Transcript The Mexican Banking Sector from 1995 through 1998, Roberto J

Dr. Roberto J. Santillán S.
EGADE
EGADE
The Mexican Banking Sector
from 1995 through 1998
Roberto J. Santillán-Salgado, Ph.D.
Dr. Roberto J. Santillán S.
EGADE
• After implementing a successful
“shock” plan to control the
hyperinflation observed in 1987,
Mexico’s economy initiated a stable
recovery.
• Important deregulation measures in
the financial sector (1989-1990) and
the privatization of the banking
system (1991-1992) propelled an
active credit market that supported
both increased consumption and
investment.
Dr. Roberto J. Santillán S.
EGADE
• Additional market-oriented policies
were implemented: other important
privatizations, along with the
signature of NAFTA favored a
significant inflow of direct and
portfolio foreign investments.
Dr. Roberto J. Santillán S.
EGADE
• The capital account surplus financed
and increasing current account
deficit, which at the time was
considered justified as a signal that
important productive investments
were taking place.
Dr. Roberto J. Santillán S.
EGADE
• Even while the objective to curve
down inflation was achieved year
after year (inflation for 1994 was
close to 6%, the lowest rate in 25
years), the use of a semi-fixed
exchange rate as a nominal anchor
for prices and an evident, politically
motivated, reluctance to adjust to a
more realistic level resulted in a
significantly overvaluation of the
Mexican currency.
Dr. Roberto J. Santillán S.
EGADE
• During 1994 several unexpected and
tragic events took place (Colossio’s
and Ruiz Massieu’s assesinations
and the upsurge of the guerrilla
movement in the southwestern state
of Chiapas).
• Capital flight ensued and was
propelled by the hike in the United
States interest rates, putting
additional pressure on the foreign
currency reserves of the country.
Dr. Roberto J. Santillán S.
EGADE
• By December of that year, shortly
after President Zedillo took office,
the exchange rate was initially
devalued by 15%, and free floated
next day.
• Among other problems that resulted
from the peso devaluation one of the
most dramatic was the Tesobonos
crisis.
Dr. Roberto J. Santillán S.
EGADE
• Tesobonos were dollar-denominated
and government-backed medium
term bonds issued since several
years before, but with more
frequency during 1994 as a measure
to reduce a large scale capital flight,
as the above described political
events took place.
Dr. Roberto J. Santillán S.
EGADE
• However, the same phenomenon
they were intended to avoid made
them a difficult problem for the new
government.
• A total of 30 billion US dollars in
Tesobonos had maturities of six
months or less.
Dr. Roberto J. Santillán S.
EGADE
• Capital flight had depleted foreign
currency reserves to a low of six
billion dollars by December of 1994
and the government’s guarantee was
at stake.
• An emergency rescue package was
negotiated “overnight” to reduce the
additional uncertainty that the
Tesobonos represented.
Dr. Roberto J. Santillán S.
EGADE
• The United States, along with Canada,
Japan and several European countries
put together a 50 billion US dollars
loan to overcome the Tesobonos crisis
and reduce the risk perception of
foreign investors.
• That loan was repayed much sooner
than anticipated thanks to the fast
recovery of the Mexican economy
during the following years.
Dr. Roberto J. Santillán S.
EGADE
• From a domestic economy
perspective, the most affected sector
by the peso devaluation was the
banking sector.
Dr. Roberto J. Santillán S.
EGADE
• Very high prices were paid through
an auction process that put the
banks into the highest bidder’s
hands.
• However, more often than not the
new bankers lacked experience in
that activity.
Dr. Roberto J. Santillán S.
EGADE
• Both factors account for a relatively
careless loan authorization policy.
• While the economy was growing, bad
credit decisions were not obvious
(similar to what happened in
Southern Asia countries in 1997).
Dr. Roberto J. Santillán S.
EGADE
• However, the December 1994
devaluation took its toll in the form of
exceptionally high interest rates (to
retain capitals within the contry),
immediate inflationary pressures (as
a result of the large imported
component of domestic consumption
and investment) and an inminent
reduction of economic activity (that
year the country’s GDP expereinced
a negative growth rate of -7%).
Dr. Roberto J. Santillán S.
EGADE
• Numerous companies that were
partially indebted in dollars and saw
their liabilities increase in a dramatic
fashion also experienced significant
reductions in their sales and income.
• Many were forced to delay the
service of their financial
commitments with local banks and
several others went bankrupt and
failed on their loans.
Dr. Roberto J. Santillán S.
EGADE
• In addition to the credit crunch, most
banks had significant dollar
denominated liabilities and the
devaluation represented significant
exchange losses for them.
• Several banks became insolvent and
others went bankrupt.
Dr. Roberto J. Santillán S.
EGADE
• The Federal Banking Deposits
Insurance, FOBAPROA did not have
enough resources to cover all the
losses so additional goverment
backed debt had to be issued.
Dr. Roberto J. Santillán S.
EGADE
• However, the urgency with which that
operation had to be implemented
overlooked the regular legal process
of requesting an authorization to
Congress and, while the resources
were obtained and the banking
system was safely driven ashore,
that measure opened a whole new
political fight between the
government and the opposition
parties.
Dr. Roberto J. Santillán S.
EGADE
• Eventually, the FOBAPROA issue
was settled and a new organism, the
IPAB was created to perform the
same functions than the late
FOBAPROA, but with a limited
liabilities responsability.
Dr. Roberto J. Santillán S.
EGADE
Cuadro 1
Costos fiscales estimados de crisis bancarias
País
Período
Costo (% del
PIB)
Indonesia
1997 - 98
40
Corea
1997 - 98
27
Chile
1981 - 86
33
Japón (1)
1997 - 98
30
Filipinas
1981 - 87
13
Venezuela
1994 - 98
17
España
1977 - 85
15
México
1995 - 98
14.4
Suecia
1990 - 93
4.3
E.U.A.
