Emerging Markets

Edited by Brian Caplen

Latin America: New moves by old conquistadors

Spain’s leading banks are taking markedly different approaches to their Latin American expansion. Banco Bilbao Vizcaya (BBV) and Banco Santander, each of which lays claim to being Spain’s biggest bank, are busy chasing returns on equity in Latin America well above domestic rates. And they both expect Latin American profits to contribute substantially to overall results. But their strategies for realizing these gains diverge sharply, with BBV going for joint ventures and Banco Santander looking for majority control or outright ownership.

BBV’s director general Gonzalo Terreros says: “Acquiring minority stakes in banks or taking the joint venture route means we do not have to go it alone in these markets which, although they share a common language with Spain, may require quite different strategies that are better understood by local partners.

“This approach also helps to limit our exposure to any one market. It would have cost us double the $1.2 billion we’ve invested so far had we gone for majority control of each bank.” Terreros estimates total investment of $1.8 billion to $2 billion will be required to cover BBV’s initial Latin American ambitions.

Juan Rodriguez Inciarte, Banco Santander’s chief financial officer, points out that the time and effort involved in managing an overseas operation should be rewarded with a maximum return on investment. “If you value the work you’ve put into a venture you want to pass on as many of the benefits as possible to your shareholders,” he says. “A majority shareholding or outright ownership also gives you an adequate level of management control over the business.”

Where the two banks do agree is on the high level of returns they expect to reap from their Latin American investments. Both are confident that the region is on course for a stable political and economic future. “These countries have implemented serious and plausible reform programmes,” says Terreros. “It is worth bearing in mind that Argentina meets all the Maastricht criteria.”

Terreros says that BBV’s decision to expand into Latin America was a simple and logical one. “We saw that what we did well in our core business could be successfully exported to our natural overseas markets. To a certain extent we are seeing in Latin America a repetition of what took place in Spain a few years ago: privatization, deregulation, sharper competition and a globalization of their economies.”

Banking analyst Mariano Colmenar at BZW in Madrid points out that the relatively loose grip on the regulatory banking framework by most Latin American governments and the increasing number of privatizations have provided an impetus for Spanish expansion. “The operating outlook for banks in Latin America is similar to that prevailing in Spain some 10 years ago,” says Colmenar. “Superior economic growth combined with high interest rates in an environment of restricted remuneration on deposits is the perfect combination for banks to show above-par financial spreads.”

BBV has set itself a minimum target of 20% return on equity (ROE) for its Latin American investments, compared with the 15% it earns at home. Terreros says that, in some cases, such as Peru’s Banco Continental in which BBV holds 38%, ROE has soared from 11% to 30% in 18 months. Mexico’s Probursa, in which BBV holds 80%, is still well short of target, but Terreros expects the Mexican economy to return to what he terms its “cruising speed” next year.

So far, BBV has spent some $1.2 billion on its Latin American expansion. This includes shareholdings in banks in Colombia, Panama, Argentina and Puerto Rico, as well as Peru and Mexico. This year it expects to make about $400 million pretax profit from these operations, equivalent to about 30% of its estimated consolidated group profit. “Once our investments have reached a level of maturity Latin America’s contribution to group profits should increase to 40%,” says Terreros.

Banco Santander has also set a minimum 20% ROE in Latin America compared with 16% for the Spanish group. Rodriguez Inciarte says the bank is obtaining this in all operations except Puerto Rico’s dollar-denominated economy. Banco Santander aims to boost Latin American profits from a current 14% to 20% of its $11.07 billion equity. The bank has set 20% of its consolidated equity as the maximum amount of capital it plans to invest in the region. The current book value of its investment is $1.55 billion.

“We consider ourselves insiders in Latin America,” says Rodriguez Inciarte. “We have had a physical presence there for 40 years and the bank was, in fact, founded in 1857 to finance trade between Latin America and the port of Santander.”

“For us there is no such place as Latin America ­ each country is a different market, although they nearly all share the same language and that is a crucial factor. I can send 30 people from Madrid to negotiate in Latin America and going through the books of any bank would not pose a problem for them.”

BBV’s Terreros agrees that language gives Spanish banks an edge over international rivals. “We negotiated our shareholding in Argentina’s Banco Francés in only 18 days,” he says. “It might not be so easy to perform a due diligence in Indonesia or North Africa, for example.”

The acquisition of 30% of Banco Francés, Argentina’s third largest bank, makes BBV the most exposed Spanish player in that country. BBV is also the only bank to take a serious plunge into the Colombian market by acquiring a 40% stake in Banco Ganadero, the country’s largest financial institution.

