Overview of Mexican Banking Sector’s Strength
As the 88th National Banking Convention in Mexico approaches, it’s crucial to understand the current state of the banking sector amidst the ongoing government transition.
Firstly, it’s essential to acknowledge that Mexican banks are solid, well-capitalized, and maintain high liquidity.
Bankers have consistently emphasized that the banking sector is part of the solution, not the problem. Unlike the 1990s when Mexican banks faced a crisis and required government support, today’s banking sector is resilient.
Regular stress tests conducted by regulatory authorities reflect the banks’ strength in extreme scenarios.
The primary indicator of bank health, the Capitalization Index (ICAP), averages nearly 20% (19.93%), significantly above the regulatory minimum of 10.5%. This is the highest level since 2010.
Most of the over 50 banks operating in Mexico exhibit good health, with only a few smaller banks having less diversified portfolios or greater exposure to sectors like consumer lending or SMEs potentially being more vulnerable.
Moody’s Ratings Adjustment: A Cause for Concern
Despite the banking sector’s strength, Moody’s Ratings recently adjusted its outlook for the Mexican banking system from positive to negative, citing adverse contextual factors.
- Economic Slowdown: Concerns over the economic slowdown in 2025.
- US Tariffs on Mexico: Impact of US tariffs on the Mexican economy.
- Judicial Reform: Uncertainty surrounding the judicial reform.
- Increased Credit Risk Provisions: Banks will need to set aside more funds for credit risk and invest in digitalization, potentially affecting profitability.
- Low Interest Rates: Persistent reductions in the Banxico reference rate.
- Growing Digital Bank Competition: Increasing competition from neobanks and digital platforms.
The central concern for Mexican bank performance is the weak economic growth.
Credit to SMEs: The Balancing Act
Mexican banks have experienced an extraordinary period of profit generation. Although profitability is starting to decrease, it remains high with a ROE of nearly 18%.
Banks have capital available for lending, but they must do so responsibly as these are depositors’ funds.
During this banking convention, an agreement between banks and the government to lower interest rates for small and medium-sized enterprises (SMEs) is expected.
- Lower Interest Rates: Measures to facilitate access to financing and reduce credit costs for SMEs.
- Collaboration Between Commercial and Development Banks: A potential agreement to offer credits with lower interest rates.
- Government Support Programs: Possible introduction of low-interest guarantee programs, factoring formulas, and development bank support to encourage credit issuance.
- Access to Formal Financing for MIYPES: Aim for 30% of micro, small, and medium enterprises to access formal financing by 2030.
The success of these credit initiatives at lower rates for SMEs hinges on a crucial factor in decline: a reliable judicial system that ensures the security of guarantees.
