| |
Headline: Shakedown in the Isthmus
Source: Euromoney
Date: June 2000
Author: Michael Peterson
For years Central Americans have told visitors that their region is grossly over-banked. A new wave of mergers suggests that this is set to change, reports Michael Peterson
Despite Central America's common cultural heritage, unity among its six constituent countries - seven including neighbouring Panama - has long remained an unfulfilled dream. Trade barriers and state ownership have turned the region into a series of tiny, diversified economies, each served by its own banking industry.
But things are changing fast. In the past few months Central America has found itself in the middle of a full-blown merger frenzy. Announcements of deals come almost weekly.
In countries throughout the region, first- and second-tier banks are merging. And the number of serious discussions taking place behind closed doors suggests that there will be many more deals before this year is out.
Central American bankers have long talked about the need for their industry to consolidate. More than 100 banks and about 100 financieras, second-class deposit-taking institutions, serve the region's 35 million population. As a result, the average Central American bank has capital of less than $20 million and makes less than $2 million annual profit. It offers a limited range of services and serves a small geographical area.
In the past 10 years, the region has moved towards economic integration. The Caribbean Basin Initiative, a series of bilateral agreements with the US, aims to put many Central American exporters on the same footing as those in Nafta, notably Mexico's highly successful assembly or maquiladora companies.
But though trade barriers between the countries have fallen in recent years, and as some industries, notably the airline business, have become pan-Central American concerns, finance has remained fragmented, until now.
Undeveloped capital markets
In Central America, finance usually means bank lending. The only three international bond issuers are the governments of Costa Rica, El Salvador and Panama. Supranational bodies - the IFC, the Inter-American Development Bank and the Central American Bank for Economic Integration - channel some funds into the region, particularly for development projects and for impoverished Nicaragua and Honduras.
Local capital markets provide limited financing opportunities. Central America lacks a single stock market and efforts to integrate national exchanges have produced few results. There is little demand for equity, and most outstanding shares are highly illiquid. Most users tap the local bolsas only for short-term local currency debt in small quantities.
Consolidation in the banking industry has been hampered by pride among the privately owned banks. For some time, it has meant larger banks picking off smaller players. But now the merger announcements come almost weekly, and no longer do they involve only larger banks buying minnows.
The merger that first caught the headlines was the announcement last December that El Salvador's biggest bank, Banco Agrícola Comercial, was to take over fifth-ranked Banco de Desarollo. The deal has been given the nod by shareholders and regulators and should be completed in July. That was followed by a deal involving El Salvador's third-largest bank, Banco Salvadoreno, unveiled in March, and a growing volume of M&A activity in the smaller banking sectors of Guatemala and Costa Rica. In May, merger mania spread south to Panama when Banco del Istmo announced its plan to acquire one of the country's leading mortgage banks, Pribanco. That followed a smaller acquisition by del Istmo's rival for leadership of the Panamanian banking market, Banco General.
If the merger of del Istmo and Pribanco goes ahead, it will create an institution larger than the new Agrícola Comercial in El Salvador and reassert the might of Panama's banking industry. Panamanian banks, which serve not only the domestic market but a large offshore client base, have long been considered superior to those of the rest of Central America.
But why is consolidation happening now? One reason is the need to raise funds internationally as competition for local deposits grows and interest rates fall. Although the biggest of the region's banks, such as Banco del Istmo, Banco General and Banco Cuscatlán, can raise funds internationally through US commercial paper programmes or securitization, most institutions remain too small to tap international capital markets.
Also, bank regulators have been applying pressure for consolidation to strengthen banking systems and prevent systemic problems. New bank laws have been introduced in much of the region designed to increase absolute levels of capital, prevent shady practice, and force greater disclosure about the composition of bank balance sheets. Life has become much harder for Central America's armies of small and weak institutions.
The government pressure for a strong banking sector has produced its best results in El Salvador. Although the country is not Central America's biggest in terms of population (Guatemala is) nor the richest in per capita terms (that is Costa Rica), increasingly it provides economic leadership to the rest of Central America and its banking sector reforms have been widely imitated.
An active central bank
El Salvador has far fewer banks than Guatemala, which has an economy of similar size, but the central bank, led by president Rafael Barraza, has pushed hard in recent years to strengthen the banking system. Since Banco Credisa went bust in 1998, costing the government dearly, the authorities have been keen to prevent any bank drain on public coffers.
A minimum capital threshold of ESc100 million ($11.4 million) has been imposed, which all its banks now meet. A deposit guarantee scheme, funded by the banks and the central bank, was introduced last year to reimburse small depositors if a bank fails. It signals that the central bank is willing to let struggling banks fail.
