Stronger financial regulation threatens the push by foreign banks to expand corporate banking operations in Mexico, the chief executive officer of the country’s biggest domestic lender has said.
Alejandro Valenzuela of Grupo Financiero Banorte told Emerging Markets in Cancun that “stronger regulation, lower [permitted] levels of leverage for foreign banks and the probable scarcity of capital globally” in the coming years is weighing heavy on financial executives operating in the region.
“Only the most sound of global banks” will have the capital to expand their corporate business aggressively in Latin America’s second largest economy, he said. Foreign banks’ balance sheet constraints gave Banorte “a competitive advantage”.
Valenzuela added: “Local banks are locally managed and are thus more agile.” He claimed they have also been “less leveraged than foreign banks”.
Banorte jumped from being the fifth largest bank by assets in Mexico at the beginning of 2008 to the third largest with more than 12% of the overall market. Local subsidiaries of foreign banks, which control 75% of the local market, have repatriated capital back to their parents upon the onset of the crisis.
Richard McNeil, head of Latin America debt capital markets for Goldman Sachs, pointed to the shortage of syndicated loan offers from foreign banks to Mexican firms. He said this is evidence that liquidity in the local bank market has not returned to pre-crisis levels due to foreign banks’ dominance.
“There’s still residual uncertainty overshadowing banks globally, with the result that those markets in Latin America that are most reliant on foreign banks may take a bit longer to normalize fully.”
But Augusto Urmeneta, head of Latin American capital markets at Bank of America Merrill Lynch, said that Latin American corporate business has become strategically important for Western financial institutions over the past year due to strong regional growth. “We will continue to put our balance sheet to play for select clients that need strategic funding,” he said.
Nevertheless, Valenzuela said balance sheet constraints are having a “bigger impact on the corporate outreach [of foreign banks] than retail operations.” He added: “Mexico still presents a huge opportunity for the retail operations of foreign banks in the medium term, as it is an underbanked country.”
In other comments, Valenzuela said he expects credit growth of 10%-15% this year by Banorte, as Mexico roars out of recession.
After beefing up capital buffers to absorb projected losses on mortgage and credit card products, he said: “These have not been run down this year, so this shows that the recovery has been faster than anyone expected”.
He said the Mexican central bank would not hike interest rates until early 2011. An increase would boost banking profitability if demand for credit outweighed the subsequent increase in the cost of paying depositors.