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300-133-1

This case was written by Professors Mauro F Guillén and Adrian E Tschoegl, The Wharton School, University of Pennsylvania. It is intended to be used as the basis for class discussion rather than to illustrate either effective or ineffective handling of a management situation.

The case was made possible by the co-operation of a number of regulators and bankers and compiled from published sources.

The New Conquistadors: Spanish Banks and the Liberalization of Latin American Financial Markets

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THE NEW CONQUISTADORS: SPANISH BANKS AND THE LIBERALIZATION OF LATIN AMERICAN

FINANCIAL MARKETS*

“In the dominions of Spain, the sun never sets.” —Philip II, King of Spain (1556-1598)

1. Introduction: What is Happening?

Two Spanish banks with little prior foreign experience—Banco Santander (Santander) and Banco Bilbao Vizcaya (BBV)—have almost overnight become the largest foreign participants in commercial banking in Latin America. Between 1994 and 1998, they have built extensive retail banking “empires” on the basis of some twenty acquisitions of leading domestic banks (see Table 1 for a complete list). The stock market has endorsed their strategy. Of the world’s 50 largest banks (in terms of market capitalization), BBV (at 56%) and Santander (47%) ranked 1st and 3rd in terms of total stockholder returns between 1993 and 1998 (The Banker, July 1998, p.20). Presently, Santander is ranked as the 40th largest bank in the world by Fortune magazine (279th

largest company), and BBV as the 46th largest (344th company). The arrival of the Spanish banks to Latin America represents one of the boldest and most far-reaching initiatives in multinational retail banking to date. Rarely have banks sought to dominate mass-market banking in a foreign country, let alone across so many different ones.

Until the mid-1980s Spanish banks had maintained a limited international presence. Now their Latin American acquisitions have brought them into competition not only with domestic retail banks but also with other foreign banks. These include Citibank and BankBoston, which have been present in Latin America since the early 1900s, and

* Professors Mauro F. Guillén and Adrian E. Tschoegl prepared this case solely as a background document for class discussion. The authors would like to thank Citibank for the generous grant to the Wharton School that supported this research, and the 33 regulators and bankers that gave so generously of their time to answer questions. J. Campa, A. Corcóstegui, S. Kobrin, D. Lessard, T. Malnight and M. Meyer provided helpful comments and corrections. I. Corominas, P. Freire, G. Méndez, C. Muñoz, and A. Ripert provided able research assistance. Still, the analysis and opinions contained in this case study are those of the authors. © 2000 Trustees of the University of Pennsylvania. “All rights reserved. No written or electronic reproduction without express permission.”

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relative newcomers such as Hongkong and Shanghai Bank Corp. (HSBC), Bank of Nova Scotia, and some European banks (see Tables 2 and 3). Citibank is a particularly formidable competitor because of its long residence throughout Latin America, its ubiquity, and its ability to cater to upscale retail customers around the world.

The Spanish banks are only part of the Spanish rediscovery—some would even say “reconquest”—of the Americas. During the 1980s and 1990s Spain has become the largest European investor in Latin America, primarily in telecommunications, air transportation, power and water utilities, construction, gas, and oil as well as banking. After decades of neglect, Spain is now forging strong investment ties with Latin America, but trade flows remain unimportant. Although the timing of economic reform differed sharply by country, the logical historical reference point is the Latin American debt and banking crises of 1982. Since then, and as Latin America’s “lost decade” lingered on, democratically elected presidents came to power across the region. These governments— with the support of broad coalitions of the middle class and business interests— introduced market-oriented reforms of the financial system including liberalization of foreign entry. Thus only recently have Latin American banking sectors become ripe for foreign investment.

This case study focuses on three of the most important banking markets in Latin America. Chile was the first to liberalize its economy, following the military’s overthrow of the Allende government and the 1973-74 oil crisis. Santander, BBV, and Banco Central Hispano (also Spanish) have used acquisitions and mergers to come to own three large banks in the country. Now, facing a mature, competitive market, Chilean and Chilean-foreign banks are starting to invest elsewhere in Latin America. Argentina has a large, growing economy and one of the highest per capita incomes in the region but remains under-banked. Large, sluggish government-owned institutions some of which are slated for privatization still dominate the banking system. Although foreign banks might wish to bid, they already control over 40% of loans and deposits. Mexico nationalized its banking system in 1982 in response to the debt crisis, but exempted Citibank—the one foreign bank. When Mexico privatized the banks again in the early 1990s, it permitted only domestic bidders. Then liberalization and commitments under NAFTA and OECD membership resulted in some opening to foreign banks. The 1995 tequila economic crisis again brought the banking system to the brink of collapse. This time, the government allowed foreign banks to acquire domestic banks. Table 4 presents comparative economic, political and social information for Spain, Chile, Argentina and Mexico. Table 5 compares the financial systems of emerging and developed countries.

2. The Home Setting: Spain

2.1 Economic and Political Background

During the last twenty years Spain has transformed itself from being one of the most politically and economically inward-looking countries in Europe to one of the most open and dynamic. Change, however, has been gradual. The various political parties agreed on

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the transition to democracy in the late 1970s; economic reform then took place over a long period of time culminating in 1998 with Spain’s entry into Economic and Monetary Union (EMU) as a founding member. Spain’s center-right (1977-82 and 1996 to date) and moderate socialist (1982-1996) governments have pursued policies which, on the one hand, expanded the state administration and welfare services, and on the other deregulated the economy, privatized state-owned companies, and welcomed foreign investment. Economic growth was intense during the late 1980s—following membership in the European Union in 1986—and again after the brief slowdown produced by the Gulf War of 1991. Still, unemployment remains as high as 16%.

2.2 The Structure of the Banking System

Spanish banking has always been covered by a shroud of secrecy. In fact, popular wisdom traditionally bunches the banks together with the Church and the military under the rubric of Spain’s poderes fácticos—the powers that be. The Spanish banking sector has historically been one of the most protected and regulated in the world, leading scholars such as Boston University’s Sofía Pérez to argue that Spanish banks have been “banking on privilege.” The restrictive banking law of 1940 made it almost impossible for banks to grow domestically other than by acquisition. In 1962 a new banking law allowed commercial banks to become universal banks and to build their holdings of industrial companies. In addition to private banks, other important institutions include: the savings banks (Cajas de Ahorro—traditionally even more regulated than the banks); the credit cooperatives; and official credit institutions, which played an important role in the government’s industrial policy of the 1960s and 1970s.

The Banco de España (est. 1782) became a real central bank with the Banking Act of 1921 and was nationalized in 1946. Over time it grew in its influence with policy- makers—many of whom were trained in its prestigious Research Department—and won ever greater supervisory powers. From the 1960s on, central bankers tried to reform financial markets and the government’s deficit-financing practices so that inflation could be curbed, a goal that proved elusive until the mid 1980s. In 1994 the Law of Autonomy gave the central bank a large measure of independence to free it to fight inflation.

