The Mexican banking sector’s sustainable shift

The significance of environmental, social and corporate governance is on the rise in Mexico, thanks to trendsetters such as Grupo Financiero Banorte

Following the introduction of the Mexican Stock Exchange’s sustainability benchmark, the Mexican banking sector has made great strides towards incorporating ESG matters into all aspects of business
Following the introduction of the Mexican Stock Exchange’s sustainability benchmark, the Mexican banking sector has made great strides towards incorporating ESG matters into all aspects of business 

Nowadays, more of the public than ever before places environmental, social and corporate governance (ESG) matters at the top of its list of priorities when choosing a financial services provider. As much as this trend has been supported by the sharing of information in the internet age, the global financial crisis was also responsible for prompting a rethink of company-wide practices.

Consequently, financial markets from across the globe are placing greater importance on ESG, with individual institutions undergoing a drastic transformation of their internal structures, core values and long-term goals.

Even though Mexico has not progressed as quickly as other markets in terms of ESG, a significant shift is now impacting the country’s entire business community. This started in 2011, with the landmark introduction of the Mexican Stock Exchange’s sustainability benchmark IPC Sustentable, in order to formally recognise companies excelling in ESG terms.

Since IPC Sustentable came into play, several public companies in Mexico have stood out for their efforts to incorporate ESG practices in their day-to-day operations, as well as their long-term strategies. One such organisation is Grupo Financiero Banorte (GFNorte), Mexico’s third-largest bank in terms of deposits and loans.

World Finance spoke with Carlos Hank González, GFNorte’s Chairman, about the steps the institution has taken to embrace ESG matters and what they mean to the group.

What is required to get ahead of the pack in ESG terms?
For GFNorte, developing solid corporate governance has been a top concern, as we are one of the most public companies in Mexico, with a float of over 80 percent and a well-diversified investor base. In terms of governance standards, we excel among our peers in the Mexican Stock Exchange.

For instance, the roles of chairman and CEO are separated, while we also increased the percentage of independent board members to 73 percent a couple of years ago.

We also have strong engagement with our shareholders; assembly quorum has always been higher than 70 percent, and a consensus must be reached for new proposals. Moreover, in August 2016, we amended our corporate bylaws.

Now, any acquisition that involves related parties and has a value equal to or above five percent of GFNorte’s total assets is reviewed by the audit and corporate practices committee and our board of directors. Most importantly, it must also be approved by our shareholders. We have also increased the number of members in our nominations committee from four to seven, four of whom have to be independent.

What was the main driver behind modifying the group’s bylaws?
Since my appointment as chairman, I have been committed not only to complying with the relevant legal and regulatory frameworks, but also to maintaining our top-notch status in corporate governance. Under this rationale, we favour transparency and security in order to best protect shareholders’ interests.

For instance, Mexican law requires 20 percent shareholder approval for M&A transactions with related parties but, as previously mentioned, we lowered it to five percent in order to provide investors with extra assurance that significant decisions will be taken through corporate channels.

Mexico’s sovereign credit outlook has changed from negative to stable, as a result of debt reduction and improved fiscal consolidation

Moreover, we enhanced the nomination process for board members by increasing the percentage of independent members from 26 percent to 57 percent before the bylaws amendment was even made. It is important to highlight that only 13.5 percent of Mexican Stock Exchange companies hold this committee and, on average, only 19 percent of their members are independent.

How important are minority shareholder rights in terms of good governance?
Mexican regulations are quite strong in terms of the protection of minority shareholders, and in this respect we are fully compliant. We also maintain very strong communication with our international and local investors.

This applies to internationally recognised proxy advisors as well, in order to ensure that they are fully up to date with Mexican regulations and any major developments at GFNorte.

Our bylaws specifically detail the rules we have in place to protect the rights of shareholders. For example, shareholders representing five percent of capital stock may directly enforce civil liability action against administrators upon the terms of the applicable regulations.

