Finance

The Reform Club

Banking

The government is adamant not to see a repeat of the local banking crisis that crippled the economy, and moreover, has honed the banking sector both for fiscal prudence and social value.

The Ecuadorean banking sector saw its nadir in the 1998 to 1999 period when a crisis fueled by a collapsed banking system ultimately cost the nation $8 billion. Close to half of the then 40 banks fell by the wayside, and in January 2000, the prospect of hyperinflation led to the declaration of a state of emergency by President Jamil Mahuad, who adopted the US dollar in place of the sucre, the local currency at the time. Determined never to see such days again, subsequent reforms under the Correa administration have led to a stable banking landscape underpinned by the government’s insistence on prudent solvency measures. IMF numbers point out that the average bank assets to GDP ratio from 1961 to 2011 was at 21.04% with a minimum of 13.12% in 1990 and a maximum of 39.66% in 1999. Meanwhile, the official bank capital to assets ratio for 2011 (latest data) was 8.6%. Average non-performing loans as a percentage of total bank loans from 1998 to 2011 was at 9.19%, with a minimum of 3.2% in 2011 and a maximum of 31% in 2000.

THE NEW BANK CODE

The Correa administration has made systemic reform of the banks the cornerstone of its broader economic development plan. As a result, ideologically motivated steps have seen greater state involvement in banking policy. Understandably perhaps, private banks have been concerned that shareholders would become vulnerable to government policy. To counterbalance such accusations, the government insists its new banking code is vital to generating employment and supporting broader economic growth and social welfare by swelling state coffers. The government built up a liquidity fund to safeguard against repeat banking crises that was funded by taxing the banks. Assets in the fund have risen 36% since 2012, according to Ecuadorean Central Bank (BCE) data, and stood at $1.64 billion by the end of 2013.

Furthermore, the government has ensured that the BCE worked in step with its social and economic development policies. Thus, the BCE, formerly an independent entity, post-crisis became subsumed within the executive branch’s economic team, and fortified with a new Economic Planning Ministry. Commenting on Ecuador’s financial landscape, Diego Martinez V., President of the Board of the BCE told TBY that, “Our new policies make it more attractive to keep money here. This has increased liquidity in the economy, which encourages further investment. Credit policies are also important, be it via the private or public banking sector. Total credit increased from 20.3% of GDP to 28%. In nominal amounts, credit growth has been at 109% over the past five years, while private credit rates have grown by 92%, and the public banking figures are at 356%.”

With 516 articles, the banking bill has its detractors, who are concerned that its new Political Board for Monetary and Financial Regulation consolidated power in political hands in contravention of free market economics. The Board features five government officials, comprised of the Minister of Economic Policy, the Minister for Production, the Minister of Finance, the Secretary for Planning, and a representative of the President.

The new bank code is just the latest installment in a long line of banking sector reform, where a 2011 referendum barred legal representatives, board members, and shareholders of financial institutions from business activity beyond the financial sector. As a result, these individuals divested or liquidated, among others, their stakes in insurance, brokerage, and pension companies. The code also bolstered requirements for private banks to retain their assets and investments in Ecuador. And in 2012 the BCE raised the mandatory rate at which private banks kept their assets and investments in Ecuador from 45% to 60%. Since November 2012, the BCE has obliged all international cash transfers to Ecuador to flow through central bank accounts, and some observers perceive such currency control as a potential precursor to a new Ecuadorean currency to replace the US dollar.

Meanwhile, at the retail level, current reforms have limited borrowers’ liability in case of default on mortgages and auto loans. Official data indicates that reforms have impacted banking sector performance, and the total net profit of all private banks in Ecuador stood at $268 million in 2013 marking a 15% YoY decline. Private Banking Association of Ecuador data points to an average return on equity (ROE) of 10.15% for the banking industry as a whole in 2013, down from 12.79% in 2012, and 18.91% in 2011.

