Sep 17, 2013
Mexico, September 11th 2013 - The outlook for Mexico's banking system remains stable, says Moody's Investors Service in a new report titled "Banking System Outlook: Mexico". The outlook reflects Moody's expectation that Mexican banks will continue to have relatively sound financial profiles despite moderate economic growth in 2013 and into 2014.
Moody's expects Mexican banks to maintain strong fundamentals over the next 12-18 months, which supports the stable outlook for the system. Capitalization and profitability levels will provide sufficient resources to support growth and create additional reserves, and absorb even large losses without falling below regulatory capital minima. Bank asset quality also remains strong, "While we expect some increase in non-performing loans from current lows as delinquencies in consumer loans and loans to homebuilders go up, bank profitability and capitalization continue to be strong" said David Olivares-Villagomez, a Moody's Vice President Senior Credit Officer and author of the report.
Mexican banks maintain stable funding and liquidity positions because they primarily fund themselves with peso-denominated customer deposits that make up 69% of total liabilities, as opposed to interbank and money market funds. Large portfolios of government securities also provide liquidity buffers against funding stress.
Falling unemployment and relatively contained inflation reflect the benign macroeconomic environment despite current economic slowdown. "Even though the Mexican economy has slowed over the last couple of years, Moody's estimates that GDP growth of 1.6% in 2013 and 3.1% in 2014 will continue to support bank lending", said Olivares-Villagomez. Moreover, rising personal income and domestic demand, along with good export levels are also positive credit factors that sustain bank activity over the outlook period. These estimates also reflect the rating agency's view that the proposed structural reforms will have a greater impact than the recent cyclical factors.
Moody's notes that the Mexican government is proposing structural reforms to encourage economic growth. For the bank sector, the reforms include streamlining the bankruptcy process and facilitating the enforcement of collateral agreements and guarantees. "These initiatives will encourage bank lending to the private sector, which is currently low relative to other Latin American countries," said Olivares-Villagomez.
Re-disseminated by The Asian Banker