Montevideo — The current interest rate hike is something that “continues to be necessary for the adjustment of expectations” of inflation, Andre Gailey, CEO of Banco Itaú in Uruguay, tells Bloomberg Línea in an interview.
“This rate, being momentary, did not generate a change in the cash flows of companies or individuals in terms of investments”, he said during the interview he granted together with Agustín Tafernaberry, director of Wholesale Banking at Itaú, one of the main players in the financial sector in South America, and with a strong presence in Uruguay.
The volatility of the exchange rate and international commodity prices led to an increase in hedging instruments by companies, and “what we are seeing in the first half of the year is a record in the use of derivatives trading volumes,” Tafernaberry said.
The Brazilian bank expects both the agricultural and construction industries to drive the Uruguayan economy this year and next, although it is also preparing “specific support” for Uruguayan startups seeking to grow in Latin America, Gailey said, and who is also Itaú's Regional CEO for Argentina and Paraguay.
In Uruguay, Itaú is seeking to advance in the fintech business with the purchase of 30% of Prex and Paigo, although in Argentina it has announced the divestment of its digital wallet Ank.
When asked about the divestment, Gailey stated the decision was something “specific” amid the difficulties to make that operation profitable. “After analyzing the world scenario, the specific local scenario, the local rules and the projections, we saw that the chances of making the Ank operation profitable were very low,” he said.
The following interview has been edited for the sake of length and clarity:
Bloomberg Línea: Do you see technology companies in Uruguay with a greater need for financing? Or are those funds not sought within Uruguay?
Andre Gailey: We created a Tech Nucleus, which is an area dedicated to serving technology companies as clients. It is even a support area for the country’s fintechs. Through this area we offer specific credit products for technology companies, to invest in their growth and enable them to grow more. Núcleo Tech has alliances with various institutes in Uruguay and we are going to launch in the second half of the year specific support for startups and technology companies in Uruguay and Latin America. We really understand that this is a different market, with different needs, and we have created a specific front to meet the needs of those clients.
How do you see the demand for credit in the Uruguayan private sector evolving?
Agustín Tafernaberry: We see it as in good health and very strong. There are several areas of development and growth. We can talk about infrastructure, trade, agriculture. We see several lines of the bank’s business with significant demand for credit from customers. Particularly in the corporate world, which is leading the growth of the credit market, with very good growth levels, so we see it as very positive. We also have to recognize that the rate levels from which we come, and at which we are, are still super attractive.
The current level as well?
Agustín Tafernaberry: Beyond the fact that markets have adjusted rates, if one looks at a regional or international level we have positive rates.
Andre Gailey: And as regards individuals, we also see demand continues to be strong in the first half of the year. The effect of inflation should reduce demand a little in the second half of the year, but we see a fairly consistent market that will have a significant growth in 2022.
Do you see any sector as more buoyant than others?
Agustín Tafernaberry: Agriculture clearly stands out, construction as well. The latest government announcements on infrastructure works are very important.
Andre Gailey: Agriculture directly, but also indirectly generates with all the machinery and irrigation. There is strong investment in the sector and in our vision it will maintain a good level of activity in the country both in 2022 and 2023. Agriculture will be a strong driver of the country’s growth throughout the next two years.
How does Itaú see the rate hikes that Uruguay’s central bank (BCU) has been applying?
Andre Gailey: We are quite positive about the rate hike in the sense that it is necessary to anchor inflation expectations and bring them down to levels that are within the target and make inflation sustainable in the long term in the country. There is a challenge of an inflation that is partly imported, due to inflation globally, but it is still necessary to raise rates for this adjustment of expectations in each country. Besides, it is super aligned with what central banks are doing around the world.
Do you expect more rate hikes?
Agustín Tafernaberry: The bank is expecting some more rate hikes. It is important that we get into a situation of positive real rates to anchor expectations. We believe that the central bank will continue along this line, even maintaining it through next year in order to achieve a drop in inflation.
How have your clients readjusted their investment portfolios in view of the appreciation of the Uruguayan peso?
Andre Gailey: First, we see this situation as something temporary and that after this commodities cycle and with the Fed rate hike, things will normalize in the second half of the year. Companies have a more long-term view. Of course, there are companies that take advantage of the specific moment of the rate, but in general, flows continue to be normal, both for importing and exporting companies. On the individuals’ side, those who have income in pesos also continue with a normal life. Those who have an investment in dollars today maintain their investment. Since this rate was temporary, it did not generate a change in the cash flows of companies or individuals in terms of investments.
Agustín Tafernaberry As far as our clients’ behavior is concerned, we see more and more of them using hedging instruments. These international flows that we see, this regional volatility, what awakens are more hedging positions and the use of instruments to positively capture the movements. We have had everything. We have had a dollar at the beginning of the year at 44. We reached 39 and now it is over 41 pesos to the dollar. Clearly the market also shows opportunities and what we are seeing in this first half of the year is a record in the use of volumes of derivative operations.
Andre Gailey: It is very important for companies to have a hedging policy in order not to be greatly impacted by the volatility of the currency or commodities in the international market and to be able to better plan their income and cash flows.
In Uruguay, Itaú announced this year acquisition of stakes in Paigo, Prex and Resonance. What’s the thinking behind those purchases?
Andre Gailey.: The idea is to enter markets where we have little presence, especially the low-income and digital origination market, where the bank has tested directly but still with little success. These companies have expertise in originating digital credits, in opening 100% digital accounts, to an audience different from the bank’s target. We believe this is a way to complement the bank’s portfolio and to invest in financial inclusion in the long term.
Doe the bank plan more acquisitions in Uruguay?
Andre Gailey: We are always looking at opportunities and looking at our strategy. There are always ongoing conversations.
In Argentina, the bank ceased its investment in Ank, but in Uruguay the bank is buying fintechs. Is Itaú focusing on more stable countries?
Andre Gailey: The Ank decision is exclusively related to the capacity of making the investment in Ank profitable. After analyzing the global scenario, the specific local scenario, and what the local rules are and making projections, we saw that the chances of making Ank’s operation profitable were very low. That is why we made the decision to evaluate the potential strategic paths for Ank. But we continue with a strong operation for the bank in Argentina, and even with Prex itself, which is also present in Argentina.