El Financiero, Mexico, D.F. Friday, June 21, 1991 - Page 4
SOCIMER SUGGESTS INDEPENDENT BANKING EVALUATIONS
DOUBTFUL THAT THE BIG BANKS WILL PAY THREE TIMES BOOK VALUE;
1.4, THE JUST PRICE.
Analysts at one of the panels at the Capital Markets Seminar in Mexico, organized by Latin Finance and El Financiero, concluded that prices of almost three times book value, paid for the first Mexican banks auctioned in the process of re-privatization, will probably not be repeated in the case of the larger institutions.
Officers from the International Consulting Group SOCIMER, addressing more than 100 people present at one of the event's panels, indicated that, in the case of the bigger banks, the proper price to offer, taking into account legal, macroeconomic and competitive considerations, would be around 1.6 times book value.
“The purchase of banks carries with it a certain amount of prestige and power, why not recognize it, and these are extra economic aspects to consider, but there are also, and above all, economic evaluations to be made,” indicated Guillermo Ramirez, director of the Socimer Group.
In the spirit prevailing throughout the seminar, the panelists expressed optimism about the economic future of Mexico, but there were also manifestations of the need to act with caution, Ramirez pointed out the “importance of making an evaluation of the banks “in situs.”
Despite the work done by the Ministry of Finance in the preparation of documents which analyze the financial status of the banks in the dis-incorporation process, Mr. Ramirez called for the use of independent evaluations.
“It is the same as with a used car, you have to have it tested by your own mechanic, as well.”
He pointed out that the portfolio evaluation should be done taking into account aspects such as the inter-banking lines, which he included among the "problematic" points, and in the case of real estate, he said that an independent evaluation was justified, particularly when such properties have a book value which has appreciated at an estimated rate of 60 percent from 1989 to 1990.
In the absence of a process of independent evaluation, “an additional element of risk is assumed, thus the introduction of precautionary measures should be contemplated,” commented the banker, who has participated in projects of this nature in his own country, Chile, as well as in Venezuela, Argentina, Paraguay and the Dominican Republic, among others.
In disclosing the risks assumed by those who contemplate the purchase of a Mexican bank, another panelist, the Mexican lawyer Juan Jose Paullada Figueroa, pointed out that the “legal framework is the appropriate one.”
Nevertheless, the lawyer warned about the large amount of discretion permitted to the government in the 1990 law, and added that its spirit reflected the intention by the state to continue with authoritarian management of the framework in which the Mexican banking institutions will operate.
Concerning the risk of international competition which the recently privatized institutions could confront, Bruce Claugus, a New York attorney and founder of Claugus and Mitchell, LLP, for the Socimer Consulting Group, argued that competition undoubtedly will exist, and said that it is not too farfetched to think that in five years foreign banks will have control of 51 percent or the majority ownership of some existing or newly licensed banking institutions.
Bruce Claugus argued in favor of United States banks - thus far relatively uninterested in the re-privatizing process -testing the waters by participating with the permissible 5 percent foreign ownership, which would allow them to gain experience in the market, and to see if they become interested in enlarging their position.
Linking the subject of financial services to the future free trade agreement, Bruce Claugus said that an investment position, although minority, would allow the banks to apply “pressure” to accelerate the pace of the protocol of accession which, in any event, taking into account the experience with the treaty with Canada, should not exceed, as a maximum, a duration of ten years.
With all the risks inherent to an operation of this type, the speakers at the Seminar pointed out that the “quid” of the matter in the purchase of a bank is to project the business and see if the risk is justified when compared to the profits expected.
The conclusion was clear, it is justified to buy, but you have to be careful about the price you pay.
Again, as CS First Boston did in its analysis of the Mexican banks, the panel concluded that Mexico is a “under banked” country.
“All the studies point to the banks having growth margins”, Ramirez said, and explained that with banks handling 66 billion dollars, and a PNB of about 200,000, the resulting coefficient of 30 percent could be doubled, as is the case in other Latin American countries.
Besides, profit margins of between 7 and 10 percent are very attractive and, even though the speakers indicated that they will be forced down once the dis-incorporation is finalized, the rates of return will continue to be attractive.
In a mathematical exercise presented to the audience of national and foreign bankers, brokers, and analysts from the most important firms of the financial world, it was demonstrated that Mexican bank profits equal 16 percent.
In an analysis which includes data of the 18 institutions which will be privatized, it was concluded that during 1990 adjusted profits would total 1.455 billion dollars.
On the basis of that calculation, the representatives of Socimer concluded that the financial groups which bid successfully for Banco Mercantile and Banpais anticipated rates of return based on a scenario of utmost confidence in the country, justifying prices of up to 3.20 times their book value.
In fact, the “trust” in Mexico ingredient was one of the constants presented in all the panels on the first day of the Seminar.
Neil Allen, managing director of Bankers Trust for Latin America, spoke of the “re-internationalization” of the subcontinent, and identified Mexico as one of the countries which has set the pace in the return to the capital markets.
“These are markets which we have to create within, as well as without, the Latin American nations to avoid the repetition of the costly errors of seeking development based on foreign debt,” said
Alberto Luzarraga, managing director from Continental Bank.
But if it is true that “Mexico” and “trust” seemed the common denominator in all the speeches, a measure of prudence was introduced to foreign as well as to the Mexican investors by Antonio Marchand, from Banco Nacional de Mexico, who observed that “you can't sell trust, you rent it”, and concluded his remarks with the same suggestion made by other speakers at the panel of the European Inter American Finance/Singer & Friedlander Workshop “walk, but walk with caution” in the capital markets of our country and recognize the opportunities, but do not think that risks are nonexistent.
