Mexico is set to be one of the world’s most profitable banking markets during the next few years. For almost a decade following the mid-1990s financial crisis, Mexico limped along virtually without a functioning banking system, as banks worked out bad loans and lent very little. But now, even with credit levels at a fraction of equivalent markets elsewhere, Mexico is showing up high on the profits’ radar of international banks.
“Mexico is the most important country after the US for Citigroup, no question about it,” says Manuel Medina-Mora, CEO of Grupo Financiero Banamex and president and CEO of Citi Latin America and Mexico. “When we were integrating with Citi [Banamex was purchased by Citi in 2001 and Mr Medina-Mora was Banamex’s CEO at the time], the Mexico and Japan [operations of Citi] used to be about the same size. There is no comparison today. Mexico is by far the more important market and Latin America has become a region as important [to Citi] and in some years, more important than either Europe or Asia,” he says.
“Our plans are to continue to grow aggressively in Mexico and to defend our position as one of the two leading financial groups,” he says. Banamex and BBVA Bancomer account for 44% of both Mexico’s loans market and its deposits. In a country with a population of 108 million, such large market shares result in huge operations.
Even for a bank such as HSBC, with its historical roots in Asia and holding a smaller market share in Mexico than Banamex, Mexico comes out as the fourth largest contributor to group profits after the UK, the US and Hong Kong.
“Mexico is HSBC’s largest emerging markets business anywhere in terms of profitability and contribution to group earnings [making it larger than Brazil, where HSBC bought Banco Bamerindus in 1997],” says Paul Thurston, chairman and chief executive of HSBC Mexico, who has recently taken on responsibility for HSBC’s Central American operations, too. Previously, he spent seven years in Asia running the personal financial services business across the region, so he is able to contrast and compare the two geographies.
“In many of the Asian countries, we continue to invest from a low base but here we bought a significant sized business. We bought a bank here in 2002 [Bital], which had a sizeable share of the banking infrastructure in the country – 19% of the country’s branches – but had a much smaller share of the total business. We have been building that out and that has allowed us to take, in four years, an organisation that made $22m in the first year of ownership to one that made $1bn last year. We are now 16% of the deposit market, 13% of the loan market but only 11% of the consumer loan market.”
Loans growth potential
In Mexico, bank lending as a percentage of gross domestic product (GDP) is 15%, much lower than in comparable countries, such as Brazil and Chile. This means that there is enormous growth potential. A large proportion of the population does not have bank accounts, and consumer finance as a widespread business is in its infancy. On the corporate front, until recently, banks would only lend to the big names, leaving the small and medium-sized enterprises (SMEs – Pymes as they are known in Mexico) that represent the lion’s share of Mexican output, largely untouched. Mexico’s credit markets are experiencing 25%-plus growth rates as banks and borrowers go through the catch-up process to a more normal situation.
| “At the beginning of this year, the level of penetration of banking is about 15% or 16% of GDP. That is a result of the 1994 crisis and includes the recovery of the banking system in the past three years,” says Marcos Martínez, chief executive of Santander Mexico, another major player in the market. |
“We know that this level is very low for Mexico and its needs. Now Mexico is very attractive for us because of the conditions of the economy, the government policies and the stability in the market,” says Mr Martínez.
“The banks here have less penetration than in other Latin American countries, such as Brazil or Chile. Even if we [Mexican banking] grow aggressively and grow by one percentage point of GDP per year, it will still take 20 years to be in a comparable position with Brazil and we will still be far from Chile’s level.”
Partnership required
Mr Martínez believes that the kind of growth needed to give Mexico a big push forward, and to bring SMEs and many lower income people without credit histories into the mainstream, requires co-operation between the government and the banks. “We would like to partner with the government and get their support to reduce the risk [of lending to higher risk credits] to a reasonable level for a commercial banking operation,” says Mr Martínez, a former head of the Association of Mexican Banks. “This is better than the government being a competitor of the banking system as they have been in the past. They thought we were not doing our job so they went direct to the market.”
The Mexican government owns a small business lender called Nacional Financiera (Nafinsa) and foreign trade bank called Banco Nacional de Comercio Exterior (Bancomext), and there are currently plans to merge the two and rationalise their operations.
Mr Martínez believes such a partnership between banks and government could raise the already fast rate of asset growth by five times. The sectors earmarked by the government as areas of priority funding are infrastructure, housing and agriculture, but Mr Martínez and other bankers feel that, especially with infrastructure, there are many procedural changes – concerning tendering and bidding rules, etc – that could lift growth rates and they have proposed these changes to the government.
With or without government support, key sectors of the market are growing so fast that banks are going to be stretched trying to keep up. They will be challenged in advancing funds to new borrowers without an accompanying rise in non-performing loans (NPLs), especially in the credit card space. Credit bureaux are developing but they still need tocollect sufficient data to be effective.
The banks also have to raise service standards, which have been criticised even by the rating agencies. Standard & Poor’s has the major banks rated above the level of the sovereign, yet in a recent report it said: “Customer loyalty has decreased, mainly because quality of service remains the Achilles’ heel of Mexican banks... service at branches is poor and slow, and solving problems usually takes a long time.”
To respond, the banks have to focus on all their channels. They are expanding internet and telephone services, but branch networks, which are the mainstay of Mexican banking, also have to grow. Mexicans, even if they are affluent, like to visit their local branch and chat with their adviser.
