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Foreign banks in Latin America Manuel Galatas Director, BBVA Asia

Foreign banks in Latin America Manuel Galatas Director, BBVA Asia Financial Reforms in China and Latin America. Beijing, June 7th 2007. INDEX. 1) Spanish banks lead foreign banking in Latin America. 2) Why to invest in Latin America? Bank’s point of view.

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Foreign banks in Latin America Manuel Galatas Director, BBVA Asia

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  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 2) Why to invest in Latin America? Bank’s point of view 3) Foreign Banks Contributions to Latin America economy 4) Less hurdles in BBVA’s roadmap in Latin America

  3. 2006 UK Spain 10% 35% USA 20% Others Nethe. 12% Germany Canada Japan France 9% 4% 6% 2% 2% SPANISH BANKS ARE THE LEADERS IN FOREIGN BANKING IN LATIN AMERICA… CONSOLIDATED CLAIMS OF REPORTING BANKS ON LATIN AMERICAN COUNTRIES: 1990 Source: BIS

  4. Distribution of foreign banks consolidated assets DEC 2006 100 Others ITA 80 NET 60 UK FRA 40 GER 20 EEUU 0 Spain ARG BRA CHI COL MEX PER VEN ... IN ALL BIG COUNTRIES The Spanish banks are the main creditors in the seven main economies of the region Source: BIS

  5. BBVA INTERNATIONALIZATION BBVA in 1995: a domestic and retail bank.... More than 15000 millions of Euros were invested in Latin America The Group presence was extended to more than 35 countries More than 42 millions of clients 100.000 employees of more than 50 different nationalities World leader in Project Finance and Trade Finance BBVA in 2007: a Universal and International bank

  6. WORLD PRESENCE OF BBVA Taiwan Korea North America Asia Beijing India USA Japan Shangai Panama Mexico Spain Singapur Australia South America Puerto Rico Europe Dominican Rep. Colombia Russia Belgium Caiman Islands Ecuador United Kingdom Venezuela Peru Switzerland Paraguay France Bolivia Italy Uruguay Chile Portugal Argentina Brazil

  7. Total Investment: 1000 Million € *CNCB’s IPO on 29/04/2007 **CIFH listed in Hong Kong POSITION OF BBVA IN CHINA: A BREAKTHROUGH ALLIANCE + FINANCIAL INVESTMENT STRATEGIC INVESTMENT Initial Investment 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 CNCB(China)* 4,83% 80% 15,17% CITIC Group BBVA 57% 15% CIFH(HK)** 28% Public listing

  8. POSITION OF BBVA IN LATIN AMERICA Pension Funds Deposits Credits As of March 2007 Country Ranking Ranking Market share Ranking Market share Market share Argentina 10,0% 8,1% 18,7% 1º 3º 2º Colombia 11,4% 10,8% 16,4% 3º 3º 3º Chile 4º 8,0% 8,1% 31,1% 4º 1º Ecuador - - - 87,6% - 1º Mexico 1º 28,2% 27,9% 19,6% 1º 1º Paraguay 2º 15,1% 20,0% - 1º - Peru 2º 24,6% 27,2% 26,2% 2º 3º Uruguay 5º 9,1% 9,9% - 5º - Venezuela 4º 10,3% 11,7% - 4º -

  9. BBVA, A EUROPEAN BANK WITH LATIN AMERICAN ORIENTATION Employees geographical distribution (March 2007) Branch geographical distribution (March 2007) Source: BBVA Business in Spain represents only 37% of the employees and 48% of the offices

  10. INDEX 1) Spanish banks lead foreign banking in Latin America 2) Why to invest in Latin America? Bank’s point of view 3) Foreign Banks Contributions to Latin America economy 4) Less hurdles in BBVA’s roadmap in Latin America

  11. Population growth Potential market growth • Economic growth and changes • Low banking penetration Margin to improve efficiency • Export of know-how, technology, new products… Diversification • Low cyclical synchronization, • less volatility of benefits WHY INVESTING IN EMERGING MARKETS ?

  12. Projections of population 2010 2050 % var 1.032 1.937 2,5% Africa 4166 5.217 0,7% Asia 730 653 -0,2% Europe 593 783 0,9% Latinamerica 348 438 0,7% North-America 6.906 9.076 0,9% World 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. Demographic structure 2005 Europe East Asia Latin South EMU World & Central & Pacific America Asia Asia 24 20 16 30 33 0-14 28 69 69 67 64 62 15-64 64 7 12 18 6 5 65 & more 7 Source: WB & UN

  13. IMPROVEMENT IN MACROECONOMIC BALANCES Nominal stability and reduction of external disorders have caused a favorable macroeconomic environment with more possibilities of economic growth

  14. POTENTIAL GROWTH REMAINS HIGH Potential economic growth Business cycles aside, potential growth in Latin America is above the level estimated for developed countries 4,5 4,0 3,2 2,8 3,0 2,3 1,5 0,0 EU Spain USA LatAm Source: BBVA Macroeconomic achievements are impressive: orthodox monetary policy dominates the region.

