One evening in late January, a crowd gathered at the Luis C. Morton gallery in Mexico City. Those present had come to bid for more than 200 works of art as they went under the hammer. On the list were works by Mexican and foreign artists such as Manuel Felguerez, John Frederick Herring and Luis Nishizawa.

The government arranged the auction after it had become a temporary owner of the works after intervening in nearly 30 Mexican financial institutions in the long wake of the 1994 peso crisis. The proceeds of the sale, along with those from loan porfolios, hotels, golf courses, a marina and entire banks that have been sold in the past few years, will be set against the estimated $100 billion cost of bailing out Mexico’s banking sector. The government raised around Ps30 billion ($3.1 billion last year).

The sale marked a symbolic turning point. The last signs of Mexico’s banking crisis are fading from view. Print, radio and television advertising campaigns by banks are proof that the banking industry is at last getting back into the businesses of taking deposits and lending money. Most of the financial institutions taken over by the government after the peso crisis that could be sold have been sold, with only one major exception, Mexico’s sixth-largest bank, BanCrecer, remaining under official control. The rest have been or are being liquidated and sold off in chunks: a loan portfolio here, a building there.

Once the government agency responsible for cleaning up the banking sector, IPAB, finally closes the sale of Banco del Atlántico to Grupo Financiero Bital and finds a buyer for BanCrecer, the clean-up operation will be almost complete.

Barring another disaster, Mexico’s beleaguered banking sector may have finally put its six-year crisis behind it. “Further restructuring still needs to be done, but things are definitely getting better,” says an officer in the regulation department of Banco de México, the central bank. “The two most important things to bear in mind is that past due loans in the financial system are now more than 100% provisioned for and that the net revenue of the banking sector is now higher than total expenses, including loan loss provisions.”

After years of recapitalization, restructuring and consolidation, the sector does look in remarkably good shape. With substantial help from the government, banks’ balance sheets have been largely purged of problem loans. Two years before the 2003 deadline set by Mexico’s bank regulators, almost all Mexican banks can now meet tighter rules on bank capital that bring them largely into line with the BIS guidelines.

A Slow Road Back
However, most Mexican banks are only now reopening their doors for new business. In the aftermath of the December 1994 peso devaluation, banks stopped lending almost overnight and it has taken a long time for them to return to normal levels of lending. Since 1994, lending to the private sector has fallen to less than 20% of GDP from nearly 40%, even though the economy has grown at its fastest rate in 20 years. In 2000, when GDP growth topped 7%, lending actually fell. Still, the volume of bad debts is falling and while the volume of performing loans is increasing.

Foreign banks like Citibank, Scotiabank, Banco Bilbao Vizcaya Argentaria (BBVA) and Banco Santander Central Hispano (BSCH) have all seen the possibilities for retail banking in a country with 40 million workers, but only 8 million bank accounts. These banks have all bought up retail operations in Mexico. In the past few months, the foreign banks have battled to attract new customers with marketing campaigns. And where Mexicans once equated banks with endless queues, bureaucracy and infuriating errors, they are now beginning to enjoy a revolution in customer service. 

Increased foreign participation has helped to boost consumer confidence. Changes in Mexico?s laws allowed a string of major foreign acquisitions in the past few years, culminating in two major Spanish acquisitions last year: BBVA?s takeover of Bancomer, at the time Mexico?s second-largest bank, and BSCH?s purchase of Serfín, formerly Mexico?s third-largest bank.

Says Anatol von Hahn, president of Scotiabank Inverlat, now Mexico’s eighth-largest bank, “When you look at Mexico now, it is a country that has turned itself around after the [peso] crisis. We feel that the opportunities for retail and commercial banking are enormous. Like all of Latin America, Mexico is under-banked. But it also has the advantage of Nafta and its position next to [the US], the engine of the world’s economy.” Bankers like von Hahn are well aware of the forecast that Mexico’s consumer spending could double within the next decade.
New Controls, New Owners
Hopes are now high that Mexico’s bank’s can start over and not repeat the mistakes that together with the peso crisis, put them out of business six years ago. At that time, the new owners of the recently privatized banks, with little previous experience in banking, rushed to make loans. Excessive loan growth, weak credit control and an over-abundance of poor risks were bad enough. The banking system crashed after interest rates tripled following the peso crisis and bad loans went through the roof.

