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Foreign banks in Latin
America
Manuel Galatas
Director, BBVA Asia
Financial Reforms in China and Latin America
Beijing, June 7th 2007
1
INDEX
1) Spanish banks lead foreign banking in
Latin America
2) Why to invest in Latin America? Bank’s point of
view
3) Foreign Banks Contributions to Latin America
economy
4) Less hurdles in BBVA’s roadmap in Latin
America
2
SPANISH BANKS ARE THE LEADERS IN FOREIGN BANKING IN LATIN
AMERICA…
CONSOLIDATED CLAIMS OF REPORTING BANKS ON LATIN AMERICAN COUNTRIES:
1990
Canada
6%
Others
19%
France
8%
Germany
11%
Japan
16%
USA
26%
UK
8%
Source: BIS
SPAIN
3%
2006
UK
10%
Spain
35%
USA
20%
Netherlands
3%
Nethe.
9%
Germany
Japan
France
2% 4%
2%
Canada
6%
Others
12%
3
... IN ALL BIG COUNTRIES
Distribution of foreign banks
consolidated assets
DEC 2006
100
Others
ITA
80
NET
60
UK
FRA
40
GER
20
EEUU
0
Spain
The Spanish
banks are the
main creditors
in the seven
main
economies of
the region
ARG BRA CHI COL MEX PER VEN
Source: BIS
4
BBVA INTERNATIONALIZATION
BBVA in 1995: a domestic and retail bank....
More than 15000 millions of Euros were invested in Latin
America
The Group presence was extended to more than 35 countries
More than 42 millions of clients
100.000 employees of more than 50 different nationalities
World leader in Project Finance and Trade Finance
BBVA in 2007: a Universal and International bank
5
WORLD PRESENCE OF BBVA
Taiwan
Korea
North America
India
Asia
Beijing
USA
Japan
Shangai
Panama
Mexico
Spain
South America
Colombia
Ecuador
Peru
Bolivia
Chile
Brazil
Singapur
Australia
Puerto Rico
Dominican Rep.
Europe
Belgium
Caiman Islands
Venezuela
Paraguay
Russia
United Kingdom
France
Switzerland
Italy
Uruguay
Portugal
Argentina
6
POSITION OF BBVA IN CHINA: A BREAKTHROUGH ALLIANCE
+
FINANCIAL INVESTMENT
Initial Investment
4,83%
15%
CNCB:
CNCB(China)*
15,17%
• Exclusive alliance
80%
CITIC Group
BBVA
STRATEGIC INVESTMENT
57%
CIFH(HK)**
28%
Public listing
Total Investment: 1000 Million €
• Cooperation agreements
• Exclusive access to China
CIFH:
• Financial stake (15% capital)
• Phase II – build-up a joint
platform:
- Shareholding increase
- BBVA Asia business integration
- Exclusive access to wholesale
banking business
*CNCB’s IPO on 29/04/2007
**CIFH listed in Hong Kong
7
POSITION OF BBVA IN LATIN AMERICA
As of March 2007
Deposits
Pension
Funds
Credits
Country
Ranking
Market
share
Ranking
Market
share
Ranking
Market
share
Argentina
1º
10,0%
3º
8,1%
2º
18,7%
Colombia
3º
11,4%
3º
10,8%
3º
16,4%
Chile
4º
8,0%
4º
8,1%
1º
31,1%
Ecuador
-
-
-
-
1º
87,6%
Mexico
1º
28,2%
1º
27,9%
1º
19,6%
Paraguay
2º
15,1%
1º
20,0%
-
-
Peru
2º
24,6%
2º
27,2%
3º
26,2%
Uruguay
5º
9,1%
5º
9,9%
Venezuela
4º
10,3%
4º
11,7%
-
8
BBVA, A EUROPEAN BANK WITH LATIN AMERICAN ORIENTATION
Branch geographical distribution
Employees geographical distribution
(March 2007)
(March 2007)
Other
2%
Other
2%
Am erica
48%
Spain
31%
Spain
50%
America
67%
Source: BBVA
Business in Spain represents only 37% of the employees and
48% of the offices
9
INDEX
1) Spanish banks lead foreign banking in Latin
America
2) Why to invest in Latin America? Bank’s
point of view
3) Foreign Banks Contributions to Latin America
economy
4) Less hurdles in BBVA’s roadmap in Latin
America
10
WHY INVESTING IN EMERGING MARKETS ?
