1
Foreign banks in Latin America
Manuel Galatas
Director, BBVA Asia
Financial Reforms in China and Latin America
Beijing, June 7th 2007
2
INDEX
1) Spanish banks lead foreign banking in Latin America
3) Foreign Banks Contributions to Latin America economy
2) Why to invest in Latin America? Bank’s point of view
4) Less hurdles in BBVA’s roadmap in Latin America
3
SPANISH BANKS ARE THE LEADERS IN FOREIGN BANKING IN LATIN AMERICA…
Source: BIS
Canada6%
France8%
Germany11%
UK8%
USA26%
Others19%
Netherlands3%
Japan16%
SPAIN3%
1990
2006UK
10%USA20%
France2%
Spain35%
Canada6%
Others12%Japan
2%
Nethe.9%
Germany4%
CONSOLIDATED CLAIMS OF REPORTING BANKS ON LATIN AMERICAN COUNTRIES:
4
The Spanish banks are the main
creditors in the seven
main economies of
the region
... IN ALL BIG COUNTRIES
Source: BIS
Distribution of foreign banks consolidated assets
0
20
40
60
80
100
ARG BRA CHI COL MEX PER VEN
Others
ITA
NET
UK
FRA
GER
EEUU
Spain
DEC 2006
5
BBVA INTERNATIONALIZATION
BBVA in 1995: a domestic and retail bank....BBVA in 1995: a domestic and retail bank....
The Group presence was extended to more than 35 The Group presence was extended to more than 35 countriescountries
More than 15000 millions of Euros were invested in More than 15000 millions of Euros were invested in Latin AmericaLatin America
More than 42 millions of clientsMore than 42 millions of clients
World leader in Project Finance and Trade FinanceWorld leader in Project Finance and Trade Finance
100.000 100.000 employees of more than 50 different employees of more than 50 different nationalitiesnationalities
BBVA in 2007: a Universal and International bankBBVA in 2007: a Universal and International bank
6
WORLD PRESENCE OF BBVA
Spain
USA
Mexico
North America
Europe
Asia
South America
PortugalItaly
United Kingdom
France
Belgium
Switzerland
Russia
Argentina
Colombia
UruguayChile
Panama
Peru
Dominican Rep.
Beijing
Singapur
Shangai
Japan
Bolivia
Puerto Rico
Brazil
Ecuador
KoreaTaiwan
ParaguayVenezuela
India
Australia
Caiman Islands
7
POSITION OF BBVA IN CHINA: A BREAKTHROUGH ALLIANCE
CNCB:
• Exclusive alliance• 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
Initial Investment
FINANCIAL INVESTMENT STRATEGIC INVESTMENT+
BBVA CITIC Group
CNCB(China)*
CIFH(HK)**
4,83%15,17%
15%
80%
57%
Total Investment: 1000 Million €*CNCB’s IPO on 29/04/2007
**CIFH listed in Hong Kong
Public listing28%
8
Market shareRanking
Argentina
Deposits
ColombiaChile
Ecuador
Paraguay
Market share
1º3º4º-
2º
Credits
Country Ranking
3º3º4º-
1ºPeru
Uruguay2º5º
2º5º
Venezuela 4º 4º
Market share
Pension Funds
Ranking
2º3º1º1º
-3º--
POSITION OF BBVA IN LATIN AMERICA
10,0%11,4%8,0%
-
15,1%
8,1%10,8%8,1%
-
20,0%24,6%9,1%
27,2%9,9%
10,3% 11,7%
18,7%16,4%31,1%87,6%
-26,2%
--
As of March 2007
Mexico 1º 1º 1º28,2% 27,9% 19,6%
9
Spain31%
America67%
Other2%
Spain50%
America48%
Other2%
BBVA, A EUROPEAN BANK WITH LATIN AMERICAN ORIENTATION
Branch geographical distribution(March 2007)
Employees geographical distribution(March 2007)
Business in Spain represents only 37% of the employees and 48% of the offices
Source: BBVA
10
INDEX
1) Spanish banks lead foreign banking in Latin America
3) Foreign Banks Contributions to Latin America economy
2) Why to invest in Latin America? Bank’s point of view
4) Less hurdles in BBVA’s roadmap in Latin America
11
WHY INVESTING IN EMERGING MARKETS ?
