Banks Buck the Crisis

The region’s banks lost little of their luster in the slowdown, and now global financial institutions increasingly are looking to their Latin American operations for growth prospects.

In the past, a global financial crisis that involved Latin America and banking titans of the United States and Europe historically would demand an international response to a tempest in the southern hemisphere.
But the financial crisis that began in 2008 turned that model on its head. Wall Street has not solved this crisis; it created it.
And Latin America and its leading banks, far from being Ground Zero of the financial crisis, were a rare shelter in this economic storm. Eschewing the allure of subprime mortgages, and spurning the seductive embrace of exotic securities like the now-reviled Collateralized Debt Obligations, Latin American banking operations emerged largely unscathed from the worst banking disaster since the 1930s.
The global financial crisis is far from over – just Google “Greece’’ if you want evidence – yet Latin American banking franchises are increasingly lauded for their restraint, conservative balance sheets and solid reserves.
Meanwhile, those that are part of large global banks – the players include Santander, BBVA, Citigroup, Scotiabank and HSBC – have clearly banished any doubts that they are corporate stepchildren. In many cases, they are among the most reliable sources of earnings. Furthermore, their markets are viewed with increasing appeal while Western governments attempt to reboot their own economies.
“HSBC is committed to the emerging markets,” said Roy Caple, head of public affairs HSBC Latin America and the Caribbean. Founded as the Hongkong Shanghai Banking Corp. in 1865, London-based HSBC is today the world’s largest financial institution thanks largely to an unwavering commitment to globalization that predates the term itself.
With its roots in East-West banking, today HSBC is redoubling its efforts in other emerging markets. “We are witnessing a shift from industrialized to emerging market-led growth, as demonstrated recently,’’ said Caple, who is based in Mexico City.  “In the long term, these rapidly growing markets will drive the majority of demand for products and services, including those of the financial sector.”
HSBC is among the top five institutions for banking market share in Mexico, Brazil, Peru and Panama.
None of this is to minimize the headaches that Latin America experiences.  The region may no longer get pneumonia every time America sneezes, but it is likely to feel a bit peaked. While Latin American banking operations held their ground in 2009, the domestic markets as a whole turned in their worst economic performance in nearly 30 years.
Looking ahead, the Americas seem set for at least a weak recovery. Latin American economies must grapple with issues like the earthquake that struck Chile, the trade might of China and the seemingly intractable drug wars plaguing Mexico.
Despite these challenges, the major players appear to be  in it for the long term.  Indeed, Citi CEO Vikram Pandit made an effort last year to dispel rumors that it might put its Banamex unit on the block to staunch bleeding in other units.
“Citi and Banamex are one and the same,’’ Pandit told a closed-door meeting of executives and advisory council members, according to a report in the Mexico City newspaper Excelsior. “The future of Citi is in the emerging markets, it is in Latin America and is in Mexico.’’
Banamex and other Latin operations contributed more than $12 billion in net revenue to Citi last year, or about a fifth of its total.
With giants like Citi and HSBC, Mexico’s market has by far the largest penetration of global banks among large Latin countries. These foreign-owned banks collectively have about a 90 percent market share. They include BBVA’s Bancomer and Banco Santander Mexico, whose corporate parents reside in Spain. Another major player is Canada’s Scotiabank Inverlat. Multinational banks also have a significant presence in Argentina, Chile and Peru.
In the rest of the region, local- and state-owned enterprises play a more prominent role in the overall banking market.
In Brazil, for instance, a corporate merger created Itaú-Unibanco. It is the second largest in the country, behind only state-run Banco do Brasil, which recently acquired a controlling stake in Banco Patagonia in Argentina.
Luis Miguel Santacreu, a financial services analyst at São Paulo’s Austin Rating, said state-owned enterprises were a crucial factor in battling the economic viruses circling the globe in the last couple of years.
“The share of the state-owned banks in the system’s credit portfolio has increased, because they were used by the government to avoid the deepening of the recession,’’ he said. “But historically the privately owned national banks have dominated the system. The three largest foreign banks are of lesser importance.’’
Brazil’s strategy – using state-owned banks to fuel the economy by pumping money into the economy – was also employed by China, which avoided a recession altogether thanks to massive lending.
For the private sector local banks, knowledge of their markets kept them stable during the turbulence of 2009.
“We are convinced that national banks have a competitive space,’’ said Jorge Londoño Saldarriaga, president of Bancolombia. Headquartered in Medellin, it is Colombia’s largest financial institution, and is listed on the New York Stock Exchange. “National banks have not grown less than multinational banks; each one has its possibilities. If you notice, our bank has been quite successful.’’
In the first quarter of 2010, Bancolombia reported income was up 10 percent compared to a year ago. Loans that were past due dropped by 27 percent from the first quarter of 2009, and loans that were charged off declined 40 percent.
Results like that may help ease fears that recent credit expansion could come to haunt banks later.
The delicate task of finding the right balance between aggressive and reckless lending may be the biggest challenge facing Latin bankers in the near term, experts say. That note was sounded by Guillermo Babatz, president of the National Bank and Securities Commission, at the Mexican Bankers Association annual meeting in Acapulco in February.
“In the space of two or three years, the banks went from an environment in which it was relatively easy to generate high returns to one where only those that were able to expand credit activity without compromising quality will be able to generate returns in keeping with the demands of their shareholders,’’ said Babatz.
A natural question is this: Why didn’t Latin American banking collapse along with Wall Street, London and other financial capitals? It would seem to be a particular vulnerability for those that are part of multinational corporations, which would seemingly have freer cross-border flow of assets, both good and toxic.
For many of the institutions, the answer is that Latin operations were insulated by autonomy. “Santander is organized by subsidiaries, meaning that each bank is locally incorporated, locally supervised, responsible for its own funding and capital management,’’ said Francisco Luzón, the head of Banco Santander’s Latin division. “This creates in effect a firewall among units, so that contagion can’t spread.’’
Besides protection from Wall Street’s financial toxins, these firewalls produced value another way: Santander’s initial public offering of part of its Brazilian business became one of the top three IPOs last year.
Can the winning streak continue? Banks are still placing bets on the region.
“We need to be ambitious in seeking out non-organic growth opportunities which complement our existing franchise in Latin America,’’ Vicente Rodero, head of South American operations for BBVA (originally Banco Bilbao Vizcaya Argentaria), told the Reuters Latin American Investment Summit in Madrid in early May. “We are studying all opportunities which come along.’’
Latin America accounts for about 19 percent of BBVA group revenue; Mexico about 25 percent; and Spain and Portugal, some 35 percent.
And oddly enough, the region’s relative lack of development could prove to be an asset in the coming years. The reality is that there are still huge swaths of the population and business sectors that aren’t part of the formal economy. Making them banking customers, depending on your view, is either a huge challenge or a ripe opportunity.
In the developed world, for instance, the norm for total lending to the private sector is generally about 100 percent of gross domestic product. In Latin America, only Chile comes close to fitting that profile. In Brazil, it has historically hovered around 40 percent.
In Mexico, it hit a low 15 percent, down from the traditional 20 percent.
“The system of providing finance for business is enormously dysfunctional in Mexico,’’ said Leon Bendesky, a partner in Mexico City’s economics consulting firm Sirem. “All the official figures point to a very severe shortage of credit for Mexican companies, especially the small- and medium-sized ones. And even the big companies use nearly all the credit for working capital, almost none for investment.’’
What’s clear is that, for many Latin bankers, the global crisis of the last two years was a wake-up call of sorts — a reminder that what they do is important, and that traditional approaches are more enduring than the wild-money fads that sank much of Wall Street.
“This is a business that is very attractive in the emerging world,’’ said Londoño, of Bancolombia. “Banks have to grow much faster than the economy. That is gratifying. It is like being a lever for development in the community in which I work.’’

