Mexico: Non-traditional Banking Page 1 of 7

Mexico: Non-traditional Banking Overview of Specialized Financial Entities

Sylvia Montaño, Patrick Hess August 2007

Summary

Since the implementation of the North American Free Trade Agreement (NAFTA) in 1994, opportunities and diversity in the credit markets of Mexico have increased tremendously. Due in part to said agreement, a whole new way of lending has been created; one that is more in line with “Nonbank banks” in the United States. A never-before-seen category of consumers now has access to credit in Mexico. Prior to the advent of a non-traditional banking sector, acquiring financing for an automobile, home or business was out of the question for many. Currently, this industry is growing to reach more and more Mexicans, regardless of credit history. The market is still young; yet, it is becoming increasingly specialized and efficient. Most importantly, the legal environment for this industry is uncharacteristically open to the participation of foreign firms. U.S. financial institutions interested in participating in this market by way of lending or investing will find relatively few complications in Mexico. Market Demand

The non-traditional banking sector in Mexico is comprised generally of newcomers that didn’t even exist less than fifteen years ago. And these recently arrived institutions are lending to people that are equally new to the industry – people that have little, poor or no credit history. Most of these firms are members of the Mexican Association of Specialized Financial Entities (AMFE), which encompasses four main types of non-traditional lenders: Financial Lending Networks with Specified Objectives (Sofoles); Financial Lending Networks with Multiple Objectives (Sofomes); more general Financial Lenders; and Manufacturing Business

Financiers. Most of the newest firms in the market are Sofoles due to the inherently decreased credit risk present when the borrower’s specific activities are known (i.e. they have agreed-upon objectives for which the capital is intended). It is at this stage that firms start lending and, by law, they have seven years to legally change to a Sofom or a traditional lending institution1. A Sofol is arranged so that the lender knows how the money will be spent (e.g. to buy a car, a house, acquire

business supplies, etc.), thus, the probability of reckless, unexpected spending is marginalized. Needless to say, opportunities are available in all realms of the non-traditional banking sector. The pie chart above

Specialization of Non-traditional Lenders in Mexico March 2007

11%1%4%

29%

55%

Business Microcredit Personal Credit Automotive Mortgages

1 Interview with Lic. María Concepción Guevara García, General Manager, AMFE (08/22/07).

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Mexico: Non-traditional Banking Page 2 of 7

displays the participation in lending activities for each major type of loan issued by Sofoles and Sofomes in Mexico as of March 20072. One can see that mortgage and automotive lending dominate the market. Currently, Mexico’s collective network of Sofoles and Sofomes has over 17 million loans issued and outstanding3. Compared to the mere 12,600 loans outstanding at the end of 19943, this number is very significant. Such loans have granted the opportunity for consumers to purchase homes and automobiles, to afford needed business upgrades or initial business investment, and to simply have more personal capital to manage life during times of financial volatility. And the quantity of these loans continues to grow at an astronomical rate. For instance, from 2005 to 2006, the number of new loans issued increased by nearly 79%3. Also, in just the first quarter of 2007, new loans grew by almost 20% (annualized)3. Today, this industry is fully recognized and regulated within Mexico. The 53 Sofoles2 and 202 Sofomes1 that operate in the Mexican market, which practice this new, outsourced form of lending, are continuously creating opportunities for previously unconsidered borrowers. These specialized financial entities devote all resources to lending in the most effective manner possible, while simultaneously hedging risk and growing their consumer base. Before 1994, the demand was present but the ability of traditional banks to efficiently create the supply was not. Unlike traditional banks, Mexico’s specialized financial entities can focus solely on these formerly atypical borrowers; in turn, the quickly expanding industry that we see today has resulted. With that said, the industry’s specialization has created opportunities for providers of capital, investment and secondary financial products and services. Market Data

Non-traditional lending faces few impediments in many markets, which includes Mexico. As mentioned above, more and more loans are issued every day at a pace rarely seen in the banking world. As well, more and more people are becoming involved. For example, the American retail giant, Wal-mart, received approval from the Mexican finance ministry in November 2006 to operate as a lender4; something they did not manage to do in the U.S. Wal-Mart plans to commence operations in the second half of 20074, targeting clients similar to those of Sofoles and Sofomes. Additionally, the Inter-American Development Bank (IDB) announced in mid-July that they plan to lend $30 to $50 million to micro/mid sized enterprises and agribusinesses in Mexico5. In order to place this capital in the hands of these small-business owners they will utilize Mexico’s network of Sofoles and Sofomes5. The IDB’s injection of capital to these non-traditional lenders may just appear to be stark competition to U.S. lending institutions; however, it also guarantees growth in the market. A chance for profitability exists for U.S. firms considering investment in any Mexican lender that will benefit from this large IDB loan.

