"No-one is sure yet to what extent Latin America will be affected by the Asian crisis but so far it's resisted surprisingly well," says George Cardona, general manager, international, at Midland Bank. "Every time Asia takes a drop so do the Latin American markets, but the impact has not been as serious as in Asia. The majority of Latin American countries look set for GDP growth of about 5%. The governments in most countries are doing all the right things. They are privatizing, and this includes the sale of banks to the private sector. They are bringing government debt under control, reducing inflation and stabilizing their currencies."
It's an environment increasingly attractive to foreign banks and not just those that have been established there for decades. Foreign banks, notably Citibank, Chase and BankBoston, have been in Latin America since the early years of the century, but in the past three years an acquisition spree by Spain's big banks and then other foreign institutions has changed the competitive landscape. Just last year HSBC Holdings, Midland's parent company, spent nearly $2 billion in Latin America. It acquired 100% of Brazil's Bamerindus and the Roberts Group in Argentina, as well as minority stakes in banks in Peru, Mexico and Chile.
A growing foreign presence
José García Cantera at Salomon Smith Barney in New York estimates that in the largest seven countries in the region, foreign banks now control about 15% of total loans and 16% of deposits, and that these figures have increased by nearly five percentage points in the last few years.
Spain's big three banks - Banco Santander, Banco Bilbao Vizcaya (BBV) and Banco Central Hispano (BCH) - have been the most active acquirers. Santander, the country's biggest banking group, is now the largest foreign bank in Latin America with total assets of $28.3 billion in nine countries.
Santander's relationship with the region goes back more than 140 years. Its founding statutes laid down as one of its objectives the promotion of trade with Latin America. It had branches in Havana and Mexico before it opened in Barcelona, and today more than 40% of its assets are located in the region, as a result of acquisitions managed through what the bank describes as a "very disciplined framework". This framework has to fulfil three main objectives: diversification, developing a regional universal banking franchise and achieving its profitability benchmarks.
"Our strategy so far has been to take majority holdings in banks in nine countries that together account for 98% of the region's GDP," says José Juan Ruiz, the bank's strategic planning director. "We do not aspire to be a global bank hence Latin America does not represent a step towards this objective. We only want to be active in areas where we have a comparative advantage and Latin America is one of them."
The group's investment-banking arm Santander Investment began looking at Latin America again about 13 years ago when the region's economies were being liberalized. "Santander Investment had already analyzed the potential for work in privatization and other areas," says Ruiz. "The deregulation of Latin America's economies makes them a natural ally for us. We can export our expertise to the region, as Spain went through the same experience about 10 years ago. We see Latin America on a regional scale, not as a series of isolated investments. We want to build one great franchise and help these countries to do business with Europe."
Ruiz says the bank prefers majority control in order to be able to influence management decisions and maximize returns to shareholders. Santander applies its own risk-control methods to these banks. In Spain non-performing loans are 0.8% of its loan book compared with the Spanish average of 2%. "This gives us a comparative advantage in Latin America where the average ratio is 3%, while some of our competitors have twice that level," says Ruiz. "The focus of our international expansion is to create shareholder value. We spent Pta325 billion ($2.1 billion) last year on restructuring these banks. The bulk of our Latin American expansion is concluded but we are open and flexible to opportunities, and we are diversifying into areas like fund management and pension funds. Last year these banks yielded $380 million in net attributable profit and we expect about $520 million this year. As for return on equity, we are in the midst of a restructuring programme and haven't yet reached our cruising speed."
By contrast, Santander's chief rival and Spain's largest bank, BBV, says its expansion programme is far from over. Indeed, it has $3.5 billion earmarked for the region on top of the $3 billion it has already spent on acquiring local banks. Last month it took control of Chile's Banco BHIF. BBV's deputy general manager José Ignacio Sánchez Asiaín defines the goal as becoming one of the three top banking groups in Latin America by the end of the century and in doing so, create value for shareholders through superior returns.
"Latin America is capable of growing faster than Spain and our ambition is to be a leader in each market in which we operate," he says. "We provide a minimum of management for our Latin American banks, with rarely more than five or six staff per operation. We believe local people should run local businesses. What we really provide is our management style that is flexible but does not change our core way of doing business. We send in implementers, not caretakers." Unlike Banco Santander, BBV tends to prefer minority holdings and wants to be perceived as a local player hand-in-hand with a high-profile partner in each of its markets.
No quick profits
Sánchez Asiaín says BBV is looking to achieve a 20% return on equity from its Latin American operations. However, foreign arrivals are finding that initial returns are lower than the continent's rate of economic growth had led them to believe. Inefficiency and bad debts will depress profitability this year and next, while as Sánchez Asiaín points out, Latin America's economies have underperformed expectations partly because of El Niño and partly because elections have upset economic programmes. However, he says: "In spite of this we are finding growth satisfactory and inflation is under control. Thanks to their orthodox economic policies they have held up well under the Asian crisis. I'm not sure Brazil would have survived this five or six years ago."
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