Spain’s banks have labored under an interventionist state bureaucracy. Tight regulations during the 1950s resulted in high costs and profits. The chairmen of the so- called “Big Seven”—Banco Español de Crédito (Banesto), Banco Central, Banco Hispano-Americano, Banco de Vizcaya, Banco de Bilbao, Banco Santander, and Banco Popular—began to meet once a month for lunch so as to exchange information, organize the market, and lobby the government. Over the years, the Big Seven managed time and again to find a mutual accommodation with the government and the central bank. The banks succeeded at influencing key reforms: restructuring of deficit financing in the early 1980s, membership in the EU in 1986, and liberalization of the stock market in 1988.

Consequently, the government pursued an ambiguous policy vis-à-vis foreign banks. It welcomed them for the pressure they brought to bear on the big banks, but its

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nationalist instincts were obvious in the seven-year protection period that it negotiated for the banking sector in Spain’s European Union accession treaty. Until 1992, the government continued to limit foreign bank entry on a discretionary basis and to maintain existing limitations on foreign banks already in Spain. In 1992, the Spanish authorities lost any right to block the entry of any European bank that met certain EU conditions.

The most momentous recent changes in the Spanish banking system have involved mergers among the Big Seven. After several unsuccessful attempts at hostile takeovers, some of them encouraged by the government, the Big Seven became the Big Four. Bilbao and Vizcaya combined in a merger of equals in 1988. Banco Central and the much weakened Hispano-Americano merged in 1991 to form Banco Central Hispano (BCH). Lastly, in 1994 Santander beat out BBV and BCH to acquire 48% of Banesto in an auction that the Banco de España organized after having rescued the bank; to add injury to insult, Santander also poached some top executives from BBV to run Banesto. In early 1998, Santander made a tender offer for the remaining shares of Banesto and now controls 97% of the bank. Simultaneously, the government reorganized the state-owned banks to create the megabank Argentaria in 1991, which it is currently privatizing in tranches. The government also gradually allowed the savings banks or Cajas—hitherto restricted to their provinces of origin—to expand nationally and encouraged mergers among them. In fact, the Cajas have eroded the banks’ market share.

Starting in 1990, the competitive environment in the Spanish banking market changed. Earlier, Barclays Bank and other foreign banks had offered interest on current accounts without triggering much response from the majors. This changed when Santander set off a war among the large banks by creating its Supercuenta, which offered high interest rates on a checking account, and by revolutionizing the mortgage loan market. BBV retaliated with its own Supercuenta, and the other leading banks did likewise. Next, BBV introduced its Libretón, an account that offered lower interest rates than the Supercuenta, but whose owners became eligible for prizes of cars, trips, encyclopedias, and cash. The war abated by the end of the year, but the chairmen discontinued their monthly luncheons. Although the margins earned by the banks during the first half of the 1990s have fallen, they have remained comfortable. On the eve of EMU, the Spanish banking sector is sound, strong and profitable. So far, Citibank and European banks interested in Spain have only acquired smaller Spanish banks and pursued niche strategies.

2.3 The Major Actors: Santander, BBV, BCH, and Argentaria

Santander and BBV are now the largest banks in Spain, far ahead from other major competitors (see Table 6). Banco Santander was founded in 1857 as a banknote issuing institution as well as a commercial bank specializing in the Spanish-American trade flowing through the northern port city of Santander. (In 1878 note issuance became a monopoly of the Banco de España.) Santander only opened its first representative offices abroad in the 1950s in Mexico City and London. Given the postwar regulatory restrictions, Santander grew during the 1940s and 1950s via acquisition, consolidating a

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national network of branches by the late 1970s, but remained a mid-sized institution. When during the mid-1980s its bigger rivals became enmeshed in internal power struggles or in difficult mergers, Santander waited for the right moment to break with the cartel and to start competing. Between 1989 and 1994 Santander revolutionized Spain’s retail banking by introducing high-yield checking and savings accounts, mutual funds, and low-interest mortgages; creating the first telephone banking service in Spain; and entering into a joint venture with British Telecom on value-added services in voice, data and image transmission. Competitive responses and the already high-density of bank branches, however, prevented Santander from increasing its market share by more than a few percentage points. The only fast way to grow was to merge or acquire, so in 1994 Santander bought Banesto. The acquisition expanded Santander’s retail network, especially in rural Spain, and put it in first place by total assets, ahead of BBV.

Santander started its current expansion abroad in the late 1980s with several small acquisitions (notably Portugal’s Banco de Comércio e Indústria in 1990) and alliances (Royal Bank of Scotland). Santander’s only foray into U.S. commercial banking started in 1991 when it acquired 13% of First Fidelity Bancorporation. This dubious strategic move paid off when First Fidelity merged with First Union in 1995, making Santander the largest single shareholder in the 7th biggest U.S. bank. Santander sold its stake in 1997 netting $2.2 billion, which it used to amortize the goodwill of its Latin American acquisitions.

Santander’s chairman is Emilio Botín, who in 1986 succeeded his father. Although his grandfather had also been a chairman of the bank, it was his father who built the bank into one of Spain’s Big Seven. The family has controlled the bank since the 1950s, currently owns about 3 % of the bank’s voting shares and family members occupy several key senior slots and directorships. The most important figure for Santander’s Latin American expansion is Ana Patricia Botín, the Chairman’s eldest child and heir apparent. When she joined the bank in 1988, Ms. Botín set as her goal to build Santander Investment, the investment-banking arm, into the “Goldman, Sachs of Latin America.”

Shortly after the start of the “lost decade,” Santander pulled out of much of Latin America and sold much of its Latin American debt holdings before the nadir. Having missed the worst of the debt crisis, Santander may have been readier than some of the U.S. and other foreign banks to increase its involvement at the first glimmerings of recovery. Within Santander’s operations there is something of a split between the old banks those such as Santander Chile that rode out the lost decade and still have a great deal of managerial autonomy, and the new banks those that Santander has acquired under Ms. Botín’s leadership and that report more in detail to Madrid. Whether “old bank” or “new,” Santander has generally bought majority stakes and has put its brand name on them. It has also tended to impose its own management on its acquisitions, especially in the areas of credit risk, audit and systems, and sends individual executives and teams on short-term assignments to other subsidiaries to help with specific projects such as the introduction of new systems or products. Santander’s Latin American operations accounted for almost 50% of foreign assets and 48% of net attributable profits

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in 1997. Mr. Botín has recently stated that “we are trying to be the best franchise in Latin America—that is our aim.”

