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President-elect Andrés Manuel López Obrador said on 9
November 2018 that he did not plan to modify the legal and tax
framework in Mexico's banking sector, at least during his first
three years in office.
President-elect Andrés Manuel López Obrador (AMLO)'s
statements were made after his party introduced a bill in Congress
seeking to eliminate banking fees for personal-sector customers and
reduce business charges: such fees and commissions account for over
30% of the sector's revenues in Mexico.
AMLO's intervention is risk-positive, indicating a reduced risk
of the planned measures being implemented rapidly, but he also said
that the legislative was independent, prompting the Senator in
charge of the draft bill to state that a commission would continue
reviewing the initiative.
It is unlikely that the bill will pass without AMLO's approval
(his signature is needed for enforcement), but if not shelved and
kept under review, the probability of AMLO being persuaded to
accept at least some of the proposed measures will increase,
raising the probability of partial implementation before 2021.
President-elect Andrés Manuel López Obrador (AMLO),
who takes office on 1 December 2018, made his statement after
Senator Ricardo Monreal, who belongs to AMLO's National
Regeneration Movement (Movimiento Regeneración Nacional:
MORENA), introduced a draft bill in Congress seeking to reduce bank
fees charged to customers in Mexico, arguing that they are
"excessive and alarming". The bill seeks to amend the Law for
Transparency (Ley para la Transparencia), the Framework for
Financial Services (Ordenamiento de los Servicios Financieros), and
the Credit Institutions Law (Ley de Instituciones de Crédito)
to cap or remove charges for balance inquiries, ATM withdrawals,
late payments, non-payments, annual fees on credit cards,
inter-bank transfers, and business use of credit card
terminals.
Bank profitability threatened, with increased impairment
also likely: capital strength and structural soundness remain
strong
Following its introduction in Congress, the shares of Mexico's
main banks declined 9% at Mexico's stock exchange. In Mexico,
banking fees account for more than 30% of Mexican banking-sector
revenues, and in IHS Markit's view passage of the draft bill would
be clearly risk-negative for banks and would materially increase
their regulatory burden. In particular, it would significantly
reduce bank profitability, hinder capital accretion, and
potentially impair payment culture and increase credit risks.
Mexican banks currently enjoy respectable levels of profitability:
the sector's pre-tax return on average assets stood at 1.7% in June
2018.
In our view, the measures are also likely to worsen
banking-sector credit risk accumulation. In particular, they are
likely to increase the risk of consumer defaults on credit card
payments, with the limited or zero costs for credit card services
now being proposed likely to encourage increased consumer usage,
and triggering greater risks that borrowers will overextend their
borrowings.
Although reduced returns and potentially higher consumer-sector
impairments will limit scope to raise additional capital from
retained earnings, banks are well capitalized with a capital
adequacy ratio and Tier 1 capital ratio of 15.9% and 14.2%
respectively in September 2018. Given this strong capital position,
the proposed measures are unlikely to damage the sector's capital
strength and structural soundness for the foreseeable future, asset
quality threats also will be moderated by leading banks' strong
credit controls, given which lending growth is likely to remain
moderate in the near term. Such controls also should help to limit
the degree of expansion in credit card usage and the risk of
imprudent borrowing patterns. Overall, despite the clear risk of a
material reduction in profitability, we expect the sector to remain
sound, with overall credit risks facing banks remaining low.
Outlook and implications
AMLO's intervention to state that the modification of
banking-related legislation was not among his priorities is
risk-positive for regulatory burdens affecting the banking sector.
However, AMLO also stated that he would respect the Mexican
legislative's independence and that lawmakers had freedom to
progress legislation. In turn, this has encouraged Monreal to
reiterate his criticism of banking-sector fees and to state that a
commission in Congress would continue working on the draft bill.
The discrepancy of views between AMLO and Monreal highlights the
existence of divisions and/or lack of co-ordination between AMLO
and his party, a situation that is likely to maintain regulatory
uncertainty in the sector.
MORENA has enough seats to pass the bill in both houses but it
is highly unlikely that the party would progress it if AMLO is
opposed to its content, risking a presidential veto. However, AMLO
has been ambivalent over his main policies over the past year,
often changing his mind and/or contradicting important members of
his team on issues such as energy, economic policy, and the now
cancelled Mexico City international airport. A key indicator for
progress with regulatory change will be whether the bill is
actually kept under review, as Monreal has suggested, rather than
shelved. If the bill is kept under review it is likely that the
commission in charge would launch a consultation process to review
the concerns of bank users, along with those from representatives
of the sector. This would impose a natural delay of the bill being
voted. If a consultation process is launched, with the bank users
being consulted, we assess that there is a clear risk of AMLO being
persuaded to support some or all of the bill, even during the first
half of his term, given that bank users would welcome a reduction
of the fees. The fact that AMLO did not rule out changes in
banking-related legislation during the second half of his term also
indicates increased likelihood of fees being capped or eliminated
in 2021 even if the current bill ends up being shelved
temporarily.
This post was co-authored by Carlos Cardenas and Natasha
McSwiggan