Double-digit growth, commitment to international regulations puts Mexico's banking sector on steady footing

For more than two decades, Mexico’s banking sector has been characterised by sound regulation, high capital adequacy ratios and strong profitability. Nonetheless, it is still small for an economy of its size and stage of development, as lending policy remains relatively conservative after a series of financial crises in the latter decades of the 20th century. After the so-called Tequila crisis of 1994-95, the banking sector was reformed and liberalised, while regulation was greatly strengthened. As the sector opened up, it came to be dominated by foreign banking groups. The sector is still concentrated in the hands of the G-7 group of the seven largest banks, only two of which are Mexican-owned, and which together account for nearly four-fifths of assets in the commercial banking sector.

Current Performance

Having learned from previous experiences, the Mexican banking sector emerged relatively unscathed from the global financial crisis of 2008-09. Since then, lending growth and profitability have picked up, despite a relatively sluggish economy, as has the sector’s share of the economy, with assets as percentage of GDP at the end of 2016 at 41.4%.

Recent years have seen double-digit increases in lending across all segments, with large corporates being the most important growth drivers. Mexico has also become one of the first countries to successfully transition to the Basel III regulatory framework. The country’s leading banks already comfortably comply with its more stringent liquidity and capital requirements, for example.

Examining the regional alternatives, Pedro Tejero, managing director and CEO of Barclays Bank Mexico, commented on Mexico’s regulatory framework, telling OBG, “It is extremely important for any financial institution to have a sound regulatory framework, and one of Mexico’s advantages is the open and flexible dialogue banks have with local regulators such as the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV), Banco de México and the Ministry of Finance and Public Credit. They listen and take on board what the financial sector says in order to make the Mexican Market more efficient and competitive, something that is not too usual in Latin America.”

The combination of conservative lending policies and a range of social and economic factors leave financial inclusion as a challenge, with less than half the population having a bank account. Increasing banking penetration is both a big policy challenge for the authorities and a growth opportunity for new and existing market players. “Penetration of the banking sector is low in Mexico and currently stands at just under 40%. However, this figure continues to grow due to the implementation of financial reforms, more trade and investment in the country, as well as a strong emphasis on financial education,” Jorge del Castillo, deputy CEO of the Bank of Tokyo-Mitsubishi UFJ (Mexico), told OBG.


Currently there are 47 banks operating in Mexico, an increase of three during 2016. Spain’s Banco Sabadell and Mexico’s own Banco Finterra began operations in January 2016, and the Industrial and Commercial Bank of China entered the market in June 2016. While the number of banking institutions has been relatively stable in recent years, this follows churn and consolidation in the past.

Despite the diverse range of players, the market is dominated by seven leading banks, known locally as the G-7. Together, the G-7 accounted for 78% of total banking assets at end-November 2016. Within this leading pack, Spain’s BBVA Bancomer has consistently been the largest bank by assets for a number of years, with a 22.6% share at end-November 2016. It is followed by Banco Santander (15.1%), Citibanamex (13.3%), Banorte/Ixe (11.6%), HSBC (7.3%), Scotiabank (4.1%) and Grupo Inbursa (4.1%). In an important development, Banamex, acquired by Citibank in 2001, was rebranded in 2016 as Citibanamex. In a signal of Citibank’s continued strong commitment to Mexican retail banking, a $1bn cash injection was announced in October 2016. This will fund investment in the institution’s technology and branch network until 2020 and follows a similar investment of $1.5bn in 2014. This investment contrasts with Citibank’s approach in Colombia, where it has signalled its intent to divest its operations.

Balance Sheets

Strong growth, with an annualised rate of 11.6% up to the end of December 2016 saw total assets in the commercial banking segment reach MXN8.6trn ($518.3bn). Meanwhile, total liabilities increased at an even faster clip, reaching MXN7.7trn ($464bn) by end-December 2016, for an annual growth rate of 12.3%. This left accounting capital of MXN855bn ($51.5bn) in the system, up 5.5% from 2015’s numbers.

The sector is generally very well capitalised, with its aggregate capital adequacy ratio ranging between 14-18% since 2011. At the end of November 2016, the capitalisation rate was 15.01%, little changed from 15.03% a year earlier, and still much higher than the regulatory minimum of 10.5%. There is also significant variation across the sector, with some institutions having a capitalisation rate well over 100%, while some others hover in the 10.5-15% range. By December 2016 the basic capital coefficient was 13.2% and while the fundamental capital coefficient was 12.8%.