BBV is the result of the 1988 merger of the then 131-year old Banco de Bilbao and the 88-year old Banco de Vizcaya. Banco de Bilbao started in 1856 to serve the banking needs of the members of the Chamber of Commerce in the northern industrial and port city of Bilbao. Subsequently the bank became a key factor in the industrial development of the steel-making Basque region. Bilbao founded its first foreign office in 1902, in Paris, but remained focused on the domestic market where over the years it acquired other local and provincial banks. Banco de Vizcaya started in 1901, also in Bilbao. It too acquired other local banks, including one in Madrid. Towards the end of the 1920s, it started its first international venture with the creation, in Paris, of the Banque Français et Espagnol. Domestic and world events intervened and it did not open further offices abroad until the early 1970s. Then it opened branches in New York, Amsterdam, London, Paris and San Francisco. It also opened representative offices in Mexico, Frankfurt, Tokyo and Rio de Janeiro. Both Bilbao and Vizcaya grew via acquisition during the 1940s and 1950s, and became industrial as well as commercial banks during the 1960s. Further acquisitions of bankrupt institutions followed during the early 1980s.

When Banco de Bilbao and Banco de Vizcaya merged into BBV, they created the largest Spanish bank at the time. Today, the architect of BBV’s strategy is its Chairman, Mr. Emilio Ybarra, a Basque known for his concern with costs, and for his commitment to hard work and long-term planning. However, Mr. Ybarra has less of a free hand with BBV than Mr. Botín has with Santander. In Latin America, BBV originally favored minority stakes, providing BBV had management control. More recently, Mr. Ybarra commented:

I don’t think there is a substantial change in strategy here. We always said that we wanted management control of the banks we were acquiring and at the same time have local partners. We will keep on applying this two-pronged strategy... What has happened is that once we invested in certain countries we have gained confidence and more knowledge and—as soon as the price was favorable— we have acquired majority stakes. Regarding the brand name, if the banks we acquire have a good name we keep it and we just add our BBV brand so that we combine their quality with our international prestige. (AméricaEconomía, June 4, 1998, p. 45.)

Now BBV has appointed a manager in Madrid to be responsible for BBV América, which includes all its Latin American operations and which accounted for 23% of consolidated assets and 17% of net attributable profits in 1997. BBV uses an organizational structure in which the country manager (rather than the functional manager) is the dominant dimension. Functional managers in each country coordinate with their counterparts in Madrid but do not report to them. Like Santander, BBV draws on expertise in one subsidiary to help another through temporary assignments and project teams. It also has a program under which 50 middle managers from Latin America will work in BBV Spain for two years in regular jobs (not internships), before returning to their home banks.

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Besides Santander and BBV, two other Spanish banks have an operating presence in Latin America: BCH and Argentaria. BCH’s Chairman, Mr. José María Amusátegui, took over the leadership of the bank in 1991. The execution of the bank’s Latin American strategy has been in the hands of the CEO, Mr. Ángel Corcóstegui (Wharton PhD ‘80 & MBA ’82), who joined in 1994 from BBV. BCH has been something of a latecomer in the current drive into Latin America. Although it inherited a number of investments that Central and Hispano-Americano had made in the 1960s, BCH has disposed of or reorganized most of these. In 1998 it announced that it was stepping up its investments.

BCH’s current strategy is to work through partnerships with powerful local family groups, while retaining management control. In southern cone it allied itself with the Luksic group, one of the largest family-controlled industrial and service conglomerates in Chile. In Colombia it joined forces with the Gilinski group which it saw as a similar vehicle for the northern part of the continent. However it is now looking for an alternative. BCH has taken minority stakes in local banks and in Puerto Rico it sold its subsidiary to Santander. Mr. Corcóstegui is concerned that although in the first flush of liberalization foreigners are welcome, in time resentment may build. BCH hopes to be able to dodge nationalistic resentment should that develop, while being able to acquire full ownership should it not.

Finally, Argentaria has reorganized the investments in Chile, Argentina and Uruguay that it inherited from its subsidiary, Banco Exterior, once Spain’s official export credit bank. Although it has kept retail operations in Panama and Paraguay, Argentaria is concentrating on corporate and foreign trade banking. Argentaria is also actively pursuing opportunities in pension management, sometimes in partnership with Citibank. Still, Mr. Fransisco González, the Chairman, is on record as saying, “Latin America is not a priority. The payoff for doing things right here [in Spain] is a lot more profitable than buying something in Latin America” (Financial Times, May 14, 1997).

3. Chile

“Chile’s rock-solid fundamentals—robust domestic and export growth, single-digit inflation, stable currency and eight consecutive fiscal surpluses—have created a banking environment that is the envy of Latin America.”

—The Banker, November 1995.

3.1 Economic and Political Background

As the first major Latin American country to introduce liberal economic policies back in the second half of the 1970s, Chile has enjoyed more economic growth than any other country in the region. Still, Chile chose, in the context of a very open economy, to moderate inflows of capital by imposing a 30% reserve requirement on short-term capital inflows. This regulation discouraged short-term borrowing from abroad and kept real domestic interest rates above international levels. Solid macroeconomic policies combined with a strong financial market reduced inflation while maintaining economic

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growth. Between 1990 and 1995, Chile averaged 7% annual GDP growth while lowering annual inflation from over 28% in 1990 to 8% in 1995. The Mexican tequila effect that so badly crippled the Argentine economy in 1995 left Chile relatively unscathed.

The particular policies and conditions accounting for the so-called Chilean “miracle” are the subject of heated debates in both academic and policy circles. Regardless, Chile did not manage to escape the effects of rising interest rates and decreasing prices for commodity exports (copper in particular) during the early 1980s, the two proximate causes of the Latin American debt crisis of 1982. Neither is Chile a political model for the region for it faces continuing problems in consolidating its transition to democracy due to the long shadow cast by the military. Chile has indeed made progress economically: exports of commodities such as copper and nitrates have lost relative importance while those of fresh fruit, wines, fish and forestry products have grown at double-digit rates; the private savings rate is among the highest in the world, thanks in part to the privatization of the pension system; power utilities and the telephone system are among the most efficient in the world; and educational standards are rising rapidly. And, indisputably, Chile is the most competitive financial market in Latin America.

3.2 The Structure of the Banking System

The Banco Central de Chile—Chile’s central bank—is an independent legal entity charged with maintaining the stability of the Chilean peso and the soundness of Chile’s payment system. Unlike its Spanish counterpart, it does not regulate the banking sector, a task allocated to an agency within the Ministry of Finance, the Superintendencia de Bancos. Financial liberalization in Chile started in the mid-1970s. In 1982, however, a severe banking crisis erupted in the context of the Latin American debt debacle. The subsequent banking law of 1986 established the current regulatory framework and included increased capital adequacy requirements, restrictions on mismatches between foreign-exchange assets and liabilities, the requirement that firms receive central bank authorization for dollar-denominated loans, the introduction of reserve requirements and deposit insurance, restrictions on unsecured lending to single and related parties and restrictions on lending for the purchase of the lending bank’s shares.

