Download Diapositiva 1 - Inter-American Development Bank

“Highly-Rated” Public Banks Around The World:
What Makes Them Stand Out?
- FIRA’s Experience -
Presentation prepared by:
Francisco Meré
February 25, 2005
Agenda
1. Evolution to success
2. Case studies on financial innovation
3. Final remarks
FIRA is a second-tier trust fund created by the Mexican government
within the Central Bank 50 years ago
• Bank Privatization
• Financial Market Liberalization
• Market Oriented Policies in Ag.
• Tequila crisis
• Lending to productive sector
practically disappeared
• From development banking
to banking development
• FIRA ´s products not attractive
to banks
• FIRA´s loan portfolio was
heavily subsidized
• Original assumption was
that enhanced funding
would encourage an
increase in credit to farming
• Loans were concentrated in
the primary sector
(commodities)
1954 – Early 1990
• Agricultural
commodities
challenged
by
trade
liberalization,
thus
risk
perception increased
Early 1990 - 1998
1999 - Today
Restructuring and a turnaround strategy were needed in order to
survive in a new environment
Product-driven
Client-driven
Evolution in focus
Agriculture
Fin. Sys.dev.
From market players to market
makers
Investment banking
Corporate governance realignment
•Downsizing
•Internal control fostering
•Process-driven design
•Staff professionalization
•Performance-based reward
Subsidy-based
operation
Value-added
products
A comprehensive approach was used for implementing the new
model
Channels
Products
•
Elimination of red-tape
•
Banking diversification
•
Value added for clients
(users & distribution
network)
•
New intermediaries
•
Strategic alliances
•
Improved targeting of
market-friendly
subsidies
•
Smart subsidies
•
Markets development
Organization
•
Reorganization to
eliminate conflicts of
interest
•
Adoption of a processoriented organization
•
Corporate Governance &
Internal Control
strengthening
•
Performance-based
employee rewards
•
Cost-cutting strategy
With our new approach, FIRA has achieved higher private sector
engagement (double digit growth for six consecutive years)
Commercial banking Lending and Lending to low
income producers
4.500
Change in credit stock by commercial banks
using FIRA´s funds
4.124
4.000
2.649
1.632
1.848
1.800
1.500
-200
846
791
541
1.018
824
1996
1997
-486,0
-600
0
1995
1998
1999
2000
2001
2002
2003
112,0
-164,0
-400
599
CAGR 17% 1998-2004
20,0
0
1.385
1.000
500
200
2.234
2.000
324,0
400
2.265
2.185
588,0
600
3.327
3.000
2.500 2.928
638,0
800
CAGR 16.7% 1998-2004
3.500
2004
1998
1999
2000
2001
2002
2003
2004
Loan Portfolio Composition
(Percentage)
Scotiabank Inverlat
7%
Interest rate subsidies
Million USD
2001
2002
2003
2004
Subsidies
82
83
54
50
As a % of subsidized
loan portfolio
5.4
4.8
2.7
2.3
As a % of total loan
portfolio
3.5
3.2
1.9
1.4
Bajío
14%
NBFI
3%
3 non bank banks
HSBC
14%
BBVA
16%
Source: FIRA. All figures in million usd
Other Banks
20%
Santander Serfin
7%
Banorte
19%
2 Factoring companies
4 Leasing companies
1 Warehouse
Agenda
1. Evolution to success
2. Case studies on financial innovation
3. Final remarks
Gradual phase-out of interest rate subsidies has been coupled with
the development of innovative financial solutions through our new
investment banking practice
FIRA’s structured finance model offers value to agribusiness community and
supports institutional development in the financial system
Value chain integration
Financial market
development/lower
transation cost
Value creation for
participants (income )
Development of analytical
capabilities for financial
intermediaries
Examples
Before FIRA’s financial innovation, shrimp producers were using
costly suppliers´ credit
Mexico exports US$264.1 million of frozen shrimps per year to the US; this industry
employs over 176,000 persons.
