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August 3, 2010

Banamex ramps up cards business

Like other Mexican banks, Banamex had to batten down the hatches on its credit card operation during the 2008-2009 financial crisis

By Verdict Staff

Like other Mexican banks, Banamex had to batten down the hatches on its credit card operation during the 2008-2009 financial crisis. But Banamex, Mexico’s second-largest credit card issuer, has now started cautiously ramping up its card marketing again. Robin Arnfield reports.

 

Mexican top five: Credit cards – market share by number of cards issuedIn the years immediately prior to the crisis, all the Mexican banks saw aggressive growth in credit card issuing and lending, particularly in the near-prime sector.

“Issuing credit cards was a way for banks to increase the ‘bancarisation’ of Mexico, to expand into segments that were previously unbanked,” says David Olivares Villagómez, senior credit officer with the Financial Institutions Group at Moody’s Investors Service.

“Credit card issuing was a highly profitable but highly risky cornerstone of the banks’ growth strategy.”

During the course of 2009, all the banks had to take remedial action to deal with the bad debt that hit their credit card loan books, with overall delinquency rates doubling between 2008 and 2009 to over 10%.

The Banco de México (Mexico’s Central Bank) instituted a requirement that banks increase their capital reserves and reduce their exposure to delinquent credit cards.

“All the major Mexican banks, including Banamex, had very strong capital bases and good profitability, which helped them cope with the big provisions they had to make for credit card losses in 2009,” Olivares Villagómez says. “For this reason, Moody’s didn’t need to change their credit ratings. Banamex, for example, retained its stable outlook.”

Les Riedl, CEO at US-based consultancy Speer & Associates, added: “Like the other banks, Banamex deliberately reduced the marketing of new cards and expansion of credit lines, as it moved to manage delinquencies.”

Other measures included actively losing bad customers, cutting lines of credit and closing secondary cards on credit card accounts. Banamex played it smart by creating a SOFOM [Sociedades Financieras de Objeto Múltiple] in April 2008 to remove most of the card assets from its books. This mitigated the impact of bad debt and concurrent requirement for increasing reserves.

A SOFOM is a consumer finance company that is not as tightly regulated as a bank. The original purpose of a SOFOM was to provide a narrow range of credit products to unbanked or underbanked consumers, but the products on offer have widened in the last five years.

 

Delinquencies

According to Riedl, Banamex managed to maintain a below-market credit card delinquencies rate during 2009. Its delinquency rate peaked in May 2009 at 11.8%, while the credit card sector as a whole saw delinquency reaching 12.5% in 2009.

In March 2010, Banamex’s delinquency rate had fallen to 4.6% due to its strategy of renegotiating credit plans with customers in default, according to IDC Mexico analyst Adolfo Becerril.

Banamex’s net revenues from credit cards in its first quarter ending 31 March 2010 fell to $386m from $398m in the first quarter of 2009.

However, in the first quarter of 2010, its credit card business had a net profit of $73m, compared to a net loss of $84m in the first quarter of 2009. For 2009 as a whole, the credit card business had a net loss of $412m on net revenues of $1.52bn.

In an earnings report for the first quarter of 2010, Citigroup, Banamex’s parent, said it had seen “continued improvement in the credit condition of its Mexican credit card portfolio during the quarter”.

Mexico finance: Key figures – private sector financing

Strengths

Eduardo Diaz Frances, Banamex’s vice-president of credit cards, said Banamex has 30% of the Mexican credit card market. Nearly $1bn worth of purchases are made monthly on Banamex credit cards, he added. BBVA Bancomer is the market leader with 32% of total receivables.

UK-based market analysis firm Datamonitor estimates that in 2009, Banamex led the debit card market with a 27% share in terms of cards in issue.

According to Diaz Frances, Banamex’s approach to credit cards is characterized by two drivers: customer-centricity and innovation.

“Banamex issues 40 different credit cards to fit customers’ needs and wants,” he says. “Core products, niches and alliances are part of our value proposition.”

