The government Thursday seized control of the country's third-largest bank, saying it will clean up and sell the struggling Serfin Financial Group in the latest chapter of Mexico's four-year bank bailout saga.
The government acted after shareholders met earlier in the day and decided not to pump in the $1.3 billion of fresh capital required to keep Serfin viable. The government then announced it would put up that money rather than let Mexico's oldest bank go under--at age 135.
Despite Mexico's ongoing recovery from the deep recession of 1994-95, its sickly banking system remains a source of great concern for the broader economy because it means a lack of capital for investment.
Last December, Mexico's Congress approved a program to finance the immense cost of cleaning up banks that were ravaged by the economic crisis flowing from the peso devaluation in December 1994. More than $65 billion in bad debts and problem assets sit in a government bailout fund, most worth a fraction of their face value.
That excludes the Serfin troubles, which surfaced in May after months of rumors and led to the suspension of trading in Serfin shares in New York and Mexico City. The government had signaled in June that it would take over unless shareholders came up with more funds.
Vicente Corta, head of the government's recently formed Bank Savings Insurance Institute, said the institute has appointed a board to oversee Serfin during the six to eight months before the banking group can be auctioned off.
Corta said four financial institutions, some of them foreign banks with operations in Mexico, had expressed interest in bidding for Serfin. One of those is the London-based Hong Kong and Shanghai Bank, or HSBC Group, which already owns 19.9% of Serfin.
Serfin isn't the last of Mexico's problem banks. Corta noted that a total of $7.4 billion has been allocated by Congress to cover further bad-loan problems plaguing four smaller banks: Bancrecer, Atlantico, Inverlat and Promex.
Mexican analysts expect only half a dozen or so major banks to survive and thrive into the next century, just one-third the number that were privatized in the early 1990s after a decade of state ownership.
Foreign banking involvement is expected to keep growing. Citibank bought the Confia banking group after it was overcome by bad debt and capital problems last year. Spanish and Canadian banks also have major investments in Mexican financial institutions.
Corta declined to predict a selling price for Serfin, and noted that some of its assets, such as a pension fund, could be sold off separately.
Adolfo Lagos, the chief executive of Serfin, told reporters that the 15 or 20 main shareholders in the bank had lost their entire investments--worth about $2 billion--in surrendering the bank to the government.
The largest shareholder was Adrian Sada, scion of the Vitro glass manufacturing empire, the nation's eighth-largest company based in the northern city of Monterrey.
Serfin was particularly hard hit by the 1994 devaluation and subsequent recession, when billions of dollars of Mexican mortgages and other loans went into default. Those questionable bank assets were handed over to the government bailout program in return for bonds to recapitalize the weakened banks.
Even after that initial cleanup in 1996 and 1997, Lagos said, Serfin still had a bad-loan percentage of about 23% of its loan portfolio, and the bailout bonds made up about 28% of its productive assets, so it was always in a vulnerable position.
Yet Lagos, who will stay on as manager of the bank until the sale, insisted that despite the bank's constant capitalization crises, Serfin's operating performance has improved steadily. A cost-cutting program has slashed the number of employees from more than 20,000 to just under 12,000, he said, yet deposits have grown by more than 17% in real terms each year since 1997.
But he said the Asian and Russian financial crises that engulfed markets last year, finally spreading to Latin America in the autumn, had undermined Serfin's attempts to put itself back on sound capital footing. Foreign investors became gunshy of Third World destinations, and interest rates in Mexico soared to the point where new lending all but ceased for several months.
"Now, whatever doubts there might have been over the quality of capital has been cleared up," Lagos said. "The new capital [from the government] gives us a real solidity, and makes our work easier. Today is a watershed."
Under the terms of its original investment in Serfin two years ago, HSBC can get back $137 million, most of its original investment of $156 million, if it chooses not to bid for the entire bank.