Spanish Banks Pin Hopes On Mexico As Economy Rebounds

Spain's two largest banks are placing bets on a rebound of the Mexican economy and its fast-growing middle class as they look for ways to offset weak growth prospects at home.

Both Banco Santander SA (STD) and Banco Bilbao Vizcaya Argentaria SA (BBVA) are trying to export a model of cross-selling that has been very successful in Spain: sell clients a mortgage, and you become their main banker.

The potential is clear. Bank debt levels in Mexico remain among the lowest in the Americas, at a rate of 23% of gross domestic product. The country remains underbanked, but in the coming years, economists expect more than a million new jobs to be created per year, adding to a fast-growing middle class.

By following this strategy, BBVA and Santander are in the process of cornering the still-incipient mortgage market in a country where government-run agencies still finance four out of every five home loans.

BBVA unit BBVA Bancomer has made the biggest strides, thanks to its 2005 acquisition of low-income mortgage provider Hipotecaria Nacional. The bank, the biggest in the country, already commands a share of 40% of the loans given by the banks, and plans to grow its mortgage lending by 12% this year by selling about 100,000 home loans, BBVA Bancomer's chief financial officer Eduardo Avila said in an interview.

"Mexico has tremendous potential. We estimate that credit will grow at an annual rate of at least 15% a year in the coming years, while gross domestic product grows 5%," Avila said.

The country has a housing deficit of 9.6 million homes, and the building rate in recent years has been about 600,000 units per year, BBVA estimates. "There's potential for the banks to take a bigger piece of the pie in the future as the country develops and the public sector withdraws from some segments," Avila said.

Santander Mexico, which is about half the size of BBVA Bancomer, has successfully targeted a more affluent segment, and lends to buy homes worth 300,000 pesos ($25,500) or more. Last year, it purchased a $2 billion portfolio of mortgages from General Electric Co. (GE), making Santander the country's second-largest private provider of mortgages.

"The bank is giving three out of every 10 mortgages in this segment, and it wants to continue at that pace," said Marcos Martinez, chairman of Santander Mexico in an interview. Santander also wants to gain ground in loans to small- and medium-sized enterprises, and it expects to grow that segment at rates above 30% per year in the coming years, taking its market share to 20% from 15% now.

"Volumes are still small, but with these growth rates, it will become a significant segment," Martinez said. The focus will be on getting clients to borrow more: some 190,000 small companies bank with Santander, but only about 30,000 of these firms have credit lines with the bank, he added.

"Both segments are key to strengthening the franchise," Martinez said.

Banks in Mexico rebounded strongly last year after a sharp recession in 2009. And both executives were upbeat about the prospects for the Mexican market. "The year has started in stellar fashion. The feedback we get from our clients on how their companies and jobs are going is a lot better than what we heard a year ago," Martinez said.

For the two banks, much is at stake in Mexico. BBVA profits from the country are likely to surpass those of Spain in the coming quarters, as the Spanish economy continues to deleverage and growth remains sluggish.

Santander, meanwhile, eventually wants to sell part of the Mexican unit in a public offering of shares, as it did a few years ago with its Brazilian unit. Martinez said that though the decision to list has been taken, the timing for a stock market debut is uncertain. "It's not likely to happen this year," Martinez said.

Santander last year bought the 25% it didn't already own of the Mexican unit back from Bank of America (BAC) in a deal that valued the business at $10 billion.

--By Christopher Bjork; Dow Jones Newswires; christopher.bjork@dowjones.com

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