The Writing on the Wall

Mexico’s concentrated banking universe features 46 commercial banks, seven of which—Bancomer, Banamex, Santander, Banorte, HSBC, Inbursa, and Scotia Bank—hold a prominent 78% market share by total assets. The system is progressing confidently toward full Basel III standards, and the Mexican National Banking and Securities Commission (CNBV) indicates robust growth between February 2016 and February 2017, with total loan portfolio growth of 11.7% to MXN4.34 billion. The commercial loan portfolio climbed 12%, while consumption and housing rose 12 and 10.2%, respectively, making the case for confidence. Deposits appreciated 16.2% over the period, confirming sectoral resilience to headwinds, although both consumer and business remain wary of the ramifications of Trumpism.

US, eh?

Indeed, financing conditions and economic outlook alike have been overshadowed by protectionist rhetoric from Washington. The peso, though now somewhat recovered, slumped to as low as 22 to the greenback in January. At stake are the terms of trade with the US through the NAFTA, as tariffs on Mexican goods could yet materialize. The deposits of Mexican corporations at US banks, exceeding USD80.6 billion, account for 3.2 times the remittances received annually by Mexico (USD24.8 billion in 2015), and it is the latter that the Trump administration seemed to be eyeing, pre-election, to bankroll his wall.

IMF remains supportive

The IMF acknowledges the government’s commitment to fiscal consolidation aimed at improving the public debt-to-GDP ratio, tackling troublesome inflation, replenishing FX reserves and, crucially, sustaining robust oversight of Mexico’s financial system. Certainly, the government’s 2017 budget indicates continued prudence to consolidate those worrying fiscal accounts amid deflated oil prices (Mexican mix oils are forecast averaging at USD42/bbl this year).

In May 2017, the IMF’s Review of Mexico’s Performance under the Flexible Credit Line Arrangement reaffirmed Mexico’s continued qualification to access USD86 billion, which the government labels a precautionary measure supplementary to a sturdy fiscal policy framework. Indeed, relative sturdiness is visible across Latin America, although the giant banks are notably concentrated in Mexico and Brazil. NAFTA allows US, Canadian, and any other foreign banks with a subsidiary in those two markets to operate wholly owned subsidiaries in Mexico.
In the Mexican corner, among the region’s largest is BBVA Bancomer, Mexico’s leading player, and a subsidiary of Spanish giant BBVA. Spanning the spectrum of retail banking, brokerage fund management, and insurance, it has around 1,800 branches nationwide. Then comes Banamex, established in 1884 through a merger of Banco Nacional Mexicano and Banco Mercantil Mexicano, and today a subsidiary of Citigroup. Citigroup’s declared USD1 billion investment in the bank, despite prevailing ambiguity over Mexico-US relations, is still penciled in for 2020. Banorte exploited Mexico’s financial crisis of the 1990s to acquire several banks for nationwide exposure. And last on the list of LatAm greats is Banco Santander.

Some Telling Numbers

The World Economic Forum’s Global Competitiveness Report 2016-2017 indicates that in terms of financial market development, Mexico came in 35th out of 138 nations. Other metrics placed the nation in 46th place for the soundness of its banks, 78th for financial services meeting business needs, 78th for the affordability of financial services, 71st for financing through the local equity market, and 57th for the ease of access to loans. When capital adequacy is considered, the ratio of regulatory capital to risk-weighted assets for 2015 and June 2016 were at 15% and 14.8%, respectively. For those periods the regulatory Tier-1 capital to risk-weighted assets ratios were 13.3% and 13.3%, while the capital to assets ratios were at 10.5% and 10.4%. By asset quality, the ratio of non-performing loans to total gross loans was at 2.6% and 2.4%, with provisions to non-performing loans at 140.1% and 145.1%. Elsewhere, the return on assets was at 1.6% and 1.7%, the return on equity at 15.5% and 16.5%, the interest margin to gross income ratio at 73% and 73.4%, and the trading income to total income ratio at 3.3% and 4% And finally, by liquidity the liquid assets to total assets ratio was at 34.6% and 32.4%, the liquid assets to short-term liabilities at 45.5% and 43.3%, and the customer deposits to total (non-interbank) loans ratio at 87.7% and 88.1% for the respective periods.

Reform and Regulation

The regulators of Mexico’s banking system are the Secretariat of Treasury and Public Finance (SHCP), overseeing institutional issues, and the National Banking and Securities Commission (CNBV), a semi-autonomous state entity responsible for supervision and vigilance. As well as banks, it regulates non-bank finance companies, brokerages, and mutual fund companies, among others. The Bank of Mexico (BANXICO) implements policy and operates inter-bank check clearing and compensation systems. And meanwhile, The Institute for the Protection of Bank Savings (IPAB, replacing the former institution FOBAPROA) is a deposit insurance institution.

