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News Article

Banks on Edge as COVID-19 Marks First Bankruptcy

By Peter Appleby | Mon, 06/29/2020 - 13:19

The economic difficulties that have beset the Mexican economy with the arrival of COVID-19 have claimed their first bankruptcy in the banking sector, El Financiero reports. On Friday, Banco Ahorro Famsa filed for Chapter 11 in the US or what is commonly known as a “reorganization” bankruptcy, which would allow the company to restructure its debts of US$59.1 million that matured on June 1.  

In Grupo Famsa’s 1Q20 report, the “Message from the CEO” noted that the group as a whole had seen a “4.9 percent year-on-year decrease recorded in net sales” which was “primarily explained by a weak consumption environment.” The company’s consolidated EBITDA grew by 14.1 percent year-on-year, hitting MX$703 million (US$30.4 million). The company’s overall debt, meanwhile, stands at MX$9.317 billion (US$402.7 million) in 1Q20.

According to El Economista, the bank has stated it will “continue to operate its businesses normally and that it (the Chapter 11 filing) will not affect any other obligation other than the 2020 bonds.”

Famsa had been underperforming for some time, says El Financiero, but it was the impact of COVID-19 that has pushed it towards bankruptcy. Problems of liquidity and the steep drop in demand for some bank products arrived at the same time that the necessity of digital banking services have risen. As noted by Mexico Business News earlier this month, COVID-19’s lockdown measures drove an increase in online banking and propelled the growth of online-only banks in Mexico.

In April, the World Bank published a report that highlighted the disastrous effect of the pandemic on banking institutions around the globe as people experienced a “sharp decrease in income as unemployment grows” which, as a knock-on effect of falling demand in services, is “already resulting in shocks to the financial system in the form of increases in non-performing loans, insolvency filings, unnecessary liquidations and asset fire-sales.”

Earlier this month, Governor of Banxico Alejandro Díaz de León warned the country of the risks banking institutions face due to the virus, reports Expansión. In the video conference to announce the report, de León said that even though the country’s financial sector had entered the pandemic in a strong position, with good levels of capital and liquidity, the persistence of the pandemic had dealt heavy blows.

"The economic outlook and that of the Mexican financial system has deteriorated and become more uncertain. In this environment, the timely monitoring and proper identification of the risks to which the financial system is exposed is especially important,” El Economista reports the governor said.

Peter Appleby Peter Appleby Journalist and Industry Analyst