Banorte’s chief operating officer Rafael Arana says that he believes most of the large retail banks in Mexico – including Banorte – are well positioned to weather the economic crisis caused by the coronavirus, with “solid capital ratios, good liquidity and relatively healthy asset quality.”
However, he warns that banks outside this top tier face a sterner test. “Smaller financial institutions, which are more exposed to SMEs and individuals, and more dependent on wholesale funding may have a bigger challenge as the pandemic worsens,” he says.
“If the economic shut down is extended for more than three to four months, then liquidity will be a major issue for the banking system and will extend to the economy. Also concerning for Mexico is a worsening in oil prices for a long period.”
To shore up its own liquidity position Banorte has scrapped plans to buy back 1% of its shares, which it announced on March 12 as its share price plummeted to Ps85.4 ($3.58) from Ps112.4 just one week before.
Arana tells Euromoney that the bank is also unlikely to pay dividends, following the recommendation by the Mexican banking regulator, the CNBV, to suspend dividend payments of profits generated in fiscal 2019 and 2020. “Given this recommendation and the abnormal circumstances, there is a higher chance to retain earnings and build up capital, although the final decision has not been made yet,” he says.
The bank will release its first quarter 2020 results after the market closes on April 23, but Arana provides some early insight into how the economic fallout from the coronavirus pandemic has impacted the bank during March.
“We do expect some segments within our loan book to be affected and we are taking proactive measures in an effort to reduce the potential impact: tourism, airports [the bank has no exposures to airlines], restaurants, SMEs and consumers,” says Arana.
“In order to reduce the impact of NPLs [non-performing loans] in our consumer and SME portfolio, we launched a relief programme on March24, through which eligible customers may have a four-month grace period without paying their monthly debt service (principal and interest).”
The programme ensures that clients will not incur late fees during this period or have a negative record in the credit bureau. Each product has different eligibility requirements, but the main one is that customers must be current in their debt payments as of February in order to apply.
However, despite the hope that this programme will limit a spike in NPLs the bank is projecting some stark scenarios for provisions.
“Our risk area ran a catastrophic stress test scenario with provisions rising from Ps18 billion in fourth quarter 2019 to Ps40 billion in fourth quarter 2019. It should be stressed this is an extreme scenario and not our forecast, but it would reflect an increase in the cost of risk from 1.9% to 5.4%,” says Arana.
“Depending on the severity of this situation, our provisions could be somewhere in the mid-point of this scenario, around Ps25 billion to Ps29 billion, or a cost of risk between 3.0% and 3.5%.”
The fact that economic slowdown can be prolonged and severe puts at risk the already tight fiscal condition of the federal government- Rafael Arana, Banorte
Banorte also believes that its exposure to the corporate segment is manageable. “Committed lines are not a significant proportion of our total corporate portfolio and these risks are already incorporated in the current capital adequacy ratios, borrower credit limits and credit reserves, so if a customer draws down on its committed facility it doesn’t increase the risk metrics,” says Arana.
“Most customers with committed lines have already communicated their intention to use those lines; and these requests have been granted by our risk committee without having a material effect on the bank´s liquidity nor on its capital position. The bank’s liquidity position was strong at the start of the current events and therefore it has been able to provide support to customers.”
Banorte’s immediate focus is to help its corporate clients resolve their liquidity challenges as many businesses are facing lower or no sales and liquidity has tightened. The bank is providing liquidity facilities to support debt service to companies with good levels of solvency, to give them some leeway to get through the economic shutdown.
“It is unlikely that the Mexican capital market will open with funding while the economy is closed due to the sanitary quarantine,” says Arana. “As for the international markets, it is likely that it will depend on how quickly the US and Europe exit the quarantine period.”
Arana says the central bank has been “active and diligent” in responding to the current situation providing liquidity both in pesos and in dollars to the banking system.
This proactive approach contrasts with that of the Mexican government. Arana notes that the federal government has so far said that: “There will be no support for the real sector through this period, neither in the form of tax breaks or additional credit support for SMEs and businesses.” Nor has it provided “any fiscal response to support the economy, other than increasing the fiscal targets to accommodate for lower oil revenues due to the decline in prices.”
While Arana acknowledges that Mexico has limited fiscal space (S&P has already lowered the sovereign rating by one notch), he points out that the country would retain investment grade rating even if it were to be downgraded again and the lack of fiscal response risks making a bad situation worse.
“The fact that economic slowdown can be prolonged and severe puts at risk the already tight fiscal condition of the federal government,” he says. “This is why we believe the federal government should reconsider providing support to the real economy; otherwise tax revenues for next year will weaken.”
The coronavirus hits a Mexican economy that was already struggling: GDP growth in 2019 was flat and expectations for 2020 were just 1.0% before the pandemic.
While it is too early for Arana to predict when the crisis will begin to ease, he does say what data points he will be focusing on. “In our view there are two relevant metrics to watch, the first one is unemployment/employment, abroad and in Mexico. The second one is closings/openings of SMEs. Both metrics are good indicators of how quickly economic activity picks up.”