The two junior partners in the latest of the proposed bank mergers in El Salvador are both top-10 banks. However, Banco de Desarollo, which is merging with Banco Agrícola Comercial, and Bancasa, which Banco Salvadoreno proposes to absorb, are among the weaker players in the top and middle tier of the banking system. They represent a further polarization of the banking industry into a top flight of banks with international scale and a bottom- tier of niche players.
"Last year we saw a lot of deterioration in asset quality," says Thomson Bankwatch analyst Agatha Pontiki. "With the superintendency [regulator] having introduced new provisioning requirements and the economy slowing down, a lot of banks felt pressure on profitability."
If Salvadoreno's takeover of Bancasa goes ahead, the country's five biggest banks will control no less than 80% of El Salvador's banking assets and account for 84% of capital in the system. Nevertheless, Pontiki points out that the sector has a lot of exposure to the construction sector, and that industry has borne the brunt of the country's economic slowdown over the past couple of years.
Guatemala, Central America's biggest country in terms of population and GDP, has long typified all that is bad about the region's banking industry. The balance sheets of many Guatemalan banks are riddled with bad loans, many made to companies or individuals connected to the banks' owners.
Although there have been several important mergers in the past year, the industry, with more than 30 banks, remains highly fragmented. The country's five biggest banks account for only 44% of assets in the system. Most are too small to invest in technology or to build a consumer brand. "There are far too many institutions for the size of the market," says Peter Shaw, bank analyst at Thomson Bankwatch. "In addition to the banks, there are a fair number of financieras, and that is the sector of the industry that has been through the hardest time recently. Some of the confidence problems that grew from the financieras have spilled over into the banking sector."
The banking system depends on injections of public cash. In 1999, the central bank repeatedly extended emergency credit to banks in trouble, to the annoyance of the country's better-run institutions.
This year the central bank has had to prop up Banco Metropolitano and Banco Promotor, which are chronically unprofitable and have bad debts. In January, the central bank gave the two institutions - which have a common owner - emergency credit lines to give them time to raise new capital. This was particularly controversial because the banks' owner is said to have funded the election campaign of the new president, who won power in November. In March, the central bank renewed the credit lines, this time insisting that if they did not find new capital the banks would face intervention.
Successive governments have tried to make improvements, but have faced resistance from parts of the industry. In December a new rule came into force requiring banks to disclose the extent of lending to related parties, but the banks have asked for more time to comply.
Nevertheless, there has been some consolidation in Guatemala. Early last year, Banco del Café, one of the country's five biggest banks, with a high profile in rural areas, took over a smaller institution, Multibanco, a leading retail bank in the capital.
Since then there have been two other mergers involving first or second-tier banks. Banco Reformador has joined with middle-ranking Banco de la Construcción, and Banco del Agro and Banco Agrícola Mercantil tied the knot in February.
More mergers on the way
More mergers and acquisitions are expected. Banco Granai y Townson and Banco Continental have not denied reports that they plan to merge and the activity is beginning to polarize the banking sector. "The better Guatemalan banks are doing pretty well at the moment," says Nigel Hubbard, manager of Lloyds TSB in Guatemala City. "But at the same time, the banks in difficulties are doing worse."
Guatemala's weaker banks will feel the effects when the government allows local banks to offer dollar accounts, as many expect it will later this year. This move would favour those banks that have access to hard currency.
Costa Rica is Central America's most prosperous country but is also the most addicted to state ownership. It is one of the few countries where a government department has a monopoly of the electricity and telecommunications sectors (including internet services). When earlier this year the government proposed to turn this into a company the result was a rare riot on the usually peaceful streets of the capital San José. Three-quarters of domestic banking assets are in the hands of state-owned banks, notably Banco Nacional de Costa Rica, Banco de Costa Rica and Banco Agrícola de Cartago. All are notoriously inefficient and provide a poor level of service but the government, which would like to privatize them, knows that a sell-off is politically impossible, given the opposition
to reform of the electricity-cum-telephone institution.
Private newcomers
The private banks have three things in common. They have all been set up relatively recently, since the government monopoly on deposit-taking ended only in 1996, they are all small and they do much of their business off-shore. But increasingly, they fall into two categories. The biggest banks and best-run banks are foreign owned: in August 1999 Banco del Istmo from neighbouring Panama bought Banex, the biggest private bank in Costa Rica. The locally owned banks are smaller and are having to team up to remain competitive.
Last month, Banco BCT and Bancomer announced plans to merge. Although they are among Costa Rica's larger private banks, their combined domestic assets are only about $150 million. However, including their asset management, brokerage and offshore banking businesses the two can claim assets of about $500 million. Many of Costa Rica's banking activities take place offshore because draconian tax policies discourage its citizens from keeping assets at home. This makes it difficult to compare the strengths of the private banks. BCT and Bancomer claim that the new
bank, which will be capitalized at about
$45 million, will be the second-biggest
private bank in Costa Rica after Banco del Istmo, which has merged Banex with its
own existing Costa Rican banking business.