Banco Santander’s big play is Chile, where its merger and 75% holding in Banco Osorno y la Unión, for which it paid 2.8 times book value, makes it the country’s largest bank with total assets in excess of Pta1 trillion. The bank’s holding company is setting a $219 million capital increase to fund the acquisition, of which $120 million to $125 million will be raised through an initial public offering of 12% to 15% of the bank’s shares.

Banco Santander’s Mexican exposure is largely through its investment banking operations, although it has just acquired a majority holding in Banco Mexicano. BBV is heavily exposed via its participation in Probursa and acquisition of two smaller retail banks. Jules Stewart

CUBA

Bypassing Helms-Burton

On October 28 EU foreign ministers announced a regulation that will allow European companies penalized under the so-called Helms-Burton Act to claw back damages in European courts. It was the latest in a long line of international measures designed to undermine the deeply unpopular American act, which punishes companies deemed to be “trafficking” in expropriated US property in Cuba.

Few people though expect Helms-Burton to go in the short term, even if the Democratic Party ­ less rabidly anti-Cuban than the Republicans ­ wins the US presidential elections. Under the terms of the current waiver, liability for any transgression starts to accrue from the beginning of November; law suits are prohibited until next February. In the meantime, foreign banks in Cuba appear to be treading carefully ­ even clandestinely.

“When Helms-Burton first appeared [in March], it certainly scared a few banks and a number of them disappeared below the parapet,” says Peter Scott, chairman of Beta Gran Caribe, which invests in Cuban assets through its subsidiary, Havana Asset Management. “I suspect that one or two cut their lines of credit temporarily, others reorganized through different channels.”

The Dutch banking group ING ­ which set up the first representative office of a foreign bank in Havana in 1994 ­ has grown cautious, announcing in July that it was pulling out of financing the Cuban sugar industry, which uses plantations once owned by Americans. “We came to the conclusion that we couldn’t ignore the legislation however much we disagree with it,” says an ING spokesman. “But we will maintain our presence in Cuba and are fully committed to growing our business there.”

The pullout of banks is leading to greater involvement of trading groups such as ED&F Man Sugar, which was prominent in financing specific provinces in last year’s sugar harvest. Alternatively, banks wishing to do business in Cuba are developing circuitous routes using off-the-shelf companies in the Caribbean and Central America to disguise their actions.

“It’s easy enough to buy companies off-the-shelf in countries with closed ownership registers and create a trail of money transfers which is extremely difficult to track,” says Scott. “Drug dealers and criminals have been doing this for the past 50 years. It’s a matter of the banks taking a leaf out of their book.”

Cuban government sources confirm that a lot of behind-the-scenes activity is taking place. They say 44 foreign financial institutions are involved in Cuba, although the vast majority have never been publicly identified. In addition, the government owns companies in countries such as Switzerland through which it can obtain financing for state projects. The Cubans have also been assisted by laws in Canada and Mexico which make it illegal for companies, including banks, from those countries to comply with Helms-Burton.

Foreign banks are perhaps encouraged by the fact that the US interest section in Havana has so far not demonstrated noticeable eagerness to pinpoint transgressors. The US authorities appear far less concerned with financing than with the purchase of assets. Only two companies have received letters under Title IV of Helms-Burton (which bars executives of the offending company from entering the US): the Domos Group from Mexico, which was involved in purchases in the telecommunication sector, and Canada’s Sheritt International Corporation, which operates an expropriated US nickel mine.

Nonetheless, banks with substantial US interests feel the need to watch their step. The revenues to be made in Cuba ­ estimated in the region of $10 million for most of the 13 banks with representative offices in Havana ­ are peanuts in relation to the profits from US operations.

Offshore banks such as NM Rothschild, which advised the Domos Group prior to the passage of Helms-Burton, and is now acting for a foreign mining company interested in acquiring a Cuban property, are taking a cautious view. “There are many cases where it is difficult to be sure whether the property has been expropriated or not,” says Keith Palmer, managing director of corporate finance at Rothschild in London. Deutsche Morgan Grenfell, which also advised Domos, is simply “watching and waiting”, according to one of its London corporate financiers.

But institutions such as Beta Gran Caribe, which created the first investment fund for Cuba in February, believe there is a living to be made providing short-term finance to smaller companies with no outstanding US claim. “Helms-Burton doesn’t affect us at all except marginally positively,” says Scott. “One or two deals have become available to us which wouldn’t have been available before, and interest rates have gone up a bit, which helps.”