Dec-01 3,722,275 2,455,293 1,020,891 251,118 15,977 230,114Dec-02 4,868,287 30.79% 3,119,963 27.07% 1,449,454 41.98% 634,561 152.69% 20,138 26.04% 278,732 21.13%Dec-03 6,070,679 24.70% 3,722,828 19.32% 1,985,756 37.00% 1,217,692 91.90% 26,049 29.35% 336,046 20.56%Dec-04 7,426,223 22.33% 4,443,841 19.37% 2,529,024 27.36% 2,091,174 71.73% 39,357 51.09% 414,001 23.20%Dec-05 9,091,305 22.42% 5,186,472 16.71% 3,303,611 30.63% 3,543,771 69.46% 84,844 115.58% 516,378 24.73%Dec-06 16,251,674 78.76% 5,936,274 14.46% 4,604,583 39.38% 4,640,591 30.95% 201,708 137.74% 642,431 24.41%Mar-07 17,049,957 19.65% 6,121,009 12.45% 5,025,899 36.60% 4,782,101 12.20% 219,978 36.23% 671,309 17.98%

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2 Boletín Trimestral AMSFOL/AMFE. http://www.amfe.com.mx/interior/interior.asp?opcion=SINTESIS. 3 Activo total por trimestre por Sofol, Cartera neta total por trimester port Sofl, Capital Contable por trimester por Sofol, Creditos otorgados por Sofol por año. http://www.amfe.com.mx/interior/interior.asp?opcion=SINTESIS. 4 The New York Times (7/17/07), “World Business Briefing | The Americas: Mexico: Approval For Wal-Mart Bank”. http://query.nytimes.com/gst/fullpage.html?res=9C07E6DE133EF930A15752C1A9609C8B63. 5 El Economista (07/17/07), “Financiará el BID a sofoles y sofomes”.

Mexico: Non-traditional Banking Page 3 of 7

In regards to industry growth, the purpose for which a firm lends does not weigh in heavily. In other words, not just one single category of lending objective is supporting the market; rather, everything from auto loans to micro-credit is sustaining growth. The graph above breaks down of each major loan type in the industry, quantity of loans outstanding and the annualized growth in the issuance of such loans3. One can notice the across-the-board growth and increasing opportunity to provide any of these Mexican lending institutions with services, capital and investment that will sustain this expansion.

Import Market

As the non-traditional lending sector grows in Mexico, so will the need for outsourced services and products. The potential market for imports in Mexico covers everything from providing capital to buying shares in a firm to actually servicing, insuring and consulting the lending activities.

6

Firm Contact Number(s) Website Firm Contact Number(s) WebsiteFord Credit de México, S.A. de C.V. Tel.: 1103-3100 www.fordcredit.com.mx

Corporación Hipotecaria, S.A. de C.V.

Tel.: (01447) 779-70-90 al 93 N/A

GMAC Mexicana, S.A. de C.V.Tel.: (0181) 8399-6364, 8399-9671 www.gmac.com.mx

Crédito Inmobiliario, S.A. de C.V. (Crédito Inmobiliario Terras)

Tel.: 5280-9696, 5280-9106 www.citerras.com.mx

Cetelem, S.A. de C.V Tel.: (0155) 9126-0270 N/A Fincasa Hipotecaria, S.A. de C.V. Tel.: 9138-9000 www.fincasa.com.mx

Crédito Familiar, S.A. de C.V.Tel.: 5599-0504, 5242-7400, 5242-7474 N/A Fomento Hipotecario, S.A. de C.V. Tel.: 5251-0535 N/A

Crédito Progreso, S.A. de C.V. Tel.: (01 81) 8124 6900 N/A General Hipotecaria, S. A. de C.V. Tel: 3067-3100 www.generalhipotecaria.com.mx

Financiera Alcanza, S.A. de C.V.Tel.: 5545-4101, 1945-0073, 5972-0462 N/A GMAC Hipotecaria, S.A. de C.V. Tel.: 5447- 8300

www.gmachipotecaria.com.mx/down_home.htm

Financiera Independencia, S.A. de C.V. Tel.: 5229-0241 www.independencia.com.mx

Hipotecaria Associates, S.A. de C.V.