STAY MOBILE

A full 60% of Latin Americans remain unbanked. Meanwhile, industry data indicates that Ecuador has a mobile phone penetration rate of 113%. This presents an excellent opportunity for greater financial inclusion that the Correa administration has not ignored as part of sweeping banking reforms. Accordingly, the BCE is set to run a pilot project for transactions in electronic money from late October to mid-November of 2014 with eight credit cooperatives. The idea is to test the smoothness of purchases at establishments such as garages, pharmacies, and supermarkets. The BCE aims to bring around 200,000 unbanked citizens in remote rural areas into the fold, with a target in excess of 2.8 million new financial transactions by 2016. Electronic money is a part of President Correa’s wider financial reform that he has defined as, “a code that finally puts the banks at the service of society unlike now, when society is at the service of banks. This is 21st century Socialism.”

SELECTED PLAYERS

Private Banking Association of Ecuador (ABPE) data indicates that the banks in 2013 registered a return on equity (ROE) of 10.15% down from 12.79% in 2012, 18.91% in 2011, and 14.32% in 2010. According to the Wall Street Journal, as President Correa was elected in 2006, the figure was at 24.21%, more than double last year’s print. The Superintendency of Banks puts the combined 2013 net profit for Ecuador’s 25 private banks, and state-run Banco del Pacifico, at $268 million, down 15% YoY. For the year the largest slice, at $53 million, went to Banco del Pichincha, followed by Banco del Pacifico with $41 million, Banco de Guayaquil with $40 million, and Produbanco with $29 million. The four alone thus accounted for 63% of the total assets of the Andean nation’s banking sector. Foreign-owned banks in Ecuador, including Citigroup, Dutch-German Procredit Bank, and Panamanian Promerica had an 8% share of the sector’s total earnings in 2013.

BANCO DEL PICHINCHA

Established in 1906 in Quito, Banco del Pichincha is Ecuador’s largest private bank. It posted 2012 net assets of $8 billion and liabilities of $7.3 billion. Bank data for 2013 indicates total assets of $9.02 billion, total equity of $780.44 million, and net income of $53.54 million. The ratio of net income to total equity was at 6.86%, that of net income€Š to total assets at 0.59%, and that of equity to total assets at 8.65%. A comprehensive offering of retail banking services is facilitated by an ATM network of over 700 units, and it has also led the field in electronic banking. In 2007 the institution launched a network of customer service centers in Spain to serve the three quarters of a million Ecuadoreans living there. The bank also has representative offices in Shanghai, Panama, and the US. Meanwhile, it is a pioneer in electronic banking.

BANCO DE GUAYAQUIL

Ecuador’s second largest private bank, established in 1923, is Banco de Guayaquil, and today operates around 200 branches and 800 ATMs. Its comprehensive service features corporate, personal, private, and transaction banking. Like rival Banco del Pichincha, Banco de Guayaquil opened its doors in Spain in 2007 to leverage bilateral relations with Madrid, followed by Panama City in 2008. As of June 2014 net assets stood at $3.6 billion, with respective total income and total expenses of $203 million and $176 million. The return on assets (ROA) was at 1.41%, and the return on equity (ROE) at 14.45%. Impressive ratios include coverage of the commercial portfolio of 206%, while that of consumer loans, its mortgage portfolio, and microenterprise portfolio were at 112.6%, 146.3%, and 88%, respectively.

PRODUBANCO—GRUPO PROMERICA

A major name in the Ecuadorean banking arena, Produbanco has made strong use of automated systems, and assesses over 4,500 consumer credit and mortgage applications per month. In 2013 it registered a net profit of $28.7 million. It was also the purchase story of the year, when in March Panama-based Promerica Financial Corp. picked up a 56% stake for $130.3 million (108.6 million Produbanco shares for $1.20 each). Given its status in the local market and AAA- rating by Bank Watch Ratings, the Produbanco brand remains unchanged.

BANCO DEL PACÍFICO

The pioneer of Ecuador’s first cashpoint in 1979, at the retail level Banco del Pací­fico offers saving and current accounts, as well as familiar investment instruments. It has a network of 1,077 service points and 218 ATMs. Also, the institution, incorporated in 1972 and headquartered in Guayaquil, is designs and manages financial advice programs and meets the investment banking needs of business of all sizes. As of June 30, 2014 it had an asset coverage ratio of 275.74%, and a solvency ratio of 14.47%. The non-performing loans (NPL) ratio was at 1.37%, fractionally down from 1.38% in 2Q2014.

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