Venezuelan Billionaire Seen Benefiting From Socialism

By Alex Cuadros - Dec 19, 2012

Last January, when he was still making the marathon speeches that are his trademark, Venezuelan President
Hugo Chavez took to state television and threatened once again to nationalize his countrys banks. Pointing into
the camera, he addressed one banker by name: Juan Carlos Escotet.
Chavez called on the owner of Banesco Banco Universal CA, Venezuelas second-largest lender, to comply with
his demand that the financial industry hand over cash to the government for agriculture loans.
Escotet, let me know if you can, Chavez said on his weekly Alo Presidente program, since suspended for this
years presidential campaign and a fresh round of cancer treatments. If not, give me the bank, compadre. Tell
me how much the bank costs, and well nationalize it right away.
Chavez, who has carried out more than 1,000 government takeovers since taking office 14 years ago, didnt follow
through on his threat. In fact, his reign has proved a boon to banks, which thrive on the currency controls and
high interest rates that have sunk much of Venezuelas productive economy. Spanning across the Caribbean to
Miami and Panama, Escotets closely held financial empire has allowed him to amass a fortune worth at least
$1.3 billion, according to the Bloomberg Billionaires Index.
Escotet, 53, started getting calls from Chavez on live TV when he became head of the countrys banking
association in 2010. Since stepping down last year, hes kept a lower profile. He has never appeared on an
international wealth ranking, and he declined to comment for this account.
21st-Century Socialism
The threat is not against banks as an industry, but against the banker as owner of the bank, said Francisco
Faraco, a Caracas-based financial-risk consultant. Its undeniable that bankers are at risk because of their
wealth and their name.
As part of the project he calls 21st-century socialism, Chavez has imposed price caps on companies that include
Procter & Gamble Co. and Colgate-Palmolive Co. Amid currency controls in place since 2003, companies such as
armored-car provider Brinks Co. resorted to the parallel market to buy dollars and repatriate dividends until
Chavez banned the practice outright in 2010.
The scarcity of dollars for imports, combined with shrinking local industry, means that Venezuelans often face
shortages of basic foodstuffs such as sugar and milk. Chavez also has shut down brokerages and jailed bankers.
One of them, Ricardo Fernandez Barrueco, has been in prison for more than three years as he awaits trial for
allegedly misusing depositor funds.
Subsidized Lending
Still, Chavezs socialist project depends on capitalist banks. He needs institutions such as Escotets to fund
Venezuelas ballooning public debt, according to Faraco. Thats what feeds the social programs that have cut
poverty and made the president popular, carrying him to re-election by more than 10 percentage points in
October. Even with Chavez in Cuba, recovering from his fourth cancer surgery since last year, his allies won 20
out of the 23 gubernatorial races in regional elections this past weekend.
Investing in government bonds is profitable for banks because of Venezuelas high borrowing costs -- the second-
highest among major developing nations, according to JPMorgan Chase & Co. Banks charge even higher rates to
consumers, who are motivated by 18 percent annual inflation to buy goods such as washing machines and cars on
credit. That more than compensates for the subsidized lending Chavez mandates for areas such as agriculture
and housing.
The public spending boom also has generated a flood of Venezuelans bolivars that are mostly trapped in the
country due to currency controls. Because of that, banks can offer near-zero interest rates on deposits, according
to Ricardo Villasmil, an economist at the Universidad Catolica Andres Bello in Caracas who advised the
opposition in the October elections.
Spending Binge
Taken together, these factors place Venezuelas banks among the most profitable in the world. Aided in part by
the governments election-year spending binge, they generated an average return on equity of 53 percent as of
October, according to the countrys banking regulator. That measure of profitability compares to Goldman Sachs
Group Inc.s peak of 34 percent in 2007, data compiled by Bloomberg show.
Its paradoxical, because the banks are making money almost without doing anything, said Villasmil.
Banesco holds more than 100 billion bolivars ($23.3 billion) in assets. Its second only to Banco de Venezuela SA,
which Chavez expropriated from Spains Banco Santander SA in 2009. The avowed Marxist paid Santander $1.1
billion, or about 95 percent of the units book value at the artificially strong official exchange rate. Book value is
defined as total assets minus liabilities.
