The nationalization of Banco de Venezuela will create poorer standards, greater inefficiency and declining profitability.
BY LATIN AMERICA ADVISOR
Venezuelan President Hugo Chavez [recently] announced plans to nationalize Banco de Venezuela, the South American country's third-largest bank in terms of deposits and a unit of Spain's Banco Santander, in order to increase state control of the financial services industry. Do you think Santander and the Chavez government will come to an agreement soon? What does the government's move mean for Venezuela's banking sector?
Franklin Santarelli:, Senior Director for Latin American Financial Institutions at Fitch Ratings: The final outcome of these negotiations is, like all negotiations, uncertain in nature and depends on the agreement of a reasonable price. Initial signs indicate that an agreement could be reached between the parties. President Chavez has announced on several occasions in the past his intention to acquire an efficient and large bank in order to provide services for his social agenda. The incorporation of state-owned banks so far has not yielded the desired results, with private banks being relied upon to deliver most of the services he has requested. If the government finally acquires Banco de Venezuela, its main challenge would be to integrate an efficient, previously privately owned bank into the current network of publicly owned entities without losing its efficiency while leveraging its expanded network. For the rest of the banking system, it would be a challenge to compete with a large government-owned bank. The nationwide outreach of Banco de Venezuela could help the government to provide several services directly to the population, without leveraging the private-sector banks. If the government manages to merge most of its financial entities into one large bank, this would result in by far the largest bank in the country with a significant influence over the market, and even more importantly, it would have the government as its largest individual depositor.
Ben Ramsey,Vice President for Emerging Markets Research at JPMorgan: President Chavez said [last] week that Venezuela and Santander will come to an agreement soon; we agree that this is the most likely scenario. According to information widely reported in the Venezuelan press and confirmed by recent comments from President Chavez himself, Santander already had an agreement in place to sell Banco de Venezuela (BdV) to another local private entity for around $1.2 billion, thus providing a benchmark for the current negotiations with the government. We think both Venezuela and Santander will want to strike a deal as quickly as possible since uncertainty over BdV's status raises the risk that a migration of clients and personnel to other institutions could erode BdV's value—ultimately not in the interest of either party. With this new acquisition, the government would already become the single-largest player in the local financial system, and we do not see any additional takeovers for now. Indeed, the government bears a heavy burden of proof that it can efficiently manage BdV. For its part, the private sector would still maintain over three-quarters of the financial system's assets and deposits, but will face an increasingly un-level playing field in an already tougher operating environment characterized by slowing growth, rising inflation, deteriorating credit quality, and strict regulations (not to mention the still murky issue of the forced sale of structured notes, which could severely impact the balance sheets of some medium and small-sized institutions). Against this challenging backdrop and given the government's clear bias for greater state control of the economy, over the medium term further government expansion into the banking sector cannot be ruled out.
Asdrúbal Oliveros, Economist and Co-director of Ecoanalitica.com: Various aspects are important to consider regarding this action. In the first place, since approximately a year ago, Venezuela has been interested in acquiring a large bank to compete more directly within the financial system and have better control over the management and distribution of public deposits. Banco de Venezuela was always a natural candidate, given its shareholder structure. In our opinion, the government and Grupo Santander will end up with good terms in the negotiations, and the Venezuelan state will probably end up paying around $1.5 billion dollars for BdV. It is clear that the problem is not one of resources, because the fiscal position of the government is comfortable given the excellent performance of petroleum prices. The point that worries us is the growth of the state in activities not fundamental to it and a decrease in the role of the private sector. Behind the purchase of BdV is the ideological concept that only the state is capable of resolving problems and that it is the principal artifice of social transformation. But incentives for inefficiency in public-sector companies in the medium term are quite high. The consequences of these measures will be, in the first place, a restructuring of deposits since, due to its size, BdV will manage a large proportion of official deposits. In addition, although we can rule out a nationalization en masse of the banking sector, it is likely that bankers will perceive a high level of risk, which could slow down investing in the sector, especially capital investments.
Patrick Esteruelas, Latin America Analyst at the Eurasia Group: President Hugo Chavez has further tightened the state's grip over the banking sector with the announced takeover of Grupo Santander's Banco de Venezuela. The state is clearly looking to play a more active role in the financial sector with the purchase of Banco de Venezuela, which will increase the state’s share of total deposits from 13 percent to 24 percent. Grupo Santander, which was looking to leave Venezuela for some time, has been forced to sell to the state after the government denied it permission to sell to local bank Banco Occidental del Descuento. While local market estimates value Banco de Venezuela at anywhere between $1.6 billion and $2.1 billion, Grupo Santander will struggle to get a fair price after losing all bargaining power. The government already intervenes quite heavily in the banking system, forcing banks to direct close to 40 percent of all loans to agriculture, housing, tourism, and microfinance, and capping consumer lending rates. The government is also due to release this week the details of a new law that will tighten regulation further, increasing mandatory credit allocations and lowering commission and service fees. All told, the state's growing role and tight grip over the banking system are likely to result in poorer standards, greater inefficiency, credit misallocations and declining profitability.
Republished with permission from the Inter-American Dialogue's daily Latin America Advisor newsletter.