1980 - 92
2.4
Dr. Roberto J. Santillán S.
EGADE
• As a result of the banking crisis, there
has been an active process of mergers
and acquisitions in the sector that, along
with an increased participation of
foreign banks in the domestic market,
has reshaped the Mexican banking
system.
Dr. Roberto J. Santillán S.
EGADE
From 1995 through 1998, eleven banks
were intervened by the National
Commission of Banks and Securities
Markets:
• Cremi, Unión, Banpaís, Interestatal,
Sureste, Capital, Centro, Industrial,
Confía, Anáhuac and Banco
Industrial.
• In every case irregular transactions
or a sharp deterioration of the loans
portfolio was observed.
Dr. Roberto J. Santillán S.
EGADE
Some of the most relevant operations
that have reshaped the Mexican
Banking System during the 1995-1998
period are:
• The acquisition of 16% of the stock
of Bancomer, the second largest
bank in the country, by the Bank of
Montreal (Canada).
Dr. Roberto J. Santillán S.
EGADE
• The acquisition of 19.9% of the stock
of Banca Serfin, the third largest
bank in the country, by HSBC Latin
America BV (HSBC); additional
investments in convertible bonds
and the use of swaps of Brady bonds
to pay for the operation totaled an
investment of 174 millions of US
dollars.
Dr. Roberto J. Santillán S.
EGADE
• After a turbulent period of
accounting audits that revealed
illegal operations of management
and resulted in the imprisonment of
its previous CEO and owner, Banca
Confia, a Nuevo Leon based bank
with national coverage, was 100%
acquired by Citibank (USA).
Dr. Roberto J. Santillán S.
EGADE
• The amount paid for Confia was in
the order of 600 million pesos,
roughly equivalent to 75 million US
dollars.
• Bank of America (USA) opened two
subsidiaries, Bank of America
México and Arrendadora Bank of
America 1995
Dr. Roberto J. Santillán S.
EGADE
• 10% of Banco Inverlat, S.A.’s equity
was acquired by the Bank of Nova
Scotia and currently holds
convertible stock representing 6% of
Inverlat’s equity plus subordinate
obligations convertible in stock
representing 39% of equity with
maturities during next year (2000).
Dr. Roberto J. Santillán S.
EGADE
• Banco Bilbao Vizcaya-Mexico, S.A.
(Spain) purchased part of the offices
of Banca Cremi, Banco de Oriente
and Promex to attain a leading role in
the recent evolution of the Mexican
banking sector.
• Banco Santander (Spain) acquired
70% of the controlling interest in
Banco Mexicano, S.A.
Dr. Roberto J. Santillán S.
EGADE
• 51% of Banco Industrial’s equity was
purchased by the Far East National
Bank for an amount of 60 millon
USDs to be paid during a period of
three years.
Dr. Roberto J. Santillán S.
EGADE
Other important bank mergers, acquisitions
and liquidations during the 1995-1998 period
were:
• 99% of the equity of Banco del
Centro’s equity was acquired by
Grupo Financiero Banorte, S.A. de
C.V. for 729’966,810 Mexican pesos,
roughly equivalent to 100 million US
dollars.
Dr. Roberto J. Santillán S.
EGADE
• Banco del Atlántico, S.A. took control
of the network of Banco Interestatal
S.A. after the former assumed the
liabilities of the later.
• Banco del Atlántico, S.A. was
mergered with Banco Internacional,
both national-coverage banks,
creating another “mammoth”
institution with national coverage
and more than a thousand offices.
Dr. Roberto J. Santillán S.
EGADE
Smaller Banks Transactions:
• Banca Promex S.A absorved Banco
Union.
• Banca Afirme
Obrero, S.A.
acquired
Banco
Dr. Roberto J. Santillán S.
EGADE
The Banking System restructuring
process:
• As a result of an intense
restructuring, including mergers and
new foreign participants:
– 27 new banks have entered the market
– 10 of those are Mexican and 17 foreign
based
– Ten of them have national operations
and the rest operate on a regional base
Dr. Roberto J. Santillán S.
EGADE
New Mechanisms and Regulatory Changes
to Strengthen the Banking System:
• January 1995: Access to foreign
currency fresh resources
• March 1995: Increased Balance Sheet
reserve requirements
• March 1995: Temporary
Capitalization Program
• May 1995: Selective purchase of
problematic loans by the government
Dr. Roberto J. Santillán S.
EGADE
1998 New Financial Sector
“Package” Sent to Congress
• Authorization for 100% foreign ownership of
banks.
• Increased autonomy of the "Comisión
Nacional Bancaria y de Valores", the official
supervisory agency for banking activities.
Dr. Roberto J. Santillán S.
EGADE
1998 New Financial Sector
“Package” Sent to Congress:
• The Central Bank has received additional
authority to manage the foreign exchange
rate.
• A limit of $100,000 US deposit insurance
will increase the general public’s
awareness on the quality of different
banks.
Dr. Roberto J. Santillán S.
EGADE
Mexican Banks Key Market Data
• Each banking office has a potential
customer base of 14,900 people
• There are only 24 checking, savings
or other accounts for every 100
persons; i.e., approximately 0.24
accounts per Mexican!
• High concentration of banking
activity in Mexico City
– 58.8% of total deposits
– 59.2% of total loans
Dr. Roberto J. Santillán S.
EGADE
Mexican Banks Key Market Data
• In the rest of the country there is
only one banking office for every
1000 Sq. Kms. To give attention to
21,750 people
• The efficiency measure for those
provincial offices is of only 14
accounts for every 100 people