In the biggest single development in Mexico’s banking system since foreign banks entered the market a decade ago, Banorte, the country’s third largest financial institution, and medium-sized bank Ixe Grupo Financiero have agreed to merge. The $1.3bn deal, announced in November last year, was approved by authorities in February.
Both banks are locally owned and the merger will lend some muscle to Mexican competition in the foreign-dominated banking sector. “It is possible to develop market niches in banking up to a certain point,” says Alejandro Valenzuela, chief executive officer of Banorte. “But at that point, becoming bigger requires huge investments. At the end of the day, banking is an industry that requires scale.”
Seeking synergy
Looking closely at the deal, the two institutions have strikingly dissimilar business models. Banorte, with 555bn pesos ($45.7bn) in assets, is largely a retail bank with most of its business in the north of the country. Ixe, about one-sixth the size in terms of assets, specialises in private and investment banking and has a high-income clientele mainly in Mexico City.
Nevertheless, Mr Valenzuela tells The Banker a link-up will provide “important opportunities for synergies”. He says Ixe had reached a point where it would have taken several years to grow further using its own investment capabilities. Joining forces with Banorte means the process can be accelerated.
This is all too true in Mexico in terms of small and medium-sized banks competing with the big players. Indeed, 80% of the banking system’s total assets, loans and deposits are concentrated in just seven financial institutions. Five of these are foreign-owned – BBVA Bancomer, Citigroup’s Banamex and subsidiaries of Santander, HSBC and Scotiabank – while two are Mexican – Banorte and Inbursa.
However, the big players have tended to focus on consumer lending for the 25% or so of the population that has a bank account, and on commercial lending mainly to large companies – and not in all sectors. This left gaps in the market for smaller and more specialised banks to fill.
For instance, Banco del Bajío, ranked ninth in terms of assets, is the leading lender to agribusiness companies and has held a 25% share of this market for six years, according to Joaquin Dominguez, the bank’s chief financial officer.
“There are 42 banks in the system and two types of medium-sized banks – those focused on consumer lending and those focused on commercial lending,” says Guillermo Babatz, president of the National Banking and Securities Commission (CNBV), the country’s financial regulator. “The medium-sized banks ripe for consolidation are those involved in commercial lending, about eight to 10 banks, which provide only about 15% of the credit to the private sector.”
Move to mergers
CNBV officials do not think there will be more mergers involving medium-sized commercial banks in the short term, however, as these banks – unlike Ixe, which is owned by a group of local investors together with JPMorgan Chase – are controlled by individuals or a family. The banks are healthy and profitable and the owners do not see any need to change. “The market forces for consolidation are there but, in practice, I don’t know how likely it is that that will happen [in the short term],” says Mr Babatz.
Bankers and regulators agree, however, that there could be more mergers involving these banks in two or three years.
A steep fall in interest rates in recent years and losses in consumer credit markets, especially in the credit-card segment, in 2008 and 2009 means the big banks are looking for new lines of business and the possibility of obtaining these through acquisitions. This drive has increased with Mexico’s economic recovery and with the passing of the international financial crisis.
All the big banks in Mexico are now lending to small and medium-sized enterprises (SMEs), which account for some 85% of the country’s businesses and employment. Previously, this was a market covered largely by medium-sized commercial banks and non-bank credit institutions.
Ignacio Deschamps is CEO of BBVA Bancomer, Mexico’s biggest commercial bank, which now lends to about 500,000 smaller companies and has a 30% share of the market. He says: “SME lending and banking services for the non-banked sectors are going to be the main sources of growth for the banking system in the next decade.”
A second reason for more mergers in the mid-term involving medium-sized commercial banks is that, while these banks and the Mexican banking system in general are highly capitalised and should have no difficulty in meeting Basel III capital requirements, the same may not be said of Basel III’s expected liquidity requirements. Acquiring a lender with better liquidity ratios could do the trick.
Banco del Bajío is in an advantageous position in terms of these liquidity requirements as it has twice the number of branches and deposits compared with most medium-sized commercial banks. Mexico's medium-sized banks have on average just 100 branches each and must rely on the interbank market for funds, which is more expensive than deposits.
