Liquidity mitigates volatile market

As the fifth largest financial institution in Paraguay measured by loans and deposits, Sudameris Bank, provides a full range of commercial and retail banking and insurance products and services.

The last 18 months was one of the most challenging times in recent years for Paraguay. A rebalancing of domestic financial market liquidity and the sharp economic downturn internationally brought it challenges.  

Late 2008 and early 2009 were marked with liquidity shortages as international institutions brought liquidity home to shore up their respective domestic positions; hence driving up funding rates in Paraguay. This was then reversed by: (i) substantial capital repatriation as domestic investors in international equity and fixed income portfolios salvaged what remained of their portfolios post crash; and, (ii) the Central Bank also provided substantial disincentives to placing funds with it.  The combination brought a substantial drop in rates by late 2009 early 2010.

In late 2008 and early 2009 some defaults were seen in international trade of soft commodities as some of the international trading houses sought to lay off some of the losses on their long positions on (Paraguayan) domestic exporters.

Whilst market conditions were at times challenging, Sudameris Bank has continued and consistently maintains a policy of high levels of capitalisation, high levels of liquidity and substantial voluntary generic provisions.  This allowed Sudameris Bank to gain market share through the crisis as it was able to service existing and new customer needs.  

History
Sudameris Bank was founded in Paraguay over fifty years ago and has always been a European owned bank. Formerly a subsidiary of the European consortium bank, Banque Sudameris, it was acquired by Banca Commerciale Italiana in 1994 and was in turn acquired 78 percent by the Abbeyfield Group in 2004. In 2008 Abbeyfield increased its holding to 98 percent by issuing an exchangeable convertible in Abbeyfield Financial Holdings. The balance of Sudameris Bank is held by minorities through a local listing on the Asuncion Stock Exchange.

In the last five years the balance sheet has growth at a compound average growth rate (CAGR) of 19.5 percent and productive assets have been raised to 87 percent bringing Sudameris Bank to have the second highest level of earning assets in Paraguay.

With a current Tier 1 ratio of 20 percent, Sudameris Bank is the most solvent bank in Paraguay. Its NPLs stand at 0.5 percent which ranks No 2 in the market and it nonetheless maintains a pool of Loan Loss Provisions, 86 percent of which are voluntary, at 3.7 percent reflecting a prudent approach to solvency. 

The efficiency ratio is 61 percent with a target of 50 percent for 2010. Fee and Commission income currently represent 49 percent of the Net Intermediation Margin.  Over the last five years Net Income has a CAGR of 23.1 percent and the 2010 forecast is for 25.9 percent return on average equity (ROAE).

Quality and innovation
The bank’s quality balance sheet approach to growth has placed it as one of the best performing institutions in the financial system with solid financial ratios, sound asset quality and important market share gains.

This has been possible through a client driven strategy where account executives are focused on acquiring client relationships as opposed to placing products; and the culture of the ‘excellence of delivery’ rather than pricing as a competitive advantage.

Funding and credit products have been adapted to the ‘funds flow’ needs of clients and this has allowed the bank to introduce products which truly meet the needs of clients.  Innovation continues to be the focus and this has brought the bank naturally to better segmentation of clients rather than ‘one size fits most’.

Financial strength
With over 80 percent of funding derived from retail deposits the bank has a very stable funding base.  In recent times, it has joined the Inter American Development Bank Trade Finance Programme and has received long term funding from the IIC. It is also joining the IFC Trade Finance Programme and is preparing to receive long term funding from the FMO. The Bank is also supported by AFD and Oikocredit.

Although very well capitalised, Abbeyfield Financial (the Irish holding company) will make a capital increase in 2010 to maintain the bank well capitalised for future growth.  A strategic plan developed in 2009 calls for an annual 1 percent increase in market share until reaching 10 percent. When Abbeyfield entered the capital of the bank in 2004, it had a three percent market share.  After completing a two year reorganisation, the bank has advanced its market share by almost 100 basis points per annum; most recently consolidating its position surpassing HSBC and Citi.

Market position
Sudameris Bank has taken advantage of market opportunities to consolidate its position: In the corporate sector, it continues to be a lender of environmental, maintenance and improvement capital as well as providing multi-currency cash management, forex and working capital requirements. It has been a leader in developing the domestic currency forwards market (on a delivery basis) and a provider of innovative solutions on trade.

With substantial liquidity on hand as the global financial crisis unfolded, Sudameris Bank was able to sustain its clients from the volatility of their international funding.  This also allowed for substantial new client acquisition.  At the beginning of the crisis, the bank shut down any funding mis-match until it had negative gap; consciously sacrificing earnings for solvency. The bank acquired a reputation for looking after its clients in bad times as well as good.

In individual banking, great strides have been made. The Bank has been a pioneer in the residential mortgage market and has gained a No 2 position despite a LTV ceiling policy of 80 percent.  In credit cards, the Bank has deepened its hold on the upper segment of the individuals market being the only issuer of premier (black) cards in the market.  For the middle market it has the best ‘advantage points’ programme on its Privilege credit cards and has been acquiring substantial market share with its no frills ‘Sudameris Light’ credit card.

Looking forward
Paraguay has a bright future. Its population demographics are highly favourable with 48 percent under 20 and 63 percent under 30. Mobile phone penetration is almost 1:1.

With relatively low land prices, abundant water supply and a low cost labour environment, it has grown to become the fourth largest exporter of soy beans and is a major exporter of wheat, corn, sunflower, sesame seed, meat and electricity.

It is a low tax environment which is now seeing the early stage development of manufacturing, assembly and facon industries as a platform for MercoSur. As part of an assistance programme from the EU, it also enjoys favourable tarrif regimes on many exports.

With a strong consistent monetary policy, the are no capital or foreign exchange restrictions and it has an ‘open door’ policy for foreign investment. Sudameris Bank offers an entry portal for FDI in Paraguay.

Sudameris Bank will continue to invest in its staff and in its IT.  These are the core two pillars of its Strategic Plan 2014. 2010 has seen the commencement of the offering of insurance products and the business has been profitable in its first three months of operation. The group is also exploring the pensions and life insurance needs of its clients.