Opinion

Last updated: 7th Jul 2010

The well-capitalized nature of Latin American financial institutions in recent years has helped the economies of the region to emerge from the global financial slowdown with limited damage. From a market standpoint, banking stocks throughout the region experienced less-severe drops in value in comparison with global financial conglomerates like Citigroup. Banco Santander Chile, for example, viewed as a bellwether for Latin American banking institutions, has experienced share price growth of more than 80% over the last five years and 50% since the second half of 2009. With regards to balance sheet health, the IMF estimates the collective Tier-1 capital ratio of banking institutions in Brazil and Mexico at 18.5% and 17.3%, respectively, as of December 2009. The United States, by contrast, registered a ratio of only 13.5%. The Tier-1 capital ratio measures the proportion of core equity capital to the bank’s total assets, essentially a representation of the ability of a bank to withstand monetary losses.

Loans by financial institutions to the private sector in Latin America are at levels of below 60% of GDP, with major players such as Mexico and Argentina at loan levels below 20% of GDP. By contrast, the bulk of the world’s industrial economies provide credit to the private sector on the scale of 80% to 160% of GDP. Latin American credit markets were able to expand by more than 25% in 2008 and 2009, while the United States and United Kingdom each saw credit markets shrink in size by more than 10%. There is still much room for growth with regards to private credit penetration in the Latin American market, and this growth potential is compounded by estimates from the UN Economic Commission for Latin America and the Caribbean (ECLAC) that show the region’s GDP growing by 4.1% in 2010.

Latin America’s success can also be evidenced by the health of its M&A markets. M&A activity in the region has started 2010 at its fastest pace in ten years. Year to date, Mexico and Brazil rank among the top three developing economies in terms of volume of acquisition activity. According to Dealogic data, Mexico was the second most active emerging market acquirer with US$32.7bn, while Brazil ranked third with US$12.9bn. Financial institutions in particular have emerged as a key acquisition sector, with multinational firms noting new opportunities for consolidation and increasing their investment in the region in the hope of taking market share from leading local groups. Key transactions include the pending cross-border acquisitions of Banco Patagonia in Argentina by Banco do Brasil and LQ Inversiones Financieras in Chile by Citigroup, as well as last year’s landmark acquisition of UBS Pactual by BTG in Brazil.

With regards to the insurance sector, firms in the region have seen 6.9% growth in their total written premiums over the last six months. The only measurable financial downsides have been related to the payment of claims from the massive 8.8 magnitude earthquake and tsunami that struck the southern part of Chile in February 2010. A key trend that has emerged is that four of the top six insurance companies in Latin America in terms of total written premiums are bank-affiliated insurers — Bradesco Seguros e Previdência, Sul America Companhia Nacional de Seguro, Itaú Seguros and Seguros Inbursa – further marking the trend towards consolidation in the financial institutions sector. Demand is also growing for pension annuities and life insurance products. The economic turmoil of 2008 and 2009 heightened the awareness among consumers of the asset risks related to their supplementary pensions, and many insurers are planning to develop rate products to satisfy the market needs.

The Latin American debt crises of the 1990s and early 2000s have inspired more responsible fiscal practices and stimulus policies, which in turn have ensured that the wealth from the region’s natural resources, manufacturing and other industries has not been squandered, as was the case in previous economic booms. Whereas two decades ago Latin American economies built up dangerous public and private deficits, it is the world’s developed regions like the United States and the European Union that now find themselves in this situation. It is due to these factors that the success of Latin American financial institutions today is relatively decoupled from the influences of larger industrialized economies.

Alejandro Santoni
Associate
BroadSpan Capital