FINANCIAL SERVICES ADVISOR a PUBLICATION of the DIALOGUE November 7-20, 2019

LATIN AMERICA ADVISOR FINANCIAL SERVICES ADVISOR A PUBLICATION OF THE DIALOGUE www.thedialogue.org November 7-20, 2019

BOARD OF ADVISORS FEATURED Q&A TOP NEWS Ernesto Armenteros Vice Chairman of the Board, BANKING Banco de Ahorro y Crédito Unión What Will the Next Venezuela Doubles Pablo Barahona President & COO, Amount of Euros Global Retail Markets West, Liberty Mutual Group Argentine Gov’t it Provides Banks Felipe Carvallo Venezuela’s central bank has Vice President - Analyst doubled the amount of euros that Latin America Banking Mean for Banks? Moody’s Investors Service it provides to local banks. The country’s hyperinflation, along Richard Child with U.S. sanctions, have led to a CEO, Mattrix Group surge in the use of the European currency. Michael Diaz Jr. Page 2 Partner, Diaz, Reus & Targ

Ernesto Fernández Holmann INSURANCE Chairman of the Board, Ayucus Mutua Madrileña Rich Fogarty Buys 45 Percent of Managing Director, Alvarez and Marsal Seguros del Estado Desiree Green Spain-based insurance company Vice President, Peronist Alberto Fernández takes office as Argentina’s president on Dec. 10. The country’s Mutua Madrileña has bought a banks are watching for policies that could affect the sector. // File Photo: Fernández Cam- International Government Affairs, stake in Colombia’s Seguros del Prudential Financial paign. Estado. The transaction is expect- The rise of Peronist Alberto Fernández, who won Argentina’s Earl Jarrett ed to close, pending regulatory Chief Executive Officer, presidential election on Oct. 27, led to a plunge in investor approvals, early next year. The Jamaica National Group confidence in the South American country, with stocks, Page 2 Thomas Morante Chair, Insurance Regulatory & Q bonds and the peso falling since he won the primary election Transactional Practice Group in August. Bank deposits in Argentina fell to $31.55 billion in late BANKING Kaufman, Dolowich & Voluck August, as compared to $35.24 billion before the election, as Argentines Manuel Orozco Citi Taps Romo to Director, withdrew money following new capital controls restricting the purchase Head Citibanamex Migration, Remittances & Development, Inter-American Dialogue of dollars. Will Fernández’s presidency make things harder for Argen- Citigroup has named Manuel Adalberto Palma-Gomez tina’s financial services sector, and what kinds of policy changes can Romo to head its Citibanamex unit Senior Partner, banks and other financial services providers expect during his term? Will in Mexico. Romo was executive di- Proxy, Gobernanza Corporativa rector for credit cards at Citibana- customers continue withdrawing large amounts of cash from Argentine Rodolfo Pittaluga mex before moving to Banorte. He Adjunct Professor, banks? What can the country’s banks do to prepare for the period ahead? returned to Citibanamex earlier Florida International University this year. College of Law Page 2 Fabian Saide Alejandro Garcia, managing director and regional group head Founder, CEO and President, for Latin American financial institutions at Fitch Ratings: “It Paykii is too early to tell how more negative the environment could Jan Smith Partner, become for Argentine banks under the upcoming administra- KoreFusion A tion, but clearly downside risk is ample. In addition to the existing chal- Roberto Teixeira da Costa Founder & Board Member Emeritus lenges of economic recession and very high inflation, banks could suffer CEBRI in the scenario of a potential sovereign credit event, given the impact that Mario Trujillo this would have on market confidence and stability in the local payment CEO, DolEx Dollar Express system. Unlike the 2001 crisis, Argentine banks now have fairly limited di- rect exposure to sovereign debt, but they have sizable assets in the form of deposits and securities with the central bank, which in turn is a large creditor of the federal government. Therefore, any major negative shift on economic and monetary policy could materially affect local banks. The Romo // File Photo: Banorte. Continued on page 3

