Mexican Banking Deal Reflects Brighter Outlook

Spain’s biggest bank, Banco Santander Central Hispano, won the bidding Monday for Mexico’s troubled Grupo Financiero Serfin, paying an unexpectedly high price that reflects improved investor confidence in Mexico’s banking system and brighter prospects for its economy overall.

The deal opens up a new front in the invasion of Latin American banking turf by Spanish banks, led by Santander and Banco Bilbao Vizcaya Argentaria.

With Monday’s deal and a string of other recent acquisitions spanning the hemisphere, Santander will become the largest bank in Latin America, controlling nearly 10% of the region’s bank assets. Adding Serfin, Mexico’s third-largest bank, to its existing operations here, Santander will control about 18% of Mexican bank assets.

Within the past week, Mexico’s three largest banks have been swept up in merger and takeover fever, heralding a long-awaited consolidation of the anemic Mexican banking sector that analysts have said is critical to revive consumer and business lending that have been stagnant since the 1994 peso devaluation and ensuing economic crisis.

Last week, Grupo Financiero Banamex-Accival, Mexico’s largest bank, made an unsolicited $2.4-billion bid for No. 2 Grupo Financiero Bancomer. Bancomer had agreed in March to be acquired for $1.4 billion by Spain’s Banco Bilbao Vizcaya Argentaria. Bancomer has two weeks to respond to the Banamex offer.

The near-collapse of Mexico’s banking system during the mid-1990s crisis forced the government to take over, sell off or close numerous banks, including Serfin, at a cost that now approaches $100 billion, according to Standard & Poor’s.

Mexico now has just four home-grown financial institutions left of the 18 that were privatized in 1991. That number may shrink even more before merger fever abates. The main suitors have been foreign banks; thus far, U.S. financial institutions have been reluctant to buy retail banking operations here.

Santander’s $1.56-billion bid for Serfin, which was taken over by the government in July, is the highest price yet paid for a failed Mexican bank. But, at $12.6 billion in government clean-up costs, Serfin was also the costliest for Mexico to rehabilitate and make desirable to prospective buyers.

The Serfin auction was held under the auspices of the Bank Savings Insurance Institute, known by its Spanish acronym IPAB, a new government agency that oversees failed banks and insures deposits. Santander’s offer was more than 20% higher than that of HSBC Holdings of London, Serfin’s only other bidder, IPAB chief Vicente Corta said Monday.

Santander’s bid, as much as 40% above expectations, prompted some analysts to declare Mexico’s five-year banking nightmare officially over.

“The reason is the fundamentals have not only stabilized but are getting better for the remaining half-dozen banks,” said Brent Erensel, Deutsche Bank’s Latin American banking expert.

Some analysts even made the argument that the Serfin deal might be a bargain, given their outlook that the Mexican economy is on the road to sustained recovery and that banks have truly turned the corner. The bid equals 1.59 times Serfin’s book value.

Steven Faucher, a bank analyst at Salomon Smith Barney in New York, said Mexican banks are more attractive to investors now because of recent changes in bankruptcy laws that give lenders more power to recover their money in the event a borrower defaults or declares bankruptcy.

Other observers aren’t so sure. Victor Manuel Herrera, Standard & Poor’s managing director in Mexico City, described Mexican banks as “weak although stable” in terms of capital and reserves.

“Banks are improving gradually” but not investing as much in technology as banks in Argentina and Brazil. “That’s where we lag behind,” Herrera said.

Technology is seen as a crucial competitive issue because of banking’s rapid conversion to Internet transactions, a much more efficient means of doing business than traditional checking.

But most analysts seemed in agreement that the deal was good for the government, that the IPAB did a good job salvaging Serfin, Mexico’s oldest bank.

“We succeeded in preserving the value of the Banco Serfin franchise,” IPAB’s Corta said Monday.

Serfin has 569 branches and nearly $11 billion in assets and $5.5 billion in deposits.