This time round, they will have to operate under new government controls and in many cases new owners. “Everything is in place in terms of new laws and judicial systems, though of course they have yet to be tested,” admits Mauricio Naranjo González, vice-president of the national banking commission, CNBV. In addition to tighter regulation of bank capitalization ratios and lending activities, banks will in the future have to operate without the unlimited state guarantee on bank deposits that until now has underwritten the activities of the Mexican banking sector.

Following recent changes to the country’s bankruptcy code, which proved hopelessly unwieldy as the banking sector has tried to untangle the knot of bad debts left over from the financial crisis, banks now have a better chance of recovering assets in the event of default on secured loans. Last year’s Congressional approval for the new bankruptcy laws that close many of the loopholes which allowed individual and corporate borrowers to evade their creditors have given banks more confidence to lend again.

So far, the signs of a banking recovery are good. Mexico’s top three banks posted profits in 2000. Banamex, which was the first Mexican bank to fully provision itself against bad debts, has had the strongest results of any bank in 2000, declaring net profits of Ps8.5 billion ($874 million), pushing its return on equity to 22%. LatinFinance last year selected Banamex as Bank of the Year for its impressive recovery.

Says Jorge Hierro, a Banamex vice-president, “There has been a significant clean up. The majority of the banking sector has now turned the page, although some banks still need to increase their capital in the light of stricter rules.”

Integration of the merged BBVA Bancomer under new Spanish management is well under way. Of the bank’s 12 senior executives, eight are from BBVA and four from Bancomer. BBVA Bancomer’s deputy director of financial analysis and investor relations, Federico Reyes Bueno, says that the objective is to meld the two banks into a single franchise before the end of the year. In mid-February, BBVA was on the verge of increasing its stake in BBVA Bancomer from 30% to 40%.

A Return to Profitability
Bancomer declared 2000 net profits of Ps.1.68 billion. Says Reyes: “All banks’ earnings in the past five years have been dedicated to provisioning. But now we are seeing Mexico’s banks return to more normal levels of profitability.”

Like BBVA and Bancomer, Spain’s BSCH has started to integrate Banca Serfín with its own Mexican banking group, Grupo Financiero Santander Mexicano after it bought the Mexican bank back from the government for Ps14.7 billion last year. Although both Santander and Serfín continue to operate separately, integration of the two banks has started with treasury operations, corporate finance, fund management, credit cards and private banking operations according to Juan Carlos Antonovich, head of investor relations at Serfín. Says Antonovich: “So far, most key positions in the bank have gone to Santander executives with the exception of course of Adolfo Lago who remains at the head of Serfín.”

Santander has asked the government to adjust the agreed sale price by handing back upwards of $200 million of the original price paid to cover gaps discovered in Serfín’s balance sheet since the deal was closed. IPAB executives say that this request is outside the terms of the original sale contract. A decision is expected from an international mediator by early March. Under the terms of the original deal, Santander has until the end of 2002 to complete its integration with Serfín. The consolidated results of Santander Mexicano and Serfín for the year 2000 show a net profit of Ps2,14 billion.

Big Deals are Done
Although all the big deals have probably now been done, the CNBV’s Naranjo believes that there is room for further consolidation. How this plays out depends on what happens to BanCrecer, which the government is due to sell in the coming months. So far only Monterrey-based Grupo Financiero Banorte, which has already taken over Bancentro and Banpaís after the 1994-1995 crisis, has publicly expressed its interest. “Banorte is primarily interested in the branch network and deposit base of BanCrecer,” says Banorte’s head of investor relations, Jorge Colin Huerta. “But if the bad loans are included in the sale, we would also be interested in collecting bad loans.”

IPAB officials say they have already received visits from foreign banks interested in BanCrecer. Banorte itself is often mentioned as a foreign takeover target. It is highly profitable and remains under Mexican ownership. In 2000, Banorte made a return on equity slightly above 20% on the back of lending growth and reduced expenses. Banorte’s main shareholder is Roberto González, who led the privatization bid for Banorte in 1992.

Possible Buyers
Citibank, Scotiabank, BankBoston and, a few years ago Bank of America before it merged with NationsBank, have all looked like possible buyers of Banorte.

But Citibank’s troubles with Banca Confía have probably dampened its ambitions in Mexico for the time being. Although it settled a dispute last November with IPAB over cancellation of an indirect subsidy to finance its rehabilitation of Confía, a retail bank it bought in 1998, Citibank continues to struggle to integrate the Mexican bank.

