Despite slow growth in the Mexican economy in 2013, the prospects for the next few years remain positive, given recent structural reforms, a stable macroeconomic environment and an improved credit rating. The banking system has been experiencing a period of stability not seen in its recent history. Not only was it not affected by domestic financial crises, but it also demonstrated resilience in the face of global problems stemming from the 2008-09 financial crisis. Following the financial reforms that went into effect in 2014 and are considered among the most important structural reforms, new and significant changes to the system are expected over the next few years. With sound and well-capitalised banks, the next step in creating an efficient system that could boost economic growth is to confront two distinctive and related features of the system: low banking and credit penetration. The Mexican banking sector comprises the central bank, Banco de México (Banxico); loan institutions (both commercial and development banks); public development funds and trusts; and self-regulating entities.
Regulation
The system is regulated by the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV), an autonomous entity created in 1995, and the Secretariat of Finance and Public Credit, which has the power to grant and revoke the licences of banks and non-bank subsidiaries. Banks are also under the supervision of Banxico, which is entrusted with promoting the sound development of the financial system. Since 1999, the Institute for the Protection of Bank Savings is responsible for guaranteeing bank deposits – up to 400,000 investment units (unidad de inversion, UDI) per person per bank – providing financial support to banks with solvency issues and establishing mechanisms for institutions in the case of bankruptcy, with the aim of protecting bank depositors. One UDI is worth around MXN5 ($0.38).
Sector Makeup
There are 46 commercial banks and six development banks in the country. In 2013 three new banks entered the market, all of them domestic commercial banks: Banco Bancrea, focusing on loans to small and medium-sized enterprises (SMEs); Fundación Dondé Banco, specialising in collateralised consumer credit; and Banco Inmobiliario Mexicano, which concentrates on real estate financing. The total assets of commercial banks in the country reached MXN6.5trn ($505.05bn) in December 2013, 8.8% above the MXN6.01trn ($466.89bn) in December 2012.
Credit was the most important contributor to assets, accounting for 46% of the total, or MXN3.03trn ($235.4bn). Investment came in second, with 27%, or MXN1.79trn ($139.16bn). From 2012 to 2013, growth in the credit portfolio was responsible for 50% of total asset growth and investments for another 30%. The assets-to-GDP ratio was 40% and credit-to-GDP was 18.5%, both higher than in 2012, when they were 38% and 17%, respectively.
Sector Giants
Commercial banks hold 51.7% of assets in the Mexican financial system. There is a high degree of concentration, with the seven largest banks holding close to 80% of total assets (see analysis). Growth in liabilities was 9.1%, from MXN5.37trn ($417.2bn) in 2012 to MXN5.86trn ($455.3bn) in 2013, while equity increased 6.7%, reaching MXN678.7bn ($52.7bn) in 2013, over MXN636bn ($49.4bn) in 2012. Short-term deposits were the most relevant component with 34% of the total, followed by long-term deposits (13.5%). In 2013 interest revenue was MXN449.1bn ($34.8bn), 4.4% more than MXN430.2bn ($33.4bn) in 2012. The loan portfolio accounted for 72% of total revenues, or MXN322.8bn ($25.08bn), an 8.71% rise on 2012. Income from investments in securities accounted for 11.2% of the total, reaching MXN50.3bn ($3.9bn), a 7.3% decrease from 2012.
Revenue from repurchase instruments also saw a negative performance, falling 11% and standing at MXN39.5bn ($3.06bn), or 9% of the total. Interest expenditure was MXN153.5bn ($11.9bn), a reduction of 2% from 2012. Repurchase expenses accounted for 37% of the total and interest paid to long-term deposits was 23%. Net revenues in 2013 totalled MXN107.07bn ($8.31bn), which is 23.5% higher than MXN86.69bn ($6.7bn) in 2012. Regarding profitability, the return on assets (ROA) was 1.7% in December 2013, 20% higher than in 2012. Return on equity (ROE) also increased by 13%, standing at 15.8%.
Lending
Total credit provided by commercial banks in December 2013 was MXN3.03trn ($235.4bn). Commercial loans were the most important, with MXN1.84trn ($143.35bn), or 61%, of the total; followed by consumer credit at MXN673.02bn ($52.3bn), or 22%; and home loans with MXN513bn ($39.8bn), or 17%.
