Mexican banks are likely to take a more stringent approach to loans and investments, at least in the first half of 2021, as the country works through the Covid-19 pandemic and its consequences.
The nation’s banks were quick to recognise the risks associated with the pandemic in 2020 and, despite being well capitalised at the outset, are still hyper-vigilant a year into the pandemic. “Banks entered the crisis in 2020 with good levels of capitalisation, good profit margins, healthy assets and, above all, strong liquidity,” says Alejandro Tapia, senior analyst at Fitch Ratings. But, he adds: “In times of crisis, Mexican banks tend to be very prudent and this crisis is no different.”
Economic contraction
Mexico’s economy contracted by more than 9% in 2020, according to preliminary data from the UN Economic Commission for Latin America and the Caribbean (ECLAC). It is forecast to rebound by around 4% in 2021, but that is contingent on the pandemic receding to a manageable level. The general consensus is that if the economy grows between 3% and 4%, the banking sector will expand by at least double that rate.
In times of crisis, Mexican banks tend to be very prudent and this crisis is no different
“It is important to keep in mind the economic contraction we experienced in Mexico last year. A depressed economy means less activity for banks,” says Luis Niño de Rivera, outgoing president of the Association of Mexican Banks and chairman of Banco Azteca.
Ceres Lisboa, senior vice president for financial institutions in Latin America at Moody’s, agrees: “Everything depends on the economy’s traction in 2021. Maybe the worst is over, but there is still a lot of uncertainty to watch and we do not think banks are going to start lending again in the short term.”
Luis Niño de Rivera, Banco Azteca
Several major issues will determine how the banking system performs and what bankers decide to do this year. At the top of the list is the rollout of vaccinations to protect the population against Covid-19. The campaign got off for a slower start than expected as the second wave of the virus pushed up cases and deaths reached new levels in the first six weeks of the year.
Risk of bad loans
The longer it takes to get a handle on the virus, the greater the risks to the economy and banking sector. Noemi Levy, an expert on banking and financial systems at the National Autonomous University of Mexico, says that while non-performing loans (NPLs) were not a serious issue in 2020, there is a real possibility of a jump as the crisis continues.
“NPLs are going to increase. I do not see a way around it with a restaurant sector in crisis, a hotel sector in crisis and a retail sector in crisis,” says Ms Levy. “Goods and services are not moving as people stay in their homes. I think there could be a serious problem, even if the government does not require banks to increase reserves as past-due loans increase.”
The number of NPLs inched up in 2020, increasing from 2.1% in March, when the pandemic hit Mexico, to 2.5% overall in November 2020. In terms of sectors, NPLs increase by 0.2 percentage points for business loans, by 0.6 percentage points for mortgages and by 0.7 for consumer loans.
Another factor influencing growth will be Mexico’s capacity to take advantage of the USMCA, the tripartite trade agreement with Canada and the US that took effect in July 2020. The pandemic has slowed things, but so have disputes and criticism of the way president Andrés Manuel López Obrador’s government has applied the agreement, particularly in the energy sector.
Still, there are positive signs. Plans for a $1.2bn logistics centre in the capital, Mexico City, were presented in January as part of a larger package of almost $12bn in transportation and other infrastructure projects to facilitate trade under the revamped USMCA. “The better the USMCA works, the greater the opportunities for banks and for Mexicans to secure jobs,” says Mr Niño de Rivera.
The USMCA can go a long way towards helping the country create jobs and, as a corollary, stimulate consumption, creating a virtuous cycle. Official statistics point to a low unemployment rate of 3.2%, but private groups say the numbers are much higher and that labour conditions have deteriorated during the pandemic. The Mexican Institute for Competitiveness, a think-tank, reported that nearly 650,000 people lost their jobs in the country last year — the largest number in more than two decades.
Monitoring possible reform
Rating agencies are closely watching the potential for regulatory and legal changes, including the possibility that Congress could revisit reforms to the central bank, the Bank of Mexico (BdeM), that were postponed in early February 2021.
“Risks exist for regulatory changes. In the past few years there was talk of change, but it never moved anywhere. There is more interest today and there have been surprises with [the López Obrador] administration, which increases risk,” says Verónica Chau, head of Mexican financial institutions at Fitch Ratings.
The central bank reform, passed in the Senate in late 2020, has been moved off the table for now. It would have changed rules to require the BdeM to purchase dollars from banks that they could not sell, and is linked to currency generated by tourism or brought into the country as cash remittances. Critics claimed the legislation would create the potential for the central bank to acquire cash originated from entities involved in asset laundering.
The finance committees of the two chambers of Congress held a joint open session the first two days of February, hearing from 67 institutions, including the BdeM, that the legislation was dangerous. “Thanks to the information that was provided, Congress has decided to postpone any decision and take more time to study this,” says Mr Niño de Rivera, who testified that the change would be harmful to the central bank and banking in general.
Remittances were huge in 2020, reaching $40.6bn — an increase of 11% over the previous year, according to the central bank. The boom is attributed to the pandemic, with Mexicans in the US and elsewhere spending less and sending more home. More remittances were also sent electronically instead of in person, as a result of the lockdown, which would, in a way, make the central bank reform moot.
