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Venezuelan Billionaire Seen Benefiting From Socialism

Billionaire Venezuelan Uncovered Profiting From Chavez Socialism
Venezuelan billionaire Juan Carlos Escotet, owner of Banesco Banco Universal CA, poses for a photo in San Juan, Puerto Rico, on Sept. 30, 2011. Photographer: Jorge A Ramirez Portela/GDA via AP Images

Last January, when he was still making the marathon speeches that are his trademark, Venezuelan President Hugo Chavez took to state television and threatened once again to nationalize his country’s banks. Pointing into the camera, he addressed one banker by name: Juan Carlos Escotet.

Chavez called on the owner of Banesco Banco Universal CA, Venezuela’s second-largest lender, to comply with his demand that the financial industry hand over cash to the government for agriculture loans.

“Escotet, let me know if you can,” Chavez said on his weekly “Alo Presidente” program, since suspended for this year’s presidential campaign and a fresh round of cancer treatments. “If not, give me the bank, compadre. Tell me how much the bank costs, and we’ll nationalize it right away.”

Chavez, who has carried out more than 1,000 government takeovers since taking office 14 years ago, didn’t follow through on his threat. In fact, his reign has proved a boon to banks, which thrive on the currency controls and high interest rates that have sunk much of Venezuela’s productive economy. Spanning across the Caribbean to Miami and Panama, Escotet’s closely held financial empire has allowed him to amass a fortune worth at least $1.3 billion, according to the Bloomberg Billionaires Index.

Escotet, 53, started getting calls from Chavez on live TV when he became head of the country’s banking association in 2010. Since stepping down last year, he’s kept a lower profile. He has never appeared on an international wealth ranking, and he declined to comment for this account.

21st-Century Socialism

“The threat is not against banks as an industry, but against the banker as owner of the bank,” said Francisco Faraco, a Caracas-based financial-risk consultant. “It’s undeniable that bankers are at risk because of their wealth and their name.”

As part of the project he calls 21st-century socialism, Chavez has imposed price caps on companies that include Procter & Gamble Co. and Colgate-Palmolive Co. Amid currency controls in place since 2003, companies such as armored-car provider Brinks Co. resorted to the parallel market to buy dollars and repatriate dividends until Chavez banned the practice outright in 2010.

The scarcity of dollars for imports, combined with shrinking local industry, means that Venezuelans often face shortages of basic foodstuffs such as sugar and milk. Chavez also has shut down brokerages and jailed bankers. One of them, Ricardo Fernandez Barrueco, has been in prison for more than three years as he awaits trial for allegedly misusing depositor funds.

Subsidized Lending

Still, Chavez’s socialist project depends on capitalist banks. He needs institutions such as Escotet’s to fund Venezuela’s ballooning public debt, according to Faraco. That’s what feeds the social programs that have cut poverty and made the president popular, carrying him to re-election by more than 10 percentage points in October. Even with Chavez in Cuba, recovering from his fourth cancer surgery since last year, his allies won 20 out of the 23 gubernatorial races in regional elections this past weekend.

Investing in government bonds is profitable for banks because of Venezuela’s high borrowing costs -- the second-highest among major developing nations, according to JPMorgan Chase & Co. Banks charge even higher rates to consumers, who are motivated by 18 percent annual inflation to buy goods such as washing machines and cars on credit. That more than compensates for the subsidized lending Chavez mandates for areas such as agriculture and housing.

The public spending boom also has generated a flood of Venezuelans bolivars that are mostly trapped in the country due to currency controls. Because of that, banks can offer near-zero interest rates on deposits, according to Ricardo Villasmil, an economist at the Universidad Catolica Andres Bello in Caracas who advised the opposition in the October elections.

Spending Binge

Taken together, these factors place Venezuela’s banks among the most profitable in the world. Aided in part by the government’s election-year spending binge, they generated an average return on equity of 53 percent as of October, according to the country’s banking regulator. That measure of profitability compares to Goldman Sachs Group Inc.’s peak of 34 percent in 2007, data compiled by Bloomberg show.

“It’s paradoxical, because the banks are making money almost without doing anything,” said Villasmil.

Banesco holds more than 100 billion bolivars ($23.3 billion) in assets. It’s second only to Banco de Venezuela SA, which Chavez expropriated from Spain’s Banco Santander SA in 2009. The avowed Marxist paid Santander $1.1 billion, or about 95 percent of the unit’s book value at the artificially strong official exchange rate. Book value is defined as total assets minus liabilities.

