Latin Finance - July 2008 - (Page 27)

banorte outlook to build another 80 branches this year, taking its total to 1,142 by the end of 2008, an expansion funded largely via the loan portfolio and other assets. “We are facing the challenges of growth while other banks are facing the challenges of repairing their balance sheets,” says Valenzuela. “You have to be very careful when you’re growing at this speed,” he says. “Making sure that we are careful with processes, risk analysis and overall management of the bank in these conditions becomes essential.” NPLs made up 1.5% of the total at the end of last year. that’s totally under-banked. Managing the risks correctly, the potential there is tremendous.” It is important when approaching the lower-income market to keep risk to a minimum through common-sense precautionary measures like going through the credit bureau and making sure borrowers have jobs that can be tracked, says Valenzuela. He also recommends steering clear of any product with negative amortization – a major factor in the housing crisis north of the border. Infrastructure Promise Targeting SMEs Although Banorte’s shares fell more than 3% when Peña resigned on April 14, his replacement seems relatively unfazed by the departure. “He’s a great person. Certainly he took with him some of the know-how of this institution,” Valenzuela says of Peña. “But at the end of the day these institutions evolve very rapidly and its not the person, it’s the team that makes the difference,” he adds. Banorte is known as a major innovator in mortgages and is still the only bank offering a 30-year housing loan. Its mortgage lending grew 31% in 2007. Analysts, however, say the next big boom is in lending to small and medium-sized enterprises (SMEs). In the system as a whole, credit to business rose 27% last year compared to 21% for consumer credit. “The next growth story in Mexico is not the consumer, it’s the SMEs,” says Mario Pierry, a LatAm bank analyst with Deutsche Bank in New York. “The consumer is almost saturated.” Valenzuela says Banorte is pushing hard into that niche, offering small businesses the gamut of services, ranging from bank accounts to payrolls in order to position for receiving deposits and extending credit. But with regard to mortgages, the banker believes there is plenty of space in the market for banks ready to focus on the lower end of the housing scale. “The premium segments tend to be more crowded because that’s where all the banks find good returns with lower risk,” Valenzuela says. “The C and D market will be the next stage of development and Valenzuela sees infrastructure as a huge opportunity in Mexico under president Calderón’s ambitious development plan, and says Banorte has about $270 million in venture capital invested in projects including housing, toll roads and bridges. lending. Banorte is no exception, as core deposits total about 170 billion pesos and loans total about 200 billion pesos. Banorte’s investor relations officer David Suárez says that while the bank would ideally fund all its lending through core deposits, it has not been able to do for 18 months and has had to go to money markets and branch-level lending through instruments like six-month promissory notes. Most of the money market debt it bought was government bonds across the curve from a day to 30 years, says Suárez, adding that such funding was more costly than being able to use core deposits. “We don’t have a squeeze, but our funding costs have increased a little bit and that has compressed margins a little,” he adds. Not for Sale? Probably the most recurrent rumor in Mexican banking circles is that a foreign institution eager to jump into the local market will eventually snap Banorte up. But while the bank’s shareholders would have the last word, analysts covering the sector see no reason for it to change hands any time soon. “If you were the controlling shareholder, the only reason you would sell is if you thought that you could grow or get a better return than 20% a year somewhere else,” says Pierry. “They are investing. Every action this bank is taking is to remain independent.” Valenzuela adds that he intends to be in the driver’s seat for the long run. “A shareholder at the end of the day says: “What is my best option?’” says the interim CEO. “Keeping my money and my beliefs in an institution that gives me the leverage and the returns that I want.” “[Our mandate] is to have a long-term perspective of generating value for our customers and our shareholders,” he says. “It’s not about dressing the bride for tomorrow, it’s about having a perspective for the next five or 10 years. If a third party comes and says that they can do better, it’s for the shareholders to decide.” LF Banorte Ratios Slight adjustment Q1 2007 Assets (m pesos) 248,939 ROA 2.7% ROE 24.0% NPL (% of total loans) 1.4% Source: Banorte Q1 2008 301,526 2.6% 23.2% 1.6% He adds that Banorte’s preference is to be a temporary investor for an average period of five years. In investment banking, retail-oriented Banorte is dwarfed by larger competitors. But the bank is increasingly to be seen lurking on the sidelines of a deal. After Goldman Sachs and Santander won a $4.1 billion bid with local construction firm ICA for the federal government’s 30year FARAC toll road project last year, for example, Banorte took a sizable chunk of the syndication. “We know ex ante that we cannot provide the critical mass for huge projects,” says Valenzuela. “It’s not [about] trying to get the whole pie, but to get different pieces of pies in projects where you believe that the long-term profitability is very high.” With loans growing faster than deposits, most Mexican banks are having to look beyond core deposits to fund UPDATE For more of this interview see www.latinfinance.com > July/August 2008 LATINFINANCE 27 http://www.latinfinance.com

Table of Contents Feed for the Digital Edition of Latin Finance - July 2008

Latin Finance - July 2008 Contents Investment Banking Outlook Compensation Survey Colombia Investment Banking Borrowers vs. Investors Banorte Profile Braskem Financing Strategy Brazil Hydro Finance Peru Port Privatization Panama Money Flows Argentina Local Markets Guide to Banking Technology Who Said That?

Latin Finance - July 2008

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