Banco del Istmo has been a protagonist of further bank mergers in recent weeks. But rather than adding tiny Costa Rican banks to its portfolio, it has been buying up competitors at home. Panamanian banks are giants by the standards of most of Central America. Several have assets of more than $1 billion and capital of more than $100 million. But even in dollarized Panama, consolidation is now the order of the day.
Panama is an offshore centre, traditionally serving customers from the rest of Latin America, and most of the many banks based in Panama City remain aloof from the local market. However, those that do serve local customers, notably Banco General and Banco del Istmo, are large enough to fund themselves in the US market. "The larger local banks in Panama are well run and the fact that they have set up commercial paper programmes
in the US demonstrates that the outside impression of their management is favourable," says Joe Salterio, HSBC's country manager in Panama.
Last month Banco del Istmo, which specializes in commercial and investment banking, announced plans to merge with Pribanco, which offers mortgages, to form the Primer Banco del Istmo (First Bank of the Isthmus). Final terms have not been announced, but it is believed that del Istmo will offer around $240 million for Pribanco. The merger, if it goes ahead, will bring together the second and third biggest private banks in Panama and create an institution to rival the state-owned Banco Nacional de Panama with assets of $3.7 billion. It will put the combined bank ahead of the largest private bank, Banco General, which recently announced a merger with smaller rival Bancomer.
Forces for consolidation
Though Panama's banking sector is stronger than in the rest of the region, some of the forces that are driving consolidation in Central America also apply to Panama. A new banking law came into force two years ago, but it is only within the last six months that the regulator has begun to audit banks to ensure that they comply. Smaller banks are struggling to reach the standards demanded. "The local banks in Panama are relatively strong, primarily because of the dollar economy," says Terry McCoy, country manager for Scotiabank in Panama. "But there are still some smaller and medium-size banks that could be subject to further consolidation."
And it is not only locally owned banks that are buying and selling. Last month Chase said HSBC has agreed to buy its business in Panama, which had a net value of $27 million, for an undisclosed sum. The deal should be completed during the third quarter of 2000.
Chase did not simply use Panama as an offshore banking centre. It had a strong franchise in the local market that HSBC is confident it can develop. The US bank's exit from the market reflects the ambiguous attitude of many foreign banks towards the region. Only one foreign bank has spent money to develop a presence in Central America in recent years. Scotiabank has historical links with the Caribbean and has identified Latin America and Central America in particular as an emerging market into which it can expand with relatively little competition. It
has bought local banks in Costa Rica and
El Salvador in recent years and is one of the few institutions that is present in Belize.
Lloyds TSB's presence in the region is a historical accident. Its outposts in Guatemala and Honduras are the relics of an international network. This year it celebrates its 80th anniversary in Guatemala. Country manager Hubbard notes that his is the second-oldest private bank in the country.
Foreign banks' strategies
But the biggest foreign bank in Central America (including Panama) is Citibank and it will be interesting to see whether HSBC's strategy of cultivating a worldwide client base of high-net-worth individuals will encourage it to expand from Panama into Central America proper. "This region has the population equivalent to just one Latin American economy in the South," says Pontiki at Thomson Bankwatch. "So if they decide they want to be in Central America they will want to be in the region as a whole, not just one country."
But for now, many foreign institutions are choosing to do business with Central America from a distance. Investment banks such as Salomon Smith Barney and Credit Suisse First Boston have had some success in winning bond underwriting and M&A mandates from the region, even though most of their investment bankers fly in from New York or Miami.
Salomon Smith Barney recently advised on the merger of Banco del Agro and Banco Agrícola Mercantil in Guatemala. If the wave of bank mergers continues, there could be many more such mandates on offer. *
A world apart
Belize may be part of Central America, but it is a world away from Guatemala City, San Salvador or San José. The entire Atlantic coast of Central America, from Belize to the western tip of Panama, shares an English-speaking Caribbean culture that co-exists uneasily with the bulk of Spanish-speaking Central America.
Belize is unusual in that it has maintained its independence from Guatemala, although sporadic border clashes, the most recent this year, sometimes make that independence precarious.
For some years the Belizean government has battled against the perception that Belize, like other small and underpoliced Caribbean countries, is a haven for drug smugglers. So it may seem surprising that the government has pursued a policy of turning the country into a tax haven. Belize now hosts many companies incorporated for tax purposes. But it has been cautious about the type of offshore banks it wants to attract and until recently it had none.