• Population growth
• Economic growth and changesPotential market growth
• Low banking penetration
Margin to improve
efficiency• Export of know-how, technology, new products…
Diversification • Low cyclical synchronization, less volatility of benefits
12
A DECLINING POPULATION IN EUROPE, BUT A GROWING TREND IN EMERGING COUNTRIES
The European population will not
increase in the next decades whereas
population will grow in the emerging
countries. The greater
proportion of prepared young population and
more will increase the
proportion of non-banked population. Source: WB & UN
Projections of population2010 2050 % var
Africa 1.032 1.937 2,5%Asia 4166 5.217 0,7%Europe 730 653 -0,2%Latinamerica 593 783 0,9%North-America 348 438 0,7%World 6.906 9.076 0,9%
Demographic structure 2005
East Asia & Pacific
Europe & Central
AsiaEMU Latin
AmericaSouthAsia World
0-14 24 20 16 30 33 2815-64 69 69 67 64 62 64
65 & more 7 12 18 6 5 7
13
IMPROVEMENT IN MACROECONOMIC BALANCES
Nominal stability and reduction of external disorders have caused a favorable macroeconomic environment
with more possibilities of economic growth
-7
-6
-5
-4
-3
-2
-1
0
1
2
Fiscal Balance (% GDP) Current Account Balance (% GDP)
1981-1990 1991-2002 2003-2006
Annual Average Fiscal and Current Account Balance
Source: BBVA
14
POTENTIAL GROWTH REMAINS HIGH
Macroeconomic achievements are impressive: orthodox monetary policy dominates the region.
Business cycles aside, potential growth in Latin
America is above the level
estimated for developed countries
Source: BBVA
Potential economic growth
2,32,8
3,2
4,0
0,0
1,5
3,0
4,5
EU Spain USA LatAm
15
LATIN AMERICA IS UNDER-BANCARIZED …
Banking assets / GDP(March 2007)
261,5%
96,8%
65,2%48,9% 43,4%
29,7% 27,5% 27,3%
SPAIN CHI BRA ARG COL VEN MX PER
Domestic credit to private sector (% GDP)
020406080
100120140160180200
UnitedStates
EuropeanMonetary
Union
East Asia &Pacific
MiddleEast &NorthAfrica
Europe &CentralAsia
LatinAmerica &Caribbean
World
Source: World Bank & BBVA
16
…THE BANCARIZATION IS ALREADY INCREASING
Credit has displayed a remarkable recovery since 2004, sustained by the favourable economic environment and
the soundness of banking systems in the region.
Source: BBVA
-15
-10
-5
0
5
10
15
20
25
jan-0
1ap
r-01
jul-0
1oc
t-01
jan-0
2ap
r-02
jul-0
2oc
t-02
jan-0
3ap
r-03
jul-0
3oc
t-03
jan-0
4ap
r-04
jul-0
4oc
t-04
jan-0
5ap
r-05
jul-0
5oc
t-05
jan-0
6ap
r-06
jul-0
6Source: FMI ; *Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
Private sector credit in Latin America* (nominal yoy growth)
-15
-10
-5
0
5
10
15
20
25
jan-0
1ap
r-01
jul-0
1oc
t-01
jan-0
2ap
r-02
jul-0
2oc
t-02
jan-0
3ap
r-03
jul-0
3oc
t-03
jan-0
4ap
r-04
jul-0
4oc
t-04
jan-0
5ap
r-05
jul-0
5oc
t-05
jan-0
6ap
r-06
jul-0
6Source: FMI ; *Argentina, Brazil, Chile, Colombia, Mexico, Peru and Venezuela
Private sector credit in Latin America* (nominal yoy growth)
Credit Growth (YOY %)
-20
0
20
40
60
80
100
Arge
ntina Braz
il
Chile
Colom
bia
Mexic
o
Peru
Vene
zuela Lata
m
2004 2005 2006Q3
Source: BBVA from IMF data
17
“ASSET-SEEKING” & “ASSET EXPLOITING”: REASONS TO STAY IN LATIN AMERICA
The Latin American banking systems present higher
revenues than the developed countries
Latin American banking systems have a wide margin to improve their efficiency
Expansion in Latin America is an opportunity
to increase profitability
Source: BBVA based in Moody's
Argentina 4,15 5,55Brazil 5,44 8,58Chile 2,75 4,85Colombia 6,94 9,01Mexico* 4,98 7,18Peru 5,11 8,30Venezuela 9,08 14,37Spain 1,60 2,70
Average 1997-2006 (% assets)