Scotiabank has aggressively pursued market share to compete with the Spanish banks after increasing its stake in Banco Inverlat to 55% last November. Says Von Hahn: “For the moment, our plan is on organic growth. We have about 400 branches and a distribution network that is poised for growth.”
Says Banorte’s Colin, “We are not looking to sell Banorte. Our main interest at the moment remains that of buying BanCrecer. We know that we could be an attractive target for larger banks, both in and outside Mexico, but selling up is not part of our plan.”

Banco Internacional (Bital), Mexico’s fourth-largest bank, looks like more of a takeover target. Although it is profitable, Bital needs to raise capital. Wall Street bankers often claim that no Mexican bank has a future as an independent business in an industry that is consolidating at a global level. Banamex, the largest remaining Mexican-owned bank, could also go the way of Bancomer and Serfín and be bought by a foreign bank.

Hierro, the Banamex vice president, laughs off the suggestion. “That’s for foreign institutions to answer,” he says. “All I can say is that there is no better run bank in Mexico.” The size of Banamex’s huge deposit base probably means that it can survive without a foreign parent on which to rely for cheap foreign funding.

Strengthening bank profitability is helping to put to rest fears that local banks, with less access to international capital, would be set back by the arrival of foreign banking giants. Says Banamex Vice-President Jorge Hierro, “We have weathered the worst of the foreign competition. When the foreign banks first came into the market after the crisis, they pursued very aggressive strategies to gain market share at the expense of profitability. Now they are concentrating more on profitability.”

In 1998, just 24% of the banking system was foreign-owned, but this figure rose to 48% by 2000 according to Central Bank data. The government hopes that the new owners of Mexican banks will be a stabilizing influence on the sector. In the past two decades, the country’s banks have oscillated between state and private ownership. They were nationalized in 1982 following the debt crisis, privatized in the early 1990s, in many cases only to be taken over once again by the government in the second half of the 1990s and sold once again back into private hands.

At the start of 1982, Serfín was a private sector bank owned by Ernesto Garza Laguera. But Serfín, along with all other Mexican banks, was nationalized by the government of President López Portillo after Mexico defaulted on its foreign debts and sank into crisis. Ten years later, Serfín was back in private hands following a successful privatization bid by a brokerage house owned by Monterrey’s Sada family. Serfín was managed by Adrián Sada González until July 1999 when the government stepped in once again to save the failing bank. Ten months later, Serfín was returned to private hands for the third time in less than two decades when BSCH outbid HSBC with a $1.6 billion offer.

The impact of increased foreign ownership has started to make a noticeable difference. “Foreign banks have been much more aggressive in terms of marketing and service culture,” says Federico Rubli Kaiser, a central bank spokesman. “You can see it in the advertising campaigns on television, radio and print.”

But Standard & Poor’s Mexico analyst Ursula Willhelm warns that although “so many positive things happened last year, Mexican banks are still exposed to market fluctuations. If things turned bad again, there is a real danger that they could be in trouble once again.”

Mexican bankers are worried by government policies that have forced the independent central bank to keep domestic interest rates high. Says Nathaniel Karp, a financial sector analyst at BBVA Bancomer, “A combination of higher [domestic] government debt issuance and a tight monetary policy by the Bank of Mexico have kept interest rates high at around 18% and this makes it hard for banks to increase lending.”

Banco de México has yet to follow the US Federal Reserve Board’s rate cuts and is sticking to its strict anti-inflation cannon. “Low inflation is best for the banking sector,” says a senior central bank official. “The only way we can get low interest rates in the medium term is by sticking to our inflation targets. We need the confidence [in the financial system] that a tighter monetary policy brings.”

Banco de México, which does not attempt to manage the floating exchange rate but follows a British-style monetary policy of inflation targeting instead, last year delivered an inflation rate of just under 9%. This is high by international standards, but was less that its 10% target.

Could Mexico’s banks survive another crisis? “We don’t know,” says the Banco de México official, “but the chances are certainly better now than they were one year ago.” The hope is that consolidation in the banking sector, new regulations on bank capital and widespread foreign ownership have created a banking system strong enough to stand on its own feet.

If the system does not, who will bail Mexico’s bankers out next time? Since the state is withdrawing its unlimited guarantee, the costs of any future banking crisis will have to be borne not just by the state, but by shareholders and depositors as well. LF