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Investor To The Rescue (Int'l Edition)


International -- Cover Story -- Latin America: MERCANTIL PROBURSA

INVESTOR TO THE RESCUE (int'l edition)

Spanish banker Miguel Navas knew when he came to Mexico City in October, 1994, that he had a tough task ahead. His bank, Banco Bilbao Vizcaya (BBV), had paid $136 million for a 20% stake in Mercantl Probursa, one of 18 Mexican banks privatized in 1991 and 1992 after a decade of government control. Although the banks had sold for premium prices, BBV wanted a foothold in Mexico, whose economy seemed to have endless promise. Now the bank was in trouble, and he was assigned to help.

But Navas never dreamed that a massive peso devaluation would make his mission all the more urgent. With Probursa crushed by a mountain of overdue loans, BBV spent $340 million last July to increase its ewnership to 70% and shore up Probursa's capital, and it began remaking the bank from top to bottom. "We've had some very difficult moments, with a lot of tension," admits Navas, Probursa's new general director, who routinely works 13 1/2-hour days. "But if we didn't believe it was a good business, we wouldn't be doing it."

Probursa, founded in 1933 by members of Mexico's small Jewish community, is a prime example of the changes Mexican companies are going to go through as foreign investors increase their influence. Perhaps no industry needed a shakeup as badly as Mexico's banking sector. After 10 years of state control, banks such as Probursa were technologically backward and had little experience in lending money. Last year, about 6.5% of Probursa's loans were in arrears because of high interest rates following the Chiapas uprising. When the devaluation pushed interest rates on floating-rate loans to 105% in April, Probursa's portfolio of bad loans more than doubled, to 16%.

IMPORTED TALENT. Most other Mexican banks were no better off. Indeed, the government was forced to seize four this year to save them from collapse, and spent more than $2.5 billion to help seven others recapitalize and set aside reserves. Says Navas: "I came here [in 1994] to a Mexico that had a triumphant economy, and today it's just another emerging country."

Nevertheless, Navas has been busy. In the past year, he has laid off about 1,000 employees, or 20% of the workforce. Eight experienced Spaniards were transferred from Madrid to head Probursa's main departments. Navas sold off a major office building and consolidated operations in the bank's modern, art-filled headquarters. And since BBV won control in July, officials have been cleaning up Probursa's books, writing off more than $330 million in bad debts and renegotiating loans with customers. In October, Probursa began lending again--cautiously--to the corpmrate customers they judge most likely to weather this year's economic storm.

Following BBV's lead, other foreign banks may play bigger roles in remaking Mexico's financial system. Canada's Bank of Nova Scotia is negotiating to turn its minority stake in Inverlat into a controlling position. In another deal, two European banks may take control of their Mexican partner, Bital.

The government is likely to offer big concessions to foreign institutions to rescue struggling Mexican ones. In the case of Probursa, the government bought $1 billion of the bank's overdue loan portfolio at a 20% discount, and pays the new bank owners a fee to administer the loans. Finance Secretary Guillermo Ortiz has made it clear that he won't let any Mexican bank fail. Instead, he wants to see a consolidation of banks.

BANK BASHING. For Navas, Mexico has provided a real learning experience. He says he was "shocked" by how little consumers know about banking and by their "contempt" for banks. "They believe that everything bad that was happening to them was the fault of banks," he says. For months, angry debtors staged protests outside bank branches until the government came up with $1.2 billion in subsidies for lower interest rates on overdue loans.

The coming months will likely see more changes for the banks. If the economy begins to pick up soon, their worst difficulties may be over. But a period of consolidation is sure to follow. As the Probursa experience shows, banks that are not strong enough to make it on their own face upheaval and possible takeover, whether they want it or not.By Geri Smith in Mexico City


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