Ms Levy believes the reform legislation for the central bank is unnecessary, with the amounts in cash remittances representing just a small amount of dollars entering the economy. Technological advances that are making digital transfers simpler will limit this supply of dollars further, she says.
Big hitter: BBVA Bancomer remains Mexico's largest bank by assets
On a solid footing
Mexico’s banks are flush with cash, with liquidity jumping in 2020. The government regulator, CNBV, reported that total deposits in the system were up by 10.8% in the first 11 months of that year. The biggest jump was in demand deposits, which grew by 17.8%.
The banking system, which includes 51 commercial banks and six development banks, saw the Tier 1 ratio increase and liquidity was 225% at the end of the third quarter, according to CNBV. This was up from 194.2% compared to the same period in 2019. The minimum requirement is 100%.
Return on assets was 1.01 in November, down from 1.71 year earlier, which Mr Tapia says was mainly the result of the large banks increasing reserves as a response to the crisis. Capitalisation was 17.42%, up more than a point, and well above the required 10.5%, while coverage for NPLs in September was 1.63 times, compared to 1.46 times from the previous year.
NPLs are going to increase... with a restaurant sector in crisis, a hotel sector in crisis and a retail sector in crisis
Government policies have played a role, with the state announcing different stages to help Mexicans get through the crisis, including deferring interest payments on loans, providing leeway for past-due loans and deferring dividend payments.
Mr Tapia says the programme suspending dividends had an important impact, “leading to stronger levels of capitalisation. It is the highest level of capitalisation that we have seen in years,” he says.
Demand for credit suppressed
Some banks are itching to lend, but customers are still cautious. “This is not a problem of supply, but demand,” said Julio Carranza, director general of BanCoppel, in a video presentation. “Banks have resources available for customers, but customers are still very cautious.”
Mr Niño de Rivera says the system has about 1.2tn pesos ready to lend, but that banks are not going to overlook the capacity to collect on loans or fail to take into account the economic activity a loan will support.
He says one sign of this caution is the increase in demand deposits, which can be withdrawn at any time, compared to term deposits. “Demand deposits are a thermometer, showing us what people are thinking. Business and individuals are keeping a close eye on liquidity because of the uncertainty in the immediate future — businesses [are] watching their performance and individuals [are watching] their income or salary,” he says.
Lending was down across the board in the first 11 months of 2020. Loans to the business sector were down 1.6% in November compared to a year earlier, the worst monthly performance since April 2010. Consumer loans were down 7.1% in November, slightly better than the previous month.
An exception was mortgages, which were up 9.1% in November — the slowest monthly increase for the year, but still performing better than other sectors, thanks to low interest rates.
Noemi Levy, National Autonomous University of Mexico
At the same time, mortgages also represented the second largest amount in pesos of credit restructured under government-sponsored programmes in 2020. Of the total amount of loans restructured, 47% corresponded to large companies, 23.8% to mortgages, 14.8% to small and medium-sized businesses, 8.3% to consumer loans, and the rest to other categories.
Ms Lisboa does not expect a major change in policy as the pandemic continues.
“We see banks in 2021 [being] more conservative in terms of lending. We might see growth figures focused on secured lending, like mortgages and large commercial loans, but banks are not going to be willing to start lending again because the recovery might be even more difficult in Mexico. It might take time for the recovery to translate into a rebound of risk appetite in banks,” she says.
She adds that the country’s largest banks will remain the most conservative, lending to known clients and not attempting to reach out to new ones. The top six banks account for 75% of assets in the system, with BBVA Bancomer, a subsidiary of the Spanish banking giant, the largest by far with $125.3bn in assets in April 2020, according to a regional ranking by S&P Global. Following were Banorte with $83.8bn, Santander Mexico with $77.8bn, Citibanamex with $75.1bn, HSBC Mexico with $42.9bn and Scotiabank with $31.7bn.
Increasing tech uptake
A final outcome of the pandemic that could help the bottom line of banks is the acceleration of digital change. Banks had been making strides with technology for front- and back-office improvements, but this has changed dramatically as banks temporarily closed branches to safeguard employees and customers.
Ms Lisboa expects banks, especially the large ones, to continue adopting new approaches. She notes how technology “has helped banks reduce internal expense and this is ongoing. It is a way to compensate for some of the operating losses as the recovery continues”.
In Mexico, unlike other countries in the region — particularly Brazil — digital transformation has not yet led banks to consider closing branches. According to Mr Niño de Rivera, branch closures in 2020 were a response to the pandemic. “There is no correlation in Mexico between technological advance and branches closing. We have had branches close because of the pandemic,” he says.
The combination of healthy liquidity, strong banks and new technology that is making banking quicker and more accessible to more people in Mexico should enable the banking system to perform well, despite the obstacles and risks posed by the pandemic. Mr Niño de Rivera is optimistic. “We have considerable strength that helped us through the enormous uncertainty of the previous year that has, so far, carried into this year,” he says.
