Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
AmericasMarch 5 2007

Coming out of the mire

Two banks collapse and someone forgets to replenish the nation’s cash supply – tough times for Guatemala’s financial system. But as Monica Campbell reports, there is some cause for optimism.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Alarm bells first went off in October, 2006. That is when the Guatemalan Superintendency of Banks shut down Bancafe, owing to liquidity problems following the 2005 bankruptcy of Refco, a US commodities brokerage that managed more than $200m in US Treasury bonds for Bancafe’s offshore enterprise.

Most customers at Bancafe, Guatemala’s fourth-largest bank, have since recuperated their deposits. Banco Agromercantil, Guatemala’s fifth largest bank, took on 30% of Bancafe’s assets, with the rest absorbed by locally owned Banco Reformador and Banrural.

Then came the permanent suspension in January of Banco de Comercio, owing to an overextended loan portfolio and fraud. Banco Industrial, Guatemala’s biggest bank, took over Banco de Comercio’s $123m in deposits. The closures sent jitters throughout Guatemala’s banking system. When news broke of Bancafe’s closure, Guatemalans lined up by the thousands to empty their savings. Rumours circulated of other possible bank collapses, with number-two G&T Continental pegged as the next institution to fall.

But the system avoided lasting damage and Guatemala’s credit rating remains intact. However, the shake-ups made one thing clear: Guatemala’s banking sector is in dire need of consolidation. More than 20 banks exist in Guatemala, far too many for any Central American economy.

“In the next few years there will be some 10 or 12 banks left in Guatemala,” says Flavio Montenegro, head of G&T Continental. Luis Prado, head of international operations at the country’s largest bank, Banco Industrial, agrees: “It’s a logical process and follows the world trend. There’s no reason why so many banks should exist.”

Recent consolidation moves include Banco Industrial’s acquisition of Banco de Occidente, which held about 4% of the market. In early 2007, Banco Agromercantil absorbed Banco Corporative, another small bank with assets of some $1.5bn.

At the same time, Guatemala’s larger banks are anxious to expand their presence regionally, particularly as the Dominican Republic-Central American Free-Trade Agreement (DR-Cafta) takes hold. “We’re interested in southern Mexico and openings in Honduras,” says Mr Prado. Last June, G&T Continental acquired El Salvador’s Banco Americano, a commercial bank. “We’re also looking to enter other countries in Central America,” says Mr Montenegro.

Consolidation and regional expansion brings up the issue of supervision. Some bankers and analysts have applauded the Superintendency of Banks for shutting down Bancafe and defending the system. And when rumours of problems at G&T Continental swirled, officials quickly defended the bank’s solvency. Even so, there is plenty of room for improvement. One could also see the Bancafe collapse as a clear case of slipshod supervision over Guatemala’s offshore banks. The Superintendency does not publish financial statements from offshore operations.

Also, red flags went up at Bancafe nearly a year before its collapse, when the bank’s offshore operation was named as one of Refco’s chief creditors. There is no good explanation for why the banking authorities took so long to act.

Another knock: if you visited a cash machine in Guatemala any time since November, it is likely that you walked away with empty pockets. On top of the recent collapse of two banks, administrators at Guatemala’s central bank added to the troubles by forgetting to place the regular order for fresh bills. Guatemala does not print its own currency, the quetzal. That is done at foreign mints, with bills regularly shipped in by boat. If an order is skipped, Guatemala’s flow of cold cash ends. Central bank officials also blamed the cash shortfall on a heavy amount of withdrawals following Bancafe’s closure.

“A lot of things have happened in a short time,” Mr Prado tells The Banker. “But this shouldn’t all be lumped together to question supervision. Of course, the money shortage reflects an error. It shouldn’t have happened. But that’s it.” Others are more sceptical. “It was a strange time for an administrative error of this scale, just when everyone was nervous about the banking system,” says Mario Cuevas, director of financial research at the Guatemala City-based Centre for National Economic Investigation. “Of course the cash shortage just fuelled criticism that an air of secrecy, a real lack of transparency, still exists at the supervisory level.”

Economic stability

Meanwhile, Guatemala’s biggest banks are moving on. They continue to post profits, although their rate of past-due loans is not sparkling. It helps that the economy, while far from racing along, is showing respectable growth. It expanded by some 4.6% in 2006, the strongest growth rate in Central America for the year. Better consumer spending and exports fuelled growth. So did an increasingly healthy tourism sector. Add to this relatively steady inflation and a free-floating quetzal that holds its own against the dollar, thanks in large part to remittances.

The DR-Cafta, ratified by Guatemala in March 2005, is also expected to gain traction soon and help the region compete with China and India. To take advantage of this free-trade pact, bankers say the country must continue to streamline customs procedures and other logistical hurdles in order to become a bigger business hub in Central America. Local financial institutions are also anxious to offer a wider range of products and services. A capital market barely exists. Corporate debt activity is scant and so are public listings.

Meanwhile, the pensions market has yet to be unshackled from the state. Capital markets is a “business area that we must develop in the region”, says Fernando Peña, head of Banrural. Yet, adds Mr Peña, “no brave or serious effort exists to make this happen”. The absence of capital markets is also explained by conservative local corporations preferring to keep a low profile and conceal their economic situation. Meanwhile, when strong, blue-chip businesses decide to go public, they often do so in the US or European markets.

Efforts are still lacking in terms of tapping customers unassociated with well-connected families, established companies or individuals who can boast solid credit histories and high salaries. There are new products designed to cater to small and medium-sized business. Programmes are also in place to educate lower-income customers about the financial sector, from how to open a basic current account to investment options.

“We’re aiming to help smaller enterprises with the management and administration of their liquidity and debt,” says Mr Montenegro. Still, no bank can boast real inroads in terms of bringing the many Guatemalans without banking experience into the fray. “We still see a huge potential to tap the nearly 35% of unbanked Guatemalans,” says Mr Prado.

Remittance flows

Banks are slowly taking advantage of the possibilities offered by the huge amount of remittances from Guatemalans working abroad, mostly in the US. In 2006, the amount of cash sent home reached a record $3.6bn, only $101m less than export revenue. “Five years ago, you didn’t see any of this money staying in banks,” says Prado. Now, most remittances flow through formal institutions and several banks, including Banco Industrial and Banco Agromercantil, have opened branches or built alliances in the US with banks such as Wells Fargo in order to connect with their compatriots abroad. “We started this year with 15 offices in the US and plan to increase that to 40,” says Mr Montenegro. Currently, G&T Continental runs offices in California, New Jersey and New York, among other states. Abroad, Guatemalan banks mainly focus on opening bi-national savings accounts and offering pre-paid credit cards.

Despite the scandals and mismanagement, the global appetite among heavy hitters for a slice of Guatemala’s banking system is also expected to increase. HSBC, Royal Bank of Scotland and Bank of America are often mentioned as banks willing to make wagers on Guatemala (and other parts of Central America).

Banco Azteca, a fast-growing bank in Mexico that specialises in offering microloans to the poor, was recently given the green light to operate in Guatemala. “It’s easy to imagine a strong foreign presence in Guatemala over the next few years,” says Mr Prado. Given an already rocky 2007, the entry of foreign players could give Guatemala’s financial system some much-needed lustre.

Was this article helpful?

Thank you for your feedback!