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AmericasDecember 5 2005

Unlikely bedfellows

With profits healthy, private banks seem happy to play ball with their ideological nemesis, president Hugo Chávez. Jane Monahan reports from Caracas.
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Despite the increasingly anti-capitalist rhetoric from president Hugo Chávez, Venezuela’s private banks are booming. And listening to Venezuela’s financial authorities, the opportunities for private banks seem to stretch as far as the eye can see, and way beyond the seven kilometre-long valley where Caracas, the capital, lies, nestling between massive rainforest-covered hills, the Cordillera de Avila, to the north, and migrant shacks or ranchos, covering every available flat piece of land to the west and south.

Nelson Merentes, the country’s finance minister, tells The Banker: “There are huge investment opportunities. [So] for us it is very important that the banks should be healthy. We want private banks to increase their capacity to give credit and to support new lines of credit in areas and ways defined by the government. We want an alliance between the private banks and the public sector.”

For example, Mr Chávez’s government wants private banks to co-operate in providing micro-finance, to help bring the 80% of the population that is now poor, according to government estimates, into the mainstream. (See box on page 92 and article on Banmujer on page 93).

Additionally, Mr Merentes says that in 2006 private banks will have an opportunity to support long-term, state-directed projects in, for instance, agribusiness, food industries, plastics and metallurgy. The projects will be aimed first at developing the country’s non-oil economy – Venezuela, the world’s fifth biggest oil exporter, has traditionally been heavily dependent on its oil revenues – and then at reducing the country’s food imports, now the biggest import item.

Giving momentum to the government’s plans, annual GDP growth increased 11% in 2005, and 17% in 2004, which were among the highest economic growth rates in the world, Mr Merentes noted. The rebound follows a recession in late 2002 and early 2003 caused by crippling anti-government strikes, including at PDVSA, Venezuela’s state oil company.

Healthy rapport

Gustavo Marturet, chairman and CEO of Banco Mercantil, one of the four largest private universal banks in Venezuela, together with Banco de Venezuela, Banco Provincial and Banesco, says there are “a few differences” between private banks and Mr Chávez’s left-wing government. But he also says: “We have a good working relationship. Dialogue is fluid and good.”

Roman Mayorga, the Venezuela representative of the Inter-American Development Bank (IDB), says: “While other private sector groups have not been co-operating with the government, private banks have been, and this has proved very rewarding.

“The banks have been making tons of money,” he adds.

Proof of the last is that Trino Alcides Díaz, Venezuela’s banking superintendent, says the increase in annual average after-tax profits in the banking system in August 2005 are “over 30%, almost the highest in the world”.

Venezuelan banks’ assets, capital and deposits have also trebled between December 1998, when Mr Chávez was first elected president, and 2005.

Banks are also much better capitalised and provisioned, and publish consolidated accounts. This is partly as a result of a marked improvement in supervision during the current administration, despite some of the best technical staff leaving the superintendency, and the fact that the central bank has lost much of its autonomy.

Non-performing loans represented only 1.5% of total loans in the Venezuelan banking system in August 2005, down from 10% in 1995, says Mr Díaz, and “for each bolivar [Venezuelan currency unit] with problems, there are now two bolivars in provisions”.

But the co-operation between private banks and Mr Chávez’s government is not totally straightforward. For instance, in June 2005, government deposits placed in Venezuela’s 32 private commercial and universal banks – which account for 58% of system assets (foreign banks have a 36% share and public banks 6%) – averaged 25% of their total deposits, making the banks very dependent on the government.

Furthermore, much of the private banks’ profitability has stemmed from buying up government bonds, like T-bills and equivalent paper, where yields, though they have fallen slightly in recent months, are still over 10%. For instance, in June 2005, an average of 51% of total bank assets in Venezuela’s 32 private commercial and universal banks was in government bonds, which is a higher average than in other Latin American banks.

Government mandates

Meanwhile, making more inroads into conventional banking activities, obligatory credits have been re-introduced in four areas: micro-finance, agriculture, housing and tourism. The upshot is that 31.5% of private bank lending is now tied up in various lines of government-directed credit, more than ever before.

Added to that, foreign exchange controls have been in force since 2003, though this does not have much of an impact on private banks as their foreign exchange operations are small and banks such as Spain’s Santander can, after paying taxes, repatriate all their profits in a foreign currency. And in May 2005 the government also introduced some interest rate controls.

