BRIEFING BOOK : Privatized Mexican Banks Get Ready for Foreign Competition

ISSUE: Recently privatized Mexican banks are preparing to confront international competition, especially from U.S. banks in the commercial lending market. The North American Free Trade Agreement would open the banking system further by permitting U.S. and Canadian banks to open subsidiaries in Mexico, starting in the year 2000.

BACKGROUND: Foreign ownership of Mexican banks had been prohibited since 1938. A 1991 law permitting private-sector banking, after a decade of government monopoly on bank ownership, allows foreigners to own up to 30% of a bank’s corporate parent company and 10% of a bank.

Banks are already under pressure to generate enough profits to justify the large sums paid when the government sold its 18 commercial banks last year. That keeps loan interest rates high at the same time interest on deposits shrinks. Many banks are having difficulty meeting stricter capital requirements imposed by regulators this year, and bad loan portfolios are growing as the economy slows. The two biggest banks, Banamex and Bancomer, have started massive layoffs as they automate.

Two bank mergers have already been announced, and a third is expected. Meanwhile, five new banks have been authorized by the Treasury Ministry.

OUTLOOK: Mexican banks will probably continue to monopolize retail banking in the country because they already have extensive branch networks that foreign competitors would find costly to duplicate.

“To develop the presence and market knowledge to make a successful foray into the Mexican market implies a great deal of investment of resources for an uncertain outcome,” David C. Mulford, chairman of Credit Suisse First Boston, told a meeting of the Mexican Banking Assn. during the group’s convention this week in Puerto Vallarta.

Competition for corporate business is expected to intensify, however. More than 10% of commercial lending to Mexico’s private sector was provided by U.S. banks last year, and that will probably rise as the largest Mexican corporations strengthen their relationships with U.S. banks.

The hottest competition between Mexican and foreign banks will probably be for the middle market--small to medium-size businesses. U.S. and Canadian banks have know-how and experience to provide the specialized services such companies need.

STRATEGY: Mexican banks are pushing retail business. Mortgage loans have more than quadrupled in four years. Mexican banks have issued 12 million credit cards--almost as many as the rest of Latin America combined. A whole new client base of workers who may not have used banks before is becoming available as the retirement system is privatized through accounts administered by banks.

Alliances with U.S. and other foreign banks will increase as Mexican institutions work to preserve a share of the corporate market and gain a position in the emerging middle market. Mexican banks can offer their knowledge of the market in exchange for a foreign partner’s knowledge of the business.

U.S. banks will welcome joint ventures in lending to smaller Mexican companies but should be less willing to share the premium corporate market, where access to international capital markets is critical.

Meanwhile, Mexican banks need to cut costs and improve efficiency in order to keep their retail edge and attract foreign partners for commercial operations.

“We have to push down the cost of capital in the Mexican economy,” said the banking association’s new president, Roberto Hernandez, who is also chairman of Banamex.