Reforms have helped Mexico fortify its financial system and develop its financial markets. Now the scale and scope of the banking sector needs to expand
A health check on Mexico’s financial system has found the nation’s banks well capitalized and likely to prove resilient against external shocks. The assessment is one of a series being carried out by the International Monetary Fund in countries considered to be of prime importance to global financial stability.
“Our assessment of Mexico’s financial system is very positive,” says Fernando Montes-Negret, a senior financial expert in the IMF’s Monetary and Capital Markets Department, and head of the team that conducted the process. “The country has better tools for systemic crisis management and competent supervision.”
In the wake of the global economic crisis, Mexico is one of 25 interlinked financial systems that the IMF considers it prudent to subject to a mandatory in-depth review every five years. Countries being evaluated over the next two years include Argentina, Brazil, Japan, France, and Spain.
Mexico is an active participant in international efforts to strengthen regulation of the global banking system through the G20, of which it currently holds the presidency, the Financial Stability Board, the Bank for International Settlements, and the Basel Committee on Banking Supervision.
Agustin Carstens, Governor of the Bank of Mexico, says: “We remain committed to internationally coordinated reforms to strengthen the global financial system and address issues of systemic risk through improved cooperation in areas such as heightened capital standards and recovery and resolution planning.”
Mexico itself has set a good example. Since its own financial firestorm, the Tequila Crisis of 1994-95, the authorities have worked to strengthen institutions, add transparency to decision-making processes, and develop a solid macroeconomic foundation. The average capitalization ratio for the banks is 16%, which is well above the U.S. and Euro average of 9-10% .
These efforts have paid off. When Mexico was hit hard by the 2008-09 global crisis, the financial system emerged relatively unscathed. The IMF notes that despite the sharp fall in economic activity and the severe stress experienced by the financial markets at the time, “the broader system reacted well and spillovers were contained”.
“We were among the few countries in the middle of the global crisis to move to a more open economy... The result has been an economy where exports are more dynamic, and where consumption and investment have reacted accordingly.”
Jose Antonio Meade,
Secretary of Finance and Public Credit
Credit must be given to the government for its efforts to stabilize the economy while simultaneously opening the country to trade opportunities. Jose Antonio Meade, Secretary of Finance and Public Credit explains: “In recent years, within a very complex international environment, Mexico has grown more than its partners because we worked to strengthen public finances with two reforms: we introduced a minimum tax – and our control of income tax is working very well – and we strengthened indirect and direct taxes, which has allowed us to address the crisis without undermining our fiscal framework.”
Mr. Meade is also proud of his country’s recent record with regard to international trade. He says, “We were among the few countries in the middle of the global crisis to move to a more open economy. Mexico unilaterally lowered its tariffs for the poorest countries, those with whom we had not traded previously, and that reduction made us more competitive. The result has been an economy where exports are more dynamic, and where consumption and investment have reacted accordingly.”
Nevertheless, Mexico needs to remain vigilant to risks from outside the country, given its significant links to the global economy – particularly the U.S. economy – and to Spanish banks. The IMF says the authorities “need to monitor closely and respond quickly to emerging risks.”
The fund goes on to recommend a range of actions to further bolster financial stability, suggesting a number of high priority reforms to be implemented within the next three years.
These include strengthening the institutional framework for supervision of financial regulation by establishing a fixed term for the President of the Banking Commission, rebalancing its board, and promoting stronger legal safeguards for its personnel.
Manuel Sanchez, Deputy Governor of the Bank of Mexico, acknowledges that the banking system faces important challenges in order to more deeply contribute to long-term economic growth. “Perhaps the most important endeavor is for the system to prudently increase its scale and scope within a competitive environment,” he said in a recent speech in New York.
Mexico’s banking sector is the second largest in Latin America. It is highly concentrated, with the seven largest financial groups holding or managing about three-quarters of the system’s total assets, worth around US$600 billion.
The sector is dominated by foreign ownership. Market leaders include Banamex (owned by U.S.-based Citigroup), BBVA Bancomer
(Spain), Santander (Spain), and HSBC (U.K.) The only local bank among the top five is Banorte, which recently reported that its first quarter net profit jumped 36% on the year to US$184 million, on the back of double-digit growth in bank deposits and loans.
A report from Credit Suisse says Mexico’s banking sector is about to enter the most compelling growth cycle for a decade, foreseeing a sustainable earnings growth rate of at least 20% – possibly as much as 35% – a year. It says higher economic growth, the end of consumer deleveraging, low-cost and abundant funding, and an overcapitalized banking system are the right ingredients for profitable sustainable growth.
Switzerland’s second biggest bank has been expanding its presence in Mexico to capitalize on growing opportunities in the market.
“We believe the conditions are set for Mexican banks to experience a massive improvement in ROA [return on assets] and ROE [return on equity] in the years to come, a process that should start already this year but be more meaningful in 2013,” says the report.
Higher credit growth could boost the banks’ profitability. “For instance, the combination of better mix and 15% volume growth can lead to a sustainable earnings growth rate of at least 20% a year. Higher rates could add an extra 15%,” the report adds.
Mexico is one of the most populated countries in Latin America and the second largest economy, yet it has a much lower quantity of total loans as a proportion of GDP – 24%, compared to 48% in Brazil and 78% in Chile.
In a potential market of 60 million people, the local consumer loan market is currently just 4% of GDP.
Deutsche Bank has highlighted Mexico as one of the most promising countries in Latin America in terms of its potential for consumer loan growth.