Since the BPA money-laundering scandal in 2015, Andorra’s small banking system has made efforts to ensure transparency and attract business from high-net-worth individuals abroad. Stefanie Linhardt reports.

Mora Banc

When Andorra’s Banca Privada d’Andorra (BPA) made the headlines for the wrong reasons in 2015, the country – and its banking sector in particular – felt the repercussions. But two years have passed and not only has the BPA case been resolved, but Andorra has also signed major international tax information exchange agreements, and continues to implement EU banking regulations, all of which have been viewed favourably by market-watchers.

Two years ago, the US authorities accused BPA of money laundering. In a note published in March 2015, the US Financial Crimes Enforcement Network deemed the bank a foreign financial institution of “primary money laundering concern”, and alleged BPA was laundering money for organised crime in Russia and China, and for corrupt officials in Venezuela.

Although BPA was an isolated case, the issue threatened to tarnish the reputation of Andorra’s four other banks and, as banking accounts for about 20% of the country’s gross domestic product, affect Andorran taxpayers and the economy as a result.

Fast action

“Most banks here are hybrids between a commercial and private bank,” says Pedro Gonzalez Grau, chief executive at Mora Banc, the country’s third largest bank by assets. “When the BPA situation came up and people thought ‘here is a private bank that is blowing up’, what they didn't realise is that BPA also had commercial banking activities, which means loans, mortgages, etc, and therefore a number of local clients that needed to be serviced. It wasn’t just a case of dealing with a collection of high-net-worth individual private banking accounts, it was much more complex than that.”

The Andorran government reacted quickly and implemented the EU directive on bank recovery and resolution to avoid a bailout by taxpayers. Through the new framework, the resolution process was initiated and BPA’s cleared assets and liabilities were moved to a third entity, which was capitalised with €30m of funds from the resolution fund provided by Andorra’s banks. In July 2015, the ‘good bank’ was sold to US investment company JC Flowers and today it operates as Vall Banc.

Vall Banc launched in March 2016 with an asset customer base of about €2.5bn. These customers were cleared but Christoph Lieber, Vall Banc’s chief executive, says: “It is important to bear in mind that the process of clearing assets is a lengthy one and still ongoing.”

While the country’s four other banking institutions might have gained a few clients from Vall Banc and the troubles at its predecessor BPA, the broader hope was for a normalisation of the situation after BPA’s collapse.

“To some extent, there has been a concerted sympathy on behalf of the rest of the Andorran banking system in making sure that Vall Banc and the purchase of it is a success,” says Mr Gonzalez. “The best news for us with respect to Vall Banc is that it is functioning normally; it is not so much whether I can gain assets here or there.”

Ultra-ambitious Vall

Vall Banc was launched with a new strategic focus in private banking for high- and ultra-high-net-worth individuals (HNWIs and UHNWIs). Mr Lieber, who has experience in Swiss wealth management, is looking to create a rival to the big Swiss institutions, with an emphasis on business from Andorra, Spain, France, Latin America, Switzerland and Germany.

To satisfy Vall Banc’s international ambitions despite its small size, at the end of March the bank announced a partnership with US asset manager BlackRock. This initiative allows Vall Banc’s customers to invest in any and all securities available on BlackRock’s management platform, Aladdin, individually, as well as through one of four investment portfolios allocated by BlackRock.

This gives Vall Banc the capacity to offer wide-scale investment opportunities without having to employ the significant resources and infrastructure to serve the clients to such a high standard.

“We are the first bank to entirely outsource large parts of its value-added chain,” says Mr Lieber. “BlackRock, our partner in asset management, has great international expertise and by using its capacities we are able to provide our customers with services only major banks can provide.”

Mr Lieber is especially excited about being able to use BlackRock’s risk management capabilities, as HNWI and UHNWI wealth management customers tend to be more concerned in maintaining and safeguarding their assets than growing them aggressively.

By collaborating with BlackRock, Vall Banc could withdraw customer investments from the market, if necessary, thus limiting customer’s exposure to market risks. This is something a major bank could not do easily, as withdrawals from the market by a large player such as some Swiss banks would have a negative impact on the stability of the market in itself, says Mr Lieber.

“We are achieving growth mainly outside of Andorra and this is where Vall Banc in partnership with BlackRock can compete with any Swiss bank,” he adds.

Beyond the borders

As Andorra only had about 78,000 inhabitants as of 2015, domestically its banks are competing for a small local pool. For that reason, they are also targeting private banking clients abroad.

“The banks have some commercial business, with some €7bn of loans, but they only come from the Andorran economy,” says Esther Puigcercós Font, general manager of the Andorran Banking Association (ABA). “The banks don’t lend abroad. The rest of the business is private banking, in which we have more than 85 years of experience with highly qualified personnel.”

According to the ABA, the five Andorran banks have international presences in Luxembourg, Switzerland, Monaco, Spain, Israel, the US, the Bahamas, Mexico, Panama, Peru, Brazil, Chile and Uruguay, while clients also come from other countries.