Originally launched in 1968, the Clásica credit card portfolio is Banamex’s largest, followed by B-Smart, a youth-oriented card which was the first EMV chip card in Mexico, Diaz Frances said.

Other cards include Citi Travel Pass, which generates miles to be redeemed for flying with any airline without black-outs, and the invitation-only Beyond card.

“Alliances are a good way to get customers who otherwise might not be interested in having a Banamex card,” said Diaz Frances.

“Successful products in our co-branded portfolio include Citi/AAdvantage; the Affinity card issued with fashion retailer Grupo Inditex; Costco; Home Depot; Office Depot; and Best Buy cards. The Mexican Football League’s most renowned teams put their logos on our credit cards, as does the national football team [la Selección] and Spain’s FC Barcelona.”

Edgar Dunn & Company director Romina Abal added: “Banamex is very sophisticated in terms of cardholder segmentation. This is its biggest strength when compared to other issuers. In fact, Banamex is the pioneer in Latin America of incorporating lifestyle elements into its segmentation strategy – for example, travel behaviour – to complement traditional socio-demographic segmentation.

“A strategy that differentiates Banamex from the rest of the credit card industry is that it offers very specific products for niches of the consumer market – for example preferential currency exchange rate services for heavy travellers.”

 

Quote from David Olivares Villagómez, Moody’s Investors ServiceNew products

In recent months, Banamex has launched a number of new card products. Its stand-alone web-only bank called Blink was launched in January 2010, which targets the 18-to-35-year-old age group and offers the facility to design Blink debit cards online. According to Banamex spokesperson Miriam Garcia-Bulle, Blink will launch a Blink credit card in August 2010.

In April 2010, Banamex launched a limited-edition Visa debit card bearing the logo of Mexico’s national football team. In June, the company launched an account package bundling a bank account, access to internet banking and a credit card.

Targeting new clients and existing customers who have one or all of the three products already, the package offers reimbursement of annual Banamex credit card membership fees plus free online banking. To qualify, clients are required to pay their Banamex credit card bill online from their Banamex bank account before the due date.

Abal says that the A and B income segments – the main market for credit cards – are over-saturated in Mexico.

“There are two alternative ways for banks to grow: cross-sell and/or up-sell to their existing clients; and penetrate the lower-income base,” she says.

“I believe Banamex will do both. The lower-income base is particularly interesting because there is still a lot of room to grow, and because Banamex, based on its scale and distribution channel, is particularly well-positioned to compete in this segment.”

Abal says that the new bundled product that Banamex is offering is a typical example of cross-selling.

“By capturing current account transaction volume history, internet banking history and credit card history, Banamex, through its very sophisticated segmentation strategy, can leverage this information and offer its clients more relevant products,” she says.

“This is based on in-house data mining technology that is not available at any other Mexican banks.”

 

Mexican credit cards: Key figures – cards issued and activation ratesCautious approach

“Banamex has had a cautious approach to credit cards since the financial crisis,” says Riedl. “In the first quarter of 2010, the economy was showing signs of recovery but it’s still early days, so prudence is necessary.”

Riedl thinks Banamex is the Mexican bank which is most actively trying to expand its credit card business.

“Banamex has been quicker than the other banks to put some marketing dollars into its credit card business,” he noted.

Diaz Frances adds: “We’re constantly developing new products and value-added services by focusing on our customers’ needs. Nevertheless, we are cautious about granting credit in order to protect our clients and our shareholders.”

As an example, Diaz Frances cites the Impulso Empresarial (Business Initiative) SME credit card, which was launched in March 2009.

“This card is linked directly to an SME’s revolving line of credit account and allows the cardholder to withdraw money and make purchases up to their limit,” he said.

“The progress of the card’s rollout has been slow, as it depends on demand for revolving credit, and applications have been affected by the 2008-2009 financial crisis. But the active cardholders’ performance has proved to be much better than we expected.”

 

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