Published in November 2016, the IMF’s latest Financial System Stability Assessment reports on the stress tests it carried out in collaboration with Banco de México and the CNBV. Even under adverse economic scenarios, the IMF found that, overall, the banking system is resilient. While the larger commercial banks were found to remain sufficiently capitalised even in a stressed scenario, some of the smaller banks did not fare as well, suffering reductions of up to 30% in their capital in some cases.

Regulatory Reform

The government introduced comprehensive financial reforms in 2014. While the reforms have not been judged to have fully delivered on their promise to promote financial inclusion, for example, there is a clear consensus among market players that the already-robust regulatory regime has been further strengthened. The reforms boosted the regulatory powers of the CNBV, as well as the National Commission for the Protection and Defence of Users of Financial Services, the government body charged with consumer financial protection.

More recent initiatives aimed at promoting competition and looking after consumers interest include the October 2015 regulatory change introduced by Banco de México making it easier for account holders to change the bank into which their salary is paid. “Over recent years, financial regulations have become considerably tighter; although this is comes at a cost for many key players, it guarantees the health and the stability of the financial system,” Enrique Vilatela, CEO of InvestaBank, a local bank, told OBG. “It can now be said that after reform, enhanced regulations and strong institutions such as Banco de México, the country has one of the healthiest and most robust banking systems in the region, if not the world.”

Vilatela also praised the authorities’ efforts to further develop the sector in close collaboration with market players. “There has been a noticeable improvement in dialogue between private banking institutions and government entities,” he told OBG. “Regular forums mean that all parties get to communicate twice a month to share knowledge, experience and policy ideas. The formation of common goals will undoubtedly help to drive the development of the sector forward for all stakeholders,” he added.

Under the new Basel III regulations all of the G-7 have been designated as domestic systemically important banks (D-SIBS), and therefore subject to more stringent capital and liquidity requirements going forward. All seven are part of larger financial conglomerates, often including subsidiaries active in insurance, brokerage and pensions. In particular, the D-SIBs will be required to hold an additional capital buffer beyond the 10.5% minimum, with the additional requirement to be phased in over the course of four years. BBVA Bancomer will require the largest additional capital buffer, equating to 1.5% on top of the 10.5% minimum. CitiBanamex and Banco Santander require an extra 1.2%, while Banorte/Ixe would need an extra 0.9%.

Meanwhile, Scotiabank, HSBC and Banco Inbursa will all require an additional 0.6%. In 2016 all of Mexico’s G-7 banks exceeded in even these capital requirements, meaning they will not be required to raise or generate further capital for regulatory purposes during the remainder of the four year phase-in period. While banks operating in Mexico appear well placed to deal with the Basel III regime, however, some market observers have pointed to the consolidation of risks at a global level as a pressure point for some foreign headquartered banks with operations in home or other countries that may not be in as healthy a financial position as their Mexican operations. Notwithstanding these risks, and as long as the banks comply with the minimum necessary requirements, the CNBV has the powers to protect Mexican operations in case of home-host contagion.

Sufficient Liquidity

Under the new Basel III regime, banks were required to maintain a liquidity coverage ratio (LCR) of 60% from 2015, with this requirement being ramped up by 10 percentage points annually so that all banks must have a 100% LCR by 2019. As of the third quarter of 2016, the aggregate LCR in the Mexican banking sector was 152.5%. All seven of the largest banks, as well as many others already comfortably surpassed even the 100% LCR requirement, well ahead of schedule. All of the banks met the minimum 70% LCR for 2016. While meeting the more stringent liquidity requirements was never expected to seriously challenge the larger players, some market observers had previously signalled concern about the capacity for smaller banks to do so. By the end of the third quarter of 2016, however, only five institutions had an LCR lower than 100%, while only two, Autofin with 75% and Barclays with 81.54%, were lower than 90%. “For some institutions, the new LCR legislation has been somehow constraining. However, a well capitalised banking sector is crucial for the health of the economy. Such a significant jump in the requirement, based on Basel III methodologies, has meant an extra effort for some banks to be fully compliant, which is currently the case,” Tejero told OBG. According to the stress tests reported in the IMF’s latest financial system stability assessment, all of the larger banks had sufficient liquidity, while some of the smaller banks could face foreign currency shortages in the event of a prolonged recession.

Credit History

Strong credit growth in 2016 saw domestic private sector credit as a share of GDP approach levels last seen in 1971, when it peaked at 34.1%. Successive economic and financial crises saw credit fall sharply thereafter, reaching a low point of 11.1% of GDP in 1988. Under the 1989-94 administration of President Carlos Salinas, breakneck growth saw credit almost triple to 30.9% of GDP in 1994 before the onset of the tequila crisis caused credit to collapse to 15.7% by 1996.

