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.
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.