Mexico’s President, Andrés Manuel López Obrador (“AMLO”) has a bit of thing for “Mexicanisation”. You would be forgiven for thinking that his administration is somewhat hostile to the concept of foreign ownership. Companies in Mexico are better owned by Mexicans, run by Mexicans, and staffed by Mexicans – so says AMLO. After a legislative onslaught aimed at nationalising much of the energy sector, he has now set his sights on banking. Four of the country’s five largest banks are foreign owned and AMLO has railed that profits made by them are rarely reinvested in the local economy.
AMLO was no doubt delighted therefore to learn that CitiBanamex, the Mexican subsidiary of Citi and the country’s second largest bank, is to end its retail banking operations in Mexico. A senior executive at Mexico’s Federal Economic Competition Commission (“Cofece”) said, “From an economic standpoint, analysis showed that in recent years Citi’s market share in retail banking has been declining. Perhaps they see Mexico as a less lucrative market as the business strengthens its footprint in Asia.”
True, CitiBanamex’s exit from its retail arm was no doubt influenced by grim balance sheets. Consumer banking in Mexico also contends with multiple challenges endemic to the country’s financial system, not least money laundering. Nonetheless, this is a significant move given that the bank’s branch network is larger in Mexico than in any other country in the world.
Of course, one bank’s retreat is another bank’s opportunity. Here, AMLO is unlikely to lose much sleep over scaled down US-owned banking operations. Indeed, Citi’s decision to sell its Mexican consumer banking business could tilt the sector, dominated by US financial giants, to more local control. That’s all very well but Mexican banks cannot compete with the technological sophistication of US banks. Moreover, struggling customers can put off new entrants into the sector.
A senior executive at CitiBanamex said, “Banks need to know that their customers can repay them. One of the main problems in Mexico is that people often struggle to repay loans, the knock-on effect of this is increased interest rates to mitigate risk.”
“One of the main problems in Mexico is that people often struggle to repay loans, the knock-on effect of this is increased interest rates to mitigate risk.”
Senior executive, CitiBanamex
On balance, a bit of healthy competition could be beneficial, however. A Senior official at Cofece said, “The entrance of a new player, from a competitive point of view can lead to better products and a more diverse range of those products. It can reduce prices and force smaller banks to adopt modern technology to keep pace with their peers. That is good news for the whole sector.”
“The entrance of a new player, from a competitive point of view can lead to better products and a more diverse range of those products.”
Senior Official, Comisión Federal de Competencia Económica, Mexico
That being said, regulatory challenges could also dissuade new entrants from taking the plunge. The National Commission for the Protection and Defense of Users of Financial Services does a good job in protecting customers at the larger banks, but smaller banks have been less inclined to implement the full breadth of its regulatory frameworks. AMLO may need a little more patience before his dream of a Mexican banking utopia comes to fruition.