Some small, specialised banks also face liquidity challenges. Take Compartamos, Mexico’s leading micro-financier that provides working-capital loans to women in suburban and rural areas. The bank obtained a licence in 2006 but still has not made much progress in funding its successful lending operations with deposits. Instead, about 40% of the bank’s funding is from equity financing and the rest is bond issues and credit from local and international banks, says Compartamos CEO Carlos Daniel.
Consumer challenge
For small and medium-sized banks focused on consumer credit and linked to retailers, the challenges are quite different: it is not the deposit side of the balance sheet that is a problem, but increasing the volume of credit.
The biggest bank in this category, Azteca, ranks 12th in the system in assets but has the third largest branch network, with 1314 branches located in the Elektra retail chain and other Grupo Salinas-owned stores.
Carlos Septien, Banco Azteca’s CEO, says that all the bank’s loan products – from credits to buy-in-store goods to loans for house renovations, credits for micro-businesses, small farmers and fishermen – are “tailor-made for the 70% of the population that is not served by the big banks, whose monthly household income is $1000 to $3000, with two or three people contributing”.
However, while the bank has had evident success in deposit-taking in its eight-year existence, this has not been matched by its granting of credit. At the end of December, Azteca’s total loans, amounting to 25.7bn pesos, were only about one-third of its total 67bn pesos deposits.
Finally, Banco Wal-Mart de Mexico, a newcomer ranking 37th by assets, is opening accounts at a rate of 14,000 a week, mainly from its 19,000 points of sale in Wal-Mart stores, where it has a correspondent banking network, in addition to a 300-branch network in Mexico City.
The correspondent banking model, authorised about a year and a half ago, has proved a good business tool for small banks focused on providing credits to middle and low-income groups in Mexico. “The small banks have an advantage. People feel more comfortable operating in these stores where they go daily rather than entering a bank,” says Carlos-López Moctezuma, a senior CNBV official.
Phone home
Meanwhile, Mexico’s financial authorities are taking correspondent banking a stage further with a phone banking initiative, expected to be the biggest of its kind to date in Latin America. The first commercial phone banking products will be mass-marketed in July, according to CNBV officials.
Bankers and regulators agree that the rationale for introducing this phone banking plan now is convincing. There are 90 million mobile phones in use in Mexico, which has a total population of 110 million. There are also 16,000 correspondent banking points, much more than the number of bank branches. Ninety per cent of mobile phones are pre-paid and 60% to 70% of the top-ups are made in the country’s biggest retail stores, Wal-Mart and Oxo, which have correspondent banking services.
The cash-in and cash-out points where customers will be able to credit their mobile bank accounts or withdraw funds from them will also be the same correspondent banking points in stores where people currently top up cellphones.
Opening a mobile bank account will be done at a correspondent bank and will be a simple process.
The cost of money transfers between towns and rural communities, which is the most frequent financial transaction of low-income groups working in Mexico’s large informal economy, will be significantly reduced, from about 45 pesos per local transfer using Western Union, to just 2 pesos with the new phone technology, according to regulators.
Meanwhile, most think the big banks are best placed initially to compete in the new market because they have the appropriate technology and research-and-development capabilities.
Banamex is said to be considering a strategic alliance with Telcel, the mobile phone company owned by Mexican billionaire Carlos Slim, which has about 60 million customers – three times more than Banamex’s stated 19 million at present. And for its part, Banorte is considering adapting Banorte Móvil, its upscale, two-year-old mobile banking operation, to low-income customers. Banorte leaves it up to customers to chose their own telecom provider and simply supplies an application that can be downloaded onto a mobile phone.
“Multi-channel banking from mobile to correspondent to retailers will grow enormously in coming years as more non-banked sectors are integrated into the formal economy. But the biggest opportunity lies in mobile banking,” says Manuel Medina-Mora, Citigroup’s CEO for Mexico and Latin America.
While all players will be busy trying to widen their customer base with new products, the Mexican banking market is not at all homogenous and further local mergers might not materialise for years. The medium-sized banks that face the possibility of mergers in two to three years are only those that are focused on lending to companies and which will have a tough challenge meeting Basel III liquidity rules.
