Grupo Financiero Banorte, S.A. de C.V.

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Grupo Financiero Banorte, S.A. de C.V.

359 Paseo de la Reforma
Mexico City, D.F. 06500
Mexico
Telephone: (525) 625-4800
Toll Free: (01) (800) BANORTE
Web site: http://www.gfnorte.com.mx

Public Company
Incorporated: 1899 as Banco Mercantil de Monterrey S.A.
Employees: 11,284
Sales: 8.19 billion pesos ($893.62 million) (2001)
Stock Exchanges: Mexico City
Ticker Symbol: GFNORTE
NAIC: 493110 Warehousing and Storage Activities; 522110 Commercial Banking; 523110 Investment Banking and Securities Dealing; 523120 Securities Brokerage; 523920 Portfolio Management; 524113 Direct Life Insurance Carriers; 524126 Direct Property and Casualty Insurance Carriers; 525110 Pension Funds; 551111 Offices of Bank Holding Companies

Grupo Financiero Banorte, S.A. de C.V., once a regional bank mostly concerned with serving commercial and industrial accounts, has grown to become a full-service financial conglomerate—the fourth largest in Mexico in terms of capitalization (and third largest in portfolio value) and the largest one still controlled by Mexican shareholders. It is a holding company whose units include not only the bank but allied subsidiaries for brokerage, life, and property/casualty insurance, pension funds and annuities, leasing, factoring, and warehousing. Careful, conservative management enabled GFNorte (usually still called Banorte) to survive the currency crisis of 1994 and its aftermath. While many other banks its size went under, Banorte took advantage of the crisis to acquire other banks and to expand from Mexico’s north into all areas of the country.

From Regional Bank to Full-Service Financial Group: 1899-1993

Banco Mercantil de Monterrey S.A. was founded in 1899 in Monterrey, capital of the state of Nuevo Leon and home of many of Mexico’s largest and most dynamic industrial enterprises. In 1913, during the revolution that swept across the country, bank officers sent millions of dollars worth of gold bullion to the United States to keep it from falling into the hands of the warlords who roamed the countryside. The bank later expanded into the other states of northeastern Mexico. By 1976 it ranked 14th among Mexican banks in total assets, and in 1978 it had 53 offices. Still, Banco Mercantil de Monterrey did not receive much attention in a city where there were 13 banks of deposit, 18 lending houses, and six mortgage banks, all but six headquartered in Monterrey.

Banco Mercantil de Monterrey subsequently grew to become the largest of Mexico’s five regional banks, with 125 branches in northern Mexico. When world oil prices dropped in 1982, however, the value of Mexico’s peso collapsed and the government nationalized the nation’s banks in order to restructure the financial system. Banco Mercantil de Monterrey was merged with Banco Regional del Norte in 1986 and took the name Banco Mercantil del Norte, or Banorte for short. Capably administered by Eugenio Clariond Reyes Retana, Banorte was found in a 1990 survey to be the most profitable of the 15 biggest banks in Mexico. Total assets had reached more than 4 billion pesos.

Banorte was one of the last nationalized banks to be repriva-tized in the early 1990s. In 1992 the government sold 66 percent of the bank for 1.78 billion pesos ($567 million), to a group headed by Monterrey-based tycoon Roberto Gonzalez Barrera, chairman of Gruma, S.A. de C.V., Mexico’s largest producer of cornmeal and tortillas. The new owners intended to increase service along the border with the United States, buy or establish a brokerage house, and create an integrated financial group. Banorte’s chief executive, Francisco Patino Leal, kept his job. Speaking of his bosses, he later told Joel Millman of the Wall Street Journal, “None live from the bank, so they don’t need dividends. That gives us freedom to manage soundly.” In 1993 the bank acquired Grupo Financiero Afin, whose holdings in eluded a brokerage, and became Grupo Financiero Banorte. In addition to the bank and brokerage house, its subsidiaries now included a currency exchange, warehouser, equipment lessor, and guarantor of bonds and sureties.

