Capable of complexity

That the Dominican Republic’s banking system has expanded rapidly in the past few years is no surprise, given the strong economic growth that the country has experienced. More remarkable are the increasing size and the increasing degree of sophistication in recent transactions involving local banks and customers seeking financing.

The Dominican operations of Citibank, for example, recently completed a $30 million structured deal for Aerodom, the group owned by a consortium of local and international investors. Aerodom has been awarded management rights to a group of Dominican airports and sought project financing to fund its expansion plans.

Ignacio Jasminoy, Citibank’s corporate business head in the Dominican Republic, says: “This was the biggest single transaction done by a bank in the Dominican Republic. We alone disbursed the $30 million.” Citibank says the deal was done at very competitive rates, below those in September’s sovereign bond issue from the government.

A transaction that Citibank says also broke new ground for the Dominican Republic this year swapped a floating rate for a fixed rate on $15 million of five-year financing for Grupo M, a leading local free zone company. Nicole Reich, Citibank’s country corporate officer, says: “These are needs that a lot of customers have, but maybe they don’t even know they have them, or maybe they don’t know there is a solution to manage their finances better.

“So when you generate the first deal it is not just that one deal, which is win-win for us and the customer. It is also an opportunity to start promoting this kind of thing in the country. If you have better ways of financing the project, then that of course means more productivity for the customer and for the country.

“These needs might be dormant in a lot of customers and these kind of innovative solutions are a big help.”

Citibank is next year celebrating 40 years since its re-entry to the Dominican Republic (its first operations were nationalised under the dictator Rafael Trujillo) and is one of two foreign banks – the other is Canada’s Scotiabank – with full banking operations in the country. Competition is fierce, with a dozen local commercial rivals able to offer full banking services also. The best of Dominican companies have long turned to international banks as one option for cheaper financing.

“All the big companies in the DR are being financed perhaps 20 or 30% by Dominican banks and 70% by international banks,” says Pedro Castillo, president and CEO of Banco Progreso. “There is not one big European bank that is not already doing business with the Dominican Republic.”

In the wake of the government’s sovereign issue there is an expectation that even more domestic companies could seek international financing. Reich says the anticipated increase in competition will be very positive. “It will put pressure on the financial system to become better every day,” she says.

A move towards greater overseas financing could also have bright implications for transparency in the corporate sector, by encouraging local companies to open up their books to clearer scrutiny if they want to do business abroad.

Fragmented System
In many ways the financial system remains highly fragmented, with more than 150 different institutions including savings and loan associations, so-called development banks (which cannot receive sight deposits) and a plethora of originally unregulated small finance houses. But with the commercial banking sector highly concentrated in the hands of a few players – the four largest banks hold almost 70% of commercial bank assets – there is wide expectation that the process of rapid consolidation begun in the past few years will continue.

The largest bank, Banco Popular, is around twice the size by assets of its nearest private rival, Banco Intercontinental (Baninter). State-owned Banco de Reservas is the second-largest commercial bank and reported net profits in 2000 of almost $35 million.

“In 1987 there were 24 banks – now there are 13,” recalls Castillo. “We do believe that in the next five years we will have fewer than 10. There are eight million people here: you don’t need more than five banks.”

Banco Progreso started life when local shareholders bought the Dominican operations of Bank of Boston when that bank left in 1985, and as a result Progreso has always had a strong share of corporate business, although Castillo says corporate margins are wafer thin. His bank is determinedly pushing into the retail sector, completing a merger last year with Banco Metropolitano that doubled its size. “We need to get more into the retail market every day because the lending margins in the corporate market are going to be so low that you will be working for nothing more than small commissions here and there. It is very competitive,” he says.

Asset growth in the financial sector has been strong, with annual growth rates of more than 20% over the last three or four years. Even in the first half of this year, gross assets grew more than 11%. But inevitably Dominican banks are still small by Latin American standards. Banco Popular de Puerto Rico has more assets than the entire Dominican banking system.

Citibank’s Reich says: “This year there has been a lot of liquidity in the system so rates have been going down dramatically – and that of course has generated even more competition because when banks are liquid they are willing to sacrifice the spread to do business.”

Progreso’s Castillo says there are still a lot of people who are underbanked. While the market for credit cards is well developed, he says, there is still a rich market for debit cards, for example. And the country’s generally well-regarded telecommunications should help growth of this sort of transactional capability. Stores are installing microchip card readers. “More than 15,000 merchants in the DR have the most advanced point of sale authorisation system in the world,” boasts Castillo.

The country’s capital market remains embryonic, with no listed companies and few instruments. However growth could be stimulated by the introduction of private pension companies, which was approved by law this year. Most of the Dominican banks have entered the market by establishing pension providers (AFPs), sometimes jointly with rival banks.

“There are not many alternatives or options to manage all the liquidity there is currently,” Reich points out. “As the market starts to develop, that will help.”