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MEXICO - Bankers' Bonanza
With returns soaring for Mexican banks, regulators are seeking to boost competition, expand credit and cut costs for consumers.
Barely a decade ago Mexican banks were on the verge of collapse. A currency crisis had plunged the country into a deep recession, triggering a wave of loan defaults that mired the banking system in red ink. The government would eventually spend $65 billion and take over a dozen banks to keep the industry afloat. Survival, not profits, was the order of the day. Today, the industry is raking in money like never before. Mexican banks, recapitalized largely under foreign ownership, are enjoying an unprecedented boom in lending and profitability. Their earnings have quadrupled since 2000, reaching an estimated $4.5 billion in the first three quarters of 2006. The Mexican subsidiaries of global giants like Citigroup, HSBC Holdings, Banco Santander Central Hispano and Banco Bilbao Vizcaya Argentaria enjoy far higher margins on average than their parent companies. Industry leader Bancomer, a subsidiary of Spain's BBVA, generated 39 percent of the group's net income in 2006 despite having only 13 percent of its assets. Banco Nacional de México, a subsidiary of Citigroup and the No. 2 lender, boasted a return on equity of 25.3 percent in 2006, compared with its parent's 18.8 percent.
That's very good business. Too good, in fact, say the banks' growing ranks of critics. They argue that the big banks operate an oligopoly that charges overly high interest rates and fees, restrains the supply of credit to consumers and businesses and hurts Mexico's growth prospects. Mexico's political left has long railed against supposed abuses of market dominance by banks and other big businesses; now the new center-right government of President Felipe Calderón is joining the fray, ratcheting up the pressure.
In a speech to industrialists in January, Calderón effectively accused Mexico's bankers of impeding the country's global competitiveness. Mexican businesses have to "confront and compete in" the new global economy, he said, so it is the patriotic duty of the banks to help them by offering credit on terms that are "competitive" with what financial institutions offer abroad.
Mexican regulators are bearing down on the banks. The Federal Competition Commission, the antitrust regulator, is due to release a report on credit card interest rates and fees this month designed to pressure lending institutions to lower their charges. Banco de México, the central bank, has sought to foster competition by increasing transparency. Last year it required banks to publish annual percentage rates on consumer loans and credit card balances and disclose commissions and fees; it also put a mortgage simulator on its Web site to enable consumers to compare the costs of mortgages. The Ministry of Finance, meanwhile, has licensed a number of new entrants, including the Mexican subsidiary of Wal-Mart Stores, with the hope that fresh competition will make credit more widely available at a lower cost (see box).
Not surprisingly, the big banks reject any suggestion of unfair practices. "Today's high level of profitability," argues Sandy Flockhart, the Mexico Citybased president of HSBC for Latin America and the Caribbean, "is a necessary and welcome sign of the industry's recovery from the bleak days of the late '90s. We have gone from a situation where banks were not very profitable -- a nine-to-ten-year period of credit losses -- to where they are becoming more profitable," he explains.
Banks also point to the recent strong pace of credit growth as a sign that the industry is competitive and innovative. Consumer lending rose at a 45 percent annual rate in the first half of 2006, to a total of $110.5 billion, according to the central bank.
Héctor Rangel, chairman of BBVA Bancomer, contends that surging bank profits and lending reflect the underlying strength of Mexico's economy, which grew by 4.8 percent in 2006, as well as banks' efforts to expand their customer bases.
The pressure to inject greater competition into the banking sector is part of a larger national debate over the influence and allegedly oligopolistic practices of big business. Central bank governor Guillermo Ortiz frequently complains that the relatively high cost of telephone service or electricity, for example, harms Mexico's competitiveness and slows growth. Now as the battle over the banks courses through the Mexican Congress, the only question seems to be how big a stick will be used to bring banks into line with the country's political priorities.
The left-wing Partido de la Revolución Democrática, whose populist leader Andrés Manuel López Obrador narrowly lost the July 2 election to Calderón, introduced a draft law in November that would establish a congressionally appointed competition commission with the power to halt government purchases from sectors deemed noncompetitive. The proposed law would apply to industries in which 50 percent or more of sales are concentrated among four or fewer companies, thereby putting Mexico's banking industry squarely in its sights.
