PAVING THE WAY

Ecuador 2012 | FINANCE | REVIEW: BANKING

Ecuador's highly liquid banking system is helping to grease the wheels of economic growth. Solid profitability combined with a new regulatory framework are incentivizing financial-sector development and opening opportunities for direct investment.

The roots of Ecuador's current banking system date back to 1948, when the Central Bank of Ecuador (CBE) was established. Its current stability is partially the product of the hard-earned lessons of 1998-1999, when bank and currency crises upended public financing. In total, 16 banks of the 40 that existed at the time collapsed.

Since the currency transition the financial system has seen a period of marked recovery. More recently the CBE has sought to underscore dollarization by increasing liquidity in the domestic market. These measures include raising the threshold of assets that private banks must keep in Ecuador from 45% to 60% and raising the required contribution to the liquidity fund from 3% to 5% by the end of 3Q2012 and from 9% to 10% annually. The fund supports Ecuador's financial system as the country's central bank hasn't backed it up since the 1998-1999 crisis.

The CBE has also said all international cash transfers to Ecuador must flow through accounts at the CBE starting in November 2012. This measure appears to be a method of currency control that in the future may culminate in the dollar being replaced by a new Ecuadorean currency.

CURRENT DYNAMICS

Today, Ecuador's banking system is comprised of 25 banks and represents the third fastest-growing non-oil sector in the country. The four largest institutions—Pichincha Bank, Banco de Guayaquil, Banco del Pacífico, and Produbanco—dominate the sector, accounting for 69.5% of total profits, according to local regulator Superintendencia de Bancos (SBS). Small and medium-sized banks are also fairing well, having grown their combined loan portfolio by 18.7% to $5.15 billion in 2011. Local banks lead the way, with Citibank representing the only major foreign player.

The recent emergence of cooperatives, some of which hold up to $30 million in assets, is a new source of dynamism in the banking landscape. The 40 cooperatives currently regulated by SBS saw 39.5% growth in 2011, raising their overall asset base to $2.43 billion. With the number of unregulated cooperatives growing exponentially, new legislation is being drafted to establish a separate regulator.

At the end of 2011, Ecuador's private banks reached 17.57% profitability, up from 13.3% in 2010 according to the country's Private Banking Association (ABPE). Adding Banco del Pacífico to the equation—a private bank run by the state—net profits increased 51% to reach a combined $395 million. Approximately $45 million of the profits came from the sale of Ecuadorean insurance company Rio Guayas Compania de Seguros y Research, which was owned by Banco de Guayaquil and sold in compliance with new anti-trust regulations.

According to the Economist Intelligence Unit, Bank lending grew at an annual pace of 20% in 2010 and 2011, fueling concerns of a credit bubble. However, 1H2012 saw 17% annualized growth. This slight deceleration is expected to continue as banks offset new capital rules by reducing borrowing limits on revolving credit, which may guide a “soft landing" for loan growth.

Deposits grew in concert in 2011; 18% overall, with 8% growth in checking accounts and 22% growth in time deposits, signaling a healthy trend for long-term positions among retail banking customers.

Led by strong balance sheets among the big four, 2011 also saw a decrease in non-performing loans (NPLs), improvement of provisions, and increased liquidity across the sector. “The year 2011 was very positive for the banking sector in Ecuador," Banco Promerica President Ricardo Cuesta told TBY. “The banks reached significant levels of liquidity, and we saw significant growth in loan portfolios. The financial system remains very liquid, with a clear solidity and solvency above locally and internationally required levels."

The new anti-trust legislation, put in place by the CBE in 2011, prohibits banks from holding insurance groups, hedge funds, and brokerage houses. Other regulatory changes include a new threshold for major shareholdings as well as a requirement to make credit cards available for free, a move that financial services company Analytica forecasts will squeeze margins by up to $140 million. Further changes under discussion include anti-cyclical measures such as provisioning for credit defaults. Analytica forecasts that the sector's profitability may drop to 10% in 2012 as a result of the legislative transitions, putting the onus on the banks to develop further innovation and technology to lower overheads.

The first bank to comply with the new anti-trust law was Banco de Guayaquil, with the sale of its insurance and research company to ACE Group of Switzerland for $55 million and its brokerage unit to employees for $1 million. The nation's other major players are following suit. Banco de la Producción, the third largest lender with a market value of $185 million, has put its insurance and brokerage units on the auction block while Pinchincha Bank, the largest publicly traded bank valued at $695 million, must shed its insurance, brokerage, and investment assets.

Cut-rate prices in concert with promising sector figures are creating unprecedented possibilities for foreign investors, according to Ecuador's regulators. “These facts will generate lots of opportunities," BCE President Pedro Delgado told TBY. “And it is also the right time as the regulatory framework is incentivizing development in [the financial sector]."

The Financial Action Task Force (FATF), the global anti-money laundering body, returned Ecuador to its “black list" in 2012. However, the move had little impact on sector-wide performance, and the CBE adamantly denies holes in its due-diligence regime.

FINANCIAL INCLUSION

One of the government's main targets in the financial sector is to increase banking penetration. According to the CBE, 37% of Ecuadoreans own a bank account. This figure compares to 98% in Spain, 42% in Brazil, and 20% in Peru. Ecuador has 9.3 branches per 100,000 people, putting it just behind Chile and ahead of Colombia. According to the CBE, the government would like to see this figure grow by double-digit rates in the medium-term.

In April 2012, Ecuador joined the Alliance for Financial Inclusion (AFI) and announced that the CBE would make a number of commitments under the Maya Declaration, a statement of principles aimed at banking the unbanked in the developing world.

Specific measures include helping lower-income Ecuadoreans living in remote areas gain access to financial services to fit their needs. One of the pioneers of this project is the Inter-American Development Bank (IDB). It has offered a $10 million loan to Ecuador to aid financial inclusion efforts. The project seeks to help 200,000 people in remote areas and hopes to see upwards of 2.8 million new financial transactions generated by 2016.

Increasing technology, both through public and private-sector driven innovation, is having the most immediate impact on Ecuador's retail banking penetration. Infrastructure for mobile wallet and other transactional systems is currently being implemented by the CBE, while the banks compete to broaden market share through the development of electronic and wireless banking platforms. Today, Pinchincha Bank, which leads the way in alternative distribution networks, is making nearly two-thirds of its transactions electronically.

Specific financial inclusion mechanisms include the recent prohibition on fees for dozens of services such as the issuance and renewal of credit cards and the printing of account statements as well as developing microfinance channels and promoting financial education.