Meanwhile, two Russian banks, Stolichny Bank and Inkom Bank, are negotiating full banking licences. Observers say these are unlikely to be granted until the revolution in domestic Cuban banking, led by central bank governor Francisco Soberon and senior executive Jose Julio Rodriguez, is more complete.

Three years ago the Cuban banking system was virtually non-existent. Che Guevara, who assumed the presidency of the Banco Nacional in 1961, turned it into a Soviet accounting tool. The state banks have since been divided into more logical units with fairly autonomous and reasonably efficient management.

The Banco Nacional will lose its current multifunctional form later this year, to be replaced by a central bank charged with monetary policy and a development bank to take deposits and foster small business.

In the meantime, all the indications are that the Cubans are obtaining finance from foreign banks in spite of US efforts to deny them. A World Trade Organisation panel due to meet on November 20 to rule on EU complaints that the Helms-Burton Act is extra-territorial is likely to increase the pressure for the act to go. Philip Eade

KAZAKHSTAN

No murders please, we’re Kazakh

The restructuring of Kazakhstan’s banking sector may have reached a watershed with the failure of KRAMDS Bank, the largest casualty to date and one of the top five banks. The National Bank decided to pull KRAMDS’ licence after a year-long struggle to rescue it.

But regulators are claiming that the worst is over in a two-year long crisis that has seen the number of banks cut in half, with 55 forced to close or merge in 1995 alone and 30 more whittled down since January.

As in many post-communist economies, Kazakh banks have suffered from imprudent lending, sometimes prompted by political pressures, in other cases due to speculative excesses.

Most observers pinpoint gross financial mismanagement as the main cause of KRAMDS’ collapse, starting with the $5.7 million Almaty headquarters, a $3.5 million office in Dzhambul and resort developments along the Black Sea and in Bulgaria. Unfortunately, the real estate market proved less than ideal when it tried to shed these holdings to raise quick cash. The bank also lost the chance to participate in the EBRD’s small business development programme last year, when shareholders refused to raise the bank’s capitalization, says EBRD deputy resident representative in Almaty, Michel Maries.

Yet KRAMDS’ fall was also caused by conditions inherited from the Soviet era, when credits were given to enterprises regardless of the prospect of repayment. Local bankers says the government still puts pressure on banks to offer risky loans to prop up faltering factories. In KRAMDS’ case, non-performing loans amounted to 60% of its credit portfolio. Many of the loans on KRAMDS’ books belong to enterprises that no longer exist.

But now the National Bank is getting tougher on such credits which may curb political lending. Since introducing new regulations in April 1995, the National Bank has stepped up efforts to force banks to reach higher levels of accountability or move aside. Capitalization requirements were raised to $1.5 million, and reserve demands set at 20%. Banks must now provide quarterly reports on performance, and the National Bank is sharpening training for its inspectors.

The failure of KRAMDS was a major test for the regulators and one they seem to have passed reasonably well. “In most cases, you don’t liquidate such a bank,” says Grigory Marchenko, deputy director of the National Bank.

Branches were closed, employees laid off and a frantic search for foreign investors undertaken. When a Singapore businessman was unable to agree immediately to a proposal in early October, the National Bank decided to call it a day, promising to pay off individual depositors starting in early 1997. Corporate clients, including 17 embassies and a number of international aid organizations, will have to wait longer to find out if, and when, they can expect to see any of their savings. Total deposits amount to Kt3 billion ($42.8 million). Despite extensive local press coverage of the liquidation, the National Bank managed to quell fears among depositors in other banks and kept panic withdrawals to a minimum.

The National Bank is claiming that Kazakhstan’s other leading banks are safe, but the same may not be true of smaller institutions whose poor capitalization could yet bring them down. Once local banks increase their capitalization and tighten up, the future looks bright, says ABN Amro Kazakhstan’s head of structured finance, Noman Siddiqui. “There’s a lot of potential here that local banks can focus on.”

In the meantime, Kazakh bankers are breathing a bit easier than their Russian colleagues for at least one reason ­ the murder rate among bankers is still zero. Although some attribute this to tighter government controls on law and order, one banker ventured: “We’re very cautious about importing Russian banking culture.” Rachel Katz

ASIA

Seeing is not yet believing

Behind the euphoria that greeted the $1.9 billion three-tranche global bond, issued in early October by Malaysian oil company Petronas, there lies another story. The fine spreads and strong demand unleashed by the deal have led to declarations that interest in Asian credits has reached a new plateau.

