Focus: Financial Sector

The Need to Adjust

The Need to Adjust

Jul. 14, 2013

Transnational corporations are increasingly opting away from developed markets and looking for alternative regions to invest in, and Mexico has been made more competitive by rising manufacturing costs in China and other emerging economies. In these circumstances, the Mexican banking sector is growing faster than that of any other Latin American country in 2013, including Brazil. Regional banks are expected to register a credit expansion of 10%, while in Mexico that figure is expected to be 12% to 15%. This is due to the fact that Mexican banks are well capitalized and they are also applying the new regulations of Basel III, as well as the fact that the Mexican banking sector has a better profitability profile than that of Brazil, Chile, Peru, or Colombia. The Mexican banking sector also has a lower default rate compared to Brazil. In 2012, the figure stood at 2.53%, and 2.45% the previous year. Also, Mexico has a credit risk coverage for financial risks of up to 182%.

Authorities cite that the Mexican banking system is strong, but there are still things to be wary of, such as the level of credit entering the economy. Financing remains far lower than what is required for greater economic growth, a fact that becomes apparent when you look at domestic credit provided by the banking sector as percentage of GDP. In Mexico, domestic credit only accounts for 26.2% of GDP, whereas that figure stands at 40.3% in Brazil and 81% in Chile, while the overall average for Latin America is 50%. The Association of Mexican Banks (ABM) estimates that there will be 15% growth in domestic credit in 2013. From April 2010 to September 2012, there was consecutive growth in bank loans to the private sector. Yet bank deposits as a percentage of GDP remain far lower than that of other economies, due to a low level of financial penetration in Mexico.

The banking system has some very important strengths that explain why Mexico has been so stable. A healthy solvency rate stands out in particular, with a capitalization index (ICAP) of 16%. That enabled Mexico to be one of just 10 countries to be able to apply the Basel III regulations in January 2013, which requires a minimum ICAP level of 10.5%. However, the problem lies in the amount of credit that SMEs have access to, especially when it comes to financing fixed capital formation. Credit remains limited and concentrated in human capital, and so finding access to cheap credit is crucial. The Treasury has stated that in order to provide better financing, banks need to make the necessary modifications for capitalization. On March 25, 2013, the National Banking and Securities Commission (CNBV) announced that issuance limits on subordinated debt would be expanded so as to strengthen bank capitalization requirements without banks having to list on the Mexican Securities Exchange (BMV). The issuance limits were raised from 300 million UDIs to 400 million UDIs, or from Ps1.4 billion to Ps1.9 billion. Given that one of the government's priorities is to increase access to credit for micro-, small-, and medium-sized enterprises, the expansion of the limit on issuances for subordinated debt will not only increase access to credit for those companies, but will have a positive effect in other areas of their portfolios as well.

Special Contribution by José Antonio Quesada, Lead Partner of Clients and Markets at PwC México