Andorran banks forced to look further afield

Traditionally reliant on neighbour Spain for their customer base, Andorra’s banks have been forced to reassess their strategies in light of the country’s – and the rest of Europe’s – economic malaise. Instead, they are targeting the Latin American market, as well as disillusioned clients of Swiss banks, attracted to a national banking sector renowned for its discretion and stability.

Few European countries can boast a well-capitalised banking system that is faring well in the context of the region's current financial crisis, but this is the case in Andorra, the tiny principality located in the Pyrenees mountain range.

By focusing on activities that are less capital-intensive, essentially wealth management, and adopting cautious investments strategies, the five banks that operate in the country have been able to deliver strong results, despite the ongoing troubles in the eurozone. But they are also in active search for new territories and clients in order to reduce their historical dependency on a single foreign market.

Spanish reliance

This is especially true because the market in question is Spain, one of the most embattled economies in the eurozone. For a long time, Andorran banks have made a profitable living out of offering discreet and conservative private banking services for well-off Spaniards, especially those from the north-eastern regions of Catalonia and Valencia. But the current problems faced by its large neighbours has triggered a rethink of Andorra's strategy.

“Traditional Spanish business in Andorra [behaves exactly as it does] in Spain,” says Gilles Serra, the CEO of Andorra's Banco Mora. The explanation is a simple one, he says. As they feel the pinch of the long-running domestic crisis, Spaniards are spending their savings, which has meant a hit on private banking assets in Spain. Many are doing the same with their Andorran accounts. “Spaniards come to Andorra to cash their savings because they need the money today,” says Mr Serra.

One of the strongest points about Andorra is that you never hear about us in the newspapers. We want to keep it that way

Gilles Serra

As a result, Andorran banks have been making an effort to find clients elsewhere in Europe, and further afield. Some have set up offices or purchased companies in Latin America, and in general they have been trying to capitalise on changes that have been taking place in the global wealth management market. “We are moving from a private banking business that was based almost exclusively on Spanish clients to one that has a much more diversified client base,” says Josep Segura I Solà, the deputy general manager at BancSabadell d'Andorra. “We have even seen people who banked in Switzerland come to Andorra because the strategies of the banking sectors in both countries are different.”

International pressure

This international focus makes sense, especially because Andorra is a country of barely 70,000 inhabitants, which, despite high levels of income per head, could hardly sustain a banking sector with a combined balance sheet of just over €13bn at the end of 2010. Although very discreet with statistics, Andorran banks say that at least half of their business comes from overseas. In the case of Banco Mora, the provision of private banking services for international clients accounts for 85% of revenues.

So it is not surprising that bankers have spent the past three years worrying about international moves to exchange information on tax and other measures that politicians have been pushing on offshore centres such as Andorra. Indeed, for a short period of time in 2010, the country was a specific target for French president Nicolas Sarkozy, who threatened to renounce his title of co-prince of Andorra (the other co-prince is Spain’s Bishop of Urgell) if the country did not change its bank secrecy laws. But the storm passed and Andorran bankers say that not much has changed, especially compared with the concessions that other countries, such as Switzerland, have been forced to make.

Andorra has signed a few agreements to exchange information, the most significant one being with Spain. Other countries to have signed such agreements include Argentina, Poland and Australia, which today are not particularly relevant to Andorran banks. The country has pledged to do reforms to increase tax transparency, which were enough to remove its name from the list of unco-operative tax jurisdictions maintained by the Organisation for Economic Co-operation and Development (OECD). Local bankers, however, say that such measures have had little effect on their way of doing business.

Xavier Cornella Castell, the deputy general manager at Credit d'Andorrà, believes the fact that Andorra is now part of the OECD's list of accepted offshore centres has helped the country. He says that previously each government had its own blacklist, which was typically not always based on accurate assessments of Andorra's banking laws.

Bankers hope then that the perceived advantages of Andorra will continue to attract clients who value security and discretion – the main attributes that the Andorran financial system strives to advertise. Much of the focus is on ultra-high-net-worth (UHNW) individuals. “In Spain and Luxembourg, our focus is on UHNW clients, to whom we can offer integral advice, not restricted to the management of their financial wealth,” says Mr Cornella. “Basically the kind of services provided by family offices, but within the structure of a bank.”

Broadening appeal

There is a widespread belief within the Andorran banking sector that the country will continue to pick up a substantial share of new business from clients who have moved from Swiss banks, unhappy with recent legal changes in its wealth management market. “If you are a Turkish or Indian client and you are not comfortable with the new arrangements, we offer you an alternative,” says Mr Serra of Banco Mora. He notes that the strategy of limiting the country's exposure to Spain is gradually bearing fruit. Two years ago, the bank had virtually no assets under management from clients based outside Europe. Today, this new group represents some 15% of Banca Mora's €6.1bn of assets under management.

With our non-performing [loan] ratios, we can offer viable credit for Andorran and non-Andorran clients

Josep Segura I Solà

But expansion of the client base is done in a very careful way. Andorran banks are not known for adopting aggressive marketing campaigns to become more widely known. “One of the strongest points about Andorra is that you never hear about us in the newspapers,” says Mr Serra. “We want to keep it that way. We have seen the excesses of other countries and we don't want to repeat them.”