Tel.: 5599-0504, 5242-7400 N/A

Sociedad de Fomento a la Educación Superior, S.A. de C.V.

Tel.: 5514-0704, 514-0709, 5514-0715, 5514-0690 www.sofes.com.mx

Hipotecaria Casa Mexicana, S.A. de C.V.

Tel.: 5520-5160, 5282-4975 www.hcasamex.com.mx

Caterpillar Crédito, S.A. de C.V.Tel.: (01 81) 8040-5454, 8040-5472 www.catfinancial.com

Hipotecaria Crédito y Casa, S.A. de C.V. Tel.: 5230-0300 www.creditoycasa.com

Cemex Capital, S.A. de C.VTel.: (0181) 8342-8930, 8328-7205 www.cemexmexico.com

Hipotecaria Independiente, S.A. de C.V. Tel.: 5575-4587

www.hipotecariaindependiente.com.mx

Corporación Financiera de América del Norte, S.A. de C.V. Tel.: 5488-3280 N/A

Hipotecaria ING Comercial América, S.A. de C.V.

Tel.: (0181) 8319-0835, D.F. 5282-2365, 5282-2404

http://hipotecaria.ing-comercialamerica.com/

Corporación Financiera de Occidente, S.A. de C.V. "FINOX"

Tel.: (0133) 3616-5234, 3616-5235, 3615-6324 www.finox.com.mx Hipotecaria México, S.A. de C.V. Tel.: 9140-3050 www.hipotecariamexico.com

De Lage Landen Agricredit, S.A. de C.V. Tel.: 5261-0046 N/A Hipotecaria Nacional, S.A. de C.V

Tel. sin costo: 01-800-225-2627 www.hipotecarianacional.com.mx

FICEN, S.A. de C.V.Tel.: (0133) 3648-4600, 5207-0795, 5314-5818 www.ficen.com.mx Hipotecaria Su Casita, S.A. de C.V

Tel.: (01800) 2366-255, D.F. 5245-9553 www.sucasita.com.mx

Financiera Compartamos, S.A. de C.V.

Tel.: 5276-7250, 5276-2558 www.compartamos.com Hipotecaria Vértice, S.A. de C.V. Tel.: 5283 8210 N/A

Financiera Mercurio, S.A. de C.V. Tel.: (01222) 232-2200 www.financieramercurio.com.mxHipotecaria Vanguardia, S.A. de C.V.

Tel.: 1054-2000, 5525-8064 www.vanguardiahipotecaria.com

Finarmex, S.A. de C.V.Tel.: (0133) 3125-2481, 3563-6058 www.finarmex.com.mx Metrofinanciera, S.A. de C.V.

Tel.: (0181) 8340-8710, 8340-5239 www.metrofinanciera.com.mx

GMAC Financiera, S.A. de C.V. Tel.: 5447-8300 N/A Patrimonio, S.A. de C.V.Tel.: (01 81) 8342-2400, 8342-5060 www.patrimonio.com.mx

Grupo FinTerra, S.A. de C.V. Tel.: (0155) 5278-3820 www.finterra.com.mxOperaciones Hipotecarias de México, S.A. de C.V.

Tel.: (0147) 7716-1644, 7716-2329 www.ohm.com.mx

HIR PYME, S.A. de C.V. Tel.: 5242-7790 N/AMonex Financiera, S.A. de C.V. N/A N/AServicios Financieros Navistar, S.A. de C.V. Tel: 5526-6290 N/ASociedad Financiera Agroindustrial, Sofihaa, S.A. de C.V. Tel. 5207-8180 N/A

Mortgage LendersSofoles in Mexico

Automotive Lenders

Personal Credit Lenders

Business Lenders

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6 El Universal (2/19/06), “Sofoles, opción segura de crédito”. http://www.eluniversal.com.mx/tudinero/vi_1390.html.

