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Mexico banking sector risk
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
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