Mexico Banks: Good Outlook

Citigroup will invest $1.5 billion in its Mexican unit, Banamex, over the next four years. Here an ATM in Puerto Vallarta. (Photo: Coolcaesar)

Financial reform encourages lending with better conditions for consumers and increases competitiveness.


Inter-American Dialogue


Citigroup's chief executive officer, Michael Corbat announced last month that the New York-based financial services company will invest $1.5 billion in its Mexican unit, Banamex, over the next four years and also increase loans to small- and medium-sized businesses as well as to the energy sector by a combined $14 billion. Over the next few years, what is the growth potential for foreign and domestic banks operating in Mexico? Which segments of banks' businesses in Mexico will experience the most growth? How will President Enrique Peña Nieto's financial sector reforms affect the sector? 

Alejandro Garcia, senior director for Latin America Financial Institutions at Fitch Ratings: 
Fitch expects that lending growth in Mexico will speed up in 2015 and thereafter, driven by sound investment prospects in the infrastructure and energy sectors, and also aided by the expected economic recovery. Fitch believes that loan growth could resume to roughly 15 percent annually, after recording one-digit annual growth rates in 2012 and 2013. Fitch expects that investment projects will benefit both global and local banks. However, the positive effects could be larger for foreign participants, given their better capacity to provide funding alternatives for infrastructure and energy projects, which will likely require specialization, sizable amounts and long tenors. However, local banks should also benefit broadly from the spillover effect of such investments and the potentially improved economic environment. In Fitch's opinion, corporate and commercial lending will resume quicker and at a faster pace due to strong investment prospects, benefiting banks with strong franchises on these segments. However, the improved economic environment and the planned investments should also benefit smaller businesses and the retail sector, although this is more likely to occur gradually. Fitch believes that the benefits of the financial reform will be material only over the medium term. In the near future, loan growth is mostly driven by the pace of economic growth. Lending could accelerate in the short term if development banks provide larger and more flexible funding alternatives, but longer term prospects depend on increasing per capita GDP and reducing informality.

Nicolás Mariscal, chairman of Grupo Marhnos in Mexico City: Mexico is a country with macroeconomic stability and is very attractive to banks because of its growth potential and its juicy rates of return on equity (ROE), which on average are 14 percent (though depending on the niche could reach levels of 30, 40 or even 70 percent). The average ROE in other regions is 8.2 percent for Europe, 8.8 percent for North America, 16 percent for Asia-Pacific and 17.2 percent for Latin America. And while the seven largest banks in the Mexican banking system account for 88 percent of the profits, the size of the market and the potential for bringing more people into the banking system as well as the opportunity to diversify into various niches also gives other players the opportunity to be winners. Banks in Mexico lend an amount equivalent to 26 percent of the country's GDP, while the amount banks lend in Argentina and Brazil is equal to about 50 percent of their countries' GDP. The financial reform, approved in January, encourages lending with better conditions for consumers and increases competitiveness. Along with the new legal framework, development banks have a more important role to play alongside commercial banks in order to achieve financial inclusion. This is because there are still millions of Mexicans who do not have access to credit or don't have a formal savings account. I believe that there and in financing for small- and medium-sized enterprises is where there is most opportunity.

Tapen Sinha, professor of risk management at the Instituto Tecnológico Autónomo de México: The World Bank's Global Findex database shows that less than 30 percent of Mexican households have bank accounts. This contrasts sharply with regional leaders like Brazil or Chile, both of which have nearly double the proportion of households with bank accounts. Countries with much lower per capita income, such as Bolivia or Ecuador, have more households with bank accounts. The two largest banks in Mexico, BBVA Bancomer and Banamex, have 2,000 branches each, whereas HSBC, Banorte and Santander have half of that. In Brazil, Banco Popular do Brasil specifically targets low-income households that prefer cash transactions. In Mexico, there is no such institution. Research from other countries shows that reducing fixed costs of opening and operating bank accounts increases the take up rate substantially in poorly banked parts of a country. In Mexico, instead of reducing those costs, we are observing their rise. The Internet transfer of money costs 20 pesos, yet getting a check certified costs 10 times that. In other words, the rich can do transactions more cheaply than the poor in Mexico. What will the efforts by Banamex do? They will increase the monopoly power the bank already has. I suspect most of their increased interest is not so much to boost lending to small- and medium-sized businesses, but rather to take advantage of the Citibank connection to get oil-related transactions, which will definitely be dominated by large businesses, not small ones. Already, 80 percent of Mexican banks have foreign ownership. These actions will certainly not reduce that.

Adalberto Palma Gómez, senior partner at Aperture S.C. in Mexico City: Several structural economic reforms approved by Mexico's Congress have generated optimistic expectations for the development of projects for which, it is assumed, financial activity will be required. Along with officially announced infrastructure programs, there is a scenario for financing needs in areas such as energy, telecommunications and other large infrastructure projects. By their nature, the execution of such projects must focus primarily on large companies in the productive sector and, on a more limited and selective basis, medium-sized companies. The financing needs of the projects that the government's reforms and infrastructure works require transcend the current capacity of the local banking system. The small group of banks (with foreign capital) that are concentrated in the Mexican market could partially participate in meeting these requirements. However, a substantial portion will have to be satisfied with transnational bank financing. The financial reform enacted by Congress aims to reduce the high levels of concentration that prevail in the sector and also to promote the extension of credit-in particular, credit that is geared toward small- and medium-sized enterprises (SMEs). For such goals to be achieved, the effective development of competitive conditions for the participation of small- and medium-sized financial institutions, which mainly operate with local capital, need to be implemented. These financial institutions face competitive disadvantages that restrict the deployment of their potential (such as the absence of regulations applicable to their business models). There is a real danger that the objectives of 'de-concentration' and increased credit offering to SMEs may be jeopardized in favor of further concentration in the entities identified in the financial reform.

Republished with permission from the Inter-American Dialogue's daily Latin America Advisor