Crèdit Andorrà's five pillars

Crèdit Andorrà is the country’s largest bank and the only one in The Banker’s Top 1000 ranking, with Tier 1 capital of $479m equivalent at the end of 2016. A true hybrid, combining domestic retail banking with private banking and wealth management in Andorra and internationally, the bank has “a balanced approach towards international expansion and a proportionally larger exposure to the domestic economy than its peers”, according to Fitch Ratings.

The bank’s strategy can be split into five pillars, according to Xavier Cornella, managing director at Crèdit Andorrà. These are: further strengthening of its position in the domestic market; a continuation to invest in its international businesses, especially in Spain, Luxembourg and the US; further specialising and differentiating its private banking and wealth management proposals; further digitalisation of services; and additional cuts in costs.

According to Fitch, Crèdit Andorrà had a domestic market share of more than 40% in loans and deposits at the end of 2015, “which gives it some pricing power in domestic retail banking”, but it also had the highest percentage of problematic assets among Andorran peers.

To compete in private banking internationally and continue growth of its assets under management (AUM) at about 6% to 8%, Crèdit Andorrà will launch a new virtual advisory service targeted at HNWIs but also its affluent clients, which will be available to domestic clients this year, and subsequently also abroad.

“It is an interactive system, which will give you an investment proposal depending on your risk profile,” says Mr Cornella. “But if you prefer, you can also personalise it. I don’t believe there is something comparable in the market at the moment.”

The bank’s main operating subsidiaries are in Spain, Luxembourg, the US and several Latin American countries.

Covering all angles

The country’s second largest bank, AndBank, has a greater focus on international private banking than its peers. Despite some outflows after the BPA crisis, Andbank’s AUM grew by 6% in 2015, some 78% of which came from outside Andorra, according to Fitch data.

Andbank today operates in 12 markets, and Fitch says its international expansion strategy “exposes it to integration, execution and operational risks” but believes that “risk controls in place mitigate this”.

Mora Banc is the third largest bank in Andorra with a market share of 17% in loans and 18% in AUM, although it ranks second largest in the country if only focusing on the domestic market, according to Fitch.

The bank revised its strategy in late 2015, streamlining its organisation, derisking its balance sheet and enhancing corporate governance, after a planned international acquisition fell through. Mora Banc serves its commercial and private banking clients from Andorra, Switzerland and the US. “Mora Banc’s commitment to Andorra is unquestionable,” says Mr Gonzalez. “We are lending and are committed to support the Andorran economy.”

With regards to international private banking, Mora Banc believes its strengths lie in the fact that it is a family-owned business, and also in serving Spanish-speaking communities, as “there are not many Spanish-speaking private banks”, adds Mr Gonzalez. The bank invests in select private equity concerns, such as the Casa Vicens – a house built by architect Antoni Gaudi in Barcelona now being transformed into a museum – which clients can invest in alongside the bank.

Meanwhile, BancSabadell d’Andorra’s main activity is providing financial services within Andorra. The commercial bank, founded in 2000, is majority owned by Spain’s Banco Sabadell, with the remaining capital belonging to more than 800 individual Andorran investors.

Regulation differences

Despite not being an EU member, Andorra’s commitment to implementing the union’s banking regulation followed a realisation that with increasing globalisation, Andorra could not stay isolated from the rest of the world or, crucially, from its neighbours.

With the signing of the 2011 monetary agreement, Andorra adopted the euro as its currency and since 2014 has minted coins. The agreement also came with the need for Andorra’s banks to implement and introduce all EU banking regulations according to an approved schedule – but the BPA case called for faster action.

“When the BPA case happened, we were scheduled to incorporate the corresponding directive to deal with bank insolvencies but, in light of the issue, we had to do that much faster,” says Mr Gonzalez. “Unfortunately in such a small country, when one bank is doing something wrong, it can very easily be extrapolated to the rest of the country.”

As a result, Andorra accelerated the adoption of international regulations in general. “Instead of doing it over the course of three to four years, we tried to do it over one to two – also to provide comfort to the international markets,” adds Mr Gonzalez.

“We also signed the Organisation for Economic Co-operation and Development’s [OECD’s] agreement on automatic exchange of information, we are incorporating International Financial Reporting Standards [IFRS] as we speak, we have to look at the Markets in Financial Instruments Directive II and III as we speak, and all that increases the need for resources in legal compliance both at the bank and the local regulator levels.”

Andorra’s banks have to fully comply with Basel III by 2018 and are setting aside provisions for that, which is likely to affect returns in 2017. In 2016, net profits across the country’s banks decreased by about 7% on aggregate to a total of €156m, according to ABA data, returning 9.73% on equity.

Since January 2017, local banks have also had to report in compliance with IFRS, which will mean the banks have to not only publish 2017 results in accordance with IFRS but will also have to adapt 2016’s reporting to IFRS to be able to compare financials, according to Mr Cornella.

All these changes in requirements could mean banks need to add resources, according to Standard & Poor's, as “Andorra is seeking to enhance financial institutions' resources and capabilities, while advancing toward international standards of legislation on anti-money laundering”.