BANKING NEWS NEWS BRIEFS CIBC to Sell Venezuela Doubles Majority Stake in Citi Taps Romo as Head of Citibanamex Unit Amount of Euros it FirstCaribbean Unit Citigroup has named Manuel Romo as the head of its Citibanamex unit in Mexico, the unit Distributes to Banks The Canadian Imperial Bank of Commerce, said Nov. 15 in a statement, Reuters reported. or CIBC, has reached a deal to sell a majority Romo, who worked for the bank from 1991 to Venezuela’s central bank has doubled the stake in its Caribbean unit to a Colombian 2008, returned to Citibanamex last April after amount of euros in cash that it provides to lo- billionaire and his financial firm for $797 working for rival Grupo Financiero Banorte. As cal banks as hyperinflation and U.S. sanctions million, the Canadian bank said Nov. 8, the CEO of Citibanamex, Romo will replace Ernesto have resulted in a surge in the use of the Euro- Calgary Herald reported. GNB Financial Group, Torres Cantú, who was named last month as pean currency, Reuters reported Nov. 15, citing owned by Colombian billionaire Jaime Gilinski, the head of Citi’s Latin America operations. four sources familiar with central bank activ- will acquire 66.7 percent of CIBC FirstCarib- ities. Euros are increasingly being used since bean shares, leaving CIBC with a nearly 25 the bank started distributing them to financial percent stake in the Barbados-based bank. The institutions in February, following the Trump sale values FirstCaribbean at approximately Brazil’s Caixa Reports administration’s tough sanctions, which were $1.2 billion, lower than the $2.9 billion when 66.7% Increase in CIBC took over most of the business in 2006, Bloomberg News reported. “The Caribbean is a Net Income for Q3 Hyperinflation and U.S. low-growth market that presents idiosyncratic Brazilian state run bank Caixa Econômica Fed- sanctions have led to a risks to the banks, (e.g., hurricanes),” Gabriel eral on Nov. 12 reported a 66.7 percent rise in surge in the use of the Dechaine, an analyst at National Bank Finan- net income for the third quarter, as compared to the same period last year. In a statement, euro in Venezuela. cial, said in a note to clients, Bloomberg News reported. He said the transaction was a “pos- the bank said it had 8 billion reais in profit itive” one from a risk standpoint. “At the risk ($1.92 billion) for the quarter. Recurring net of being flippant, the only time we hear about income for the three-month period amounted to also imposed that month. Local companies use the Caribbean is when there’s a problem,” he 4.2 billion reais. euros in cash to pay for imports or employee added. The deal is expected to close next year, bonuses, easing pressure on the depreciat- pending certain approvals, the Calgary Herald ed local bolivar currency. According to the reported. The sale is expected to boost CIBC’s Mutua Madrileña Buys sources, Venezuela’s central bank began giving common equity tier 1 capital ratio by more than around 1 million euros ($1.10 million) per week 40 points, the bank said in the statement. 45% of Colombia’s to the country’s main private banks, as well as Seguros del Estado nearly 500,000 euros to smaller banks, double the previous amounts. If that rate continues, BBVA Argentina Spanish insurance company Mutua Madrileña euros could surpass within months the value has purchased 45 percent of private Colom- of bolivars in circulation, which currently totals Reports 63.8% Rise in bian insurance provider Seguros del Estado, about $59 million, according to Venezuelan au- Net Income for Q3 Finance Colombia reported Nov. 18. In the deal, thorities, Reuters reported. Venezuela’s econ- the Spanish company also acquired an option omy has also become increasingly dollarized, to take control of Seguros del Estado in four BBVA Argentina on Nov. 7 reported $11.1 a recent study by Caracas-based research firm years. Mutua Madrileña previously purchased billion in net income for the third quarter, a Ecoanalítica shows, Bloomberg News reported. Chile-based BCI Seguros. Seguros del Estado 63.8 percent rise as compared to the second According to its survey, more than half of retail is Colombia’s second-largest property and ca- quarter and an increase of 264.6 percent as transactions in the South American country in sualty insurer, Finance Colombia reported. The compared to the third quarter of last year. For October were in dollars. In Maracaibo, Vene- boards of both companies have approved the this year’s third quarter, BBVA Argentina posted zuela’s second-largest city, some 86 percent deal, and the transaction is expected to close an average return on assets of 11 percent and of all transactions were in dollars, the study early in 2020, following regulatory approvals. an average return on equity of 81.3 percent. said. [Editor’s note: See related Q&A in the Feb. Seguros del Estado president Jorge Mora will The bank said its consolidated financing to 28-March 13 issue of the Financial Services maintain his position, and Mutua Madrileña will the private sector amounted to $211.8 billion, Advisor.] have the company’s vice presidency and will an increase of $27.1 billion, or 14.7 percent, also appoint two of its five directors.

