In spite of a hostile government and an overcrowded and ferociously competitive market, Bolivia’s banks are set to turn in one of their strongest ever sets of annual results. The banks are in confrontation with the leftist government of Evo Morales, a populist leader who is calling for a cut in loan rates and an increase in interest paid on deposits, a tactic he knows will be well received by the indigenous population and Bolivia’s poor, his main constituency.
So far these measures have remained in the realm of political rhetoric, but there is the ever-present threat of Mr Morales putting his demands into practice. Bankers complain that the government is reluctant to even hear their case. “It is almost impossible to have a meeting with the politicians, who are simply not interested in listening to our side of the story,” says the CEO of one bank in La Paz.
On the other hand, the market is glutted with 10 banks fighting for market share in a country with a mere eight million inhabitants, of which more than half barely manage to scrape by on a subsistence existence. Another three million Bolivians have emigrated to Argentina, Brazil, the US and Spain to find work.
Buoyant sector
Bolivia’s banks are proving surprisingly resilient to these obstacles. A recent report by credit rating agency Standard & Poor’s (S&P) highlights the buoyant performance of the country’s financial system, despite the constraints. “Indicators have shown high liquidity and an adequate capital base during the first half of 2007,” S&P said. “There was a significant 33% increase in bank deposits on an annual basis, while total loans grew 11.8%. Non-performing loans continued to decline to 7.05% as of June, from about 10.5% in June 2006. The system’s profitability is slightly but steadily improving, with a 1.4% return on assets for the first half of 2007, up from 1% in the first half of 2006.”
The agency also cites Bolivia’s buoyant economy as a factor that is fuelling higher returns. S&P recently revised its outlook on Bolivia to stable from negative and affirmed its long-term B- sovereign debt rating. “The ratings on Bolivia reflect strong support from the international community, as demonstrated by debt-relief initiatives and abundant natural resources, particularly one of the largest gas reserves in the world,” says S&P analyst Lisa M Schineller.
Bolivia’s natural gas reserves are estimated at between 53,000 billion and 55,000 billion cubic feet, enough for 1339 years of domestic consumption or to supply the US’s needs for 2.8 years. However, Ms Schineller points out that a fragmented political landscape, characterised by strong divisions among regional, social and ethnic lines, continues to constrain ratings on Bolivia.
“Despite being elected by a significant majority in 2005, Mr Morales did not garner the sufficient two-thirds majority in the nation’s constituent assembly,” she says. “As a result, the opposition in Bolivia has a stronger voice than elsewhere in the Andean region.”
This has brought the negotiating process to a head, with violent street clashes over seemingly whimsical issues such as whether to reinstate the city of Sucre as the capital, more than a century after the title was bestowed on La Paz. The most contentious issues will be left for a national referendum in 2008, including greater administrative autonomy demanded by some regions and the re-election of the president.
Nevertheless, the Bolivian economy is yielding one of its best performances in living memory, apart from a spike in inflation, which soared to more than 11% in October on an annualised basis. Real gross domestic product (GDP) is projected to grow 4% in 2007, with a similar figure on the cards for 2008. The government is running a fiscal surplus and the country has a current account surplus. The central bank’s reserves stood at an historic high of $4.8bn in October. This, along with significant official debt relief, makes Bolivia a net external creditor.
Consolidation prospects
Bolivia’s banks have taken advantage of the strong economy to position themselves for future growth. Recognising the need for critical mass, last year Banco Mercantil kicked off what is expected to be a round of consolidation over the next few years by launching a bid for Banco Santa Cruz. The takeover propelled the merged Banco Mercantil Santa Cruz into the top slot in Bolivia’s ranking. It was also one of the 20 largest transactions in Latin America last year, as well as the biggest transaction ever undertaken in Bolivia’s financial sector.
“Our banking culture told us that the time was ripe to take a big step forward with an acquisition,” says Juan Carlos Salaues, the bank’s deputy chairman. “We looked at several banks but could not find the right cultural affinities.”
Banco Santa Cruz was 97% owned by Spain’s Grupo Santander, which was keen to divest its Bolivian interests and sold the bank to Mercantil for $27m. The resulting entity became the market leader with more than $1bn in assets. The merger also meant that Mercantil Santa Cruz increased its loan portfolio by 68%, net profits by 102% and return on equity by 17%. The new bank’s market share in loans increased from 14% to 22% of the domestic banking industry, deposits from 16% to 25% and assets from 14% to 23%.
“The synergies were quite clear to us,” says Mr Salaues. “[Banco] Santa Cruz has always been strong in its local market in the eastern region of Bolivia, while Mercantil was a leading institution in La Paz and the western, mountainous part of the country. There was only an 8% overlap in our client portfolios and the combined entity brought us a deposit base of more than $1bn – a record figure for a Bolivian bank.”
Though Mr Salaues acknowledges that there are too many banks in Bolivia’s market, Mercantil Santa Cruz has no plans to participate in a second round of consolidation. “We are still busy digesting our acquisition,” he says. “We are going through a period of adjustment and starting to see the benefits of the merger in terms of asset growth and a broader deposit base, as well as increased profits.”
Mercantil Santa Cruz is focusing on all areas of universal banking except microfinance. “We are looking to expand in credit cards, auto finance, mortgages and especially in the small and medium-sized enterprises (SME) market,” he says. “But we have no wish to compete on loans of $1000 or less. We are also active in the overseas remittances sector, where we rank second behind BancoSol.”
Most of the country’s mainstream banks are targeting the SME market. One of the most aggressive in this lucrative sector is Banco Nacional, Bolivia’s oldest bank, which is headquartered in the city of Santa Cruz.