Merger activity in the banking sector was intense during the mid-1990s. Mergers helped the 50% foreign-owned Banco Santiago move into first place in the size rankings and Banco Santander Chile move into second place. These new leaders heightened the pressure on previous number one Banco de Chile (now in 3rd place) and Banco del Estado de Chile (now in 4th place) and on middle-tier banks such as Banco Edwards and Banco Hipotecario de Fomento (BHIF). By the end of 1997, the banking industry consisted of 15 private locally-incorporated banks, including four foreign wholly or majority-owned subsidiaries and some with large foreign minority positions, plus Banco del Estado de Chile. In addition, thirteen foreign banks operate as local branches of their parents. In total, the foreign banks account for some 20% of banking system assets and loans.

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Banco de Chile and Banco del Estado de Chile are solid institutions and either difficult or impossible to acquire. In June 1998, Global Finance rated Banco de Chile the best domestic commercial bank in the country. It is an obvious acquisition target but a takeover would require a public tender offer as the bank is widely held. Also, the bank has a poison pill in the form of a 40-year loan owed to the central bank. (The loan was part of a rescue package during the 1982 crisis and contains some restrictive covenants; any acquirer would wish to pay it off before maturity.) Banco del Estado de Chile is state- owned and the government has no plans to privatize it.

In the period 1991-1997, assets at the four largest banks grew more slowly than at the 12 middle-sized banks, but for both more rapidly than at the 13 smallest banks. However, most of these were branches or subsidiaries of foreign banks. Of the four largest banks, Santiago and Santander, inclusive of mergers, grew almost twice as rapidly as Banco de Chile or Banco del Estado de Chile. Though profitable, the mature and fiercely competitive Chilean financial sector more closely approaches performance norms in the OECD countries than those in Latin America in terms of margins and service: ROE for the financial system fell from 21% in 1993 to about 13% in 1997.

3.3 The Spanish Banks

Santander entered in 1978 with a branch and initially established its subsidiary in 1982, when it acquired insolvent Banco Español Chile. In 1989, it renamed the bank Banco Santander Chile in preparation for a more aggressive approach to the market. In the early 1990s, Santander decided to target the lower-middle to middle income of the Chilean consumer market due to the sustained and strong growth of these segments and the strong position of Citibank and Bank of Boston in the upper-income segment. In 1993 the bank acquired Fincard, then Chile’s largest issuer of credit cards, and in 1995 it acquired Financiera Fusa, a consumer finance company targeting lower-income customers. These acquisitions gave Santander a leading market share in these segments. It then consolidated these two businesses into its Banefe division. By 1995, Santander was the sixth largest private commercial bank in the country. In 1996, it acquired Banco Osorno y La Unión to become the second largest commercial bank in Chile.

Informed sources suggest that one reason Santander bought Osorno was to forestall BBV’s entry, but that it overpaid in the process. The merger has apparently also caused Santander major problems. Santander’s competitors maintain that the costs of merging information systems make it a high-cost bank, with returns trailing those of other local banks. The difficulty of merging different credit cultures also has resulted in some loss of control. In particular, most Chilean banks like Osorno have followed a practice of lending money against collateral whereas Santander emphasizes cash-flow.

Santander’s greatest coup in the Chilean market was its introduction of the superhipoteca, a new mortgage product. Santander based aggressive price cutting on a reengineering of the mortgage issuing process that cut both costs and time. The bank gained almost a 14% market share in the stock of mortgages as many individuals rushed

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to refinance; it now has perhaps some 20% of the flow of new mortgages. Santander also turned real estate agents and developers into sales agents for its mortgages, thus getting the bank closer to the customer’s purchase decision. The superhipoteca gave Santander a visibility boost and resulted in much public acclaim; competitors reportedly ejected Santander’s representative from the Bankers Association for having upset the market.

For many years, BBV only had a representative office in Santiago. In June 1998 BBV announced that it was buying Banco Hipotecario de Fomento (BHIF) from the Said family. BHIF has 52 branches and a 4.5% market share. Speculation is that BBV will try to acquire another Chilean bank (Banco Edwards is the most commonly mentioned). Lastly, BCH formed a 50-50 holding company (O’Higgins Central Hispano–OHCH) with the Luksic group which already owned Banco O’Higgins, named after Chile’s independence hero. OHCH then bought almost 43% of Banco Santiago from the central bank, which had acquired the shares in a rescue. (The central bank still owns about 38% of Santiago which it intends to sell as soon as the market for emerging countries’ securities improves.) In 1997 Euromoney rated Santiago the best bank in Chile. OHCH now controls BCH’s former subsidiaries in Argentina, Uruguay, Paraguay, and Peru.

4. Argentina

“One of the mysteries of the second half of the twentieth century is how Argentina, so rich in so many ways, has had such difficulty fulfilling its great potential.”

—Felipe A.M. de la Balze, Remaking the Argentine Economy (New York: Council on Foreign Relations, 1995), p. 1.

4.1 Economic and Political Background

No country in Latin America has undergone more drastic economic change over the last few years than Argentina. At the turn of the century the country ranked among the wealthiest in the world thanks to exports of beef and grain. Then decades of instability— 19 presidents (9 generals among them) and 45 economy ministers during the fifty years to 1993—resulted in erratic policies and secular economic decline. In the midst of the capital flight, hyperinflation and social unrest of the late 1980s and early 1990s, the newly elected President Menem pushed an ambitious program comprising deregulation and liberalization, privatization of state-owned companies, and creation of Mercosur, a customs union with Brazil, Uruguay and Paraguay. A key piece was the April 1991 Convertibility Law that created a currency board (i.e., an unmanaged, fixed exchange rate regime) with the Argentine peso pegged to the U.S. dollar at parity. These reforms have resulted in strong economic growth, falling inflation, and huge foreign investment inflows that helped finance a yawning trade deficit. The economy has expanded vigorously except in 1995, when investors, companies, and consumers overreacted to the Mexican crisis. Today Argentina is perhaps the richest country in Latin America and boasts the best educated population as well. However, much remains to be done in terms of unemployment and export growth.

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4.2 The Structure of the Banking System

Federal, provincial and municipal banks—many of which still exist—have traditionally dominated Argentine banking. Still today, the largest bank is the government-owned Banco de la Nacion Argentina. Private banks were nationalized and privatized several times during the last half century, but the biggest impediment to the development of the financial sector has been instability and hyperinflation. At one point total deposits fell to $2 billion (for a country of 33 million people) as people avoided bank accounts. Even today, Argentina is an under-banked market.

Nowhere is under-banking more evident than along Calle Reconquista in downtown Buenos Aires. Convoys of armored trucks block traffic as they deliver or load cash at the central bank or at the headquarters of the leading banks. In 1997, in an attempt to encourage the use of banks (and to discourage tax evasion), the government ordered companies with more than 100 employees to pay salaries and wages through a bank. Even so, today, most Argentines still settle utility bills and other obligations, including even purchases of cars and homes, in cash. Bankers estimate that roughly one third of the adult population in Argentina is still not a bank customer. To reach these people, banks are experimenting with new approaches. Banco Río de la Plata (owned by Santander) will open 100 automated service centers at gas stations owned by YPF, the large oil company. Banco de Galicia has agreed with the newly privatized mail system to open as some 400 mini-branches at postal offices throughout the country. Citibank has just announced similar programs with Blockbuster Video stores and McDonald’s. These moves follow the successful introduction in Spain of bank branches in supermarkets, a policy that Santander pioneered.

