Mexico’s Banks Play Catch-Up : Finance: Newly privatized institutions are struggling to modernize as the nation develops vital trading relationships in the global economy.

The lines at a Mexican bank rival those at Disneyland during spring break: lines to open an account, lines to wire money and the inevitable line to get the manager’s approval for any transaction.

One reaches the head of the line only to scale a mountain of paperwork. Tellers fill out triplicate forms on manual typewriters when customers ask to cash a traveler’s check. Sales of cashier’s checks are logged by hand.

Despite a smattering of automated teller machines and the proliferation of bank credit cards, such antiquated, time-consuming procedures confront all Mexican bank clients--whether individuals, small businesses or corporations.

Now, efforts are underway to overhaul this recently privatized financial system. Government regulators and the new bank owners are in a race to modernize the system to keep up with a booming domestic demand for financial services and to ensure that Mexico’s banks can compete as the nation develops increasingly important ties to the world economy.

The proposed North American Free Trade Agreement would allow U.S. and Canadian banks, brokerages, leasing companies and insurance firms to take over gradually increasing shares of Mexico’s financial services during the next eight years. They will be fighting Mexican companies for a market where loan demand has grown 24% over the past three years--compared to a 1% drop in the United States--and is expected to increase 15% annually for the next three years.

“Those who cannot become competitive in the next two to three years are going to have serious problems,” predicted Antonio del Valle Ruiz, the new chairman of Banco Internacional, a mid-size bank with $7.8 billion in assets.

Advocates of the pact also argue that many other American firms will benefit because free trade will help the Mexican economy grow and stimulate demand for exports. Mexico’s leadership acknowledges that the financial sector’s inefficiencies have been a drag on the Mexican economy, discouraging savings and contributing to the high cost of borrowing. Economists say Mexico’s banking system must modernize if the economy is to expand and accommodate greater foreign investment.

Upgrading the financial industry will require massive spending for new computer systems, new branch offices and for training personnel. Financing improvements will be a tremendous challenge for managers under pressure to show a return on the high prices investors paid--a total of $12.5 billion--to acquire Mexico’s 18 commercial banks. The banks fetched an average price three times book value, compared with the U.S. and European average over the past five years of two times book value.

Even the most optimistic predictions foresee a spate of bank mergers, if not outright failures, before the dust settles. Among the first to fold may be banks owned by investors who exhausted their resources in making acquisitions and have little left to improve operations.

The heart of the new Mexican financial system is a modified form of universal banking (not allowed in the United States) that permits investment groups to form holding companies that can own a variety of financial service firms, including banks, brokerages and insurance companies. Such groups bought 15 of the formerly government-owned institutions.

Industry leaders say this “synergy” will allow them to more effectively serve customers and to tap their client base for many services in order to increase profits.

Executives at Bancomer, one of the nation’s two largest banks, say they counsel well-heeled clients on mutual funds and arrange to finance investments through a brokerage firm owed by the same parent firm.

Other banks have similar visions: Loan money for a new car, then sell the client car insurance through another subsidiary. “Synergies are complicated to achieve,” cautioned Raul Mendez, vice president of Booz, Allen & Hamilton de Mexico, a consulting firm that advised the Mexican government on the bank sales. “There are certain captive markets, such as insurance. But usually synergy only occurs when a company is excellent in its core business.”

Roberto Hernandez, chief executive of Mexico’s largest financial group, Banamex-Accival, sees the 11.5 million individual retirement accounts mandated under a new private pension plan as a means to improve service and expand access to its core banking business.

“Banking has always had an elitist image,” said Hernandez, who with his partner Alfredo Harp Helu led an investment group that in 1991 bought the government’s 71% interest in Banamex-Accival for $3.25 billion. The retirement accounts are a means of bringing affordable banking services to the masses, he said during an interview at the historic downtown colonial building that serves as the bank’s headquarters.

The bank is offering a new home-improvement loan program called “Spaces,” which allows workers to borrow funds using their retirement accounts as collateral.

Hernandez, whose wealth comes from shrewd investments in Mexico’s free-wheeling stock market, enthusiastically pulls out an artist’s rendering of what the modest Santa Fe neighborhood in northwest Mexico City could look like with a few improvements, such as paint and drain pipes, financed by his bank, naturally.

The pension accounts also provide long-term funds, a rare commodity in Mexico, for the bank to offer home mortgages and long-term business financing, he added.

For corporate clients, Banamex-Accival is combining commercial banking with investment banking services, offered by the Accival brokerage that is also part of the financial group.

