Competitive banking sector fuels economic stability
A SERIES OF MERGERS AND AQUISITIONS HAS SERVED TO SHORE UP THE DOMINICAN BANKING SECTOR AS GROUPS SUCH AS BANCO DEL PROGRESO SEEK TO INCREASE THEIR MARKET SHARE

IN THE MONEY Dominican banks are hoping to cash in on the positive economic climate.

As is usually the case in an expanding economy such as the Dominican Republic’s, stellar growth has its origins in the banking system, which relies on solid macroeconomic fundamentals for long-term asset growth and healthy loan portfolios. Since December 2000, interest rates in the Dominican banking sector have fallen by some 5%, sparking an upsurge in bank lending in the first half of 2001 and a wave of consolidations that have made the sector more competitive and sophisticated.

The authorities are confident that the conditions that led to the banking system’s strong results last year, namely a healthy economy and macroeconomic stability, will continue through 2002. As Francisco Guerrero Prats, governor of the Central Bank of the Dominican Republic, explains, “economic growth by the end of 2001 was well above the Latin American average, and was accompanied by single-digit inflation, low interest rates and a stable exchange rate.” The net international reserves were close to $1 billion last year and the economy received a healthy flow of foreign direct investment that was also around $1 billion. With the added resources coming from the recent $500 million sovereign bond issue, officials see a positive trend in terms of macroeconomic performance for the year 2002.

PEDRO CASTILLO President and CEO of Banco del Progreso

Most experts in the sector agree that there are still too many banks in the Dominican Republic and that the consolidation process will continue well into the next year at least. A large portion of the smaller banks now occupying marquee space in the nation will likely dissolve into other entities through acquisitions and joint ventures.
One bank that is expected to be around when the dust settles is the Banco del Progreso, which emerged as a purely corporate banking entity from the buyout by local investors of the Bank of Boston’s Dominican operations in 1985 and is now one of the four largest groups in the country as a result of its own series of acquisitions and expansion. One of its long-term goals, says Banco del Progreso president and CEO Pedro Castillo, is to reduce the bank’s dependency on corporate banking.

“In 1995 we had 13 offices and in 2001 there were some 74,” Mr. Castillo notes. “Back then we probably emitted just about 10,000 credit cards, and at the close of 2001 that figure was around 150,000. In 1999 we won the exclusive rights for American Express in the Dominican Republic, which gave us a great competitive advantage in the market.”
Mr. Castillo explains that the bank’s strategy is to diversify its operations towards high-volume, low-margin services that are more competitive but also provide more stable earnings than corporate banking. “Corporate banking also means small margins, but with large clients you risk a big percentage of your business. Our goal is to lower our dependency on corporate banking to less than 50%. But that will take time.”

The Banco del Progreso president predicts that foreign banks looking for a share of the Dominican market will likely–and wisely, he adds–seek to consolidate three or four current banks that control something like a 10% share of the market, as is the case of Mr. Castillo’s bank, in a bid to secure an overall market share of some 40%.
But far from being overly concerned that Banco del Progreso may get lost in the shuffle, Mr. Castillo insists that his firm will be one of the main players to take an active role in future consolidation deals.

“Our bank has always been open to the possibility of forming strategic alliances,” he notes. “There are 14 banks in the Dominican Republic and there is really only a need for about five. We’ve had several offers, but we’ve never considered selling out. We have decided that we would rather enter into a joint venture with an international institution without first having to consolidate with other local banks, even though we are also open to that idea. A little more than a year ago we acquired the Banco Metropolitano and we are currently searching out two Dominican financial institutions with the idea to either acquire them and merge or to enter into a joint venture.”