• Population growth
Potential market
growth
• Economic growth and changes
• Low banking penetration
Margin to
improve
efficiency
Diversification
• Export of know-how, technology,
new products…
• Low cyclical synchronization,
less volatility of benefits
11
A DECLINING POPULATION IN EUROPE, BUT A GROWING TREND IN
EMERGING COUNTRIES
Projections of population
2010
1.032
2050
% var
1.937
2,5%
4166
5.217
0,7%
Europe
730
653
-0,2%
Latinamerica
593
783
0,9%
North-America
348
438
0,7%
6.906
9.076
0,9%
Africa
Asia
World
The European
population will not
increase in the next
decades whereas
population will grow in
the emerging
countries.
Demographic structure 2005
East Asia
& Pacific
Europe
& Central EMU
Asia
Latin
South
America
Asia
World
0-14
24
20
16
30
33
28
15-64
69
69
67
64
62
64
65 & more
7
12
18
6
5
7
Source: WB & UN
The greater
proportion of
prepared young
population and
more will increase
the proportion of
non-banked
population.
12
IMPROVEMENT IN MACROECONOMIC BALANCES
Annual Average Fiscal and Current Account Balance
2
1
0
1981-1990
1991-2002
2003-2006
-1
-2
-3
-4
-5
-6
-7
Fiscal Balance (% GDP)
Current Account Balance (% GDP)
Source: BBVA
Nominal stability and reduction of external disorders have
caused a favorable macroeconomic environment with more
possibilities of economic growth
13
POTENTIAL GROWTH REMAINS HIGH
Potential economic growth
4,5
4,0
3,2
3,0
2,8
2,3
1,5
Business cycles
aside, potential
growth in Latin
America is above
the level estimated
for developed
countries
0,0
EU
Spain
USA
LatAm
Source: BBVA
Macroeconomic achievements are impressive: orthodox
monetary policy dominates the region.
14
LATIN AMERICA IS UNDER-BANCARIZED …
Banking assets / GDP
(March 2007)
Domestic credit to private sector (% GDP)
261,5%
96,8%
65,2%
48,9% 43,4%
SPAIN
CHI
BRA
ARG
COL
Source: World Bank & BBVA
29,7% 27,5% 27,3%
VEN
MX
PER
200
180
160
140
120
100
80
60
40
20
0
United
States
European East Asia &
Pacific
M onetary
Union
M iddle
East &
North
Africa
Europe &
Central
Asia
Latin
America &
Caribbean
World
15
…THE BANCARIZATION IS ALREADY INCREASING
Private sector credit in Latin America* (nominal yoy growth)
Credit Growth (YOY %)
100
25
20
80
15
2004 2005 2006Q3
60
10
5
40
0
20
-5
-10
Latam
Peru
Mexico
Colombia
Chile
Brazil
jul-06
apr-06
jan-06
jul-05
oct-05
apr-05
Venezuela
Source: BBVA
jan-05
jul-04
oct-04
apr-04
jan-04
jul-03
oct-03
apr-03
jan-03
jul-02
oct-02
apr-02
jan-02
jul-01
oct-01
apr-01
jan-01
Source: FMI ; *Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
-20
Argentina
0
-15
Source: BBVA from IMF data
Credit has displayed a remarkable recovery since 2004,
sustained by the favourable economic environment and the
soundness of banking systems in the region.
16
“ASSET-SEEKING” & “ASSET EXPLOITING”: REASONS TO STAY IN
LATIN AMERICA
Average 1997-2006
(% assets)
Argentina
Brazil
Chile
Colombia
Mexico*
Peru
Venezuela
Spain
Operating
expenses
Net
revenues
5,44
8,58
2,75
4,85
6,94
9,01
4,98
7,18
5,11
8,30
9,08
14,37
1,60
2,70
4,15
* 1997-2004
Source: BBVA based in Moody's
Latin American banking systems
have a wide margin to improve
their efficiency
5,55
The Latin American
banking systems
present higher
revenues than the
developed countries
Expansion in Latin
America is an
opportunity to
increase
profitability
17
LATIN AMERICA: A BETTER OPTION TO DIVERSIFY THE RISK
Real GDP Growth (in %)
8
Spain
Latin America
Business cycles in Latin
America and Spain are not
correlated. On the contrary,
the correlation with Europe
has increased.
