Latin America -
..the next "boom" for bankers.
...the short term returns may be inviting, but competition is heating up!!!
Commercial bank loans to Latin America in the first half of
1996 reached an all time high, even as greater competition squeezed
profit margins. Syndicated loans to Latin America reached US$10.1
billion in the first half of this year, up 70 percent from the
same period last year, according to Loan Pricing Corp, Gold Sheets,
a New York firm that tracks the loan market.
New York-based Chase Manhattan Corp., the largest arranger of
loans in the US, led the way, with $2.6 billion in loans to Latin
American companies in the first half of 1996. BankAmerica Corp.,
based in San Francisco, was second, putting together $2 billion.
Citicorp was third.
The renewed interest in Latin America reflects increased confidence
in the region's economies and the growing success of Governmental
policies aimed at improving trade links and market access within
the region.
If the current pace continues, says Loan Pricing Corp., bank lending
to Latin America will surpass last year's total of US$17.5 billion,
the largest amount since the early 1980's, after which a wave
of defaults caused bankers to shun the region. The growth in lending
reflects banks' increased confidence in the region, as well as
dissatisfaction with slim profit margins on alternative investments
in the world's more mature financial markets.
Nowhere else has this interest been more perked than in Mexico. With consumer spending being pulled up by strong advances in the market, Mexico seems destined to be on a definite rebound path following one of the worst recessions in the nation's history. After a disastrous year in 1995, Mexican stocks have made a dramatic rebound, gaining 24 percent in US dollar terms so far this year. The country's economy grew faster than expected in the second quarter, prompting Wall Street analysts to scramble to boost their growth forecasts for the year. Mutual funds that invest in developing countries, however, remain neutral on Mexico. If investors become as bullish as many of the analysts have, more gains could be in store.
"We've had a strong bias to Mexico," says Jay Pelosky,
Latin American equity strategist at Morgan Stanley & Co. "The
market is under-owned." Emerging market investors still have
just a sliver more Mexican stocks than the market's size would
indicate. Based on Mexico's US$70 billion market capitalization
in Morgan Stanley Capital International indices, the country would
merit 8.6 percent of an emerging market portfolio. According to
Micropal, a firm that tracks mutual fund performance, mutual funds
that invest in developing countries had 8.9 percent of their portfolios
in Mexico at the end of June.
While funds may still be lukewarm on Mexico, they have dramatically
increased their investments. At the end of last year, a comparable
group of funds had 6.71 percent of its money allocated to Mexico
and at the end of the second quarter of 1995, they had just 6.05
percent, according to Micropal. What has changed investors' minds
is the expectation that the country would pull out of a recession,
its deepest in six decades. Mexico's economy contracted 6.9 percent
last year.
The Mexican government said the economy grew 7.2 percent in the second quarter, above the 5.6 percent forecast by economic analysts. The better-than-expected showing prompted analysts at Union Bank of Switzerland (UBS) and elsewhere, to increase their growth estimates. UBS now expects Mexico to grow 3.9 percent, up from a previous estimate of 2.4 percent.
"We had compelling evidence that the banking sector is
coming back faster than expected," said Lawrence Goodman,
an economist at Salomon Brothers. "The second surprise is
how robust the Mexican consumer has been."
Betting growth would be stronger than expected, early last month
Salomon Brothers recommended that investors boost the portion
of a Latin American portfolio invested in Mexico to 30 percent,
up from 27 percent. The benchmark stock market index has surged
14.5 percent in dollar terms in the past month and Pelosky (at
Morgan Stanley) said the bolsa could gain 15 percent more before
the end of the year.
Pelosky said he is bullish on Mexico because of the likelihood that companies will report stronger-than-expected earnings, interest rates could fall further and the currency will remain stable. Companies could benefit from efforts to restructure their operations, as well as from faster growth. Pelosky's top picks include Grupo Posadas SA, a hotel operator; financial services company, Grupo Financiero Bancomer SA; Coca-Cola Femsa SA, a Coca-Cola bottler; and steel maker, Hylsamex SA.
Salomon is recommending many of the same companies, particularly
those with strong export content in their revenues, including
steel companies, Altos Hornos de Mexico SA and Hylsamex; and banks
Grupo Financiero Banamex-Accival SA and Bancomer. The firm also
recommends cement maker, Cemex SA; Telefonos de Mexico SA and
media company, Grupo Televisa SA. The big issue for the economy
will be how quickly consumer demand returns. With consumer spending
accounting for about 60 percent of economic activity, the country's
turnaround will remain sluggish if Mexicans don't begin to spend.
Investors have cause to worry. Retail sales fell 0.2 percent in
June, compared with the expectation of an increase of 2.7 percent,
while car sales fell 6.5 percent in July, compared with the previous
month.
Goodman said he sees the 7.9 percent increase in activity in the
restaurant and hotel industries, released as part of the second-quarter
Gross Domestic Product (GDP) data, as a sign the consumer is beginning
to spend again.
"The consensus was that it would have taken until the
fourth quarter for the consumer to jump on board," said Goodman.
"We are seeing an indication that the consumer is coming
back early."
"We are also seeing a lot of US banks going into Latin America
chasing yield," says Meredith Coffey, an emerging-markets
loan analyst at Loan Pricing Corp. "But, while banks' profit
margins are higher in Latin America, they're also under pressure
here too," she adds. "It is still a very competitive
market and prices are falling."
In syndicated lending, banks arrange groups of lenders, or
syndicates, to share in the risk of large corporate loans. Along
with earning fees for setting up the group, they also earn an
interest margin, or spread, on the loans they keep. The margin
equals the difference between the interest they receive and the
rates they pay to depositors and investors. Interest margins have
narrowed on loans to Latin America's biggest borrowers, Chile,
Argentina and Mexico, said Loan Pricing Corp.
In Chile, whose "A-minus" credit rating, from Standard
& Poor Corp. (S&P), is the highest in the region, average
interest margins on loans to higher-rated companies declined to
roughly 0.38 percentage points more than the London Inter-Bank
Offered Rate, or LIBOR, from 0.52 percentage points in the first
half of the year.
Average interest margins in Argentina, whose "BB-minus"
credit rating is well below Chile's and three notches into junk
bond territory, have fallen even further. They're now about 1.62
percentage points more than the LIBOR, about 1.5 percentage points
lower than at the beginning of the year.
In Mexico, which has a "BB" credit rating from S&P,
average interest spreads are expected to fall from the current
level of about 4 percentage points as companies take advantage
of strong lending demand to refinance existing loans. Margins
on some loans could fall as much as 3 percentage points, Loan
Pricing Corp. said.
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