Outside of Europe, Latin America is seen as the most promising source of growth for Andorran banks. Banca Mora, for instance, has an office in Miami that aims to provide offshore services to Latin American clients, and is opening another one in Montevideo, from where the company expects to expand its presence in growing markets in South America's southern cone. Credit d'Andorrà owns a broker dealer in Miami, an advisory firm in Mexico City, a bank in Panama and a representative office in Montevideo. Deputy general manager Mr Cornellá says that most new money coming into the bank's private banking business today comes from Latin America, a region that already accounts for 30% of Credit d'Andorrà's total assets under management, worth more than €9bn at the end of 2010.

Metacapital, a US broker dealer, was acquired by Credit d'Andorrà in 2011, as well as BPP, a Luxembourg-based bank, and Banco Alcalá, a Spanish one. Also last year, Banca Privada d'Andorra acquired Banco Madrid, a private banking outfit that belonged to Spain's Kutxa. In theory at least, these could be signs that Andorran banks are taking advantage of their strong capital positions to go out shopping in order to expand their international footprints.

But they are very cautious when it comes to playing the mergers and acquisitions game, even in a distressed market where bargains might be found. “We are cash rich, and we are always open to acquisitions as long as they make sense to us,” says Mr Serra, referring to Banco Mora. By 'making sense' he means that new units have to add value to the services offered to clients, rather than work only as a cash-generating proposition.

“I am sure that investing in a shoe factory in China can be a good business, but it is not for us. The same goes for purchasing a bank in Latin America,” he says.

Advancing with caution

Even Credit d'Andorrà, which has been the most active player in this area, is set to step on the brakes after the buying spree of last year. “It is difficult to find acquisition targets that are adequate to our size and goals, especially in Latin America,” says Mr Cornella. “We prefer to grow a bit slower... keeping costs under control. If you grow by waving your chequebook, you can find it difficult to profit from it later.”

Andorran banks have also suffered few direct effects of the eurozone crisis. “Our only problem is where to place the excess of deposits,” says Mr Serra. Spanish clients are inclined to compare the returns delivered by their Andorran bankers with the sky-high current account rates currently offered by Spanish banks that are desperate for deposits. Latin American investors are also used to much higher performance rates than the rock-bottom rates delivered by German bonds.

The challenge therefore is to match the investment security that Andorran banks pride themselves on with a performance that is proving difficult to achieve in volatile markets. The purchase of BPP in Luxembourg is a step forward for Credit d'Andorrà in its goal to provide a wider range of investment products to clients in order to help them meet such goals, says Mr Cornella.

Home comforts

When it comes to their own investments, Andorran banks are particularly careful with their approach. Mr Serra says that Banco Mora's investments are exclusively kept in conservative assets such as German government bonds. He also claims that the bank has “no leverage whatsoever”, so it is not affected by the current woes in the interbank market that are causing so many sleepless nights for other European bankers.

This cautious approach, mixed with the focus on wealth management, not a capital-intensive activity, has helped Andorran banks to post strong results, with capital ratios that are the envy of its neighbouring countries. By the end of 2010, solvency ratios ranged from a little below 15.5% at Banco Sabadell d'Andorra to a huge 32% at Banca Privada d'Andorra; Banca Mora closed 2011 with a 30% ratio. Liquidity ratios stretched from 54.7% at Credit d'Andorrà to almost 95% at Banca Mora.

The European crisis and Andorra's current economic slump will likely have taken some shine off the numbers for 2011, but bankers say that all things considered the past year was pretty positive for the industry. At BancSabadell d'Andorra, which is 51% owned by Spain's Banc Sabadell, it was probably a little bit more than that. Mr Segura says that the bank closed 2011 with significantly better solvency and liquidity ratios, while profits are going up, too. And all that with a strong focus on commercial banking in Andorra itself.

One of Sabadell's main priorities is to work with Andorra's small and medium-sized enterprises, which basically means all non-banking firms in the country. By lending to retailers, property developers, the hospitality sector and ski-related outlets, Sabadell managed to increase profits in 2011 while keeping its ratio of non-performing loans at a very modest 0.6%.

Mounting attraction

Mr Segura says that the Andorran focus is likely to bear even more fruit in the future, if the country's government approves a set of measures aimed at opening up the economy for foreign companies. There are plans to attract innovative businesses to the country that wish to take advantage of its low taxes and much-needed availability of credit, a rarity in places such as Spain.

“Liquidity is lower than it was a few years ago, but in our case at least, the volume of loans we granted increased last year,” says Mr Segura. “With our non-performing [loan] ratios, we can offer viable credit for Andorran and non-Andorran clients.” Sabadell is so rigidly focused on Andorra that even its private banking business is managed exclusively from the country, without any presence abroad. The bank claims to operate in a completely independent way from Sabadell in Spain.

Mr Segura believes that once economic reforms are approved, the local economy could pick up steam again, which will be good for banks operating in Andorra. The country's economy spent four straight years in recession from 2007, and the slump continued in 2011. To correct this situation, Andorran authorities have been marketing the country as a tourist destination well beyond the Spanish and French markets on which it has traditionally relied. The idea is to convince more people to enjoy its ski slopes, restaurants and low-cost luxury shopping, which already draws about 7 million tourists a year.

This strategy is already seeing some success, as witnessed by the army of Russians that took Andorra by storm in January, invading the ski chalets of the country's mountains and the shopping malls of Andorra la Vella, the capital city. Andorran banks will be hoping to attract the attention of the same sort of clients.


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