Pablo Bedoya, the bank’s general manager and chairman of the Bolivian Bankers’ Association, says his objective is to boost SME business to 25% of Banco Nacional’s portfolio by next year, an increase more than fourfold the current 6%. The mix is now roughly 60% corporate banking and the rest in various retail segments, such as credit cards and home mortgages.
“We have already put together our sales team, which will offer a more personalised product than what the competition has in the market,” says Mr Bedoya. “The main products we are promoting are loans for business investment and for operating capital, as well as a mix of these two categories.”
Seeking value not rank
Banco Nacional was displaced from the top spot in the Bolivian bank ranking following the Mercantil-Santa Cruz merger, but Mr Bedoya says he is not unduly concerned by the loss of pole position. “Our objective is not to be the biggest,” he says. “On the contrary, we are focused on quality of service and providing value for our shareholders.
“This is why we entered the SME market in a big way in 2006. This sector is showing remarkable growth and many banks were late to pick up on the potential. Bad debts are declining and we expect this to continue and eventually reach an average of no more than 7%. In the past, the non-performing loan ratio was as high as 10% to 11% of the loan book.”
This reflects the banking sector’s generally sound performance. Mr Bedoya says Bolivia’s banks have recovered from the 1998-2004 crisis, when more than $1bn was wiped from the deposit base. “My concern today is more with political uncertainty. It isn’t clear where the government plans to take the new constitution. What worries me most is the outlook for judicial safeguards and respect for private property. It is important for business and the country to be able to rely on a clear political framework.”
Banco Unión was a casualty of the economic crisis and, through a combination of inept management and asset impairment, was declared technically bankrupt in 2003. During the crisis, the bank was placed in government hands and is now 83% state owned. It had $50m in negative equity before 2003, which today has been turned to a positive $25m, a figure that the bank intends to increase to $52m by 2010.
“We went through a painful period of adjustment and have emerged as one of the country’s most profitable banks,” says general manager Luis Alberto Castañeda. Also headquartered in Santa Cruz, Banco Unión is keen to move away from corporate banking to expand its SME portfolio.
“We want to provide a value-added service to smaller businesses and to move out of the La Paz-Santa Cruz-Cochabamba axis, which represents 95% of the country’s banking activity. In this sense, we plan to expand in microfinance through our 47 branches.”
Remittances channel
Banco Unión is also a leader in the fast-growing remittances business, which is bringing $1bn a year into the country from workers abroad, of which 30% is channelled through the banks.
Mr Castañeda says the bank plans to set up alliances with institutions abroad, particularly in Spain, to tap the emigrant workers’ market. Bolivians make up a smaller proportion of Latin Americans employed in Spain than, for instance, Ecuadorians, but they comprise a more lucrative market. Many Ecuadorian workers have settled in Spain so can no longer be considered part of the emigrant workers’ market, while the vast majority of Bolivians are temporary workers. “In the medium term this could even lead to the opening of Banco Unión branches in Spain, Argentina and the US,” he says.
Santa Cruz-based Banco Económico is also chasing the two key segments of SME lending and workers’ remittances from abroad. Eduardo Paz, the bank’s deputy general manager, says the focus for future growth will be to expand business outside the classic banking axis. “We are opening four new branches a year, and half of these are outside La Paz, Santa Cruz and Cochabamba, and they are aimed mainly at capturing new SME accounts,” he says.
“This sector now accounts for about 50% of our business, a figure which we want to grow to 75% in the next four years. We see ourselves well placed to achieve this by offering a highly personalised service to customers who can take on loans of $10,000 to $500,000.”
Mr Paz shares other bankers’ concerns about Bolivia’s political instability, which he says represents an obstacle to investment. “The Latin American average for foreign and domestic investment is 19% of GDP,” he says. “In Bolivia, the figure is below 14%. This needs to be at least 25% if we expect to relieve poverty in a meaningful way. It is important to recover investor confidence and work out an initiative for public-private investment, above all in infrastructure. Some of the statistics are truly alarming. For instance, Beni, the country’s second largest province, has less than 90 miles of paved roads.”
Bolivian banks have shown themselves capable of using innovation to meet the growing competitive challenge. Banco Bisa, a leader in the corporate sector, has started offering euro accounts to customers wanting to flee the weakening dollar. The bank is the system’s best capitalised, with $85m in equity – a remarkable comeback after taking a major hit in 2004, when the collapse of a handful of big corporate clients pushed the bank $12m into the red. By 2006, management had turned this round to a $4.1m profit and the bank expects to post a $16.5m profit this year.
“This has been achieved largely by a shift in strategy to focus on the retail and SME segments,” says international vice-president Vittorio Aloisio. “As a result, we have boosted our return on equity from 5% to 19% in a year and fee income now accounts for 45% of profits. Our corporate business, which was 93% of the loan book in 2004, has been managed down to 70%.”
Euro tactics
Banco Bisa began offering euro-denominated accounts in 2003, when the dollar was still appreciating against the boliviano. With the dollar in decline since 2006, euro deposits have grown from €3.5m to €18m.
“Customers can open a euro savings account with €200 or a fixed-rate account with €1000,” says Mr Aloisio. “By mid-2008 we expect euro deposits to reach €50m. We are the first Latin American bank to offer this service to customers who wish to protect their savings against currency volatility and it has been a huge success.”
The bank recently sold a €7.5m, 181-day note through its broker, Bisa Bolsa, on the Bolivian exchange at 3.5%, in the first deal of its kind for Latin America. Mr Aloisio says the bank plans to issue about €30m in such notes in 2008.TABLE: Banks in Bolivia: 31 December 2006 ($m)