There is also room for other services. Despite their relatively high per capita income, only 17% of Argentinians have a credit card, compared to 21% of Chileans and 19% of Mexicans. Lastly, Santander, a Citibank-Argentaria joint venture, BankBoston, and HSBC are all active in the market for managing pension funds. Private pension funds have been in operation for only two years and represent a mere 2.5% of GDP. Thus the banks are interested in taking the lead in what promises to be a major business.

The tequila shock of 1994-95 resulted in a 20% fall in deposits as customers turned to cash, or sent money abroad. By March 1995, roughly one in three Argentine bank was technically bankrupt. When the supervisory authority raised capital adequacy requirements and increased required reserves, banks responded by merging or by selling themselves to better-capitalized foreigners. Recent reforms have restored a lot of confidence in the system but the need for capital continues to attract foreigners.

One can categorize the industry into three main sectors: first, the large, full-service, official and private institutions that operate nationwide; second, smaller private sector and rural cooperative banks; and third, provincial and municipal banks. The large commercial banks account for most of Argentina’s $134 billion of assets (end-November 1997). The top ten private banks gathered 41% of the assets and 40% of the deposits of

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the system at the end of December 1997. The large banks generally meet international standards with respect to capitalization ratios and profitability. The smaller private-sector and rural cooperative banks continue to lose importance. The provincial and city-owned banks represent a problem in that the central government cannot force the governments to privatize them and the banks’ operations remain highly politicized.

The number of commercial banks continues to fall. There are now 138 financial entities, down from 469 at the end of 1980, 315 at the end of 1985, 220 at the end of 1990, and 158 at the end of 1995. Privatizations reduced the number of state-owned banks from 35 at the end of 1980 to 20 in December 1997, and consolidation reduced the number of private banks from 179 to 118.

The foreign banks’ presence in Argentina dates back to initiatives to exploit natural resources and agricultural development during the 19th century. Citibank arrived in 1914 and BankBoston in 1917. They were the only two foreign banks to compete actively in the retail market until recently (see Tables 1-3). Since the 1980s, the number of foreign- owned private banks has fluctuated around a slight growth trend, helped by the government’s removal in 1994 of operating and ownership restrictions. There were 27 foreign banks at the end of 1980, 32 at the end of 1985, 28 by March 1997, and 34 at the end of 1997. Of these, some 15 are branches, 5 are affiliates and the rest are subsidiaries. There are also 103 representative offices, though some of these belong to banks that also have an operating presence. Between March 1997 and May 1997, the foreign banks’ share of assets in the banking system jumped from about 22 to 37%, their share of loans from 19 to 44%, and of deposits from 19 to 41%.

4.3 The Spanish Banks

In Banco Río de la Plata, Santander acquired one of the most profitable and best capitalized banks in Argentina. In 1997, Euromoney rated the bank the best in the country for its conservative lending policies that kept asset quality high and for its blue-chip corporate client base. Still, as one observer put it, “Santander came in with a colonialista mentality.” Another remarked, “They took a racing car and tuned down the engine.”

When BBV acquired Banco Francés it became the owner of a well-run bank with a compatible culture. As a result, BBV essentially left Francés alone, sending in only three or four expatriates. (Incidentally, when BBV acquired Francés, it also acquired Francés’ foreign operations, including an Uruguayan subsidiary acquired from Banesto.) BBV’s acquisition of Banco de Crédito Argentino is a different story. The bank was not performing well and the problem of merging the two banks is a major challenge.

One innovation that the Spanish banks introduced in their competition for deposits was bank accounts that offer the customer chances to win prizes. Santander introduced the accounts on a Monday in December 1997, and BBV Banco Francés followed that Friday. The central bank had disapproved of the accounts, as had most of the banking community, but ultimately could find no legal grounds for blocking the move. Still, the

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accounts are not eligible for deposit insurance. To date, the local banks have not introduced similar accounts although executives report that they have considered doing so.

5. Mexico

“Our experience with Mexican bankers was an expensive one.” —Bank of Mexico official reflecting on the banking crisis of 1994-95.

5.1 Economic and Political Background

Mexico is a country of extremes. A modern, export-oriented economy coexists with inward-looking agriculture and manufacturing. The North-South, rural-urban, educated- uneducated, and rich-poor divides are sharper in Mexico than in any other large Latin American country save for Brazil. Although its unique political system has provided for stability and a planned circulation of power within the elite, Mexico’s economy has not kept up with rapid population growth. Until the 1980s policies encouraged import- substitution in manufacturing, which led to the rise of a relatively large urban middle class at the expense of the rural peasantry. Also, Mexico borrowed heavily from abroad after new oil deposits were discovered in the early 1970s. When in the early 1980s interest rates rose and crude prices fell, Mexico defaulted on its debt and saw its financial system collapse.

Two presidents—Miguel de la Madrid (1982-88) and Carlos Salinas (1988-94)— took a series of bold steps: nationalization and then privatization of the banking system; compliance with the GATT (now WTO) trading regime; liberalization of foreign investment; privatization of certain state-owned enterprises; membership in the free trade agreement with the United States and Canada (NAFTA); and grudging power sharing with opposition parties at the state and city levels. The Mexican economy performed well in the early 1990s, growing vigorously with a falling—although still double-digit— inflation rate. The most visible transformation had to do with foreign trade: the country became a major exporter of automotive products, consumer electronics and other assembled goods as well as of commodities such as oil and various agricultural products. Mexico became the first developing country to become a member of the OECD in 1994.

The government of President Salinas got carried away by its apparent economic successes and by growing international investor confidence. Portfolio investment rose sharply after capital controls were abolished in 1991 and the government held the currency within an increasingly unrealistic band. In spite of the visible signs of economic strain and political turmoil during 1994, President Salinas decided to leave office late in the year without making the necessary macroeconomic adjustments. Within a couple of weeks speculation mounted that foreign reserves were running out. Investors withdrew their portfolio investments swiftly, and the government and domestic firms found they could no longer roll over their short-term debt with international lenders. The peso collapsed by 45% between December 1994 and January 1995, forcing the United States

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to orchestrate an international bailout amounting to US$52 billion. Although 1995 was a year of economic contraction and increasing poverty and unemployment, the Mexican economy managed to recover from the so-called tequila crisis in 1996 and 1997 thanks to an export boom that also allowed for a repayment of the international loan.