Of total commercial credit, 72% went to non-financial private companies, 6% to financial entities and 22% to governmental entities. In terms of consumer credit, credit cards were the most important, with 45% of the total, followed by payroll credit at 20%, personal loans with 19% and car loans with 11% of the total. Middle- and high-income housing made up 82% of total housing credit and loans for social housing accounted for the remaining 18%.
From 2012 the volume of credit grew by 10.2%. Consumption and housing grew above the average with 11.6% and 13.3%, respectively. Commercial loan growth was 8.9%, below the average for the sector. Credit to financial entities had the best performance, rising by 34%. Loans for social housing grew 27.2% and payroll loans increased by 16.3%. Only two sectors saw credit volumes fall: moveable goods dropped a mere 0.2% and capital lease transactions decreased by 19.4%. Despite growing below the overall volume (9% against 10.2%), given its weight of the total volume (44%), loans to non-financial private companies were responsible for 39.3% of the growth in lending between 2012 and 2013. Loans to middle- and high-income housing contributed 14.4%, and although credit to financial entities accounts for only 3.7% of the total, at 34% of growth it was the third most important in contributing to the 10.2% growth rate for the period.
From 2008 to 2013, growth in credit reached 60.3%. Capital lease transactions had the worst performance from 2012 to 2013, but the best since 2008 (764%). Credit to governmental entities increased 155% in the same period and saw its share of total loans go from 8.3% to 13.2%. It is also worth mentioning that the growth rate of loans for social housing was more than double the rate for medium- and high-income housing, with 147.1% and 69%, respectively. Credit cards had the smallest growth rate at 2.9%, which might explain the significant drop in its share of the total, from 15.6% in 2008 to 10% in 2013.
NPL
Regarding the soundness of the system, nonperforming loans (NPLs) were at MXN102.05bn ($7.92bn), or 3.4% of the total. Consumption was the group with highest ratio of 4.1%, followed by housing with 4%, while commercial loans had the lowest rate at 2.6%. Loans to the public sector had the lowest ratio among all segments, with only 0.01% of NPLs. Financial entities and car loans also had below average ratios of 0.11% and 2%, respectively. The low percentage of NPLs from the public sector and financial entities helps explain the soundness of the commercial credit portfolio. Financial leasing was the segment with highest ratio, 14.7%, followed by consumer loans (7.9%), personal (7.5%) and social housing (5.4%). From 2008 to 2013 NPLs rose from 2.5% to 3.4%. Moveable goods, credit cards, and the medium- and high-income housing segment saw drops in their NPL ratios, while increasing in all other segments.
By The Index
Passing to the analysis of the capitalisation of the system, the total capitalisation index (índice de capitalización, ICAP) was 15.5%, the index of basic capital (índice de capacidades básicas, ICB) was 13.5% and the index of basic capital 1 (ICB1) was 13%. Although there was a decrease from 2012, the three indices were comfortably above the minimum ratio established by the authorities. For ICAP, the Basel III requirement is 8%, but Mexican authorities have adopted a higher ratio of 10.5%. ICB and ICB1 have minimum values of 8.5% and 7%, respectively. The indicators show a sound banking system, which is acknowledged by many people in the sector. However, that does not necessarily translate into an efficient system. In the case of Mexico, despite the system’s soundness, it still has a low banking and credit penetration. The CNBV has implemented financial education programmes, as well as reforms (see analysis), and addressing this issue as one of its main objectives. “Only 9% of monetary transactions in Mexico are done by credit card. This is very low compared to the rest of Latin America, where the average is 30-50%,” said Antonio Junco Goicoechea, the director-general of MasterCard in Mexico.
