Consultancy sees M&A likely in banking sector to improve efficiency

Friday, January 28, 2011

The Paraguayan banking market could see some M&A action over the coming months as one way to increase the system's efficiency, Daniel Correa, economic area manager at Asunción-based consultancy MCS, told BNamericas.

The last purchase in the local banking system was in October 2008, when Banco Regional completed its merger with ABN Amro Paraguay from Spain's Santander (NYSE: STD), thus becoming the country's largest bank.

Dutch bank Rabobank holds a 40% stake in Banco Regional, which it acquired in early 2008.

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The local unit of Spain's BBVA (NYSE: BBVA) and locally owned Banco Continental are Paraguay's second- and third-largest banks, respectively, in terms of assets among the system's 15 private banks.

"There is a certain degree of concentration that until now has been beneficial since banks have been efficient. But in growing markets such as Paraguay, there come moments in which the only way to keep growing is by absorbing or merging with other banks," Correa said.

Paraguayan banks posted a 55.4% efficiency ratio last year.


Last year was good for local banks both in terms of loan growth and profitability, given the economy's extraordinary expansion.

The system's 15 banks posted combined profits of 1.08tn guaranies (US$235mn) for a 31.9% ROE and a 2.66% ROA, up 21.4% compared with 2009.

Net loans grew 34.6% to 28tn guaranies as of December 31, up 34.6% compared with the same time in 2009.

According to central bank BCP, Paraguay's economy expanded by 14.5% last year, its fastest pace ever, thanks to increased private investment, consumption and construction activity. MCS is forecasting a 4-5% GDP expansion for 2011.

Correa said this level of bank profits is sustainable as long as the market keeps growing.

"In the scenario we have modeled, economic growth will slow down, though the profitable-although-volatile agribusiness segment will keep fueling loan expansion," he said, adding that banks' stricter risk management policies could end up slowing down lending.

Paraguay's banking system has experienced dramatic growth over the last five years, with banks' gross financial margin growing almost 2.5 times to US$466mn, despite interest rates' having lowered, with lending and deposits expanding fivefold as of end-2010.

Today, the market has new products that did not exist before or were very underdeveloped, and banking penetration has grown considerably, Correa said.

"Banks' solvency and equity structures are pretty solid today," he said.

For instance, credit and debit cards doubled in five years to more than 1.2mn. The livestock loan portfolio has grown tenfold to US$650mn, while mortgage loans, which were virtually nonexistent five years ago, have been fostered by second-floor state bank AFD, he said.

The increase in the Paraguayan population's income and an emerging middle class made banks bet on new products to finance, such as cars, home appliances and consumer goods, Correa said.

Paraguay's banking system had 45tn guaranies in assets as of end-2010. Their combined equity grew by 25.9% to 4.82tn guaranies last year.