5.2 The Structure of the Banking System

The government nationalized Mexico’s banking sector in September 1982, as a response to the Latin American financial crisis. At the time, the banking system consisted of 60 private domestic banks of various kinds. Many of these banks belonged to wealthy individuals or closely-held family groups. Following nationalization, the government named political appointees to run the banks under strict orders from the central authorities; the government essentially used the banks to purchase government bonds. Interest rate controls, high reserve requirements, and other restrictions further discouraged bank expansion. These restrictions were temporary, being gradually eliminated during the late 1980s, but the overall effect was to create a banking system that ill-served the public and that consisted of banks without bankers or their skills.

By the late 1980s, the government had consolidated the banking sector into six national and 12 regional banks, operating more than 4,450 domestic branches. In 1990, the government began the process of reprivatization executed in six auctions of three banks each. To prevent undue concentration, the government forbade any successful bidder in an earlier auction from participating in subsequent auctions. Also, only qualified (domestic) entities could bid. The first auction took place on June 7, 1991 and the last one on July 3, 1992. The process was thorough and left the banking system largely in the hands of Mexican business groups and private investors. Estimates suggest that the government’s restrictions on bidders probably cost it about 20% of the possible revenue that it might otherwise have garnered. Having privatized the banks, the government began issuing new banking licenses, the first in decades.

In early 1995, in order to alleviate the banks’ problems created by the new crisis, the Savings Protection Fund (Fobaproa), a trust under the Banco de México, entered into risk-sharing swaps with the banks—the banks acquired bonds and gave up non- performing loans. By April 1998, the government put before Congress a new reform to the financial system. The proposal gives the Banco de México full control over exchange rate policy, strengthens banking supervision, and removes restrictions on foreign ownership of Mexican banks. The government also wants to transfer 552 billion pesos to Fobaproa, which had previously injected this amount to prop up insolvent banks. If Congress approves this transfer, Mexico’s public debt will rise from 28% to 42% of GDP. The government’s position is that the obligation already exists; all the legislation does is acknowledge it.

Currently, Mexico’s banking system includes 52 commercial and foreign banks. There are also development banks, savings and loans and credit unions. The bancos de primer plano or multibancos (first-tier commercial banks) may offer virtually any

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financial service, including commercial and investment banking as well as securities services. When the government re-privatized the multibancos in 1993, they numbered 18. Now there are only ten. In addition there are 14 smaller, second-tier banks. Informed sources expect further mergers and currently the authorities are not issuing new domestic banking licenses. The authorities have received inquiries, but as the banking system is becoming increasingly competitive and is still fragile, they see no reason to authorize new banks.

For a long time, Citibank was the only foreign bank operating in Mexico. Citibank had entered in 1928, at a time when other foreign banks were withdrawing in the face of widespread anti-foreign feeling. In 1932, the government banned new entry by foreign banks but grandfathered Citibank, by then the only remaining foreign institution. After World War II and until 1994, Mexico only allowed new entry via representative offices.

Since 1994, Mexico has opened to foreign banks in a series of hesitant and perhaps even grudging steps. Today, the foreign presence takes two primary forms: “foreign affiliates,” and shareholdings in Mexican multibancos. Under NAFTA, Mexico agreed to permit North American banks to establish locally-incorporated subsidiaries and then extended the opening to banks from all OECD-member countries. There are 28 of these affiliates and they represent about 4% of banking system assets. The NAFTA treaty provides that individual affiliates may not account for more than 1.5% of banking system assets and that the total across all affiliates may not exceed 25% of banking system assets. (The NAFTA restrictions expire in 2000.)

After the tequila crisis, the Mexican government permitted foreign banks to take majority equity positions in some domestic banks; the NAFTA treaty restrictions do not apply in these cases. As of the end of 1999 foreign banks had majority stakes in three of the 10 multibancos, held options to acquire majority stakes in two, had large minority stakes in two, and were organizing a recapitalization of one. No foreign bank was allowed at the time to control any Mexican bank whose book capital (at the time of acquisition) exceeded 6% of the banking system’s total book capital. This blocked foreigners from majority ownership of Mexico’s three largest banks: Banamex, Bancomer and Serfin. (As of 1999 HSBC owned 20% of Serfin, and Bank of Montreal 16% of Bancomer.) The foreign-controlled domestic banks accounted for 18% of total assets; together with the affiliates’ 4%, foreign banks controlled 22% of total assets. (Foreign banks also had stakes in excess of 15% but less than a majority share in banks that represented 43% of banking system assets.) Foreign control of local banks is a politically sensitive topic in Mexico.

5.3 The Spanish Banks

BBV became the first Spanish entrant in commercial banking when it took an interest in Probursa in 1991 at the invitation of its owners. The Mexican investor group that bought Probursa in the 1980s quickly realized the skill deficit they were facing. BBV took an initial 2% stake and brought in 10 managers from Spain to provide expertise in

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all areas. BBV has built up its a stake to 70% as the government eased its entry regulations. BBV Probursa also acquired the assets, deposits and branches of Banco Oriente and Banco Cremi and now has 335 branches and 5,087 staff in Mexico.

BCH became the second entrant when it took a stake in Grupo Financiero Bital in 1992; its affiliate Banco Commercial Portugués took a similar stake. Bital owns Banco Internacional de México and had also acquired Banco Atlántico from the government. Santander was the third Spanish bank to enter retail banking. Santander Investment had entered Mexico in 1989, and Santander had established an affiliate in 1994. However the push in retail banking came in 1997 when Santander acquired 60% of InverMéxico, which included brokerage and insurance companies as well as Banco Mexicano with its 265 branches, 6,300 employees, and a 4.9% deposit market share. Santander merged Banco Mexicano with its ”foreign affiliate” to create Banco Santander Mexicano after it wrote off Mexicano’s capital and transferred its loans to the deposit guarantee fund.

As they did in Chile and Argentina, the Spanish banks introduced new competition on the liability side of the Mexican market. BBV’s Mexican slogan is: Una nueva cultura bancaria—A new banking culture. All three are trying to build a strong depositor base, but have pursued slightly different strategies. In late 1996, BBV introduced its Libretón, a move that Santander mimicked with its Supercuenta. Within a few months BBV could boast 460,000 new accounts and Santander 240,000. (BBV also raised interest rates for depositors; as of the spring of 1998, BBV had 485,000 accounts and US$178 million in its Libretón accounts.) The regulatory authorities, preoccupied with all the problems in the banking system, never gave the innovation a second thought. Now local banks such as Banamex, Inverlat, and perhaps others have also introduced these lottery-linked accounts, which qualify for deposit insurance. Bital did not introduce lottery-linked accounts but instead has focused on service. It aggressively opened branches and its advertisements emphasized the ubiquity of its new branches. Bital also extended the traditional 9 a.m. to 1 p.m. bankers’ hours to 7 p.m. and introduced Saturday opening.