Changing The Tide
There appears to be a consensus among policymakers and the private sector that banking penetration is very low. For Manuel Molano, the deputy director-general of the Mexican Institute for Competitiveness, banking penetration in the country is a central issue and the key to bringing about significant changes. As electronic methods of payment, such as mobile banking and internet transactions, replace cash, it gets harder to stay on the informal side of the economy. Molano said the country has made significant progress in increasing bank penetration through agreements between banks and other distribution networks, such as convenience stores. For José Molina, the CEO of local merchant services firm Prosa, Mexico is a cash-dominated economy, which means there is tremendous room for growth in new technologies. Molina believes mobile banking will be the future of the industry, though it is still a nascent trend. The economically active population is accustomed to using cards and standard banking services. However, the section of the population that is most aware of new technologies is younger and thus less economically established. The bottom line is that the effects of mobile banking may not be seen for another seven or eight years.
In addition to electronic banking, an increase in banking penetration is being promoted through postal service offices in locations where there are few or no bank branches. Seven banks are now offering services such as payments, deposits and payroll loans through this means. For example, in 2014 Banco Nacional de Mé xico (Banamex) and convenience store Oxxo signed an agreement to launch an initiative to provide debit cards to clients that will be associated with a saving account, which can be opened and receive deposits of up to MXN7000 ($544) monthly at all Oxxo stores.
Regional Trends
According to the latest data from the World Bank, domestic credit as a proportion of GDP was 47% in Mexico, well below the Latin America and Caribbean average (75%) and lower than economies like Brazil (111%), Chile (108%) and Colombia (73%), but still above Venezuela (42%), Argentina (37%) and Peru (17%). Compared to higher-income economies, the gap is even wider (156% for the EU, 205% for the OECD and 230% for the US). NPLs were 2.2% in Mexico, lower than Brazil, Chile, Peru and Colombia and higher than Argentina and Venezuela. Despite the low NPL ratio in comparison to other Latin American countries, one of the most important credit indicators, the ratio to GDP, is still very low. Not only is the volume low, but some significant areas of job creation receive less credit than the average. According to CNBV data, in 2013 30% of total credit went to financial entities and the government, 23% to large companies and 15% to SMEs, despite the last being responsible for approximately 70% of the jobs in Mexico. It is for this reason that Juan Bautista Guichard Michel, the CEO of Invex, told OBG, “The fact that the percentage of debt to GDP is very low in Mexico does not mean that it must necessarily be increased. As we move forward the key is to guarantee that public spending, whether from tax revenue or debt, is used in productive projects with more transparent reporting mechanisms.”
Gabriel Casillas, the director-general of economic analysis at Banorte, told OBG that whereas historical reasons, such as the nationalisation of banks in the beginning of the 1980s and the banking crisis of 1995, are behind the low level of credit, there are other key factors such as the high level of informality and the difficulty in recovering collateral in case of default. Moisés Tiktin, director-general of Grupo Financiero Monex, said the repercussions of the banking collapse 20 years ago yielded a very prudent financial sector, which has had two effects: a very strong and resilient system in relation to global factors, but this has also been a major contributor to low credit penetration.
Development Banks
As public federal institutions, development banks have the primary goal of promoting access to credit for individuals and organisations, targeting sectors that have a significant impact on job creation, segments without proper access to financing such as rural producers, and long-term credit to increase productivity. Their mandate also includes the provision of technical assistance and training to borrowers. Development banks are institutions through which development policies are implemented and they work in cooperation with both public entities and private financial intermediaries. These banks cannot lend directly, providing funds either indirectly through other financial institutions or through guarantees for these institutions to lend to riskier sectors.
There are six development banks in Mexico. Nacional Financiera (Nafinsa) has a focus on SMEs. Banco Nacional de Obras y Servicios Públicos (Banobras) is responsible for funding investments in public and private infrastructure, as well as public services, with its main focus being on federal entities and municipalities. Banco Nacional de Comercio Exterior’s ( Bancomext) objective is to promote the integration of SMEs into international trading. It finances short-, medium-and long-terms projects and also contributes technical assistance to foster exports from SMEs.
The Sociedad Hipotecaria Federal (SHF) concentrates on the housing sector, especially for lower-income segments. By granting guarantees for construction, acquisition and renovation of homes it aims to promote the development of primary and secondary mortgage markets. Banco Nacional de Ejército (Banjército) has as its main objective the provision of banking and credit services to the members of the Mexican Armed Forces, Air Force and Navy.
