Ecuador Banks’ $1 Billion Fire Sale Cuts Assets’ Value

(Corrects location of surge in finance-company mergers in 10th paragraph of story originally published May 9.)

Ecuador’s push for banks to sell non- core businesses is creating a $1 billion asset glut as the nation’s biggest financial firms struggle to find buyers before a July deadline.

Banco de la Produccion SA, the country’s third-largest lender with a market value of $185 million, is trying to shed insurance and brokerage assets and will shut its investment business, Chief Executive Officer Abelardo Pachano said. Banco del Pichincha CA (PCD), the country’s largest publicly-traded bank valued at $695 million, must sell or close its insurance, brokerage and investment units.

Ecuador’s biggest banks are trading at a discount of more than 50 percent to peers in Colombia and Peru in part because of the drive begun last year by President Rafael Correa, an ally of Venezuela’s Hugo Chavez, to ban banks from operating or holding stakes in other companies. Now, lenders are watching the value of their units erode as rivals vie to complete the sales by the government’s July 12 deadline.

“This pressing time frame has caused damage in the value” of the units, Pachano said in an April 17 interview at his offices in Quito. “It’s a forced sale under conditions that are truly contrary to the interests of the financial system.”

Photographer: Adriano Machado/Bloomberg

Ecuador's President Rafael Correa led a successful drive last year to ban banks from operating or holding stakes in other companies. Close

Ecuador's President Rafael Correa led a successful drive last year to ban banks from... Read More

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Photographer: Adriano Machado/Bloomberg

Ecuador's President Rafael Correa led a successful drive last year to ban banks from operating or holding stakes in other companies.

Shares of Ecuador’s biggest banks traded at an average 4.99 times trailing 12-month profits at the end of last year, according to the most recent data from the Quito stock exchange. The ratio is less than half the current valuation of 15.56 times earnings for the three biggest lenders in Colombia and 12.76 for Peruvian peers, based on data compiled by Bloomberg.

Share Drop

Produbanco has fallen 11 percent to $1.25 since May 6, 2011, the day before Ecuador approved a constitutional referendum banning financial institutions, their owners, and investors with stakes of 6 percent or more from owning companies or stock outside the banking industry. Correa said last year the new rules would prevent unfair lending practices that favor affiliated companies at the expense of rivals.

Banco de Guayaquil SA, Ecuador’s second-biggest bank with a market capitalization of $422 million, is down 31 percent in the same period to $1.68, while Pichincha, which gets about 22 percent of its revenue from outside Ecuador, has climbed 16 percent $1.65.

Ecuador’s stock markets are less liquid than bourses in neighboring countries. In April, 35,126 shares of Pichincha changed hands, compared with 8.48 million shares of Colombia’s biggest lender, Bogota-based Bancolombia SA (PFBCOLO), data compiled by Bloomberg show.

Andean M&A

Banco de Guayaquil, based in Guayaquil on Ecuador’s Pacific coast, said last month it was the only lender to have completed the required sales. Ace Ltd. (ACE), a Switzerland-based insurer, bought the bank’s insurance unit for $55 million in December. The lender sold a brokerage business to employees for $1 million last month and its funds administrator for $2.75 million.

The forced sales in Ecuador come amid a surge in acquisitions of the Andean region’s finance companies, sparked by economic growth topping 6.1 percent in Colombia and 7.2 percent in Peru as well as the integration of stock markets in Bogota, Lima and Santiago. Acquisitions of Andean region financial firms worth a record $7.56 billion were announced last year, five times the previous year’s total, according to data compiled by Bloomberg.

The new rule in Ecuador creates an opportunity for investors to pick up the units or even entire banks cheaply, Walter Spurrier, the director of Guayaquil-based economic researcher Grupo Spurrier, said in an interview April 25.

‘Low Cost’

“If I were a Colombian or Peruvian insurance company, for example, I’d be looking at what to buy in Ecuador because I can enter the market at a relatively low cost,” said Spurrier, who has covered the country as an analyst since 1970 and used book prices to estimate that $1 billion of assets are up for sale.

For potential buyers, the sales may be too good to pass up, said Andres Cordovez, chief executive officer of Seguros Equinoccial SA, Ecuador’s fourth-biggest insurance company. Quito-based Equinoccial is in talks with lenders selling insurance units, he said, declining to identify the banks.

“While we don’t agree with the law, we can’t let this go unnoticed,” Cordovez said in an April 25 telephone interview.

Pedro Solines, the head of Ecuador’s banking and insurance regulator known as the SBS, didn’t respond to interview requests made by telephone and e-mail. Economic Policy Minister Jeannette Sanchez, who also oversees the SBS, didn’t reply to voice messages seeking comment, nor did the ministry’s press office.

Reinforcing Divide

Correa’s economic policies, favoring state intervention in the economy, may limit demand for Ecuador’s financial institutions said Vicente Albornoz, head economist of the Cordes research institute in Quito. Correa canceled oil contracts with Rio de Janeiro-based Petroleo Brasileiro SA (PETR4) and defaulted on $3.2 billion of government debt in 2008 and 2009.

“There’s little interest abroad in Ecuador’s banks,” Albornoz said in a May 3 interview. The government’s policies “are chasing off everyone.”

Ecuadorean government debt is South America’s third- riskiest after Argentina and Venezuela, according to JPMorgan Chase & Co.’s EMBIG index, which measures the extra yield investors demand to own dollar bonds over U.S. Treasuries.

Bolivian President Evo Morales’s seizure of the country’s main electricity company on May 1, two weeks after Argentina took over its biggest oil producer, is reinforcing a divide between Latin American leaders that support private investment and those pursuing more government intervention in their economies.

Trading Volumes

Venezuela, Argentina, Bolivia and Ecuador have taken over energy, cement, airline, pension and mining companies in the past five years while governments in Chile, Colombia, Brazil and Peru have sought to draw investment to bolster growth.

Ecuador’s rule change may also cut trading volumes in the country’s securities exchanges as market makers such as Pichincha sell their brokerages and clients withdraw money from banks’ investment funds to comply with the law, said Ulises Alvear, the president of the nation’s Brokerage House Association. The total amount managed by funds affected by the law, including trusts, dropped 25 percent to $878 million in the 10 months following the law’s approval, the most recent data from the SBS and Ecuador’s Superintendent of Companies show.

“This is a year of uncertainty,” Alvear, who is also chief executive officer of Quito-based MetroValores Casa de Valores SA, said in an April 13 interview. “It’s hard to sign a contract with someone when you don’t know if they’ll be around in six months.”

To contact the reporter on this story: Nathan Gill in Quito at ngill4@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at Papadopoulos@bloomberg.net

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