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AmericasJune 1 2012

Mexico continues its reform drive

Much of the good work that has gone on in Mexico's banking sector in recent years has its foundations in the regulations brought in in the aftermath of the 'Tequila crisis' in the mid-1990s. But as its financial intermediation levels lag those of Latin American rivals Brazil and Chile, there is still work to be done.
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Mexico continues its reform drive

From a meeting room on the 46th floor of Mexico City’s Torre Mayor, the tallest building in the country, Alejandro Valenzuela, CEO of Mexican bank Banorte, reports on the integration of Ixe, a competitor that the bank acquired in 2011 and which has offices in the skyscraper. Once fully completed, the deal is expected to create the third largest bank in the country.

“The challenge that the industry has from a structural basis is that if you do not generate enough scale you are in trouble,” says Mr Valenzuela. “But if you have too much scale, you are also in trouble – that is what we have seen from [the financial crisis].”

The subject of scale is particularly relevant to the Mexican banking system as it is dominated by international groups. The problems that many of these international institutions are currently facing outside of Mexico can have direct repercussions in the Mexican market, too. Prior to the Banorte-Ixe merger, Mexico’s top three banks by Tier 1 capital were BBVA Bancomer, Citi’s Banamex and Santander. HSBC was in sixth position, behind locally owned Banco Inbursa and Banorte. Up until now, none of the foreign groups have listed their Mexican operations in Mexico, but this may be about to change.

Gold rush

With increasing capital requirements in Europe, many foreign groups are looking to raise equity overseas. Spain’s Santander is a prime example. The Madrid-based bank has announced that it will list 25% of its Mexican business on the Bolsa Mexicana de Valores (BMV), Mexico’s stock exchange, in 2012.

Santander declined to comment on the listing beyond pointing out that the group considers Mexico one of its 10 core markets – Brazil and Chile are the other two in Latin America – and that Mexico contributed 13% of the group’s earnings in the first quarter of 2012, up from 7% in all of 2008. In 2003, the Spanish bank sold 24.9% of its Mexican operations to Bank of America for $1.6bn and bought back the stake in 2010 for $2.5bn. Analysts believe that such a stake would raise a much higher amount in the forthcoming initial public offering, thanks to the strong performance the bank had in Mexico over the past couple of years.

It is very good that local banks become public locally, because that increases transparency, accountability and governance. And it also [provides] a new investment opportunity here in Mexico

Gerardo Rodriguez Regordoza

“[The deal] will help Santander further strengthen its capital as it faces rising real estate provisioning in its home market,” says Maria Jose Lockerbie, managing director of the financial institutions group at Fitch Ratings, in a written statement. “The Spanish government has imposed tough new coverage levels for real estate assets on all banks, which we believe will result in lower profits for the biggest banks this year and potentially in losses for some smaller banks.”

Fitch downgraded Santander from AA- in February to A with a negative outlook, following a downgrade of the Spanish sovereign in January 2012. But Ms Lockerbie says: “Santander’s plan shows the bank has more flexibility to boost its capital than other Spanish lenders.”

Levelling the field

Another change in the Mexican market will come with the implementation of a rule that requires all banks that issue subordinated debt to make it convertible into publicly traded shares and to list themselves on the BMV if they want the debt to count towards their capital ratios. The rule is expected to come into force in 2013.

Many would welcome more listings because of the increased transparency that they would bring to the market. Mr Valenzuela recalls an acrimonious situation when a client fell into trouble in 2008 as a consequence of the financial crisis. “We were [one of] six or seven banks heavily involved [with this client, but] the only bank that had to publish in Mexico that it was in trouble with this firm was ourselves,” he says.

The government would also welcome a local listing of foreign groups. Gerardo Rodriguez Regordoza, Mexico’s deputy finance minister, says: “It is very good that local banks become public locally, because that increases transparency, accountability and governance. And it also [provides] a new investment opportunity here in Mexico.”

Unsurprisingly, foreign groups disagree that a local flotation will make the market more transparent. Without going into details regarding specific deals, Banamex’s chief executive, Javier Arrigunaga, says: “Arguing that the listing of foreign-owned banks on the Mexican stock exchange would bring more transparency is inaccurate, since the information that the banks would disclose is currently available to the Mexican authorities and the public. We are issuers of debt in Mexico, so we already do the same disclosure as any other bank.”

Others play down transparency issues. The governor of Mexico’s central bank, Agustín Carstens, believes that local listings of foreign banks would not change the market in a significant way.

Right direction

The operator that would most benefit from an increase in listings is Mexico’s stock exchange. Javier Artigas, BMV’s head of strategic planning, says that banks that have listed with them, such as Banorte and smaller lender BanRegio, have posted good results and represent positive stories for the bourse and for the financial system, as they confirm that Mexico can offer long-term funding to multinational issuers.

“We had good performance, especially compared to other exchanges, where first-quarter performance was flat compared to 2011,” says Mr Artigas. “There is liquidity in the market. And if any of the banks were interested to list locally, they will find liquidity.”