Banco del Ahorro Nacional y Servicios Financieros’ (Bansefi) role goes beyond the provision of credit. It aims to stimulate savings and promote the financial inclusion of informal segments, as well as regions with limited access to financial services. This process of inclusion also involves financial education programmes.
Segment Breakdown
The development banks’ combined assets totalled MXN1.25trn ($97.12bn) in December 2013, corresponding to 7.7% of GDP. Banobras had the largest share (39%), followed by Nafinsa (28.7%), Bancomext (17.5%), SHF (8%), Banjército (4%) and Bansefi (2.5%). This difference between the volume of assets might be explained by the role of each bank. Infrastructures projects, for instance, involve massive volume of resources. Banking and financial inclusion, on the other hand, deals with much lower values.
Of the total funds raised in 2013 (MXN642.8bn, $49.94bn), 81%, or MXN518.3bn ($40.2bn), were deposits and 19%, or MXN124.48bn ($9.67bn), from loans from other banks and institutions. Long-term deposits were the main source of funds at 61%, followed by debit securities (18%) and long-term loans (11%). Short-term deposits represented only 2% of the total and short-term loans accounted for 8%. Thus, long-term funding prevails, which is the appropriate profile for the funds of a development bank. Growth in total resources from 2012 to 2013 was 13%, as deposits increased by 13.8% and loans were up by 10.5%. The net revenue of development banks was MXN5.48bn ($425.7m), nearly 24% lower than MXN7.2bn ($559.4m) in 2012. This fall was reflected in the ROA, which went from 0.69% in 2012 to 0.48% in 2013, and the ROE, which stood at 6.08%, against 8.91% in 2012.
Their total credit portfolio was MXN567.8bn ($44.1bn), 45% of assets and 3.5% of GDP. Annual growth from 2012 to 2013 was 16%. Regarding the distribution of the credit, commercial loans account for the largest part, but more unequally than in the case of commercial banks. Commercial loans accounted for 92.9% of lending by development banks, consumer credit had 1.9%, housing had 3.9% and credit as an agent of the federal government made up 1.4%. Of the total commercial credit, 38% went to non-financial private companies, 29% to financial entities and 33% to government entities.
In regard to solvency indicators, the NPL to total credit ratio was 1.25, 0.5 point above 2012. The ICAP was lower than the ratio of commercial banks at 14.3% against 15.5%, but ICB (14%) and ICB 1 (13.3%) were higher. As happened to commercial banks, there was a decrease from 2012 but still much above Basel III requirements. The banks with the largest share of assets were also the leading lenders, but the concentration among the largest banks was even higher. Banobras’ credit portfolio was 48% of the total (MXN272.7bn, $21.18bn), Nafin had 21.2% (MXN120.6bn, $9.3bn), Bancomext 14.5% (MXN82.79bn, $6.4bn), SHF 12.5% (MXN70.97bn, $5.5bn), Banjército 3.6% (MXN20.24bn, $1.57bn) and Bansefi 0.09% (MXN498m, $38.6m). Although holding less than 1% of the credit portfolio, Bansefi had the highest growth rate from 2012 to 2013 at 114%, Banobras and SHF grew 14%, Nafin and Bancomext grew by 8% and Banjército saw 0.2% growth.
Outlook
With good liquidity and capitalisation ratios underscoring the soundness of the Mexican banking system, banking failures and financial crises are not on the radar. The profitability of banks operating in the domestic sector is also not a problem, and they should continue to perform well. That, however, does not mean that there are not challenges ahead.
According to Mario Maciel, the director-general of CI Bank, the Mexican banking system is very well capitalised and has no structural problems. “The challenge remains how to grow financial inclusion,” he said. Thus, addressing low banking and credit penetration is the main task. The financial reform is without a doubt an important initiative, but as Maria Tapia, the senior investment officer at Inter-American Bank of Development, told OBG, large banks in Mexico have found a very comfortable business of making profits with low volumes of lending, relying on investments, and lending mostly to large firms and the public sector. If the current low banking penetration means that there is room for growth, the necessary change will also depend on the willingness of banks to redefine their position. Therefore, if Mexico wants its banking system to be an engine for growth, it will have to seriously address these issues.
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