Shareholders representing 10 percent of the capital stock are entitled to designate and dismiss board members at general shareholder meetings. They can also request to defer voting on any affair should they feel insufficiently informed. And shareholders with a share of at least 20 percent may judicially oppose the resolutions of general meetings through their right to vote.

How is ESG being strategically integrated into GFNorte’s operations?
GFNorte has a robust ESG programme that encompasses initiatives to help protect the environment, such as evaluations of the loans that the bank grants or through responsible investment in the asset management activities that we perform. We are also engaged in our communities through various initiatives with employees and clients, which include health, education and social support.

Our corporate social responsibility programme supports initiatives aimed at achieving sustainable development and fostering social responsibility, even in the pursuit of returns on investments. It also requires awareness about sustainable development and environmental protection in our day-to-day operations. Today, we have permanent ESG functions in our procurement, human resources, credit and investment divisions.

In terms of innovation, how has GFNorte changed in recent years?
Since 2013, we have been partnered with IBM to develop Sumando, a transformative program. Sumando has already delivered a central data repository, which is a starting point for a series of projects regarding business intelligence, client interaction, industrialisation, risk management and multichannel sale. We have already started seeing an enhanced experience for clients as a result.

The central data repository unifies loans, cards, checking accounts and treasury platforms in order to give a full picture of the products that customers have and their indebtedness capacity. By analysing this repository, we gain insightful knowledge into customers’ transactional behaviour, which in turn feeds into the ‘next best action-next best offer’ (NBA-NBO) system.

This delivers customers the most suitable products and services based upon their previous transactions. Every time the NBA-NBO system analyses client behaviour, it receives feedback from the previous actions, refining itself over time.

The NBA-NBO system has proved helpful not only in creating more efficient product campaigns, but also in improving collection activities. Thanks to this system, we have increased our ability to interact with customers through various channels and points of contact. For example, we can send clients a timely SMS notification on their payment due date or offer them a relevant service that they do not yet have.

What other new technology is GFNorte incorporating?
In 2016, we increased our sales capacity through a new multichannel architecture. This means that we no longer sell solely through branches, but also through ATMs, contact centres and internet and mobile platforms. Last year, mobile and online banking served more than 1.2 million clients, with 963 million transactions representing an eight percent increase in year-on-year growth.

We are also implementing technologies that facilitate identification through biometric systems, aiming to not only deliver a more pleasant and efficient experience to our users, but to also strengthen security. For instance, we were the first bank in Mexico to introduce mobile banking authentication via selfies, and we also use a voice recognition confirmation system to add further security.

Finally, we have been working on a pilot project with Watson, IBM’s artificial intelligence system, so users can carry out operations by giving instructions through their mobile phones.

Does GFNorte have a strategic plan in place for the future?
We aim to become the best financial group in Mexico through our Perfect Vision 20/20 strategy, which is based on three pillars: our investors, for whom we seek to generate added value and profitability; our customers, who we aim to serve more closely; and our employees, for whom we strive to offer the best conditions in the workplace and for their professional development.

On the financial side, our strategic plan aims to double our profits and increase return on equity to 20 percent by 2020. We hope to achieve this by increasing our cross-sale ratio from a multiple of 1.8 to a multiple of 2.2 products per customer.

In pursuit of this goal, we have made significant changes to the way we manage our retail bank. For example, we have enhanced information and business analytics to better understand customer segments, which in turn has made us more accurate and relevant in terms of our product offerings.

We have also modernised our technological platform in order to support our sales teams, improve business and simplify processes so as to reduce costs.

What is the outlook for Mexico’s banking industry for the rest of the year?
We are expecting steady double-digit growth for the credit portfolio. Over the summer, S&P and Fitch changed Mexico’s sovereign credit outlook from negative to stable, as a result of the reduction of debt and improved fiscal consolidation.

Alongside this news, NAFTA renegotiations seem less uncertain, with meetings already underway.