Caught in the Middle

Much of the talk in the Mexican banking community these days tends to focus on the future of Banco Mercantil del Norte, the country’s sixth-largest bank and the only large independent player left in Mexico. Now that Spanish and American banks control Mexico’s three leading banks, there is plenty of speculation that Banorte’s independence cannot last much longer. But for Banorte, the question of the future is more about how it will survive than with whom.

In 1995, Monterrey-based Banorte committed itself to becoming a national franchise. At the time, it was a successful regional bank with 100 branches. It began opening new ones and acquiring others. In 1997, Banorte decided to become a financial services group and established mutual and pension fund companies, and a bancassurance division. Over the next few years, the bank continued to expand geographically as well as to diversify the types of services it offered.

Today, Banorte has 452 branches and has become a multi-regional player. It must still expand in Mexico City, the southeast and the northwest parts of the country if it is to establish a truly national footprint and compete effectively against the foreign banks. The bank’s management is considering various ways of tripling the number of branches it operates in the capital and in these two regions.

One possibility would be to acquire Bancrecer, a bank that the government took over after the country’s 1994-95 banking crisis and plans to sell in September. “Our strategy is to improve our national coverage,” says Othón Ruiz, Banorte’s chief executive officer. “It is not the only alternative for us. There is a branch selling process because of the mergers between other banking groups.” Still, he says that it is worth “taking a close look at Bancrecer to see if it is a prudent and good way to improve our national coverage.” Banorte and Scotiabank Inverlat have each paid $15 million for the right to bid for Bancrecer.

Bancrecer has more branches than Banorte really needs, and there is some overlap in markets. Ruiz says Bancrecer has traditionally aimed at a lower-income market than Banorte has. “We have to look very carefully to be sure that it would enhance this franchise as opposed to harming it,” he says. “We don’t want to do anything that would be excessively risky and jeopardize the value of this franchise. But at the same time, if there is an opportunity to increase the value of the franchise, we will take it.”

Banorte is also in the process of a year-long effort to rationalize its internal operations. It installed 100 new ATMs last year, but closed costly branches and electronic point of sale terminals as part of a cost-cutting exercise. The bank has changed its credit authorization process to incorporate more sophisticated risk analysis; it has developed a profitability measurement system that pinpoints profits down to the client and branch level. It is working to change Banorte offices from full branches into points of sale.

Banorte clearly needs a financial partner to share the cost of becoming a national player and competing with more formidable opposition, now that international groups have bought the country’s largest banks. Banorte hired Goldman Sachs this year to advise on a possible sale. He says the need to find a foreign partner is a fact of life: banking is a capital intensive business. “In this business, if you are doing well you need capital. If you are doing badly, you need even more capital.”

Yet Mexicans avoid investing in banks, he complains. Too many investors remember the upheavals in the banking industry in the 1990s. Ruiz says he often asks people how much of their portfolio is invested in bank shares and the answer is usually “none.” So, if Mexicans do not want to invest in Mexican banks, he asks, “Where are we going to get the capital from? There is a major contradiction.”

Ruiz says that environment will be right for an alliance with a new partner, assuming that the Mexican economy resumes growth and the country has a new tax code in place by the end of the year. By then, says Ruiz, the bank should reach an acceptable valuation. “We will have done our homework. We will have better coverage. If we also have a better environment in Mexico and the US, then we will be in the position to negotiate the alliance that we are eventually going to require to face the competition.”