Mexico’s banks enjoy strong growth conditions
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Mexico’s banks enjoy strong growth conditions

Credit growth and positive margins offset Trump risks; HSBC Mexico still failing to flourish amid sale rumours.

Banorte was the first large Mexican bank to report its second-quarter earnings, and it posted strong results, backing the argument that the country is one of the few in the emerging markets that is at an early stage in the credit cycle.

Mexican banks find themselves in such an enviable position at a time when many other EM banking markets are beset with falling credit demand and rising non-performing loans. This is one of the reasons why Mexican banking stocks are widely tipped to outperform – although risks remain, not least those surrounding the US elections.

Banorte’s quarterly results were strong, with a 3.7% quarter-on-quarter rise in net income (despite a 90-basis point higher effective tax rate) and an improvement in its efficiency ratio to 44.1% from 47.1%.

Led by CEO Marcos Ramirez, the bank continues to deliver on its strategy of improving profitability; much of its performance was bank-specific – such as its 5% quarter-on-quarter reduction in costs.

Of more interest for the market as a whole, however, were the post-results comments from senior management confirming the system-wide buoyancy of demand for credit from the private sector.

Banorte reports this to be strong throughout the consumer and corporate segments. Loan demand is expected to remain strong and enable the bank to grow its credit portfolio by around 14% this year, despite a projected slowdown in state and municipality credit demand. The public sector represents about 25% of Banorte’s credit portfolio.


Marcos Ramirez,

“We have seen strong demand for mortgages, consumer products such as payroll loans and auto loans, as well as demand picking up from the [until recently moribund] SME and commercial segments,” says Ramirez.

The rate increase from the Central Bank of Mexico in July also helped Banorte’s net interest margin performance in the first half of the year – up to 4.8% from 4.4%, which should also be a common driver of banking performance throughout Mexico.


Gabriel Casillas, chief economist and head of research at Banorte, predicts the central bank will increase the base rate by 50bp at its September and December meetings, which will further boost system-wide NIMs.

The reason for the likely interest rate increases will come from growing volatility caused by the one negative factor stalking the Mexican economy: the possible election of Donald Trump in the US.

“Trump will be very Mexico-specific and we think the peso will absorb a lot of the volatility ahead,” says Casillas. “That’s why the central bank has changed its reaction function to the exchange rate and that’s why we think they will hike by 50bp in September and in December.”

However, Mexico’s low level of credit penetration means that a one percentage point increase in the policy rate is unlikely to dampen credit demand and should not negatively impact the banking sector.

“In terms of general credit, we don’t think it will have a very important impact on aggregate demand because of low credit penetration,” says Casillas. “After the [US presidential] election on November 8, we will have a better assessment of the exchange rate and central bank rates for 2017.”

The bank backed up this call on the weak transmission of higher interest rates to banking fundamentals with regression analysis from 2000 that shows that, until base rates are above 10%, there is little impact on asset quality. NPLs remain low (down to 2.27% from 2.80% in the second quarter of 2015 at Banorte). Casillas suggests that, while the 10% level may now have been lowered due to the long period of historically very low interest rates in recent years, he is confident that asset quality will not be harmed until rates rise at least above 8%: “Honestly, it will take a while for interest rates to hurt asset quality.”

Heightened risks

The other Mexican banks should be enjoying a benign operating environment, but the news is not universally positive. On June 30, Moody’s downgraded HSBC Mexico due to “heightened transition and execution risks stemming from management’s ambitious growth strategy coupled with the bank’s slow progress in improving its sluggish profitability,” the agency says.

HSBC’s desire for profitability is creating a tension with the increased underwriting standards that the bank introduced between 2012 and 2014. The focus on higher credit risk standards led to a big decline in revenues and market share, particularly in retail banking, from which the bank has been unable to recover. The bank did return to positive net income in the first quarter of 2016, but earnings remain weak and in downgrading the bank, Moody’s pointed to “increasing loan loss provisions, which have soared to nearly 90% of the bank’s pre-provision income as of Q1 2016, a figure that is twice as high as the peer’s average.”

Although HSBC Mexico’s asset-quality metrics have improved in recent quarters, its NPL ratio was 5.1% in the first quarter of 2015, more than double the 2.1% average for the sector. The bank is now torn between its mandate to grow quickly and an attempt to maintain higher credit-risk standards.

There are persistent rumours in the market that HSBC will sell its Mexican bank adding the country to the list of those it has exited in Latin America. Scotiabank, which is putting its Mexico operations at the heart of its international strategy, is one of those banks believed to be interested in acquiring HSBC Mexico as a means of boosting market share.

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