Panamanian Lender
Escotet controls 58.9 percent of Banesco in Venezuela, according to documents filed with Spains company
registry by Banesco Corporacion Holding Hispania SL, his Madrid-based investment vehicle. The Venezuelan
flagship had a book value of 7.9 billion bolivars as of Sept. 30, financial statements on its website show. Based on
the price Chavez paid for Santanders Venezuelan operations, at Caracas-based financial consultancy
Ecoanaliticas inflation-adjusted exchange rate of 8.4 bolivars per dollar, Escotets stake is worth about $525
million. The official exchange rate is currently 4.3 bolivars per dollar.
Escotets second-largest asset is Panama-based Banesco SA. Because the unit operates in dollars outside
Venezuela and is not subject to seizure by Chavezs government, its value is based on the price-to-book and price-
to-earnings multiples of five publicly traded Latin American banks: Bancolombia SA, Scotiabank Peru SA, Chiles
Banco de Credito & Inversiones, Mexicos Grupo Financiero Banorte SAB and Brazils Itau Unibanco Holding SA.
The Panamanian lender reported a book value of $264 million and a 12-month profit of $47 million as of June
30, according to its website, making his 70.4 percent stake worth $430 million.
Smaller Units
Escotet also owns TodoTicket 2004 CA, which administers employee benefits for companies and government
entities. Together with his Venezuelan insurance provider and Miami-based Banesco USA, the billionaires
smaller units are valued at a combined $120 million, according to data compiled by Bloomberg. After accounting
for dividends, reinvestments and market performance, Escotet probably controls at least 1.6 billion bolivars in
cash and other investable assets, or $200 million at Ecoanaliticas real exchange rate, according to the ranking.
Its not that Venezuelan bankers are sharks, Faraco, the financial-risk consultant, said of the industrys
profitability. This is a consequence of the economic policies of Chavezs government.
Education, Perseverance
One of eight children of Spanish immigrants, Escotet got his start as an errand boy at a Venezuelan bank in 1976,
according to an interview published last year in the magazine Mercado de Republica Dominicana. He studied for
his college degree at night while working full-time at a lender called Banco Union, then owned by the second
generation of the local Salvatierra banking family.
Banking doesnt run in my family, Escotet told the magazine. What runs in my family is a lot of education and
a lot of perseverance.
Faraco met Escotet when the billionaire was an executive at the Sociedad Financiera Latinoamericana, trying to
come up with a name for his incipient banking empire.
The first time I saw the word Banesco was on this sofa here in my office, Faraco said. He had a notebook with
him that was full of logos and a name. At that time he didnt have a bank, but he had plenty of desire for one.
Plan B
By the early 1990s, Escotet had accumulated enough cash to take over the small Bancentro lender from local
businessmen. He founded his Panama unit in 1992. Seizing on a financial crisis in Venezuela, he scooped up a
half-dozen savings and loan institutions by the middle of the decade.
Another opportunity presented itself when the Salvatierra family took out a $150 million loan from Citigroup Inc.
to fend off a hostile takeover of Banco Union in the late 1990s. Cash- strapped, they accepted an offer from
Escotet in 2000 to renegotiate the debt with Citigroup, merging Union into Banesco as part of the deal.
Along with his banks in Panama and Miami -- home to the worlds largest community of Venezuelan expatriates -
- Escotet has opened branches in Colombia, Curacao, the Dominican Republic and Puerto Rico. Most Venezuelan
businessmen create this sort of plan B outside the country, according to Faraco. Married with three children,
Escotet still lives in Caracas.
Hostility, Affinity
In a speech earlier this month, when Chavez announced that his cancer had returned, he anointed Vice President
Nicolas Maduro as his preferred successor. Under the constitution, if the president is unable to continue his post,
general elections must be called within 30 days. Maduro, a former bus driver and union leader, has pledged to
maintain Chavezs 21st-century socialism.
Despite Chavezs hostility toward capitalism, Escotet has expressed some affinity with the ailing presidents
vision. In an interview last year on state TV, while still serving as head of the banking association, he defended
his industry against criticism for its role in financing housing projects -- a priority of Chavezs government -- that
had gone under.
Nothing can affect us bankers more than social problems, because in the end, these are our customers, Escotet
said. We bankers are here to bet on everything that is beneficial for Venezuela.
The Bloomberg Billionaires Index takes measure of the worlds wealthiest people based on market and economic
changes and Bloomberg News reporting. Each net worth figure is updated every business day at 5:30 p.m. in New
York. The valuations are listed in U.S. dollars.
To contact the reporter on this story: Alex Cuadros in Sao Paulo at acuadros@bloomberg.net
To contact the editor responsible for this story: Matthew G. Miller at mmiller144@bloomberg.net
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