Moody’s Lowers to Negative Mexican Banking Sector Outlook

Moody’s Ratings has changed its outlook on the Mexican banking sector from positive to negative, citing economic slowdown and trade tensions with the United States as key factors. Despite solid fundamentals, the sector faces increasing challenges in 2025.

According to Moody’s, Mexico’s economic growth is expected to slow to 0.7% in 2025, driven by reduced public spending and institutional changes. Additionally, uncertainties surrounding trade relations with the United States are contributing to macroeconomic pressures and lower business volumes.

The agency warns that potential US tariffs could negatively impact Mexico’s manufacturing, automotive, and technology industries. These disruptions may lead to currency depreciation, increased inflation, and constraints on interest rate cuts, which would dampen loan demand. The resulting volatility in exports, exchange rates, and inflation could also reduce banks' risk appetite.

Moody’s report highlights that despite prudent credit origination standards, non-performing loan ratios are expected to rise as consumer loans mature in a slowing credit market. While the banking sector has benefited from rising real wages, increased remittances, and low unemployment, asset quality may see a slight deterioration. Non-performing loans, which stood at 2.0% of total loans in 2024, are projected to increase modestly.

Loan portfolio growth is expected to moderate to single digits over the next 12 to 18 months, down from 13% in 2024. This slowdown follows a strong year in which consumer loans grew 18% and corporate loans rose 14%. Trade tensions may further pressure business volumes, although banks are expected to maintain conservative credit policies and high loss reserves.

Moody’s adds that Mexican banks’ exposure to the most tariff-sensitive sectors, including agriculture, automotive, textiles, and chemicals, accounted for only 4% of total loans in 2024. However, large concentrations of government-related credit, particularly with state-owned oil company PEMEX, remain a systemic risk.

Despite these challenges, Mexico’s banking sector retains strong capital reserves and credit loss provisions, which support its ability to absorb potential losses. However, profitability is likely to decline due to rising provisioning needs and increased investments in digitalization amid growing competition from online banking platforms.

Moody’s also points out that banks face persistent high operating costs due to systemic inefficiencies, heavy cash usage, and extensive branch networks. Nevertheless, liquidity remains strong, supported by customer deposits. The rating agency further cautions that the Mexican government’s ability to provide financial support to banks is weakening due to deteriorating policy frameworks and fiscal pressures. While systemically important banks have access to resolution tools, government support remains moderate.