Hernandez said his group’s strategy can be carried out under existing regulations.

His major competitor expects further deregulation of Mexico’s financial sector.

Ricardo Guajardo’s office is a comfortable corner of the ultramodern Bancomer headquarters on the city’s prosperous south side. He is a professional administrator, placed in charge of Bancomer by Mexico’s oldest industrial dynasty, the Garza family. Like them, he is from the northern manufacturing city of Monterrey.

The government still owns 22% of Bancomer’s bank, and while Guajardo praises the government as a shareholder, he is less enthusiastic about its role as a regulator.

For example, current regulations limit financial groups to ownership of one bank. Guajardo, who is also president of the Mexican Bankers Assn., envisions a future in which financial groups own a variety of specialized banks.

Bancomer has separated the bank into four parts: traditional retail; private banking for individual clients with balances of $100,000 to $500,000; corporate banking, and personal banking for small businesses and individuals with balances over $500,000.

Guajardo believes such specialization within financial groups is essential to success in the future. “It is important for each subsidiary to maintain its identity,” he said. “The clients and the sort of attention they need is different.”

Working-class customers need to make deposits, cash checks, make payments on their credit cards and pay utility bills--services Mexican banks already provide, he said. Wealthier clients need advice on investing money, which requires a detailed understanding of their financial goals, he added.

Bankers acknowledge that they are still a long way from providing that level of service, but they have taken a few, halting steps toward improvement.

Banamex recently took out full-page newspaper ads to announce a singular innovation: All branches nationwide will now honor checks drawn on any account with the bank. Before, checks could only be cashed in the city where the account was.

Providing even such a seemingly simple service required a huge investment in telecommunications. Most bankers say they are in the process of automating their systems and that service will improve.

However, observers have serious reservations about the new system.

Baring Securities noted in a recent analysis of Mexico’s new financial system that financial supermarkets have not proven especially effective in the United States. Baring cites Sears, Roebuck & Co.’s recent decision to spin off its financial services group as the most recent evidence that the concept may be flawed. However, many other analysts maintain that Sear’s experience only proves that trying to operate a financial services group under the umbrella of a retailing giant was a mistake.

In addition, the financial groups have been criticized for exacerbating the concentration of wealth and financial power. Although ownership of the financial groups is dispersed among 30,000 shareholders, the leading shareholders are often closely tied to top industrial groups.

Despite strict regulations governing relationships between banking and industry, those interlocking corporate boards have raised fears that Mexican finance could repeat past errors, such as the awarding of credit based more on one’s connections than credit-worthiness.

When the banks were nationalized in 1982, government auditors found a mire of low-interest and unpaid loans made to other subsidiaries of the corporations that had owned the banks, as well as to bank directors and their relatives.

The most egregious example was Comermex, a mid-size bank that was on the verge of sinking under bad loans. “The owners treated the banks like their private piggy banks,” said one official, who asked not to be named.

As a result, the law re-privatizing the banks prohibited industrial conglomerates from buying them. That sets the Mexican model apart from European and Japanese systems, in which industrial groups are often built around strong banks.

However, the people with the means and prestige to organize consortiums to buy banks were often directors of leading industrial and commercial groups. They simply set up separate companies to do the bidding. Regulators who screened the bidders say they will watch lending practices carefully to assure that the industrial groups do not control the banks.

An additional problem is that a relatively small group controls the financial market.

Between them, Bancomer and Banamex-Accival control nearly half of Mexico’s banking assets, the largest brokerage, the biggest leasing company, the biggest warehousing company and the second-ranked factoring firm.

They compare in size to U.S. super-regional banks. But in Mexico, they are giants, with 50% more assets than their nearest competitor.

Moreover, they have the ability to raise more capital, as demonstrated by Bancomer’s $803-million stock sale in the spring. Their access to funds for modernization will allow them to win more market share and distance themselves even further from competitors who used most of their resources to buy their banks.

“I always said it was better not to have a bank than to pay too much,” said Del Valle Ruiz, who bought Banco Internacional at one of the lowest prices paid, after being outbid on four other banks.

Because of the intense competition, consultants at Booz, Allen & Hamilton expect a rash of mergers in three to five years.

“Nobody bought the banks with the idea of selling,” Booz, Allen & Hamilton’s Mendez said. However, as the new bankers face the realities of loan portfolios with, in some cases, up to 11% bad loans, and an increasingly competitive market, some will be forced to sell, he said.

“Before the foreign competition enters the market, the Mexican banks will already have torn each other to bits,” he predicted.