Operating expenses
Netrevenues
* 1997-2004
18
LATIN AMERICA: A BETTER OPTION TO DIVERSIFY THE RISK
The region a good option to diversify,
because the synchronization
between European and Latin American stocks exchanges is
smallSource: BBVA
Correlation between Eurostoxx and Latin American stock exchange
-0,8 -0,6 -0,4 -0,2 - 0,2 0,4 0,6 0,8 1,0
ene-
98jul
-98
ene-
99jul
-99
ene-
00jul
-00
ene-
01jul
-01
ene-
02jul
-02
ene-
03jul
-03
ene-
04jul
-04
ene-
05jul
-05
ene-
06jul
-06
ene-
07
México Chile Brasil
-4
-2
0
2
4
6
8
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
(f)20
08(f)
Spain Latin America
Real GDP Growth (in %)
Source: BBVA; (f) forecast
Correlation=-0,037
Business cycles in Latin America and Spain are not correlated. On the
contrary, the correlation with Europe has
increased.
19
OTHER MICROECONOMIC FACTORS
Experience
Competition
Non-economicfactors
Why the Spanish Banks?
Solvency
Sharing the same culture and language helps the know-how to be transferred easier and allows the implementation of technological common platforms.
In the Spanish financial system there is a strong competition. Pressure on
margins enhances the seeking of more profitable businesses.
Spanish banks have changed their exposition towards Latin America
20
INDEX
1) Spanish banks lead foreign banking in Latin America
3) Foreign Banks Contributions to Latin America economy
2) Why to invest in Latin America? Bank’s point of view
4) Less hurdles in BBVA’s roadmap in Latin America
21
FOREIGN BANK CONTRIBUTIONS
EFFICIENCY
Increasing in bank
competitionLower cost of
credit
New financial products
Improvement in banking system
efficiency
ECONOMIC VULNERABILIT
Y
Increase in the financing in
local currency
Less probability of credit crunch
Import of risk management
systems
Improvement in bank soundness
22
1. EFFECTS IN EFFICIENCY: MORE BANK COMPETITION AND LOWER COST OF CREDIT
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.
Banking Spreads
0
2
4
6
8
10
12
14
16
Peru Colombia México Venezuela Chile Argentina
2000 2005
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.
23
1. EFFECTS IN EFFICIENCY: EFFICIENCY HAS IMPROVED IN ALL SYSTEMS
Except in Argentina, the ratio of Operating expenses/Net revenues has shown a tendency to be reduced.
Source: Moody`s & BBVA
Efficiency ratio
40
50
60
70
80
90
Arge
ntin
a
Bras
il
Chile
Colo
mbi
a
Méx
ico*
Perú
Vene
zuel
a
(Operating expenses / Net revenues)
dic-99 jun-06
* 2004
24
2. EFFECTS IN ECONOMY VULNERABILITY: THE EXPERIENCE OF SPANISH BANKS IN CONTROLLING MACROECONOMIC RISKS
The Spanish banks are used to operate
in volatile environments because the
performance of the Spanish economy twenty years ago
was not so different from other emerging
markets.
Source: BBVA based in FMI
Macroeconomic evolution
2.9
5.4
-1.6
2.8
7.7
-1.6
-4
-2
0
2
4
6
8
10
GDP Inflation
Current account
Spain 87-96 LATAM 97-06
25
2. EFFECTS IN VULNERABILITY: LESS VULNERABLE BANKING SYSTEMS
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.
BIS RATIO: Bank regulatory capital to risk-weighted assets
Default rates in Latin America have fallen since 2002, and are currently lower than in emerging Asia.
BI S Ratio 2006
05
101520253035
Urug
uay
Braz
il
Peru
Chile
Colom
bia
Mex
ico
Arge
ntina
Indo
nesia
Filip
inas
Sing
apor
e
Thail
and
Kore
a
Mala
ysia
India
LATAM = 16,2 ASIA = 15
26
2. EFFECTS IN ECONOMIC VULNERABILITY: MORE BANK FINANCING IN LOCAL CURRENCY
Financing by local subsidiaries has displaced the financing in USD,
reducing currency
mismatching.
