Financing a Gold Opportunity: Nearshoring
STORY INLINE POST
Q: What are the challenges that domestic manufacturing companies face in obtaining financing?
A: I identify in manufacturing companies that in some way they operate like cost centers. Maybe they are part of a holding company and are left with a small profit margin. So when looking at companies with such small margins, the ability to pay comes into play. This may limit their access to financing. It is with access to the complete picture of their group’s finances that very interesting credit structures can be made to perfectly adjust to the needs of this type of client.
This financing limitation represents a higher risk for the financial institution and higher costs for the company. Lending to an entity with an apparently limited ability to pay can translate into additional guarantees.
Another challenge that I identify is that these types of industries have a lot of short-term working capital needs. Again, with a comprehensive scan of their structures and financial needs, better-adjusted and tailored made financing solutions can be offered. Many times, due to the lack of access to their holding company and the limitation in their financing, companies end up requiring more resources from the holding company, which can generate inefficiencies at the group level.
On the other hand, facilitating these financings also requires certain expertise on the banks’ side to analyze and consider the different stages that the project will go through in order to adjust to the specific clients’ needs.
Q: What is the main difference between the challenges faced by national manufacturing companies, and now with relocation, foreign ones in obtaining financing?
A: There is a relevant difference. Companies that have been established in Mexico for years, from a credit standpoint, have a certain financial history. Those seeking to relocate to Mexico lack financial history in the country. This is a very strong difference. Granting these financings requires specialized banks that know how to analyze their operations abroad.
At Banco Base we focus on analyzing the full picture by leveraging on the closeness and dedication to our customers. Our added value is this close relationship which allows us to fully adapt to their needs. We understand that the apparent payment capacity of a newly relocated company is limited but we know that there may be a group strategy behind them. We have this capacity for holistically analyzing opportunities, and not limited to financing related needs.
Many times their production chains depend on timely payments to suppliers in other geographies, and exchanging resources with their holding companies, generally outside of Mexico. We provide a comprehensive expertise in international payments where we are able to process multi-currency transfers with extended hours of operation and offering as well foreign exchange hedging solutions according to their needs. We have the required tools to ease a soft landing for companies seeking to relocate in Mexico, including support regarding cultural gaps by providing executives who speak their language.
Q: What does nearshoring represent for Banco Base operations?
A: It represents a golden opportunity. Such clients have an international treasury with a need for knowledge of currencies and international payments. It is something we've been doing for +37 years and nearshoring is definitely not a new trend for us either, it has been years in the making. These are investments that are made in a horizon of 10 to 15 years for this type of industry, in part what we are now seeing are the results of investments that were made several years ago.
The manufacturing sector represents close to 40% of our loan portfolio. We have seen that it continues to grow despite the slowdown in the global economy in general. One of the challenges with the manufacturing sector is the volatility in prices to cover its long-term needs and must be analyzed based on the current ability to pay but also with the future ability to pay according to the investments that will be made. This helps to mitigate uncertainty and with it the implicit risk of projects.
A very suitable product that we have are short term lines of credit for currency exchange. We offer credit facilities in USD and MXN, from very short term to longer terms. We are very agile in authorizing and executing exchange lines of credit for international payment operations. We are also very active in receivables factoring solutions within this industry. We support the financing of the productive chain, helping to provide efficiency to the companies’ treasuries.
Q: What is your outlook for financing in 2023 with respect to the Mexican peso?
A: We closely follow the exchange rate. Approximately forty-percent of Mexico's GDP is explained by foreign trade. The United States has dealt with high inflation, economic slowdown, and more recently with what happened with regional U.S. banks, resulting in an overall uncertain environment. This has generated a slowdown in the flow of credit in the United States. Let us say that the ghost of the recession is already looming. We think it is going to be a mild to moderate recession, extremely different to that experienced in 2008.
As a result of the U.S. economic slowdown we might expect a lower flow of dollars into Mexico which will create room for an increase in the exchange rate to around MX$18.10 by year-end. Nevertheless, if Mexico is capable of fully seizing the Nearshoring opportunity, the country could capture relevant foreign investments within the next 3 to 5 years, which would boost its economy and potentially drive the exchange rate below MX$17.00.
Mexico has very different banking and credit dynamics than those from the United States. Mexican banking is resilient, profitable, has strong capital adequacy ratios and solid fundamentals. Based on such strength, opportunities poised by nearshoring will continue to materialize despite the fact that the US economy slows down temporarily. I would expect credit to continue expanding in Mexico as it has during the recent months.
Q: What are Banco Base’s main objectives for 2023?
A: On the horizon of Banco Base we want to continue growing our number of clients. We want to expand our operation by increasing our market share by about 20%. We want to remain very close to our clients and continue with our strategies to promote a soft landing for companies coming from abroad. Above all we will continue investing in technology. Last year we budgeted close to MX$300 million (US$16.70 million) for IT related investments and this year we have a budget of up to MX$650 million (US$36.18 million). Our bet is personal and customized solutions hand in hand with very punctual advice to our clients by using technological tools. Regarding our appetite for lending, we aim to grow our loan portfolio by 10% to 15% this year, with a core focus on companies with financing needs within our market niche.
Banco Base is a Mexican chartered bank with over 38 years of experience supporting businesses. It provides a wide range of financial services to help businesses increase their profitability, with a core focus on treasury and FX solutions including currency exchange, domestic and international payments, derivatives, and credit facilities; all of which are structured based on our customers’ specific needs.