Mexico: Rising NPL levels cause concern

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By:
Chloe Hayward
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Non-performing loans in Mexico are growing at a worrying pace. Despite official estimates putting consumer NPLs at 5.8% of the total consumer loan market, some analysts believe that real levels are in double digits already.

"There are a growing number of consumer loans ending up as NPLs in Mexico. This emerging trend is the result of increasing over-indebtedness," says a loan financial specialist in Mexico. "Although this indebtedness is still lower than in places like the US and UK, it is reaching a worrying level for Mexico."

He adds: "A couple of banks have recently sold NPL portfolios that have been made up of defaulted consumer loans but the individual loans are for small amounts and so these portfolios aren’t worth much. The banking system in Mexico is very concentrated – it’s the main consumer banks that are involved here."

David Martens, head of distressed debt at ABN Amro, saw these two portfolios in the market. "These portfolio sales could have been a coincidence but it could also be the sign of a growing trend," he says.

"Mexico is economically tied to the US so if the US is having credit market issues and falling into recession then it would be unrealistic to think Mexico will carry on without feeling some of the US pain."

Robert Rauch, head of research at Gramercy, the second-largest purchaser of Mexican NPLs, says: "Though I don’t think there will be problems in the mortgage market yet, the US slowdown will put more pressure on consumer loans in Mexico."

Walter Molano, head of research of BCP Securities, says: "A large part of the consumer loan market in Mexico is based on remittances. With the US entering a recession, remittances to Mexico are dropping dramatically. In turn, an increase in the Mexican NPL market is a natural extension of the remittance slowdown."

Remittances to Mexico fell 2.8% in the first two months of 2008, compared with the year before. The Mexican central bank says it expects little or no growth in remittances this year after they rose 1% to a record $23.98 billion in 2007. As the US enters a slowdown, Latin American migrants, especially those working in the informal economy are going to be the most economically vulnerable.

But, amid this concern, some bankers think there are profits to be made out of rising NPLs. "There is an opportunity here for us – we are looking to see where fallouts are appearing in the credit markets all around the world and there has been Mexican business recently," says Martens.