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.

Perked interest

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.

Banking growth

"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.

Top performers

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."

Syndicated lending

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.

Improved ratings

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.



Executive Time "Online" also has a printed version which is available throughout the Caribbean and some selected North American cities.

For information about subscriptions and advertising for both the "Online" and in the printed version.

Tel: (809) 674-4364 Fax: (809) 674-7237 E-mail: transcaribbean@hotmail.com

Return home..
Back to Achives

Please feel free to send your comments, questions or request for subscription to Executive Time Magazine at
transcaribbean@hotmail.com

Copyright and design by Trans-Caribbean Marketing Company
Tel:+(809) 674-4364 Telefax: +(809) 674-7237