There is not much to be pleased about in Mexico these days. The economy
is slumping in tandem with the downturn in the US, leading to more
unemployment. Politics is also messy, with the government unable to
push critical structural reforms through a divided congress, fuelling
business leaders’ frustration. So why are investment bankers in Mexico
still cheery?
Perhaps it is because these tough times represent a mere speed bump
when compared with the financial abyss that Mexico entered in 1994,
when the banking system crashed after the peso collapsed. The
government spent an estimated $150bn on bailing out the financial
institutions.
The recovery was not easy. The outcome, however, did bring a
much-needed reworking to the financial sector. Banks received an
injection of discipline; their strengthening also coincided with a
respectable export-led economic recovery, as the 1994 North American
Free Trade Agreement took effect.
Foreign infiltration
Foreign financial heavyweights spotted opportunity. The outside
perception of Mexico had picked up considerably. Interest rates
stabilised. In 2000, ratings agencies granted the country investment
grade (BBB) credit. Soon, Mexico became one of the safest investment
spots in Latin America – a region where few countries can boast
economic or political stability. Plus, many domestic banks, despite
boasting better balance sheets and fewer bad loans, were still
crisis-weary and ripe for acquisition. Within a few years, foreign
banks, from US-based Citibank to Spain’s Banco Santander Hispano
Central, had taken over Mexican banking. Now, a fully Mexican bank is
an endangered species.
The reality of a banking sector controlled by outsiders may rile
nationalists but investment bankers are clearly spotting the perks.
They now operate in a more stable and liquid system – most investment
banking services in Mexico count on foreign backing – and are able to
broker deals that at one time were rendered unthinkable.
“Investment banking is still just starting in Mexico. There is still a
lot of money outside of the country and we are out to bring those funds
back home,” says José Ponce, an investment banking manager at Inversora
Bursátil, the brokerage arm of Banco Inbursa, a domestic player.
Boon for bonds
The local bond market best shows what investment banks in Mexico
are pulling off. The bond market nearly evaporated after the 1994 peso
crisis. Yet better economic times, along with the successful
liberalisation of Mexico’s private pension funds system in 1997, have
proved to be a boon for the market. “For the first time, we have a
massive amount of institutional money seeking long-term investment,”
says Francisco Hernández, vice-president of Standard Bank London, a
relative newcomer to Mexico’s investment banking scene.
The pension funds are mostly benefiting from the country’s young
workforce; with labourers not old enough to tap their retirement cash,
a $35bn pile has accumulated. A cautious regulatory set-up essentially
forces pension funds to snap up only government paper or the most
sterling corporate debt. Last year, the value of corporate debt issues
in Mexico totalled about $3bn – treble the figure from four years
prior. Most of those bonds went into pensions funds’ portfolios.
Pent-up pension funds
The number of local companies carrying the credit ratings strong
enough for local pension funds is limited to about 20. That leaves
pent-up retirement cash earmarked only for market darlings, such as
Cementos México, the cement giant,Teléfonos de México, the country’s
largest telephone operator, and Bimbo, Mexico’s largest bread maker (it
placed about $673m in corporate bonds in 2002).
New business in areas besides bonds will be welcome. The M&A market
is showing signs of life but most bankers agree that it is still too
uneven. “M&As are really divided into two segments,” says Jorge
Rodriguez, a senior investment banker at Bank of America México. “One
is made up of huge transactions but those elephants only occur once a
year. The other area is full of smallish deals.”
Mortgage promotion
The market for mortgage-backed loans is also brewing and offering
investment bankers another product option. A pillar of the Vicente Fox
administration is to deliver as many as 700,000 mortgages a year to
Mexicans in the lower and middle income sectors – an attempt to build
up employment in the construction sector while also addressing the
housing crunch.
“So you have a need for mortgages and a need to raise money to fund
them. Right now, though, the government’s demand is not being met
fully. You’re still seeing banks limiting their risk and only offering
bridge loans to developers,” says Mr Hernández.
Meanwhile, companies are only tip-toeing into the markets for equities.
“That type of activity is still non-existent for us,” says Mr
Rodriguez. “There has not been a real equity offering in a long time.”
It may be some time before Mexico’s investment engine runs at full
speed and thus allows for more growth into other banking areas.
According to Mexico’s finance ministry, the economy will only hit 1.5%
this year, as the all-important US market continues to drag. It does
not help that the government is doing little to give the economy a
push. President Fox does not enjoy a majority in congress and
opposition politicians are blocking his efforts to push through fiscal,
labour and energy reforms – changes that outside investors insist are
needed to make Mexico more competitive.
The tight economic climate makes for a competitive banking scene. “All
the players are attacking the same high-end clients,” says Mr Ponce.
“It is a bit tougher for us. We are much more limited because we do not
have a branch in the US. But we will continue to grow little by little.”
Survival methods
To Mr Rodriguez, survival in Mexico’s highly concentrated
investment banking market will depend on innovation. “The bond market
may have developed substantially in recent years but the issues are
still plain vanilla. So any new player trying to make inroads in this
market must come with new ideas. If not, you are just proposing what
everyone else is,” he says. “We try to offer our clients one-stop
shopping so they do not need to head anywhere else.”
Mr Hernández appears ready to accept the challenge of being a newcomer.
“We just opened up our representative office here three months ago. But
we are an emerging markets bank and know what it is to operate in tough
markets,” he says. “We are poised to be here for a long time. We will
not run away when things go bad.”