The Economist: Mexico’s Banks Now Sturdier Than Their Foreign Owners

Thursday, 27 Sep 2012 08:03 AM

By John Morgan

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Mexico’s banks, once considered a financial backwater for tin-pot investors, look pretty good these days relative to some of their American and European cousins.

In fact, Mexico’s banks are so profitable now they can offer a lifeline to those in more developed nations, The Economist reports. For example, Santander, a major Spanish bank, this week listed part of its Mexican subsidiary on stock exchanges in Mexico City and New York, thereby boosting its overall core-capital ratio.

It’s a far cry from the not-too-distant global banking past. When Mexico’s banks collapsed in 1995, following the devaluation of the peso and financial convulsions dubbed the “tequila crisis,” bankers in Europe and America could not believe the irresponsible lending that had occurred. They passed the hat for a $50 billion bailout.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

Santander’s Mexican listing, which raised about $4 billion, was priced at two times book value, more favorable than most American or European banks can get at home, and Santander Mexico provides a return on equity almost double the rate commonly found in Europe, approximately 20 percent.

Meanwhile, Moody’s Investors Service rates the Mexican subsidiaries of Citibank, Santander and BBVA as less risky than their respective parent companies. Both BBVA and Canada’s Scotiabank are also believed to be pondering a float of their Mexican operations.

The Economist concluded Mexican’s banks’ smooth negotiation of the financial crisis is due both to a favorable economic climate there and to conservatism in their own lending. Private debt is one of the lowest in Latin America, at about 20 percent of gross domestic product.

However, only a third of Mexican firms have access to commercial bank loans. Moreover, credit scoring in Mexico is controlled by large banks and is so strict that a missed phone bill or tax payment can render someone ineligible for loans.

“So because you were fined 500 pesos ($40) by the tax authorities, you cannot get credit to buy a car, which would contribute 10,000 pesos to [value-added tax],” said Giulliano Lopresti of Crea Mexico, a small-business organization.

Credit card rates in Mexico are also very high, and customer service at Mexican banks is still patchy. But with so many new potential customers, the banks do not have to work that hard to turn a profit. Santander is adding more than 100 branches a year to its Mexican network, and new laws allow supermarkets to turn themselves into banks as well. Overall lending in Mexico is rising by 15 percent per year, a rate many Americans would envy.

In a preliminary prospectus, Santander said it believes Mexico has good growth prospect because of its sound economic fundamentals, young population, growing middle class and low penetration of banking services, Reuters reported.

The bank had 841 billion Mexican pesos ($64.10 billion) in assets and a loan portfolio of 338.9 billion pesos at the end of June, according to Reuters.

Editor's Note: 'It’s Curtains for the US' — Hear Unapologetic Warning from Prophetic Economist.

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