Expected strong 2Q and Amlo bounce positive for Mexico’s banks


Rob Dwyer
Published on:

Markets take Andrés Manuel López Obrador (Amlo) victory in stride; analysis shows Santander could outperform under next administration.

Amlo’s election success was expected, but stunning

The landslide victory of Amlo in the Mexican presidential election on July 1 didn’t lead to a negative impact on the financial markets, as some had predicted.

Assets have performed well and the Mexican banks – on something of a roll – should see these benign economic conditions continue.

Amlo’s success was expected, but stunning: he became the first presidential candidate to win a majority of the popular vote (53%) and, perhaps more important for governability, his coalition (Morena) won an outright majority in both houses of congress – almost two-thirds in the lower house.

However, markets have responded positively: the currency has strengthened against the dollar, the 10-year udibono yields have compressed and equities have rallied.


Rafael Elias,

Analysts such as Exotix’s Rafael Elias, who had predicted a widespread sell-off on a strong Amlo performance, believe the new president-elect’s swift change in tone has been the cause of the good market sentiment.

Amlo’s often-belligerent tone in the campaign has been transformed into one of conciliation and market-friendly comments, particularly in regards to fiscal prudence and maintaining the independence of the country’s central bank Banxico.

According to Elias: “Thus far, Amlo (and his team) and the markets have proven us initially wrong, helped by this conciliatory tone and more pragmatic proposals, including walking back on several campaign promises.”

This is good news for the banks, whose management had feared a deterioration of financial sentiment could impact the economy and calm the strong tailwinds that have been driving performance recently – principally stronger economic growth in the US and lower domestic inflation.

Core earnings

The most recent government data, published for May, show that the sector’s core earnings continue to grow strongly, up 27% year-on-year. A deceleration in the system’s net interest income and fee growth was more than offset by higher income from other sources – loan growth increased to 11% from 9% – and lower provisions.

Goldman Sachs’ financial sector analyst Carlos Macedo says that, in combination with also-strong April results, the latest data point to a strong second-quarter.

He says: “With two out of the three months in the books, it appears from the data that banks will once again report solid quarterly profits, with ROE printing above 1Q levels almost across the board.”

However, the key question remains whether these levels of return on equity will be sustainable once policy rates start to decline – the consensus is for Banxico to start cutting in mid-2019 – and cuts into net interest margin securities.

Macedo is sceptical, but says he will only know for certain when that tightening cycle begins.

Given the overall lower participation in Mexico City’s loans during Amlo’s term (5%), we believe Banorte has more at risk 
 - JPMorgan report

Meanwhile, JPMorgan has published a report that assesses which banks will likely benefit most from the Amlo administration.

The report – aimed to give an insight into which banks will outperform in the coming years – looks at how Amlo interacted with the individual participants in the financial system while he was mayor of Mexico City.

Led by Domingos Falavina, the report comes to an interesting conclusion for stock pickers — that Santander Mexico has potentially the most to gain. Scotiabank also benefited from an increase in public-sector business during these times – while BBVA Bancomer saw a loss of market share.

“During Amlo’s tenure, Mexico City saw a very spread usage of banks, with Bancomer losing share to an average of 32% (from 48%) and Scotiabank taking the lead with 36% of loans provided.

“Santander went from close to 0% participation to around 15% during Amlo’s term, while Banorte had 5% share from 1% to 2% before.”

Today, Bancomer has the leading market share of federal loans (37%), followed by Banorte (26%) and Santander (10%) – with the implication of a more even split of federal business favouring Santander.

“Given the overall lower participation in Mexico City’s loans during Amlo’s term (5%), we believe Banorte has more at risk,” states the JPMorgan report. “Additionally, government loans (which also includes states and municipalities) represent more in Banorte’s total loans than in Santander Mexico.”

Public finances

Another interesting finding for the report was analysis of Amlo’s impact on Mexico City’s public finances during his tenure as mayor. The bank uses this analysis as a possible predictor for what will happen with the country’s finances under the coming administration.

The research found that debt increased substantially, but so did GDP and so, overall, leverage decreased slightly during Amlo’s term.

The findings were normalized through comparison with other large cities’ finances.

The results are encouraging for those worried about the seeming contradiction between Amlo’s expensive campaign commitments – paying for apprenticeships for young people who are out of work, doubling the pensions for senior citizens and other items of public expenditure aimed at alleviating poverty – and his pledge not to increase taxes: Mexico City’s net debt as percentage of total income fell substantially during Amlo’s term (from 2.9% in 2002 to 2.4% in 2004%) before increasing again in the following years (in 2014 it hit 3.0%).