In many countries, Felipe Martínez would be a banker’s dream client. The second-generation owner of Emyco, Martínez has built the company into one of Mexico’s leading shoemakers and retailers. It produces about 7 million pairs of fashion footwear a year and boasts President Felipe Calderón as its best-known customer. Emyco has also cultivated the U.S. market, selling its shoes through the Macy’s department store chain.
Martínez has little need for banks to keep his business running, though. The 67-year-old CEO finds bank loans unduly expensive. Rates on commercial bank loans averaged about 15 percent in 2009, far above the central bank’s short-term policy rate of 4.5 percent. Instead, Emyco, like many other Mexican companies, relies on vendors and customers for the bulk of its financing. Such credit costs the company several percentage points less than bank loans, and Emyco can tailor the terms to suit its needs — offering discounts to retailers who pay early for their shoe orders, for example. “We don’t rely on long-term credits from the banks,” says Martínez.
Emyco has plenty of company. Mexico’s businesses borrow twice as much money from suppliers as they do from banks, according to figures from the Banco de México, the central bank. The ratio is even higher for companies like Emyco in the central Mexican city of Léon, the heart of the country’s shoemaking industry. Bankers appear frustrated at and resigned to the situation. “Supplier credit is easy to obtain, and these businesses have done so all their lives,” explains Antonino García Ponga, head of small and medium-size enterprise banking at Banamex, the Mexican subsidiary of Citigroup that is the country’s second-largest bank by assets.
Banks also struggle to penetrate the retail end of the market. Some 80 miles northeast of Léon, the hard-scrabble campesinos of Jaral de Berrio, an ejido, or communal farm, that occupies what was once the largest hacienda in Mexico, survive mostly on remittances sent from family members working in the U.S. BBVA Bancomer, a subsidiary of Spain’s BBVA that is the industry’s largest player in Mexico, sees these funds transfers as a big opportunity. The bank has issued nearly 1 million remittance debit cards, which allow holders to withdraw funds deposited by relatives in the U.S. from its ATMs in Mexico. The bank handled nearly one third of the $20.7 billion in remittances that were sent back to Mexico from immigrant workers in the U.S. in 2009. But BBVA Bancomer has had little success in getting cardholders to broaden their business with the bank by, say, opening savings accounts or taking out loans.
“People are using the remittance cards just to withdraw money that has been sent from the U.S.,” laments Gabriel Guerrero, Bancomer’s head of remittance cards. He still hopes the program will eventually help the bank cross-sell more products. “That is where we are heading,” he says, “but there is a lot of work to be done.”
Indeed, there is. Mexico is an anomaly in today’s financial world. The economy is closely integrated with that of its large neighbor to the north, and the domestic banking market is dominated by some of the biggest names in global finance — Spain’s Banco Santander is the No. 3 player there and the U.K.’s HSBC Holdings is fourth. Yet the industry remains far smaller in relative terms than in most comparable countries. Bank loans to the private sector amounted to a paltry 24.4 percent of gross domestic product at the end of 2008, compared with 57.8 percent in Brazil, 67.7 percent in Chile and more than 100 percent in the U.S. and Western Europe.
The industry’s small scale is a handicap for Mexico as it seeks to recover from the economic and financial crisis. The country’s output plunged by 6.5 percent in 2009 — the biggest drop since the 1930s — largely as a result of the big drop in demand in the U.S., Mexico’s biggest export market. By contrast, Brazil’s economy is estimated to have contracted by a modest 0.4 percent last year. Mexican bank lending did grow by 3 percent in 2009, notwithstanding the recession’s severity, according to Moody’s Investors Service, but faster credit expansion would help stimulate a recovery.
“The country could definitely use more bank credit, especially for poorer Mexicans who would spend any money immediately and give a boost to economic growth,” says Tapen Sinha, a professor of risk management at Instituto Tecnológico Autónomo de México in Mexico City.
The relative scarcity of credit is also a missed opportunity for the big banks, for which Mexico is one of their most profitable markets. Although the recession has reduced some banks’ earnings, the industry remains enviably profitable. Earnings of the country’s banks rose 11 percent in 2009, to 62 billion pesos ($4.76 billion), according to the National Banking and Securities Commission. Among the big four, Bancomer’s net income declined 16.6 percent in 2009, to 21.6 billion pesos, and Banco Santander’s earnings fell 17.6 percent, to 9.5 billion pesos, but Banamex posted a 48 percent jump in profits last year, to 18.8 billion pesos. The bank attributed the surge to a 27 percent expansion of lending, to a total of 350 billion pesos, and the high-net-interest margins common to Mexican banks.
