In an emphatic bid to lift Mexico’s economic growth and put the country on a par with other large emerging economies, president Enrique Peña Nieto, in the year since he has been in office, has introduced more structural and legislative reforms, and more changes – in telecommunications, labour, education, financial regulation, taxation, political reform and energy – than the country has seen in a decade.
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Troy Wright, CEO of Scotiabank Inverlat, Mexico’s seventh largest commercial bank by assets and Tier 1 capital, believes that the Mexican banking system as a whole – 45 banks in total – will benefit. “The old saying is ‘rising tides lift all boats’ – I would say the entire economy, and therefore all of the banks, regardless of size, will benefit from the general reforms,” he says in a telephone interview from Toronto, where the bank’s parent, Scotiabank, is based.
When it comes to the key energy reform, generally considered the biggest game-changer in terms of economic policy in Mr Peña Nieto’s reform agenda, Mr Wright believes that it is Mexico’s seven largest banks (five of which are foreign owned – BBVA Bancomer, Citigroup’s Banamex, and subsidiaries of Santander, HSBC and Scotiabank – and two of which are local – Banorte and Inbursa) that stand to gain the most. And it is Scotiabank and Banamex, he says, that are the best positioned of them all.
“At Scotia, it’s a tremendous opportunity. I think all of the big banks in Mexico will play some role. But I think the difference is that we will bring to the table our deep knowledge of the oil and gas business and the ability to provide advisory services,” he says.
Time for change
The centrepiece of the energy reform, the overhaul of the oil monopoly of Petroleos Mexicanos (Pemex), has deep political significance in a country where the day oil was nationalised 75 years ago is still a national holiday. But now, as a matter of economic expediency – Pemex’s production fell by one-quarter over the past decade, due to a lack of technology and money – private sector investment will be allowed through profit-sharing or possibly production-sharing contracts, in the exploration, production and sale of oil and gas.
That liberalisation, which alone among all the reform measures required congressional approval of constitutional amendments, will enable oil majors such as BP and Exxon Mobil to explore for oil in deep waters in the Gulf of Mexico and also facilitates the exploitation of the country’s large shale gas deposits (Mexico is estimated to have the fourth largest shale gas reserves in the world).
The energy reform also includes changes in the petrochemical industry, initiatives to increase Pemex’s budgetary autonomy and allows private sector participation in electricity generation. According to the government, if fully implemented, it could increase Mexico’s average economic growth by between 0.5% and 1% over the next six years, and by as much as 2% by 2025. Estimates suggest that oil-related investment could grow by between $10bn and $15bn per year over the next six years and that oil production could increase from 2.5 million barrels per day in 2012 to 3 million barrels per day in 2018 and 3.5 million barrels per day in 2025.
The exact impact of the reform, however, will depend a lot on secondary legislation, expected to be decided early 2014, and on whether the contracts drafted provide sufficient incentives to private companies.
Good connections
The advantages of the reform to banks are not hard to see. Full implementation of the reforms will require banks with a lot of capital and liquidity, access to international capital and equity markets, skills at structuring financial deals and, ideally, specialist knowledge.
The other big bank in Mexico, aside from Scotiabank, with expertise in the energy sector is Banamex, which, among other things, recently provided advisory services to those involved in shale gas development in the US. A subsidiary of Citi, Banamex is the leading Mexican bank for corporate lending and the second largest commercial bank in the country, and is set to profit greatly from the new reforms.
Meanwhile, the country's two Spanish banks, BBVA Bancomer – Mexico’s biggest commercial bank with a 23% share of all loans and deposits as of September 30, 2013, according to Comision Nacional Bancaria y de Valores (CNBV), the national financial regulators – and Santander – Mexico’s fourth largest bank with about a 14% share of both markets – while not known for their expertise in the oil and gas business, are nevertheless in a strong position to assist with the financing of projects, provide access to international equity markets and service suppliers that might be involved in any type of contract with Pemex.
Additionally, oil and gas companies might require hedging-type services, involving derivatives and related strategies, to assist them in managing risks arising from fluctuations in commodity prices.
Opportunities abound
The energy reforms are not the only changes set to boost banking activity in Mexico. Mr Peña Nieto has also unveiled a transformational, six-year infrastructure plan, with projected government and private sector investments of $316bn per year, equivalent to about 5% of gross domestic product (GDP), over the six-year period. Under the plan, thousands of kilometres of new roads are to be built, as well as new railways and telecoms infrastructure. The plan will also see investments made in the national water company, as well as in Pemex and the state-owned federal electricity commission.
This means that Banorte, which is a locally owned bank and Mexico’s third largest, can still be an important player in coming years, according to Alejandro Valenzuela, the bank’s CEO, despite “never being an energy-driven institution. Though clearly we will have to develop skills in this,” he admits.
