On the back of hard-earned lessons from the mid-1990s, Mexican banks are now among the most robust and well capitalized in the world. Favorable market conditions, including rising household income and a massive unbanked population, have attracted major foreign competition, while prudent regulatory upgrades have set the stage for sustainable growth. As a result, Mexico’s banking system has become the country’s armor against external risk.
In 2009 and 2010, as the rest of the North American market reeled in crisis, Mexican banks proved their mettle. Although economic activity fell sharply and financial markets were stressed, the system reacted well and spillovers were contained. Now that the broader financial network is in rebound, Mexico’s banks are well positioned to capitalize on highly positive demographics and a rising tide of banking penetration that promises to raise all ships in the sector.
Accordingly, Mexican banks have earned high international praise in 2012. In March, the IMF released its latest, and most laudatory, Financial Sector Assessment Program (FSAP) for Mexico. “Overall, our assessment of Mexico’s financial system is very positive,” said Fernando Montes-Negret, a Senior Financial Sector Expert and head of the IMF team that conducted the FSAP update. “The country has better tools for systemic crisis management and competent supervision.”
Although international shockwaves still pose risks, especially considering Mexico’s linkages to the global economy generally and to Spanish banks specifically, the IMF and the World Bank concluded in their 2010 stress tests that the system was fully capable of withstanding “severe shocks.” The report specifically cites Mexican banks’ praetorian capital buffers, a liquidity base that promises continued sector expansion as well as paving the way for early adoption of Basel III requirements. In April 2012, Standard & Poor’s Ratings Services assessed the sector’s potential response to different election outcome scenarios. The conclusion was that Mexico’s banks had a sound footing in the face of volatile international markets or any potentiality for shifting sands domestically. “The Mexican banking system is one of the best capitalized in the world,” reported Standard & Poor’s analyst, Alfredo Enrique Calvo. “It also benefits from stable profitability and depends mainly on deposits for funding, which supports diversification and is a cheaper funding source.”
Industry insiders are equally optimistic. “Mexico has a huge advantage in four very important aspects,” says Marcos Martínez Gavica, Executive President of Grupo Financiero Santander, an associate of the Spanish banking giant and the country’s third largest bank by assets. “Mexico has a well-capitalized financial system, a portfolio of good quality, good provisions for that portfolio, and a market that has good levels of liquidity in comparison with others that do not.”
Luis Peña Kegel, Director General of HSBC Mexico, notes the role of demographics in underpinning the sector’s future prospects. “Around 65% of Mexicans are under the age of 35,” he says. “This provides a solid growth base with about a million marriages every year for the next 15 or 20 years. That’s a lot of people getting houses.” HSBC, among others, hopes to capitalize on this trend through low-cost and quickly executed mortgage products.
BY THE NUMBERS
Promising fundamentals and solid growth figures underpin this optimism. The capital adequacy ratio (CAR) across the system stands above an enviable 15%, while non-performing loans remain low and stable. Moreover, lending is growing steadily as Mexico aims to raise its low 24% banking penetration rate. In 2011, commercial lending increased 16% and accounted for 46% of the overall portfolio. The SME share of this figure was only 13%, but the segment saw 19% growth compared to 2010. Consumer lending accounted for 20% of the total, with 10% comprised of credit card lending.
Although commissions are under pressure from government regulations that took effect in 2011—limiting the amount banks can charge clients—those same regulations are helping to bring new retail bankers into the picture. As a result, every bank among the top five by asset size increased their customer base in 2011.
At the end of 2011, the banking system comprised 42 institutions and had total assets of some Ps6 trillion ($470 billion). The seven biggest banks in the country were responsible for 86% of total loans and deposits. Of those, foreign banks accounted for 66%.
The strong foreign presence in Mexico’s banking sector is a legacy from the 1995 Tequila Crisis recovery, while its current level of profitability and capitalization bear the trademarks of lessons well learned.
Crisis struck in the nascent years of Mexico’s banking privatization. In 1994, with strained public finances, high-credit risk in the banking system, and civil unrest in the south, investors began rapidly selling off their tesobonos, a type of debt instrument denominated in pesos but indexed to the US dollar. The government was forced to abandon the fixed exchange rate, and a 50% devaluation ignited inflation that peaked at 52% and sparked capital outflows across Latin America.