The Spanish banks have also contributed to the building of skills on the asset side of the market and in running a bank. Nationalization of the banking system destroyed commercial banking skills when the government forced the banks to hold 90% of their assets in the form of government bonds. Both BBV and Santander have plans to expand their branch network, although only within Mexico and not into the southwestern U.S. (Opening in the southwestern U.S. could perhaps allow them to tap into the lucrative market for immigrants’ remittances worth US$6 billion annually that Banamex and Bancomer control. However the banks face competition from non-banks that can provide the same service and they are concerned with the problem of deterring money- laundering.) Lastly, BBV and Santander have entered the market for pension funds, which the government transferred to management companies in 1997.

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6. Looking to the Future

The major Spanish banks have followed clearly different strategies in their approach to Latin America. Recently, Latin Finance (April 1998) quoted Mr. Ybarra as saying, “I admire Santander in some things, as I’m sure they admire us in others. We are both competitors in Spain as well as in Latin America, but it’s normal to have different strategies, and we are both doing well in Latin America.” As shown in Table 7, executives in Latin America believe Santander and Citibank to be the best banks in the region. Yet, it is not clear whether Citibank will meet the Spaniards’ challenge in the middle market segment or rather keep focusing on the upper segment. In Argentina, and especially in Brazil, BankBoston is focusing on upper-income customers.

Many analysts maintain that it is way too early to tell whether entering retail banking in Latin America was a good idea, let alone which approach was best. What is clear is that the Spanish banks have brought innovations and have shaken up what were cozy, stagnant markets. Longer-run, some observers worry about what will happen when returns and margins in Latin America fall to competitive levels. They fear a dismantling of the networks that the Spanish and other foreign banks have been building. Moreover, as the fallout from the Asian crisis finally hit Latin America in the summer of 1998, the shares of the foreign banks operating in the region fell between 30 and 50%, although they recovered during 1999. Will the sun once again set on the dominions of Spain after the easy money has been made?

In early 1999 Santander and BCH announced their merger into Banco Santander Central Hispano (BSCH). As of June 1999, BSCH was the largest bank of the “euro zone” in terms of market capitalization (37 billion euros), followed by Deutsche Bank (32 billion), ABN Amro (30 billion), and BBV (29 billion). BSCH was the fourth largest if U.K. banks were included (Actualidad Económica, 28 June-4 July 1999, pp. 90-91). In October 1999 BBV reacted by taking over Argentaria—the previously state-owned bank—to form BBVA. The two banks have also further strengthened their presence in Mexico. In 2000 BSCH took a controlling stake in Serfín, and BBVA in Bancomer. Presently, BBVA-Bancomer is the largest bank in Mexico, followed by Banamex (still Mexican owned) and BSCH-Serfín. BBVA-Bancomer’s next plan is to create a bank in the United States aimed at the Hispanic population. The ranking of the largest banks in Latin America as a whole is now dominated by BSCH (9.4% of assets) and BBVA (7.5%), followed by Brazil’s Bradesco (4.9%), Banamex (3.4%), and BankBoston (3.3%). The two Spanish megabanks are now in the process of eliminating redundancies in their Latin American operations and further expanding into a variety of financial services, including pension funds, mutual funds, and electronic banking. BSCH has acquired patagon.com, Latin America’s largest financial portal, while BBVA has formed a strategic alliance with Telefónica of Spain, cemented by cross shareholdings. Telefónica is the majority owner of Terra Networks, the firm which acquired Lycos, the third largest portal in the U.S. BBVA has taken a stake in First-e, the Irish electronic bank. Do the new conquistadors know any limits to their expansion?

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7. Questions for Class Discussion 1. Why are the Spanish banks so keen to enter Latin American markets? Why

weren’t banks from other countries as aggressive as the Spanish banks?

2. What capabilities or know-how enabled the Spaniards to succeed in the region, at least thus far? Who are the Spanish banks competing against?

3. Which market—Argentina, Chile, Mexico—is most attractive from the point of view of a foreign bank? What entry modes did the Spanish banks—Santander, BBV, BCH—use? Did each bank choose the same entry mode for all markets? Why?

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Table 1: Acquisitions of Banks in Latin America since 1982 by Spanish Banks

Country Acquirer Bank Acquired % Stake Acquisition Date

Purchase Price US$million

Argentina Santander Banco Río de la Plata 35.1 � 1997-98 888 23.93 1998-20012 131

BBV Banco de Crédito Argentino 71.8 � 100 1997 466 Banco Francés del Río de la Plata 35 � 52 1996 300

OHCH1 Banco Tornquist 100 1996 75 Bolivia OHCH Banco Santa Cruz 100 1998 168

BBV Banco Industrial 19982

Brazil Santander Banco Noroeste 80 1997 500 Banco Geral do Comercio 50.1 1997 202

BBV Banco Excel Economico 55 1998 450 Chile Santander Banco Osorno y La Unión 51 1996 496

Banco Español Chile 100 1982 50 BBV Banco Hipotecario de Fomento (BHIF) 55 1998 352 OHCH Banco Santiago 43 1995 252

Colombia Santander Banco Comercial Antioqueño 55 1997 146 BBV Banco Ganadero 44 � 59 1996 328

Banco Nacional de Commercio 19982

Mexico Santander Grupo Financiero InverMéxico � 60.8 1997 502 BBV Banco Oriente & Banco Cremi 100 1996 21

Probursa 2 � 70 1991-1996 480 BCH GFBital 8.3 1992 105

Paraguay OHCH Banco Asunción Peru Santander Banco Interandino & Intervalores 100 1995 45

Banco Mercantil 100 1995 44 BBV Banco Continental 60 1996 256 OHCH Banco del Sur 49.2 1995 108

Puerto Rico Santander Banco Central Hispano Puerto Rico 99.3 1996 289 Caguas Central Federal Savings Bank 100 1990 51 Bayamón Federal Savings 100 1989 n.a. Federal Savings Bank of Puerto Rico 100 1987 102 Banco Crédito y Ahorro Ponceño 100 1978 361 First National Bank of Puerto Rico 100 1976 n.a.

Uruguay Santander Banco del Litoral Asociados 100 1982 n.a. BBV Banco Pan de Azúcar 19983

Venezuela Santander Banco de Venezuela 93.3 1996 351 BBV Banco Provincial 40 1996 300

Note: 1) OHCH is a holding company jointly owned by Banco Central Hispano (BCH) and the Luksic family through its holding in Banco O’Higgins. 2) Announced phased purchase that will raise ownership to 56.5% by 2001. 3) Under negotiation at time of writing.

