Documents on Mexican Politics.

Where Are the Foreign Banks?

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
         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

         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

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

         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

         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

         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

         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

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

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
Michael Peck
International Reports
Mexico Service