After reaching a low of 13.4% in 2001, relative economic stability combined with orthodox macroeconomic policy and sound financial regulation have facilitated a recovery in credit, which reached 32.7% of GDP in 2015. Total domestic credit reached MXN4.3trn ($259.2bn) by end-December 2016, up 12.9% on a year earlier.

Commercial Credit

Commercial credit in the country reached MXN2.8trn ($168.8bn) by the end of December 2016, accounting for 63.5% of the banking system’s total lending portfolio. This represented strong annual growth of 13.8% in the most important lending segment.

The bulk of the commercial lending portfolio, or 73.3%, is made up of business lending (MXN2trn, $132.6bn, up 16.6% annually), but also includes government, with MXN585bn ($35.3bn), up 3.4% and financial entities with MXN189bn ($11.4bn), up 21.5%. Particularly strong lending growth to large corporates saw their share of the business lending portfolio increase further, from 76.1% to 77.2% in the year to end-December 2016. Strong demand from such firms is at least partly a result of external financing becoming more scarce. As a result, the share of small and medium-sized enterprises (SMEs) in business lending fell slightly from 23.9% to 22.8% over the same period, with declines registered in each of the micro, small and medium-sized commercial lending segments.

Financial institutions operating in Mexico that are crucial to lending, especially for SMEs, are multiple-purpose financial firms, known locally as sociedades financieras de objeto múltiple, which have provided a variety of credit products from personal loans, mortgages, commercial loans, leasing and microcredit since 2006, with estimates that average growth in all entities will reach 15-20% for this 2017, compared to the 12.4% growth recorded in 2016.

Consumer Credit

Total credit outstanding to consumers also expanded at a relatively robust rate of 12.4% in the year to end-December 2016 to reach MXN896bn ($54bn), or some 20.6% of total bank lending. Within this lending segment, all subsegments with the exception of credit cards experienced double-digit growth over the course of the year. Accounting for 40.3% of all credit to consumers, credit card debt reached MXN356bn ($21.5bn) by end-December 2016, up 9% on a year earlier. Personal lending increased by 14.2% year-on-year to reach MXN185bn ($11.1bn), while loans linked to the account in which salaries are paid increased by 15.4% to reach MXN219bn ($13.2bn). While large firms located in the main urban centres are relatively well catered to in terms of bank lending, there is clearly scope for increased lending to smaller firms. “Away from Mexico City there is strong potential for financing in key secondary cities such as Monterrey and Guadalajara. The combination of strong growth in such areas as well as a strong demand from SMEs means there are various opportunities for financial institutions to attend these fast growing, medium sized companies in key areas,” Luis Barroso González, CEO of UNIFIN, a Mexican finance firm, told OBG.

Loans to finance home purchases are the other large credit heading in Mexico, accounting for 15.8% of all credit. With an annual growth rate of 10.3%, lending in this segment lagged behind commercial and consumer credit. It is also smaller than consumer credit, reaching MXN688bn ($41.5bn) by end-December 2016. NPLs: Even in the face of strong credit growth in 2016, the rate of non-performing loans (NPLs) actually declined substantially over the course of the year, falling from 2.6% in end-December 2015 to 2.15% in end-2016. This marks further progress from the 2013 peak of 3.2%, which was a time of large defaults in the home construction sector.

NPLs vary across the banks’ portfolios, however. The most dramatic improvement is in evidence in commercial credit, where the rate of NPLs has declined by 0.55% over the year to reach 1.31% by end-December 2016. This is driven by the sharp decline in the NPL rate on the business lending portfolio from 2.61% to 1.78% over the year, as the previously high rates of NPLs among housebuilders continues to moderate. By contrast, NPLs in consumer credit have remained relatively stable over the year, improving by only 0.06% to reach 4.22% by end-December 2016. Moderate declines in NPLs were in evidence across all sub-segments of consumer credit, with the exception of loans relating to accounts into which salaries are paid, which deteriorated from 2.92% to 3.4%. Despite improving the most of the consumer credit subsegments over the year, with NPLs dropping 0.3% to 5.23%, personal loans are still the most challenging of all lending segments in this regard. Improvement in NPLs was also in evidence in the housing credit segment, falling 0.57% to reach 2.79% by end-December 2016.

