Pulling The Banks From The Rubble

On May 29, a quiet revolution occurred. Spain's Banco Bilbao Vizcaya agreed to pay $350 million to buy 70% of a troubled Mexico City bank, Mercantil Probursa. The Spanish institution will be the first foreign financial group to gain control of a Mexican bank. What's more, the Mexican government is swallowing $780 million in bad loans to make sure it doesn't have to pay even more to bail out Probursa later.

Probursa is one of many Mexican banks that have landed in hot water because of the country's economic crisis. Just four years after Mexico raised $13.5 billion by privatizing 18 state-run banks, at least half of them are back on the dole--big time. The government has already ponied up a total of $6.2 billion to shore up the banks and pay off dollar-denominated certificates of deposit. Now, it is introducing an $11 billion program to restructure the loans that can't be paid

off at today's astronomical 60% rates.

Impressive as these sums sound, they may not be enough to fix the bad-loan problems. Moreover, the government knows that these are just Band-Aid measures designed to get the banks through the immediate crisis. It is now recognized that indiscriminate lending and failure to streamline operations have contributed almost as much to the banks' problems as the peso crisis. Finance Secretary Guillermo Ortiz is determined to fix the banking mess by introducing foreign competition and pushing the banks to seek foreign partners or consolidate. Says Fernando Borja, the Finance Secretariat's director of commercial banking: "We are going to see a complete restructuring of the banking system [this year]."

NOT ENOUGH MUSCLE. There isn't much time. With the economy imploding and interest rates still sky-high, thousands of bank clients have defaulted on corporate loans, auto-financing deals, and mortgages, leaving banks with at least $10 billion in uncollectible loans--equivalent to more than 10% of their total loan portfolios. And that percentage is expected to grow in the second half of the year as bankruptcies and unemployment multiply with the deepening recession. The worry is that even strong banks such as Banamex, Mexico's largest, and Bancomer will get so bogged down in dealing with their troubled loans that they'll have few spare resources to finance a recovery. "The banks won't have enough muscle to sustain the degree of fresh lending we need for recovery," warns economist Rogelio Ramrez de la O, a consultant in Mexico City.

No wonder the government is looking for all the help it can get. Bilbao Vizcaya's takeover of Probursa may be a model for other mergers and acquisitions that the Mexican government is encouraging. As part of the deal, the government's Fobaproa--an agency like the Federal Deposit Insurance Corp.--agreed to buy a big chunk of Probursa's problem-ridden loan portfolio.

Banking regulators are considering similar schemes to clean up the portfolios of three banks--Banca Cremi, Banco Unin, and Banpas--that the government was forced to seize last year because of management and fraud problems. It wants to sell them in August. Officials say they may take past-due loans from the banks' books and securitize them to be sold at a discount, possibly with the help of American investment banks. "The government is willing to enter into loss-sharing with buyers," says Javier Gavito Mohar, vice-president of the National Banking & Securities Commission.

The government seems willing to cut sweet deals to entice foreign buyers, which can now buy up to 100% of all but the three largest banks. Still, while some European and Canadian banks are reported to be checking out properties, most U.S. banks say they prefer to open their own subsidiaries to focus narrowly on corporate lending, private banking, and peso trading rather than retail banking and other activities. "They're living in a fantasyland if they think foreign banks are tripping over themselves to get into Mexico by buying Mexican banks," says John Donnelly, head of Chemical Banking Corp.'s Mexican subsidiary. Jittery Mexicans are flocking to the nine foreign subsidiaries that have already opened and are paying high premiums for scarce funds.

BACKLASH. The government believes that more competition will help rather than hurt Mexican banks--by forcing them to modernize quickly. Officials are also encouraging several Mexican banks to merge operations.

Stronger banks such as Banamex and Bancomer reported earnings better than expected in the first quarter, but they are still scrambling. Banamex, whose earnings dropped 35% from the previous year, cut 15% of its workforce in the first quarter. "The market took the [earnings] news well because it expected them to be much lower," says Banamex CEO Roberto Hernndez. "But that doesn't mean they were good."

Even these banks are worried about a growing popular backlash against banks. Thousands of debtors have joined forces in a movement called Barzn, which demands relief from punishing interest rates. Barzn demonstrators--the organization claims it has a membership of 700,000 small-business owners and farmers--have staged countrywide protests that forced some of the banks to shut their doors.

Recognizing the big political risk that such problems pose, President

Ernesto Zedillo Ponce de Len's chief political minister, Esteban Moctezuma, recently ordered each of the 32 states to set up offices to help debtors negotiate debt relief. It seems likely that the Mexican government will have its hands full with the banking crisis for months to come.

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