen Green. “This exciting development will give HSBC a strong presence across a fast-growing economic region which, with the ratification of CAFTA, has encouraging prospects. It will allow us to expand into new markets, in a region of 83 million people, including Colombia, and in which large sections of the population do not have a bank account.”

On completion of the acquisition, a senior management team will be selected from both organisations and will be led by Sandy Flockhart, an HSBC group general manager and chairman and CEO of Grupo Financiero HSBC in Mexico.

Others looking for a Central American acquisition may find themselves, as HSBC did, not buying directly from the local owners of the banks but from the regional banking groups that have grown up in the past few years. As well as Banistmo, there is Banco Cuscatlán from El Salvador and BAC International Bank (held 49.99% by GE Capital) from Costa Rica.

Scotiabank roots

HSBC has now boosted its presence in Central America but the international player with the longest history in the region is Scotiabank.

“Scotiabank has deep roots and a long history in Latin America [including Central America] and we are proud to grow our operations in this region, where we have become a leading bank,” Scotiabank president and CEO Rick Waugh said at the time of the Interfin announcement. “Acquiring Interfin complements our strategy of investing in high-growth markets, where we anticipate increased demand for financial services. This region is an increasingly important part of Scotiabank’s international strategy and we have built a strong franchise by delivering superior service and by providing financial stability.”

Scotiabank has had a presence in Costa Rica since 1995 and the combined operation with Interfin will have 41 branches, 75 ATMs and about 950 employees.

Growing market share

The other recent acquisition by Scotiabank in Central America was in El Salvador, where last year it took a majority stake in Banco de Comercio de El Salvador, giving it a 17% market share. In The Banker’s listing of Central American banks (see March 2006), Comercio was the third largest bank in El Salvador by Tier 1 capital and Scotiabank El Salvador was placed fourth. Combining the two puts the merged institution on a par with Banco Salvadoreño, one of the other large banks in El Salvador. Together, the merged Scotia operation, Salvadoreño, Cuscatlán and Agrícola have 80% of the market. Like Scotiabank, the other three banks have regional as well as local strategies and all have holding companies in Panama.

Since last year, Salvadoreño has been 54% owned by Banistmo, Panama’s largest private bank and Central America’s largest private banking group.

“The bank had to make the choice between becoming a Central American player or just concentrating in one country,” says Andrés Roshardt, finance director of Banco Salvadoreño. “The shareholders decided they didn’t want to concentrate in just one country but they also thought that buying small banks in small countries was not the best solution, so they decided to go with Banistmo.”

The big push

For Cuscatlán, the big push forward came in 2004 when it bought the Central American operations of Lloyds TSB of the UK, giving it substance in Panama, Guatemala and Honduras. It also has an operation in Costa Rica and a representative office in Nicaragua. The holding company has been in Panama since 2001 – as well as tax advantages, this structure makes for ease of regulation because Panama is the region’s international financial centre, with good accounting standards.

“Central America is ‘hot’ and there will be a lot more consolidation, especially in countries such as Guatemala and Honduras, where there are too many banks,” says Mauricio Samayoa, Cuscatlán’s president. “In the case of Cuscatlán, we have each piece of the cake in El Salvador – insurance, pension fund, brokerage – and we would like to grow in the same way in Honduras, Guatemala and Costa Rica, but Nicaragua is too small and too expensive [to bother with].”

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Comparing Banistmo with Cuscatlán, the former is bigger in Costa Rica and Honduras but still does not match the latter in El Salvador and is not present in Guatemala, even though Alberto Vallarino, CEO and president of Banistmo, sees it as the bank’s last target market (see interview in The Banker, June 2006).

Alberto Vallarino: sees Guatemala as Banistmo’s last target market

Shopping list

So what is there left to buy? In Guatemala, the country’s largest bank, Banco Industrial, was galvanised to buy Banco de Occidente, the fourth largest by Tier 1 capital, partly because of fears that a foreign bank would use it as springboard into the market.

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“Occidente was a most attractive institution to foreign banks and we feared that a foreign bank would take it over,” says Diego Pulido, CEO of Banco Industrial. “Bancafé is the only other bank that has sufficient infrastructure to make it attractive to a foreign bank, although the equity is quite small. If you acquire Bancafé, you are really acquiring the 150-branch network and you would need the capital to grow it.”

 

Bancafé is known to be up for sale and several banks are thought to be interested in acquiring it, including Guatemala’s third largest bank, Banco Agromercantil, plus Banistmo and HSBC – the latter two now in a position to move forward as a single entity.

“This is just the beginning of the consolidation process in Guatemala,” says Mr Pulido. “Acquiring Banco de Occidente was a key step for us and will give us economies of scale and the chance to improve its profits.

“Five years ago, we were a very small bank compared with Cuscatlán and Banistmo. Now we are much more important in a financial sense. So far, we decided to stay in Guatemala because it is the country growing the fastest in Central America but now we are interested in going overseas.” Likely targets are El Salvador, Honduras and Mexico.