The bank's bullishness is owing, in part, to its recent $850m acquisition of 50% of BBVA’s Mexican pension fund business (Mexico’s social security institute acquired the other 50%). This pension fund represents about 4% of Mexico’s GDP and is the country’s biggest pool of long-term resources, according to Mr Valenzuela. Banorte intends to invest it in the infrastructure projects that the country needs: “We want to be an active player in this change and having pension funds gives us this possibility,” says Mr Valenzuela.
Santander Mexico is also bullish about its prospects. Marcos Martinez, the bank's CEO, says that it will be in a strong position when gas and oil pipelines have to be built, and ports need to be constructed or expanded to accommodate the new developments.
“We are very well positioned because of the expertise beginning in infrastructure development in Spain in the 1980s and 1990s, and because of that, as the most important bank in Mexico financing infrastructure before the 2008 crisis,” says Mr Martinez. “And we have not only financed projects. We have also done equity investments in six projects in Mexico as shareholders, as a bank."
Level playing field
While the biggest banks are expected to profit most from the energy overhaul, one objective of the government’s financial reform – which is also very ambitious – is to narrow the gap between the smaller banks and the seven largest. The latter collectively held 87% of total loans and deposits in the system and had a high Tier 1 capitalisation rate of more than 16% as of September 30, 2013, according to CNBV.
Gonzalez Aguade, CNBV’s president, says: “Six or seven banks account for a huge part of the market and what we want to do is make sure that the other 38 banks [have] more of a level playing field in relation to the large banks and that they have more opportunities consistent with their scale.”
The authorities plan to increase competition and transparency in the marketing of bank products and services, and to reinforce customers’ rights, for instance, to move their accounts from one bank to another and to change mortgages. The main thrust of the reform, though, is to promote bank lending to the private sector, which now only represents about 26% of GDP. This compares with an average in Latin America of 44%, and in Brazil and Chile of between 60% and 80%, Mr Aguade says.
The government believes it can achieve this by making it much easier for banks to obtain collateral and collect on debt repayments when a creditor defaults on a loan. “Instead of the process taking about four or five years to recover a mortgage or a car loan when creditors stop paying, with the reform it should take only about a year,” says Mr Valenzuela.
Bankers are unanimous that this improvement in the legal processes for debt collection by banks, if implemented, will change the cost of financing and so increase the system’s capacity to lend more. CNBV’s Mr Aguade believes that as a result of this reform, smaller banks will also be in a better position to provide credit to Mexican businesses. Companies will no longer have to go to a big bank to obtain a loan, he says.
Broader reach
The government also plans to significantly boost lending by Mexico’s state-owned development banks in private sector finance in unconventional sectors such as small municipal public works, small agribusinesses and housing for low-income families; sectors in which Mexican banks are now generally reluctant to extend credit on their own, because of the risks involved.
Mr Martinez, Santander’s CEO in Mexico, points out that before this financial reform, Santander was already collaborating with a development bank. Starting with a guarantee from the state-owned Nacional Financiera and then on its own, on the basis of its own system for evaluating clients’ credit records, Santander Mexico was willing to be more aggressive in its lending to small and medium-sized businesses (SMEs, or PYMES in Spanish) in Mexico. It defined SMEs as companies with annual sales of no more than $8n, and offered credits to such businesses at a fixed rate of 8%, lower than any of its competitors.
Such was the success of this SME operation that this segment of Santander’s loan portfolio in Mexico grew 80% in 2012, and 29% in the first nine months of 2013, compared to an average of 7% in the banking system as a whole in the same period of 2013. Mr Martinez says: “Our lending to PYMES is growing at four times the rate of the rest of the financial system. And in mortgages, we are growing 12.5%, which is one of the highest growth rates in this segment.”
Guaranteed growth?
Many bankers think the opportunities for banks to increase their lending operations in Mexico are considerable, especially in retail banking, due to the low level of bank penetration in the population and the growing number of young people joining the middle class. “The retail side of the business has an opportunity to grow at double-digit rates in the next three to five years,” says Mr Wright.
Scotiabank Mexico has only about a 5% share of the system’s total loans and deposits but a 12% share of the mortgage business and a 20% share of auto loans, and Mr Wright thinks that, on balance, the financial reform will be beneficial.
It is Mr Martinez’s belief, however, that bank lending to the private sector will grow irrespectively. “The reform will help. But without the reform we will do it. It will be a relative help only,” he says.
Meanwhile, injecting a note of caution in the overall reform process, Ricardo Salinas, owner of a Mexican conglomerate that includes Banco Azteca, a medium-sized bank that focuses on consumer lending, said during a November 1 interview on PBS on US television: “Mr Peña Nieto: he has all these reforms on the table at the same time. That’s a problem. Not even the best bullfighter fights five bulls at the same time."
