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Banorte’s treasurer on the EM rout, banking stability and Basel III

In an interview with Euromoney, the treasurer of Mexico’s Grupo Financiero Banorte shares his concerns over the emerging markets sell-off and regional banking stability, and says Basel III is the single most challenging piece of regulation Banorte is facing.

Carlos Arciniega, general director of treasury for Grupo Financiero Banorte is concerned about the emerging markets (EMs) sell-off that has ripped through markets since last year, but he is also phlegmatic.

“Volatility will always be a source of concern or a gateway to search opportunities,” he says. “We trust that the economic conditions in Mexico will keep us apart from major problems.”

While Mexico has been buffeted by the rout in EMs, it has shown greater resilience than many of its regional and global peers, largely as a result of the structural reforms it has engaged in and close ties to the US and its recovery.

However, this can swing both ways, and weakness in the US economy does impact Mexico’s performance despite its strong fiscal and monetary institutions, deep local pensions market and liberal trade regime, says Deutsche Bank in a report.

“A new administration, however, has already delivered labour market, financial and fiscal reforms,” says Deutsche Bank. “Proposals to allow greater private investment in the energy sector are set to be passed and would be another step in the right direction, given Mexico’s abundant natural resources.

“Together with a pick-up in US activity, this should support stronger growth in Mexico.”

Mexico’s economy grew at 1.1% last year – down sharply from a 3.9% growth in 2012 and its weakest performance since 2009 when the country was in recession.

Weaker-than-expected US demand for Mexican-made exports, combined with a contraction in domestic construction, caused much of the drag on growth – factors that will hit again this year. Barclays has already lowered its 2014 forecast to 3% from 3.7%.

The strength of the local and regional banking sector will be key to growth, too, and here Arciniega says he has regional concerns, but that Mexico’s banks are well-regulated and robust.

“Regional banking-sector stability will follow the course of the economies of each country where the banks are located,” he says. “Mexico, apart from the favorable economic conditions, has one of the best regulatory frameworks worldwide.”

Mexico, for example, was the first to adopt minimum capital requirement standards under Basel III in January of last year.

Even still, on the question of what single piece of financial regulation is posing the greatest challenge to Banorte, Arciniega says Basel III is right up there.

“The most important challenge in the current context is to maintain profitability levels within the framework of implementing regulations issued under Basel III,” he says.

At the end of January, the group reported that fourth-quarter net profits rose 20% to Ps3.62 billion compared with the same period a year ago, but that it recorded only modest expansion to its credit portfolio due largely to economic weakness.

Few treasurers of banks, or even bank chief executives, would disagree with Arciniega’s assessment of the challenge Basel III poses to profitability. The higher capital rules are driving monumental change in the global banking sector, shaping the relationships banks have with companies as well as their own banking relationships.

Arciniega adds: “Our relationship banks have been changing their profile through time. Before, they were targeting specific products; currently they are focused on learning more about their customers’ needs, which helps to facilitate better relations and explore new sources of business.”

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