An analysis published today by Aristimuño Herrera & Associates draws attention to an increase in arrears in 36 of the 47 Venezuelan banks. The increase in credit card fees is one of the causes.

A rise in the rate of arrears has been observed in the accounts of banking institutions, with rates of 1.14% in February 2007 increasing to 1.34% in January 2008 and 1.41% in February.

Of a total of 47 commercial and universal banks, 36 have seen their rate of arrears increase in the last 12 months. This figure, according to Aristimuño Herrera & Associates, will continue to increase through the year. This will strike in unison with a fall in the banks' profits, which will without doubt hang over the system in a negative way.

The economic slow down which will occur in 2008, along with an increase in interest rates, is a highly detrimental combination for the solvency of Venezuelan banks' credit portfolio.

The maximum rate of interest that banks can charge for credit card loans has now risen to 32%, which is evidence for the increase in arrears for this credit, which now represents 14% of all loans, equal to Bs.F 14,733,193. Banks have done away with sending out unsolicited credit cards, just as with the phrase "Buy now, pay later". Credit cards are the easiest form of borrowing to use and the hardest to pay back- in periods of economic cooling things are aggravated even more by the increased cost of borrowing.

At Aristimuño Herrera & Associates, they predict that credit cards will be one of the biggest headaches for banks this year. Furthermore, they foresee 2008 being a difficult year for banking in general, as financial obligations are not met.

Tied up assets belonging to banks increased from Bs.F 733,266,000 in February 2007 to Bs.F 1,472,102,000 twelve months later- an increase of 100.8%.

In February 2008, uncollected debts outstanding were covered by 156.2%, but in the same month last year, they were covered by 203.34%. Seven banks are now below 100% in the cover of their bad-debt portfolios.

Faced with a fall in profits and an increase in arrears, the outlook for banks is not promising.

The greatest reason behind the increase in arrears for consumer credit is that, on the one hand, Venezuelans are spending more, and on the other hand they are now starting to strongly feel the effects of spending in the last quarter of 2007, especially when there are no bonuses to receive and with an increase in interest rates in parallel to an increase in inflation and an overall decrease in the economy (it will grow less than the 8.4% achieved in 2007).

Since October 2007, the average amount of a bank's assets has increased by 6%, placing itself at 23.12%, and the same rate for credit cards is currently at 31.03%.

However, we must bear in mind that the impact on additional credit spending in banks was behind the Venezuelan Central Bank's decision to raise interest rates for savings accounts, costing Bs.F 1,747,906,000, which represents 38% of net profits for the banking sector in 2007. This is without even considering the fall in takings from credit for the manufacturing sector, since the interest rate is now fixed at 19%, compared to a previous average of 25%, meaning a decrease of 6%. In a portfolio of Bs.F 7,386,888,000, these 6% are equivalent to a decrease in takings of Bs.F 443,213,000.

Banks are thus looking to compensate for this increase in their costs combined with the decision taken this Tuesday by the Venezuelan Central Bank to regulate certain banking commissions, along with an increase in interest rates and its associated impact on the rate of arrears.

Source: economista24.com