The promise of emerging market economies has attracted the attention of international investors across the globe. However, their contributions, while significant, are too often characterised by a focus on short-term returns as opposed to sustainable gains. For this reason, those with domestic ties are proving far more effective when it comes to spurring sustainable growth. A prime example is Grupo Financiero Banorte (Banorte) whose contribution to Mexico’s economy in recent years has been considerable to say the least.
Mexico faced headwinds in 2013 and exhibited a lower rate of economic growth than the previous year, in no small part due to a contraction in consumption and retail activity, reduced government spending, waning construction and infrastructure development, and weaker foreign trade. The country’s economic woes, however, were far from exclusive to domestic issues, as continued volatility in international financial markets came as a result of the Federal Reserve’s decision to taper its excessive bond-buying programme.
Even against this backdrop of relative uncertainty, however, Banorte’s performance was overwhelmingly positive last year, and as of September, the group’s profits had grown by 25 percent year-on-year. The institution manages $139bn in assets and is the only financial group of its size controlled by Mexican shareholders; and herein lies the key to Banorte’s success ahead of its international counterparts. The firm’s decisions are taken locally, without the influence of international headquarters, which has proven to be a significant advantage, considering the recent weakness of so many global institutions.
Banorte return on equity
Banorte total assets
Banorte offers universal banking products and services to those in the Mexican financial system through an integrated model, serving the premium, wholesale and mass retail segments, third party correspondents and 16 small- and medium-size enterprise (SME) centres nationwide.
The firm is currently the third-largest banking institution in Mexico measured by amount of loans and deposits. Aside from increasing its market share, Banorte has consolidated its position as one of Mexico’s most profitable banks and is recognised for its strong fundamentals and sound asset quality, as well as high capitalisation and liquidity levels.
The right balance
With a robust strategy and extensive local knowledge, Banorte has been able to partially offset lower expansion in its loan portfolio and an unfavourable interest rate environment with an improvement in its funding and loan mix, as well as the payment of some high interest paying liabilities, such as a syndicated loan and a perpetual bond.
Core deposits are growing close to 15 percent on a yearly basis, while consumer loans are increasing close to 20 percent, driven by payroll and credit cards increasing 40 percent and 21 percent respectively, year-on-year. As a result, the bank’s net interest margin is currently expanding, which is a positive development, considering that the last time Mexico underwent an easing monetary cycle in 2008, Banorte’s net interest margin contracted by over 300 basis points.
As a result of higher net interest margins and non-interest income, total revenues have expanded by 12 percent over the past 12 months, and expenses by eight percent. Further still, provisioning costs are normalising after having to cover the expected losses of homebuilder exposures during the first half of the year. The group is delivering a significant expansion in earnings on the back of positive operating leverage and the integration of Afore Bancomer’s results. Return on equity (ROE) currently stands at 14.3 percent, despite the dilution of earnings per share and the ROE stemming from a recent equity offering, while return on assets is 1.4 percent, having expanded 16 basis points over the past 12 months.
Banorte’s capitalisation levels are adequate, reaching almost 15 percent, and its leverage ratio is above 12 percent. The firm is entirely Basel III-compliant in terms of capitalisation requirements, which allows it to concentrate more on achieving its growth targets and less on meeting new regulation, as other banks in the world are having to do.
Banorte’s shares trade in the Mexican Stock Exchange with the ticker ‘GFNORTEO’. It is the third most liquid stock in Mexico and has one of the largest floats among publicly traded companies of approximately 90 percent, even before a follow-on share offering carried out in July 2013. The group has more than 3,900 investors, including approximately 400 large global institutional funds, and its various corporate policies meet and even exceed international best practices.
Last year, in particular, was full of changes aimed at increasing shareholder value. Throughout 2013, Banorte implemented a variety of initiatives to consolidate its presence in the Mexican market and strengthen its financial position.
To complement a string of acquisitions in recent years, in July, Banorte’s sound fundamentals and positive outlook were recognised by investors in the global follow-on offering in the local and international ECM markets, which became the most significant transaction in Mexico’s history. The shares were sold through the Mexican Stock Exchange – in which 447,371,781 common shares were subscribed at a price per share of MXN 71.50, equivalent to MXN 31.99bn (approximately $2.5bn). The follow-on offering was so successful that the stock price increased by more than 10 percent the day after the offering, and as of the end of 2013 the price exceeded the offering price by more than 26 percent.
Banorte’s performance was overwhelmingly positive last year, and as of September, the group’s profits had grown by 25 percent year-on-year
As a result of Banorte’s promotional efforts in Mexican and international markets, and in spite of continued volatility, an oversubscription of 3.4 times was achieved, representing a demand of more than $8.5bn (over subscription was 4.7 times in the international offering and 2.8 in the local offering). The share allocation was 63 percent among international investors and 37 percent among local investors. In this offering, 10,126 Mexican retail investors, 22 Mexican institutional funds (including four of the most important Afores) and 160 global institutional funds participated. This primary follow-on offering is the largest in Mexico’s history, the greatest from a locally controlled Mexican financial institution, the second most important public offering in the country’s history and the ninth most important carried out by a Latin American financial institution. Furthermore, it is the most important executed by a Mexican financial institution, measured in terms of the amount placed among local investors.
Banorte’s domestic focus extends to those who are so often neglected by international financial institutions and the firm maintains a commitment in all it does to promote financial inclusion and access to banking products and services for lower income segments. The bank has been supporting SME financing with special guarantees, as well as other priority sectors including agribusiness, low- and middle-income housing and infrastructure financing for some time.
Moreover, Banorte has launched a green platform for MiSMEs (micro-, small- and medium-sized enterprises) within the framework of the Green Businesses Summit 2013, organised by the Global Institute for Sustainability, which aims to achieve a more sustainable production chain to establish SMEs as bank clients and in effect ensure service providers are more competitive.
The bank has also penetrated a sizeable percentage of Mexico’s unbanked population through third party correspondents, and early in 2012 launched MiFon so users could withdraw funds at thousands of ATMs worldwide and transfer money from one account to another via their mobile phones.
Banorte’s corporate social responsibility efforts have seen the bank commit to the United Nations Global Compact – an initiative that aims to integrate 10 principles in the areas of human rights, labour, the environment and anti-corruption into organisational business strategy and operations. The bank has participated for a second year in the carbon disclosure project, and has been selected once again to feature on the Mexican Stock Exchange’s Sustainability Index.
The bank as a whole is very engaged with local communities and environmental protection throughout Mexico, and is committed to exceeding best market practices in corporate governance. Currently, 67 percent of the board members are independent, doubling the percentage required by current stock market legislation in Mexico. The Audit and Corporate Practices’ Committee is fully comprised of independent members, ensuring the utmost transparency in all operations.
What is clear from the example of Banorte is that with a distinctly local focus and close ties to the region’s wider development, institutions can overcome market volatility and boost the long-term prospects of emerging market economies, regardless of shaky circumstances in the international marketplace.