  15. LATIN AMERICA IS UNDER-BANCARIZED … Banking assets / GDP (March 2007) Source: World Bank & BBVA

  16. …THE BANCARIZATION IS ALREADY INCREASING Source: BBVA Credit has displayed a remarkable recovery since 2004, sustained by the favourable economic environment and the soundness of banking systems in the region.

  17. Operating Net Average 1997-2006 (% assets) expenses revenues Argentina 4,15 5,55 Brazil 5,44 8,58 Chile 2,75 4,85 Colombia 6,94 9,01 Mexico* 4,98 7,18 Peru 5,11 8,30 Venezuela 9,08 14,37 Spain 1,60 2,70 “ASSET-SEEKING” & “ASSET EXPLOITING”: REASONS TO STAY IN LATIN AMERICA The Latin American banking systems present higher revenues than the developed countries Expansion in Latin America is an opportunity to increase profitability * 1997-2004 Source: BBVA based in Moody's Latin American banking systems have a wide margin to improve their efficiency

  18. LATIN AMERICA: A BETTER OPTION TO DIVERSIFY THE RISK Business cycles in Latin America and Spain are not correlated. On the contrary, the correlation with Europe has increased. The region a good option to diversify, because the synchronization between European and Latin American stocks exchanges is small Source: BBVA

  19. Experience Solvency Competition OTHER MICROECONOMIC FACTORS Why the Spanish Banks? Spanish banks have changed their exposition towards Latin America In the Spanish financial system there is a strong competition. Pressure on margins enhances the seeking of more profitable businesses. Sharing the same culture and language helps the know-how to be transferred easier and allows the implementation of technological common platforms. Non-economic factors

  20. INDEX 1) Spanish banks lead foreign banking in Latin America 2) Why to invest in Latin America? Bank’s point of view 3) Foreign Banks Contributions to Latin America economy 4) Less hurdles in BBVA’s roadmap in Latin America

  21. EFFICIENCY Increasing in bank competition Lower cost of credit New financial products Improvement in banking system efficiency FOREIGN BANK CONTRIBUTIONS ECONOMIC VULNERABILITY Import of risk management systems Improvement in bank soundness Increase in the financing in local currency Less probability of credit crunch

  22. Banking Spreads 16 14 12 2000 2005 10 8 6 4 2 0 Peru Colombia México Venezuela Chile Argentina 1. EFFECTS IN EFFICIENCY: MORE BANK COMPETITION AND LOWER COST OF CREDIT 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. 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.

  23. Efficiency ratio (Operating expenses / Net revenues) 90 dic-99 jun-06 80 70 60 50 40 Perú Chile Brasil México* Argentina Colombia Venezuela * 2004 1. EFFECTS IN EFFICIENCY: EFFICIENCY HAS IMPROVED IN ALL SYSTEMS Source: Moody`s & BBVA Except in Argentina, the ratio of Operating expenses/Net revenues has shown a tendency to be reduced.

  24. 2. EFFECTS IN ECONOMY VULNERABILITY: THE EXPERIENCE OF SPANISH BANKS IN CONTROLLING MACROECONOMIC RISKS Macroeconomic evolution 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. 10 7.7 8 5.4 6 4 2.9 2.8 Current account 2 0 GDP Inflation -2 -1.6 -1.6 -4 Spain 87-96 LATAM 97-06 Source: BBVA based in FMI

  25. 2. EFFECTS IN VULNERABILITY: LESS VULNERABLE BANKING SYSTEMS BIS RATIO: Bank regulatory capital to risk-weighted assets 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. Default rates in Latin America have fallen since 2002, and are currently lower than in emerging Asia.

  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

  27. 2. EFFECTS IN ECONOMIC VULNERABILITY: LONGER TERMS IN LOCAL CURRENCY MARKETS Peru: Sovereign Bonds Yield Curve Interest rate Maturity 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

  28. INDEX 1) Spanish banks lead foreign banking in Latin America 2) Why to invest in Latin America? Bank’s point of view 3) Foreign Banks Contributions to Latin America economy 4) Less hurdles in BBVA’s roadmap in Latin America

  29. BBVA has faced periods of high macroeconomic and political instability in the past,...

  30. BBVA has faced periods of high macroeconomic and political instability in the past,...

  31. ...but now there are better economic and political fundamentals

  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

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