Finance

Dear Prudence

Banking

The Dominican Republic's banking universe is hallmarked by pragmatic regulation and a healthy print across vital metrics—although low penetration needs to be addressed.

The efficiently regulated Dominican banking sector has sustained decent solvency levels, capitalization, and profitability, as well as a long foreign currencies position. Scotiabank research reveals that the total assets of the financial sector had climbed from 38% to 45% of GDP over the past five years as of June 2014. Moreover, the healthy asset quality of the deposit-taking institutions is confirmed by the halving of systemic non-performing loans (NPL) to 1.9% in 2014 from 4% in 2009. In a TBY interview, Central Bank Governor Héctor Valdez Albizu provided an encouraging birds-eye tour of the banking sector. Among the key metrics highlighted, as of August 2014, were total assets of financial intermediation institutions of Ps1,142,723 million, marking nominal YoY growth of 8.6%. Indicative of a vibrant economy, the second largest in the Caribbean after Jamaica, “total loans of the financial sector, commercial banks concentrated 86.9%. Indeed, the loan portfolio of multiple banks totaled Ps586,693.2 million in August 2014, up 12.8% YoY.” Meanwhile, public deposits in the financial sector in August 2014 reached Ps935.674 million, on a 10.4% YoY climb. The public sector is a major force in financial intermediation, and state-owned Banco de Reservas boasts one-third of banking system assets on a respective 38% and 32% share of loans and deposits according to official data as of August 2014.

Elsewhere, domestic currency deposits outperformed their 2013 print by, 12.9%, while foreign currency deposits rose just 3.6% for the period. In August 2014, the share of domestic currency deposits among total deposits in the system was 74.6%, up 1.7 percentage points on August 2013 (72.9%), on the decline in the share of FX deposits from 27.1% to 25.4%. “An important element worth noting is that during the period of August 2013 to August 2014, financial intermediaries decreased their exposure to credit risk by maintaining the downward trend in NPL ratio, which dropped from 2.9% to 2.2%, driven by lower coefficients shown in commercial banks and savings and loans,” the Governor added. Of note, banking delinquencies rates shed 1pp to 1.9%, while the provision coverage of nonperforming loans markedly rose from 117.0% to 164.3%. The sector’s solvency ratio posted at 18.18% in July 2014, thus far above the stipulated 10% minimum, and the respective return on assets (ROA) and average equity (ROE) for August 2014 was 2.02% and 18.33% for the month. “Meanwhile, the commercial banks posted ROA of 2.05% and ROE of 21.45%,” he concluded.

NEW SHOOTS

The Dominican Republic has been active in fostering economic conditions amenable to business, both local and FDI through prudent use of facilities extended by a range of international agencies. According to Nearshoreamericas.com, since it partnered the International Finance Corporation (IFC) back in 1961, the latter had invested $962.9 million in the nation’s private sector by 2013. And recently, the Dominican government also negotiated a $250 million loan with the Inter-American Development Bank (IDB), to enhance the investment climate and foster productivity, particularly that of SMEs, which account for 97% of all Dominican enterprises and 30% of GDP. The IDB has laid out recommendations that the Caribbean nation is advised to follow, which include facilitating SME access to financing in order to bring them increasingly into the formal economy.

SELECTED PLAYERS

The top-three players in the highly concentrated Dominican banking sector approximately claim a 60% market share, according to the IFC. Established in 1963, Banco Popular Dominicano, a subsidiary of local Grupo Popular, is the main force in the local market, on roughly a one-third share of total assets. The leading issuer of debit and credit cards, it has a nationwide branch network of around 200 and over 700 ATMs. In June of 2014, it introduced the Popular ProExporta platform in partnership with the Dominican Exporters Association (ADOEXPO) to avail exporters of beneficial rates in export factoring, among other facilities.

In terms of performance, for FY2013 total assets were robust at Ps251.8 billion ($5.84 billion), up YoY from Ps223.5 billion. Total deposits saw a minute appreciation from Ps34.4 billion in 2012 to Ps35.7 billion ($827 million). Meanwhile, the net loan portfolio saw slower YoY growth to Ps156.4 billion ($3.63 billion) from Ps143.9 billion. Over 2013 the return on assets (ROA) stepped down a rung to 1.83% from 1.92%, while the return on equity (ROE) metric, at 20.19%, barely budged from the 20.18% print of 2012, both down from 22.40% in 2011. Provisions for NPLs declined to 197.12% coverage from 198.99% a year earlier.

BANK TO BANK

Banco BHD was the second largest privately held bank in the Dominican Republic ahead of its merger with Banco León in 2014, then the fourth largest privately held bank. The merged entity has been renamed Banco BHD-León, with combined assets exceeding $4.33 billion, rendering it the fifth-largest bank Central America. As at June 30, 2014, Banco BHD had total assets of Ps132,891,924,864, and total liabilities of Ps119,402,014,258.

The sole foreign banking presence in the Republic boasting retail outlets, and one of Latin America’s most widely present financial institutions, Scotiabank, with a branch network of close to 100, is the fourth largest bank in the Dominican Republic by total assets. It has risen from fifth, it’s ranking after growing more than two fold following its 2003 partial purchase of collapsed Banco Intercontinental (Baninter Bank), which had collapsed that year.

Incidentally, the state’s decision, at the time, to take over that sole failed bank led to a subsequent deficit of around 15% of the GDP. Over 2012, the gradual appreciation of Scotiabank’s total assets to $124.6 million confirmed the aforementioned prudence of Dominican bankers during what was an election year. For 2013 total assets rose by 6.6% YoY from Ps49.8 billion to Ps53 billion thanks to the rise in loan portfolio to Ps34.9 billion from Ps32 billion.

ON THE MOVE…

The percentage of banked adults remains low, at around 38%, short of the emerging market average of 42% and developed market average of 89%. Yet mobile penetration has leveled out at around 90%, which has prompted financial institutions to leverage mobile banking to boost financial inclusion. Mobile payment is today a serious facilitator for the world’s unbanked, as well as a multi-faceted convenience for those who are. According to digital security giant Gemalto, global transactions by mobile payment via NFC-enabled phones could exceed $426 billion in 2015.

Banco Popular explained to TBY the outcome of its pioneering 2012 launch of a mobile app. “This app has the ability to trace ATMs, Popular branches and businesses with special offers for our customers via an augmented reality interface and GPS, and had been downloaded over 160,000 times, by June 2014 registered a volume of over 398,000 transactions and over $65 million settled, on a rise of 297% in transactions and over a 305% in the amount of these transactions,” bank President Manuel A. Grullón explained. And in 2014 Banco Popular Dominicano and local telco Orange Dominicana launched the Orange m-weight, a virtual pre-paid card facilitating mobile banking transactions.

…AND MICROBANKING

Credit and savings financial institutions (bancos de creditos y ahorros) are essential financial institutions in the Dominican Republic when considering the stunted participation rate in financial instruments, be it mortgages or regular retail banking. Industry research reveals that in the Dominican Republic, 70% of internal production stems from micro businesses, where fewer than 10% of those people are banked. According to Mixmarket, in 2012 microfinance loans amounted to approximately Ps610 million.

One notable local player is Banco Ademi, 64 branches has bumped up its portfolio by 14% in 2014. Executive President Guillermo Rondón told TBY in conversation of an, “…aggressive strategy in the micro credit segment; we have increased our take in agricultural micro credit and we see this sector as one of the main driving forces for the bank in this segment. We also see a great potential in agribusiness.”

Yet he rounded off by stressing the need for greater formalization of micro-industry. “Micro companies represent around 30% of GDP, which implies huge potential for us and for the country.”

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