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Banco Agromercantil CEO Rafael Viejo considers that Industrial overpaid for Occidente and is keen not to do the same in any negotiations with Bancafé. “We have two different strategies for growth. One is to make an acquisition and if we do, it will have to be for a good price,” he says, while not confirming or denying the rumours about his bank and Bancafé.

“If we don’t make an acquisition then our plan is to invest in our network of branches, and in four years take it from 84 to 300. In the first year, we will reinforce the south-west of the country [Occidente’s stronghold], where we have picked up new customers following Occidente’s takeover.”

Different strategy

Like many banks in Central America, Agromercantil is not listed on the stock exchange, because the local market is too shallow, and so potential buyers have to negotiate direct with the owners. In Agromercantil’s case, a Central American strategy is only a medium-term prospect after expanding first on the home front. Mr Viejo points out that not every bank in the region is going in this direction and that the merits of the strategy may have been overstated

“Agrícola sold its operations in Nicaragua and Honduras to concentrate on El Salvador,” he says. “Cuscatlán is very strong in El Salvador but not so strong in the other countries; they have presence but they are not leaders. In fact, there is not a single example of a foreign bank being a leader in another Central American country. Our strategy is not to have offices in all of the countries. We want to be a major player in any market we go into.”

Forging alliances

Another approach is to forge co-operation between players. For example, in the area of cash management, Banco Ficohsa of Honduras works with Industrial, Salvadoreño, Interfín and Banco de Crédito Centroamericano of Nicaragua to provide a cross-border service to regional clients.

Like most Central American banks, Ficohsa has a huge business in remittances. It is the third largest bank in Honduras by Tier 1 capital, in a system that consists almost totally of private capital. Its remittance arm, Ficohsa Express, has 10 outlets on the east coast of the US and there are plans to expand to the west coast. Recently, Ficohsa became the first private Central American bank to open a representative office in the US – in Coral Gables, Florida. The significance of the event was symbolised by the attendance of the Honduran President, Manuel Zelaya, the central bank governor and the president of the national congress at the opening ceremony in Florida.

“Remittances this year will account for 30% of the gross domestic product of Honduras and the business is growing at 40% this year,” says Gerardo Zanabria, finance director of Banco Ficohsa. A strong position in remittances has led a number of banks to do securitisations backed by the cash flows. Ficohsa is taking a first step towards this goal by using the remittances as collateral for an international loan before going into the market with bonds.

Only 12 years old, Ficohsa is doing a lot of things for the first time and has yet to go to the international bond markets for fund raising. Currently, the funding is 30% from development banks and 70% from deposits. The bank has been rated since 1998 and must be considered a good prospect for international investors because, despite its short life, it is already the third or fourth largest bank in Honduras and excels in trust and foreign exchange services.

The largest and oldest bank in Honduras, Banco Atlántida, is a very different kind of institution, tracing its roots back to 1913, predating the central bank by several decades and originally performing the note issuing function. And today it is not standing still. “We are making changes. Traditionally, we were a corporate bank but this past year we have been expanding the retail operation, including credit cards, housing, personal and car loans,” says Mario Aguero, vice-president of corporate banking.

Atlántida is also considering new funding options and recently did a 560m limperas ($29.6m) bond issue in the local market. “This was the first time the bank had done this but we need to be open to new ideas,” says Gustavo Oviedo, vice-president of operations.

Tough nut to crack

In reality, the toughest market for international banks to break into in Central America may well be Costa Rica, which is ironic because its image is of being the most open and business-minded place in the region (or at least second to Panama). Yet with Interfín gone to Scotiabank and two-thirds of the system under state ownership, further options are limited.

There is also the issue of competing against the state banks, because private banks that do not have a provincial branch network are required to place additional reserves, over and above what they place with the central bank, with the state banks to be used for regional development.

“We have additional reserve requirements on demand deposits and we don’t have unlimited deposit insurance like the state banks,” says Interfin’s Mr Liberman. “So our cost of funds is higher but we compensate for this with better efficiency ratios.”

The state banks argue, however, that their business is made more difficult by regulation, that they are restricted from going overseas and cannot operate offshore banks as the private banks do. “Banks come from Central America to Costa Rica but Costa Rican banks cannot go to other countries,” complains Eduardo Salgado, president of Banco Nacional.

Nacional does have something of an international platform, however, through its joint-venture holding in Banco Internacional de Costa Rica (BICSA), which it owns together with state-owned Banco de Costa Rica. BICSA is based in Panama and has offices in Nicaragua, Costa Rica, El Salvador and Miami.

Bernardo Alfaro, a senior executive at Nacional, says: ”We have strong limitations [as a state bank] in terms of the operating controls that we face. We can’t be as fast and efficient, in terms of buying equipment or hiring people as the private banks.”

The bankers quote an example of ordering new ATM machines that were delayed so long by bureaucracy that they were out of date by the time they arrived.

Banks in Central America face many challenges, one being the risk of granting dollar loans to borrowers without dollar funding. But there are also huge opportunities as living standards improve on the back of CAFTA. With limited banks available, now is the time to buy in Central America or spend the rest of the century regretting it.

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