Grupo Financiero Banamex S.A. Business Information, Profile, and History

Company Perspectives:

Grupo Financiero Banamex's integration to Citigroup allows it nowadays to offer a broad range of financial services in Mexico and worldwide as part of the main company of financial services in the world, with 200 million accountholders in over 100 countries.

History of Grupo Financiero Banamex S.A.

Grupo Financiero Banamex S.A. (Banamex) is the largest financial group in Mexico (and Latin America) and includes the nation's second largest bank, also called Banamex. The group is a wholly owned subsidiary of U.S.-based Citigroup, Inc., the world's largest financial group, and includes a broad array of subsidiaries providing such financial services as retail and commercial banking, investment banking, consumer loans, management of mutual and pension funds, insurance, and buying and selling of securities. No other financial group has had such an impact on Mexican history, ranging over the course of more than a century.

A Century of Insider Status: 1884-1982

There were only three banks in Mexico in 1881, when a Paris-based one received a government concession allowing the establishment of the Banco Nacional Mexicano the following year. This bank was allowed to issue notes that were for a time the only ones accepted by the federal government for tax payments. It had the right to put into circulation notes valued at up to three times its reserves. The bank was almost exempt from many taxes, such as ones on capital shares, notes, and dividends. As banker for President Porfirio Díaz, it acted as intermediary between the government and foreign creditors. In return, the federal government obtained a substantial line of credit at or below market interest rates. The Banco Nacional Mexicano merged in 1884 with the smaller Banco Mercantil Agricola e Hipotecario, financed largely by Spanish capital, to form the Banco Nacional de Mexico (Banamex). In 1896 Banamex won a contract enabling it to collect for the federal government the notes of other banks--a privilege the bank is said to have abused by letting the notes accumulate and then suddenly presenting them for reimbursement.

Banamex's privileged position ended with the fall of Díaz in 1910. Its French managers left Mexico with the outbreak of World War I, appointing Agustín Legorreta Ramírez as acting president. After a decade of revolution Legorreta used his connections with foreign financial interests to reestablish the bank as a medium for the deposit of funds that the Mexican government needed to put aside for debt repayment. Banamex acted in close concert with the Banco de Mexico, the nation's new central bank, and also consulted closely with U.S. government officials. Legorreta was only able to secure his own position, however, in 1932, when he was put in full charge of the bank. In 1937, 36 of the 50 bank branches in Mexico belonged to Banamex. Three years later Banamex held 60 percent of the total loan portfolio of all the banks in Mexico (excluding the central bank). During this period it financed government-backed agricultural projects that other banks refused to support.

Banamex established an insurance company in 1933, which later became Seguros America Banamex, and an investment bank in 1936, which later became Financiera Banamex and grew to be the second largest investment bank in Mexico. It also established another investment bank, Financiera de Ventas Banamex, which became the nation's fifth largest mortgage bank. In 1942 Banamex began to take part in the administration and direction of Mexico's largest enterprises, such as firms engaged in the production of chemicals, minerals, cellulose, and paper. After the end of World War II Banamex took new steps to attract U.S. capital to finance and promote industry in Mexico, and it took stakes in some of the ensuing enterprises, such as Celanese Mexicana, S.A. and Reynolds Internacional de México, a subsidiary of Reynolds Metals Co.

After the death of Agustín Legorreta in 1937 the family interests in the bank were assumed by his nephew Luis Legorreta García, who was succeeded by Agustín Legorreta's son, Agustín Legorreta López Guerrero. In 1977 Grupo Banamex was formed by the fusion of the bank with its investment- and mortgage-banking arms. It also owned a brokerage house, three insurance companies, a factor, and two other banks--one of them, the California Commerce Bank, in the United States. Banamex also held significant stakes in no less than 167 Mexican companies, according to one account--153 according to another--including sizable holdings in mining, real estate, and hotels and tourism.

Nationalization and Reprivatization: 1982-94

The Legorreta family's reign ended in 1982, when the government nationalized all of Mexico's banks in order to reconstruct the sector following the financial meltdown of 1982, when the country was unable to pay its debts. At this time Banamex and its longtime rival, Banco del Comercio, S.A. de C.V. (Bancomer) each accounted for about a quarter of the assets in the nation's commercial-banking system. A year later the government pledged to sell minority stakes in the nationalized banks, and in 1987 Banamex--along with Bancomer and Banca Serfin--each issued new stock equivalent to 34 percent of their paid-in capital. Bank executives and favored clients snapped up the offering. The big banks had already won back, in 1984, auxiliary institutions such as brokerages and insurance companies, paying for them with indemnity bonds issued by the government as compensation for the nationalizations.

