Bank on Chile
Interview with Daniel Subelman A. Managing Director Head of Capital Markets Banco Penta
Based in Santiago, Banco Penta provides commercial banking and other services to large companies and corporations in Chile. It operates in two areas: Investment Banking, and Company and Corporate Banking. The bank offers various products and services, including mutual and investment funds, shares, term and demand deposits, fixed-rate and derivative instruments, foreign currency, and investment advisory services, as well as foreign investment and portfolio management services to high-net-worth clients and institutional investors.
It also provides credit products with bullet maturity or installments; credit for exporters and overdraft lines; foreign currency purchase and sale products; and hedging.
1.For those who may not be familiar with Banco Penta, can you outline the bank’s history and its current status?
Banco Penta was created nine years ago as Chile’s first and only investment bank, focusing on the asset management business, originally aimed at high-net-worth clients. The asset management business is carried out mostly through our asset management subsidiary, Penta Admnistradora General de Fondos. The bank oversees the rest of its assets under management through a fully dedicated team. Currently, on a consolidated basis, Banco Penta has more than USD2bn of assets under management from more than 3,500 clients invested in mutual funds, public investment funds and private investment funds. Our investment funds cover a broad array of investment areas such as real estate and automotive. Beginning in 2009, it was decided to make inroads into new business areas, resulting in the creation of our corporate banking division. To date, Banco Penta has a lending portfolio of over USD1.0bn. Along with this, and with the purpose of enhancing the profitability of our banking ledger through cross selling, we developed a corporate sales and trading desk, strengthened our debt and capital markets team, and developed a real estate arm.
From the outset, through our own stock exchange broker Penta Corredores de Bolsa, we have offered securities brokerage services to our high-net-worth clients, while also developing our corporate finance business. As of 2011, Banco Penta began the coverage of local financial institutional investors, to which the bank offers brokerage services, as well as the distribution of banking products through a dedicated sales and trading desk. Banco Penta is a subsidiary of Empresas Penta, a privately-owned local group with investments in banking, insurance, healthcare and real-estate.
2.What services does the bank offer its customers?
The key to our success has been a clear and effective business strategy that has enabled us to focus on our strengths, taking advantage of business opportunities and become Chile’s first and only real investment bank. Banco Penta focuses exclusively on three types of clients: high-net-worth individuals, institutional investors and corporate clients. In order to serve these clients, the bank offers the following products: asset management, brokerage, corporate finance, financing and sales & trading.
Our business model is based on taking advantage of the synergies that exist among the bank’s different clients as they interact jointly in our platform through our different products. All our clients come up with business ideas, which we then help to develop and execute through specialized structuring teams, such as corporate finance, asset management, and project finance.
This structuring capacity, when added to our balance sheet capacities, either of the bank itself, of our private banking clients or of our controllers as co-investors, enable us to generate value and transform business ideas into down-to-earth concrete business operations. Few local industry players have the capacity to implement the strategy developed by Banco Penta; banks typically have a balance sheet and lending capacity, but lack the necessary agility and flexibility to structure ad hoc solutions to their different clients and, on the other hand, local brokerage houses –which are usually more agile and flexible- lack the required financial muscle to accompany their clients through their own balance sheets.
3.What steps is Banco Penta taking to grow it operations?
The bank is undergoing an integral and full growth process and expects to adhere strongly to this path in the years to come. Throughout 2015, all of the bank’s lines of business are expected to grow and continue to mature with a preferential focus on the credit business and financial institutional investors.
With respect to our corporate clients, our future strategy is to continue to support them with financing. To that effect we are developing several banking products aimed at delivering a broader range of solutions to their needs; likewise, we are also strengthening our debt capital markets (DCM) and sales & trading teams in order to generate fees to improve our return on equity (ROE). Along these same lines, we have already committed a new capital increase that will leave us with a shareholders’ equity of USD 400 mm; which, in turn guarantees our future growth prospects.
With respect to our institutional investors, our strategy for the years ahead is to consolidate our current position and increase our sales & trading and our brokerage businesses with them. Likewise, as of this year we began to distribute funds -of our own and of third parties- to such clients. We expect to strongly develop this line of business from here on.
With respect to our high-net-worth clients –following the process of initial AUM growth- our future strategy is to build and expand our clients’ degree of principality while gaining a greater percentage of their wallet. During the year 2013, Empresas Penta sold its controlling stake in AFP Cuprum, the second largest pension fund in Chile. This sale will enable tapping new AUMs from this segment, since in the future we will not be barred to operate with them, while simultaneously clearing any potential conflict of interest that could have arisen between the bank and AFP Cuprum; all of which is expected to boost our capital inflows from the institutional investor segment. Finally, it cannot be ruled out for Banco Penta to expand its operations abroad, always adhering to our above-depicted business model.
4.Can you describe how Chile’s financial industry has developed in recent years and how it is likely to develop in future years?
Chile’s financial industry has developed significantly over the last 20 years, achieving a high level of consolidation. However, zooming in on its members, one may observe very unalike contexts. These significant differences generate different opportunities for such industry players. On the one hand, banks and pension fund administrators (AFP) have been subjected to stringent regulations and fiscal supervision. High regulatory barriers have deterred new entries into the industry. Thus, during the last decades these industries have undergone multiple merger processes, springing significant industry concentration.
Additionally, banks and AFPs have reached important business volumes following high-growth periods during the last decades. The foregoing led the banks to assume considerable scales, encompassing increased operating efficiency, but at the same time, it has brought about new challenges regarding their agility. In this context, these organizations have left interstices that allow the entry of new competitors with niche strategies, such as retail banks and investment banks.
On the other hand are broker dealers and asset managers. These players have had a lesser degree of regulation and oversight allowing for a large number of incumbents. The size of such two industries is relatively small; reason why their current high level of fragmentation is not sustainable. During these last years, Chile’s capital market regulations have deepened, thereby increasing their operational costs. In sum, the size of these industries, their high level of fragmentation, and the new regulatory environment should logically be followed by a process of intensive M&A activity.
5.What is the role of financial institutions in promoting Chile’s growth?
Financial institutions are fundamental in the Chilean economy and play a key role in the country’s development. The country’s institutional investors -basically AFPs, life insurance companies and asset managers manage close to USD 250 bn in assets (i.e. approximately 65% of Chile’s GDP). Since Chile is a demographically young country, the AUMs managed by AFPs are continuously growing since the system’s social security contribution inflows exceed its annual pension payment outflow. Such continuously increasing social security savings have paved the way for the development of a deep and broad debt capital market, in terms of amounts and maturities; which, in turn, enable project financing under attractive terms and conditions, consequently favoring the kind of investment projects that currently support a significant part of the country’s economic growth.
On the other hand, local banks, following the profound crisis experienced in Chile in the 1980’s, and partly because of the stringent regulatory environment enacted and supervised by the country’s Superintendence for Banks & Financial Institutions (SBIF), currently exhibit high levels of financial solvency, liquidity and equity strength. The solidity of the local banking industry was successfully put to test during the 2008 world financial crisis, when local banks managed to weather out the crisis without major complications. Such financial soundness of the banks further deepens the local capital market. Thus, on the one hand it permits borrowing and lending the private savings of natural and corporate persons into investments. On the other hand, it permits customized financing operations, adequately complementing certain financing schemes via bonds offered by institutional investors. Likewise, the sheer fact that nowadays there are nearly 22 banks with lending capacity, ensures a strong and competitive lending environment, which is why the lending terms and conditions usually associated to such financing operations are often very competitive.