Latin Finance - April 2008 - 23

banesco strategy At the end of last year the loan portfolio totalled $7.54 billion, up a spectacular 86% year-on-year. Banesco reported net profit of $323 million for full-year 2007, up a sturdy 58% on the $204 million netted the previous year. Banesco’s average rate of return on equity last year also increased, by almost six percentage points, to 39.08%, while its average return on assets came to 3.25%, fractionally less than the 3.26% of 2006. “The bank’s return on equity is above the rate of inflation and also above average for the banking sector, which is 32.66%,” says José Grasso, financial analyst and director of Softline Consultores, a consultancy in Caracas. – is overstated. This is largely because the government has already transferred much of them to new state-owned banks set up in the past two years to centralise government transactions. “The withdrawal has already taken place. The dependence that the banking system as a whole has on public deposits is now not more than 15%-16%, and in our case it’s less than 10%,” Escotet says. He adds, however, that the government still depends on private banks and their extensive branch networks for payment of state payrolls and pensions. Banking the Community In response to the political climate, Banesco has sensibly sought to develop high-profile community banking services, an initiative that Escotet says has two business motives. “Firstly because we think money can be made in those sectors, but also because the community banking customer today will tomorrow be a client of Banesco,” he says. Microfinance is by nature small, with community banking catering for some 7,500 individuals and a portfolio currently valued at just $30 million. But Escotet says it has been extremely successful. Furthermore, although credit risk analysis in community banking is a very different process to that used in traditional banking, the pleasing result is that the risk of bad loans is in fact lower than for other Banesco customers. Past-due loans in community banking account for 0.34% of the total, while past-due loans in Banesco’s total loan portfolio represent 0.78%. The average for Venezuela’s banking system as a whole is 1.28%. “What we are doing is replacing the loan sharks, who in the barrios charge absurd rates like 7% or 8% per week,” Escotet says. Compulsory Lending One government policy that has been negative for Venezuelan banks is compulsory or directed lending. Financial institutions are legally required to put a portion of their loans into specific sectors, such as mortgages, sometimes at discount rates. “Banking in Venezuela is every day more complex, and we’re very regulated,” says Escotet. He adds that directed lending accounts for 23% of Banesco’s loan portfolio. “Fortunately, the majority of these loans are at preferential but variable rates, and so for banks that have developed economies of scale they can still be profitable, especially if you have good credit risk management in place.” He adds that the most problematic loan type is mortgages, on which banks cannot levy an interest rate higher than 10.80%. “The average bank rate today for time deposits is 12%, so it’s a business that generates losses because of the financial margin,” says Escotet. Grasso says Venezuelan banks will likely face further regulation if a new banking law is approved this year. “Banesco’s management is agile and modern, and it will be able to adapt to a new environment in which banks will have to be more flexible, efficient and innovative,” he adds. Escotet says the risk of banks’ dependence on deposits belonging to state entities – which a few years ago accounted for the largest single category Central American Gold After three years of strong economic expansion, growth is likely to continue at a slower pace over the medium term, suggesting the outlook for banks in Venezuela is deteriorating, says Franklin Santarelli of Fitch in a recent report. “Even if loan demand keeps its positive pace, a moderate increase in monetary liquidity and the restrictions on growth by highly leveraged banks suggest loan growth in real terms will be somewhat reduced,” Santarelli says. “The distorted set of interest rates and compulsory lending can also reduce loan expansion as a risk control tool.” With this in mind, Banesco seeks to offset exposure to the inherent volatility at home by expanding fast overseas. The bank is specifically targeting Central America, a region it sees having vast potential for growth. “We’re not looking at competing in Brazil, for example, although not because we’re not professionally capable, but because the capital demands are large,” Escotet explains. “It’s much more logical to target the Central American region, and we think that the next 10 years are going to be the golden decade of Central America.” Escotet says Banesco examined the possible acquisition of two banks, in Costa Rica and Guatemala, but in the end opted to install and develop its own banking model – a move far less costly than undertaking acquisitions. Banesco used its own capital to fund the opening of a full retail bank in Panama last year. It has operated an international bank in Panama since the mid-1990s, and has small operations in Florida and Puerto Rico. Panama was the place of choice to expand, Escotet says, because Banesco already had a footprint there and because the country has become a key destination offshore for funds belonging to Venezuelan highnet-worth individuals. “In Panama we already had a critical mass of business and that allowed us to be more aggressive in our entry,” he says. “We were the first bank to open seven branches in Panama simultaneously and with the full range of services.” Escotet adds that 60% of new accounts have been opened by Panamanians. Banesco’s Panama operation held $704 million in assets at the end of 2007, and made a net profit of $8.7 million. Banesco does not rule out the possibility of M&A in the future. “There is always time for acquisitions once you have a critical mass in the local community.” LF April 2008 LATINFINANCE 23
Latin Finance - April 2008

Table of Contents for the Digital Edition of Latin Finance - April 2008
