If you want to make money in banking these days, Mexico is the place to be. Just about everyone forecasts that the country's newly privatized banks can look forward to record earnings.

And Mexican bankers are maintaining their optimistic forecasts despite a recent sharp slide in the country's stock market.

The stock market's 17.5% decline in June from its high of the year "won't have an impact on our operations," said Javier Fernandez, director of planning at Bancomer.

Growth Has Been Strong

The bank's expectations for growth in earnings this year and next are based on growth in loans and other assets, Mr. Fernandez said, and both are continuing to grow strongly.

"Mexico's banks are in a position to grow extremely rapidly," said Diane B. Glossman, an equity research analyst at Salomon Brothers Inc. in New York. "Part of it is being driven by the economy, and part of it, by the low penetration of financial services."

At Bancomer, Mexico's biggest retail bank, with 742 branches, earnings will climb 62% this year, to $614 million, and about 37% next year, to $838 million, according to a First Boston Corp. forecast.

Stable Mexican Peso

A stable exchange rate for the Mexican peso, lower real interest rates, capital repatriation, and rising financial intermediation all create an attractive environment for banking, wrote Salomon Brothers analysts in a recent report.

As a result of deregulation and capital inflows, the amount of funds flowing into the Mexican banking system will double over the next eight years, and 12 million accounts will be opened, Salomon predicted.

In early July, Mexico completed privatizing the 18 government-owned banks for a total of $12.4 billion under a two-year-old program to sell government-owned companies. The last state-owned bank, Banco del Centro, went for $280.4 million, or 4.65 times book value.

The highest-priced was Banco del Atlantico, a $3.5 billion-asset bank sold in March for a stunning 5.3 times book value, or $478 million.

Other high flyers were the $5 billion-asset Banco Mexicano Somex, which sold for 4.18 times book value, and the $501 million-asset Banco de Oriente, which sold for 4.14 times book.

The lowest-priced were the $33 billion-asset Banco Nacional de Mexico, or Banamex, which sold for 2.42 times book value; $18.7 billion-asset Banca Serfin, which sold for 2.69 times book; and $1.8 billion-asset Multibanco Mercantil de Mexico, which sold for 2.6 times book.

Banks Raising Equity

To keep pace with anticipated growth, Mexico's big banks are raising hundreds of millions of dollars in fresh equity.

In March, Bancomer raised $837 million in equity through a global stock offering. The offering was increased from $500 million to meet strong demand.

More recently, Banamex sought to raise $1.5 billion through a similar offering, but it postponed the offering until Mexico's volatile stock market stabilizes. Market sources said the bank hoped to use most of the equity to fund bank purchases and to fuel investment and expansion.

Wide margins and a massive surge in credit demand are behind remarkable profit growth.

15% Asset Growth

Total assets of Mexican banks, $160 billion at yearend, will climb by 155 this year, at least, according to an estimate by the Bank of Mexico. And even that estimate may be low.

During 1991, for example, Bancomer's loan portfolio grew by 40% in real terms, versus 24% for the overall banking sector, First Boston has estimated.

Within Bancomer's portfolio, durable goods loans, for items such as cars, were the fastest-growing category, with a 179% increase, followed by mortgages, up 109%, and credit cards, up 64%.

Deposits are growing equally fast.

Meanwhile, net interest income, which accounted for 66% of Bancomer's operating income before loan-loss provisions in the past three years, has been growing by 40% a year since 1989 and is expected to rise to nearly $1.92 billion in 1992, up from $1.23 billion last year.

Forestalling Competitors

For the most part, Mexico's banks are aiming to consolidate their hold on the market before the chill winds of competition start blowing.

Some critics say that, despite their impressive record, Mexican banks face severe structural impediments and have a long way to go before they can face competition from abroad.

"Institutions are riddled with unnecessary overhead and antiquated technology, and only 10% of the population has savings accounts," noted Kleiman International Consultants Inc., New York.

This outdated infrastructure, some analysts predicted, could create pressures for new mergers.

High Concentration

Mexico's banking sector is already highly concentrated after earlier mergers, which reduced the number of banks from 60 in 1982 to the current 18.

The three top banks -- Banamex, Bancomer, and Banca Serfin -- account for 66.8% of the $121 billion in assets of the first 16 banks privatized.

Others say Mexican banks and corporations are relying on dollar-denominated funding in record amounts but that the profits they count on for repayment are almost all in pesos.

Vulnerable to Peso Decline

Any downturn in the Mexican economy, coupled with, say, a sharp depreciation in the peso against foreign currencies, could leave Mexican banks and their borrowers unable to repay their debts -- in the same way Mexico was unable in 1982 to meet its international payment schedule.

"A devaluation of the peso would contribute to a slowdown of the economy and increase inflation, and both of these factors would be negatives for banks," said Manuel Lasaga, a managing director at International Management Assistance Corp., Miami.

"Economic growth in Mexico is slowing down," James Capel, the London-based investment bank, noted in a recent report.

Growth in Mexico's gross national product reached only 3.6% in 1991, below the government target of 4% and down from 4.4% in 1990. The figure is continuing to fall.

Fear of Slowdown

"These developments since mid-1991 are raising fears that Mexico may now be entering a period of significant and prolonged slowdown," James Capel added. Still, analysts predict any slowdown will be temporary.

Mexican banks will play a leading role as the nation's economy expands, analysts said, especially if the country signs a free-trade agreement with the United States and Canada.

U.S. banks now are barred from doing business in Mexico, but negotiators have reached preliminary agreement on letting U.S. banks gradually increase business in Mexico. U.S. banks would also be allowed to engage in securities-related activities and insurance.

A final draft agreement was expected to be completed soon.

In early June, Roberto Hernandez, president of Banamex's parent company, Banamex-Accival SA de CV, hinted that Mexico may become more flexible in opening up its financial sector.

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