Calderón's ruling Partido Acción Nacional party rejects the opposition proposal but agrees on the need to bolster competition. "I prefer regulation via the market rather than by regulatory means," says Senator Gustavo Madero, president of the Senate's Treasury and Public Credit committee and an influential member of the PAN party.
Mexico's banking industry has always been concentrated, but the fallout from the 1994'95 Tequila Crisis made it even more so. The government stepped in to save 12 institutions in the late '90s and later sold most of the big players to foreign entities. The results are stark. The top five banks controlled 80 percent of industry assets in 2005, up from 74 percent in 1994. Foreign banks controlled 83 percent of assets, compared with just 4 percent in 1994.
The big four -- Banamex, BBVA Bancomer, Santander and HSBC -- today have 71 percent of the banking system's assets and 74 percent of deposits and provide 70 percent of lending, according to data from Mexican supervisory agencies and Moody's Investors Service. Banamex and BBVA Bancomer alone account for 43 percent of assets and 44 percent of deposits.
The big banks' market clout translates into impressive profits. Last year Banamex generated net income of $2 billion, or 9 percent of Citigroup's total net from continuing operations of $21.2 billion, despite controlling just 3 percent of group assets. Mexico is the fourth-largest profit center for HSBC after the U.S., the U.K. and Hong Kong.
The level of profits is all the more remarkable considering the industry's relative underdevelopment. Only one Mexican in five has a bank account. The country's per capita income is only about $6,000, and half of the population of 107 million lives below the poverty line.
Fee income is a big driver of bank earnings. The leading banks charge $1.50 to $1.80 for withdrawals from automated teller machines; a bounced check costs clients about $100 at BBVA Bancomer, and in the range of $70 to $80 at Banamex and HSBC. Marcos Avalos, research professor at Universidad Anáhuac in Mexico City, says fee income has soared over the past five years because "Mexican banks do not face competition from other financial intermediaries."
Banks enjoy relatively cheap funding. Banamex, for instance, pays an initial annual rate of 1.01 percent on savings accounts and 0.9 percent on checking accounts that maintain a minimum balance of about $1,000. BBVA Bancomer pays 2 percent a year -- below the current inflation rate of 4 percent -- on savings accounts as well as checking accounts that hold a minimum balance of about $270.
Lending rates, in contrast, are high by international standards. Annual percentage rates on credit card balances at BBVA Bancomer were 73 percent, compared with 32 percent for a comparable card at BBVA in Spain, the central bank's Ortiz cited at a presentation at the Bank for International Settlements in June 2006; HSBC charged 72 percent in Mexico and 21 percent in the U.K., and Banamex charged 62 percent, compared with 21 percent for a comparable Citigroup card in the U.S.
Consumers' willingness to pay such high rates is "a sign of a banking system too small for the society," contends Roberto Newell, director general of the Instituto Mexicano para la Competitividad, a private sector think tank.
The combination of high rates and fees and low cost of funds produces juicy margins. BBVA reported that Bancomer's spread between the average rate it charges borrowers and the bank's average cost of funds was 12.5 percentage points in the fourth quarter of 2006, compared with a spread of 2.88 points at BBVA in Spain. According to Ortiz's presentation to the BIS, the average net interest margin for Mexican banks is about 4.5 percentage points, compared with a range of 2.5 to 4 points for banks in the Czech Republic, Hungary, Poland and Slovakia, and roughly 1.5 points for Spanish banks.
"Banks' interest margins are much higher in Mexico than in the countries of origin, despite the fact that Mexican inflation, market volatility and taxes are at levels very similar to those of the home countries," Ortiz told a banking conference in Spain last June.
Banks say their charges simply reflect the risks and costs of doing business in the country. Millions of Mexicans, for example, pay their bills in cash at local bank branches because they don't trust the national mail service to deliver their payments on time, necessitating an extensive branch network.
