Nearly a decade after a financial crisis ripped through Mexico, local bankers are now beaming as earnings rise. But, as profits are transferred to the headquarters of the foreign banks that dominate Mexico’s financial landscape, resentment is deepening among local politicians. Stepped up scrutiny may toughen the operating environment for banks.
In the first quarter of this year Banamex, Bancomer, Santander Serfin, HSBC and Scotiabank, all foreign owned, racked up about $7.5bn in earnings, a 14% jump from the same period in 2003.
Brightest spot
In many cases, the returns in Mexico represent the brightest spot of a parent company’s bottom line. Profits at Bancomer represent about 25% of the total earned by Spain’s Banco Bilbao Vizcaya Argentaria (BBVA), its owner. Banamex, Citigroup’s Mexican unit, tacked on $1.45bn (8%) to the US bank’s bottom line. UK-based HSBC says business from its Mexican subsidiary Bital, acquired in 2002, was key to its profit growth last year.
All but one of the country’s six largest commercial banks have landed in foreign hands, a result of the government selling off Mexican bank assets after the 1994 peso devaluation forced an enormous bank bail-out.
The wave of takeovers began in 2001, when Citigroup spent about $12.5bn for Banamex-Accival. Next came Spain’s Santander Central Hispano acquisition of Serfin and then HSBC’s buy-out of Bital. The latest move came when BBVA paid $4.1bn for the 40% of Bancomer it did not already own. In all, about 85% of Mexican banking assets are in foreign hands, the highest such concentration in Latin America.
Economic stability and market potential made Mexico’s banking sector one of the most attractive in Latin America. “The degree of [bank use by the population] in Mexico is very low,” says Luis Peña, who recently left Banamex to head Banorte, Mexico’s third-largest bank and the only major institution without foreign ownership. “About 70% of supermarket transactions are still in cash. In the US, 74% of the transactions at Wal-Mart occur with no cash. Foreign banks are after the whole enchilada in Mexico.”
Political heat
However, the fat profits are generating political heat. Mexico’s powerful central bank chief, Guillermo Ortiz, recently slammed foreign banks for charging Mexicans up to three times more for basic services than they do elsewhere. Income from commissions currently make up 30% of profits at Banamex.
Critics say banks are more interested in easy profits from ATM use or credit card fees than in extending credit lines to small businesses and individuals, which could strengthen Mexico’s economy. Lower fees and a keener focus on roping Mexico’s enormous unbanked population into the system is needed, says Mr Ortiz.
Although Mexico’s central bank has the authority to regulate bank fees, it is unclear whether authorities will intervene. For now, the push is to have bank executives explain to local legislators why lending levels in Mexico remain low. Some substantial changes could come of the meetings, analysts say, perhaps in the form of tighter supervision of banking fees.
More threatening is a proposal sponsored by lawmaker Alejandro Gutiérrez of the Institutional Revolutionary Party, Mexico’s main opposition party. It would require foreign banks to fund local subsidiaries in the case of a government debt default or a similar crisis that could jeopardise deposits. Mr Gutiérrez says the measure is necessary to guarantee that foreign banks will not abandon their local banks – as they did during the Argentina debt crisis.
Banks are also criticised for dragging their feet when it comes to lending to individual borrowers and small and medium-sized businesses. “Mexico needs banks to take up their role as promoters of sustainable economic growth,” said Mexico’s President Vicente Fox at a bankers’ summit in Acapulco in March.
“Without credit there’s no growth, without growth no development.” Lending in Mexico to smaller businesses as a percentage of gross domestic product is still less than 10%, according to the central bank, trailing other Latin economies, including Brazil and Chile.
Cutting borrowing costs and reducing fees are honourable in theory, but not practical, bankers say. “Several conditions are hurting the Mexican market right now. Foreign investment is down, which means fewer projects, and the economy is sluggish,” says Marcos Martínez, president of Santander Serfin. “The real strength of Mexico’s banking sector will come when the economy regains its steam. For now, we have to look for alternative forms of income.”
Marcos Martínez, Santander Serfin: foreign investment is down and the economy is sluggish
Bankers’ defence
Bankers also are not shy about reminding politicians of the heavy amount of foreign investment they bring to Mexico – capital that helps build investor confidence. As important, they add that traditional sources of income in Mexico, such as using deposits to buy government bonds, are also suffering from lower interest rates
“You have higher operational costs structures in Mexico, in terms of security, which has to be in place, and external theft,” says Sandy Flockhart, head of HSBC’s Mexico business. “There are also the costs of working within the legal infrastructure to enforce creditors’ rights. Whereasin the US you can demand payment under a credit card, it is much more difficult here and that implies a higher cost. You’ve got to measure that end within interest costs and commission costs.”
Catering to smaller companies still does not make good business sense, say some bank executives. “Small and medium-sized businesses still do not behave as well as families. With families, you have 90% of the accounts current in the registers, compared with 80% for small businesses,” says Fernando Quiroz, Banamex’s head of strategy and corporate development.
So banks will continue to bet on strong consumer demand in Mexico. They are particularly encouraged by Mexico’s growing love of plastic. Once limited to the wealthy, the rate of credit card use among middle-class Mexicans is soaring. The trend pushed up BBVA Bancomer’s credit card accounts by one-third, to 3.5 million in 2003. Despite a sluggish local economy, consumer spending has recovered to pre-1994 levels, resulting in surging sales on credit and a 28% jump in consumer debt. Low-interest offers, more flexible payment plans and aggressive marketing plans, some aimed at lower-income Mexicans, are behind the increase.
Although some may worry about reckless buying binges sinking Mexicans into debt, banks are focused on the sizable profits to be made from commissions on credit card transactions. “The credit card business grew by 40% last year. But it still represents only about 3% of gross domestic product,” says Mr Quiroz. “Compared with other countries, there’s still a lot of room for growth.”