as compared to the second quarter and an FEATURED Q&A / Continued from page 1 increase of $38.9 billion, or 22.5 percent, as compared to the third quarter of 2018. country will face ample U.S. dollar needs in and exchange rates), which will strengthen 2020, so foreign exchange rate volatility will the banking system. The banking system likely continue. Banks have limited foreign should be oriented toward the granting of UBS, Banco do Brasil debt denominated in hard currencies, but credit, dismantling its current role as a pas- to Form Investment stability of U.S. dollar-denominated deposits sive taker of deposits at the central bank. A will remain under pressure, given the banking sector that is more regulated, and Banking Venture country’s weak external profile. Many banks therefore more stable and predictable, can have been increasing their holdings of liquid be expected.” UBS Group and Banco do Brasil have agreed assets and dollars to the extent possible, but to form a joint venture to provide invest- Ivana Recalde, director for Latin ment-banking and institutional brokerage America financial institutions services in South America, Bloomberg News Any major negative ratings at S&P Global Ratings: reported Nov. 7. Zurich-based UBS will control shift on economic A “The incoming administration the venture with a 50.01 percent stake, while and monetary policy will continue facing challenges to reduce state-owned Banco do Brasil will control the could materially economic imbalance—mainly inflation—and rest. UBS’ control of the venture will allow it to affect local banks.” to gradually resume growth and normalize avoid some requirements that Brazil places on economic variables. Under a scenario — Alejandro Garcia of still-high inflation and contraction of economic growth in 2020, we expect it is hard to anticipate if that will be enough credit growth in real terms to be limited or in the very challenging conditions that the negative, depending on the trajectory in the country will face in the following years. decline of interest rates. In addition, the Another event risk for banks is the scenario possibility of the implementation of directed of further government intervention in the credit as happened in the past is not dis- financial sector. In the past, Argentine banks carded, given the need for working capital suffered from compulsory lending and inter- financing. With regard to credit quality, we est rate caps and floors in certain products see delinquency to continue to be higher Ermotti // File Photo: World Economic Forum. and sectors, among other measures.” than historical levels at about 4.5 percent government-owned entities, including restric- and 5.5 percent until purchasing power re- tions on hiring and bonuses, Bloomberg News Estanislao Malic, specialist covers and the resolution of large corporate reported. The venture is subject to regulatory in finance and banking at the cases. Profitability would be affected by approval and is planned to operate in Brazil, Center for Economic and Social lower rates of central bank securities and by Argentina, Chile, Paraguay, Peru and Uruguay. A Studies (CESO) in Buenos Aires: the implementation of inflation adjustment Clients of Banco do Brasil will have access “Argentina’s post-election banking crisis and IFRS 9. We will continue monitoring the to the global trading, research and invest- is due to the imbalances of Cambiemos’ evolution of deposits with withdrawals that ment-banking services of UBS, while UBS will management. In addition to the dollariza- have been decelerating.” have access to corporate customers of Banco tion of accounts via excessive external do Brasil and the bank’s transaction flows. “If I indebtedness, which resulted in a situation Valeria Azconegui, vice am a corporate client of Banco do Brasil, I will of structural instability in 2018, and with president and senior analyst now have access to what UBS has in terms of Cambiemos strengthened following the at Moody’s Investors Service: its local and global capabilities,” Tom Naratil, midterm elections, there were bad financial A “The outcome of the presidential the president for UBS Americas and co-pres- policy decisions after the elections. After the election has increased market uncertainty ident for global wealth management, told primary elections, the government ran from because the president-elect is perceived