“highly-rated” public banks around the world: what makes them stand out? - fira’s experience -...
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““Highly-Rated” Public Banks Around The World: Highly-Rated” Public Banks Around The World: What Makes Them Stand Out?What Makes Them Stand Out?
- - FIRA’s ExperienceFIRA’s Experience - -
February 25, 2005February 25, 2005
Presentation prepared by:
Francisco Meré
1. Evolution to success
2. Case studies on financial innovation
3. Final remarks
Agenda
• FIRA´s loan portfolio was heavily subsidized
• Original assumption was that enhanced funding would encourage an increase in credit to farming
• Loans were concentrated in the primary sector (commodities)
FIRA is a second-tier trust fund created by the Mexican government within the Central Bank 50 years ago
• Bank Privatization
• Financial Market Liberalization
• Market Oriented Policies in Ag.
• Tequila crisis
• Lending to productive sector practically disappeared
• FIRA ´s products not attractive to banks
• Agricultural commodities challenged by trade liberalization, thus risk perception increased
• From development banking to banking development
1954 – Early 1990
Early 1990 - 1998
1999 - Today
Restructuring and a turnaround strategy were needed in order to survive in a new environment
Value-added products
Client-driven
Evolution in focus
Agriculture Fin. Sys.dev.
From market players to market makers
Investment banking
Corporate governance realignment
•Downsizing
•Process-driven design
•Performance-based reward
•Internal control fostering
•Staff professionalization
Subsidy-based operation
Product-driven
A comprehensive approach was used for implementing the new model
Products Channels Organization
• Elimination of red-tape
• Value added for clients (users & distribution network)
• Improved targeting of market-friendly subsidies
• Smart subsidies
• Markets development
• Banking diversification
• New intermediaries
• Strategic alliances
• Reorganization to eliminate conflicts of interest
• Adoption of a process-oriented organization
• Corporate Governance & Internal Control strengthening
• Performance-based employee rewards
• Cost-cutting strategy
Loan Portfolio Composition(Percentage)
NBFI3%
BBVA16%
HSBC14%
Bajío14%
Santander Serfin7%
Scotiabank Inverlat7% Other Banks
20%
Banorte19%
3 non bank banks
2 Factoring companies
4 Leasing companies
1 Warehouse
-486,0
588,0638,0
324,0
112,020,0
-164,0
-600
-400
-200
0
200
400
600
800
1998 1999 2000 2001 2002 2003 2004
4.124
3.327 2.649
2.928 2.185
1.800 1.632
1.848
2.265 2.234
1.385
1.018846
824
791
599
541
0
500
1.000
1.500
2.000
2.500
3.000
3.500
4.000
4.500
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
With our new approach, FIRA has achieved higher private sector engagement (double digit growth for six consecutive years)
Commercial banking Lending and Lending to low income producers
Change in credit stock by commercial banks using FIRA´s funds
CAGR 16.7% 1998-2004
CAGR 17% 1998-2004
Interest rate subsidies Million USD
2001 2002 2003 2004
Subsidies 82 83 54 50
As a % of subsidized loan portfolio
5.4 4.8 2.7 2.3
As a % of total loan portfolio
3.5 3.2 1.9 1.4
Source: FIRA. All figures in million usd
1. Evolution to success
2. Case studies on financial innovation
3. Final remarks
Agenda
Gradual phase-out of interest rate subsidies has been coupled with the development of innovative financial solutions through our new
investment banking practice
Value chain integration
Value creation for participants (income )
Development of analytical capabilities for financial
intermediaries
Financial market development/lower
transation cost
Examples
FIRA’s structured finance model offers value to agribusiness community and supports institutional development in the financial system
Before FIRA’s financial innovation, shrimp producers were using costly suppliers´ credit
Feed companiesFeed companies
Financial schemes before structured credit :
Shrimp producers
Shrimp producers
50% cash 50% 7 month
credit
Ocean GardenOcean Garden
Shrimp producers
Shrimp producers
Feed delivery
Result:
•High borrowing cost to shrimp producers
•Liquidity constraints to OG and suppliers
•Thus limitations to industry growth
Working capital loans
Future delivery of shrimp
Mexico exports US$264.1 million of frozen shrimps per year to the US; this industry employs over 176,000 persons.
