International Business: MEXICO
MEXICAN BANKS PULL OUT OF A DIVE
Tough action and fiscal restraint head off a full-scale collapse
At Mexico City's glass-domed stock exchange, financial analysts packed a conference room recently for a briefing on Banca Serfin, Mexico's third-largest bank. The news certainly sounded bad: Serfin lost $50 million in the second quarter, and 45% of its loan portfolio was uncollectible. Yet Serfin's share price rallied 11.5%, to 4.35 pesos a share.
How so? Investors finally were convinced that the bank's new management had started taking tough steps to clean up Serfin's books, toss out inept executives, and find a savvy foreign bank as a partner. "The bank finally recognized the extent of its problems," says Jose A. Garcia-Cantera, Latin American banking analyst at Salomon Brothers Inc. in New York.
Serfin isn't alone. More than a dozen other Mexican banks are saddled with massive problems. Even so, Mexico's worst-ever banking crisis may be easing faster than had been expected. The National Banking & Securities Commission, headed by veteran central banker Eduardo Fernandez Garcia, has done a good job, most analysts say, in preventing the banking crisis triggered by the peso devaluation of 1994 from reaching the depths of Chile's 1982 banking collapse, which crippled Chilean banks' lending ability for four years.
In the past 20 months, Fernandez seized seven banks for mismanagement or fraud, while a government agency shored up others by buying $6 billion worth of uncollectible loans. Fernandez has also offered incentives such as low prices and government cleanups of troubled banks to attract foreign buyers, winning investments totaling more than $1 billion so far.
Now, Mexico's reviving economy is stirring hope that a business upturn will buoy the banking system. Gross domestic product in the second quarter rose 7.2%, thanks to renewed industrial activity, mostly linked to exports. With interest rates above 24%--kept high by the Central Bank's anti-inflationary monetary curbs--most businesses still can't afford to borrow, and most banks are focused on boosting their capital and setting aside bigger reserves. But by the second half of 1997, Garcia-Cantera predicts, bank profits will return to pre-crisis levels as rates fall, some past-due loans become current, and businesses start borrowing again.
Serfin is getting into better shape to share in such a recovery. It is Mexico's oldest bank, founded in 1864, but had deteriorated into a shambles. Driving its turnaround is Adolfo Lagos Espinosa, who was recruited as chief executive in March from his job as consumer banking chief at Bancomer, Mexico's No.2 bank.
"What have we changed? Everything," says Lagos. In six months, he has replaced half of Serfin's top managers and laid off nearly 10% of its 18,000 employees. He ended all loan rollovers, even though that aggravated the bank's past-due tally, and set aside reserves to fully cover bad loans--the main reason for the $50 million second-quarter loss. He also returned Serfin's headquarters to Mexico City from Monterrey, where majority shareholder Adrian Sada, of the powerful Monterrey business clan, had moved it after a group he headed bought control in 1992.
Market sources say banking authorities had pressured Sada--who held the posts of chairman and CEO although he had little banking experience--to bring in new management as a condition for official aid. Lagos bristles at any suggestion that he was the government's choice to run Serfin. But he sees the chance to turn it around as "the professional challenge of a lifetime."
TEAMING UP. In May, Lagos negotiated a second, $2.6 billion government purchase of bad loans, following a $520 million purchase last year. And he has raised 61% of $1.3 billion in new capital that he pledged to obtain as part of the deal. J.P. Morgan & Co. advanced $291 million of that through a convertible debt issue backed by the Mexican government's guarantee. Morgan is searching for an investor to take a 20% equity stake in Serfin and pay off the bridge loan. "We're looking for a true strategic alliance with a global bank," says Lagos.
If Mexico's economy continues to mend, other banks that have teamed up with foreign partners may enjoy turnarounds as well. Spain's Banco Bilbao Vizcaya (BBV) has invested $476 million for a 70% share in Mercantil Probursa and just plunked down $22 million for two smaller banks, while Canada's Bank of Montreal bought a 16% stake, worth around $450 million, in Bancomer. On July 25, the Bank of Nova Scotia agreed to pay $175 million for an eventual 55% of what had been Mexico's fourth-largest financial group, Inverlat. Scotia has assumed management control and will hand over bad assets to the government. Meanwhile, Spain's Banco Santander, Bank of Boston, and GE Capital are conducting due diligence on several Mexican banks.
"We've been very flexible with investors who we think will strengthen the banking system," says Fernandez. But if bank profits start to recover, the price of entry into Mexican banking will go up.By Geri Smith in Mexico City