Sniffing for bargains in Latin America

Spanish banks slowed their drive into Latin America in 1999 as margins narrowed at home. But with the end of the regional recession in sight and an expected boom in the Spanish economy, the Spaniards will soon be on the hunt again.

Predictions are that Spain's two biggest banks, Banco Santander

Central Hispano and Banco Bilbao Vizcaya, will soon be back in the fray. Up to early 1990, the two banks made major strides in to Latin America. BBV targeted retail banks, sealing deals with Banco Provincial in Venezuela and Banco Ganadero in Colombia, as well as with two Argentine banks, to form Banco Frances. .

Banco Santander, meanwhile, targeted the investment banks. It now has holdings in Mexico, Argentina, Brazil, Colombia, Chile, Peru, and Venezuela.And the war chest that has funded its expansionist attempts in the past is now deeper than ever. In November last year the bank announced net attributable profit for the third quarter of $1.23 billion-a 20% rise on the corresponding period in 1998.The bank also replenished its coffers last year with a Ptas221.6 billion preferential share issue and an Ptas83.2 billion subordinated bond issue.

In 1999 the banks briefly turned their backs on Latin America and locked horns over Europe. Banco Santander merged with BCH while BBV tied the knot with Argentaria. Banco Santander also acquired a 5% share in Soci6t6 G6n&ale of France and geared up to acquire Portuguese finance company Champalimaud. But Latin America has remained fertile ground for the Spaniards. Banco Santander's Latin American franchises earned it Ptas72.4 billion in profit in the first nine months of last year, up from Ptas;45.1 billion in the same period the previous year.

The liberalization and privatization processes which economies in Latin America are undergoing, and the need for capital to finance infrastructure projects are contributing to the massive increase in investments in the region. In 1998 Spanish companies made direct investments of Ptas1.8 trillion in Latin America-a year-on-year increase of 80%-consolidating Spain as the second-largest investor in the region after the United States.

Improved growth in Latin America is a big attraction for the Spaniards. The region is expected to grow 3.5-4% in the year 2000, according to Banco Interamericano de Desarrollo. Says Shipley: "Some of the Asian banks are even starting to buy into Latin American banks.They see them as an attractive opportunity." Foreign banks are showing particular interest in the Mercosur countries of Argentina, Brazil, Uruguay, and Paraguay as well as Mexico. Commercial banks are the main target.

Similarly, strong growth in the local Spanish market is likely to fuel the expansion of its banks this year. Spain's economy, along with that of Ireland, is Europe's top performer. In the third quarter of 1999 the Spanish economy grew 3.7% more than in the same period a year earlier and 3.6% more than in the second quarter of 1999, according to the National Statistics Institute.

Historical ties also give Spanish banks a leg up in Latin America. Steven Shipley, managing director of KPMG Barents in Virginia, says: "Culturally, they are more in-tuned, and they understand better the language differences and how to reach the market than some West European and North American banks that have invested there."

Latin America offers Spanish banks new distribution channels and access to new products. And, says Shipley, some local banks are a bargain, given their strong revenue growth, operating efficiencies and profitability, "as long as the Spanish banks are able either to structure a transaction that minimizes their exposure to bad debt holdings or to reach an agreement to transfer bad debt out of the institution before they acquire it."

Investing in Latin America's shaky banking sector is not without risk. "The biggest risk," says Shipley," is how you actually value the transaction.A big concern is the fragility of the banks in these economies. What is it that you really are buying?" Some Spanish banks are playing it safe, investing 50% or less in the Latin banks and settling for minority ownership. The rights of minority shareholders is also becoming an important issue in Latin America, where investor groups are agitating for legislative changes to protect their interests against multinational beneficiaries of privatizations and second-wave equity sales.

In some of the Latin American countries, governments are still trying to salvage the local banking systems. Late last year Mexico auctioned management of $2.5 billion of bad loans issued by the country's third-largest bank, Banca Serfin, ahead of the bank's sale by the government. Banorte, a large Mexican-owned bank, won the bidding for part of the loan portfolio of Serfin, which was taken over by the government in July last year. Banorte bid 2.58 billion pesos ($267 million) for a fouryear contract to administer the loans. It was not immediately clear how much it expected to recuperate. But BBV has already expressed interest in Serfin, which will be sold in the first half of this year.

The auction was the first by the Institute for the Protection of Bank Savings since it was set up in May last year to sort out the Mexican banking system. It launches a long-awaited drive to recoup some of the swelling costs of a five-year bailout of the banking system. The institute has projected that the cost of the rescue stands close to $90 billion, based on an expected recovery of 20% of the value of assets.

As desperate as some Latin American banks are for a foreign white knight, there is a discernible backlash against Spanish incursions in Latin America. Spanish banks are often portrayed as economic imperialists. Their reputation hasn't been helped by the deterioration of relations between Spain and Chile following the decision of a Spanish court to extradite former Chilean President Augusto Pinochet to face charges of human rights abuses.

Perhaps they'll be more welcoming to the Italians. Plans for a step-by-step merger between Italy's thirdlargest and Spain's second-largest banking groups began to take shape in December when the main shareholders of UniCredito Italiano bought a stake of just under 2% in Banco Bilbao Vizcaya Argentaria.

The operation, which bankers said was worth about E775 million ($794 million) and represented the biggest single shareholding in BBVA, marked the initial move toward a significant Italian stake in the Spanish group. The Spanish group will take the next step, buying a stake of about 13% in UniCredito, while the Italian bank is expected to buy a further shareholding of close to 10% in BBVA. The enlarged group, second in Spain in terms of total assets behind the BSCH group, has explicit-ambitions- of leadership in the "Latin" market-a concept embracing the Iberian peninsula, Latin America, and Italy.

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Banks Dominate

New Euro-Latino Exchange

Latibex, the first European market for Latin American stocks, was inaugurated in Madrid in December, with the listing of five- major com-_ panics based in Argentina, Brazil, Mexico, and Puerto Rico. Latibex is a joint venture between the Spanish and Latin American stock exchanges to allow shares in the region's leading companies to quote in one exchange in the common currency of the euro.

Already, the new market is dominated by Spanish-- Latin American banking stocks. The five companies that began trading in December were: Aracruz Celulosa of Brazil, BBV Probursa of Mexico, Banco Frances and Banco Rio de la Plata of Argentina, and Banco Santander of Puerto Rico. Their market capitalization is Eur7 billion.

Later, six other firms, based in Colombia, Chile, and Venezuela, will also be listed on Latibex, the only market for Latin American stocks traded in euros. The future market capitalization of all 11 companies will exceed Eur25 billion ($25.3 billion), or 7% of the Madrid stock exchange. In the long term the market could comprise 50 firms with an estimated market capitalization of around Eur200 billion.The electronic exchange will be supervised by the Spanish stock exchange authorities.