Wrangling Over Rules

Jorge Londoño Saldarriaga, President of Bancolombia

Bankers from Latin America are adding their voices to the debate about new standards and enhanced regulation for global financial markets.
Coming from banking systems that performed comparatively well during the recent crisis, Latin American bankers urged the Basel Committee on Banking Supervision to consider the “unintended consequences” of higher capitalization requirements and other changes that could force emerging market banks to divert funds from financing development.
Jorge Londoño Saldarriaga, president of Bancolombia and chairman of the Working Group on Regulatory Reform of the Institute of International Finance’s Emerging Markets Advisory Council, said many banking supervisors in the region already require larger capital cushions than the international recommendations – in part because of lessons learned in past banking crises.
“We believe that modifying the general level of capitalization – from the 8 percent capital that was set – holds little relevance for solving the problems that caused the crisis,” Londoño said.
The problem lies with changing what can be classified as basic capital, forcing the region’s banks to boost capital for reserves instead of expansion.
The head of Colombia’s largest bank said he was also concerned about proposals for new bank levies, which could hamper the recovery of global banks. “Measures have emerged that can be understood from the point of view of politics,” he said in a telephone interview with Latin Trade. “But they are difficult to understand from the technical point of view.”
Londoño said the working group expected their recommendations, sent to the Basel Committee, to get a fair hearing. “The regulating bodies have opened their eyes a lot to banks in emerging markets,” he said.
The resilience of Latin American banks is one of the hallmarks of change in a region once known for collapses and costly cleanups.
“Thanks to about 30 crises in the financial sectors in Latin America in the last 25 years, the financial sectors have strengthened,” said Enrique García, president and CEO of the Corporación Andina de Fomento, the Caracas-based lending agency. “We have good central banks, good supervisory boards.”
Supervision is the key, according to Francisco Luzón, head of Spain-based Banco Santander’s Latin America division. “While the regulatory framework is important, the quality of central bank supervision is a more decisive factor in the strength and efficiency of a banking system,” Luzón said.
“Both Brazil and Mexico have excellent supervisors, tempered by their experience of banking crises in recent decades,” Luzón said. “It is no accident that neither country suffered a banking crisis in the latest global meltdown.”
Luis Miguel Santacreu, a financial services analyst at Austin Rating, a São Paulo-based consultancy, said Brazil’s supervisors made major strides.
“The regulators have learned over time and by their own mistakes,” Santacreu said. “They decided to invest heavily in information technology, and they learned from other central banks. The central bank supervisors have all the information of the credit portfolios of all the banks on a monthly basis.”
Jeanne del Casino, a vice-president and senior credit officer of Moody’s Investor Services, said that the region has widely adopted the international standards set by the Basel accords.
“Many of the countries have already espoused Basel II concepts. For example, Peru has adopted them fully, so they have all the credit risk, market risk and operational risk parameters for all the banks in the system,” del Casino said. “Countries like Mexico, Brazil, Chile and Colombia are making changes to the requirements that also include accounting changes. For example, the Chileans completed the changes to IFRS [International Financial Reporting Standards] for the banking system last year.”
Even some of the more left-leaning governments have espoused the need for well-supervised banks. Del Casino sees positive developments in Bolivia where President Evo Morales seems to have good operators to stir the financial pot. “Bolivia is very consistent and they’ve become quite strict in terms of reporting,” said Del Casino.

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