Today there is a permanent, very strong competition in the banking business in Mexico. The push for financial inclusion will continue this trend

Javier Arrigunaga

The success of Mexico’s banks is not just confined to a handful of players. The whole system has performed well and has greatly improved over the past decade. Since the ‘Tequila crisis’ in the mid-1990s, ignited by a sudden, severe devaluation of the Mexican peso, the country’s banks have come a long way, both in terms of scale and solidity. The capitalisation ratio of the Mexican banking system is about 15%, considerably higher than international requirements – and since 2000, this ratio has consistently been higher than 14% (with the lowest point in 2000, when it stood at 13.8%). Prudent regulation and supervision have helped lenders navigate through a scorching recession imported from the US in 2009, when Mexico’s gross domestic product (GDP) fell by more than 6% and about 700,000 jobs were lost.

“Two-thousand and nine was a fantastic test [for the financial system],” says Mr Valenzuela. “The economy contracted by 6% and there was not a single bank that went into trouble. That is a major achievement. It shows that all the work that has been done [after the 1995 crisis] has been conscientious.”

Aiding growth

Data shows that Mexico’s banks have been able to support the country’s economy, meeting fast-growing demand for loans from corporates and individuals while keeping non-performing ratios at bay. In 2000, non-performing loans represented 9% of total portfolios, but the ratio decreased sharply to 1.8% in 2005, only to rise to 3.2% in 2008, and decrease again to 2.5% in 2011, according to data from the Mexican Banking Commission.

“The banking sector has been an important [part of] the Mexican economy’s growth process: banks have been able to channel funds to serve the existing demand for financing,” says Adolfo Albo, chief economist in the Mexican division of BBVA Research, part of the Spanish bank. “Note also that banking activity has supported economic growth with low levels of delinquency. Banks have been efficient in channelling funds to support economic growth and at the same time they have taken care of the quality of their loan portfolio,” he adds.

Mexico should indeed be proud of its achievements, but bankers and authorities are deeply aware that much still has to be done. Despite double-digit loan growth – as of February 2012, consumer loans were up about 24% compared to the previous 12 months and corporate loans were 10% higher than they were in February 2011 – bank penetration is limited and credit still only represents 26% of GDP. “Having a still-low banking penetration, the question is: do we have the right conditions for that [credit expansion] to grow on a continued basis in double digits?” says Mr Regordoza. He believes the answer is in the affirmative.

In 2011, to help the situation, the Mexican government introduced rules to allow the creation of correspondent banking agents (corresponsales bancarios) – typically retail outlets in rural areas which carry out certain functions on behalf of a bank. It has also simplified legal requirements for banks that wish to operate through a restricted mandate and has created regulation on mobile banking.

Such rules were welcomed by the market. Banamex’s Mr Arrigunaga says that, since April 2012, his institution has offered accounts from which clients can make transactions using their mobile phones, reducing branch costs and reaching clients in more rural areas. “Today there is a permanent, very strong competition in the banking business in Mexico,” says Mr Arrigunaga. “The push for financial inclusion will continue this trend.” 

Innovative strategies

Growing a customer base in a country with such low banking penetration as Mexico is crucial to sustaining high levels of growth, but this does not come without risk. Analysing the creditworthiness of new customers with no solid financial record is both difficult and costly. Partly thanks to its owner’s business connections, conservative bank Inbursa has devised an interesting-looking strategy. Inbursa is owned by Mexican billionaire Carlos Slim and has teamed up with leading phone company Telmex, also part of Mr Slim’s investment interests, to try to identify new small businesses that, despite having a limited financial track record, could access credit.

Luis Frias Humphrey, director of corporate and international banking at Inbursa, says that more than 60% of new businesses in Mexico fail within three years, so a company that has been paying its phone bill for that period has given an indication that it is well equipped to survive. “If they are good payers [of the phone bill], it gives you an idea that the management is at least well organised,” he says.

Other banks have been guaranteeing returns by specialising in niche markets, such as Banco Interacciones, which focuses on lending to the public sector. “We are
 not a retail bank, we do not have lots of branches but what we do have is a very handsome yield on the deposits that we
 give to investors,” says Gerardo Salazar Viezca, chief executive of Interacciones. “We do not incur the operating cost of having those branches, and [depositors] know for a fact that their money is invested in low-risk assets.”

There is a great deal of justified pride within Mexico’s banking system regarding its recent achievements: its strength, new initiatives and the healthy competition that has been driving costs down and pushed lenders to diversify their strategies. However, as banks the world over are faced with tough conditions and stringent requirements, no one in Mexico needs reminding of the risks of complacency.

“Most of the people that work in the financial sector were deeply affected by the 1995 Tequila crisis; part of our homework is to make sure that whomever takes over, when our time is [up], is able to understand the risks that were taken [that led to previous crashes] and [know how to] avoid them,” says Mr Valenzuela. “Mexico is still suffering the aftermath of the Tequila crisis. If you look at financial intermediation, Mexico has achieved half of what Brazil has been able to, and a quarter of what Chile has done.”  

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Read more about:  Americas , Mexico , Regulations
Silvia Pavoni is editor in chief of The Banker. Silvia also serves as an advisory board member for the Women of the Future Programme and for the European Risk Management Council, and is part of the London council of non-profit WILL, Women in Leadership in Latin America. In 2019, she was awarded an honorary fellowship by City University of London.
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