Bancomer's Guajardo: 'We Need to Have a Vision' (int'l edition)

In mid-June, Mexico's new bank deposit protection agency, the Bank Savings Protection Institute, known as the IPAB, moved to take control of Grupo Financiero Serfin, Mexico's third-largest banking group. The Serfin decision raised anew worries about Mexico's weak banking system, which has cost the government $65 billion so far. In addition to Serfin, the government has budgeted some $13 billion to clean up three more banks. Even the strongest banks show serious weakness in their balance sheets. Ricardo Guajardo Touché is the CEO of Grupo Financiero Bancomer, which controls Mexico's second-largest bank. He spoke to Business Week recently on the banking system's troubles. Here are edited excerpts of the interview:

Q: At the end of last year, the banking crisis appeared to be close to resolution after the approval of a series of banking reforms, including the establishment of the IPAB. Now, Serfin must be rescued, and market analysts are worrying about capitalization levels at Mexico's stronger banks. Some analysts say the system needs $25 billion to get back on track and start lending again. What's happening?
The Serfin situation was no surprise. Neither are Bancrecer, Promex, and Atlantico [three other banks awaiting cleanup.] Most of the monies that have been talked about are already in the budget of the new deposit insurance institute. A lot of the issues that were already on the table last December or November have come back -- and obviously because we are talking about very sizeable amounts, they always make news.

Once we get the most critical cases out of the picture in terms of finding some kind of solution, I think the remaining system will be able to attract whatever capital it requires to bring the system to international standards. I don't think it has to do anything with the contraction of credit in the country. I don't think we are holding back lending because of any lack of capital. Good or bad, regulatory capital is being met, and that's it.

The reasons why credit is not available are both because of demand and because of supply. On the demand side, the volatility of the markets in the last five years has been such that it makes it very risky for a lot of people to take credit. They perceive that interest rates could move again as they have moved practically every year since 1995 and that they can get caught in the middle. On the supply side, the whole experience in terms of nonpayments and the lack of an efficient judicial system to enforce contracts -- of any type -- creates an environment that makes credit a very high-risk proposition that requires high margins.

Q: Bancomer is buying Banca Promex. How much do you estimate is needed to clean up its balance sheet?
If I remember right it's between $1.5 billion and $2 billion.

Q: How much will Bancomer put in, and how much will come from the IPAB?
That's the gross figure that will be required to clean up the bank. I think the total figure that we will put in is probably $500 million.

Q: The IPAB will put in another $1 billion to $1.5 billion?

Q: Are there other banks that could need rescuing?
The only thing I can say is that I don't think the Serfin situation came as a surprise. I don't think there was any doubt among the analysts and the markets. The market has a reasonably good reading of what's going on. I don't think there will be surprises.

Q: What are the most urgent priorities for the IPAB and the Finance Ministry?
The most urgent is to clean up the situation. A general task for both the authorities and the intermediaries is to try to envision what kind of a financial system Mexico requires going forward. We need to have a vision.

Q: What is that vision?
I think we should look at what other countries have done, what seems to be working for them. I continue to think that the Spanish or Canadian model could be the closest to our situation. A few large banks, national, universal in nature with regional and niche players. A few large institutions that can lead expansion into the mass segments of the population which are expensive and costly to service. You need very large economies of scale to really provide the service at a profit. Given the contraction of the Mexican market in the last five years, I don't think there is room for that many banks.

Q: Can you comment on reports of discussions about a merger between Bancomer and [No. 1 bank] Banamex?
I think it's something that makes sense. I think it's a difficult proposition. There is no negotiation or agreement between us. As you know, we're working on back-office projects in an intensive way. But I think the idea of at least one reasonably large and strong Mexican player in North America is appealing. I think we would add value to the country because we have to look at the market in a more global perspective. Right now, it's hard to do it because of the local crisis and the difficulties, especially in financial markets, which isolate Mexico from the U.S. and Canada. But once financial stability is achieved in Mexico, I think the [North American] market will be more penetrable.

Q: Mexico's Federal Competition Commission wouldn't be too happy...
That's why it's a difficult proposition, so it's not something that may happen soon. But it could happen eventually -- whether that particular merger or another one. I think eventually something should happen in order to create one or two Mexican players in the market. Otherwise, we are going to be only part of larger chains, which is not especially bad, but I think in financial services, it adds value to have your own strong intermediaries.

Q: Some Wall Street analysts have raised questions about your mortgage accounting specifically. There are estimates that Bancomer needs anywhere between $400 million and $1 billion. What's your estimate?
I think that in order to clean up the balance sheet completely, we'll need something on the order of $500 to $700 million. I think we have the resources to do it. I think we will be able to do it when the time is right.

Q: How will you do it?
Partially continue to grow, partially increase equity, and partially selling assets as we did last time. We did it in 1996 with that formula, raising $1.5 billion by selling nonstrategic assets, raising some equity from the shareholders, and forming the Bank of Montreal partnership. I think the figure is quite manageable.

Q: Is the Bank of Montreal likely to increase its stake?
Not now. I don't see any move on that front. It has 16% of the shares but 20% of the voting shares.

Q: How would the shareholders increase equity?
The way any corporation raises money in the markets, sometimes inviting new shareholders.

Q: But it might mean a dilution for existing shareholders?
It could happen, a little bit. It's not a major problem.

Q: Is Bancomer lending now?
We're lending to any individual or corporation that meets our risk-adjusted rate of return. We use the same criteria that the Bank of Montreal uses, the same criteria that Bank of America uses. The best proof of that is that they don't lend either, because as you know we have subsidiaries of [Banco] Santander and [Banco] Bilbao [Vizcaya] and Citibank, and their portfolios are not growing either. And they don't have any capital problems. They have technology, they have expertise, they have capital, and they are acting exactly the same way that the Mexican banks are acting.

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The Mexican Bank Crisis Just Won't Go Away (int'l edition)

TABLE: Mexico's Bottomless Banking Bailout

ONLINE ORIGINAL: Bancomer's Guajardo: ``We Need to Have a Vision'' (int'l edition)

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