The wisdom of spending $10 billion buying Latin America banks has not always been crystal clear to analysts but the results are starting to come through. In the first quarter, BSCH’s Latin American banks earned nearly $200 million, 69% up on the first quarter of 1999, and roughly 40% of the total. By contrast Spanish retail banking managed a meagre 4% increase in profits.
On a medium-term basis Latin America is expected to contribute closer to 30% of the total and part of the logic of merging with BCH is to reduce the proportion of these earnings. As Santander discovered in 1998, Latin volatility can have a considerable impact on the parent company’s share price.
Right now, however, the bank is benefiting from a benign outcome: growth prospects in most Latin countries have improved and BSCH has had several years to put its purchases in order. This has involved considerable writing oV of bad loans and provisioning, modernizing of systems, staV cuts and only limited lending. Up to now BSCH has followed the tried and tested philosophy of leading Latin banks such as Brazil’s Itaú in not advancing too much credit but in putting government paper on the asset side of the balance sheet. Analysts are starting to appreciate the good points of BSCH’s Latin strategy.
“Initially we had concerns with (Santander’s push into) Latin America. The extent of their investment and, as such, the proportion of group risk in the region had implications for the bank’s overall rating. However, the bank’s performance and management of this expansion has been exemplary,” says Steve Hussey, director of financial institutions at Fitch IBCA. “Now the merger of Banco Santander with BCH in Spain has diluted the effect of this expansion and the Latin American banks belonging to BSCH and BBVA have among the best asset quality in the region” The challenge now is to meld the Latin banks into a common franchise which is being done under the Project America programme. “What we had in Latin America was a group of banks, some from BCH, some from Santander, some from way back, that needed to be turned into a real franchise with return on equity of 25% and efficiency ratios of 45%,” says José Luis del Valle, BSCH’s finance director. “The banks were running independently. Now the managers from Latin America all speak the same language and know what the priorities are – reduction of costs, improved efficiency, a careful eye on loans and growth of mutual funds.”
Currently in Latin America the BSCH’s banks’ average return on equity is 18% and the efficiency ratio is 51%. Non-performing loans are over 3% compared with 1% in Spain and del Valle expects the differential to narrrow but not disappear. “You can’t lend aggressively in Latin America, especially in retail,” he says. “Our market share in Latin America grew much more in deposits, and mutual and pension funds than in lending.”
BSCH still has many problems to solve in the region. Colombia has proved difficult because of the dire state of the economy and Banco Santander Colombia lost money last year. After a restructuring things improved to a break-even situation by the first quarter of this year. Mexico has also proved troublesome although with the acquisition of Serfín last month BSCH is now able to greatly improve its position in that market. Serfín gives it a 16% market share.
In Chile the problem is having a larger share of the market than the authorities like. This arose because of the BSCH merger – both parties have Chilean interests. Banco Santander and Banco Santiago in which BSCH has a 43.5% stake give BSCH a 27% market share. BSCH hopes it will be able to reduce the pressure it is under by selling branches rather than an entire bank. A Salomon Smith Barney report on Chilean banks by Jose Garcia-Canter says: “Although this is a complex situation and anything could occur, overall we believe the following will finally happen: BSCH will be able to keep both Santander Chile and Santiago after making a slight market share divestiture; BSCH will end up controlling close to 79% of Santiago, because the central bank will realize that it could obtain a better price selling to BSCH than in the market (the central bank has a 35% stake puttable on certain conditions to BSCH). After these two situations a reclarified BSCH will continue with its plans for the creation of BSCH Latin America Holding Company, including Santander Chile and Santiago.”
In Brazil BSCH has decided to concentrate its efforts in the southern part of the country, struggling like other foreign entrants to establish sufficient size. This situation was partly resolved in January when it bought 97% of Grupo Financiero Meridional which included Banco Meridional headquartered in Porto Alegre in the southern state of Rio Grande do Sul and investment bank Bozano Simonsen. This gives it a market share of 3.1%.
