Nominal Asset Growth Masks Deeper Problems
BMI View: We maintain our view that although banking asset growth in Venezuela will remain extremely high, due to soaring inflation, real expansion of the sector will be much more modest. While a new exchange rate system may bolster banks' capital base and demand for financial services by formalising and expanding the market for hard currency, financial firms will still have to contend with a hostile business environment and substantial political uncertainty.
We are forecasting nominal growth in Venezuelan banking sector assets to continue expanding at a very rapid pace, however we expect expansion in real terms to be much more subdued. Headline consumer price growth stood at 57.3% in February, the most recent month for which the Banco Central de Venezuela (BCV) has released data, and we believe inflation will average 50.5% year-on-year (y-o-y) over the course of 2014. In 2014, we are forecasting total assets to grow by 55.0% y-o-y, down from 64.6% in 2013. We further expect that given the weak economy (we are forecasting real GDP growth of just 0.5% in 2014), client loans will account for a declining share of total assets, a trend which has been in place since 2010. We expect client loan growth to reach 48.0% y-o-y in 2014, down from 62.6% in 2013. Over a longer time horizon, we expect that asset growth will gradually converge to its pre-global financial crisis rates of growth of around 30.0% y-o-y.
|Inflation-Fuelled Asset Glut|
|Venezuela - Banking Sector Assets|
Sicad 2 May Provide Limited Opportunities
In a move seen by most observers as a pragmatic step, in late March the government launched a new exchange-rate system known as Sicad 2, which is described by Venezuelan authorities as a market-based initiative meant to help meet the enormous demand for hard currency, which has hitherto been confined to the illegal parallel markets. The system requires participants to hold dollar accounts in banks, and will incorporate a market for trading in both bolívar and dollar-denominated bonds. The system may help bolster the banking sector, as demand for financial services, particularly among individuals and small businesses, begins to rise.
However, the main theme in the banking sector will continue to be inflation. In real terms, asset growth stood at 9.2% y-o-y in February, according to the most recent data provided by La Superintendencia de las Instituciones del Sector Bancario (SUDEBAN), Venezuela's banking authority.
|Real Asset Growth Low By Historical Standards|
|Venezuela - Banking Assets And Inflation|
Soaring inflation has eroded the value of the domestic currency, and the government continues to rapidly print money in a bid to finance its wide fiscal deficit, a trend we expect to continue in the months ahead. Indeed, M2 money supply growth hit a multi-decade high 75.1% in February. If data from more recent months, particularly those which follow the introduction of Sicad 2, fail to show a reduction in the rate of expansion of the money supply, inflation is also likely to stay elevated over the medium term.
|Ballooning Money Supply Suggests High Inflation Will Persist|
|Venezuela - Money Supply Growth|
Business Environment Still Extremely Poor
Even setting the issue of inflation aside, we believe there is ample reason for caution regarding the banking sector, for many of the same reasons we have a negative view regarding the business environment for firms operating in virtually all sectors in Venezuela. The administration of President Nicolás Maduro has framed the country's economic malaise as the direct result of greedy business owners out to exploit ordinary citizens, and the government has passed a series of statutes which have the stated intent of correcting the effects of these alleged crimes. The government closely regulates prices and profits, with threats of imprisonment for business owners deemed to be guilty of violating the vague and inconsistently applied restrictions.
Significantly, Maduro also continues to operate under an 'Enabling Law', passed by parliament in November 2013, granting him the ability to pass laws by decree, and which will extend at least until November 2014. As a result, laws do not have to be debated in parliament, and policies can change extremely quickly. This fact was illustrated on April 1 when the government announced that in an effort to get more people to own their own residences, landlords will be forced to sell any property they have owned for longer than 20 years or face a massive fine. While such heavy-handed intrusion into the private sector is not uncommon in Venezuela, the banking sector has largely avoided Maduro's crosshairs in recent months. With international firms withdrawing from their Venezuelan operations, and shrinking productive capacity throughout the private sector, fewer available targets in the ruling party's economic war against so-called 'parasitic bourgeoisie' may mean that such luck may eventually run out.
|Total assets, VEFmn 1||403,089.92||588,926.50||927,898.72||1,526,975.16||2,366,811.50||3,124,191.18||3,936,480.89||4,920,601.11||6,150,751.39|
|Client loans, VEFmn 1||181,666.33||265,012.17||397,606.66||646,368.19||956,624.91||1,243,612.39||1,591,823.86||1,989,779.82||2,487,224.78|
|Client deposits, VEFmn 1||324,902.74||483,338.01||788,818.61||1,324,430.00||2,079,355.10||2,911,097.15||3,842,648.23||4,918,589.74||6,148,237.17|
|Loan/deposit ratio 1||55.91||54.83||50.41||48.80||46.01||42.72||41.43||40.45||40.45|
|Loan/asset ratio 1||45.07||45.00||42.85||42.33||40.42||39.81||40.44||40.44||40.44|
|Notes: f BMI forecasts. Sources: 1 SUDEBAN/BMI.|