No crisis here: Ecuador's strong banking system

Friday, October 14, 2011

The current European debt crisis does not seem to be affecting Latin America's banking system. Quite to the contrary, the region has shown it is standing strong and, for the first time in history, is setting an example for the rest of the world's banking markets.

Such is the case for Ecuador's stronger-than-ever financial system, as the country's banks are growing in terms of operations and credit portfolios.

Despite the decline that banking operations suffered in 2009 - when the international crisis at the time did affect Ecuador's local economy - indicators have quickly jumped back to their average growth rates of the past 3-5 years.

BNamericas spoke to PCR Ratings Ecuador's managing director, Luis Jaramillo Jiménez, about why the country's banking system is so sturdy nowadays and about the outlook for 2011-12.

BNamericas: What's the expected consumer loan and microcredit sector growth for 2011?

Jaramillo: It's expected that for 2011, commercial loans will expand as much as 15%, 32% for consumer loans and some 20% growth in microcredit, when comparing to the average growth rates from the past 3-5 years for each sector (commercial portfolio at 12.6%, consumer portfolio at 19.2% and microcredit at 18.0%).

As a protection measure against the effects of the international crisis in the first semester of 2009, the Ecuadorian banking system closed new loan operations and concentrated solely on renewing existing loans, so there were no new loans in that period. This made 2010's growth rates somewhat distorted, which is why we analyze loan expansion based on the average from the last 3-5 years.

BNamericas: What's the expected growth for the entire loan sector - including consumer, commercial, mortgage, car, etc - for 2011?

Jaramillo: As I said, we have to compare the growth rates from the past 3-5 years to determine 2011's loan portfolio general expansion. The general lending sector is expected to grow up to 30%, reaching some US$20bn. The average growth for the period has been 15.3%, and as of July 2011 there was already a 23.6% increase in the loan sector. When comparing July 2011 to the same month the previous year, there is 11.3% growth.

BNamericas: Which loan portfolio produces the highest earnings?

Jaramillo: Many financial institutions have decided to enter the microcredit sector because it has the highest interest rates. It´s important to mention that the interest rates in Ecuador, for the financial system, are set and fixed by the central bank.

But every bank has its own position in the portfolio they decide to enter. Most loans are in the consumer segment. Having the largest portfolio in volume, it's the segment that produces most earnings.

BNamericas: What's the expected revenues and ROE for 2011?

Jaramillo: The average for the past four years is around 15.8%, and it's expected that this year it might decline slightly. By July 2010, the ROE was 10.7%, clearly lower than the previous years, but it's expected to reach 12.0% by year-end.

BNamericas: Citigroup is the only foreign bank operating in Ecuador. Given the ongoing global crisis, does it look like the company will stay in the country?

Jaramillo: This would be a question better answered by the folks at Citi. Since they're a multinational institution, sometimes decisions by the HQ are different than the ones local executives would consider. But from our perspective, Citi has an interesting business in Ecuador, with a good position in the corporate segment (they're not involved in personal banking). It wouldn't be a good idea to leave a market where they have a sturdy and low-risk operation.

BNamericas: Do you think Spanish group Santander could enter the local market in 2011-12?

Jaramillo: There have been no signs of interest in entering our banking system from this banking group, or any other foreign financial services company. But we think that this could be an interesting bet, given their diversification in the Latin American region.

After the 2009 crisis, Ecuador has shown important progress in equity coverage, solvency, liquidity and corporate governance in the banking sector, which has resulted in a strong financial system. Perhaps, the constant legal changes in our country discourage foreign banks from entering the system. But our banks have survived with this legal situation, and as it turns out, it's been a profitable business [for them].

BNamericas: Given the increase in the remittances sector, do you see a potential expansion by the banking system into management of these funds? For example, Banco Pichincha is handling remittances. Is this an industry trend, or just an initiative by Pichincha?

Jaramillo: All banks are looking for ways to handle remittances. Some do it through their offices or international representatives, and others grant local loans.

In general, given that remittances are the second largest form of income for Ecuador, some banks have assigned special departments to serve this segment. Although remittances suffered a decrease due to the international crisis, during 1H11, a total of US$1.22bn was recorded.

Ecuador received remittances of US$ 2.32bn in 2010 mainly from Spain (43.0%), the US (41.0%) and Italy (8.30%).

BNamericas: Due to the success that state-owned bank BIESS has had in the mortgage sector, is the government expected to expand into other loan segments with BIESS or another bank?

Jaramillo: The state owns many banks, mostly focused on granting loans for economic development and the public sector.

Banco BIESS was created basically to administer insurance client's money efficiently, looking to generate social and economic returns on financial operations. The BIESS is an investment bank, and is mainly focused on the mortgage sector and as an important investor in the stock market, but the other state banks grant all sorts of loans for whatever needs clients may have.

BNamericas: Due to the current European debt crisis, is there another protection strategy planned, similar to the actions taken in 2009 to freeze new loan operations?

Jaramillo: Nowadays, the banking system in Ecuador is solid, solvent and liquid. There have been no registered signs of European debt crisis effects on our economy. Unlike the situation in 2009, banking operations remain open and maintain their yields, achieving adequate coverage levels.

Ecuador has an important characteristic, which is that local bank's investments abroad are minimal, so negative effects can be easily controlled. This is because the Latin American system, in general, has become strong after years of crisis, the opposite of what has happened in Europe.

About Luis Jaramillo Jiménez

Luis Jaramillo Jiménez has a business degree from the Pontificia Universidad Católica de Ecuador and an MBA in finance and banking from the Escuela Politécnica del Ejército.

He has more than 18 years of professional experience in high management positions in multinational and local companies, and as a private consultant in financial, management, and credit and risk analysis issues. Jaramillo has taught at the Universidad Técnica de las Américas and at the Escuela Superior de Policía, and has lectured at conferences on risk, credit and finance.

About the company

Pacific Credit Rating is a rating agency with international coverage. It offers financial services ratings, assessments of corporate governance, fiduciary assessments and microfinance ratings. The company has offices in Bolivia, Ecuador, El Salvador, Panama and Peru.