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Table 2: Acquisitions of Banks in Latin America since 1982 by Foreign (non-Spanish) Banks

Country Acquirer Bank Acquired % Stake Acquisition Date Purchase Price US$mn

Argentina HSBC Banco Roberts 70 1997 668 Bank of Nova Scotia Banco Quilmes 70 1997 188

Banco Quilmes 25 1995 57 Citibank Banco Mayo Cooperativo 1998

Brazil HSBC Bamerindus 100 1997 940 Chile HSBC Banco Santiago 7 1997 144 Mexico HSBC Banco Serfin 20 1997 300

JP Morgan Banco Serfin 8 Bank of Nova Scotia GFInverlat 55 1992-96 106+ Bank of Montréal GFBancomer 16 1996 475 Citibank Confia 100 1997 45 B. Comm. Portugues Bital 8

Peru HSBC Banco Sur 10 1997 16 Bank of Nova Scotia Sudamericano 25 1997 14

Table 3: Who is Where

Citibank BankBoston Santander BBV BCH HSBC Nova Scotia

Argentina S♣ S♣ A � S♣ S♣ S*♣ S♣ S♣ Bolivia B S S*♣ Brazil S S S♣ S♣ S♣ Chile B B S♣ S♣ JV♣ A A Colombia S S S♣ A � S♣ A/S? Ecuador B Mexico B & S♣ S S♣ S♣ A* A A Panama B B B&S S B Paraguay S A/S? Peru B B S♣ A A* A A Puerto Rico B S♣ S♣ Uruguay B B S S S/B? Venezuela B B&S♣ A♣ B

Notes: S—Subsidiary. B—Branch. A—Affiliate. JV—Joint Venture. ♣ Includes acquisition of local banks. * Owned by the O’Higgins Central Hispano (OHCH) joint venture.

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Table 4: Background Statistics on Spain, Argentina, Chile, and Mexico, circa 1996

Spain Argentina Chile Mexico Population (million) 39 33 16 95 GDP per capita (international $) 14,520 8,310 9,520 6,400 Annual GDP growth rate 1990-95 (%) 1.1 5.7 7.3 1.1 Unemployment (%) 22 17.2 5.4 5.5 Consumer price index (annual %) 3.6 0.1 6.6 34.4 Consumer price index (average annual % 1990-96) 5.0 16 14 19

Annual population growth (%) 0.14 1.4 1.7 1.8 Illiteracy (% population aged 15 or more) 4.6 3.8 4.8 10 Life expectancy at birth, females (years) 81 76 78 75 Telephones (per 1,000 population) 385 160 132 96 Female labor force (% of total) 36 31 32.1 32 Income inequality (top 20% over bottom 20%) 4.6 … 7.4 14.2 Newspaper circulation (per 1,000) 104 144 456 116 Population in largest metropolitan area (% of total) 7.4 33 37 17 Political system Parliamentary

monarchy Presidential

republic Presidential

republic

External debt (% of GNP) … 32 39 46 Trade (% of GDP) 47 16 54 48 Most important export Automobiles Foodstuffs Minerals Automobiles Main trading partners European

Union (EU), USA

Brazil, EU, USA

USA, Japan, Brazil

USA

Inward foreign direct investment (% of GDP) 18 8.7 23 26 Outward foreign direct investment (% of GDP) 6.0 0.2 4.1 1.1 Membership in trade blocs EU Mercosur Mercosur

affiliate NAFTA

National currency Peseta Peso Peso Peso Average exchange rate (local currency per US$) 150 1.00 450 8.5 Exchange rate regime European

Monetary Union

Currency board

Adjusted according to a

set of indicators

Free floating

Gross domestic savings (% of GDP) 22 18 29 19 Stock market capitalization (% GNP) 43 15 94 31

Sources: Economist Intelligence Unit; International Finance Corporation; United Nations; World Bank.

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Table 5: Comparative Banking Statistics of Selected Emerging and Developed Economies

Bank Deposits/GDP1

Bank share in financial

intermediation2

Share of state-owned

banks3

Share of foreign-owned

banks5

Non-interest operating

costs6

Net interest margins7

Non- performing

loans8

Argentina 24 98 36 22 8.5 9.2 11 Brazil 21 97 48 9 6.0 6.8 6 Chile 21 62 14 21 3.0 6.1 1 Colombia 9 86 23 4 7.3 8.3 3 Mexico 33 87 28 1 3.9 5.1 15

Venezuela 13 92 30 1 5.7 8.1 18 India 3 80 87 7 2.6 2.9 209

Hong Kong 8 … 0 784 1.5 2.2 3 Korea 5 38 13 5 1.7 2.1 1 Singapore 6 71 0 80 1.4 1.6 …

Taiwan 6 80 57 5 1.3 2.0 3 Indonesia 8 91 48 4 2.4 3.3 11 Malaysia 9 64 8 16 1.6 3.0 8 Thailand 7 75 7 7 1.9 3.7 8

United States 4 23 0 22 3.7 3.7 2 Japan 3 79 0 2 0.8 1.1 3 Germany 5 77 504 4 1.1 1.4 … Spain … … … 2 … … 4

Notes: 1) Average percentage over the period 1980-95. 2) Assets as a percentage of the assets of banks and non-bank financial institutions in 1994. 3) Percentage share of assets in 1994. 4) Not strictly comparable. 5) Percentage share of assets; date not given. 6) As a percent of total assets, averaged over 1990-94. 7) As a percent of total assets, averaged over 1990-94. 8) Average 1994-95; these figures may not be strictly comparable. 9) Relates only to public sector banks.

Source: M. Goldstein and P. Turner, “Banking Crises in Emerging Economies: Origins and Policy Options.” Bank for International Settlements Economic Papers No. 46 (1996).

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Table 6: Characteristics of the Leading Spanish Financial Institutions, 1997

Santandera BBV BCH Argentaria La Caixa Caja Madrid Popular Assets (bn$) 171 139 77 77 66 41 23 Net loans (bn$) 72 57 39 42 32 22 16 Equity (bn$) 4 5 3 4 3 3 2 Market shares (in Spain): Private sector loans 8.8 9.6 7.6 7.5 7.4 5.6 4.4 Private sector deposits 8.9 10.0 7.6 5.1 9.6 6.3 3.7 Mutual funds 16.3 12.8 6.7 6.0 8.0 3.8 3.7 Profitability: Net interest income/ATA 2.3 3.0 2.7 1.9 2.3 3.0 4.8 Operating expenses/ATA 2.6 2.8 2.5 1.7 2.5 2.1 3.1 ROA (%) 0.7 1.0 0.6 0.6 1.0 0.8 2.0 ROE (%) 19 18 11 11 18 11 23 Branches: 5,288 4,349 2,871 1,794 3,612 1,452 1,936 Spain 3,842 2,829 2,659 1,734 3,612 1,452 1,936 Abroad 1,446 1,520 212 60 0 0 0 Employees: 72,740 60,282 27,930 15,354 15,851 9,898 11,742

Note: a Includes Banesto. Source: J.P. Morgan.

Table 7: Best Latin American Banks

A poll of 500 Latin American executives showed Citibank and Santander neck-and-neck in response to the question, “Which financial institution will be the leading bank in Latin America?” (Answers in percentages.)

Citibank Santander BBV Others

Argentina 54 13 13 20 Brazil 37 27 7 27 Chile 31 54 6 19 Colombia 30 40 19 11 Mexico 36 41 16 7 Venezuela 31 41 20 8

Average 37 36 13 14

Source: AméricaEconomía, May 1998.

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