Regulators in Mexico have raised the stakes on the country’s foreign-owned banks, urging them to list on the Bolsa Mexicana de Valores (BMV), the national stock exchange, at a time when banks are facing tighter capital provisions worldwide.
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A proposed rule says all banks which issue subordinated debt will have to make it convertible into publicly traded shares and list themselves on Mexico’s stock exchange if they want the debt to count towards their capital ratios. The rule is expected to take effect in the second half of 2013.
Legally, Mexico’s authorities do not have the power to force a locally incorporated subsidiary to sell part of itself or list on the stock exchange. “We are not forcing them [the banks],” says Guillermo Babatz, president of the Mexico’s financial regulator, CNBV. “And this is not something we will try to do. But we believe the new rule will be a powerful incentive [for banks to list], and influence them in the medium term.”
Big hitters
Mexico’s foreign-owned banks include BBVA Bancomer, the strongest bank by Tier 1 capital, holding 18% of the Mexican banking system’s assets, 16% of its loans and 23% of its deposits, Citigroup’s Banco Nacional de Mexico (Banamex), Santander Mexico and two small but fast-growing subsidiaries of Scotiabank and HSBC. They issue subordinated debt in Mexico but none of them currently has a listing of their own.
A reversal of this situation would considerably increase the capitalisation of the Mexican stock market as the foreign-owned banks include some very big companies. Luis Tellez, chairman and CEO of BMV, points out that BMV’s capitalisation now is equal to about 43% of Mexico’s gross domestic product (GDP), or $450bn.
But while boosting Mexico’s stock exchange, the second biggest national market in Latin America after Brazil’s, could have a positive indirect effect on the country's economy, that is not the main reason why the new rule is being introduced, says Mr Babatz. “The reason is because we really believe a listing will contribute to a subsidiary becoming a more truly local bank,” he says. “You have to realise [that] close to 80% of the assets in the Mexican system are owned by foreigners [which is more than in any other country in Latin America except in Central America]. So the rule is quite an important step for us.”
Latam co-operation
In a separate move, to directly add liquidity to the Mexican stock exchange, BMV signed a letter of intent in December to join Chile’s, Peru’s and Colombia’s exchanges and be part of Mercado Integrado Latino Americano, Latin America’s first stock market link-up, known as MILA, which was launched last year.
[At CNBV] we really believe a listing will contribute to a subsidiary becoming a more truly local bank
This alliance is expected to give MILA a market capitalisation of more than $1000bn, boost its trading and initial public offerings (IPOs), and bring to MILA world-class companies including America Movil, the telecoms provider controlled by Mexican billionaire Carlos Slim, Televisa, the world’s largest Spanish-language media company, and Grupo Mexico, one of the world’s biggest copper and zinc processors.
Listing foreign subsidiaries on a stock exchange would, of course, also go towards strengthening the banking groups' capital position and help meet tighter capital requirements introduced by Basel III. Such funds may also be used to finance the growth of local operations.
A case in point is offered by Brazil, where Spain’s Banco Santander listed its subsidiary in 2009 and raised more than $8bn on the Brazilian stock exchange – the largest IPO ever in Brazil at the time. Funds were used to expand the Brazilian unit’s branch network, ATMs and improve capital ratios. Recently, a further recent sale of shares proved a quick and beneficial source of additional capital for the bank's Spanish headquarters.
No need to IPO?
However, Mexico is not Brazil and its stock market is not as liquid as that of the region’s largest economy. Some bankers have pointed to concerns about valuations and market depth as reasons to keep away from a listing on the Mexican stock exchange in the past.
Mr Tellez says that more recently, thanks also to a series of reforms, the situation has improved. For instance, it is a sign of how much broader the local investor base has become that in the largest IPO ever on the Mexican bourse, at the end of 2010 – the listing of Obrascon Huarte Lain, the Mexican unit of a Spanish construction group – 65% of the shares were subscribed by local investors and 35% by foreign investors. “Five years ago it would have been the reverse; the situation has changed on the buy side and the equity side,” says Mr Tellez.
Mr Tellez is convinced that most of the foreign-owned banks in Mexico will “eventually tap the market”. However, due to ongoing volatility in equity markets around the world, that moment may not be in the immediate plans of many banks.
Further, according to Mr Babatz, there are no signs of Santander’s unit or BBVA’s unit planning a local IPO to provide capital to themselves or their groups. “On the contrary, what we have found is that they are as aggressive, or more, than other banks. They are making a return on capital that is more than enough to pay out a dividend and invest in the local market; and all the liquidity they need for their business, they get from the local market in deposits,” he says.
Between January and November 2011, the average return on equity (ROE) of Mexico’s banking system was 12.18%. BBVA Bancomer and Santander Mexico recorded the highest ROEs in the country, of 18.9% and 16.08%, respectively. Indeed, Mr Babatz says banks are more profitable now than they have been in the past three years, credit portfolios are growing at an average annual rate of 40% and credit businesses across the board – from corporate to small companies lending to consumer credits and mortgages – are growing at double digits.
Manuel Medina-Mora, chairman and CEO of Citibank in Latin America and Mexico, draws attention to another obstacle to listing. He says that for a global bank, when listing different subsidiaries in different countries, there is always a question about what is the right transfer price for a local subsidiary, and further concerns surrounding the right allocations. “How are you actually allocating global expenses, research and development, innovation of products, global marketing... the costs of centralised operations and functions? It is always quite challenging to allocate [these costs] correctly,” he says. “And therefore it is a topic that requires a very, very serious analysis before anyone can actually entertain the idea.”
Long-term hope
Once effective, the new rule on issuing subordinated debt, the prospect of increased liquidity on the stock exchange and the potential for growth in the Mexican banking industry itself may encourage the country's units to list locally in the near future. For a bank expanding via acquisitions, a local listing can also be advantageous. Paying for assets with new stock from the local unit is less complicated for local shareholders and avoids the legal and tax-related complexities associated with cross-border deals.
In general, after the 2007-08 crisis, regulators around the world think there is merit in global banks having fully, standalone, self-sufficient local subsidiaries, as opposed to having subsidiaries in name but which, in an operational sense, have a centralised liquidity and capital management regime.
Mr Babatz says: “The issue is that with a self-sufficient subsidiary, there will be more of an arm's-length approach in any operation between the parent company and the Mexican bank... Those transactions will have to be done much more carefully when the local bank is listed because the bank’s management here, on the ground, will have a fiduciary duty towards shareholders in Mexico.”
