A Free For All In Mexican BankingGeri Smith
Last year, the officers at Bancomer decided the mammoth Mexican bank had grown too bloated. Even with more than 35,000 employees, service at its 900 branches nationwide was lousy and past-due loans had tripled to 9% of its total portfolio. The bank went on a crash diet, trimming the workforce by around 20%. It signed strategic alliances with Canadian and U.S. banks to improve credit analysis and branch operation. Today, customers wait an average of just eight minutes in line, bad loans are down to 8.2%, and operating costs have fallen 3.2% from last year.
Not a moment too soon. As decided under the North American Free Trade Agreement, Mexico has opened banking to foreign competition. On Oct. 17, it licensed 18 U.S., Canadian, European, and Japanese commercial and investment banks and 16 brokerages to compete with their Mexican counterparts. "We've been preparing to compete for some time, and now we're ready," says Miguel A. Noriega, general director of Bancomer's investment banking division.
Indeed, a dose of fresh competition could be very good for Mexico's banks, whose profitability has slowed in the past two years (table). Officials hope the rivalry will boost the economy by reducing borrowing costs and making more credit available. It will also have the desirable side effect of forcing local banks into better business practices.
Some smaller banks may fail or be absorbed by larger ones. But Finance Under Secretary Guillermo Ortiz calls that a "necessary step in the financial system's evolution," which began three years ago with the privatization of 18 banks that had been controlled by the government for a decade.
SHAKEUP. Except for Citibank, which has been operating in Mexico under special license for 65 years, most foreign banks do not intend to venture into retail banking, although they are expected to shake up such key areas as mortgage lending and credit cards. They will also probably dominate in creating a market for derivatives. However, they are initially limited to just 6% of total registered capital, increasing to 15% by 2000. So while Mexican banks will be forced to become more efficient, they do not face a mortal threat. "The majority of banking services will remain in local hands, but there will be ample business for everyone because Mexico's financial sector is growing fast," says banking analyst Laura Z. Berdeja of Baring Securities Inc.
Besides, the efficient foreigners--with their state-of-the-art technology, emphasis on service, and sophisticated products--will be much-needed role models. While the industry was under government control, payrolls expanded and banks lost sight of the concept of customer service. They also were obliged to lend three-fourths of their money to the government to finance the budget deficit, so credit analysis was an undeveloped art. Now, to compete with foreigners, local banks are signing technology-sharing agreements with U.S. credit analysis services. And the National Banking Commission has beefed up regulation after recent fraud scandals at two Mexican banks.
The government was encouraging a banking shakeup even before it gave foreign competition the green light. In the past year, authorities approved 17 new Mexican banks and 20 nonbank banks, which do not take deposits but offer specialized lending and other services. The newcomers are capturing market niches with credit-card promotions, ATMs, and telephone banking.
A high-profile example is Banco Inbursa, controlled by industrialist Carlos Slim, who runs Telefonos de Mexico. The one-year-old bank, with registered capital of $570 million, racked up earnings of $32 million in its first nine months. The key to its success: low costs, few branches, and innovative programs to minimize collection costs.
Mexico's financial services sector has been growing at real rates of 25% to 30% a year for the past three years. While such growth is unsustainable in the long run, similar rates are expected for the next few years. "Financial services should grow faster than the rest of the economy for some time to come," Ortiz says. As the new banks on the block force local institutions to clean up their act, Mexican as well as foreign ones should be in shape to cash in.
THE BANKS' TOUGH YEAR JUNE 1993 JUNE 1994 RETURN ON EQUITY 41.1% 27.4% RETURN ON ASSETS 1.6% 1.2% PAST DUE LOANS* 7.2% 8.3% NET INTEREST MARGIN 7.2% 5.7% DATA: NATIONAL BANKING *Percent of total portfolio COMMISSION, BARING SECURITIES