Source: BIS
Foreign financing locally granted in local currency (%rest foreign financing)
01020304050607080
ARG BRA CHI COL MEX PER VEN LAC
20061995
27
2. EFFECTS IN ECONOMIC VULNERABILITY: LONGER TERMS IN LOCAL CURRENCY MARKETS
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
Peru: Sovereign Bonds Yield Curve
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1 da
y
0.5
year
1 ye
ar
2 ye
ars
3 ye
ars
4 ye
ars
5 ye
ars
9 ye
ars
10 ye
ars
11 ye
ars
15 ye
ars
20 ye
ars
Dec 2005 Dec 2006 May 28, 2007
Inte
rest
rat
e
Maturity
28
INDEX
1) Spanish banks lead foreign banking in Latin America
3) Foreign Banks Contributions to Latin America economy
2) Why to invest in Latin America? Bank’s point of view
4) Less hurdles in BBVA’s roadmap in Latin America
29
BBVA has faced periods of high macroeconomic and political instability in the past,...
2002 132003 82004 62005 52006 11
Number ofelections
1989 171990 141991 31992 01993 101994 181995 61996 81997 71998 151999 122000 112001 42002 132003 82004 62005 52006 11
0200400600800
1.0001.2001.4001.6001.8002.000
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Sovereign spreads in Latin America (EMBI+)Basis points
Source: JPMorgan
30
BBVA has faced periods of high macroeconomic and political instability in the past,...
Frieden, Ghezzi& Stein, 2001
0.940.960.981.00
1.021.041.061.081.101.121.141.16
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Source: Frieden, Ghezzi
0.940.960.981.00
1.021.041.061.081.101.121.141.16
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Months
Exchangeratedepreciation andGovernment changes in Latin America (1970-2000)
Frieden, Ghezzi& Stein, 2001
0.940.960.981.00
1.021.041.061.081.101.121.141.16
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Source: Frieden, Ghezzi
0.940.960.981.00
1.021.041.061.081.101.121.141.16
-9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9
Months
Exchangeratedepreciation andGovernment changes in Latin America (1970-2000)
31
...but now there are better economic and political fundamentals
150170190210230250270290310330
oct-0
5no
v-05
dec-
05jan
-06
feb-0
6ma
r-06
apr-0
6ma
y-06
jun-0
6jul
-06
aug-
06se
p-06
oct-0
6no
v-06
dec-
06jan
-07
feb-0
7ma
r-07
apr-0
7
Argentina(Pa)
EMBI+ (b.p.) and elections in Latin America
Source: BBVA and J PMorgan
Venezuela(Pa)
Chile(1st round Pr
and Pa)
Bolivia (Pr)
Chile(2nd round Pr)
Colombia (Pa)
Peru(1st round Pr
and Pa)
Colombia(Pr)
Peru(2nd round Pr)
Mexico(Pr)
Brazil(1st round Pr
and Pa)
(Pr) Presidential(Pa) Parliamentary
Brazil(2nd round Pr)
150170190210230250270290310330
oct-0
5no
v-05
dec-
05jan
-06
feb-0
6ma
r-06
apr-0
6ma
y-06
jun-0
6jul
-06
aug-
06se
p-06
oct-0
6no
v-06
dec-
06jan
-07
feb-0
7ma
r-07
apr-0
7
Argentina(Pa)
EMBI+ (b.p.) and elections in Latin America
Source: BBVA and J PMorgan
Venezuela(Pa)
Chile(1st round Pr
and Pa)
Bolivia (Pr)
Chile(2nd round Pr)
Colombia (Pa)
Peru(1st round Pr
and Pa)
Colombia(Pr)
Peru(2nd round Pr)
Mexico(Pr)
Brazil(1st round Pr
and Pa)
(Pr) Presidential(Pa) Parliamentary
Brazil(2nd round Pr)
32
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.
33
Foreign banks in Latin America
Manuel Galatas
Director, BBVA Asia
Financial Reforms in China and Latin America
Beijing, June 7th 2007