VENEZUELA-OUTLOOK: 1997, the Year of the Banking Revolution

By Estrella Gutiérrez Reprint | | Print |

Estrella Gutierrez

CARACAS, Dec 23 1996 (IPS) - The Bank of Venezuela changed overnight to being 60 percent controlled by foreign capital, mostly Spanish, in a revolution of the local financial system which will make itself increasingly felt in 1997.

Three operations, two by the biggest Spanish banks and a third by a Chilean financial group, led to the change after 60 percent of the banking sector went into insolvency in 1994 detonating a general economic crisis.

“A domino effect is bound to occur, the US bank will be forced to take a stance,” the specialist Jose Grasso told IPS, adding that “a positive revolution is underway, which will strengthen the financial system and make it more competitive.”

On Dec. 19, the Spanish Santander Bank, at position 39 on a world scale, acquired 90 percent of the Bank of Venezuela, the third and oldest in the nation, in a public auction arranged by the Deposits Guarantee Fund (FOGADE).

Hours later, the Infisa financial group, the third largest in Chile, took 93 percent of the Consolidated Bank, the fourth in capturing funds in November and with one of the best branch networks, in a similar move.

Santander’s main competitor in Spain, the Bilbao-Vizcaya Bank, also made a counter bid against its rival for the Venezuela Bank, only to force them to increase their offer, but meanwhile, in Madrid, its authorities made the best move of the day.

This body officialised an agreement with the biggest private economic group in Venezuela – Polar, to take over 40 percent of the largest and most solvent bank in the country – the Provincial – the first to act as universal.

The foreign invasion is occurring under the protection of a Banking Law promoting the liberalisation of the sector, which has in fact been in place since late 1993, but the crisis which shook the nation at the same time left the legislation unimplemented until a year ago.

Grasso, director of Softline Consultors, a banking analysis specialist, considered investor confidence in Venezuela had been improved following the stabilisation programme brought in by the government since April last year, which should have some effect on the traumatised financial sector.

The attraction of the Venezuelan banking market for the international groups is animated by the forseeable economic dynamism, as well as this being one of the few “virgin lands” left in the reigning sectoral globalisation process.

Grasso said that in Venezuela in the oil sector alone, there will be investments of 62 billion dollars over the next ten years.

For this specialist, there is no real conciousness of the approaching transformation of the bank, which will force the tradional Venezuelan banking sector families into changing radically to adapt to the new situation.

The new banking law allows the unrestricted entry of foreign groups in three different ways: the creation of a new bank or the partial or total purchase of an existing entity, or as a subsidiary.

Only two Dutch and one Ecuadoran bank had made use of the law before Thursday’s great leap.

Meanwhile, the City Bank, the only foreign concern operating here since years ago, prepared itself for the battle and was the seventh in the deposits ranking in November.

Apart from the acquisition of those which were in FOGADE hands since the crisis, there will be a rush of fusions, capital injections and operative modifications in 1997 by the middle sized and small entities in order to remain in the market.

Grasso is predicting two tendencies: the most dominant of which will be to act as a universal bank, something which the new law allows, while the legislation and tradition promote a new specialised system in the country.

This universality will mean lower costs, greater efficiency, service quality and increased profits – which are still in high margins in Venezuela – but which will fall as the competition puts on the pressure, as happened in the rest of the world.

Those not strong enough for the landslide will have to consolidate by specialisation in market niches and restricted areas of business.

This will be the territory taken by “the Creoles” – the established Venezuelan families – said Ignacion Salvatierra, executive director of the Union Bank, the fifth in deposits ratings, Friday.

The outcome will be five or six “mega-banks,” which will also include the insurance sector, dragged down into the crisis by the banking debacle, and the new, tasty area of the private pension funds which came into action in 1997.

Grasso said conservative estimates predict that by the year 2001 the Venezuelan pension funds will handle six billion dollars and 18 billion by 2006.

The present Venezuelan banking cake is not very big. Its total assets amount to around 12.9 billion dollars, according to Softline figures, and deposits of 9.8 billion dollars.

The State had to take over 17 of the 47 banking entities in 1994 in successive waves of bankruptcy, while spending seven billion dollars in aid for depositors, prolonging the agony, closing some entities and reopening others.

This figure was equal to 16 points of the Gross Domestic Product of the time, in a flurry of action some sectors consider was “the perfect example of what not to do,” and which could also result in the legal prosecution of those who handled it.

Also, the “fugitive bankers,” a new class in Venezuela, are throwing a shadow of insecurity on the reprivatisation operations like those of Thursday, as the former owners are taking legal action against its nationalisation in 1994.

This Friday, again, the Colombian Tequendama bank went over to the Peruvian Credicorp group, after a Colombian rival withdrew following a legal petition against the intermediary sale in Bogota by the old owners of the Construction Bank, who owned the now sold entity until its closure.

But however this may be, for Grasso and other analysts there wil be a revolution in the nation, and as a result the Venezuelans will have better services, banking workers will be better paid, and service, technology and human capital will play a part in determining the winners, along with the financial resources.

Venezuela has arrived years late at the globalisation of the banking sector which has occurred on a world scale, backed by its mining and oil wealth and its privileged geographical position, sandwiched between North and South America and facing the Caribbean islands.