Provisions & Coverage

Improving performance across the banks’ lending portfolios, signified by the broad-based declines in NPLs, has allowed the banks to reduce the aggregate rate of provisioning against possible losses, while still improving the coverage ratio — the amount by which provisions exceed NPLs. Across all lending segments, provisioning declined by 0.28% to reach 3.37% by end-December 2016, while the coverage rate improved by 16.93% to reach 157.4%. This means that provisions against possible losses were more than 1.5 times total. Increases in the coverage ratio are also related to the efforts of the CNBV to maintain updated regulatory models for provisioning. In December 2015, new models for provisioning credit card exposures were released and in January 2017, new models for non-revolving consumer exposures we released. These new models recognise in more a accurate and comprehensive way the credit risk of the banks´ debtors.

At a disaggregated level, it is unsurprising that consumer credit, the best performing segment in terms of reduced NPLs, also saw the most impressive improvement in the coverage ratio, up 13.95% to 215.67%. Helped also by increased provisioning by the banks — up 0.47% to 9.1% in the year to end-December 2016 — against possible losses on their consumer loans, more than double the amount of non-performing consumer loans was set aside as provisions. Particularly in light of rapid recent growth in consumer credit, such precautionary provisioning is a prudent move by banks to guard against potential future losses in their riskiest lending segment. By contrast, the aggregate decline in provisioning was driven by the falls in the commercial (down -0.48% to 1.73%) and housing (down -0.1% to 1.52%) credit segments, which saw their coverage ratios nonetheless increase to 131.85% (up 12.8%) and 54.4% (up 7.25%), respectively.


Strong credit growth was matched in 2016 by equally strong growth in resources available to the banks, particularly in deposits. Total resources available to banks increased by 12.5% in the year to end-December 2016, and in line with lending growth, to reach MXN4.8trn ($289.3bn). Of this, the largest and fastest growing resources were deposits on call, which increased by slightly less than 15% to reach MXN2.9trn ($174.8bn). Growth in term deposits was more moderate, increasing by 11.2% to reach MXN1.trn ($60.3bn).

The banks’ ability to continue attracting deposits meant that they could sustain rapid growth in lending without having to rely heavily on the money markets or inter-bank lending, which, nonetheless, increased by 7.6% and 15.9%, respectively, to reach MXN519bn ($31.3bn) and MXN303bn ($18.3bn). Should lending continue to grow rapidly, it will be important that the banks’ continue to rely on deposits for financing as much as possible so as to avoid becoming vulnerable to any future credit crunch in the short-term interbank and money markets.


With domestic interest rates rising throughout 2016, it is not surprising to see strong improvements in the banks’ net interest margin. Already, averaging around 10% in recent years, these margins are characterised by the IMF as being “high and stable” in Mexico. When coupled with rapid, organic growth in their lending portfolios, this contributed to strong improvements in profitability, up 8.3% to MXN282.5bn ($17bn) in 2016.

This is particularly impressive at a time, until recently, of record low inflation. Nonetheless, this improvement in net profits was not enough to keep pace with overall growth in assets, meaning the return on assets (ROA) for the sector as a whole actually declined moderately, by -0.01%, to reach 1.31% for the year to end-December 2016. Growth in net profits did, however, outpace growth in capital, meaning that return on equity (ROE) did improve marginally, by 0.15%, to 12.64%.

After the financial crisis, the ROA at Mexican banks fell significantly, from 2.9% in the first quarter of 2008 to 1.13% a year later, and has ranged between 1% and 2.2% since. Having fallen sharply from over 20% to 11%, Mexican banks’ ROE likewise soon recovered, ranging between 10-15% until early 2014, when it again surpassed 20% before moderating to just over 10% in 2014. At current levels, therefore, both ROA and ROE are towards the middle of their usual ranges over the past decade, outside of isolated periods of volatility.

Development Banks

As well as the 47 commercial banks operating in Mexico, there is also a constellation of six publicly owned development banks with a wide range of specialist areas, including SMEs, public infrastructure, trade promotion, housing, savings and lending to the military.

“State actors such as Banobras and Nafin play a very pivotal role in infrastructure development,” Octavio Lievano, country head of Crédit Agricole, told OBG. “They not only fill gaps in financing that private bank sources do not cover, for example, very long tenors, but they also have a prime position in overseeing key projects. Often their participation in a project is seen by the market as a stamp of approval and government support.”

According to the CNBV, lending by the development banks in Mexico was increasing at an even faster pace than that of the commercial banks, with an annual growth rate of 17% in the year to end-September 2016, bringing the total lending portfolio to MXN838bn ($50.5bn). Meanwhile, in its November 2016 Financial System Stability Assessment, the IMF noted that the development banks were “well-capitalised and liquid”, while their “NPLs have remained below 2% since 2010 and provisions cover about 260% of NPLs”.

