All for one: Citigroup's multi-billion-dollar purchase of Banamex is a landmark on the road to the banking sector's recovery. (Banking & Finance).

Citigroup's US$12.5 billion acquisition of Banamex, Mexico's second-largest bank (which is still in negotiations), is merely the latest and most spectacular example of buy-outs by global financial powerhouses that have penetrated the local banking sector since 1995. In this case, the unprecedented amount agreed upon will be the largest that any foreign bank has put into Mexico, and easily surpasses all other previous local-bank acquisitions by Banco Santander, Banco Bilbao Vizcaya, Hong Kong Shangai Bank and Nova Scotia Bank.

If the deal prevails, Banamex shareholders stand to receive US$6.25 billion in cash and almost 127 million Citigroup shares, in exchange for 100% of their stake in Banamex. Together, Citigroup and Banamex would control 20% of the pension-fund market with each of their Afores (pension fund administrators) combined--Citigroup's Garante with 2.1 million accounts, and Afore Banamex with 2.4 million accounts. Mexican law forbids any single Afore to have more than 5.5 million accounts, forcing banks to refuse any new accounts that take them beyond that amount. The measure keeps banks out of trouble with market regulators, but both banks combined would be approaching that limit.

Another issue is that both banks would now control Bannaci's telephone company, Avantel. However, this has yet to be settled upon by Cofetel (the Federal Telecommunications Commission), as foreign companies are forbidden to control more than 49% of any national telecommunications company.

Most surprising however, is that Citigroup is seeking to be listed on the Bolsa, and if approved, will be the first international company to have done so. Meanwhile, current directors Roberto Hemandez and Alfredo Harp will retain their positions and will join Citigroup's board, along with Robert Rubin, William Rhodes and Victor Menezes.

This merger was well received by the market and Banamex's shares soared 17% above their normal high. It has also sparked an upsurge in direct foreign investment inflows. Although positive, the effect that this investment will have on the unyielding strength of the peso is a growing cause for concern for the government, and, needless to say, the nation's export sector.

The deal also seems to have prompted another interesting turn of events: Banamex recently cut its interest rates on mortgages (to 19.38%) and loans for cars (to 19.75%). The move came hot-on-the-heels of Scotiabank-Inverlat's own interest rate cut by 5% on the same kind of loans.

Whatever drawbacks and concerns may exist, the deal is also a clear indication of investor confidence in Mexico. The alliance of strong foreign banks with Mexican financial credit institutions signals not only confidence, but a gradual recovery of the banking sector--making it unlikely to repeat the mistakes that exacerbated the peso crisis in 1995 and dried up the credit market.

Mexican banks have thus demonstrated their ability to recover and prosper. There now exists a healthier financial structure that can only lead to greater stability and investment appeal. Even so, it's good to keep in mind that healthier banks alone will not suffice to jump-start the credit market. Interest rates are unlikely to reach attractive levels until a fiscal reform package is approved, so let's see how things come along.

Rafael Olvera is an independent financial consultant.

Banacci banquet

Banacci "O" series shares soared following Citigroup's May 17
acquisition announcement, compared to the stock's previous monthly high.

30 JUNE 2000   $13.222
31 JULY 2000   $14.246
31 AUG 2000    $15.045
29 SEPT 2000   $13.894
31 OCT 2000    $14.257
30 NOV 2000    $12.492
29 DEC 2000    $15.159
31 JAN 2001    $17.826
28 FEB 2001    $17.60
30 MARCH 2001  $16.510
30 APRIL 2001  $16.850
16 MAY 2001    $17.450
17 MAY 2001    $22.580
31 MAY 2001    $23.480
12 JUNE 2001   $23.420