por Michael Peck
Mexico Serive, 1995.
Not in Mexico, it seems. A year ago, foreign banks and brokerages were beating down Mexico's doors to get into a promising financial sector long insulated from outside competition. Yet some six months after the Zedillo government cleared the first batch of foreign bank subsidiaries for launch, the invasion of US, European and Japanese capital is progressing at a snail's pace. Even an open invitation to buy directly into the retail banking industry has elicited little apparent interest thus far. But don't assume that foreign bankers are giving up on Mexico. "It really depends on your tolerance for risk," notes Ed Thompson, Latin American banking analyst for New York- based Thomson Bankwatch. "A lot of banks are taking a wait- and-see attitude and not jumping in as they otherwise might have, while other institutions see a chance to pursue wholesale business." Bank of America this week became the first US bank to launch a full-fledged subsidiary in Mexico under the financial sector liberalization implemented under NAFTA in 1994. Bank of America's new country manager James McCabe views the launch as a logical next step in the US bank's recent efforts to broaden its base of corporate finance and other wholesale banking activities in Mexico. Aside from BoA, only Spanish-based Santander has made a formal launch among the 18 foreign banks cleared for subsidiary setups last October. On the brokerage side, Barings of Mexico in November became the first full foreign-owned subsidiary in the market, and the house has quietly continued building its domestic base of operations despite the UK parent bank's collapse and subsequent sell-off to Dutch-based ING earlier this year. But most of the 47 foreign banks, brokerages, insurers and other financial institutions approved last fall for subsidiary launches are biding their time to see how the financial sector turmoil spawned by the peso crisis sorts out. "People simply want a look around to see what's happened to the banking market because of the crisis, and they're delaying their plans to expand in Mexico," says the head of Mexican operations for one brokerage. Why Haven't They Come? What's happened is an outright collapse in demand for peso loans to Mexican companies. Until the peso debacle, these figured to become a driving force behind the first stage of foreign bank subsidiary expansion in Mexico. With loan rates still hovering in the 80-90% range, demand for peso loans has evaporated. And with domestic banks struggling to hike provisions against an explosion of non- performing corporate debt, foreign banks have little incentive to plunge into the present market. Sharply diminished trading volume, reflecting the exodus of foreign portfolio investment over the past five months, also has dampened the enthusiasm of US, European and Japanese investment banks to expand peso-based securities market operations. Despite the Bolsa's moderate recovery in recent weeks, most analysts expect the recovery in foreign participation in the Mexican equities market to be slow and halting, and soaring cete yields have done little to lure foreign investors back into the local Treasuries market. In response to flagging foreign interest, the Zedillo government is moving to accelerate opening of the domestic banking industry to direct foreign investment. Mauro Leos, vp at US think-tank Ciemex-Wefa, says the crisis has effectively driven the government to embrace the accelerated timetable for liberalization that Washington sought but failed to obtain in the NAFTA negotiations. The result, Leos predicts, will be "some interesting opportunities for foreign investment in the banking sector." Thompson agrees that the Zedillo government has taken some important steps to open up the financial sector, especially in hiking the cap on foreign participation in domestic retail banking institutions to 25%. Spain's Banco Bilbao Vizcaya already has taken advantage of that change to increase its stake in the Probursa financial group to the new cap. But if Mexican authorities have concluded that capital- rich foreign institutions offer the best hope of bailing out the growing list of undercapitalized domestic banks, they face a more difficult sell in dragging prospective foreign investors to the altar. That's especially true now that Mexico's slide into recession and high inflation has knocked the wind out of the emerging market for consumer credit. Citibank, the only foreign bank with an authorized Mexico subsidiary prior to the NAFTA liberalization, sent a strong signal of its diminished expectations when it announced earlier this year that it has deferred plans to expand its consumer-banking services in Mexico. The basic problem, Thompson notes, is that any Mexican bank up for sale is bound to come with the heavy baggage of burgeoning bad-debt portfolios and other asset problems. It's no accident that speculation on a big bank sale to foreign interests has focused on Mexico's No. 3 bank Serfin, which faces greater asset problems than its larger rivals Banamex and Bancomer. And confidence in Mexican banks continues to suffer. Beyond the bad-loan problem, some analysts have questioned whether banks accurately reported their first-quarter earnings, which were far better than anyone thought possible. The discrepancy was likely caused by an extraordinary ruling by Mexican banking regulators that allowed banks to charge some reserves against equity instead of earnings, which would have lowered reported earnings. ...And What It Will Take to Make Them Come? Could Serfin or other troubled banks be sold to foreign investors? "Anything can be sold at some price," says Thompson. "But banks like Citibank or Chemical or Bank of America have much better prospects abroad than buying assets in Mexico." Country managers of foreign bank representative offices in Mexico emphasize that they have not abandoned plans for eventual expansion of local operations or establishment of full subsidiaries. But until the banking market emerges from its present trough -- which now appears unlikely before early 1996 -- they expect to focus their efforts more narrowly on three areas: 1. Trade finance: Trade finance remains a staple of banking operations in Mexico, with bankers reporting persistent strong demand for financing on a secured basis. Falling Mexican imports of US and other foreign goods since the peso's plunge has dampened lending activity somewhat, but the impact should be limited as two-way trade flows remain strong. 2. Financial market operations: While volatility and diminished volume have eroded prospects for trading profits in local securities markets, the peso crisis also could yield some windfall opportunities. Foreign banks and brokerages are especially well positioned to become intermediaries for corporate clients in managing international portfolios and hedging against currency and interest-rate risk through derivatives operations. Over the longer term, foreign players also are expected to become an important force in domestic securities markets. 3. Mergers and acquisitions: Foreign institutions see potential for development in the mergers and acquisition business, particularly as the pressures of deepening recession and heightened foreign competition force a growing number of Mexican companies to merge or perish. Michael Peck Editor International Reports Mexico Service firstname.lastname@example.org