A boom in exports and an international rescue package orchestrated by US President Bill Clinton cushioned the blow, and in less than 18 months the economy was growing again. A process of institutional building and financial liberalization followed. The subsequent injection of foreign capital and competition into the banking system, in concert with an improved regulatory framework, accelerated a full recovery, redesigned the financial architecture to make crises less likely, and laid the groundwork for the resiliency that now typifies the sector.
THE PLAYING FIELD
Today, Mexico’s banking industry is dominated by foreign players or mergers between foreign and domestic companies, with the notable exception of Banorte. Bancomer, associate of Spanish lender BBVA, is Mexico’s largest bank by assets with $92.88 billion. Banamex, an associate of Citigroup and the product of the largest US-Mexican merger, comes in second with $88.51 billion in assets. Santander Mexico, the Mexican unit of the Spanish giant, holds $58.39 billion in assets. The only local lender in the top tier is Banorte, with $47.38 billion, putting it in the fourth spot in terms of assets. Rounding out the top five is HSBC’s Mexico unit, with an asset base of $37.17 billion.
Marking a high level of conglomeration, the seven largest financial groups manage about 75% of Mexico’s total financial assets, or approximately $600 billion.
Although high concentration carries a slightly higher risk of contagion, foreign interest from leading global banks is a reflection not only of attractive domestic market dynamics, but also Mexico’s strategic positioning as a launch pad for Latin American expansion. However, at least one counter-cyclical reaction is on the horizon. Santander Mexico is planning an IPO of 25% of its shares, which would help the Spanish bank further strengthen its capital base against rising real estate provisions at home.
BANKING THE UNBANKED
One of the most salient legacies of the crisis—and the driver of Mexico’s impressive consumer loan growth—is a disproportionately low banking penetration rate. According to the IMF’s International Financial Statistics database, outstanding loans-to-GDP were 16.2% for Mexico. This compares to 29% in Brazil and 73% in Chile. Nearly 45% of all households do not use any financial services, while over 50% of all municipalities lack access to a bank or microfinance branch. “We lost 10 years in the 1980s and we faced crisis in the 1990s,” says Ignacio Deschamps, Chairman and CEO of BBVA-Bancomer, explaining that Mexico’s low penetration rate, despite its advanced financial architecture, can be traced to nationalization and the subsequent Tequila Crisis.
In order to make up ground, Mexico has implemented a pioneering financial inclusion scheme. In 2011 the banking authorities implemented a plan that simultaneously makes opening an account easier while tightening the requirements for record keeping as accounts become larger and more active, thereby removing the obstacles for entry without sacrificing barriers to prevent misuse.
The implementation of this scheme comes on the heels of a number of other measures primarily aimed at providing incentives for lending to smaller borrowers. These include government-guaranteed loans as well as looser lending requirements for small businesses. The Secretariat of Finance has also created a new category of niche banks that cater to the previously unbanked segment as well as amended the legal framework to facilitate mobile financial services. On the demand side, banks are now required to offer basic deposit accounts with no fees, and stricter rules about fee disclosure have been put in place, while the National Agency for Financial Consumer Protection has been strengthened.
The federal government recently began a program called Cetes Directo, whereby anyone with a bank account may purchase government securities directly without the need of a financial intermediary. “Given the high proportion of informal means of saving among the population, this program may potentially give people an incentive to actually get a bank account and save their money in Cetes, instead of under their mattresses,” says Agustín Carstens, Governor of Banco de México, the country’s central bank.
The response has been clear. In the last seven years the system has grown from 22 million customers to 42 million. There are now 500,000 companies with credit compared to 100,000 only five years ago. “Currently, Mexico is experiencing one of the most dynamic banking penetration processes in the world,” says BBVA-Bancomer’s Deschamps. “The base is still low compared to other countries, but the dynamics are strong.”
Not surprisingly, banking the unbanked has become an important part of leading banks’ growth strategies. BBVA-Bancomer has increased its customers from 12 million to 18 million largely through targeting previously unbanked individuals. “Mexico is a country that is growing very fast in terms of access to credit and banking services,” says Deschamps. “We have adapted different solutions for our customers. The key to this is the mobile telephone.” Deschamps notes programs whereby customers can open accounts online with their telephone numbers serving as their account numbers.
In addition to leveraging mobile phone banking, banks like Banorte are focused on growing their corresponding net in order to increase penetration. “We are in the process of closing a deal with an important chain of convenience stores, creating an additional 10,000 sales points,” says Javier Arrigunaga, Director General of Grupo Financiero Banamex. “With this alliance, we can grow to 14,000 locations in villages or small towns where there are no banks of any kind.”
© The Business Year