When Banamex was reprivatized in 1991, it was the largest financial group in Latin America, with 720 branch offices, 31,797 employees, assets of 94.9 billion pesos ($26.2 billion), a market value of $4.6 billion, and 1990 profits of $341 million, a 22.6 percent return on capital. It had a customer base of four million people. Financier Roberto Hernández and his partners paid 9.7 billion pesos ($3.2 billion) for 71 percent of the company. Hernández, head of a small brokerage called Acciones y Valores de México (Accival), S.A. de C.V., renamed the institution Grupo Financiero Banamex-Accival, S.A. de C.V. (henceforth sometimes called Banacci rather than Banamex). It included eight affiliated enterprises focused on the promotion of investment in the industrial, tourism, and real-property sectors and also a leasing agency and the nation's largest brokerage. It held 35 percent of total credits in the agricultural and livestock sector, 42 percent in the industrial sector, and 38 percent in the commercial sector. Hernández and Alfredo Harp Helu, the new director general, each took about a 10 percent stake, the most any single shareholder was by law allowed to own. They intended to concentrate investment on sectors of the economy with the greatest prospects for growth: housing, infrastructure, small and medium-sized companies, regional development, ecology, technology, foreign commerce, and decentralization, among others.

Banamex also intended to challenge Bancomer's lead in retail banking. Under nationalization, the main business of Mexico's banks was financing government borrowing. Consumer credit was almost nonexistent. Newly privatized Banamex found itself behind rival Bancomer in technology. Still using manual procedures, its branches were characterized by long customer lines and heavy staff turnover. Nevertheless, the bank began competing vigorously in some retail fields, particularly mortgage loans, because they offered the best profit margins and the least credit risk. Banamex was extremely successful with an offering that eschewed part of its profit in the initial years of a mortgage loan but made up for this in the later years. On the other hand, Banamex avoided auto loans for what proved to be a well-founded fear of being burned.

In its long-favored field of corporate banking, Banamex benefited from continuing relationships with many of Mexico's leading corporations. Its board members included the heads of Cemex, S.A. de C.V., one of the world's biggest cement manufacturers; Grupo Industrial Minera Mexico, S.A. de C.V., the major mining company; and Kimberly Clark de Mexico, S.A. de C.V., the biggest paper products company. Banamex used its insider status to charge among the highest fees and commissions in Mexico's financial sector. To expand its range of business, it formed an equity-derivatives joint venture with Swiss Bank Corp. and another with MCI Corp. to deliver telecommunications services to Mexico. Banamex became the majority partner in the latter company, Avantel. Hernández said that the group got into this business because telephone service was so bad Banamex needed to create its own network for corporate clients. Banamex also negotiated joint ventures with the Dutch financial-services company Aegon N.V. and with the U.S. company MoneyGram Payment Systems Inc. for the transfer of remittances earned by Mexicans in the United States.

Paying Down Debt: 1995-2000

Too much Mexican public and private spending led, in late 1994, to panic conversion of the overvalued peso into dollars, an ensuing devaluation, and an economic recession. Mexico's banks had gone on a lending spree following privatization, and the poor quality of many of these loans forced the government to take over some of the banks once more. With its recognized brand name and strong capitalization, Banamex emerged in better shape than most of its rivals. Some 80 percent of its loans had been funded by branch deposits. Nevertheless, Banamex was--like Bancomer--technically insolvent and, to climb out of a hole, sold 23 billion pesos (about $3 billion) in loans to the government, receiving interest-bearing bonds in return. These loans--about two-thirds commercial and the rest mortgage--ranged in quality but were generally viewed as bad long-term risks. As part of the deal, Banamex agreed to raise its capitalization by 12.54 billion pesos (about $1.64 billion).

The recapitalization was necessary to cover other nonperforming loans, and the problem seemed unlikely to be solved until real estate prices recovered. More than 90 percent of Banamex's past-due mortgage loans involved single-family homeowners. "When some people talk about the need for banks to make foreclosures," Hernández told Institutional Investor in 1997, "it makes no sense to me. You can't throw 1 million people out of their homes in this country. So we're seeking alternatives. Here at Banamex we are offering a program aimed at reducing payments for performing loans--in other words, to reward clients who are keeping up with their payments despite the crisis. ... Will it work? We don't know yet, but we have to try something." (In spite of these conciliatory words, Banamex took at least 50,000 debtors to court.)

The bank's problems were minor, however, compared to those of its rivals. "Banamex appears indisputably first on the list on Mexican banks in what is referred to as solidity and good quality," was the conclusion of a detailed analysis published by Goldman Sachs Group, Inc. in 1996. Banamex raised the necessary capitalization funds without borrowing from shareholders or foreign banks, one of only three Mexican banks to do so. The group itself contributed 2.79 billion pesos ($549 million) and dismissed 4,000 of its 32,000 employees to pay for part of the additional capitalization. An equivalent amount was raised by dissolving two foreign subsidiaries, including a London-based Banamex investment bank and a Luxembourg-based holding company. (The group maintained its stake in California Commerce Bank and Banco Bansud, S.A., an Argentinian bank, however.) The biggest amount--4.46 billion pesos ($572 million) came from investment partners MCI, Aegon, and MoneyGram. Finally, Banamex tapped financiers abroad for 2.68 billion pesos ($350 million) in subordinated debt.