Mexican banks will also face more competition as new banks enter what they perceive correctly as a highly lucrative market. An interesting new entrant is US-store chain Wal-Mart, which has more than 800 stores in Mexico and has recently gained a banking licence, something it has been unable to achieve in the US. In total, 13 new banking licences were granted in 2006.
Counting the merits
Why is Mexico so attractive as a banking market? “Mexico has a number of advantages,” says HSBC’s Mr Thurston. “It has this strategic positioning where it is clearly part of Latin America – shares the same language and aspects of culture – and yet it has a border with the US and a lot of cross-border activities. It has a very young population with 10 million to 11 million people who will come of an age in the next five years when they will start to use financial services. You can double that number if you are looking at 10 years. It also has economic stability. But because of the problems in the 1990s there were lots of restrictions on lending activities so there is a large pent up demand for borrowing.”
An indication of how fast the market is growing is that last year HSBC grew its credit card business by 10% but in so doing only gained a 2% market share. The bank is introducing premium services for retail customers and upping its capital markets activities. The ATM network, at more than 5500, is one of the largest and most profitable in the group and the bank is proud of its rebranding in 2004, when all the Bital signs were replaced with HSBC signs in a single night.
Santander’s Mr Martínez says: “We are attacking two main products that can ‘bankerise’ the people faster: one is consumer credit and the other is the payroll [lending to employees on a company’s payroll], where you can receive lots of data and be in contact with millions of people. With companies, SMEs represent 90% of the companies in the country. If you are not serving them, you are not doing your job and having the benefits of working with a major part of the Mexican economy.”
Mr Martínez says that the bank’s SME business is growing at 100% a year.
In the Santander universe, Latin America accounts for one third of operations and Mexico, one of the most important markets, contributes 8% of group profits. Santander Mexico is held 25% by Bank of America.
Banamex’s Mr Medina-Mora says: “Credit expansion is at levels of 26% to 27% a year and banks need to strike the right balance between growth and the correct controls. This is the challenge and some of the participants [in the banking sector] may not succeed but most will. They are international banks with experience in this area.”
Universal bank
Banamex is the most universal of the Mexican banks. “We are present in all areas of finance,” says Mr Medina-Mora. “While most of our competitors are in some of them, or one of them, Banamex is competing in the consumer markets against BBVA [Bancomer], HSBC and Santander. But when you look at corporate and investment banking, our rivals are Goldman Sachs, Morgan Stanley, JPMorgan and Merrill Lynch.”
Banamex has about 2000 branches, including consumer finance outlets. Mindful of Wal-Mart’s strategy, it recently struck a joint venture deal with a Mexican retailer that will allow it to expand its locations by another 250 sites. These branches are busy – one in Polanco in Mexico City has 6000 customers a day.
“Branches in our country are very important. At a group level, we have more than 2000 locations but that will continue to grow. In three years I expect it to be 2500,” says Mr Medina-Mora. “Mexicans like to go to branches. Even the top market segment clients, they like to go to the branch, too, and have a cup of coffee and discuss their portfolio. We haven’t seen a significant change in this.”
Banamex’s aim is to have each customer served and out of the branch in less than 10 minutes.
On the capital markets front, although Mexican debt markets are growing fast, the equity market has yet to really take off. Capitalisation is concentrated in a few players and there are very few initial public offering deals in the pipeline compared with, say, Brazil. Mexican family companies have yet to appreciate the benefits of listing but this is something that may yet happen in time.
Meanwhile, Mexican banks have sufficient business to keep themselves occupied as they focus on one of the biggest catch-ups in banking history.
INFRASTRUCTURE PROJECT FINANCE
“When I started working in real estate in 1975, interest rates were 14% and if you could get five years [tenor] it was a good deal,” says Alfredo Elias, chief executive of Mexico’s state owned electricity company, Comisión Federal de Electricidad (CFE).
“From there, the interest rate went up and down but never under 14% and [the tenor was] never over five to seven years. But in the last years, it went to 10 years then 15 years and now 30 years, which is the first time I can ever remember in Mexico. This is great news for the country’s infrastructure programme.”
The CFE issued its own 30-year bonds last year and won The Banker’s Deal of the Year for Mexico, awarded in May this year. The 1.5bn-pesos deal consisted of 8.5% notes (certficados bursátiles) due 2036 and was led by Banamex.
The financing relates to a hydroelectric project on Mexico’s Santiago river, which involved the building of El Cajón dam. When the contractor finished the project, it was sold to the CFE, which raises the money and uses the electricity revenues to pay back the debt.
“The performance risk stays with the construction company that wins the bid and after it is finished the government makes the full payment,” says Francisco Santoyo, CFE’s chief financial officer. “Then you have an income source that is fairly reliable.”
CFE has just awarded the contract to build a third hydroelectric project, La Yesca, on the river using the same financing scheme.
With Mexico desperately in need of new infrastructure if the country’s economic potential is to be fulfilled, the aim is to now apply this financial model elsewhere.
“Hydroelectric projects are very high risk so if we can do this successfully in Mexico it should be possible to do it for ports, roads, bridges, etc,” says Mr Elias. “Another advantage is the reform of the Mexican pension system which now has $100bn looking for suitable places to invest.”
In another recent infrastructure development, the Mexican government sold the right to run four toll roads to ICA, the country’s largest construction company, and a fund of Goldman Sachs for $4.1bn. Santander is to provide the financing.
