Despite pandemic, Mexico 'a real treat right now' for banking, Banregio CEO says

➤ Fintech competitors who dish out credit cards to "anyone that breathes" are only growing themselves into problems, Banregio CEO says.

➤ Mexico has laid the groundwork for 25 years of low sovereign bond issuance rates and economic growth, Rivero Zambrano says.

In the five years since 41-year old Manuel Rivero Zambrano took over from his father as CEO of Regional SAB de CV, the banking group has expanded net loans to customers almost 80%. But with the pandemic in 2020, new loan demand dried up, and likely won't return until the second half of this year. The company also preemptively wrote down some 400 million pesos in bad loans during 2020.

Still, Banregio's focus on "prime" clients has prevented any major credit deterioration, the executive told S&P Global Market Intelligence. Critical of neobanks' rapid client base growth models, Rivero Zambrano is looking to secure the profitability of Banregio's digital spinoff Hey Banco before looking to expand beyond the current mark of 100,000 active customers.

The following conversation has been edited for length and clarity.

One million SMEs went out of business in Mexico last year. What risk does that imply for small and midsized banks going forward?

That SMEs imply high risk is a concept that started with the pandemic and has since dissipated. In our case, they represent 20% of our portfolio. We have always been more oriented toward more prime clients, and our past-due loans in the segment is at 5.6%, which is pretty good. Fifty percent of that book is backed by government guarantees. That said, the leverage of Mexican companies is low, which gives you more wiggle room. What's curious is that small company checking accounts grew by 26% in 2020. That means they are very liquid and aren't taking on much credit.

What will be Banregio's main challenges in 2021?

People have become more risk averse. The challenge is seeing how to make credit grow. We have some 18 billion pesos that we could be lending, but there's nowhere to allocate. There is no demand. The prospects are that vaccination will allow for economic recovery to start in the summer, along with the demand for credit. Some sectors have already returned to pre-pandemic levels, including housing construction and agriculture.

How high might nonperforming loans rise this year?

Last year we reduced NPLs from 1.8 billion pesos to 1.4 billion pesos. Support measures have ended, and we do expect a rise in delinquency, but we've cleaned up quite a bit. That's reflected in our annual profits, which decreased as we hiked our reserves, by 40% year over year, and sped up our write-off process. For these reasons, our NPLs should remain low for some time, below 2%.

Given the difficult market that the pandemic has created, do you think smaller banks might be driven to consolidation?

Small banks in Mexico fight hard to be profitable. There's no appetite from banks like us or Banco del Bajío SA Institución de Banca Múltiple to buy smaller ones, and none from larger banks to buy us. They tend to approach us regularly, but right now there's nothing, because it's a very bad time to sell. With this government it wouldn't be popular if an international bank were to buy a smaller Mexican bank, either.

What conditions have to be in place for there to be consolidation?

Compression of margins and little economic growth, I'd say. But we don't see that in the short term. Mexico is a real treat right now. And as long as the [sovereign debt issuance] interest rate stays around where it is, between 4% and 6.5%, Mexico will be a feast, for the economy and for banks. The government is fighting tooth and nail to defend its austerity, we have a large and juicy middle class that is growing, and minimum wage hikes have boosted purchasing power. That's reflected in housing prices having gone up by 7% last year. Mexico has built up momentum that will continue to be positive for 25 years or more, during which more people will enter the workforce than those who will leave it.

Some have criticized the government's support for businesses as insufficient. What is your view on them?

I think the government did well. There's obviously collaterals, but I prefer a country that isn't in debt. Of course the support measures in the U.S. were greater, but I can't compare to such a rich economy.

What about Brazil, where the government ramped up the fiscal deficit to provide stronger stimulus?

But at what cost? More debt and higher issuance rates in the future? No, thanks. It might sound cold — and time will tell — but I prefer to see an airline go bankrupt than for all of us to have to pay a higher interest rate. We are giving people who can't buy food 3,000 to 4,000 pesos every month, however. Don't think that I'm defending this government, but not everything is bad.

You have 155 branches in 22 states. How necessary are branches still in Mexico, and how far away are we from seeing any culling as digital adoption grows?

We're still far away from that. There's no excess infrastructure here like in Brazil, which has large state banks. Having said that, technology will make it happen eventually. Today 75% of our checking accounts are opened digitally, and we could end this semester closer to 100%. If that trend sticks, why would I need branches? Well, for cash, which still has a long road ahead of it. I haven't seen any aggressive measures like in India, where high-denomination bills were puled from circulation. I don't see us not having to administer cash for the next 10 years.

Why have fintechs in Mexico failed to garner several millions of clients, as has occurred in other Latin American countries?

Hey Banco has 100,000 active clients and is gaining 10,000 a week. I'm satisfied with that growth rate. My challenge now is to monetize that relationship. Neobanks only have one product, and it will be impossible for them to make it profitable on its own. I have all my products on the shelf: checking accounts, loans, investment, etc. Nubank is coming in and giving credit cards to anyone that breathes, but they don't realize we're magnificent at fraud in Mexico. They're only growing a problem. My product may not be as popular as theirs, but I know my clients won't stop paying me. Our focus is not on being the largest bank, but rather the most profitable one. I see many banks that have clients in trouble, because they led them there. Grupo Financiero Citibanamex SA de CV wrote off something like 20 billion pesos in credit cards last year ... I don't like that model.

As of Jan. 26, US$1 was equivalent to 20.05 Mexican pesos.