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AmericasAugust 31 2008

Chávez takes on banking sector

President Hugo Chávez’s decision to nationalise Banco de Venezuela has come at a time when government-bank relations are uneasy following a Ministry of Finance crackdown on foreign exchange controls. Writer Jane Monahan.
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There is little that is conventional about banking in president Hugo Chávez’s socialist Venezuela – and still less following the South American leader’s decision, on August 1, to prevent the sale to a local bank of a unit of Spain’s Grupo Santander – the third biggest bank in the country by assets, Banco de Venezuela – announcing that the Venezuelan state would buy it instead.

Just consider the unconventionality of how Mr Chávez described – after announcing the nationalisation – his government’s plans for the Venezuelan bank.

The government will expand Banco de Venezuela’s 250 branches to many more municipalities (“we will municipalise it”) and emulate the model of the Caixa Ecônomica do Brasil, the largest state-owned bank in Latin America (which serves about 33.6 million, mainly low-income Brazilians) with help from Brazilian officials, Mr Chávez declared at a press conference during a visit to Argentina.

The nationalised bank – whose sleek, black-tinted tower block headquarters are in the centre of Caracas, Venezuela’s capital – will be “an ultra modern entity” that will benefit “not only the rich and the middle class but also the people”, according to Mr Chávez. He added that clients of the bank should not be alarmed: “To those who have their savings in the bank, don’t worry. You will be more than guaranteed in the hands of the Republic. You know the banking sector of Venezuela is one of the most solid in the world.”

Client drift

It is unlikely, according to many of the country’s bankers, that the large corporate and multinational clientele that has previously done business with Banco de Venezuela will be inclined to stay on.

Moreover, although the nationalisation of ‘strategic’ industries has been government policy for some time – the government expropriated steel, cement and food companies earlier this year and large oil projects in 2007 – it is the first time it has taken over a commercial bank, marking a watershed in government-bank relations, economists and bankers say.

As a result, previous co-operative relations between the government and banks, despite ideological differences, and having proven very rewarding to several banks so far, may be undermined.

One reason for this is the government – which has been eager to increase its bank network to facilitate payments to an array of social programmes as well as bureaucracies outside Caracas and infrastructure projects – has, as a result of the nationalisation, increased the state’s share of the banking sector’s assets to 22%, more than any privately owned bank’s share.

Financial crackdown

On top of this, the nationalisation has occurred in the thick of a banking crisis, sparked by a Ministry of Finance crackdown on a loophole in foreign exchange controls, which the government introduced in 2003 to halt capital flight at a time of acute political turbulence.

The crackdown, part of a wider anti-­corruption, anti-speculation government campaign, started with a Ministry of Finance resolution, on May 19, obliging banks to sell $5.6bn in structured notes that are payable in dollars but denominated in local currency. These financial instruments were bought from foreign banks and offered local banks upside if the Bolivar devalued against the dollar. But some banks have come unstuck in this trade as the exchange rate has gone the other way, with the Bolivar strengthening 40% against parallel market dollar rates.

Under Venezuelan rules, banks are not allowed to hold foreign currency assets greater than 30% of the value of their equity but some banks are believed to have invested in notes equivalent to four or five times their equity.

Finance minister Ali Rodriguez Araque, a former president of PDVSA, Venezuela’s state-owned oil company, and a former ambassador to Cuba – who recently became the country’s ninth finance minister in as many years – declared his unhappiness with the situation in a televised interview on June 22.

Awaiting resolution

“Bankers have been loading up on these structured notes and accumulating them during the past two years,” says Robert ­Bottome, editor of the financial paper, VenEconomy. “There was just no supervision,” one local banker commented, reflecting a general concern that the practice had developed due to lax supervision.

The Ministry of Finance recently started holding talks with the banks involved on a one-to-one basis and bankers say the government is delaying enforcing the deadline after realising that such a sale could lead to some banks making losses. This is because several of the banks involved allegedly purchased their dollars last year when the unofficial rate for the dollar was five or six bolivars, whereas the unofficial rate since April has plunged a huge 50% to 60%, to about 3.3 bolivars to the dollar.

The latter is still higher, however, than the official rate of 2.15 bolivars to the dollar.

Oscar Garcia Mendoza, CEO of Banco Venezolano de Credito, says: “If banks apply the Ministry of Finance resolution exactly, some of them could lose all their equity. Their business won’t be viable in future.”

The crisis has materialised because of the scale of speculation that was going on. Michel Goguikian, CEO of Banco de Venezuela under Grupo Santander ownership, shortly before the bank’s nationalisation, said: “There have been speculators that have gone in, acquired those papers with bolivars, with money borrowed from the banks, and turned [the papers] back into dollars and then sat on the dollars expecting the bolivar to devalue.

“Well, all those who did that last year, now have their fingers burnt,” added Mr Goguikian, who previously headed ­Santander’s investment banking in South America.

Some analysts argue that the friction between the government and bankers, caused by some of the banks’ use of structured notes, will not last long. “Bankers are talking to officials and I believe the government, in the end, has no interest in prolonging a conflict with the banking sector, still less in a year of municipal elections [in November],” says Francisco Faraco, president of the bank research group at Francisco Faraco & Asociados.

System assets

The private bankers association, Asociacion Bancaria de Venezuela, says banks hold a total of about $5bn in bolivar structured notes, equivalent to only about one-­twentieth of the system’s total assets, which totalled Bv224.6bn ($105bn) at the end of February, or 43% of the country’s 2007 gross domestic product, according to the Superintendencia de Bancos y Otras Instituciones Financieras (Sudeban), the financial sector’s regulator.