Mexico: Non-traditional Banking Page 4 of 7

As stated earlier, this industry exists mainly because the firms that comprise it focus entirely on lending to non-traditional clientele. They do not allow their primary business to be distracted by administering other activities that a traditional bank would be expected to do individually. What this means for U.S. exporters is that any secondary financial activity of these lenders is fair game to generate business in Mexico. And there is no lack of firms to service. As of February 2006, Sofoles alone accounted for 53 businesses within the non-traditional banking sector (42 listed above). In addition, at present time there are 202 registered Sofomes doing business in Mexico. At the end of the first quarter 2007, Sofoles in Mexico were servicing over 226.5B pesos ($21B) of debt, and that number continues to grow every year. In the first quarter of 2007, debts outstanding grew by 8.7% (annualized) and 17.9% from March 31, 2006 to March 31, 20072. Competition

These non-traditional firms, which already exist in Mexico, are not competitors; rather, they are either potential clients to whom American exporters can provide services and products or they are investment opportunities for firms looking to expand direct financial operations in Mexico. The growth pattern of this niche sector poses great prospects for certain U.S. exporters, for these financial entities are a probable client whose demands are growing remarkably. Yet, who currently services this emergent client? The necessary capital for many of these Sofoles and Sofomes, with which individuals are financed, comes from the largest Mexican banks (listed below), other large lending institutions (such as the aforementioned IDB scheme), and through the issuance of equity. Banamex/Citigroup: http://www.banamex.com/ Banorte: http://www.banorte.com/portal/banorte.portal BBVA Bancomer: http://www.bancomer.com.mx/ HSBC: http://www.hsbc.com.mx/ Santander: http://www.santander.com.mx/index.htm Scotiabank: http://www.scotiabankinverlat.com/default.htm The pie chart below depicts the providers of financing to the private sector in Mexico as of June 20062. For this report’s purpose, credit issued to the private sector in Mexico is not the main concern, but it is noteworthy to see the formidable presence of traditional banks in Mexico. Not only do they supply the majority of the capital to the private sector as a whole (56%) but they also are the principal financers to the second runner-up in this category (i.e. Sofoles, 10%). Unlike the first runner up, INFONAVIT, which serves as a major provider of home financing (similar to Fannie Mae or Ginnie Mae in the U.S.), Sofoles rely heavily on these large banks.

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So although sub-prime borrowers acquire their funds directly from specialized financial entities, like Sofoles, these entities are acquiring a large amount of their money from the traditional banks. In fact, over 72% of Sofoles’ liabilities are in the form of borrowed capital from banks and similar organizations2. The remaining 28% of financing arrives from issuing equity2. The size of this debt has

Composition of Credit Offerings to Private SectorJune 2006

22%4%8%10%

56%

INFONAVIT Other non-Banks Debt InstrumentsSofoles Traditional Banks

Mexico: Non-traditional Banking Page 5 of 7

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created a market worth 204.5B pesos ($19B) as of the first quarter 20072. As a potential competitor to these large-scale, traditional banks, it is important to understand their strength in the market. Needless to say, raising capital is not the specialty of these non-traditional lenders; therefore, they will continue obtaining their capital from outside sources – which may or may not be from traditional banks. Considering the increasing demand for such capital (15.2% increase from first quarter 2006 to 20072), firms that provide capital or advisory services to raise funds would be wise to access the Mexican market sooner than later. Otherwise, competition from the traditional banking sector will only pose more of an obstacle in the future. End Users

Ultimately, the end users of the most probable American exported products and services in this category are the specialized financial entities. These businesses provide great confidence that opportunities shall increase in the financial markets of Mexico. This report has demonstrated the poised position of the market; yet, two additional advantageous features exist for U.S. exporters: capital is relatively cheap in the U.S. and American businesses maintain a strongly positive reputation in Mexico. Whether for an institution or individual, capital in the United States is more accessible than in Mexico. For instance, the equivalent of the federal funds interest rate in Mexico (“Tasa Interbancaria”) was set at 7.82% at the end of June 20077. In the United States during same month, money was 33% cheaper to borrow at 5.24%8. In addition to providing cheaper capital, consultancies and insurance providers should see opportunity in the Mexican market. Wherever risk presents itself, a need for insurance generally follows. As well, consultants can find the best way to manage such risk in order to hopefully avoid the need to enact insurance. Consultancies could be useful to many firms that simply desire an outsider’s opinion on the general management of business. Managing the risk associated with sub-prime lending can be difficult and enough to deter lenders from entering the market altogether. As stated earlier, this is a fast growing industry that currently services over 17M outstanding loans throughout Mexico. Both consulting and insurance services can protect a relatively vulnerable, fledgling industry in order to ensure its continued growth. Market Access

The Law of Credit Institutions, under Articles 5 and 103, grants the operation of specialized financial entities in Mexico. They are fully recognized and monitored by the National Banking and Securities Commission (CNBV), the Secretariat of Treasury (SHCP) and the Bank of Mexico9. NAFTA provides free trade for nearly all products and services between the U.S. and Mexico, and providing any of the above-mentioned services in this report is no exception. U.S. businesses possess the ability to not only provide goods and services to this sector but they also have the legal right to negotiate joint ventures or consider investment with any of these specialized financial entities. The number and size of these non-traditional financial institutions grow constantly and exporters ought to make the most of this growth.

