Mexican Bank Merger Could Spur Economy

The merger of Mexico’s second-largest bank with a Spanish banking empire foreshadows a wave of fusions among Mexican banks that could rev up a long-stalled engine of economic growth, bankers and analysts say.

BBV-Probursa, the Mexican unit of Spain’s BBVA bank, and Mexican Bancomer announced late Thursday their intention to join together and forge the country’s largest banking group. BBVA will pump in $1.2 billion in capital and take management control of the new group, the companies said.

The merger announcement comes ahead of the auction in May of Mexico’s third-largest bank, Serfin. Foreign and Mexican banks alike have expressed interest in acquiring Serfin, one of several banks rescued in Mexico’s $76-billion bailout of its battered banking sector after the 1994-95 peso crisis.

And rumors of further mergers and buyouts are rife.

“Within a year or two, we are going to have a very different map of the Mexican banking system than we have now,” said Abel Hibert, analyst for the Vector brokerage firm. “We are going to see four or five very big financial groups that are well capitalized and better regulated and supervised by the authorities. This will be very beneficial for the Mexican economy.”

If approved by shareholders and regulatory authorities, the new BBV-Bancomer banking group would control 25% of banking assets in Mexico and 30% of deposits through a network of 1,942 branches. BBVA, which stands for Banco Bilbao Vizcaya-Argentaria, is regarded as an innovator in retail banking technology and marketing, which could inject much-needed competitiveness into Mexican banking.

In Madrid, Reuters quoted Jose Sevilla, BBVA’s chief financial officer, as saying Friday that BBVA planned to cut combined costs of the Mexican operation by 30% over the next three years. BBVA would hold about 30% of the new Mexican bank, and could increase its shareholding to 40%.

The merger announcement came two days after Moody’s Investor Service upgraded Mexico’s foreign debt rating to investment grade, another measure expected to attract inflows of long-term investment capital as well as short-term stock and bond funds.

The prospect of a rush of funds to pay for bank acquisitions and other investments has raised some worries.

President Ernesto Zedillo said Thursday he had convened a meeting of his top financial officials to draft plans to counter the impact of a possible flow of hot money into Mexico. A similar inflow occurred in 1994 and then vanished when the peso was devalued late that year, setting off the crisis that drove Mexico’s banks to the wall.

Gray Newman, senior Latin American economist at Merrill Lynch in New York, said the flood of money into Mexico creates “a risk that this could lead to a rapid growth in consumption,” sucking in more imports and increasing Mexico’s balance-of-payments deficit.

The BBV-Bancomer merger involves more than Spanish banking expertise and capital. Bancomer already is partners with minority owner Bank of Montreal, which is strong in corporate banking and cash management in Canada and the United States. That offers BBVA a potentially useful channel into the U.S. market.

The banking crisis sparked by the peso devaluation has taken years to resolve. The government took over billions of dollars worth of bad loans, closed some banks and sold off others after cleaning up their balance sheets of past-due loans.

In retail banking, BBV bought Probursa, while Santander, another major Spanish bank with investments all over Latin America, took over Banco Mexicano in the early stages of the shakeout. Then U.S. giant Citibank took over the troubled Confia bank.

In addition to those three foreign retail banking players, 16 other foreign banks operate here, although most limit their activities to corporate banking. But the auctions of Serfin and, later this year, Bancrecer could attract fresh foreign institutions. Those two banks were taken over by the government because they were unable to raise sufficient capital.

Many financial analysts wonder whether Banamex, long Mexico’s largest bank, will seek a foreign partner or make an acquisition to regain its No. 1 position.

The consolidation of Mexican banking and the growing role of foreign capital in the sector have been largely welcomed as major advances in a country where lack of credit has been one of the biggest constraints on faster growth.

In December 1998, Congress adopted a law removing limits on foreign shareholdings in the largest banks. In strongly nationalist Mexico, only a few voices have so far protested the growing presence of foreign banks.

Hibert, the Vector analyst, said “bankers are realizing that this is inevitable.”