Profits feel the squeeze at Bolivia’s banks
New financial services law on the way; Will constrain bank profits
The Bolivian banking sector is braced for a more regulated and less profitable operating environment when the government publishes the details of its financial services law. The law, which was promulgated on August 21 2013, contains 540 articles that – in the main – are designed to constrain banking profits. The details, which include deposit lending floors and lending rate ceilings, were supposed to be published within 90 days of the law being passed, but the crucial details have yet to be announced. They are expected shortly.
The new financial services law will usher in an era of lower margins for the banks, but there is hope and expectation in La Paz that the leftist government won’t seek to hit the banks too hard. The country’s recent strong GDP growth – predicted to be 6.7% for 2013 – has been largely driven by private-sector credit growth and the government is reportedly aware of the dangers of saddling the banking sector with too high a cost from the new regulations.
"There will be a significant impact on bank profitability, but we do expect pragmatism [from the government]," says Cesar Arias, Latin American sovereign analyst at Fitch Ratings. "This financial services law is intended to reduce the profitability of the sector but not to ruin it, because the government understands that its recent GDP growth has been growing at that rate largely due to the growth in private consumption, which has been growing at between 15% and 20%."
The Bolivian government, led by leftist president Evo Morales, has already shown itself to be predisposed to reduce profits in the banking sector, which – apart from Banco de Crédito del Perú – is all domestic entities. In 2012 a new 12.5% income tax was introduced on financial entities whose returns on equities exceed 13% and a new 0.7% tax was levied on all foreign exchange transactions, which was one of the most profitable segments for Bolivian banks.
The Bolivian government is also trying to moderate banking profits through a market-led strategy. It has capitalized two state banks – Banco Unión and Banco de Desarrollo Productivo – and tasked them to expand quickly their loan portfolios at lower rates than seen in the private sector in an attempt to inject competitive pressures. Arias expects that Banco Unión, which had a $500 million capitalization in 2013, might become Bolivia’s largest bank in the coming years, but so far this strategy has had limited impact, according to Kurt Koenigsfest, chairman of Asoban, Bolivia’s banking association, and CEO of BancoSol. "Banco Unión is currently the fifth or sixth largest and it doesn’t have a significant weight yet and so although it is having an aggressive participation in the market, the largest banks haven’t really reacted, but let’s see what happens," says Koenigsfest, who adds that the new financial services law will include mandatory lending to certain areas of the economy. This will require banks to extend loan portfolios into new, riskier areas such as the rural economy. "In the past, the banking market was left to market forces, but there is now going to be a lot of state intervention," says Koenigsfest. "One of the possible outcomes is that we are going to have lower returns – we are going to be making less profit and we are not going to be able to reinvest the amounts that we were doing in the past. The banks were growing at a rate of about 20% a year – some in the micro-finance area were growing at about 35% a year – and they were capitalizing about 80% of the profits, which was the main source of capital for continued growth. This is the main issue we have been discussing with the government: in the medium term we are going to have pressure on income and fewer profits mean less capitalization. We will have a smaller banking sector which will not be able to accompany what is happening in the economy as a whole." Koenigsfest also expects that new legislation is likely to lead to some consolidation in the market as larger entities seek to add rural loans to their portfolio and the smaller entities face net interest margin pressures.
The IMF is also concerned about the impact of the new law. In its report following a recent visit to Bolivia it said that in its view: "The Bolivian financial system remains solid and well capitalized. Nevertheless, the new Financial Services Law could pose a risk to financial stability... The law’s emphasis on the objectives of financial inclusion and productive development are also appropriate but the instruments chosen (eg, interest rate caps and minimum portfolio quotas) could lower the profitability and capitalization of the financial system and lead to a reduction in the funds available for lending over the medium term."
The lower expected returns will be a disincentive for international investors, but will still have sufficiently attractive returns for domestic investors, according to Koenigsfest. "Instead of ROEs of 20% maybe [the industry average will be] 13% or 14% and as international investors have to discount the [political and FX] risk they should be looking for about 20% to 25%. But for local investors a 13% to 15% return – which I think is where the market will be for the next couple of years – is still going to be interesting."