Market Entry

The best way for American firms to enter the Mexican market is to initially identify two types of potential clients, both of which are specialized financial entities: stable, experienced firms (usually Sofomes) and newer, less-experienced firms (usually Sofoles). The lending institutions with more experience may be harder to access because of likely long-standing relationships with other capital, consulting and/or insurance providers. However, with such firms, there is less likelihood of losing a business partner due to bankruptcy. Yet, in order to grab market share quickly, recently formed, smaller sub-prime lenders are the quickest

7 Bank of Mexico. http://www.banxico.org.mx/polmoneinflacion/estadisticas/tasasInteres/tasasInteres.html 8 United States Federal Reserve. http://www.federalreserve.gov/releases/h15/20070625/ 9 Urbano, Horacio. Sofoles Una historia de éxito (2006), “Marco jurídico” pp. 19-21.

Mexico: Non-traditional Banking Page 6 of 7

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partnerships to create with the most growth potential. And by law, Sofoles have just seven years to make the necessary operational and legal adjustments to become Sofomes. So what is a small, limited client one year may transfer relatively quickly to possess a larger, more diverse operational capacity. Together, this strategy hedges risk while allowing for more immediate market entry. Another advantage to this industry is the centralized location of the vast majority of these organizations. Nearly all of the firms are located in or around Mexico City, which further facilitates the process of locating partnerships. The U.S. Commercial Service can assist in locating these partnerships. Our knowledgeable, experienced staff has the connections and market know-how to aid in this often-difficult process of entering a foreign country’s import market. Our offices in Mexico are located in Mexico City, Monterrey, Guadalajara and Tijuana. We provide numerous services to support our American clients, such as investigating potential partners and the current market environment, overcoming governmental impediments through advocacy, and scheduling meetings between the U.S. exporter and possible Mexican purchasers and distributors of the service/product at hand. For more information on opportunities in non-traditional banking please contact Commercial Specialist Sylvia Montaño by email at Sylvia.Montano@mail.doc.gov or phone at (52-55) 5140-2633. Key Industry Contacts

Mexican Association of Specialized Financial Entities (AMFE) http://www.amfe.com.mx National Commission for the Protection and Defense of Financial Service Users (CONDUSEF) http://www.condusef.gob.mx/index.html Bank Association of Mexico (ABM) http://www.abm.org.mx Federal Mortgage Society (SHF) www.shf.gob.mx National Banking & Securities Commission www.cnbv.gob.mx Bank of Mexico (i.e. Federal Reserve Bank) www.banxico.org.mx Secretariat of Treasury & Public Credit (SHCP) www.shcp.gob.mx Secretariat of Economy (SE) www.se.gob.mx

International Union for Housing Finance www.housingfinance.org

Mexico: Non-traditional Banking Page 7 of 7

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For More Information

The U.S. Commercial Service in Mexico City can be contacted via e-mail at: Sylvia.Montano@mail.gov.doc; Phone: (52-55) 5140-2633; Fax: (52-55) 5566-1115; or visit our website: www.buyusa.gov/mexico. The U.S. Commercial Service — Your Global Business Partner

With its network of offices across the United States and in more than 80 countries, the U.S. Commercial Service of the U.S. Department of Commerce utilizes its global presence and international marketing expertise to help U.S. companies sell their products and services worldwide. Locate the U.S. Commercial Service trade specialist in the U.S. nearest you by visiting http://www.export.gov/eac. Comments and Suggestions: We welcome your comments and suggestions regarding this market research. You can e-mail us your comments/suggestions to: Customer.Care@mail.doc.gov. Please include the name of the applicable market research in your e-mail. We greatly appreciate your feedback. Disclaimer: The information provided in this report is intended to be of assistance to U.S. exporters. While we make every effort to ensure its accuracy, neither the United States government nor any of its employees make any representation as to the accuracy or completeness of information in this or any other United States government document. Readers are advised to independently verify any information prior to reliance thereon. The information provided in this report does not constitute legal advice. International copyright, U.S. Department of Commerce, 2007. All rights reserved outside of the United States.