Bank credit in Mexico is also relatively scarce by global standards. Total bank lending amounted to 15 percent of gross domestic product in 2004, according to a comparative study by the World Bank. That was the lowest level of any country in the Organization for Economic Cooperation and Development and trailed most emerging markets. Credit totaled 19 percent of GDP in Turkey, 34 percent in Brazil and 115 percent in Spain.
Economists and officials argue that the low level of credit is at least partly responsible for Mexico's sluggish growth relative to more-dynamic emerging-markets economies in Asia. Without access to cheaper credit, Mexican firms are unlikely to be able to meet the rising competition from China and other Asian countries, analysts say, and the government will find it difficult to reduce the glaring income gaps that are driving popular unrest and emigration. "A lot of empirical evidence shows that access to credit is a determinant of GDP growth and also has an impact on inequality," Juan Carlos Mendoza, a senior financial economist at the World Bank, tells Institutional Investor.
Commercial banks supplied just 18.7 percent of business loans in the fourth quarter of 2006; more than 60 percent came from suppliers, according to Banco de México. In a February survey by the central bank, 29 percent of business respondents cited high interest rates as the reason for not seeking bank loans. Credit is so costly that desperate entrepreneurs are knocking on the doors of "nonbanking" institutions or using consumer credit sources like auto loans for help, says Eloy Vargas, president of the Association of State Governments' Secretaries.
Bankers dispute the suggestion that industry concentration is responsible for high charges or stunts economic growth.
"Concentration doesn't inhibit competition," says Marcos Martínez, CEO of Santander in Mexico and president of the Association of Mexican Banks. He says Santander's share of the credit card market has grown by 20 percentage points in the past five years, while BBVA Bancomer and Banamex have lost share. He also points out that concentration is growing in other countries, with the top three banks in the Netherlands and Sweden controlling more than 70 percent of their respective markets. "It's a worldwide trend," Martínez says.
One notable area where competition has increased and rates have come down is in the mortgage market. In the early 1990s the government authorized a new type of institution known as Sociedades Financieras de Objeto Limitado, or Sofoles, to provide financial services to low-income households. A number of these outfits focused on the real estate market after the Tequila Crisis as banks pulled back from the sector. Today there are 19 Sofoles that had a combined mortgage portfolio of $10.6 billion as of November, compared with total mortgage lending of $18.4 billion by commercial banks at the end of June, the most recent figures available.
Partly as a result of the competition from the Sofoles, bank mortgage rates have dropped significantly. Early this year banks were offering fixed-rate, 20-year mortgages at rates of 11.10 percent to 13.75 percent, down from about 18 percent in 2004. Banks also have reduced the required down payment to 10 percent from 35 percent three years ago. Interest rates on the government's benchmark ten-year bond stood at 7.99 percent at the start of March, down from 8.60 percent three years earlier. Bankers say that mortgage rates will continue to drop as the market expands -- Banamex projects the average rate will drop to 6.56 percent this year.
Inspired by trends in the mortgage market, the Finance Ministry hopes to spur competition more widely by allowing more lenders into the Mexican market. Last year it licensed 13 new banks as part of a drive to open the sector. Most of the new licensees are niche banks, such as Banco del Noroeste, a regional operator with fewer than 50 employees; Compartamos, a specialized microfinance institution; Barclays and UBS in investment banking; and Prudential Bank, whose 18 branches across the country specialize in asset management.
"The vision we have is that the entry of new banks will create more competition, even if they are niche," says Guillermo Zamarripa, chief of the bank licensing authorization division in the Treasury.
Some analysts question whether the newcomers stand a chance against powerful incumbents. "Developing a defensible competitive position is more than building branches -- it's getting customers to switch," says Newell of the Instituto Mexicano para la Competitividad. "It's not obvious that giving new licenses is going to overcome the competition issue we have."
That contention is about to be tested. Wal-Mart will open its first banking operation in Mexico in the second half of 2007. With its deep pockets and nearly 900 outlets, the retail giant could become the first major outside player to make headway against Mexico's banking oligopoly.