6
4
2
0
-2
Correlation=-0,037
2008(f)
2006
2007(f)
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
1991
1990
1989
1988
1987
1986
1985
1984
1983
1982
1981
1980
-4
Source: BBVA; (f) forecast
Correlation between Eurostoxx and Latin American
stock exchange
1,0
0,4
0,2
-0,2
Source: BBVA
ene-07
jul-06
ene-06
jul-05
ene-05
jul-04
ene-04
jul-03
Brasil
ene-03
jul-02
Chile
jul-01
ene-01
jul-00
ene-00
jul-99
ene-99
-0,8
jul-98
México
ene-02
-0,4
-0,6
ene-98
The region a good option
to diversify, because the
synchronization between
European and Latin
American stocks
exchanges is small
0,8
0,6
18
OTHER MICROECONOMIC FACTORS
Why the Spanish Banks?
Experience
Spanish banks have changed their
exposition towards Latin America
Solvency
Competition
Non-economic
factors
In the Spanish financial system there is a
strong competition. Pressure on margins
enhances the seeking of more profitable
businesses.
Sharing the same culture and language
helps the know-how to be transferred easier
and allows the implementation of
technological common platforms.
19
INDEX
1) Spanish banks lead foreign banking in Latin
America
2) Why to invest in Latin America? Bank’s point of
view
3) Foreign Banks Contributions to Latin
America economy
4) Less hurdles in BBVA’s roadmap in Latin
America
20
FOREIGN BANK CONTRIBUTIONS
EFFICIENCY
ECONOMIC
VULNERABILITY
Increasing in bank
competition
Import of risk
management
systems
Lower cost of
credit
Improvement in
bank soundness
New financial
products
Increase in the
financing in local
currency
Improvement in
banking system
efficiency
Less probability of
credit crunch
21
1. EFFECTS IN EFFICIENCY: MORE BANK COMPETITION AND LOWER COST
OF CREDIT
Banking Spreads
16
14
12
2000
2005
10
8
6
4
2
0
Peru
Colombia
México
Venezuela
Chile
Argentina
BANKING SPREAD: Interest rate spread is the interest rate charged by banks on loans to prime customers
minus the interest rate paid by commercial or similar banks for demand, time, or savings deposits.
The lower interest rates and greater banking competition are
causing a reduction of banking spreads that have been
particularly intense in countries like Mexico where the presence
of foreign banks is very important.
22
1. EFFECTS IN EFFICIENCY: EFFICIENCY HAS IMPROVED IN ALL SYSTEMS
Efficiency ratio
(Operating expenses / Net revenues)
dic-99
jun-06
México*
Perú
90
80
70
60
50
Venezuela
Chile
Brasil
Colombia
* 2004
Argentina
40
Source: Moody`s & BBVA
Except in Argentina, the ratio of Operating expenses/Net
revenues has shown a tendency to be reduced.
23
2. EFFECTS IN ECONOMY VULNERABILITY: THE EXPERIENCE OF SPANISH
BANKS IN CONTROLLING MACROECONOMIC RISKS
Macroeconomic evolution
10
7.7
8
5.4
6
4
2.9
2.8
2
0
-2
GDP
Inflation
-4
Spain 87-96
The Spanish banks are
used to operate in
volatile environments
because the
performance of the
Spanish economy
Current account
twenty years ago was
not so different from
other emerging
-1.6 -1.6
markets.
LATAM 97-06
Source: BBVA based in FMI
24
2. EFFECTS IN VULNERABILITY: LESS VULNERABLE BANKING
SYSTEMS
BIS Ratio 2006
35
30
LATAM = 16,2
25
ASIA = 15
20
15
10
5
India
Malaysia
Korea
Thailand
Singapore
Filipinas
Indonesia
Argentina
Mexico
Colombia
Chile
Peru
Brazil
Uruguay
0
BIS RATIO: Bank regulatory capital to risk-weighted assets
Financial companies present a risk profile more diversified, and they
have better access to international financing, which remarkably
elevates the solvency of the local financial sector.