Net interest margins averaged 5.9 percent last year, according to the country’s top regulator, the Comisión Nacional Bancaria y de Valores. That was down from 8.1 percent in 2008 but was still high by international standards. Funding costs are low, with banks paying an average rate of 3.75 percent on deposits. Mexican banks are also highly efficient; the sector’s cost-income ratio averages just 45 percent, compared with an average of 41.4 percent for Spanish banks and 54.6 percent for U.S. banks.
“These are very good numbers for Latin American banks — or banks anywhere,” says Alejandro García, Monterrey, Mexico–based senior director for Latin American financial institutions at Fitch Ratings.
The low level of banking penetration in Mexico is partly a hangover of the Tequila Crisis, the 1994–’95 economic meltdown triggered by Mexico’s peso devaluation, which caused widespread banking losses and forced the government to seek a U.S.-led bailout. “Well into the late 1990s, Mexican banks were simply enhancing their capital and liquidity,” says García.
The crisis doesn’t fully explain the underdeveloped state of the banking sector in Mexico, though. Other Latin American countries have seen their banking sectors rebound from severe crises. In the mid-1980s, Chile suffered an economic depression that bankrupted its financial sector and pushed unemployment above 30 percent. Between 1990 and 1995, Brazilian banks endured inflation that averaged over 750 percent a year.
The arrival in Mexico of big global banks, which bought out the country’s weakened lenders in the aftermath of the Tequila Crisis, helped stabilize the industry by bringing in fresh capital and technology. But some critics say the dominance of these foreign players — the big four control more than two thirds of all banking assets — is part of the credit problem. Former central bank governor Guillermo Ortiz maintains that the big banks act as an oligopoly, keeping interest rates and other charges high.
“If you engage in any activity with your account — in fact, even if you don’t do anything at all — you will find mysterious charges that reduce your deposits by the end of the month,” says ITAM’s Sinha, who has testified in Mexican congressional hearings on the level of rates and fees charged by banks. The status quo guarantees strong profits for the banks with little need to extend their client base — and offers few enticements to the three quarters of Mexicans who have never set foot in a bank, critics say.
The country’s reliance on foreign banks has had other negative consequences more recently, some analysts say. “A big problem over the last 18 months has been Mexico’s huge exposure to international banks that have big liquidity issues at home and have cut liquidity here,” says Tomás Lajous, Mexico City–based executive director for Mexico strategy and research at UBS.
Notwithstanding the criticism, banks have been looking to expand credit, as Banamex’s latest results indicate. With Mexico emerging from recession this year, several banks are pressing ahead with initiatives to capture a larger share of the business loan market, in particular by trying to wean small and medium-size enterprises off supplier credit. Such SMEs relied on suppliers for 56.7 percent of their financing needs and turned to banks for just 26.3 percent of funding, according to a 2009 central bank survey.
Banamex has launched a promotion offering free checking accounts and electronic banking for companies with 26 to 100 employees that use Banamex for payroll services. “We are also making loans available in less than 24 hours to business clients who have a good track record with us,” says Alejandro Macías, deputy director of SME banking at Banamex. The bank is also offering a revolving credit account plan for clients, under which their interest payments are reduced for early repayment of loans.
In 2008, Bancomer introduced an SME loan program under which it extended €95 million (1.8 billion pesos) in credit to more than 6,000 SMEs last year. It also offers free checking accounts to companies that use Bancomer’s payroll services. The bank’s overall lending to small and medium-size enterprises rose 21.7 percent in 2009, to €968 million.
It will take much more than those efforts to increase banking activity, though, judging by developments in the central Mexican state of Guanajuato. The small highland state combines many of the country’s economic strengths and weaknesses. Guanajuato has drawn foreign investment into a huge General Motors Corp. plant and related auto parts makers in the city of Silao. The state boasts a dynamic and politically active business class, whose leaders include Vicente Fox, the one-time broccoli farmer and Coca-Cola Co. executive who served as president of Mexico from 2000 to 2006. Foreign tourists flock to San Miguel de Allende, famous for six decades as an artists’ colony. But the state suffers from massive rural unemployment and can’t generate enough jobs. More than one third of the state’s 5 million people currently reside in the U.S., mostly as illegal migrant workers.
Bank lending initiatives have had little impact so far on the thriving footwear industry in Léon, the state’s largest city and the fifth-largest in Mexico. According to the local chamber of commerce, the city’s 967 shoe factories depend on banks for only 15 percent of their financing on average, while supplier credit accounts for 65 percent.
A large business like Emyco has the bargaining power to extract better financing terms from its clients than from the banks. For example, Emyco often negotiates with a leading department store chain, Liverpool, offering discounts if the retailer pays early for shoe orders. “Liverpool figures out what it cost them to make an early payment, and they deduct that sum from the invoice,” explains Felipe Martínez, 36, Emyco’s vice president for marketing and sales, who is son of the company owner and shares his name. “Clients like them have been very helpful in the tight credit situation the country is going through.”