as Bloomberg News in an interview. “If you look the exchange market, creating a devaluation, less market friendly than the Macri adminis- at our partnership, there is very little overlap and the president imposed foreign-exchange tration. A day after the election, Argentina’s of capabilities.” UBS and Banco do Brasil will controls. That decision caused a significant central bank imposed additional foreign-ex- each name three board members for the new bank run. With the new administration, we change restrictions by narrowing until Dec. entity, while Banco do Brasil will select the can expect financial stability (with interest 10 the total purchases of U.S. dollars per chairman. “This transaction captures a unique Continued on page 6

COPYRIGHT © 2019, INTER-AMERICAN DIALOGUE PAGE 3 FINANCIAL SERVICES ADVISOR November 7-20, 2019 opportunity to combine two strong partners with complementary strengths,” said Sergio P. Ermotti, UBS’ chief executive officer, Inter- national Investment reported. UBS has been CAPITOL HILL WATCH making changes to its investment banking unit A Look at U.S. Congressional Activity on Latin America in order to increase earnings and also keep down costs amid struggles with lower levels of activity in global equity, debt and mergers and Democrats, Republicans Voice Concerns acquisitions. Thirteen years ago, UBS bought Brazilian investment bank BTG Pactual for $3.1 Over Bolivia’s Political Crisis billion but later sold it back to the bank’s managing partners in 2009 in order to lower its risk U.S. lawmakers from both the Democratic and and bolster its balance sheet amid the global the Republican parties have voiced concern financial crisis, Reuters reported. about Bolivia’s political crisis following the resignation of longtime President Evo Morales on Nov. 10. The same day, House Rep. Eliot L. En- POLITICAL NEWS gel (D-N.Y.), who chairs the House Committee on Foreign Affairs issued a statement calling More Protests Erupt for a “peaceful and democratic transition led by civilian institutions,” while also commending Rubio // File Photo: U.S. Senate. in Chile After Piñera the Organization of American States for its “thorough audit of the country’s flawed presidential election and its call for new elections.” The Admits Excess Force OAS, which the Bolivian government had invited to observe last month’s election, said its audit had shown “clear manipulation” of the voting system, The Wall Street Journal reported. Protesters again took to the streets Nov. 18 in Chile following President Sebastián Meanwhile, Sens. Marco Rubio (R-Fla.) and Rick Scott (R-Fla.) said Morales’ resignation was Piñera’s acknowledgment the night before that not a coup, as the former president has claimed, the Voice of America reported. Rubio said authorities had used excessive force against the United States was following Bolivia closely, expressing his “support” for re-establishing demonstrators in recent weeks, the Associated democracy in the South American country as soon as possible. Both Rubio and Scott said the Press reported. Thousands of protesters gath- trend in Bolivia was a result of social and international pressure, and that it should extend to ered in a Santiago plaza, carrying signs calling other countries in Latin America, including Cuba and Venezuela, according to the report. for “justice,” improved pensions and Piñera’s Torres Slams Trump’s Choice for We have all changed— because the social DHS Secretary Over Migration Policy pact cracked and made its U.S. Representative Norma Torres (D-Calif.) on Nov. 12 blasted President Donald Trump’s wounds visible.” pick for Homeland Security secretary, Chad Wolf. “[Trump’s] choice for [DHS Secretary] is the architect of a policy that needlessly & callously orphaned children,” Torres wrote on Twitter, in — Sebastián Piñera reference to the family separation policy that the Trump administration implemented last year, which separated migrant children from their parents at the U.S.