With Wal-Mart's arrival imminent, the country's big banks have launched a flurry of initiatives recently to attract customers. Bancomer last year introduced five new mortgage products for clients buying homes priced from $22,000 to $300,000. One of those offerings is a dollar-denominated mortgage provided by BBVA's Texas-based subsidiary, Laredo National Bank. The terms have new flexibility, including 100 percent mortgage financing with no down payment. As part of its drive to expand its 11 million credit card customer base, BBVA Bancomer launched a platinum card aimed at the frequent-traveler crowd offering points for trips and for purchases at 15,000 stores plus travelers' insurance.
"With the platform we have and our aggressive growth strategy, we intend to maintain the position of No. 1 in all segments," BBVA Bancomer's Rangel tells II.
HSBC last year introduced Tu Cuenta, or Your Account, a package of retail financial services for a fixed monthly rate. It allows customers to write up to ten checks and make as many as ten ATM or branch withdrawals and ten deposits a month without paying commissions. There are no minimum balance requirements and no fees for deposits. Customers can bank by phone or over the Internet, and there are preferential rates for mutual funds and life insurance. Tu Cuenta pulled in 860,000 new customers last year. HSBC also launched a new credit card program in June 2006 that provides a 5 percent refund on card purchases; its credit card balances shot up 101 percent in 2006, the fastest growth in the industry.
As the No. 4 player, HSBC sees new products and improved service as essential for growing its market share, notes HSBC's Flockhart. "We want to be the leading financial services institution in Mexico in the eyes of our customers," he says.
If that means better services at cheaper prices, Mexican politicians and regulators will be only too happy to see him succeed.
Wal-Mart Takes Banking to the Masses
Critics have chafed for years at the domination of Mexico's banking industry by a handful of big international banks, contending that the concentration impedes competition and leads to high costs for consumers and businesses. But now regulators and politicians are looking to a new foreign entrant to shake up the status quo.
Wal-Mart de México, the local subsidiary of the U.S. retailing giant, plans to open a new bank later this year in a bid to capitalize on the high margins and surging demand for credit in the country. Banco Wal-Mart de México Adelante, as the venture will be called, represents the retailer's first foray into financial services; opponents have so far stymied the parent company's attempt to open a bank in the U.S.
The company will open its first branch in July in a store at Wal-Mart de México's headquarters in El Toreo, a middle-class neighborhood in the northwestern part of Mexico City. Executives expect to open about a dozen branches by the end of the year and as many as 60 in 2008.
"We are going to begin very, very, very slowly," company spokesman Raúl Argüelles tells Institutional Investor in a telephone interview. "We will be very conservative, work with a long-term vision and in a very efficient way."
The government hopes that granting banking licenses to Wal-Mart and other new entrants will spur competition. The top four banks now control nearly three quarters of the market.
Wal-Mart certainly has the heft to make an impact. The company operates 893 stores, supercenters and restaurants in more than 100 cities across Mexico, and plans to open an additional 125 this year. It welcomed some 852 million visitors to its outlets in 2006. The company earned $1.1 billion on sales of $10.8 billion in 2006.
Adelante, or "Forward," is targeting the low- and middle-income customers who make up the bulk of Wal-Mart's clientele. It will initially offer savings accounts, debit cards and credit cards. The company doesn't expect the venture to become profitable for four years.
Mexico's banking market holds enormous potential. An estimated 80 percent of the country's 107 million people don't have a bank account. The country's big banks have largely ignored the low-income market, focusing instead on serving large corporations and upper- and middle-class consumers.
One exception is Banco Azteca, launched in 2002 to target the lower-income customers of Azteca's parent company, the household appliance chain Grupo Elektra. With 1,564 branches, including 925 in Elektra outlets, Azteca boasts 6 million clients, $1.7 billion in loans and a return on equity of 26.8 percent in 2005.
Like Azteca, Wal-Mart plans to focus on its existing customers and draw on the same basic strategy that drives its retail business. "We are very good at volume," says Argüelles. "We take a product, work it, redesign it and take it to a mass scale." -- L.C.