Latin America banking: Political risk slows China’s progress
But expected wave of bank consolidation not forthcoming; hampered in Argentina by high regulatory and political risk.
At the beginning of November, China’s second-largest bank, China Construction Bank, announced it was buying a controlling interest in BicBanco, a small Brazilian entity. The acquisition, valued at a little over book value, is essentially the purchase of a banking licence in Brazil to enable CCB to begin operating there and is a continuation of the central bank’s policy that new entities in Brazil should buy existing franchises rather than be granted new licences.
The Chinese bank says it is following clients into Brazil, and analysts have been predicting further Latin American banking operations by Chinese banks since ICBC announced it was buying Standard Bank’s Argentina operations in August 2011. Chinese banks are keen for international diversification, and the resource-rich region offers attractive options. ICBC’s acquisition of Standard Bank’s Argentine operations for $600 million and a capital injection of $100 million took more than a year to be approved. A source close to the transaction said that the Argentine government wanted to influence the appointment process for the new CEO. In June, Argentina’s economy ministry announced a $2.1 billion loan from accords with Chinese banks. The delayed process was finally approved in November.
Wave of concentration
When ICBC’s Argentine acquisition was announced there was an expectation that there would be a wave of consolidation in the banking sector. However, to date there has been little activity, despite very low valuations, with the only notable exception being Banco de Servicios y Transacciones’ acquisition of consumer-finance oriented Banco Cetelem Argentina.
Maria Valeria Azconegui, analyst at Moody’s Financial Institutions Group, was one who thought there might have been some more M&A activity in Argentine banking in the past year. “I thought we might see some concentration,” says Azconegui. “But the big question is: who would buy?”
Azconegui says the banking system faces substantial regulatory and political risk. Moody’s has a negative outlook for the country’s banking system because of the worsening operating environment and the negative impact of new banking rules.
One of the most important is the rule that requires the top 30 banks to issue loans to SMEs at below market rates. These loans, which typically have terms of three years – a tenor one banker called “science fiction” for the country, given the extremely short-term deposit basis of the system, are set at around 15%, about half the commercial rate charged by banks to this sector. Despite effectively being forced to offer subsidized rates, there are problems finding enough clients to issue the loans to, given the small size of the sector compared with the regulatory targets.
“The universe of SMEs is really limited,” says Azconegui, who notes that at first banks tried to limit losses by linking loans to payroll services and other cross-selling initiatives. But because of competition to satisfy regulatory targets, banks began to lower their lending discipline to comply, despite the government extending the definition of SMEs. Banks that fail to comply face fines, but the real risk is political. “Unfortunately the central bank is not independent and [no bank] wants to be on its grey or black list, so they try to comply,” says Azconegui.
The central bank is also capping the fees that the banks can charge, which Azconegui says is likely to have the greatest impact on the consumer-oriented banks.
“System-wide, the impairment loan ratio is still low, though it is increasing, but the most risky segment is the consumer finance banks, which have NPLs of between 15% and 18%,” she says. “Part of this segment will be in a little more trouble because unemployment is rising a little bit. The past fee rate enabled the consumer finance banks to capture the NPL risk [in aggregate], but going forward the capped rate won’t be able to cover this rate.”
However, the country’s banks are very well capitalized because of central bank rules that prevent financial institutions paying dividends unless they have tier 1 capital of more than 75% of the minimum rate (which is 8%, but with operational risk regulations is nearer to 9%). Even the leading banks such as Banco Macro don’t exceed this higher threshold, and so the big banks are retaining capital. “You see many of the big banks investing in corporate buildings to hedge against inflation and make better use of excessive capital,” says Azconegui, who believes that the foreign banks view Argentina as a long-term investment.
The introduction of a capital markets law has also unnerved businesses. One of the new powers related to minority shareholders – although untested – appears to give any minority shareholder the ability to take over for six months any company that it believes is being misled by the current management.
The law is seen by many as a thinly veiled threat to media company Clarin, which has clashed with president Cristina Kirchner. With the state-owned pension fund entity Anses a minority shareholder of Argentina’s banks – and other Argentine corporations – it has added another level of political risk to Argentina.
However, with a growing expectation that the current administration will not be re-elected in 2015, there are renewed expectations of M&A in the financial sector, while asset prices have increased, although from a very low base.