Default rates in Latin America have fallen since 2002, and are currently
lower than in emerging Asia.
25
2. EFFECTS IN ECONOMIC VULNERABILITY: MORE BANK
FINANCING IN LOCAL CURRENCY
Foreign financing locally granted in local
currency (%rest foreign financing)
80
70
60
1995
Financing by local
subsidiaries has
displaced the
financing in USD,
reducing currency
mismatching.
2006
50
40
30
20
10
0
ARG
BRA
CHI
COL
MEX
PER
VEN
LAC
Source: BIS
26
2. EFFECTS IN ECONOMIC VULNERABILITY: LONGER TERMS IN
LOCAL CURRENCY MARKETS
Peru: Sovereign Bonds Yield Curve
9.0
8.0
Interest rate
7.0
6.0
5.0
4.0
Dec 2005
3.0
Dec 2006
May 28, 2007
20 years
15 years
11 years
10 years
9 years
5 years
4 years
3 years
2 years
1 year
0.5 year
1 day
2.0
Maturity
A higher economic stability, is causing an enlargement of the
terms. That allows to construct a curve of interest rates to lend
in the long term
27
INDEX
1) Spanish banks lead foreign banking in Latin
America
2) Why to invest in Latin America? Bank’s point of
view
3) Foreign Banks Contributions to Latin America
economy
4) Less hurdles in BBVA’s roadmap in Latin
America
28
BBVA has faced periods of high macroeconomic and political
instability in the past,...
Basis points
Number of
elections
Sovereign spreads in Latin America (EMBI+)
2.000
1.800
1.600
1.400
1.200
1.000
800
600
400
200
Source: JPMorgan
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
1992
0
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
17
14
3
0
10
18
6
8
7
15
12
11
4
13
8
6
5
11
29
BBVA has faced periods of high macroeconomic and political
instability in the past,...
Exchange rate depreciation and Government
changes in Latin America (1970- 2000)
1.16
1.14
1.12
1.10
1.08
1.06
1.04
1.02
1.00
0.98
0.96
0.94
-9 -8 -7 -6 -5 -4 -3 -2 -1 0
1 2
3
4
5
6
7
8
9
Months
Ghezzi& Stein, 2001
Source: Frieden, Ghezzi
30
...but now there are better economic and political fundamentals
EMBI+ (b.p.) and elections in Latin America
330
Argentina
(Pa)
310
Chile
(1st round Pr
and Pa)
290
(Pr) Presidential
(Pa) Parliamentary
Chile
(2nd round Pr)
Peru
Brazil
(2nd round Pr)
(1st round Pr
Peru
Brazil
Mexico
and Pa)
(1st round Pr
(2nd round Pr)
(Pr)
and Pa)
270
Venezuela
(Pa)
Bolivia
(Pr)
250
230
Colombia
(Pr)
210
190
Colombia (Pa)
170
apr-07
mar-07
feb-07
jan-07
dec-06
nov-06
oct-06
sep-06
aug-06
jul-06
jun-06
may-06
apr-06
mar-06
feb-06
jan-06
dec-05
nov-05
oct-05
150
Source: BBVA and JPMorgan
31
CONCLUSIONS
Latin America is a highly appealing destination for Spanish
banks due to its growth potential
 Spanish banks have properly managed risks in the region by
focusing on the most stable countries
The Latin American bet has resulted in profits for the Spanish
banks, the improvement of efficiency in the banking systems of
the region and sounder fundamentals to face negative
macroeconomic shocks
The BBVA Group has taken advantage of its record in
managing banking networks and now plays a leader role in the
region
 The way to ensure the success of BBVA in the future is adding
value to the countries where we currently do business, building a
mutual beneficial relationship.
32
Foreign banks in Latin
America
Manuel Galatas
Director, BBVA Asia
Financial Reforms in China and Latin America
Beijing, June 7th 2007
33