Banks To Feel Correa's Pinch
BMI View: We believe that a n unpredictable and unfavourable regulatory environment under President Rafael Correa, who is likely to be re-elected in Februa ry 2013, will see Ecuador ' s banking sector continue to underperform over the coming quarters . Indeed, a recent tax increase on bank s to finance social spending will weigh on the sector's profitability , and is a reflection of the interventionist policies under Correa ' s administration that banks will continue to face over the coming years .
W ith depositors as percentage of GDP more than doubling over the past five years to reach nearly 50%, and total borrowers growing at a similar pace, the growth potential of Ecuador ' s banking sector is significant. However, we believe that an unfavourab le regulatory environment under President Rafael Correa will contin ue to undermine banks' performance. Indeed, Ecuador ranks fourth worst in Latin America in our proprietary business environment rating (scoring 38.4 out of 100 ), largely due to ongoing government intervention in the economy and high operating risk s . With President Correa likely to be re-elected in February 2013 by a decisive majority ( see our online service, November 14 2012 'Citizens Revolution To Further Erode Investment' ), we believe that banks' profitability will remain well below potential over the coming years due to interventionist policies .
|Banking Potential Will Be Undermined By Unfavourable Regulation|
|Ecuador - Total Depositors And Borrowers|
Playing Robin Hood With Banks
In the latest example of government intervention in the banking sector, on December 4 Ecuador's legislature approved a bill put forward by President Correa that introduces a 3% tax on banks' revenue and eliminates a n exemption , effectively increasing bank's income tax rate from 13% to 23% as of January 2013. This rev enue will be used to finance the government's 'Human Development Stipend', a monthly cash transfer to the poor, but the measure will squeeze banks' profit margins and reduce lending capacity as a result . The legislation was approved with 81 votes in favour and only 2 against, and we therefore believe there is a strong mandate for further government intervention in the banking sector under Correa's next presidential term.
Government Intervention Could Accelerate As Growth Slows
Moreover, w e believe that slower growth in Ecuador, combined with weaker oil prices over the coming yea rs, could see President Rafael Correa ' s government further intervene in the banking sector in order maintain a high level of social spending - a major platform of his re-election . Ecuador ' s economy relies heavily on oil exports, which account for more than half of total exports and are a main source of fiscal revenue via state-run oil company Petroecuador . However, with the price of the OPEC oil basket set to unwi nd from its 20 11/12 average US$107.5/bbl level - our Oil & Gas forecasts the price to fall by 7.4% to US99.1 in 2013 - President Rafael Correa will need to secure alternate sources of to continue financing its social transfers. With the recent tax on banks setting a strong precedent, Correa's administration has demonstrated its willingness to tap into banking sector revenues, and we cannot rule out further intervention over the coming years.
|Banks Could Continue To Be Used To Fill The Growth Gap|
|Ecuador - Real GDP Growth And OPEC Oil Basket Price|
Furthermore, we believe that w ea ker oil prices will drive slower real GDP growth in Ecuador, which we f orecast to decelerate sharply from 8.0% in 2011 to just 3.6% in 2014, characterised by slower private cons umption growth . This in turn will weigh on banks' asset growth, which has already slowed from 19.2% year-on-year (y-o-y) in Janu ary to 15.7% y-o-y in July, largely driven by slower credit growth. In addition, a weaker consumer could also motivate more stringent regulations that push banks to increase lend ing in order to bolster growth . Regulators have taken action in the past by substantially reducing the interest rate ceiling on consumer loans , from 21.2% in January 2008 to 16.3% in December 2012, and we could see this ceiling fall even further as the government seeks a lternate ways to foster growth, ultimately weighing on banks ' revenues.
|Boosting Credit Growth Could Increase Consumer NPLs|
|Ecuador - Non-Performing-Loans (NPLs) By Type, % of total loans|
However, with consumer loans already posting relatively high default rates , an attempt to further stimulate consumer credit growth see non-performing loans (NPLS) head even higher and further deteriorate banks' assets . Indeed, while overall NPLs remain stable around 4.0% of total loans, consumer NPLs have ticked up from 3.4% in Decembe r 2011 to 5.1% in July 2012 . Moreover, the government intervened earlier in 2012, by passing a mortgage law that allows borrowers to default on loans by returning the underlying assets of the loans to the banks (autos, houses) . If NPLs continue to increase, other regulations which attempt to reduce consumers' debt burden could be implemented in the near term , at the cost of lower banking sector revenue . Given the large risks of operating in Ecuador's banking sector, we highlight the growing potential of regional peers such as Mexico and Colombia, both which are characterised by a favourable business environment and attractive consumer story ( see, ' Regional Banking Sector Outlook: Picking The Winners ' , October 24 2012 ).