NICARAGUA: BANKERS REPORT STABILITY, BUT NO GROWTH

C O N F I D E N T I A L MANAGUA 000343

SIPDIS

STATE FOR WHA/CEN, WHA/EPSC AND EEB
TREASURY FOR SARA SENICH

E.O. 12958: DECL: 03/30/2019
TAGS: EFIN ECON ETRD PREL PGOV NU
SUBJECT: NICARAGUA: BANKERS REPORT STABILITY, BUT NO GROWTH

Classified By: Ambassador Robert J. Callahan for reasons 1.4 b & d.


1. (C) Summary. Despite rumors of economic meltdown and
possible capital flight, Nicaragua's highly dollarized
banking sector appears to be holding its own. Officials from
the Superintendent of Banks (SIBOIF) and the Central Bank as
well as prominent banking executives tell us that liquidity
is good and exposure to badly performing loans is manageable.
Most high-net-worth Nicaraguans and well-capitalized
companies minimized their exposure to risk in Nicaragua
before President Ortega took office in 2007; the result is
that most savings and checking accounts here are modest in
size. Regrettably, diminished access to credit from foreign
financial institutions has fueled a reluctance on the part of
Nicaraguan banks to provide financing for medium to long-term
investments, which greatly hinders economic growth. HSBC
bank announced in January it would close its offices in
Nicaragua, but its presence here was quite small (HSBC will
maintain a representative office in Managua). The head of
SIBOIF privately told us that Citibank is looking to sell its
Nicaraguan operations (which focus almost entirely on credit
cards, but Citibank has made no public statements to this
effect). End Summary.

Banks Weather the Storm...
--------------


2. (C) Luis Rivas, General Manager of BANPRO (Nicaragua's
largest bank with nearly $1 billion in assets) told econoff
on March 11 that deposits remain stable, despite seasonal
fluctuations in December and January. According to Rivas,
capital flight is not a problem; BANPRO,s depositors realize
that better returns are simply not available elsewhere given
the current international economic climate. Rivas stressed
that BANPRO, as a prominent local bank, enjoys solid and deep
relationships with its depositors and shareholders, a factor
that would minimize the risk of a run on deposits in a time
of crisis. Julio Cardenas, Executive Director of BANCENTRO
(Nicaragua's second-largest bank with $750 million in
assets),detailed a similar relationship with his bank,s
depositors.


3. (C) Victor Urcuyo, the Superintendent of Banks (SIBOIF),
assured econoff that the Nicaraguan banking system remains
fundamentally sound. All major banks maintain adequate
liquidity and reserve levels, and in some cases they have
exceeded SIBOIF mandates (banks here are required to maintain
reserves of 16.25% of total deposits). On the possibility of
capital flight, Urcuyo observed that most wealthy Nicaraguans
minimized their financial exposure to Nicaragua before
President Ortega took office in January 2007. Consequently,
most deposits in the Nicaraguan banking system are modest in
value. Many businesses owned by wealthy Nicaraguan families
maintain accounts here simply for working capital purposes.
These depositors are unlikely to transfer much more cash
outside of the country. Note: Deposits and loans
denominated in U.S. dollars account for at least 70% of the
total in the three largest banks in Nicaragua (out of the
eight banks regulated by SIBOIF). Urcuyo pointed out that
while many local depositors view the dollar as a hedge,
borrowers with loans denominated in dollars are highly
vulnerable to a cordoba devaluation. End Note.

...But Withhold Financing for New Projects
--------------


4. (C) Both Rivas and Cardenas told econoff that the primary
negative consequence of the global financial crisis for local
banks is the tightening of international commercial credit.
Cardenas listed several established lines of credit that are
no longer available to BANCENTRO from prominent U.S.
financial institutions such as Wachovia. In turn, Cardenas
said, fewer financial resources are available to support
loans here, particularly for clients requiring medium to
long-term financing such as in construction, housing, and
real estate development. Such a scenario, compounded by
contracting local and international demand, greatly
contributes to retarded economic growth. Local economists
have revised their 2009 GDP growth estimates downward to 1%
and perhaps even into negative territory.

HSBC Pulls Out, Citibank Focuses on Credit Cards
-------------- ---


5. (C) HSBC announced in January that it would close its
branches in Nicaragua, but would maintain a representative
office in Managua. HSBC's presence in Nicaragua was very
small, with only $49 million in assets, created from its 2005
purchase of Panama-based Banco del Istmo. Urcuyo told
econoff that Citibank, which launched operations in Nicaragua
under its own name last September, is already looking to sell
(Citibank has stated publicly its intention to stay in the
Nicaraguan market). One reason why Citibank may be looking to
sell is the fact that roughly 98% of its operations here
focus on credit cards, a sector that, while extremely
profitable the last few years, is now experiencing default
rates of about 9%, way above the typical rate of 1-2%. U.S.
Department of Treasury advisors conducting a training
workshop with the Nicaraguan counterpart to the U.S. FDIC in
mid-March flagged this high default rate as a warning signal
for the banking industry here.

Comment
--------------


6. (C) While we expect the number of non-performing loans to
rise in Nicaragua as a result of the international financial
crisis, the major banks do appear to be maintaining
liquidity. Already the smallest in Central America (about
$3.6 billion total assets in the entire financial system),
Nicaragua's bankers have historically displayed little
appetite or capacity to provide desperately needed credit to
support medium or long-term investments. While these
conservative lending practices have been in place for many
years, they now serve to protect the banks from the
international financial crisis.
CALLAHAN