Mexico’s leading banks face new competition

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By:
Rob Dwyer
Published on:

Wave of IPOs could propel ‘mid-sized’ banks; HSBC emerging as a potentially serious player.

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The leading Mexican banks face renewed pressure from a resurgent HSBC and also from a potential wave of smaller banks that could conduct IPOs to enable them to pursue rapid growth strategies.

Alejandro Tapia, banking analyst with Fitch Ratings in Mexico City, believes that following Banco del Bajío’s IPO on June 8 there is an “increasing probability of mid-sized bank IPOs” in Mexico – classified as those with market shares of between 0.5% and 2.0%.

Tapia says this segment has shown “an appetite for strengthening the size of their franchises and business profiles” at “a faster rate” than the industry average.

As of March 2017, the aggregated credit portfolios of these banks had grown by 18% year-on-year, which is higher than the system’s average of 12%.

Banco del Bajío’s IPO showed investor appetite for the smaller, faster-growing banks. Bookrunners Citi and Morgan Stanley raised almost $500 million.

The IPO priced toward the lower end of the range (at Ps29.50 per share within the range of Ps29 and Ps32), but then performed strongly in the following days – proving a positive benchmark for future deals.

The environment for such deals is mixed, with continuing political uncertainties in Mexico – and a presidential election in June 2018.

However, international investors continue to seek exposure to emerging-market assets and the Mexican banking system is also a positive factor.

The latest figures, for April, from the central bank show that annual loan growth accelerated from 12.0% to 12.9%, driven by loans to companies and other commercial lending, up 18.6% (from 16.6%) and 18.3% (from 15.4%) respectively.

Growth in consumer and mortgages remained relatively stable, at 11.4% and 9.9% respectively. In sequential terms, loan growth also accelerated, to 1.3% month-on-month, driven by total commercial loans and the consumer portfolio.

Fitch’s Tapia says more IPOs “would be the result of some investors selectively increasing their exposure in emerging countries, in conjunction with the interest of Mexican mid-sized banks to strengthen their financial and competitive positions in the face of the broad growth opportunities that the local market offers, given the low financial intermediation in the country”.

Direct threat

Meanwhile, a more direct threat to the established top-tier banks – BBVA, Santander Mexico, Banorte and Banamex – is a resurgent HSBC Mexico.

The bank appointed Nuno Matos as CEO in December 2015 and Martin Peusner as CFO in November 2016, and their new strategy is already making progress in the objective to match industry levels of profitability.

Despite longstanding rumours that HSBC could look to divest its Mexican bank, Marcelo Telles, a banking analyst for Credit Suisse, says the new management team told him in a meeting that the bank is definitely not up for sale.

Rather, HSBC’s senior management team reportedly see Mexico as a “perfect fit” for the bank, with its large retail banking network – bigger even than its UK operation in terms of number of branches – and its large open economy.

HSBC’s sale of its business in Brazil is often cited by those who question the bank’s commitment to Mexico, but there are differences that weaken such a comparison.

The operation that HSBC sold to Bradesco was, in fact, much smaller – 6% the size of the third largest competitor versus 48% in Mexico. The Mexican economy is also much more driven by international trade than Brazil’s relatively closed economy – another factor that offers HSBC attractive corporate banking service opportunities.

HSBC is therefore investing in its Mexican business, with $150 million going into its digital platform – this year and last year – and the group is said to be willing to inject capital into HSBC Mexico’s balance sheet if needed.

The growth strategy is in its early days, but there are already positive signs: HSBC is outgrowing the system in consumer lending, with 14.0% year-on-year growth, mainly in non-revolving consumer credit, posting 20.4% growth.

However, its credit-card operation remains a challenge, with only 4.5% annual growth, versus 8.4% for the system. The bank has also shown good growth on mortgages – up 14.6%, which is about 400 basis points higher than the system.

Crucial

Crucially, HSBC intends to use this growth to narrow its profitability gap with the industry. Management predict return on equity (ROE) of between 9% and 10% in 2017 – up from 6% in 2016, and an industry average of 13.5%.

The target for 2020 is ambitious: ROE of 14%, which would make HSBC Mexico the generator of about 5% of the group’s profit.

Meanwhile, the established banks are focusing more on profitability than protecting market share.

A survey by Deutsche Bank found that Santander Mexico and BBVA Bancomer have the most conservative lending growth targets at mid-to-high single-digit rates, while Banorte expects its loan portfolio to expand 9% to 11%.

According to Ignacio Ulargui, the lead author of the Deutsche report: “The sector is becoming more competitive across most of the segments. We believe that the best example was the fact that BBVA Bancomer, the market leader, is focused on profitability rather than volume and is giving away some market share.

“Furthermore, Santander Mexico lost market share after attempting to increase rates on consumer loans. We expect the competitive landscape to remain relatively high in the coming quarters.”

The key question for the leading Mexican banks is to what extent HSBC and the mid-sized banks can add a further tightening to these competitive dynamics.