Notwithstanding all this, much of which is anathema to most bankers, Mr Marturet of Banco Mercantil does not seem fazed. He says: “[In Venezuela] there have often been highs and lows in the levels of government regulations and intervention. What is new is that now there is much tougher and more detailed supervision. This is good.”

Meanwhile, Mr Díaz, who was one of an influential team of university radicals brought into the Chávez government, says that in August 2005 private banks had already exceeded annual obligatory credit requirements in micro-finance and agriculture. “This suggests these two areas are good business, and the government has opened new lines of credit for the banks,” Mr Díaz says.

By contrast, supervision in the 1990s was lax and led to a banking crisis in 1995. The crisis was sparked, in January 1994, by the closure of Banco Latino, then Venezuela’s second biggest bank. By the time it had ended, in mid-1995, 28 financial institutions, 18 of them banks, and 792 bank-related companies, had either received assistance from FOGADE, the deposit guarantee fund, or had been intervened, liquidated or nationalised. Most of these nationalised banks were later re-privatised. For instance, Banco de Venezuela, which was nationalised in 1994, was bought by Spain’s Banco Santander Group in 1996.

Banking criminals

“There was bad management, corruption and fraud,” Mr Díaz declares. “About 1000 bankers committed fraud. All 1000 should be behind bars, but not a single one is in prison.”

He says the total cost of the crisis to the state, and ultimately to taxpayers, was 7000bn bolivars or $11bn at 1994 exchange rates, equivalent to about 20% of the country’s 1994/1995 GDP.

Against this background, it is implicit in all the Venezuelan financial authorities’ criticism of what bankers cost the state that now, during the Chávez administration, they think bankers should put something back. And as long as the banks are making such good profits, they will happily play along with a system and a president on the opposite side of the ideological spectrum.

NATIONALISATION RULED OUT:

The government of president Hugo Chávez wants to control where the resources of private banks go, but it is not interested in nationalising private banks.

This became evident when finance minister Nelson Merentes issued an immediate denial that the government’s policies envisaged bank nationalisations, after a report on the front page of the Financial Times on September 2. The article stated, in no uncertain terms, that the government was preparing to take control of Venezuela’s private banks by placing two government representatives on the banks’ governing boards.

Trino Alcides Díaz, Venezuela’s banking superintendent, told The Banker that he believed the FT correspondent had confused and politicised a legitimate, technical action taken by his office, when it had sent two representatives to inspect the accounts of Banplus, a small savings and loan company, some months before.

“We suspected that Banplus was under-capitalised and found that there were irregularities. We will probably have to liquidate the bank, but this will be done strictly for professional reasons,” says Mr Díaz.

CO-OPERATIVE BANKING:

One area where president Hugo Chávez’s government and private banks are expected to co-operate more in future is in micro-finance, where, according to Trino Alcides Díaz, Venezuela’s banking superintendent, “there are enormous opportunities”. Although public and private banks provided credits to about 9000 micro-businesses in 2004, an estimated three million micro-businesses could be established in the country, he says. On top of that, only 20% of Venezuelans have bank accounts of any description.

Meeting the challenge, early in 2006, Banco de Venezuela, one of Venezuela’s leading private banks belonging to Spain’s Banco Santander Group, is due to launch BanCrecer, which will issue about 500,000 credit contracts a year to micro-businesses in four to five years, Mr Díaz says. Officials at the Inter-American Development Bank (IDB), which is acting as adviser to the project, say BanCrecer will be a model for all Latin America’s micro-finance institutions.

Another private micro-finance bank in Venezuela, BanGente, got off the ground in 1998 with the help of $1.8m in assistance from the IDB. BanGente, with branches in five cities, had a credit portfolio of $4.4m in 2004, 3775 clients and only 2% of the bank’s total loans were “non-performing”, Mr Díaz says.

Not so Venezuela’s two small, second-tier, state-owned micro-finance outfits, Banmujer (which provides loans to poor women, see page 93), and BanPueblo (which provides credits to diverse small businesses), which “had a high level of non-performing loans in 2004, due to a lack of expertise and management controls”, the banking superintendent says.

Meanwhile, six co-operative banks, including one representing a coffee association, are also expected to be launched in 2006, as soon as Venezuela’s National Assembly approves a law allowing the formation of such banks.

However, apparently to avoid the mistakes of Banmujer and BanGente, the government has reached an agreement with the IDB to train Venezuelans who want to establish co-operative banks.

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