Mexican Banks Face New Threat in International Competition : Finance: Analysts say the government decision to open doors to foreign institutions could also fuel growth.

The government’s blessing for international banks to enter Mexico for the first time in nearly six decades may be good for economic growth--but it means trouble for dozens of Mexican banks already caught between a flat economy and ferocious domestic competition.

The 18 foreign competitors who got charters to open their doors in Mexico are expected to make $3.25 billion in new loans available next year, providing consumers and businesses a much-needed respite from tight credit and high interest rates.

It is the central part of a financial reform that also led the government Monday to permit 16 foreign brokerages and a dozen international insurance companies to set up shop, competing with important affiliates of Mexican banks, which are part of European-style financial conglomerates.

Authorizations for non-bank financial services--such as G.E. Capital, Chrysler Financial Corp. and Ford Motor Credit--which could cut into domestic banks’ consumer lending business--are expected next month.

Though the government’s action was expected, competition from the likes of Citibank, Bank of America, Fuji Bank and Dresdner Bank was a sobering thought for the nation’s bankers as they start a three-day national convention today at the resort of Cancun.

Already, investors who paid the government high prices to acquire the banks privatized three years ago have watched as more than a dozen budding domestic financiers received authorizations to compete against them.

The pressure to recoup their initial investments in the face of growing competition, combined with inexperience, a laggard economy and the lack of sophisticated credit rating services have brought many of Mexico’s banks to the brink of crisis, bankers and analysts say.

Bad loans are a “heavy burden” for his members, Roberto Hernandez, outgoing president of the Mexican Banking Assn. recently told reporters here.

Indeed, bad loans account for up to 14% of bank portfolios and more than half of capital at even the best-run banks. At two--Banco del Oriente and Banco Obrero, the labor federation-run bank--the value of bad loans exceeds capital.

“The bad-loan portfolio is not only putting pressure on the banks’ liquidity, but affecting the institutions’ solvency,” according to the Mexico City consulting firm GEA.

Baring Securities analyst Laura Berdeja called sour loans “the key risk for all Mexican financial groups.”

Problem loans have already led authorities to seize two troubled financial groups this year and a once-respected banker, Carlos Cabal Peniche, is a fugitive from justice in one extreme case. Further, the percentage of loans gone sour is rising, according to National Banking Commission statistics.

“Portfolio quality has constituted an important drag on banks’ earnings and it is a factor largely within the banks’ control, unlike the economic environment,” according to Berdeja.

Negligible economic growth has made repaying loans harder for companies that have borrowed. The government has tried to step in through a special program that lets small businesses repay lapsed loans over 12 to 16 years at interest rates as low as 14.75%--incredibly easy terms in Mexico, where a long-term loan is three years.

However, GEA warns that such programs are only stop-gap measures. “Economic recovery and the reduction of interest rates are the fundamental factors in resolving the problem” of bad loans, according to GEA analysts.

Industrialists still complain that tight credit and high interest rates undermine their ability to compete on world markets. Those high charges are in part the result of high interest rates demanded by investors, but also reflect wide margins, or spread between the interest rates banks pay depositors and what they charge borrowers.

Mexican banks were accustomed to an average margin of 8.3% as recently as December and many clearly cannot survive as they are now structured on the current average margin of 5%.

As international banks and other financial institutions enter the market, margins are expected to shrink further.

“In the midst of the banking purge we are starting to see, there will be those who cannot resist the force of globalization, open competition and the change in vision of the banking business,” said Samuel Garcia, a financial columnist in the independent newspaper Reforma.

Those hardest hit will be the mid-size and smaller banks without a market niche or regional orientation, analysts said. Those are the same banks that have suffered the most from aggressive lending policies that created the portfolio crisis, according to a recent Baring Securities report on Latin American banking.

The result will be increased pressure for mergers, according to analysts.

Because international banks initially will be confined to a total of 8% of the total market and 1% per foreign bank, their impact will be limited at first. Most are expected to concentrate on business lending.

“Foreign competition in the corporate and institutional businesses has been present in Mexico for many years,” Berdeja pointed out. However, she added that international banks will probably increase the business they do in pesos, including more sophisticated types of loans.

Analysts also noted that Mexico is still “underbanked,” with available credit remaining below that of other countries. Once the Mexican economy recovers, banking should grow at least three times as fast as other sectors, Baring Securities predicted.

In addition to BofA and Citibank, U.S. institutions granted banking charters included J.P. Morgan, Chemical Bank, Republic National Bank of New York, NationsBank, Chase Manhattan Bank, Bank of Boston, First Chicago and American Express.

Declining Profitability

The profitability of most Mexican banks has fallen sharply as a flat economy, stiff competition, poor government oversight and inadequate technology caused the proportion of bad loans to skyrocket.

The change in profitability from December, 1993, to June, 1994, of Mexico’s three largest banks, expressed in profit as a percentage of total capital:

Banamex: -6.8%

Bancomer: -28.6

Serfin: -9.1

Source: Baring Securities