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Mexico’s Banks Face “Manageable” Recession: S&P

By MBN Staff | Wed, 12/09/2020 - 14:10

Credit ratings agency Standard & Poor’s said yesterday that Mexico’s banks face a “manageable” recession though Mexico will lag behind in economic recovery.

The credit ratings agency said that carrying out the Industry Risk Analysis Country Banking (BICRA) for Mexico, it had decided not to change the economic risk ranking of its group rating, which remains at 5. Mexico’s economic risk and credit ranking scores remained at 6 and 3, respectively. BICRA, a rating methodology that “represents the baseline creditworthiness” of banks, offers scores from 1-10, with 1 being the most creditworthy and 10 being the least. “In addition, trends in economic risks and industry (in Mexico) remain stable,” said the agency.

S&P’s said the country’s banking sector was now in a “correction phase” following the severe recession that the agency expects will reduce GDP by 9.3 percent in 2020. In 2021-2022, S&P expects a weak recovery, in part a consequence of the government’s small fiscal stimuli, which has been unable to protect the country’s economy from COVID-19’s impact to the extent achieved by other nations. Mexico is unlikely to reach pre-pandemic GDP until 2024, stated S&P. “This, coupled with rising unemployment, will weaken the quality and profitability of banks.”

One saving grace has been the banking sector’s strong pre-pandemic performance, which saw banks enter the crisis with “healthy balance sheets, solid profitability and very high net interest margins of over 7 percent in the last five years,” reckons S&P. Conversely, Mexico’s low banking penetration appears to have limited the impact of the COVID-19 pandemic on the country. Mexico’s credit leveraging is low at only 32 percent as a percentage of GDP in 2020, making it one of the lowest in the region. As a result, this allows banks in the country to “have conservative lending practices with a focus on middle and high-income clients who have adequate debt capacity.”

Back in May, AMB President Luis Niño de Rivera said that the country’s banking sector was solid enough to withstand the crisis. In contrast to previous crises Mexico’s banking system had faced, it now has the infrastructure and solvency to survive, he said.

In October, however, only 20 percent of banks surveyed by El Financiero reported an increase in profits while the majority reported reduced margins or outright losses. Banco Azteca reported the greatest loss at US$210 million, while Citibanamex’s profits fell by 50.2 percent.

However, S&P noted that with the pandemic still going on and Mexico’s future economic fortunes therefore uncertain, it would keep an eye on proceedings and act to review its ratings if necessary. “Our trend in economic risk remains stable. However, we remain alert to a potential deterioration in asset quality and profitability indicators, which, if deviated significantly from our expectations, could lead us to revise the trend or BICRA's economic risk classification.”

Photo by:   Jason Leung, Unsplash
MBN Staff MBN Staff MBN staff