-Mexico border. “His orchestra- resignation. The gathering was peaceful until tion of #FamilySeparation is disqualifying for this role, and any position serving in the public’s some 300 masked protesters started throwing trust,” she added. rocks at police officers who responded by us- ing water cannons and tear gas on the crowd. Wolf was sworn in Nov. 13 as the new acting Homeland Security secretary, becoming the fifth In a televised address Nov. 17, Piñera said person to hold that position since Trump took office less than three years ago. Wolf replaces authorities had used excessive force against Kevin McAleenan, who became acting Homeland Security secretary in April and submitted his demonstrators with legitimate demands, and resignation Oct. 11. At Homeland Security, Wolf will be joined by Ken Cuccinelli, the acting U.S. he added that there would be “no impunity” for Citizenship and Immigration Services director, who will become the department’s acting deputy anyone who commits violent acts. The protests secretary, unnamed administration officials told The Washington Post. were sparked last month by an increase in

NEWS BRIEFS Santiago subway fares, but they have since on Monday that she had “no idea” where he grown in scale as Chileans have demonstrated was, adding that she planned to use all legal Colombia to Allow Riot- against wider issues of inequality in the coun- means to fight the extradition. try. “We have all changed—because the social Control Measures Ahead pact cracked and made its wounds visible,” of Planned Protests Piñera said in the address. So far, 26 people ECONOMIC NEWS Colombia’s government on Nov. 18 said it have been killed, and thousands have been would authorize local authorities to adopt injured, the AP reported. Police have reportedly Ecuador Lawmakers exceptional riot-control measures to contain shot pellets directly at demonstrators’ eyes, protests that are planned nationwide for Nov. leading to at least 230 cases in which people Reject Moreno’s 21, Reuters reported. Student groups and have lost their sight in at least one eye. Among unions have called for the demonstrations, the protests on Nov. 18, a group of demon- Economic Reforms saying President Iván Duque’s government is strators donning eye patches gathered outside seeking to impose labor and pension reforms, the country’s Supreme Court. [Editor’s note: Ecuador’s National Assembly on Nov. 17 reject- which Duque has denied. Interior Minister See the Advisor’s interview on protests in the ed a package of tax and monetary reforms that Nancy Gutiérrez said the government has no region with Monica de Bolle of the Peterson the government of President Lenín Moreno had plans to increase the retirement age or lower Institute for International Economics and the proposed, the latest setback in his efforts to the minimum wage. Johns Hopkins University’s School of Advanced cut down the country’s onerous fiscal deficit, International Studies.] El Comercio reported. Within hours, Moreno announced in a televised address that he would Mexico, Uruguay, Caricom send a new proposal to Congress. “In the next Ex-Venezuelan Spy hours I will send to the National Assembly a Members Reject Use Chief Still Missing: new project of economic urgency, focused on of Force in Venezuela tax issues,” said Moreno, El Comercio reported. Mexico, Uruguay and representatives of the Ca- Spanish Official ribbean Community on Nov. 18 issued a statement rejecting the use of force and human A Spanish national court official said Nov. 18 rights violations in Venezuela and calling for that Maj. Gen. Hugo Carvajal, a former Venezu- a peaceful and democratic solution, Reuters elan spy chief accused of attempting to traffic reported. The statement followed nationwide drugs into the United States, remains missing protests by the Venezuelan opposition against since an order for his arrest pending extradition President Nicolás Maduro’s government and a was issued this month, the Associated Press call for more demonstrations in a bid to force reported. Authorities issued an order for Carva- jal’s arrest in Madrid on Nov. 8, the official said. Maduro out of power. Moreno // File Photo: Ecuadorean Government. On Monday, Spain’s High Court released a new ruling, also dated Nov. 8, that reversed an earli- “I’m sorry that hundreds of thousands of entre- er decision that had rejected the United States’ preneurs have to continue paying the advances U.S. Imposes Travel extradition request. The court said there was of an income tax, which as a government we Sanctions on Cuba’s “sufficient evidence to justify the extradition,” tried to eliminate,” he added. The initial reform Interior Minister Reuters reported. However, Carvajal has not package was part of Moreno’s plan to meet yet been found. He has previously denied