Sandy Folckhart: HSBC can now compete on a level playing-filed for large corporates
Access to mortgages
The once-risky mortgage business is also steaming ahead, backed by the Fox government’s emphasis on expanding housing for the poor. This has encouraged banks to roll out mortgages that are accessible to low-income customers.
“We’re offering fixed-rate mortgages, something common in the US, but still unheard of here,” says Mr Peña of Banorte, the bank leading the mortgage business. “We still need to convince people that this is an honest offering, that there’s no gimmick. They want to know, for example, if there’s a condition in which the bank can review the rate.”
Fee-earning pension and insurance products are also market favourites. Mexican regulators recently loosened the rules to allow pension funds, known locally as Afores, to invest part of their $38bn of assets in global stock markets and foreign bonds. The change, to take effect this December, aims to broaden investment options and provide the estimated 32 million workers enrolled in the system with better returns on their savings, while also reducing exposure.
Currently, Mexico’s pension funds are limited to holding only government paper, which can lead to a dicey scenario if the government hits hard times. Most analysts see the recent change as a small but significant step that helps bring the still-nascent but flourishing pension system, privatised in 1997, more in line with Chile’s, which is Latin America’s most polished pension system.
“We’d like to see a higher degree of sophistication in the Mexican market, especially in terms of offering our clients more savings options,” says Mr Quiroz. “In the US there’s a tremendous array of investment alternatives, thousands of mutual funds, along with private sector-issued bonds and stocks. In Mexico, the range of capital markets is getting larger, but we’re still far behind others in Latin America.”
More attention is turning to the huge Hispanic market in the US, heavily rooted in Mexico. In this area, banks are hungry for the lucrative remittances market, which includes cheques, money orders and electronic money transfers. Santander Serfin is hoping to gain an edge in this market through its partnership with Bank of America, the most popular bank in the US among Hispanics.
“We’re designing strategies in the medium term, schemes that can be used on both sides of the border,” says Mr Martínez. “We’ll be seeing more and different types of exchanges between the two countries. We want our customers to have options, regardless of where they live.”
All of this is tightening competition. Most bankers are keeping an eye on HSBC. It has done well at integrating Bital’s personal banking legacy and improving customer service. It is also working hard to upgrade the bank’s image, to compete with Bancomer and Banamex for Mexico’s more well-heeled clients.
“The planned proposal we had for our operations in Mexico is going better than expectations, in terms of progress towards profitability and moving into new areas,” says Mr Flockhart. “The HSBC brand and name give a lot more confidence. Put it this way, large corporates were not doing business with the bank. We can now compete on a level playing-field for those customers.”
Tabs are also being kept on Banorte, which dubs itself “The Strong Bank of Mexico”, in reference to its lone independent status. Insiders say the bank is ripe for takeover, but Mr Peña denies it is actively seeking aforeign partner.
Mexico’s political dog days
it all started this February when Jorge Emilio González, the leader of Mexico’s small but influential Green Party, was caught on videotape negotiating a $2m bribe. Since then, Mexico’s political reality show has yet to stop. The latest episodes have starred Carlos Ahumada, an Argentine businessman at the centre of a string of bribery scandals involving high-ranking politicians.
The latest political blow came when Mr Ahumada, facing money-laundering charges, fled to Cuba. The situation on the island got messy, with Mexico eventually accusing Cuba of meddling in its political affairs. The Fox government decided to pull out its ambassador to Cuba and boot out Cuba’s envoy in Mexico. In a matter of days, Mexico-Cuba ties – friendly for decades despite US grumblings – disintegrated.
For Mexico, the numerous examples of political wrongdoings are embarrassing. Cleaning up the country’s notoriously dirty government was President Vicente Fox’s battle cry, but the videos have rendered his anti-corruption efforts ineffective.
The tales of graft have bruised all of Mexico’s top political parties, yet have damaged the leftist Revolutionary Democratic Party (PRD) the most. Several politicians caught in criminal acts are subordinates to Andrés Manuel López Obrador, the wildly popular PRD mayor of Mexico City. Although he is still tipped as the early favourite for the presidency in 2006, the scandals have tarnished his public image.
Mr López Obrador is now running neck and neck with Santiago Creel, Mr Fox’s interior minister and a powerful member of the conservative National Action Party (PAN), as well as its top candidate. He is seen as backer of state reforms and an astute negotiator of national security and immigration issues.
Another possible PAN candidate is first lady Marta Sahagún. “We’ll see, we’ll see,” she says when asked whether she will stand. Her chances of winning are unclear. Ms Sahagún was accused recently of using her non-profit philanthropy to promote her campaign, and some see her run as a virtual re-election campaign for Mr Fox (Mexican presidents can only serve one six-year term).
The candidate from the main opposition party, the Institutional Revolutionary Party (PRI), could be Roberto Madrazo, the powerful and pragmatic party leader. But the PRI is divided between legislators loyal to Mr Madrazo and the former parliamentary leader Elba Esther Gordillo. It may be some time before a clear PRI candidate emerges.
Jorge Castañeda, a former leftist and a member of the intellectual elite, will run on an independent ticket. Mr Castañeda, who has served as Mr Fox’s foreign minister, has won points for criticising Mexico’s traditional parties as anachronistic and corrupt. However, his independent stance has left him with few friends on the left or the right. Some of his proposals, such as doubling the output of Mexico’s state-owned oil monopoly, are also considered quixotic by the general public.
The political crises are keeping important legislative business at bay. Reforms to open Mexico’s energy sector and proposals to rework the country’s creaky tax code have little chance of seeing light during the Fox administration.
The most that can be hoped for is headway on proposals to modernise the justice system, tighten banking supervision and update the labour code.
