It took nearly a decade, an estimated $105 billion government bailout and what some argue is a big slice of Mexico’s sovereignty, but the nation’s banking sector has healed from the dismal years following the 1994-1995 peso crisis.


Scars are still apparent, but after years of stagnant growth, the sector is once again “pretty healthy,” says Jonathan Heath, a Mexico City-based economist with LatinSource, a network of economists in Latin America. Consumer lending, on ice because of bad loans and flimsy bankruptcy laws, is now seeing solid growth. Though corporate lending and bank-issued mortgages are still lagging, some say that even there banks are starting to see a slight uptick. Margins among banks have improved and the sector – at breathtaking costs to taxpayers – has emerged from crisis.


While the word “crisis” often appears in discourses on Latin America politics, finance and business, Mexico’s banking sector was indeed in such a funk throughout the 1990s. After the December 1994 devaluation, interest rates zoomed past 90%. Many lenders who couldn’t keep up with loan payments were forced to default. Banks took the hit; new lending came to a virtual halt. That, in turn, dampened consumer spending and capital investment.


But consumer lending in Mexico is humming once again. Consumer credit card lending in 2003 grew about 33% in real terms, marking the fourth year of strong double-digit growth. Banks, which once enjoyed a healthy share of the mortgage market, have mostly lost out to small and agile mortgage lenders called sofoles. There’s some speculation that as banks become more robust, they will acquire sofoles and once again become important players in the mortgage market.


Banks today are better capitalized than they were before. Indeed, the perceived risk in the market has so diminished that structured financing, a once popular finance option among Mexican banks, is no longer necessary, says Samuel Fox, senior director of international structured finance for Fitch Ratings. “Banks can get a better cost of funds elsewhere.” (Structured finance in general is more costly because a client must pledge valuable assets toward the financing.) Given Mexico’s investment grade status, banks can access markets with greater ease and banks’ foreign owners, which tend to have deeper pockets than their prior Mexican owners, can effectively cover financing needs.


Could Mexico’s banking sector be on the verge of a bubble? Akiko Kudo, a Latin America bank analyst at Fitch Ratings, is doubtful. Based in New York, Kudo says the health of Mexican banks appears solid – in part because they have refrained from corporate lending. Others concur that since their comeback, Mexican banks have been too conservatively managed to risk a bubble.


New Ownership: In with the Blue


On their road to rehabilitation, Mexico’s banks have undergone major changes in ownership. Vanished are the green and mauve logo colors of the nation’s former banking giants Grupo Financiero Bancomer and Grupo Financiero Banamex; in are the blue hues of their big-footed multinational parents Citibank and Spain-owned Banco Bilbao Vizcaya Argentaria (BBVA). British-owned HSBC, which last year delisted Grupo Financiero Bital after buying out the bank, is but the latest to slap its color scheme across Mexico’s urban landscape.


The cosmetic change in Mexico’s landscape is not the difference within the sector. Banks’ revenue formulas have also shifted, observers say. Previously, a key source of revenue for banks came from interest on loans. But now banks are ringing up quick and easy profits by charging high service fees, says Alonso Cervera, a Mexico analyst at Credit Suisse First Boston, noting that “one bank charges 1000 pesos (about $100) per bounced check.”


In February, BBVA announced it would raise its stake in BBVA-Bancomer from 60% to 100% for $4.1 billion. Mexico’s largest bank in terms of assets, BBVA-Bancomer will soon delist from the Mexican Stock Exchange, news that sent Mexico’s prim Central Bank Governor Guillermo Ortiz into a tizzy. He was quoted as saying that publicly-traded financial institutions “have, by definition, a more transparent attitude.” Ortiz also said that the delisting of BBVA-Bancomer would remove one of the most liquid stocks from the Mexican bolsa, or stock exchange. Banamex, owned by Citibank, delisted in 2001.


Banorte, the remaining biggest bank which is still publicly traded, is much smaller and less liquid, according to Urban Larson, a Latin America fund manager for Baring Asset Management. “The (bank) sector is now such a tiny part of the index that investors can more easily ignore it. Some have already switched to the housing stocks, but they are not very liquid either,” Larson says, adding that Ortiz “is right. We need more liquidity on the Bolsa.”


But a key upside to internationalism is that the system as a whole is much less risky and much more sophisticated than before, analysts note. “Banks are more efficient and give better service,” says Ignacio Cedillo Bravo, an analyst at Mexico City-based Bursametrica.


Fresh from deregulation and privatization of the early 1990s, Mexican banks were badly mismanaged. Branch bank managers ruled their banks like fiefdoms. Collateral on loans was often sketchy at best: At the former Banco Inverlat, once controlled by a Mexican family and later acquired by Canada’s Bank of Nova Scotia, bank employees were startled to see a warehouse of old black and white televisions as collateral on a multi-million dollar loan. Even on the eve of the famous devaluation, commercial banks were aggressively promoting credit card giveaways.


Stricter Credit, Tougher Accounting


Larson thinks that foreign-owned banks in Mexico will be better shielded from colossal management sins of the past because banks have become much stricter about granting credit than they used to be. “One of the fastest growing consumer credit products is a loan with automatic monthly reimbursement from the customer’s salary,” says Larson, adding that the product is only available to workers employed in the formal economy whose employers pay them via direct deposit.


Tougher accounting standards have also helped make balance sheets more honest, Larson notes. Amid a national uproar over the mega-bailout, Mexican banks began adopting stiffer U.S. GAAP-like accounting rules in the late 1990s. “Mexican bank balance sheets are very credible as management is quite conservative,” he says.


But with the nation’s major banks now delisted, or headed that way, balance sheets will fall under investors’ radars. Who’s to say in what state banks’ balance sheets and their coffers will be maintained when investors aren’t following them? “There’s less scrutiny for the banks now,” suggests Cervera. “It’s a bigger burden on authorities to inform the public about every bank.” Will national banking officials succeed in coercing banks to keep their reporting and balance sheets clean? “I hope that happens,” Cervera says.


Ortiz publicly spoke about how a lack of transparency could hurt the financial sector. Finance Ministry Francisco Gil Diaz was later reported as indicating that banking regulators could address those concerns.


Mexicans have paid a high cost for rehabilitating their banking sector. About 14% of the nation’s gross domestic product has gone toward the bank bailout. As has occurred globally, the consolidation of Mexico’s financial sector has cost thousands their jobs. And some Mexicans worry about the financial sector’s complete loss of sovereign control.

“The U.S. has been very timid about allowing foreigners to acquire U.S. banks. Ultimately the banking system is the biggest source of capital outside the stock market,” says Olaf Carrera, a public relations executive. Carrera, a Mexican, criticizes the sector for selling out wholesale to foreigners. “I don’t think foreign bankers will ever feel the social obligation to carry out transactions for the benefit of the country,” Carrera notes. “As long as service fees and commissions generate large profits, they won’t feel the need to increase lending that could benefit Mexicans.”