A 90-minute drive northeast from León, the campesinos of the Jaral de Berrio ejido are seeking to launch a new development to weather hard economic times — turning the former hacienda’s main buildings into a historical theme park.
The ejido’s 23,000 acres, jointly owned by the 4,000 inhabitants, are the remains of a mammoth, colonial-era private estate that once stretched 300 miles from the silver mines of Zacatecas state in the north to the state of Hidalgo just south of Guanajuato. The estate owners, the Jaral de Berrio family, were ousted after the Mexican Revolution of 1910–’21. Their hacienda house, though wrecked and ransacked by militias and vandals, cannot hide its flamboyant past. The facade of the 19th century building has neoclassical columns holding up medieval-style castle towers and is adorned with statues of Greek and Roman goddesses. Inside the main residential wing at the top of a broad marble staircase is a spectacular vaulted ceiling with a fresco of clouds and blue patches of sky. “The luxury of these people is hard to imagine,” says caretaker Andrés Rojas, 42. “A single one of their dressing rooms was larger than my house.”
Although resentment of the bygone rural aristocracy still runs strong, it hasn’t kept ejido members from trying to transform the hacienda house and its surrounding parkland into a business concern. The resident-owners signed an agreement a decade ago with an investment group led by two architects, Roberto Burillo and Jorge Guajardo, to develop the site into a tourist attraction along the lines of the French castles of the Loire Valley or Spain’s classic inns known as paradores. They also hope to eventually turn the hacienda house into a site for company retreats and business conferences. “The idea is to do a restoration that evokes the splendor of hacienda life in its golden era,” says Burillo, who estimates the project will cost at least $3.5 million.
Getting bank financing for the project has been nearly impossible, however. Much of the problem lies in the legal obstacles. Carved out of feudal haciendas after the Revolution, ejidos still account for most rural landholdings. Since the 1990s ejidos have been allowed to sell their acreage. But the drawn-out process requires the approval of the entire ejido through a general assembly and then various stages involving lawyers, agrarian agency officials and notary publics.
Most real estate development contracts set time limits for completing projects. For an ejido, however, there are no definite time limits. A dissident group of residents could raise objections that would paralyze the project at any stage. “Of course, this makes banks nervous about lending,” says Guajardo. Even simple mortgages are difficult to arrange because it is almost impossible for a bank to repossess a house built on ejido land if the owner defaults on his or her loan.
With little prospect for business lending to the ejidos, most banks have focused their efforts on the retail market for remittances. Jaral de Berrio, a dusty, unpaved community with cracked-adobe-walled homes, is populated mostly by women, children and older men. Aside from a few patches of corn and cattle pastures, its fields are mostly fallow and unirrigated. With few local jobs available, the residents survive on money sent back by relatives working north of the border. Almost all of Jaral de Berrio’s younger men are in the United States, doing everything from picking strawberries in California to processing meat in Illinois to hanging drywall on suburban homes in Colorado. On average, they send $200 to $300 a month to their families in Mexico, mainly through money transfer companies such as Western Union and Bancomer Transfer Services, a unit of the big bank.
Bancomer has gained a more than 30 percent share of the remittance market, thanks in part to its distribution of almost 1 million debit cards. Launched in 2002 the card program is promoted as a convenience for customers. “Clients used to line up for four or five hours with our branch tellers to receive their remittances,” says Guerrero, the Bancomer executive in charge of remittance cards. “It tied up our branches and also created security problems for clients who were being followed by criminals who knew they were there to collect remittances.” With a card clients can quickly withdraw money from ATMs at a Bancomer branch or at stores.
Bancomer hopes that an increasing number of clients will use the remittance cards to make purchases at shops and consider other financial services like savings and checking accounts. HSBC offers similar remittance cards that allow migrant workers in the U.S. to order building materials from Apasco, a Mexican cement producer, which are delivered to relatives overseeing the construction of homes the workers intend to occupy when they return to their native communities.
The vast majority of remittance cardholders stick to basics, though. On a recent Saturday morning, Eufemia Ramírez, 47, joined several other women from Jaral de Berrio on the back of a pickup truck headed to the Bancomer branch in San Felipe, a town 30 miles southwest of the ejido. Her son, a restaurant worker in Chicago, sends money to the branch every two weeks. With the quick access that her card gives her to cash from the bank’s ATMs, she has plenty of time left over in San Felipe to shop for household products and canned goods that aren’t available in her ejido. But she has no interest in opening up a savings and checking account. “I’ve never used a check — and nobody would accept one back in Jaral de Berrio anyway,” says Ramírez. Although she cannot imagine ever borrowing from a bank, she would like to see bank loans extended to her ejido to convert the hacienda house into a tourist destination. But after more than a decade of waiting, she dismisses that possibility with an old colonial Guanajuato saying: “Water for the common folk, liquor for royalty.”