On January 9, 2014, President Enrique Peña Nieto launched key financial reforms through the Banking Act, redefining the sector. Targeted were enhanced development bank performance, higher financial inclusion, and the promotion of private financing at lower rates to boost the vitality of the sector and broader economy. Meanwhile, safeguards ensured better property-rights protection for creditors and the promotion of competition among financial intermediaries. 2015 had heralded in a new system of courts geared at improving housing foreclosure processes to encourage residential lending, the second-fastest growing credit segment of that year, printing an 8.4% real average annual growth rate. Regarding liquidity regulation, in 2016, while stipulated compliance was at 70%, the leading banks and most others had rates exceeding 100%. Banks are also required to issue an annual Liquidity Contingency Plan revealing their sources of funding and measures to mitigate liquidity stress.

Reflecting confidence in the sector, the National Banking and Securities Commission (NBSC) cut the allotted time for Mexico’s banks to conform with the new capital adequacy requirements of the Basel III reforms from 12 to 10 quarters. It stipulated that in terms of the countercyclical capital buffer, banks should establish 25% of the requirements by end-2016, 50% by end-2017, 75% by the end-2018, and 100% by end-2019. Also updated was the incremental adoption of new operating risk capital requirements; lending institutions must meet 30% of the new requirements by 2H2016, 45% by the start of 2017, 80% by 2H2017, and 100% by the start of 2018.

Agents of Change

As 2016 closed, rating agencies Moody’s and Fitch both anticipated a tough 2017 for Mexico’s banks in terms of loan growth and asset quality. The latter noted that to cope with potential headwinds, Mexican banks were adequately funded with impressive liquidity profiles enabled by consistently good earnings. Yet in December of 2016 it forecast loan growth deceleration to 6 from 8% this year.

Moody’s notes banks’ oil exposure, citing the liquidity and financial leverage tribulations of state oil company Petróleos Mexicanos (Pemex), among the largest corporate borrowers in the banking system. Loans to Pemex account for roughly 6% of the sector’s total outstanding loans and between 30-40% of core capital at many institutions. Furthermore, banks have exposure to Pemex’s extensive supplier network. Yet the agency anticipates sustainable robust capitalization among banks, with retained profits set to cover capital eroded by anticipated swift loan growth.

Credit Dilemma—Growth or Risk?

Credit is only as popular as the terms at which it is available, and a concentrated sector curbs competition. In the wake of Mexico’s financial crisis of the 1990s local banks became overtly cautious lenders, making access to credit difficult. Yet this is an unsustainable stance for any nation seeking to galvanize local industry, notably the SME segment. In 2015 domestic credit to the private sector as a percentage of GDP was at 32.7%. By official figures, just 44% of adults in Mexico own a bank account, and Mexico accounts for about 2.6% of the 2 billion unbanked adults worldwide. Data of the Financial Services Consumer Protection Commission also reveals that Mexicans tend towards non-bank loans, including store credit cards, rather than bank-issued credit cards. Central Bank hikes will inevitably also raise the cost of capital, impacting both lending and borrowing dynamics. In late March 2017, the central bank raised its benchmark interest rate by a half-point to 6.50% to reduce inflation towards its 3% target. Yet higher rates shine positively on banks’ net interest margins as they charge more for loans.

SMEs

Across the world’s emerging markets, SMEs—often employing a significant percentage of the workforce—face an uphill march towards the credit required for growth. By end-2013, private-sector financing was at a low 26% of GDP, with private-sector credit at roughly 45% of bank assets, falling short of regional markets such as Argentina, Brazil, Chile, Peru, and Uruguay. In November 2013, a bill was approved to foster greater levels of lending, with banking regulators authorized to impose punitive measures against banks steering clear of credit provision. Mexico’s statistics agency, INEGI, indicates 4 million SMEs, with 97.6% classified as micro-businesses, 2% as small business, and 0.4% as medium-sized enterprises. Its 2015 study stated that just 10.6% of micro-businesses accessed financing, with rates for SMEs at 27.8% and 39.8%, respectively.
To foster banking penetration, which also spells huge potential for the sector itself, in June 2016, Mexico launched its National Financial Inclusion Strategy (NFIS) to expedite access to financial services. Concerning inclusion, Allan Cherem, the Director General of Financiera Contigo explained to TBY the credit extended to women, notably in rural areas. “We never lend money for consumption; it is always for them to invest in their existing micro-enterprises or start-ups.“ The potential take-up of such credit allows ambitious forecasts whereby, “We plan to grow five-fold by 2021 in terms of clients and employees. By YE2017 or 1Q2018 we aim to serve over 300,000 clients (and) 1 million clients by 2021.“

Alternative Routes

Mexico’s development banks form a second tier that seeks to plug the financing gap for specific economic sectors left by the major commercial banks. The non-traditional banking sector also features exchange houses, credit unions, leasing, factoring companies, and financial lending networks (SOFOMs). Sector reform required SOFOMs to deliver current information to the National Commission for the Protection of Users of Financial Services. While SOFOMs offer financial factoring, leasing, and loans and/or other credit services, they cannot receive deposits from the public.

Despite the distance yet to cover, as income and penetration levels rise, and the well-regulated sector extends credit less judiciously, Mexico’s banks stand to play an increasingly catalytic role in economic development.