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Rankings & dataJuly 24 2015

The obscured view from Venezuela

Measuring local bank performance is a challenge when a country relies on four different exchange rates.
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At first blush, 2014 appears to have been one of the most lucrative years in history for Venezuelan lenders, but the picture becomes less clear once the local exchange rate regime is taken under consideration. Going by the official exchange rate of 6.28 bolivars to a dollar, aggregate profits at Venezuela’s 10 largest locally owned banks rose 48.43%, while Tier 1 capital grew by 59.35% in 2014. The total volume of loans soared, while the asset quality continued to improve – Banco Occidental de Descuento, which at 1.98% had the highest non-performing loan (NPL) ratio, still improved from 2013, when 3.98% of its loans were in arrears.

Chart one FW

But profitability ratios cast doubts on these figures. Although returns on assets and returns on capital are still high, charts one and two show that at most banks they dipped relative to 2013.This could be a result of higher funding costs. In 2014, inflation in Venezuela was galloping – it was reported at 69% in December – which increased the cost of servicing deposits. Moreover, loan-to-deposits (LTD) ratios increased relative to 2013 at all top 10 banks which, other things equal, should increase returns.

Lost in translation

Venezuela’s complex system of capital controls does not simplify this situation.

There are now four exchange rates in the country: three official and one unofficial. One dollar fetched either 6.28 or 12 bolivars in December 2014, depending on whether SICAD I or II exchange rates were used. These two rates are used by the government for priority imports. A third rate was introduced in February 2015 for all other transactions. It is known as SIMADI and at the time of writing was 198.78, which is more in keeping with the black-market rate of 611.25.

Chart two FW

In April 2015, Spanish bank BBVA, which operates the largest foreign-owned subsidiary in Venezuela, decided to shift to SIMADI from SICAD I when accounting for their local franchise.

While SIMADI might not be the best method for assessing locally owned banks, which for the most part stay within the confines of their home country, BBVA’s decision shows lack of faith in the sustainability of the 6.28 rate.

Even if SICAD II, which offered 12 bolivars to a dollar in December 2014, is applied to bank results from last year, a very different picture emerges.

Main performance indicators are now all significantly below the 2013 levels. Profits at the locally owned top 10 are 22.32% lower than the year before. Total assets are equal to 86.2% of what they were in 2013 and Tier 1 capital experienced a 16.61% drop.   

Chart three breaks down the performance of individual banks. There we see that only two institutions posted increases in profits in 2014 under the SICAD II regime; Banco Occidental de Descuento (BOD) and Banco de Venezuela.

In bolivar terms, lending ballooned at both institutions. BOD increased its exposure to public sector loans by 163.49%, while its corporate and retail loans grew by 23.93% and 77.12%, respectively.

Chart three FW

As the possibility of a government default looms, it is not clear whether this business model will be sustainable in the longer term – in 2014 loans to public institutions accounted for 42.12% of all lending at BOD.

At Banco de Venezuela lending to public sector grew just as quickly – by 168.34% - but its share of the loan portfolio remained small at only 3.71%. Corporate and retail loans also soared, by 90.61% and 91.71%, respectively. However, under SICAD II Tier 1 capital and total assets depreciated at all institutions.

This stands in contrast to performance under the official exchange rate regime, shown in chart four.

Under the official exchange rate regime, BOD posted a phenomenal 203% growth in profits, followed by Banco Venezuela with an increase of 109.16%. Only Banesco Banco Universal and Banco del Caribe saw decreases in profitability, 5.92% and 7.65%, respectively. Total assets and Tier 1 capital expanded at each of the top 10 domestic banks.

Chart four FW

Given the recession, however, a compelling argument could be made that Venezuelan banks are still outperforming. None of the top 10 domestically owned lenders posted a loss in 2014, although the economy shrunk by 3%. The recession is expected to continue into 2015, with contraction reaching an estimated 6%, but so far local lenders appear well equipped to combat it. With aggregate LTD ratio of 59.52% and only 0.71% of loans past-due the top banks have a comfortable cushion, provided their exposure topublic sector is not too high. 

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