But some believe Andorra could even go further. “We could outsource the regulation to the central banks in Spain or France,” says Mr Lieber. “By doing this, Andorran banks would be regulated just like other EU countries and thus would make it likely negotiable to get an EU banking passport.” This is a prerequisite to offering certain services within EU member states if a bank, such as Vall Banc, does not have subsidiaries in member states (a fact UK banks are well aware of in the light of Brexit).

In isolation

Another result of Andorra’s small size is that banks have no own local currency or national bank, which complicates certain aspects of their work. Andorra’s banks have to fend for themselves.

“We don’t have a lender of last resort. One cannot rely on the government or the central bank like we have seen during the banking crises when major banks received help,” says Mr Lieber. “Banks here in Andorra don’t have this comfort but I regard it as an advantage, because it forces us to act like good entrepreneurs, knowing that if we screw up our business model we will fail – which also protects us from moral hazard.”

And to accommodate for that, due to the lack of a central bank, the Andorran banking sector has “always focused on high capital adequacy and liquidity ratios as its main principal feature”, says the ABA’s Ms Puigcercós Font. “In fact, both ratios are well above the ratios required by the Andorran banking regulations,” he adds.

Andorra’s banks are required to have a capital adequacy ratio of 10% or above and a minimum liquidity ratio of 40%. The Andorran banking sector finished 2016 with an average capital adequacy of 25.1% and liquidity ratio of 61.41%, according to the ABA – a 2.3 percentage point increase in capital adequacy, year on year.

“If in Europe today Basel III is asking for 10% Tier 1 ratio, Andorra needs to ask for 15%,” says Andbank chief executive Ricard Tubau. “And if one day Europe demands 15%, Andorra will have to demand 20%. Andorra has to have a higher level of solvency in order to first sell itself to clients, and to have a stable financial system.”

Greater transparency…

Since having been included on the OECD’s list of ‘non-co-operating countries’ in tax matters in 2000, effectively classifying Andorra as a tax haven, the country has gone to great lengths to show its willingness to be more transparent.

Andorra’s move to transparency started in 2009 when the then co-head of state, French president Nicolas Sarkozy, threatened to resign as co-prince of Andorra if it did not introduce a complete tax system to avoid being a tax haven – until then Andorra was relying solely on indirect taxes. (Andorra is a co-principality with two heads of state: the Bishop of Urgell in Spain and the French president; rights that were handed down from the French Count of Foix to the French king and later the president.)

“Since Mr Sarkozy’s warning in 2009, Andorra started its big path to modernisation with a complete tax reform, tax agreements with third countries, double taxation agreements and the [passing of its] foreign investments law,” says Víctor Pou, a professor of economics at the IESE Business School at the University of Navarra, northern Spain.

The OECD removed the country from its ‘non-co-operative’ list in 2009. Andorra has now signed 24 bilateral tax information exchange agreements, created a new fiscal framework with direct – if very competitive – tax rates, and has signed double taxation agreements. In December 2015, it signed the Automatic Exchange of Information Agreement (AEOI), which will introduce the automatic exchange of information in tax matters on a reciprocal basis from September 2018.

This – together with February 2016’s AEOI agreement with the EU, which sees Andorra collect all tax information from 2017 and exchange it annually with all 28 EU member states from 2018 – is contributing to the country’s further internationalisation and transparency.

These agreements, however, are also making the lives of Andorra’s banks more difficult as HNWI and UHNWI seeking to avoid tax by moving their investments to a jurisdictions such as Andorra or Switzerland, which used to provide bank secrecy, could have less incentive now to invest in these countries.

“The movement towards transparency and fiscal equivalency agreements has represented a major transformation for the country and the banking sector because it changed the business model Andorran banks had used for years in private banking,” says Mr Cornella. “To adapt, banks needed to change IT processes and databases, and needed to explain the changes to clients."

But the implementation of these changes will be positive for the Andorran banks, he adds, as it will give the banks the opportunity to compete with others across the world.

… but lower profitability?

In 2016, the Andorran banking sector saw a reduction in aggregate of total assets under management by about 4%, according to ABA’s Ms Puigcercós Font. He adds: “These results are aligned with the sector’s expectations, once the entry into force of the automatic exchange of information has been overcome.”

“Meeting international standards is always good for the industry and is a logical step,” says Andbank’s Mr Tubau. “Any law that brings transparency is going to be very positive for Andorra’s banking sector. The issues troubling AndBank in 2017 are the same that trouble other banks in Europe: Brexit and [Mario] Draghi,” he adds, hinting at the low interest rates set by the European Central Bank president.

Meanwhile, Mora Banc’s Mr Gonzalez believes there will clearly be some “pressure on margins from increased costs of doing business” as any financial impact the introduction of the agreement might have “would probably be related to higher expenses related to compliance, introducing IFRS, etc, but not to the automatic exchange of information per se”.

“Any kind of veiled suspicion anyone might have had about Andorra will by definition go away January 1, 2018,” he says, because from that date all information will be shared automatically – reinforcing hopes that it will enable Andorra’s banks to shake off the BPA hangover once and for all.


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