Profiting in Hard Times: 1994-99

The reprivatized banking system quickly ran into trouble when—in late 1994—investors and depositors concerned over Mexico’s growing payments deficit converted their pesos into dollars, resulting in a severe depreciation of the currency and an ensuing recession. Nine of the nation’s 16 domestic banks either were taken over by a government agency or, like Banorte, were bailed out in the form of ten-year notes from a public fund for the bad loans on their books. The situation had been made more severe by an unchecked expansion of credit in the year preceding the crisis; during this period loans grew by 36 percent—nine times the rate of growth in the economy as a whole. Banorte’s own market capitalization fell to $350 million from its peak of $1.2 billion. Even so, it emerged as Mexico’s least hard-hit bank (with net income down only 13.5 percent in 1994 and 12.4 percent in 1995) because it had, in large part, confined its loan portfolio to commercial customers rather than extending consumer loans freely to the less creditworthy general public.

Consumers who had amassed debts to Banorte that they could not pay in full were offered discounts. In this way the group collected something from credit card holders and lessees, for example. Those who had taken out auto loans had the option of returning the car or paying only its current worth, which because of depreciation was less than when purchased. For its part, Banorte negotiated discounts from its own creditors. Banorte ranked first among banks in capitalization ratio in 1995 and 1996. It did not lay off any employees during this period and even added a few hundred. The number of Banorte branches grew to 154 in 11 states in 1995.

In 1996 Banorte acquired Banco del Centro S.A. (Baneen), a regional bank with 111 branches that was about to fail, paying 729.97 million pesos (about $94 million). “The government put two and two together and saw they were about to take over a bank,” Patino Leal explained to Millman. “They didn’t want to manage the bank, so they offered it to us.” The acquisition brought Banorte a presence in three more states and made it the seventh largest Mexican bank. It was handling payroll for some 350,000 employees, each receiving cash in individual envelopes twice a month. Another 44,000 workers could withdraw their salaries using debit cards good at Banorte’s ATMs.

A much bigger acquisition for Banorte was the 1997 purchase of 81 percent of Grupo Financiero Asemex-Banpais S.A. for 678.1 million pesos ($87.4 million). Banpais, which was not formerly merged with Banorte until 2000, had been owned by the big glassmaker Vitro S.A. before it was nationalized in 1982. Like Banorte, it was reprivatized in the early 1990s, but in 1995 the government seized control again, citing irregularities in the bank’s operations. It was considered by analysts to be in the worst shape of any of Mexico’s banks. A federal official said 80 percent of its loans were approved with no more than a signature as guarantee, creating a loan portfolio of which half eventually had to be written off as worthless. Charged with embezzling $4 million, the bank’s former president fled to Spain before being apprehended and extradited. (Banpais’s holdings, however, included Aseguradora Mexicana, the country’s largest insurance company.) Also in 1997, Banorte sold 49 percent of its annuities and insurance subsidiaries to the Italian-based Generali group of insurance companies.

Banorte’s leasing subsidiary, Arrendadora del Norte, S.A. de C.V., was rated the most profitable financial institution in Mexico in 1997. Among banks, Banorte was rated number one in this category. By the fall of 1998 Banorte was one of only four of the 18 Mexican banks privatized in the early 1990s still under the same ownership. In early 1999 it ranked fifth in size, with 461 branches covering every Mexican state. During the last six years the bank also had increased its number of automated teller machines from 12 to 1,000, installed 7,000 point-of-sale terminals, mounted 3,600 corporate computer worksites, and added more than 600,000 electronic payment accounts. “This is one of the best banking stories in Latin America,” an investment analyst told James R. Kraus of American Banker. “They dominate the Monterrey market, they’ve successfully acquired and integrated other banks seized by regulators, and their basic asset quality remains good.” Another analyst called Banorte the lowest-risk bank in Mexico. One of its strengths was collecting the bad loans made by other banks. In 1999, for example, it bought the bad-loan portfolio of Banca Serfin S.A. from the government, paying only about 11 percent of the value of the loans and earning a $60 million net profit from the portfolio, according to Othon Ruiz Montemayor, Banorte’s CEO.

Company Perspectives:

The company’s mission is to satisfy our clients’ financial needs through the most up to date means of delivery to ensure that quality service is provided with cordiality and efficiency; maintain the integrity and quality of all our operations, particularly in the handling of the Group’s deposits and capital; adopt profitability and the generation of value as the work approach that will serve as an endorsement for depositors and shareholders, and will be a base for the Group’s reinvestment as well; be responsible both as citizens and as an institution, seeking to hold a position of leadership in the communities we serve, promoting development through a philosophy of “Pensar en Grande “(Thinking Big); be, as a company, a source of serious and fair employment, with the objective of treating each of our employees with the highest sense of equality and fairness.

