Bloomberg News

Bancomer Bonds Missing Rally Signals Buy to ING: Mexico Credit

June 16, 2011

June 16 (Bloomberg) -- Concern that Grupo Financiero BBVA Bancomer SA may turn over cash to its Spanish parent has sparked a sell-off in the lender’s bonds that’s making them attractive to ING Groep NV and Aberdeen Asset Management Plc.

Yields on the Mexico City-based bank’s $1 billion of bonds due in 2020 have risen 31 basis points, or 0.31 percentage point, this year to 6.65 percent yesterday, according to data compiled by Bloomberg. The average borrowing costs for Latin American banks dropped 27 basis points during the same period to 5.58 percent, Credit Suisse Group AG indexes show.

Speculation that Banco Bilbao Vizcaya Argentaria SA will tap its Mexican unit for cash has mounted as Spanish banks stepped up borrowing from the European Central Bank amid concern Greece will default. Those repatriation concerns are overstated by traders because Mexico in March cut the amount local banks can lend to parent companies as part of an effort to safeguard the economy from the European crisis, said Natalia Corfield, a corporate bond analyst at ING in New York.

“Every time there is some news related to Spain, there’s an impact on the Bancomer notes,” Corfield said in a telephone interview. “It’s harder for the holding companies to try to get some sort of liquidity or capital from them. That’s a good thing for debt investors.”

An official at BBVA Bancomer in Mexico City who asked not to be identified declined to comment. Two phone messages and an e-mail sent after normal business hours to Paul Tobin, a spokesman for BBVA, Spain’s second-biggest bank, weren’t returned.

Earnings Growth

While profit at BBVA Bancomer, Mexico’s biggest lender, rose 26 percent in the first quarter to 436 million euros ($617 million), the parent’s net income fell 7.3 percent during the same period. BBVA Bancomer’s results are reported in euros as part of the Bilbao, Spain-based parent’s overall operations.

BBVA Bancomer’s bonds yield 265 basis points more than similar-maturity Mexican government dollar notes, up from 178 on Feb. 14, according to data compiled by Bloomberg. The bank’s securities have returned 1.1 percent this year, compared with an average 3.6 percent advance in Mexican corporate debt, according to JPMorgan Chase & Co.

Standard & Poor’s rates BBVA Bancomer debt BBB, or six steps below the parent company’s AA rating. Yields on the parent’s euro-denominated bonds due in 2020 have fallen 20 basis points this year to 5.42 percent.

Mexico cut the amount local banks can lend to their parent to 25 percent from 50 percent in March. Banco Santander SA, Spain’s largest bank, also owns Mexico’s fourth-biggest financial institution, Grupo Financiero Santander SAB.

ECB Borrowing

“We’ve decided to take specific measures as to lower the capacity of Mexican banks to lend to parent companies,” Deputy Finance Minister Gerardo Rodriguez said in an interview at Bloomberg’s headquarters in New York on June 3. “We have many local banks that operate under umbrellas of broader corporation and they do have a financial relationship.”

Spanish banks’ loans from the European Central Bank jumped 26 percent in May as growing speculation Greece will default increased lenders’ financing costs. Spanish banks borrowed 53 billion euros from the ECB in May, up from 42 billion euros in April, the Bank of Spain said on its website on June 14.

Stocks globally plunged yesterday and the euro slumped on concern Greek Prime Minister George Papandreou will be forced out of office amid escalating protests over budget cuts, which could jeopardize the austerity measures the country needs to qualify for international aid. The yield on Greek 10-year bonds has climbed 523 basis points this year to 17.68 percent.

Spain’s Jobless

“BBVA Mexico will not be providing any support for BBVA Spain,” said Esther Chan, who helps manage $5 billion of emerging-market assets, including BBVA Bancomer’s bonds, at Aberdeen Asset Management in London. “We bought the credit on its own fundamentals.”

The yield on Spain’s 10-year bonds has increased 21 basis points this year to 5.66 percent. The yield on Mexico’s benchmark peso bonds due 2024 rose 14 basis points to 7.32 percent in the period.

The European debt crisis will keep hurting BBVA Bancomer’s bonds, said Lazlo Belgrado, who helps manage 5 billion euros of emerging-market bonds, including Bancomer notes, at KBC Asset Management SA in Luxembourg.

“Many people are not comfortable with the Spanish banking system in general,” Belgrado said in a telephone interview. “It’s a Spanish credit risk whatever you look at it.”

GDP Growth

Spain, which accounts for 40 percent of BBVA’s income, has the highest unemployment rate in Europe, above 21 percent. The country’s economy will expand 0.8 percent this year after shrinking 0.1 percent in 2010, according to the median estimate of 13 analysts in a Bloomberg survey.

Gross domestic product in Mexico will grow as much as 5 percent this year after a 5.4 percent expansion in 2010 that was the fastest in a decade, according to the central bank.

The extra yield investors demand to own Mexican government dollar bonds instead of U.S. Treasuries rose 1 basis point to 149 at 5:42 p.m. New York time, according to JPMorgan. The peso fell 0.3 percent to 11.9515 per dollar, cutting its gain this year to 3.3 percent.

The cost to protect Mexican debt against non-payment for five years climbed two basis points to 112, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. Credit-default swaps pay the buyer face value in exchange for the underlying securities or cash equivalent if the issuer fails to comply with debt agreements.

‘Very Satisfied’

Aberdeen’s Chan said she bought BBVA Bancomer’s bonds due 2020 after the bank’s management reassured her during investor meetings in April 2010 that it wouldn’t provide aid to its parent. Chan said she sold the 2020 notes earlier this year and bought the bank’s 6.5 percent notes due in 2021.

“When we first met the bank’s management, we were aware that the fact that BBVA Spain is currently operating in a very difficult environment could affect BBVA Bancomer as a credit,” Chan said. “After the meeting we were very satisfied. They operate separately from the parent company. We are happy holders of these bonds. We understand that the market probably doesn’t understand it very well.”

--With assistance from Boris Korby in New York. Editors: Lester Pimentel, Marie-France Han

To contact the reporters on this story: Jonathan J. Levin in Mexico City at jlevin20@bloomberg.net; Veronica Navarro Espinosa in New York at vespinosa@bloomberg.net

To contact the editor responsible for this story: David Papadopoulos at papadopoulos@bloomberg.net


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