"For the banking sector, 2010 was an excellent year"

Friday, February 18, 2011

Ecuador's banks have had a rocky public relationship with the at times combative government of Hugo Chávez-ally President Rafael Correa. Nevertheless, the sector has actually done quite well, with a healthy ROE and annual loan growth rates up above 20%.

However, the government recently spun a new state bank off social security system IESS. Known as BIESS, this state bank has shown signs of moving strongly into the country's mortgage market.

BNamericas caught up with the head of financial services at local ratings agency BankWatch Ratings, Sebastián Baus, to discuss the sector's prospects for 2011.

BNamericas: What's your general outlook for Ecuador's banking sector in 2011?

Baus: I think it's going to be very similar to 2010. Because of the economy it will be very similar. There's going to be good liquidity. If the price of oil doesn't fall and we keep the budget funded with loans from abroad, I see a year very similar to 2010.

BNamericas: So, from your perspective, how did 2010 end up?

Baus: For the banking sector, 2010 was an excellent year. It has grown its lending portfolio, been able to improve provisions, profits are still high. It was a good year compared with 2009, which was actually a bad year.

BNamericas: It's funny, because representatives of the banking sector don't seem to think it was such a good year.

Baus: I think all the pressure from the government starting in 2007 in terms of services, putting caps on fees, etc. - it forced the banks to look for other ways to do business and tighten their belts a little more. Although earnings indicators have gone down a lot compared with 2007, they're still good. Banks have been able to be more efficient with regard to costs. Of course, although there are banks that are doing very well, since there are 25 banks, there are also banks that have been strongly impacted and might not be able to handle further adjustments.

For that reason, I don't think there's going to be any more adjustments, because I don't think the government's intention is to weaken the system. The government knows we need a strong banking system, so the tone of its criticism of the banking sector has softened.

BNamericas: Does state-owned BIESS's move into the mortgage market mean the government is going after the sector from that angle?

Baus: To give you an idea, the mortgage segment represents around 10% of the total portfolio. Normally it's at around 9-12%, more or less in recent years.

BNamericas: So it's a relatively small portion of the total portfolio?

Baus: Yes, it's not much, and [private sector banks] haven't been very aggressive because in Ecuador, they don't usually grant very long terms. Because of country risk and political risk, the terms are usually very short. Some mortgages are as short as seven years, occasionally 15 years. So really it doesn't benefit you to have a mortgage portfolio of 25 or 30 years.

Now, this new bank, BIESS, is offering 25-year loans, and they're even talking about 30-year loans. They're very aggressive in all their products as far as rates. Normally BIESS, as a government institution, would be considered a little slow, a little bureaucratic. But they've come out with new systems, using the internet, call centers. And the services have really been pretty effective, and they've placed a lot of credit.

BNamericas: How much?

Baus: It's still difficult to know the exact amounts. Because it's a recently created bank, there's not a lot of public information. It's estimated that they passed US$750mn worth of mortgages from the IESS investment portfolio [into BIESS].

Obviously, the ones who should be most worried are the private sector banks. Of the total mortgage portfolio, around 80% is granted by banks. I do see [BIESS] as really aggressive competition. Like I said, BIESS is giving it all it's got. They're offering plans for prepayment of mortgages in private sector banks, and then BIESS gives them the loan.

BNamericas: So they're out to take the private sector's existing portfolio?

Baus: Yes, because they offer better rates. For example, a bank normally offers a rate of about 10% or 12%. With BIESS we're talking about 8% or 9%, and a longer term.

BNamericas: Are they subsidizing the interest rates or just taking more risk?

Baus: I wouldn't go so far as to say there's a subsidy, but yes, they are taking a little more risk there. In general, from here on out, the public sector banks - not only BIESS, but also Banco Nacional de Fomento and Banco Ecuatoriana de la Vivienda - are going to become much tougher competition than in previous years. They capitalized those banks in 2008, if I'm not mistaken, and they're working on changing their systems, to improve them, to modernize them more. So yes, the public sector banks are going to offer tough competition.

BNamericas: Are they trying to focus their lending efforts on people without access to housing loans?

Baus: Yes, but it's not just that. When they tell you that if you have a mortgage loan in some bank and they'll prepay it for you and give you a better rate, people who were clients with private sector banks are changing.

BNamericas: Do you think there will be enough demand in 2011 for the public and private sector banks to grow their mortgage portfolios without stepping on each other's toes?

Baus: I think so, because construction is booming. There's a lot of liquidity in the market, so I think there will be growth. But the growth of the state is perhaps going to be stronger, more active and constantly more present in the mortgage market.

About the company

BankWatch Ratings is a local ratings agency in Ecuador.