Becoming the Biggest Mexican-Owned Financial Group: 2000-01

Banorte formed a joint venture in 2000 with Hewlett-Packard Co. to establish a business-to-business web trading site for Latin American companies and their global trading partners. Banorte and Hewlett-Packard were planning to connect corporate customers and suppliers in various industries, including automakers, supermarkets, and secondary chemical providers. “We see this as a natural extension of our corporate banking business,” Banorte director Robert Chandler told Jessica Toonkel of American Banker. About this time the company moved its headquarters from Monterrey to Mexico City.

Banorte rose to fourth largest bank in Mexico in 2001, when the government body charged with selling off the last banks and bank assets taken over after the 1994 crisis sold Banco de Credito y Servicio (Bancrecer) for 1.65 million pesos ($174 million). Bancrecer had been Mexico’s fourth most important bank in 1982 but fared poorly under government administration in the 1980s. “Bancrecer is ideal for banks that already have a presence here and want to expand,” the government agency’s chief executive officer, Vicente Corta, had told Karina Robinson of The Banker in 2000. “It has good technological systems and 800 branches but small, bad-quality assets.” Before selling Bancrecer, the government spent $10 billion to bail out the institution. Corta called Bancrecer “the most clear-cut case of lack of market discipline, continuing to grow its assets when it was already in trouble.”

The Bancrecer acquisition more than doubled Banorte’s branches, to 1,207, and increased its assets by about 70 percent to $17.5 billion. In particular, the purchase gave it a more substantial presence in Mexico City and the southeast and northwest of Mexico. Banorte estimated the cost of merging the two institutions at $110 million but described the merger as a quicker and cheaper alternative to opening hundreds more branches on its own. Banorte also assumed Bancrecer’s $587 million portfolio of mainly government bonds that were issued in exchange for the bad loans the government took off

Bancrecer’s books. Interviewed by Jennifer Galloway for LatinFinance, Jorge Colin, Banorte’s director of investor relations, conceded, “On a stand-alone basis, Bancrecer was not a good acquisition.” However, he added, “But it will become profitable if we can make use of existing synergies and reduce costs. We know there are negatives, but we also know that we can obtain enough benefits to outweigh the negatives.”

Grupo Financiero Banorte recorded a net profit of 1.5 billion pesos ($164.1 million) on net revenues of 8.19 billion pesos ($893.62 million) in 2001. The banking sector accounted for 85 percent of the total. These figures did not include results for Bancrecer, since its shares were not transferred to Banorte until the beginning of 2002.

Principal Subsidiaries

Afionsadora Banorte, S.A. de C.V.; Almacenadora Banorte, S.A. de C.V.; Arrendedora del Norte, S.A. de C.V.; Banco del Centro, S.A.; Banco Mercantil del Norte, S.A.; Banpais, S.A. (81%); Casa de Bolsa Banorte, S.A. de C.V.; Factor Banorte, S.A. de C.V.; Pensiones Banorte, S.A. de C.V. (51%); Seguros Banorte Generali, S.A. de C.V. (51%).

Principal Competitors

Grupo Financiero Banamex-Accival, S.A. de C.V.; Grupo Financiero BBVA-Bancomer, S.A. de C.V.; Grupo Financiera Serfin, S.A.

Key Dates:

1899:: The group is founded as Banco Mercantil de Monterrey S.A.
1976:: Banco Mercantil de Monterrey ranks 14th in assets among Mexico’s banks.
1986:: Banco Mercantil de Monterrey merges with Banco Regional del Norte to become Banco Mercantil del Norte (Banorte).
1990:: A survey finds ? anorte to be the most profitable of Mexico’s 15 largest banks.
1992:: A two-thirds stake in ? anorte is sold to a group headed by Roberto Gonzalez Barrera.
1993:: The bank becomes part of Grupo Financiero Norte, an integrated financial group.
1996:: Banorte acquires Banco del Centro S.A. (Bancen), a failing regional bank.
1997:: Banorte acquires Grupo Financiero Asemex-Banpais S.A. for $87.4 million.
1999:: Now truly national, Banorte has 461 branches, located in every Mexican state.
2001:: Banorte buys Banco de Credito y Servicio (Bancrecer) for $174 million.