Mindful of the dangers, the government has vetted applications to set up offshore banks thoroughly and the 1996 offshore bank legislation requires that banks maintain a physical presence in the country. "The government wants offshore banks but they don't want brass-plate banks," says a local observer. To date only one licence has been approved, for Provident Bank & Trust.
While the government waits for an offshore banking industry to emerge, the onshore sector in Belize remains tiny. There are only four banks, all of which offer a similar mix of retail and commercial banking services. Two banks, Bank of Nova Scotia and Barclays Bank, reflect the country's legacy of British colonial rule.
One of the two local banks, Atlantic Bank, is now owned by a Honduran bank, Sociedad Nacional de Inversiones. Only
one bank remains in Belizean hands, the appropriately named
Belize Bank.
| Central America's biggest private banks, December 1999 |
| |
|
Assets $m |
Capital $m |
Countries present |
| 1 |
Banco Agrícola Comercial |
1,902 |
144 |
El Salvador, Honduras, Nicaragua |
| 2 |
Banco Cuscatlan |
1,594 |
131 |
El Salvador, Guatemala, Costa Rica |
| 3 |
Banco Salvadoreno |
969 |
78 |
El Salvador |
| 4 |
Banco de Comercio |
851 |
77 |
El Salvador |
| 5 |
Banco de Desarollo |
586 |
47 |
El Salvador |
| 6 |
Scotiabank |
479 |
45 |
Costa Rica, El Salvador |
| 7 |
Banco de Occidente |
348 |
43 |
Guatemala |
| 8 |
Banco Atlantida* |
516 |
42 |
Honduras |
| 9 |
Banex |
191 |
41 |
Guatemala |
| 10 |
Banco Industrial |
497 |
39 |
Guatemala |
| 11 |
Bancahsa* |
382 |
34 |
Honduras |
| 12 |
Banco de Occidente* |
325 |
33 |
Honduras |
| 13 |
Banco del Istmo |
239 |
33 |
Costa Rica |
| 14 |
Bancasa |
453 |
31 |
El Salvador |
| 15 |
Citibank |
228 |
29 |
El Salvador, Guatemala, Costa Rica |
| 16 |
Banco del Café |
406 |
27 |
Guatemala |
| 17 |
Banco Interfin |
241 |
27 |
Costa Rica |
| 18 |
Banco Granai & Townson |
363 |
26 |
Guatemala |
| 19 |
Banco Empresarial |
94 |
26 |
Guatemala |
| 20 |
Banco del País* |
267 |
26 |
Honduras |
| * February 2000 |
| Source: national bank regulators |
| Central America's biggest private banks after recent and proposed mergers, proforma December 1999 |
| |
|
Assets $m |
Capital $m |
Based |
| 1 |
Banco Agrícola Comercial |
2,488 |
191 |
El Salvador |
| 2 |
Banco Cuscatlan |
1,594 |
131 |
El Salvador |
| 3 |
Banco Salvadoreno |
1,422 |
110 |
El Salvador |
| 4 |
Banco de Comercio |
851 |
77 |
El Salvador |
| 5 |
Scotiabank |
479 |
45 |
Canada |
| 6 |
Banco de Occidente |
348 |
43 |
Guatemala |
| 7 |
Banco Atlantida* |
516 |
42 |
Honduras |
| 8 |
Banex |
191 |
41 |
Guatemala |
| 9 |
Banco Industrial |
497 |
39 |
Guatemala |
| 10 |
Bancahsa* |
382 |
34 |
Honduras |
| 11 |
Banco de Occidente* |
325 |
33 |
Honduras |
| 12 |
Banco del Istmo |
239 |
33 |
Panama |
| 13 |
Citibank |
228 |
29 |
US |
| 14 |
Banco del Café |
406 |
27 |
Guatemala |
| 15 |
Banco Interfin |
241 |
27 |
Costa Rica |
| 16 |
Banco Granai & Townson |
363 |
26 |
Guatemala |
| 17 |
Banco Empresarial |
94 |
26 |
Guatemala |
| 18 |
Banco del País* |
267 |
26 |
Honduras |
| 19 |
Banco de San José |
226 |
24 |
Costa Rica |
| 20 |
Banco del Agro + Mercantil |
464 |
41 |
Guatemala |
| * February 2000 |
| Source: national bank regulators |
| Central America and Panama: banking |
| assets by country, December 1999 |
| |
$bn |
% |
| El Salvador |
8 |
13.8 |
| Costa Rica |
9.8 |
17 |
| Guatemala |
4.8 |
8.3 |
| Honduras* |
3.7 |
6.4 |
| Nicaragua |
2 |
3.4 |
| Total Central America |
28.2 |
48.8 |
| Panama |
29.6 |
51.2 |
| Total Cent America and Panama |
57.8 |
100 |
| * February 2000 |
| Source: national bank regulators |
|