EDITORIAL COMMENT: Banking on niche markets

The official "unveiling" of Mexico's newest bank Banco Ve por Más on October 11 was welcome news indeed for a country whose banking sector has experienced considerable consolidation in the last 10 years. As a niche bank focused on small business and agriculture financing, Ve por Más in no way represents a competitive threat to the handful of big banks that dominate the sector. But it certainly is heartening to see old hands like Mexico's Del Valle family venturing back into banking. As some of you might recall, the family bought Banco Bital in the early 1990s when the government privatized the sector and successfully guided the bank through the 1995 financial crisis. That is no small feat if one considers that 14 of the country's 18 retail banks went bust in the years following that disaster. Since opening its doors in May, Ve por Más has built up a loan book of 600mn pesos and captured about 200mn pesos (US$52.4mn) in deposits. A critical factor that cannot be overlooked or minimized is the importance of public sector support for start-up niche banks through development funds like FIDA, in the case of agriculture. New banks lack the deposit base from which to fund loans, and borrowing from bigger banks is a very expensive option indeed. About 90% of Ve por Mass's funding comes from FIDA. The greatest success story in Mexican financial history is that of the non-bank mortgage lenders, the Sofoles, which thanks to direct funding and guarantees from federal mortgage bank SHF, now account for a third of the country's home loans. This is a considerable achievement for an industry that turns 10 this year. The Sofoles would probably have not originated anywhere near the number of low income home loans they have to date without government backing. Nor would a banking sector crippled by the worst financial crisis in Mexico's history have had the resources or interest in serving this market. While Ve por Más is still a year or two away from turning a profit, it is to be hoped that its success spurs other investors to take a look at the feasibility of niche banking in Mexico. Today, the only real financing options open to small businesses are non-bank players such as Sofoles, factoring companies, credit unions, and suppliers or a few niche banks like Banco del Bajío. To be fair to banks, many small enterprises do not meet even minimum lending requirements because in many cases they are not registered with the tax authorities and thus have no legal business history. It is easy to understand why a bank would think twice about lending to a company operating in the informal economy whose book keeping is probably done by a close relative of the owner. But the concentrated or some might say oligopolistic nature of the banking industry certainly does not foster a competitive environment where the big banks with the deep pockets are rushing to serve unattended segments of the economy and society. The facts speak for themselves. Five banks - BBVA Bancomer, Banamex, Santander, Banorte, and HSBC - are responsible for about 83% of the sector's loans. Of medium-sized banks there are only two, Scotiabank Inverlat and Inbursa, and together they have just over 10% of loans. The rest of Mexico's 25 or so banks are niche players specializing mainly in corporate and investment banking. That degree of concentration is unusual in such a large economy in Latin America, and borders on that seen in many Central American countries. So where is the opportunity for new players? Probably in small and medium-sized firms, preferably engaged in some sort of export related activity that may not have a relationship with a bank or would leave their existing bank if offered proper customer service. Banking is a people business and it is the caliber of management that will determine a green field operation's success. This is not a business that attracts amateurs given the stiff capital requirements for opening a new bank, around 215mn pesos (US$18.8mn), and other regulatory obligations. But you had better know your target market and speak the language of your clients if you want to bank them or steal them from a bigger rival. One start-up bank that has done a very good job at this is Banco Azteca, which is part of the Grupo Elektra retail empire owned by Mexico's second wealthiest man, Ricardo Salinas. Azteca is a green field operation in every sense of the word as it went through the licensing process from scratch, while Ve por Más bought its license from Dresdner Bank Mexico. Azteca started operations in October 2002 and its strategy has been to leverage the existing infrastructure of Grupo Elektra and its retail chains - Elektra, Salinas y Rocha, and Bodega de Remates - to quickly build up a base of lower middle to lower-income clients who frequent those stores. At the end of 1H04, Azteca reported loans for 7bn pesos and 14.2bn pesos in deposits, making it the ninth largest bank in terms of loans. Azteca also booked net income of 246mn pesos for the same period and had an ROA of 2.6%, compared to 0.9% for the sector as a whole. Azteca has benefited enormously from decades of experience Elektra has built up in consumer financing and its powerful business platform spanning more than 800 Elektra group stores and over 400 booths in other retailers. Elektra sees enough potential in the lower-middle and working classes that in the last two years it has opened a pension fund company, Afore Azteca, and an insurer Seguros Azteca. The bank for its part is piloting commercial and mortgage loans, and looking to offer credit cards in the near future. Whether other big retailers in the low income bracket like Almacenes Coppel will try to replicate Azteca's success in retail banking remains to be seen, but the fact that a two-year old start-up is doing it and doing it well is encouraging. More importantly, banking people who previously had little or no contact with a bank is a cornerstone of economic development whose importance cannot be ignored.