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Mexico hybrids on cards, but detail needed, says Banorte

May 13, 2014

The Mexican lender is waiting for regulators to stipulate the finer structural points on additional tier one instruments before it considers a deal

     
   Source: Serge Saint  
Mexican lender Banorte is waiting for local regulators to fine-tune rules on new style bank capital instruments, its chief executive has told LatinFinance.

"In terms of issuing new instruments, cocos [Contingent Capital] and things like that, it hasn't been truly tested," Alejandro Valenzuela, Banorte's chief executive, said in regards to the new style bank capital market in Mexico. "Today it's a very illiquid and cumbersome market. We believe over the future it will have to develop and clearly Banorte will want to test that over time.

"I think it's part of the array of instruments that you need to diversify to make sure your structure of capital is well suited for your growth purposes or to deal with any contingency that may arise."

Mexico introduced the global bank capital framework in 2013, but has not finalized the local interpretation of rules on how the principal of new-style additional tier one hybrids would absorb losses. The regulations could allow for the principal to be written off either temporarily or permanently, or converted to shares. The details of each would determine the cost to banks of issuing the instruments.

"Those rules, when they're defined they're going to define the spread and the costs of those instruments," said David Suarez, Banorte's chief financial officer. "And that's when we're going to start looking into it. But right now, since there's no reference, no benchmark, it's very complicated to do something."

Banorte has a $1.5bn subordinated bond outstanding, which loses 10% capital treatment each year as Basel III rules are phased in. The bank will need to renew the instrument "at some point", added Suarez.

Banorte would prefer to issue additional tier one instruments, rather than a tier two contingent capital security, Valenzuela added: "We believe that quality of capital is going to be as important, or even more important, than the level of capitalization." LF

See also:  BANK CAPITAL: Slow going - LatinFinance May/June 2014



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