Although strengthening its financial base, Banamex had been losing clients to the competition. Manuel Medina Mora, director general of the financial group, explained to Joaquín Fernandez Nuñez of Expansión in 1998, "There are consumers that change their bank accounts to no-fee institutions without realizing who offers better interest rates and greater solidity." He suggested that some of the bank's rivals were increasing their market share by falling into the same bad habits of the past--namely, extending credit too freely. By the end of 1996 Banamex had raised the number of its branches to 800 in order to meet the aggressive expansion of Bancomer and Grupo Financiero Bital, S.A. de C.V. The financial group also had established new subsidiaries, such as one for insurance and another for private-pension-fund management.

Banamex suffered a blow to its self-esteem when Bancomer purchased a smaller bank, Banca Promex, S.A., in 1998 to put it in first place among Mexican banks, unseating Banamex from its traditional perch. Speaking a trifle defensively of Banamex, Medina Mora told Fernandez Nuñez, "They have managed very well, although not as well as we. ... They may be first in size and assets, but Banamex remains number one in profitability and capitalization." Banamex downsized slightly that year, when it sold 49 percent of its subsidiary for pension-fund management, Afore Banamex, S.A. de C.V., to Aegon. Later, in May 2000, Bancomer rejected a bid from Banamex and agreed to be acquired instead by Spain's Banco Bilbao Vizcaya Argentaria S.A. (BBVA).

In July 2000 Banamex became the first Mexican bank to fully emerge from the 1994-95 crisis by setting aside 8.4 billion pesos ($885 million) to settle accounts with federal regulators, six years ahead of schedule. The government also had helped Banamex by initiating a loan-restructuring scheme that enrolled 103,000 of Banamex's 125,000 eligible mortgage debtors. When the magazine LatinFinance declared Banamex to be Latin America's best bank in 2000, Paul Warme, a financial analyst, told the publication that Banamex had "significantly outperformed" Bancomer since 1997. "Taking Banamex's balance sheet three or four years ago," he added, "you would never have been able to guess they would be able to generate the kind of reserves and returns they have."

Citigroup Subsidiary: 2001-02

A year after BBVA's purchase of a controlling share of Bancomer, Banamex agreed to be acquired by Citigroup Inc. for $12.5 billion. It was the largest financial-services transaction ever in an emerging market. The deal was finalized in August 2001. Two months later Citigroup announced that it would eliminate 3,600 Banamex jobs to reduce merger-related expenses. One means of doing so was by eliminating the overlap with its well-established Citibank operation in Mexico, which was the nation's seventh largest bank. Although as a bank Banamex still trailed Bancomer in assets and annual sales, it outranked its rival in equity, deposits, net income, pension funds, and private-sector loans. Banamex also led its rivals in credit-card membership. Subsidiaries included the largest brokerage house in Mexico and the second largest for pension-fund management.

Medina Mora remained chief executive officer of the group, which retained the Banamex name, while subsequently dropping "Accival." Most of its managers also remained in place. Medina Mora's first objective was to build for Banamex the potentially lucrative Hispanic market in the United States, especially the 65 percent of Mexican origin. The bank issued a Banamex USA card in 2002 with the intention of gaining a larger share of the nearly $10 billion a year that Mexican immigrants sent home. Meanwhile, Citigroup was paying out an estimated $1 billion to clear Banamex's problem loans, selling the deficit-ridden Bansud Argentine subsidiary of the bank, and buying out the firm's pension-fund partners. Banamex contributed nearly $1.2 billion to Citigroup's profits in 2002, in large part because it was said to have cut its annual expenses by $350 million--30 percent beyond projections.

Principal Subsidiaries: Acciones y Valores de Mexico, S.A. de C.V.; Banco Nacional de Mexico, S.A.; Seguros Banamex-Aegon, S.A. de C.V. (52%).

Principal Competitors: Grupo Financiero BBVA Bancomer, S.A.

Chronology

• Key Dates:
• 1884: Banco Nacional de Mexico (Banamex) is formed by the merger of two banks.
• 1914: Civil war and the start of World War I impel the bank's French managers to leave Mexico.
• 1937: Banamex holds 36 of the 50 bank branches in Mexico.
• 1977: Banamex consolidates its holdings into a single financial group.
• 1982: Mexico's private banks--including Banamex--are nationalized by the federal government.
• 1991: Roberto Hernández and others buy a 71 percent stake in the financial group.
• 1995: Banamex is technically insolvent after panic selling of the peso in a new debt crisis.
• 2000: Banamex is the first bank to settle accounts with the government's bailout fund.
• 2001: Citigroup Inc. purchases Banamex for $12.5 billion.