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Capital Markets

Mexico: Banorte prepares infrastructure fund

Combines pensions and investors; structural reforms in place for growth.

by Rob Dwyer

Marco Ramirez, CEO of Grupo Financiero Banorte, says he expects to announce a co-investment infrastructure fund that combines the group’s pension funds (Afore) and large international investors in early August. 

The development would be some welcome good news for a Mexican economy that has struggled to live up to growth expectations since a swathe of economic reforms saw economists lift long-term GDP growth rates to 5%.

Ramirez says there is still strong international investor demand in Mexican investment opportunities, despite the lacklustre results of the first round of auctions of exploration and production blocks for hydrocarbons in the Gulf of Mexico. The government had hoped to award 40% of the projects up for auction but had publicly stated it would consider 30% a success – in the end only two blocks were award – just 14.3%.

The auction was clearly hampered by the falling price of oil, but investment banks say there were also structural weaknesses, such as a lack of information about the fields involved, while potential operators had to provide a letter of credit for a large portion of the expected investment, which added both complexity and expense and is beyond normal international standards. 

Also, although the government relaxed the rules about bids from consortia, there was little time for potential groups to coalesce. 

The news was further bad news for macroeconomic growth, which is now expected to reach 2.5% in 2015.

Still interested

Despite the disappointment there is still optimism that the government will make the required changes to maintain interest in the subsequent rounds. Round One was also a small percentage of the whole, representing about 20% of prospective shallow water reserves and 7% of all hydrocarbon fields.


“We believe there are plenty of opportunities in Mexican infrastructure; there is all this money there, and now it is going to be allocated to infrastructure”

Marco Ramirez, Banorte

“Round One wasn’t as good as we expected, but really it was because the oil price is now so low: it doesn’t make too much sense to invest right now,” says Carlos Gonzalez, Banorte’s chairman. “But that’s short term. In the long term we have the reforms and the legal [framework] in place. We might not have the pace [of growth from the reforms] that we thought we would have, but they still set a much bigger pace of growth in the future.”

Gonzalez says the level of international interest about long-term opportunities in Mexico hasn’t waned: “It’s still a big thing. Whether that plays out as a macro story next year or the next isn’t certain. With oil prices down – the world is going through some difficult parts – but the reforms have already set the structures that we need in order to achieve a different level of sustainable growth. The energy world definitely have their eyes on Mexican opportunities.”

Other opportunities

However, in the near term there are still other infrastructure opportunities, and Banorte’s announcement of its joint venture with Afore will serve not only to underline the broader possibilities for FDI in Mexico but also demonstrates the bank’s breadth. By expanding its infrastructure investments via Afore, the bank has the chance through the large buy-side group to rework its large infrastructure-related loan portfolio and fixed income mandates. 

“We have a Chinese wall between these different groups,” points out Ramirez. “But fortunately they have this huge capability to invest in infrastructure. We believe there are plenty of opportunities in Mexican infrastructure; there is all this money there, and now it is going to be allocated to infrastructure. In the next two or three weeks we will close this deal that we think everyone will be talking about.”

Will the fund invest in construction risk? “Right now there are a lot of projects in Mexico, and the first investments that you see will be the mature ones. Then everyone will move to the greenfield projects and we will also go there.”

Breadth of earnings

After years of large acquisitions – including Afores and insurance companies – Banorte’s revenue base is now split roughly in thirds between its retail bank, its wholesale bank and its Afore and insurance companies. That breadth has given it stability in earnings that has been reflected in its share price.

In a recent report, Barclays called Banorte “the best of the bunch” of Mexican banks, saying its diversified revenue base was best placed to contend with the pressures of low interest rates on net interest margins. 

“A more diversified revenue base gives Banorte a buffer against ‘lower for longer’ benchmark rates,” it says. “Its credit card, Afore, insurance, annuities and brokerage segments – which we name core non-bank operations – accounted for just short of 40% of group net profit in 1Q15. Excluding brokerage, which tends to be a more volatile profit stream, the contribution was 35% of group net profit in 1Q15.”

Are the strong equity valuations (Mexican financials are roughly 14.5 times price – comfortably ahead of Latin American peers) too optimistic about future growth? “It’s not easy to say if [Mexico’s share valuations] are cheap or expensive,” says Ramirez. “Right now I would say it is fairly price. But if investors believe in Mexico then multiples will be lower in the next year because we will produce more money than everyone expected.” 

Ramirez and Gonzalez – who were both appointed from the bank’s wholesale division earlier this year – say this is particularly true of Banorte’s share price. The bank is working on internal improvements that should take the group’s ROE to 20% within five years. 

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