Financial Inclusion

Despite progress in recent years, access to bank accounts remains restricted in Mexico, with only 44% of the population having some form of bank account – moreover this figure takes into account all adults with an account from any formal financial institution, not just banking institutions. The principle reasons for this relate to broader economic and social phenomena, such as poverty and labour market informality, but June 2016 saw the launch of a National Financial Inclusion Strategy that focuses on areas for improvement within the financial sector itself. These include continued investment in infrastructure, better financial education, and more intensive use of technology and new business models (see analysis).

Mobile & Digital Banking

Mexico has been no exception to the global and Latin American trends, which have witnessed a exponential increases in mobile banking. According to the 7th “National Report on Financial Inclusion”, published in 2016 by the CNBV, the number of mobile banking contracts increased at a compound rate of 174% per annum between the fourth quarter of 2011 and the second quarter of 2015, the total number increasing from less than 250,000 to more than 6m over that period.

With about 4m web and mobile banking clients as of the end of 2016, BBVA Bancomer is the dominant player in this fast-growing market segment. Leaders in this field in Mexico have expressed the belief that it has a great deal of potential. “The future for banks is to be robust in digital,” Hugo Nájera, head of business development at BBVA Bancomer, told OBG.

However, sounding a note of caution, Vilatela pointed to some of the challenges to further expansion of the mobile banking segment. “Mexico suffers from a lack of infrastructure and confidence in financial institutions which both need to be overcome if online banking is to reach its full potential.”

Riding this wave of technological up-take are Mexico’s 160 or so financial technology (fintech) companies, which provide a variety of financial solutions, ranging from domestic online banking to international transfers for remittances. Gaining $60m of investment in 2015, players in the sector are moving quickly to acquire booming start-ups. In January 2017 Mexico’s largest bank, BBVA, acquired fintech start-up Openpay, allowing the bank to increase its range of online payment solutions.

Interest Rates & Monetary Policy

Having reached record lows in 2015, inflation began to pick up through 2016 and is expected to accelerate during the first half of 2017, breaching the upper end of the 2-4% target range of Banco de México. Taking pre-emptive action, the central bank hiked interest rates by 250 basis points in 2016, and was widely expecting to continuing the tightening cycle during in early 2017 as rates in the US, set by the Federal Reserve, continue to normalise. Monetary tightening is likely one of the reasons why credit growth had begun to moderate in late 2016, while this can be expected to increasingly weigh on new lending throughout 2017.

Access To Credit

One of the main barriers to greater financial inclusion, and particularly to smaller firms accessing credit, is difficulty in posting collateral, and banks’ reluctance to extend credit in the knowledge that their claims against collateral may in any case be difficult to enforce.

Speaking to OBG, Augusto Álvarez, managing director at Alpha Credit, a Mexican financing firm, noted that “access to credit is still a significant obstacle for companies in Mexico. Real assets remain an important consideration for banks to offer good credit, posing a challenge for companies who operate without real assets.” Pointing to one of the possible solutions to this conundrum, Álvarez added that “specialised courts for credit claims are crucial to enable banks to offer more competitive interest rates and diminish the risk of non-payment. Interest rates have been historically high and steps need to be taken to create a robust legal system that can protect consumers and banks in Mexico.”

As part of the 2014 banking reforms, federal district courts specialising in commercial matters were, in fact, due to have become operational by end-2016, but this important initiative was still awaiting full implementation in early 2017.

Such rule of law challenges affect households as well as firms, with banks’ awareness of the difficulty in repossessing mortgaged homes serving to constrain credit growth in this segment. One way consumers can increase their chances of receiving a loan is by ensuring they have a good credit score at one of the main credit bureaus operating in the country: Círculo de Crédito, the market leader, and Buró de Crédito, which is operated by US-based Dun & Bradstreet and Trans Union.


With interest rates marching higher, consumer confidence weakening and macroeconomic uncertainty prevailing, credit growth in Mexico is likely to continue to moderate through 2017, with market observers viewing mortgage lending as being particularly sensitive to the interest rate cycle.

At the same time, rising interest rates should further boost net interest margins. After rapid growth in banks’ assets during 2016, the coming years could see a recovery in ROE and ROA towards the higher levels seen in 2013 and 2014, even if the pace of growth in assets moderates.

Over the longer term, the authorities’ efforts to boost financial inclusion across the country will be crucial to the development of the sector, as well as to socio-economic advances more generally.


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The Report: Mexico 2017

Banking chapter from The Report: Mexico 2017

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