Mexican banking sector displays resilience in crisis

Mexican banking sector displays resilience in crisis

Corporate & Sovereign Strategy Coronavirus Loans Debt Regulation Economy & Policy Mexico US

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Mexico's banking sector appears to be resilient enough to weather short-term shocks to the economy from the coronavirus outbreak, market sources told LatinFinance.

"Our deposit base is healthy," said a local banker. "We just need to keep good spread margins. Banxico's continued help will be important."

Mexico's central bank, Banco de México, or Banxico, lowered the policy rate for the sixth time in a row in March, cutting it by 50 basis points to 6.5%. The 28-day TIIE interbank lending rate, a reference point for pricing bonds and loans in Mexico, now stands around 6.7%, according to Banxico.

Three local banks are charging spreads between 230 and 340 basis points over the policy rate for corporate loans, according to sources.

But with oil prices on the decline, Banxico is not expected to worry too much about short-term inflation and could carry out additional rate cuts in the near future, said a second banker in Mexico.

The central bank's $60 billion swap program with the US Federal Reserve and the Finance Ministry's proposed bond exchange will help cover liquidity shortages for Mexico's commercial banks, according to sources.

Mexico's major banks all took a hit on the stock market as the economic projections worsened over the past few weeks, but they are well prepared to confront near-term shocks after recent years of high profits, improving asset quality and implementing Basel III regulations, which resulted in comfortable capital levels to absorb losses, according to a report from Fitch Ratings.

Regulations in Mexico allow banks to have up to 16% of funding and 13% of loans in US dollars, stricter requirements than in other banking systems in Latin America, meaning the depreciation of the peso will a limited effect on local lenders, according to Fitch.

If the recession carries on for much longer, however, small and mid-sized lenders that typically focus more on consumer loans to low-income earners and loans to small businesses could see a deterioration in their loan portfolios.

If that happens, state-owned development banks Banobras and Nafin will likely step in to fill the gap as they have done in the past, said a third banker in Mexico.
Even before the start of the global pandemic, the Mexican economy was stuck in a rut and contracted 0.1% last year, the first decline in GDP since 2009 and the first time since the peso crisis in late 1994 that the economy shrank as the US economy was growing, according to Fitch.

This year, however, Mexico's GDP could fall 8%, according to a prediction from Bank of America, as economic activity slows considerably to contain the spread of the coronavirus.