Financial schemes before structured
credit :
Feed companies
Feed delivery
50%
cash
50% 7 month
credit
Ocean Garden
Working capital
loans
Shrimp
producers
Result:
•High borrowing cost to shrimp producers
•Liquidity constraints to OG and suppliers
•Thus limitations to industry growth
Future delivery of
shrimp
Shrimp
producers
In 2003, FIRA acted as structuring and distribution agent for a structured
finance facility that helped to overcome limitation for growth and developed
new financial markets
•
Profiting from successful experiences in other sectors, FIRA designed a securitization of
account receivables (working capital loans for shrimp producers) that was privately placed
by FIRA among the banking sector
•
FIRA provided enhancement (with a low VaR) to provide confort to investors
INVESTOR
Funding and partial
enhancement
1. Supply agmt.
2. Loan
Ships and
firms
Transfer of
rights
SPV
1.
Senior tranche
2.
Junior
tranche with
cash collateral
sinking fund
Development Financial Institutions are able to foster development with
a market approach
• Shrimp producers obtained a 30% discount in price of feed (which
accounts for 70% of COGS)
• Suppliers and OG freed-up their balance sheets and reduced their
credit exposure
• A new investment opportunity with low VaR, low transaction cost and
high RAROC was offered to FI
• FIRA contributed to financial system development
Structuring of an ABS financing mechanism for commodity inventory
financing has been a key factor for financial innovation as well as for market
and institutional development
• Alliance with world-class partners, with right expertise
• Warehousing sector development
• Creation of risk assessment capabilities in financial sector
• Broad acceptance of structure
• Low VaR linked to price of underlying commodity
• Commodities such as sugar, corn, wheat, sorghum, shrimp and live cattle
• Portfolio has accounted for 10% of total loans
Warehouse company
Portfolio sale
Repo of CD
Servicer
Other Investors
(Rabobank,
Deutsche bank)
Mexican
Banks
OTC hedge
Credit derivative
FIRA’s incursion in the derivatives market allows it to offer market risk
hedging products to small producers and to improve FIRA’s portfolio yields
•
FIRA trades in the OTC market interest rate swaps in MXN to hedge risk in fixed
interest rate lending and cross currency swaps to synthetically fund its USD credit
portfolio
•
There is not additional risk in FIRA’s balance sheet because all derivatives positions
are matched by FIRA’s credits disbursed
•
Both programs have allowed to reduce subsidies and to generate profitability
through derivatives operations
•
Gives low income farmers access to sophisticated financial instruments
Saldo
de posiciónbook
de derivados
en USD
Outstanding
value in USD
Outstanding book value in Mx. Ps.
(fin de
mes)
(End
of month)
Saldo de posición
en MX. PS.
(Endde
of derivados
month)
(fin de mes)
70,000
9,000
65,000
8,500
8,000
60,000
7,500
55,000
7,000
50,000
6,500
6,000
45,000
5,500
(miles)
millones de pesos
40,000
5,000
4,500
35,000
30,000
4,000
3,500
25,000
3,000
20,000
2,500
15,000
2,000
1,500
10,000
1,000
5,000
500
Feb-05
Ene-05
Dic-04
Nov-04
Oct-04
Sep-04
Ago-04
Jul-04
Jun-04
May-04
Abr-04
31-Ene-05
31-Ago-04
31-Mar-04
31-Oct-03
31-May-03
31-Dic-02
31-Jul-02
28-Feb-02
30-Sep-01
30-Abr-01
30-Nov-00
30-Jun-00
Source: FIRA
Mar-04
0
0
Agenda
1. Evolution to success
2. Case studies on financial innovation
3. Final remarks
FIRA´s new activity aims to solve market failures/imperfections with a market
approach and a clear vision of financial market development
• FIRA evolved from a traditional development credit institution to a
financial innovation entity that creates value for the agricultural sector
and develops ag. financial markets
• Through a market development approach, the small producers are able
to access sophisticated financial instruments, such as interest rate risk
hedging
• FIRA’s innovative approach has allowed it to growth at a double-digit
digit rate, which is significantly higher than agriculture GDP growth
• FIRA has contributed to increase the number of FI serving the
agribusiness sector
FIRA is considered around the globe as…
Credit Bank for the Reconstruction
"Formidable Organization”
January 2004
“Organization guided by
financial innovation”
November 2004
Latin American Association of Development Financial Institutions
“The Best Partner in Business”
May 2004
Leading Business Magazine in Mexico
“Innovative Enterprise”
November 2004
The World Bank
Leading Business School in Latin America
“Strong and Dynamic Organization”
April 2004
“An example of best practices
in financial development
institutions”
September 2004
www.fira.gob.mx
01 800 800 FIRA