Banking across Latin America and the Caribbean is generally improving, although standards vary. One of the greatest problems is that the industry is small relative to other regions, and this is particularly true of the non-Mercosur bloc of countries.
But, reckons the IDB, the problem is not only one of small credit markets. In many countries, the size of the financial sector is even smaller than is consistent with their level of economic development.
Except for Panama, most of the continental Latin American countries have a small banking sector for their level of development, according to the IDB in its report Unlocking credit: the quest for deep and stable bank lending. In the Caribbean the story is surprisingly different as most countries have larger-than-expected banking industries relative to their development. But countries such as El Salvador, Mexico and Venezuela have very under-developed banking industries.
Lack of credit is one reason. Another is higher interest rate spreads – the difference between the interest rate charged to borrowers and the rate paid to depositors. The spread between these two reflects, among other things, the efficiency of the banking sector, and liquidity and currency risks.
"Countries with small banking sectors have high interest spreads," says the report citing Venezuela as one Latin nation that suffers particularly in this regard. Panama, on the other hand, fares well and has one of the lowest spreads in the region.
Another issue facing the region is financial volatility. "Fluctuations in access to bank credit and uncertainty about the stability of the banking system are serious constraints for economic prosperity," says the report. Venezuela and Mexico have the highest credit volatility among the big countries in the non-Mercosur bloc, while Panama has the lowest.
But it's not all doom and gloom: most countries are gradually improving their banking systems; regulation is getting tighter; and credit levels are starting to rise again. In Mexico, for example, corporate lending is at the same level as it was before the 1994 peso devaluation. Consumer lending is also picking up, although the level is still short of the 3.3% of GDP before the crisis. Banks in the country are also more cautious about who they lend to.
This improvement is partly a result of the growing influence of foreign banks. In Mexico, the foreign share of banking system assets is over 50%, according to the Federal Reserve Bank of New York. Their presence has helped loan growth. In addition, foreign banks provision more aggressively against bad loans and have higher loan recovery rates.
Still, in many non-Mercosur countries, bank credit, the main source of external funding for firms in Latin America and the Caribbean, remains scarce, costly and extremely volatile, according to the IDB. "In order to survive in a world of many risks, banks need to develop mechanisms to assess risks effectively and efficiently, as well as ways of protecting their worth and franchise value in the event that risks materialize," adds the report.
Emerging Markets profiles three leading non-Mercosur banks
Banamex (photo of Manuel Medina-Mora)
Although Mexico's most profitable bank, Banamex will face a tougher trading environment this year because of fee cuts ordered by the government to spur borrowing.
Central Bank Governor Guillermo Ortiz has forced banks to cut their fees in order to encourage greater lending. As a result Banamex is likely to report a revenue increase of only 11% this year, down from 19% in 2004, according to Manuel Medina-Mora, head of Latin America at Citigroup, Banamex's parent company.
At the same, however, the government's emphasis on greater lending should play to Banamex's strengths. The bank has 1400 branches throughout the country and handles 20 million accounts and more than 135 million customer transactions a month.
Banamex offers the full range of banking services to its retail and corporate clients including deposit accounts, mortgages, consumer loans and credit cards. Banamex also offers securities brokering, insurance and pension services. The firm has launched AcciTrade, an online brokerage and AcciGame, for virtual trading.
Banamex is at the heart of Citigroup's Latin America strategy. The US bank bought Banamex in 2001 for $12.5 billion. Last year, the Banamex group accounted for about 10% of Citigroup's $17 billion profit.
BBVA Bancomer
Bancomer is the main subsidiary of Grupo Financiero BBVA Bancomer (GFBB), which is Mexico's largest private financial institution in terms of deposits and number of clients. Bancomer's strategy is to split its customer base according to individual needs and delivering tailor made products to all clients.
The largest customer segment is retail banking, for which the bank operates 1,650 branches and 4,017 ATMs. This represents 21.4% and 20.5%, respectively, of the Mexican banking system as of September 2004. Medium-sized companies and government entities are the second biggest customer base, followed by private individuals, investors and small companies.
Net income for GFBB's banking business increased by 13.2% last compared to 2003. The group offers a large variety of non-banking services through its other subsidiaries, such as the pension fund manager Afore Bancomer and Seguros Bancomer, an insurance provider.
Since 2000, the company has doubled core earnings and continues to focus on efficiency gains through creating synergies and conducting transactions electronically.
Going forward, Bancomer looks to raise client profitability by increasing the number of products per customer and by growing in the Mexican market, which is underbanked even by Latin American standards and offers good opportunities for expansion.
Banco Inbursa
Carlos Slim, is renowned, as Latin America's richest man, not only for his wealth but also for the strength of the institutions he runs – a portfolio that includes Mexico's two biggest phone companies, Telmex and Telcel, as well as banking group Grupo Financiero Inbursa. Through the latter, Slim is also the ultimate boss of Banco Inbursa, the largest part of his financial services empire, the seventh largest banking group in Mexico.
The bank is known for its technological prowess – this was, after all, one of the first to offer online banking to Mexico, and has since used this strength to cement its already close relationships with some of Mexico's biggest conglomerates
But last year was a tough one for the bank. Although its parent reported a 27% increase in fourth quarter profits, the bank saw its profits drop 42% to Ps384 million. Its financial margin was a negative Ps376 million, compared to a positive Ps106 million a year ago, due to higher interest expenses.
Still, loans were up last year by 21% at Ps54.8 billion, driven mainly by growth in the commercial and mortgage portfolios. The group will be focusing on high growth areas like mortgages and consumer lending going forward, since it doesn't expect there to be much growth in corporate lending this year.