Panamanian Lender

Escotet controls 58.9 percent of Banesco in Venezuela, according to documents filed with Spain’s company registry by Banesco Corporacion Holding Hispania SL, his Madrid-based investment vehicle. The Venezuelan flagship had a book value of 7.9 billion bolivars as of Sept. 30, financial statements on its website show. Based on the price Chavez paid for Santander’s Venezuelan operations, at Caracas-based financial consultancy Ecoanalitica’s inflation-adjusted exchange rate of 8.4 bolivars per dollar, Escotet’s stake is worth about $525 million. The official exchange rate is currently 4.3 bolivars per dollar.

Escotet’s second-largest asset is Panama-based Banesco SA. Because the unit operates in dollars outside Venezuela and is not subject to seizure by Chavez’s government, its value is based on the price-to-book and price-to-earnings multiples of five publicly traded Latin American banks: Bancolombia SA, Scotiabank Peru SA, Chile’s Banco de Credito & Inversiones, Mexico’s Grupo Financiero Banorte SAB and Brazil’s Itau Unibanco Holding SA. The Panamanian lender reported a book value of $264 million and a 12-month profit of $47 million as of June 30, according to its website, making his 70.4 percent stake worth $430 million.

Smaller Units

Escotet also owns TodoTicket 2004 CA, which administers employee benefits for companies and government entities. Together with his Venezuelan insurance provider and Miami-based Banesco USA, the billionaire’s smaller units are valued at a combined $120 million, according to data compiled by Bloomberg. After accounting for dividends, reinvestments and market performance, Escotet probably controls at least 1.6 billion bolivars in cash and other investable assets, or $200 million at Ecoanalitica’s real exchange rate, according to the ranking.

“It’s not that Venezuelan bankers are sharks,” Faraco, the financial-risk consultant, said of the industry’s profitability. “This is a consequence of the economic policies of Chavez’s government.”

‘Education, Perseverance’

One of eight children of Spanish immigrants, Escotet got his start as an errand boy at a Venezuelan bank in 1976, according to an interview published last year in the magazine Mercado de Republica Dominicana. He studied for his college degree at night while working full-time at a lender called Banco Union, then owned by the second generation of the local Salvatierra banking family.

“Banking doesn’t run in my family,” Escotet told the magazine. “What runs in my family is a lot of education and a lot of perseverance.”

Faraco met Escotet when the billionaire was an executive at the Sociedad Financiera Latinoamericana, trying to come up with a name for his incipient banking empire.

“The first time I saw the word Banesco was on this sofa here in my office,” Faraco said. “He had a notebook with him that was full of logos and a name. At that time he didn’t have a bank, but he had plenty of desire for one.”

‘Plan B’

By the early 1990s, Escotet had accumulated enough cash to take over the small Bancentro lender from local businessmen. He founded his Panama unit in 1992. Seizing on a financial crisis in Venezuela, he scooped up a half-dozen savings and loan institutions by the middle of the decade.

Another opportunity presented itself when the Salvatierra family took out a $150 million loan from Citigroup Inc. to fend off a hostile takeover of Banco Union in the late 1990s. Cash-strapped, they accepted an offer from Escotet in 2000 to renegotiate the debt with Citigroup, merging Union into Banesco as part of the deal.

Along with his banks in Panama and Miami -- home to the world’s largest community of Venezuelan expatriates -- Escotet has opened branches in Colombia, Curacao, the Dominican Republic and Puerto Rico. Most Venezuelan businessmen create this sort of “plan B” outside the country, according to Faraco. Married with three children, Escotet still lives in Caracas.

Hostility, Affinity

In a speech earlier this month, when Chavez announced that his cancer had returned, he anointed Vice President Nicolas Maduro as his preferred successor. Under the constitution, if the president is unable to continue his post, general elections must be called within 30 days. Maduro, a former bus driver and union leader, has pledged to maintain Chavez’s 21st-century socialism.

Despite Chavez’s hostility toward capitalism, Escotet has expressed some affinity with the ailing president’s vision. In an interview last year on state TV, while still serving as head of the banking association, he defended his industry against criticism for its role in financing housing projects -- a priority of Chavez’s government -- that had gone under.

“Nothing can affect us bankers more than social problems, because in the end, these are our customers,” Escotet said. “We bankers are here to bet on everything that is beneficial for Venezuela.”

The Bloomberg Billionaires Index takes measure of the world’s wealthiest people based on market and economic changes and Bloomberg News reporting. Each net worth figure is updated every business day at 5:30 p.m. in New York. The valuations are listed in U.S. dollars.

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