Latan and Caribbean 100 2002: Foreign acquirers think again

Brazilian banks continue to dominate indigenous banking in Latin America and continue to grow despite the economy’s woes.

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Methodology

DESPITE THE ADVANCE of foreign ownership across Latin America in the past 10 years - with European and US banks attracted by the substantial growth potential of retail franchises - the Brazilian banking system remains largely concentrated in domestic hands, both public and private.

Moreover, recent consolidation in Brazil has brought about more in-market mergers, driven mainly by the largest private domestic banks - Banco Bradesco, Itaú and Unibanco - than by foreign acquirers. As a result, Brazilian indigenous banks have become even larger conglomerates, retaining their dominance over business segments and the client base.

Brazil's public-sector banks still retain nearly 40% of the system's deposits, despite successful privatizations. Federal banks, having gone through large-scale restructuring of their balance sheets to restore asset quality and capitalization levels in 2001, are now better prepared to grow without the burden of poorly performing assets and weak capitalization.

The risk of political interests interfering with the banks' strategy, although less pronounced today, still has to be accounted for in their respective credit analysis.

Throughout the region, foreign banks have come to command an important market share of the asset and the deposit base, particularly in Mexico and Argentina, where international banks hold more than 70% of the deposit markets.

In Chile and Venezuela, foreign institutions control more than 60% of the systems' deposits, although some large domestic banking groups continue to compete head to head with foreign players. By contrast, however, less than 15% of Brazil's bank deposits are held by international banks.

The Mexican and Chilean banking systems are among the few that continue to attract the interest of foreign banks, which are seeking to increase market share with an eye on growth potential. The recent acquisition of Mexico's Banco International (Bital) may place the HSBC group in a higher league.

In Chile, the long expected merger of Banco Santander Chile and Banco Santiago was finally sealed, and resulted in the SCH group controlling 30% of the Chilean deposit market. In Peru, IntesaBci bought the remaining portion of its investment in Banco Wiese Sudameris, to attain 100% control.

But the Argentine crisis and uncertainty In Brazil will halt investments in the region.

The severe impact of the Argentine crisis on the local banking system, and on a number of international banks with substantial exposure to the country, has triggered a profound re-evaluation of business viability and commitment to the region.

Time to cut and run
International banks have, so far, had to provision substantial amounts against potential losses in Argentina, and many have decided to walk away from their investments, trying to cut their losses as uncertainties about the future persist.

The same applies to Uruguay, where the banking system has suffered the contagion from Argentina. Deposit runs were followed by a selective deposit freeze and by a consequent need for government intervention in the form of a cash injection, which has been largely driven to public-sector banks. It appears that foreign branches and subsidiaries have not been affected by deposit runs as severely as local banks. Weak local domestic institutions have been suspended and are likely to be closed or dismantled.

Therefore it should be expected that domestic banks in Argentina and Uruguay will be dramatically different in size and formation from that of their pre-crisis status. Updated financial statements for both Argentine and Uruguayan banks are not available.

The increased volatility in the face of presidential elections in Brazil, along with the weakening of the currency, add to regional concerns, which have triggered efforts by international banks to reduce exposure to Brazilian risk. Despite a comparatively small participation of 25% in the banking system's assets, the exposure of foreign banks to the Brazilian government and private sector is substantial, and the volatility has created a need for adjustments and provisions at head office.

As a result of the turmoil in the region and the heavy losses incurred by foreign banks in Argentina, compounded by the deterioration of the credit standing of certain domestic banks, there is likely to be a substantial slowdown in foreign investments in the Latin American banking systems.

Local banks grab market share
Argentina, Uruguay, Venezuela, Colombia, and even Brazil do not seem to offer positive economic or political prospects in the near term. Those economies face substantial challenges in encouraging investment. In fact, in light of such a bleak outlook, many foreign institutions are reconsidering their options in the region, which include investments outside Latin America.

Moreover, the pressure of shareholders and investors will make it difficult for a bank board to justify further capital allocation to any bank operation in Latin America in the short to medium term, even if the opportunity appears to be unique in terms of price and market share acquisition.

Could domestic banks benefit from the retrenchment of foreign players? In a situation where international banks are pulling back, an evaluation should certainly be made of the ability of domestic banks to leverage market share and business opportunities left on the table.

In Argentina, branches of departing foreign banks, such as ScotiaBank Quilmes, are likely to be absorbed by smaller domestic banks - an indication of the lack of interest on the part of larger foreign players in expanding their networks. In fact, more than 100 branches have just been closed in Argentina, as the banking sector continues to face difficult times.

In Brazil, indigenous banks are seeing opportunities to grab market share in local-currency deals, as international banks revise their risk appetite and become even more selective in their cross-border and domestic exposures. In Chile, Banco de Chile and other domestically owned banks such as Banco de Crédito e Inversiones and Banco del Estado, in particular, may benefit from SCH's need to divest assets and reduce liabilities, in compliance with the guidelines set by the banking supervisory board.

Celina Vansetti is a senior credit officer at Moody's Investors Service in New York

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Abigail Hofman:

Latan and Caribbean 100 2002: Foreign acquirers think again

Brazilian banks continue to dominate indigenous banking in Latin America and continue to grow despite the economy’s woes.

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