Since the banking crisis of 1994, which saw the nation's three largest banks fold overnight leading to exchange controls and a $10 billion bail out bill for then Caldera administration, Venezuela has been only too aware that a close watch of the sector is fundamental. Consumer confidence has increased significantly in recent years due to stricter measures and the wave of mergers amongst banks and insurance companies. To further emphasize the importance of a transparent and modern financial sector the current government is set to approve a slew of new laws regulating banks and insurance companies.
A long-awaited Social security law is set to be approved by the National Assembly in 2001 with most of the nation's banking big hitters eager to participate in the management of lucrative state-run pension funds. The pensions law is currently under draft and is looking for inspiration from Chile and Uruguay, both countries that changed their systems from clanking state run funds to free market systems largely managed by the private sector. The government expects $1 billion into the funds in the first year, which local banks say will lead to a rejuvenation of the dormant stock market.
As the economy recovers in line with government projections, insurance companies are also hoping that the financial rewards will be seen in greater insurance coverage. Coverage is currently largely limited to automobile and health insurance. While Venezuela's finance system is still viewed as weak because its profitability is largely provident from bond investments and not lending activities a significant drop in lending rates and government pressure to hike deposit interest rates should help strengthen the sector in international eyes.
While the Banking Deposits and Security Fund, (Fogade) now wields greater administrative power and demands complete compliance with banking regulations, the new Chavez administration has put added emphasis on the need for banks to merge. They claim that with several hundred banks and savings and loans institutions currently operating, the sector is over-crowded, creating inefficiency and high operating costs. In 2001 a new banking merger law will be approved aimed at cutting inefficiency and costs, and also ensuring that banks have sufficient financial strength to withstand the vagaries of local markets. And the much-needed mergers have already begun. In December Venezuela's third largest bank Banco de Venezuela - owned by Spain’s Banco Santander Centro Hispano (BSCH) - completed its buy out of local Banco Caracas for $320 million, creating Venezuela's biggest bank with a total of two million clients. The nation's most heavily publicized merger earlier this year was that between locally owned Interbank and the grandee of the Venezuelan banking sector, Banco Mercantil .
Banco Mercantil is one of the nation's oldest banks and through the June 2000 merger is now the second largest bank in the country. In 1999, Banco Mercantil took third place in a survey of Venezuela's top 100 hundred companies based on profits, according to the Venezuelan American Chamber of Commerce 1999 survey. "The reasons for merging are simple; Margins are under pressure, costs are under pressure, and globalization is growing," says Gustavo Marturet , the president of Banco Mercantil . "Nowadays it is more important to have larger amounts of assets managed for fewer resources, in terms of people and supported by technology. Many banks are going through the process of mergers, and Venezuela is not different in this matter." Marturet says that he expects at least four more institutions to merge in 2001. Banco Mercantil will continue to play to its strengths of the last 75 years, Marturet says. "In the past Banco Mercantil was a commercial bank, today it is a full service bank. We try to provide other services that our clients need through this network; we have divided our clients in three big groups. The large corporations, the medium and small companies, and the individuals.". Banco Mercantil represents 68% of the total $5.4 billion assets of Mercantil Servicios Financieros , the country's biggest financial services holding company with operations in 10 countries. Created in 1997, it is quoted on the Caracas IBC index and American Depositary Receipts in New York. Mercantil Servicios Financieros also owns insurance company Seguros Mercantil, U.S. bank Commerce Bank National Association, Swiss bank Banco Mercantil Schweiz AG and two small offshore institutions, one in Curacao and another in Cayman Islands.
"Through Mercantil Servicios Financieros we try to provide our Venezuelan customers all the financial services that they need and for that reason we have established this company that attends beyond all banks in Venezuela who only have commercial purposes. We not only offer our clients banking services, but provide them insurance, investment and other financial services," says Marturet . With only 500,000 people with access to the Internet, Venezuela continues to lag behind its other more proficient e-commerce neighbors such as Brazil. However, by incorporating the advantages of the Internet revolution into its banking services, Banco Mercantil is looking to reduce costs and improve its image with more e-friendly customers. "My personal opinion is that Internet is a possibility of transforming completely the banking and service industries. We are very committed in transforming our bank as soon as possible using these new technologies," Marturet says. While banking got a law to encourage mergers through tax breaks and other fiscal benefits, so too did the country's insurance sector.
INSURING THE UNINSURED
As the economy recovers so should the insurance market.
Traditionally Venezuelans are not a people that insure themselves or their property. Approximately 80% of market premiums are comprised of health and automobile insurance. In 1999 the total value of premiums stood at 475.4 billion Bolivars. A decline in purchasing power and a shrinking middle class is generally seen as the catalyst for the trend. But a shift towards buying insurance is being seen, thanks in part to 1999's mud slide tragedy which saw billions of dollars of prime real estate on Venezuela's sun-drenched northern coast buried under rubble most of which was not insured. "The flood catastrophe, which occurred in Vargas in December 1999, increased the awareness of the need for insurance protection, especially for the segment of people who could afford to have insurance protection but unfortunately had not purchased adequate insurance coverage to protect their property," says Victor Meintjes , president of Seguros Caracas , Venezuela's largest insurer owned by U.S.-listed Liberty.
Bought from Fogade in 1995, Seguros Caracas was the 7th largest insurer in terms of premiums, by 1999 it had reached second place and has reported growth of 36% in 2000 as the economy recovers from 1999's crushing recession. While Meintjes says that there has been a contraction in buying insurance by the poorest sectors of the population, opportunities exist in the future for savvy investors. "There is a diminishing market in the lower economic sector comprised of the people that have lost their purchasing power. The solution in the future is to carefully study their needs and develop alternative products to insure this sector of the market," Meintjes says. If as predicted 2001 is the year for mergers in the sector, Meintjes believes that customers will also warm to the positive aspects of foreign participation. "I believe this is a good thing as these companies are financially sound and in the longer run this will translate into better products and services for the Venezuelan insurance buyer due to increased efficiency and competition," he adds.
Technology is now seen as the key to making the insurance sector more profitable and reaching out to potential customers. Seguros Caracas has seen its revenue grow 325% since 1995 and its work force cut but 50% due in part to technological advances at its 38 offices. "Increasing the use of technology remains one of the key initiatives of Seguros Caracas. As far as Internet is concerned we are using this technology in a small way internally but in the future this will be a major working tool," Meintjes says.
VENEZUELA
Mergers
Strengthening Banking & Insurance Sector