But there is a different school of thought. This declares that Asian issuers are still the poor cousins of Latin Americans, when it comes to occupying the high-yielding exotic portfolios of US and European investors. A number of negative experiences has made investors shy and banks’ due diligence of issuers has taken hold only recently. Before that banks would often agree to waive due diligence to attract an issuer on board, according to bankers in Hong Kong. Investors’ concerns were a secondary consideration to getting the deal away.

One deal that provides the counterweight to Petronas-inspired bullishness is a $200 million 10-year yankee for Indonesia’s Sampoerna led by CSFB.

The US institutional investors who took these bonds in June thought they were buying into a company making clove cigarettes. Given their popularity with Indonesia’s millions of smokers, this seemed a fairly safe bet. They were less happy come October when Sampoerna and its president director acquired a 12.5% holding in Astra International, Indonesia’s premier car manufacturer, and intended to build its stake to 25%. The state secretary intervened with a decree to limit holdings to 10%. Then it was revealed that president Suharto and his associates were buying shares in the company. The auto business is highly political in Indonesia and one that passive debt investors might prefer to steer clear of.

Moody’s has placed Sampoerna’s long-term debt under review for a possible downgrade. “The latest annoucement in Moody’s view clearly indicates that Sampoerna intends to pursue a much more aggressive diversification strategy away from the company’s original plan as well as its willingness to use a higher level of debt capacity for this purpose,” says a report by the rating agency.

A spokesman for CSFB in New York says that full due diligence was done before the Sampoerna issue and points out that several months elapsed before the purchase of Astra shares.

Due diligence for new credits is vital if the market is to mature, says Rosa Wong, executive director of financing and risk management products at UBS Singapore. The subject has dominated the monthly meetings of the debt market practices committee of the Hong Kong Capital Markets Association (HKCMA) over the past year or so. Although the committee, made up of the leading new issue banks in the region, could not agree unanimously on five proposed recommendations for due diligence criteria for issuance in the Asian time-zone, its chairman, Mark Bucknall, head of Asian new issues for HSBC, reckons its discussions were a catalyst for change.

“It raised the debate about due diligence, and now 95% of deals undergo the process,” he says. Banks are increasingly aware that they might be held liable if an issuer is not quite straight ­ and even if it avoids punishment in the courts, its reputation will suffer. Yet it is impossible to create a template which can apply to, for example, the EIB and an Indonesian or Thai corporate borrower.

Another banker points out that two years ago, agreeing to forego due diligence for a borrower gave a bank an edge over its rivals. “An Indonesian company would ask for a quote for a new bond issue, and then ask if you would conduct due diligence. If you said ‘yes’, then he would give his business to the competition.”

Concern first focused on the expanding FRN market. Because many investors were the same regional banks that bought CDs, which do not require due diligence, issuers of FRNs (and fixed-rate bonds too) managed to escape the rigorous examination that their counterparts in the Eurobond market were subject to under International Primary Market Association rules. Questions were raised, however, when innocent US and European investors came in to buy them.

For several years, multilateral agencies and investment banks have promised a feast of Asian issuance to finance the region’s structural development. But the story has started to sound a little jaded, plenty of jam tomorrow and a few crumbs today. Too often, the risk/reward ratio on offer just doesn’t add up. Borrowers find cheaper funding in the syndicated loan market, and when they do issue bonds, yields are too low to compete with the staple Latin American offerings. And there are plenty of sharks to watch out for. Small wonder investors are cautious.

“US and European investors still hold little Asian debt,” says Patrick O’Brien, head of emerging market bond sales at SBC Warburg. Biggest buyers are Japanese and Korean banks, and many private deals end up in Taiwan swapped into dollars. “Name recognition is a problem with European investors,” says Joe Cunningham, assistant director for new issues at ANZ International.

But O’Brien is one banker who believes the Petronas deal does mark a departure for Asian issuers. Petronas, an A+/A1 rated credit, 51% owned by the Malaysian government, issued five-, 10- and 30-year bonds at 38, 57 and 85 basis points respectively over the US treasury curve. CSFB led the issue. “Petronas was a hugely impressive deal. There is always a bid for quality sovereign and quasi-sovereign issues.”

But will this demand filter down to lesser credits? At present, the answer is uncertain. Last month, JP Morgan took 25 US investors, representing assets worth $1.2 trillion on a tour of the region. According to Adam Howard, managing director of Asian capital markets for the bank, they were impressed with what they saw. But increasingly, corporate borrowers will need to satisfy the due diligence practices mainstream investors are used to. Then seeing will be believing.

Rupert Gordon-Walker