• Profiting from successful experiences in other sectors, FIRA designed a securitization of
account receivables (working capital loans for shrimp producers) that was privately placed
by FIRA among the banking sector
• FIRA provided enhancement (with a low VaR) to provide confort to investors
In 2003, FIRA acted as structuring and distribution agent for a structured finance facility that helped to overcome limitation for growth and developed
new financial markets
SPV
INVESTOR
1. Supply agmt.
2. Loan
Transfer of rights
Debt issueFunding and partial enhancement
1. Senior tranche
2. Junior tranche with cash collateral sinking fund
Ships and firms
• Shrimp producers obtained a 30% discount in price of feed (which
accounts for 70% of COGS)
• Suppliers and OG freed-up their balance sheets and reduced their
credit exposure
• A new investment opportunity with low VaR, low transaction cost and
high RAROC was offered to FI
• FIRA contributed to financial system development
Development Financial Institutions are able to foster development with a market approach
• Alliance with world-class partners, with right expertise
• Warehousing sector development
• Creation of risk assessment capabilities in financial sector
• Broad acceptance of structure
• Low VaR linked to price of underlying commodity
• Commodities such as sugar, corn, wheat, sorghum, shrimp and live cattle
• Portfolio has accounted for 10% of total loans
Structuring of an ABS financing mechanism for commodity inventory financing has been a key factor for financial innovation as well as for market
and institutional development
ServicerRepo of CD Other Investors
(Rabobank, Deutsche bank)
Portfolio sale
Mexican Banks
Credit derivativeOTC hedge
Warehouse company
FIRA’s incursion in the derivatives market allows it to offer market risk hedging products to small producers and to improve FIRA’s portfolio yields
Source: FIRA
• FIRA trades in the OTC market interest rate swaps in MXN to hedge risk in fixed interest rate lending and cross currency swaps to synthetically fund its USD credit portfolio
• There is not additional risk in FIRA’s balance sheet because all derivatives positions are matched by FIRA’s credits disbursed
• Both programs have allowed to reduce subsidies and to generate profitability through derivatives operations
• Gives low income farmers access to sophisticated financial instruments
Saldo de posición de derivados en MX. PS.(fin de mes)
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
5,000
5,500
6,000
6,500
7,000
7,500
8,000
8,500
9,000
30
-J
un
-0
0
30
-N
ov
-0
0
30
-A
br-0
1
30
-S
ep
-0
1
28
-F
eb
-0
2
31
-J
ul-
02
31
-D
ic-0
2
31
-M
ay
-0
3
31
-O
ct-
03
31
-M
ar-0
4
31
-A
go
-0
4
31
-E
ne
-0
5
mil
lon
es
de
pe
so
s
Outstanding book value in Mx. Ps.(End of month)
Saldo de posición de derivados en USD(fin de mes)
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
55,000
60,000
65,000
70,000
Ma
r-0
4
Ab
r-0
4
Ma
y-0
4
Ju
n-0
4
Ju
l-0
4
Ag
o-0
4
Se
p-0
4
Oc
t-0
4
No
v-0
4
Dic
-04
En
e-0
5
Fe
b-0
5
(mil
es
)
Outstanding book value in USD(End of month)
1. Evolution to success
2. Case studies on financial innovation
3. Final remarks
Agenda
FIRA´s new activity aims to solve market failures/imperfections with a market approach and a clear vision of financial market development
• FIRA evolved from a traditional development credit institution to a
financial innovation entity that creates value for the agricultural sector
and develops ag. financial markets
• Through a market development approach, the small producers are able
to access sophisticated financial instruments, such as interest rate risk
hedging
• FIRA’s innovative approach has allowed it to growth at a double-digit
digit rate, which is significantly higher than agriculture GDP growth
• FIRA has contributed to increase the number of FI serving the
agribusiness sector
Leading Business Magazine in Mexico
"Formidable Organization” January 2004
“Innovative Enterprise”November 2004
Credit Bank for the Reconstruction
Latin American Association of Development Financial Institutions
The World Bank
Leading Business School in Latin America
FIRA is considered around the globe as…
“The Best Partner in Business”May 2004
“Strong and Dynamic Organization”April 2004
“An example of best practices in financial
development institutions”September 2004
“Organization guided by financial innovation”
November 2004
www.fira.gob.mx
01 800 800 FIRA