Venezuela's public sector putting the squeeze on private banks

Public banks in Venezuela are putting the squeeze on the private banking sector as efforts by Maduro's government to prioritize growth of public entities are starting to show.

The state is increasingly using its own banks for the large quantity of funds it handles, resulting in greater liquidity in public banks at the expense of private ones, Asdrúbal Oliveros, managing partner of Ecoanalítica consultancy firm in Caracas, told BNamericas.

In addition, payments to suppliers by PDVSA and other state enterprises are made through state lenders Banco de Venezuela or Banco del Bicentenario, forcing many contractors to open accounts with these banks, Otto Rivero, head of ratings agency CLAVE in Caracas, told BNamericas.

Another factor which has concentrated liquidity in public banks is the government requirement that companies seeking to participate in the SICAD I and the now defunct SICAD II foreign currency mechanisms do so only through public entities.

In late 2008 state entities accounted for nearly 13% of universal and commercial bank deposits, but by November last year that proportion had grown to 33.3%.

Meanwhile public bank loans as a proportion of total universal and commercial bank lending climbed from 5.2% to 30.8% over the same period.

Over 80% of deposits from government agencies and state companies like state oil giant PDVSA are now in public banks.

RISK TO PRIVATE BANKS

Excess liquidity combined with rigid exchange controls since 2003 have driven a sharp rise in deposits and loans in the last decade, and allowed banks to achieve high rates of return.

While private sector banks continued to see profitability in nominal terms grow in 2014, growth was slower than that seen at state banks.

Meanwhile, growth in liquidity will slow in the coming years if Venezuela seeks to break the current inflationary spiral.

"While deposits are moving to public entities, private banks have been able to replace that, for the moment, with the volumes of liquidity that are circulating in the country," says César Aristimuño, president of Aristimuño Herrera & Asociados consulting firm in Caracas and director of the portal Banca & Negocios.

"The risk for banks is that, [...] if in the medium term liquidity levels fall, the impact would be high."

The high level of capital concentrated in public banks also led to a sharp rise in funding costs for private lenders between September and November last year, when the overnight rate jumped to 19% from 0.5% in the first quarter. The seasonal increase in liquidity in December reduced that cost, at least temporarily.

The squeeze on private banks comes at a time when risks to the banking sector in general are rising.

Credit demand is likely to fall and delinquency levels rise on the back of the drastic contraction in GDP projected for this year, while threat of a government default is also a major concern as Venezuela's banks have high exposure to government securities.

To this we can add expectations of a steep devaluation of the bolívar currency, which would be especially damaging for foreign-owned banks.

For an overview of the Venezuelan banking sector and a deeper insight into the growing risks for local lenders, see Bnamericas' latest financial services Intelligence Series report, 'Venezuela: liquidity drives banking sector as risks multiply'.