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www.pwc.com Doing Business in Mexico Banking and Finance November 2012 Agenda I. Business Environment. II. Investment Environment. III. Banking and Finance. IV. Future Agenda. 2 I. Business Environment. PwC 3 I. Business Environment. • Mexico is a member of the WTO, • The government has a favorable OECD and APEC. attitude towards foreign investment. • Currently Mexico has a broad Free- • Strong government efforts to reduce inflation. Trade Agreement network that includes North America, the • Mexico has a common border with European Union, Japan and some the United States, one of the largest South American countries. markets in the world. • Almost all non-strategic • Government policy encourages government assets have been exports. privatized. • No exchange control exists, • Foreign investment is restricted exchange rates are determined by only in certain strategic industries market forces. • Public/private sector cooperation. PwC 4 I. Business Environment. Financial Services • Previous government policies have not encouraged the establishment of financial service centers. • This trend has changed since the banking system was re-privatized. • Trade Agreements and Foreign Investment Law reforms have significantly reduced limitations. • Mexican banking system is now operated mainly by international financial corporations, such as Citigroup, HSBC, BBVA, Santander and Scotiabank. PwC 5 II. Investment Environment. PwC 6 II. Investment Environment. Pocket of Opportunities • Mexico, Indonesia, Australia and Poland, have a number of common features out from the crowd: They have all had a swift recovery from the 2008 crisis and have returned to sustainable growth levels. Opportunities continue to appear in these countries which are undergoing rapid structural change in their economies. Mexico’s planned opening of key markets such as media telecoms and energy, is anticipated to accelerate its transformation from a manufacturing base to a more service oriented one. PwC 7 II. Investment Environment. Pocket of Opportunities • The incoming Mexican President Enrique Peña Nieto, has announced a GDP growth target of 6%, and is planning sweeping reforms to open up labour and the telecoms, energy and media industries. • One third of the Mexican economy is reliant on exports, of which around 75% go to the United States. Mexican businesses continue to take steps to shift their focus from the US market to the emerging Latin American economies. • Having gone through a financial crisis in 1994, its banking system regulation has been assessed to be “ahead of new international standards” by the IMF. PwC 8 II. Investment Environment. Role of E7 emerging economies 9 PwC III. Banking and Finnace. PwC 10 III. Banking and Finance. Investor´s Considerations • Local credit has increased and diversified in recent years. • MEXDER has been in place for over 10 years. • Commercial credit provided by banks • A new Securities Market Act is in force since June 2006. specially, credit cards and real estate mortgage loans, have grown • New banks have been incorporated substantially. since 2002. • Brokerage houses have a significant • New niche banks and financial entities participation in the financial markets. have been participating in the local credit market. • Banco de México, the Central Bank, operates as an autonomus entity within the Federal Government, including monetary policy issues. PwC 11 III. Banking and Finance. General Note • The Mexican banking system is privately owned and managed. Foreign investment is allowed. • In order to reduce the risk of a banking crisis and to protect investors´savings in financial institutions, the Banking Savings Protection Act has been in place. • There are Commissions that supervise and regulate the different segments of the financial sector: I. CNBV II. CONSAR PwC III. CNSF 12 III. Banking and Finance. Regulatory Segmentation Full Licensed Bank Limited operations Commercal Banks Differentiated regulation “Niche Bank” Core banking standards Capital requirements PwC Category Capital requirement (millions of UDIS) Group 1 90 Group 2 54 Group 3 36 13 III. Banking and Finance. License Description Deposits Lending Leasing Rep. Office A Rep. Office for a foreign financial institution is allowed to perform only certain activities and cannot accept deposits or grant lending. Its main objective is transmiting information. Its activities are supervised by the CNBV. NO NO NO A SOFOM (E.N.R.) is a corporation, whose purpose is to grant credit and financial leasing, without requiring authorization from the Federal Government. NO YES YES SOFIPO SOFIPOS are microfinancing entities aimed at promoting popular savings and expanding access to financing for persons whose situation has excluded them from the traditional lendings systems. Its activities are supervised by the CNBV. YES YES YES/NO (depends on assets´size) Niche Bank It is also called “limited operation institution” and offers the opportunity to offer the financial services specialized in a specific geographical areas or business niches. YES YES YES A company authorized to perform the following operations: deposit, savings, financial intermediation and mortgage and trust operations. Due to the economies of scale it can achive, it is the most efficient type in the financial sector. YES YES YES Non Regulated SOFOM Fulllicensed Bank PwC 14 IV. Future Agenda. PwC 15 IV. Future Agenda. Key trends and prospects for E7 banking markets Country China India Brazil PwC Domestic credit in 2004 ($ trillion) 2.8 0.4 0.3 Projected domestic credit in 2050 ($ trillion: at constant 2004 prices) 45 Recent trends and key market drivers • Sale of major state banks with progress on reducing non-performing loans • Profitability starting to rise • Large increase in foreign bank investment • Rapid growth in retail banking, with huge potential in mortgage and consumer credit markets • Major financial sector reforms since 1991 • Public sector banks still dominant but private/foreign banks with markets share • Entry barriers being eased gradually but still significant for foreign banks • More stable economy in recent years • High profitability • Foreign banks entering via acquisition 23 8 16 IV. Future Agenda. Key trends and prospects for E7 banking markets Country Mexico Domestic credit in 2004 ($ trillion) 0.2 Projected domestic credit in 2050 ($ trillion: at constant 2004 prices) 6 Recent trends and key market drivers • Economy has stabilized recently after banking crises on 1990s • Improved bank regulation and accounting standards • Low share of banking sector in GDP gives scope for strong future growth if economic and political stability can be mantained Largest two state banks still dominant; rest of banking sector quite fragmented • Russia 0.2 5 • Regulatory regime with gradual progress on banking reforms E7 total 4.2 98 • High growth, with potential to mitigate high • Individual risks through portfolio approach • Moderate growth but lower risk G7 total PwC 30 83 17 IV. Future Agenda. Strategic implications of the rise of the E7 banking markets Adecuate local targets. Preferences of local banking. Local legal and regulatory environment. War for talent. PwC 18 © 2012 PricewaterhouseCoopers, S.C. All rights reserved. PwC refers to the Mexico member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. PwC 19