Dominican Republic guide 2016: Financial system

By:
Rob Dwyer
Published on:

DR's banks look to flourish amid competition

The country’s banking system is already well-regarded and is moving into line with international standards under the new regulation.
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The Dominican Republic’s financial sector has seen rapid growth in recent years. Ten years ago there was virtually no domestic capital markets activity and today it is worth $1 billion a year. In terms of loan growth, the system grew by 12.6% in the past 12 months. A new trust law was passed in 2011 that promises potential securitization financing to drive the country’s many infrastructure projects. Both the IMF and the rating agencies consider the banking system to be well-capitalized and well-regulated. The IMF’s latest report states: "The financial sector remains sound, with banks showing healthy capitalization, profitability and asset quality. The mission welcomed progress made in strengthening banking supervision."

Despite the relative strength of the financial system, a new law is on the way designed to strengthen it further. The proposals have already gone through eight rounds of public comments and adoption is expected to come in the first years of the next administration. The changes are progressive, rather than dramatic, but should add even greater robustness to the growing capital market’s supervisory authority. When adopted, the new law will also bring the country’s banking regulations into line with international standards.

The banking system itself is solid: following the country’s financial crisis in 2003 there was a drive to quality in the sector. Customers moved deposits and other business to the larger banks. The largest bank on the island capitalized on this trend and Banco Popular became the dominant player. However, in recent years there have been two key developments that have shaken up the Dominican Republic’s banking system. In 2014 the third and fourth largest banks merged to form Banco BHD Léon, creating a true competitor to Popular in the private sector, however, BHD Léon is still 8.7% below Popular’s market share of deposits (26.9%).

The more significant event was the reinvigoration of the government’s wholly-owned bank Banreservas. President Danilo Medina recruited Enrique Ramirez from the private sector, as he did with other top executives to run the state bank. The president’s mission for the new executive team was clear, to build the state bank into a competitive alternative for private sector retail and corporate banking clients. 

The change in the bank’s size and business mix has been dramatic. It had long been the leading institution thanks to its public sector business but the new management team has turned this upside down. In 2012 the bank’s portfolio was 80% public sector and just 20% private sector. This ratio has already been reversed. 

ENRIQUE RAMIREZ PANIAGUA 200x220
Enrique Ramirez Paniagua  
CEO of Banreservas
The public sector portfolio on the bank’s balance sheet has been reduced, largely due to a series of securitizations of credits from the ministry of finance that the bank has sold to Citi and Bank of America Merrill Lynch. Meanwhile, the bank has radically reformed its retail proposition, winning market share from the private sector, and has implemented new institutional structures to maximize cross-selling initiatives that boost both revenues and profitability. The bank is working towards reaching the cross-sell index levels of other regional competitors as it is focused on increasing the share of wallet of its existing clients rather than seeking to increase its clients base. 

The corporate banking segment has also been revamped. While the bank is strict about focusing on profitable business it is also tasked with delivering financial support to the government’s key growth sectors. It has been a strong supporter of construction, tourism and agriculture projects in the Dominican Republic.

"There is no conflict between the bank financing the growth of companies in the industries that are the strategic focus for the government and growing a profitable bank," says Ramirez. The government also introduced a law to recapitalize Banreservas to the tune of an additional Ps10 billion ($220 million) by the end of 2016. The process uses retained earnings and would-be dividend payments to increase the bank’s capitalization. The bank says the process should be complete in the first half of 2016 but the government is already considering further capitalization (the minister of finance is chair of the bank’s board of directors).

 "We are discussing a new organic law for the bank that will outline its mission statement and strategic vision for the bank – and how that interplays with the government’s macroeconomic programme," says Ramirez. "Fortunately for both the bank and government, recent growth has been above expectations so the government doesn’t need to receive any dividend payments in the near term and we can channel that into increasing the bank’s capital base to enable us to grow even faster."