Mexico to Reveal Winning Bidder for Biggest Bank : Finance: Banco Nacional de Mexico is being privatized. Two brokerages are the contenders.

MEXICO CITY —  The winner of a multibillion-dollar bidding contest for controlling interest in Banco Nacional de Mexico--with assets of $27 billion, the nation’s largest bank and one of two with a California subsidiary--was expected to be announced by early today.

Two brokerage firms, one associated with 45 prominent family businesses, are vying for the bank, known as Banamex, the seventh of 18 commercial banks to be sold by the government.

Divestiture of the banks, which were nationalized in 1982, is transforming Mexico’s financial system into a European-style Allfinanz network, with insurance and securities services distributed through banks.

The high prices being paid for banks--up to four times net worth for the six banks previously sold--indicate that Mexican negotiators for the pending North American free trade agreement will be under pressure to retain barriers to financial service markets. Observers believe investors will need a protected market to generate enough profits to justify their investment.

Citicorp is the only foreign bank now chartered to operate in Mexico, although foreign companies may own up to 30% of the new financial service groups that may buy banks. Foreign brokerages are also banned, although insurance was opened to foreign companies earlier this year.

Banamex, with 8.4 million customers, more than 31,000 employees and 725 branches, is clearly the jewel of the Mexican banking system, accounting for over 25% of the country’s banking assets.

A recent Salomon Brothers report recommends that foreign investors interested in Mexican banks bet on Banamex. Grupo de Economistas y Asociados puts Banamex atop its index of Mexican banks, based on financial strength.

The bank has owned Los Angeles-based California Commerce Bank, with $4 million in assets, for over a decade.

The sale of a 31% stake in Banamex (and options to buy another 20%) is expected bring at least $2 billion. Voteless shares representing 31% of the bank’s stock already trade on the Mexican Stock Exchange. The government’s plans for its remaining 18% stake were unclear.

If Roberto Hernandez, a self-made multimillionaire chairman of the country’s leading brokerage, wins control of Banamex, he is expected to strengthen its international presence, going after markets in the U.S. southwest, especially among Latinos.

In contrast, the second investor group, linked to the petrochemical conglomerate Desc, is expected to emphasize business banking and ties to U.S. and European banks.

That group has said it will consider joining the seven groups bidding on Bancomer, the country’s second largest bank, if it loses out to Hernandez and his partners. Hernandez has said that if he does not win Banamex, he will not bid on the remaining banks.

Many potential investor groups have targeted specific banks in order to achieve the synergies to make their financial or industrial groups more efficient, said Jesus Reyes Heroles, director of an economic consulting firm that has advised two groups bidding for smaller banks.

Potential synergies, such as combining money market operations or selling insurance through retail branches, explain the high prices that have been paid for the banks sold to date, he said.

However, the high prices have worried some other economists.

Prices are based on overly optimistic scenarios that include 7% annual economic growth--double the current rate, a halt to the daily devaluation of the peso and a drastic drop in the banking reserve requirement, leading to a credit boom, said one analyst who asked not to be identified.

“There is an inherent bias in the market to pay higher prices than are justified by the growth of Mexico and government monetary policy,” said Rogelio Ramirez de la O, general director of Ecanal, consultants that have advised some bidders.

He explained that because no one individual may own more than 5% of a bank, investments are being divided among large groups of shareholders. In the case of Banamex, one investor group includes 700 individuals and the other has 20,000.

“The key investors are able to control very large institutions with very little of their own money invested,” Ramirez said.

Also, investors anticipate that foreign banks will be kept out of the Mexican market for at least five more years. “Three years is what they are going to get,” he predicted, not long enough to generate the profits for a reasonable return on the investments being made.

Reyes Heroles said the big three--Banamex, Bancomer and Serfin--will remain multi-service banks, even if a free trade pact is signed.

New Era in Mexican Banking

The government’s controlling interest in Mexico’s commercial banks is being sold to brokerages and industrialists that plan to turn the banks into cornerstones of European- or Japanese-style integrated financial services or industrial groups.

Purchase Bank Buyer Price (millions Other investments of U.S. dollars) Confia Abaco $297 million Brokerage, leasing, insurance, accounts receivable financing Multibanco Probursa 204 million Brokerage, leasing, Mercantile bonding, accounts receivable financing, warehouse Banpais Mexival 181 million* Brokerage, insurance, leasing Cremi Multivalores 249 million Brokerage, foreign exchange house Oriente Puebla area 75 million Pharmaceuticals, trade merchants cattle ranching, leasing insurance, accounts receivable financing Bancrecer Business 125 million* Shoes, transportation, people construction, farming insurance, exchange house

* 100% of stock. In other cases, controlling interest, usually about 66%.