However, some bankers and analysts believe there is a risk, particularly if a few banks suffer heavy losses as a result of selling dollars held above the equity limits, of the government being drawn in to nationalising another bank even if it does not want to, should there be a systemic threat such as a run on deposits.

Meanwhile, in the course of the government’s crackdown it became known that Banco de Venezuela was considering a sale to Banco Occidental de Descuento (BOD), the country’s fifth bank. Although neither bank has made any comment, Mr Chávez brandished what he said was a copy of a notarised document relating to this sale, at a press conference in Madrid. His visit to Spain, just a few days before announcing the nationalisation of Banco de Venezuela was, in theory, to improve relations after King Juan Carlos told him to “shut up” last year.

“Supposedly, the idea was as follows: BOD would hand over structured notes in bolivars, whose underlying asset or guarantee in dollars is worth about $1.8bn, to Grupo Santander in exchange for the bank. Santander would leave Venezuela and the bank would be absorbed by BOD,” says Miguel Octavio, executive-director at the private client bank BBO, based in Caracas. Ecoanalitica, a Caracas-based consultancy, estimates Banco de Venezuela’s is worth about $1.8bn.

However, the chances of this bank sale going through, even if it was being seriously considered, became slight when another finance ministry resolution, published on June 18, banned any bank or financial institution – or even anyone owning more than 5% of such an institution – from buying another bank without prior government ­permission.

Ban on transfers

The resolution also banned transfers of structured notes from one bank to another without advance government approval.

Venezuela must “leave behind the structured notes and bankers must re-capitalise, because that money does not belong to bankers. It is public money,” claimed Mr Rodriguez during the televised interview in June.

Against this background, it was no secret that Santander wanted to exit Venezuela. The Spanish banking group is shopping around to buy banks in Europe, which, bankers claim, mean that it will want to divest elsewhere.

Mr Goguikian – who became CEO of Banco de Venezuela in 1996 when the ­Santander banking group acquired it for $351m (the bank was intervened during a banking crisis in 1994, then re-privatised) – outlines the difficulties of being a banker in Venezuela. “Unfortunately, we are in a constant political battle in this country. And some people think, highly irresponsibly, that keeping up the tension in the banking sector could help their interests politically,” he says.

Mr Goguikian also complains that regulation in some areas of banking was excessive. For instance, he particularly resented BanCrecer, a microfinance bank that Banco de Venezuela launched in 2006, being subjected to the same central bank reserve requirements as commercial banks, regardless of the much higher transaction costs of doing microfinance banking.

Profits fall

Pedro Coa, chief economist at Banesco, Venezuela’s biggest bank, says as a result of slower economic growth; inflation at more than 30%, causing higher operating costs; rising interest rates; and banks’ loan portfolios not growing as fast as in the past four years, due to declining demand, that average net banking profits will fall by as much as 15% to 20% this year, compared with 2007. In 2007, the country’s 39 privately owned Venezuelan banks had a return on equity of 28.83%; the system’s 10 foreign-owned banks had a return on equity (ROE) that was almost double – 48.96%; and the 10 state-owned banks had an ROE of just 6.36%, according to Sudeban.

Yet banks are continuing to make a lot of money – just not as much as before – including on the most recent government bond issues, where yields have been almost 20%.

At the same time, although Venezuela’s central bank has recently raised interest rates on government-directed credits, loans for credit cards and various term deposits, in a bid to bring down inflation, “the spreads are still huge. Bankers invest in credits at about 30% and pay about 12% on deposits. The spreads are 10 to 18 points,” according to Mr Octavio of BBO.

For some time, the government has also capped interest rates at its highest levels for lending to consumers, where demand has been strong, pushing up the largest banks’ profits. At the end of March, the country’s five biggest banks controlled 52% of credits and 53% of deposits, according to data from Banesco.

Total deposits at the end of February amounted to Bv205.3bn, 44% more than a year before, according to Sudeban. And 19% of total deposits are government deposits, down from a peak of 28% just one-and-a-half years ago, bankers say.

Leading segments

Total loans in the banking sector were Bv105bn at the end of February – a huge 64% higher than a year before, with corporate loans, credit card loans, agricultural credits and car loans the four biggest lending segments.

However, interest rates for consumer credits, including a 32% rate for credit card loans, have risen so much that “this market is now in decline”, one local banker says.

Additional pressure on bank profits has also come from a government decision to introduce a new obligatory credit this year, forcing banks to allocate up to 10% of their total loan portfolio to basic industries, especially food production, agribusiness, manufacturing and construction.

The measure signals even greater inroads by the government into conventional banking activities, as obligatory credits already exist in four other areas:

  • Microfinance (3%)
  • Agriculture (12%)
  • Mortgages (10%)
  • Tourism (3%)

The upshot is that about 47% of total bank lending is now tied up in various lines of government-directed credit, an unpre­cedented amount. Profits on these credits are low.

COUNTRY FACTS

Population26.4 million

Population growth rate1.5%

Area882,050 sq km

Real GDP growth8.4%

GDP per capita$12,200

Key sectors• Services: 57.8%• Industry: 38.4%• Agriculture: 3.8%

Labour force12.37 million

Unemployment rate8.5%

Source: CIA World Factbook 2008

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