commitments agreed to with the International The United States on Nov. 16 imposed travel accusations that he collaborated with the Rev- Monetary Fund in February in exchange for a sanctions on Cuban Interior Minister Julio olutionary Armed Forces of Colombia, or FARC, nearly $4.2 billion loan, Reuters reported. The César Gandarilla, Washington’s second travel rebel group to “flood” the United States with bill sought to improve tax collection by increas- ban of a high-level Cuban official as it moves cocaine. Prosecutors in New York say Carvajal ing some taxes and a special contribution for to increase pressure on the Cuban govern- should face trial for “narcoterrorism” as part of companies with revenues that exceeded $1 mil- ment and its ongoing support of Venezuelan a group of Venezuelan officials charged with lion annually, as well as give autonomy to the President Nicolás Maduro, Reuters reported. trafficking drugs. Carvajal, a former military in- country’s central bank. Indigenous movements U.S. Secretary of State Mike Pompeo said the telligence chief to the United States, was close and social organizations opposed some of the sanction against Gandarilla is in response to to former Venezuelan President Hugo Chávez, measures, while the business sector ques- the minister’s involvement in “gross violations Reuters reported. Carvajal’s lawyer told Reuters tioned others, the wire service reported. of human rights in Venezuela.”

FEATURED Q&A / Continued from page 3 FINANCIAL SERVICES ADVISOR is published biweekly by the Inter-American Dialogue, Copyright © 2019 individual to $200 per month from the previ- credit-negative pressure on funding after the ous limit of up to $10,000—a move aimed at market turmoil prompted by the outcome of Erik Brand preserving the central bank’s international the presidential election. Uncertainty about Publisher [email protected] reserves. Additionally, the central bank the future direction of economic policies will no longer allow banks to invest part has weakened consumer and corporate Gene Kuleta Editor of their sight deposits minimum liquidity confidence. As the peso rapidly depreciates, [email protected] we expect that depositors will continue to Anastasia Chacón González withdraw dollars from demand and savings We expect that total Reporter accounts, which form about half of the deposits will decline [email protected] system’s total deposits. In response to an significantly over the abnormally active foreign-exchange market coming weeks.” ahead of the elections, we expect that the Michael Shifter, President — Valeria Azconegui central bank will likely try to impose further Rebecca Bill Chavez, Nonresident Senior Fellow withdrawal restrictions or adopt other Sergio Bitar, Nonresident Senior Fellow requirements on central bank notes, which measures to protect international reserves. Joan Caivano, Director, Special Projects will negatively affect banks’ profitability and Increasing deposit withdrawals are credit Michael Camilleri, Director, Rule of Law Program challenge their funding costs. The central negative for banks because they depress Kevin Casas-Zamora, Nonresident Senior Fellow bank has also allowed banks to temporarily banks’ overall liquidity and raise balance Héctor Castro Vizcarra, Nonresident Senior Fellow increase their lending to the public sector in sheet volatility. We expect that total deposits Julia Dias Leite, Nonresident Senior Fellow order to finance wage payments, a measure will decline significantly over the coming Ariel Fiszbein, Director, Education Program that we expect will have a larger effect on weeks.” Peter Hakim, President Emeritus government-owned banks, but will likely Nora Lustig, Nonresident Senior Fellow leave private banks more risk averse as The Advisor welcomes comments on its Q&A Margaret Myers, Director, Asia and Latin America Program they continue to limit their exposure to the section. Readers can write editor Gene Kuleta Manuel Orozco, Director, Migration, public sector. Argentine banks will face at [email protected]. Remittances & Development Xiaoyu Pu, Nonresident Senior Fellow Jeffrey Puryear, Senior Fellow Mateo Samper, Nonresident Senior Fellow Tamar Solnik, Director, Finance & Administration Lisa Viscidi, Director, Energy Program Denisse Yanovich, Director of Development and External Relations

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