After being down and out for nearly a decade, Mexican banking is beginning to shows signs of life. Consumer credit and mortgage lending are growing briskly enough to evoke memories of the nightmare banking crash of 1995, but solvency and new safeguards have risk under control, analysts say.
Indeed, there is a consensus in financial circles that Mexican banking is operating on solid ground. The outlook for economic growth is good this year, and people are optimistic about next year's presidential election and transition, says a banking analyst.
Credit in Mexico grew at virtually negative rates from the banking collapse that followed the 1994 peso devaluation until the last couple of years. Today, credit is growing six times faster than GDP, which last year increased by 1.3%.
Consumer lending
Consumer lending – including credit cards, and automobile and personal loans – leads the pack, expanding by 45% annually; mortgage lending is increasing by 26%, and business loans, primarily to small and medium enterprises, are growing at 20% annually, according to official statistics.
Borrowers and banks alike were flattened by the banking crisis, which led to a $90 billion bail-out of the banks, and lending came to a screeching halt. As a result, even with rapid growth of lending, the starting base is so low that the total of these new credits is below 10% of GDP, the central bank reports.
Protection
A number of protective shields are built around the lending boom that should protect banks. Mexico's banks are more solvent today than a decade ago. Capitalization averages 16% throughout the financial system. Supervision has improved with more and better rules and risk classification made by ratings agencies.
Today, Mexico boasts a credit bureau that tracks payment history on multiple credit cards, cell phones, cable television and other charge accounts. There is a new credit culture, largely because ownership of over 80% of Mexico's banking system has shifted since 1995 to foreign banks. "Banks are being much more cautious in terms of who they extend credit to; they really look into who they lend to and their payment record," says Javier Marquez, manager of risk analysis at Banco de Mexico, the central bank. "Our estimate is that only 5% of net capital is at risk, and the probability of losing that in one year is 2.5%," he adds.
New regulations
Additional safeguards include new regulations. "We learned to improve the regulatory framework," says Alejandro Diaz de Leon, director of macroeconomic analysis at the Banco de Mexico. In recent years, Mexico has passed a bankruptcy law and a guarantee law that aim to expedite loan collection and recourse in case of default.
The growth trend in lending can be expected to continue apace. Worldwide, there is a trend to expand consumer and mortgage lending. Consumer credit makes up only 20% of the total lending portfolio in Mexico compared to other countries. where it reaches 33%; the balance sheet is much cleaner, with non-performing loans at 3.75% of credits; and reserves of 170% are adequate, says David Olivares, banking analyst at Moody's rating agency in Mexico City.
Risks
Caution is being urged by some analysts, however."The base has been getting larger, whether or not practices are safe or if we have a problem in the economy and a lot of people default; it is hard to see how risky that is going to be," says Felix Boni, economic analyst with Scotia Bank Inverlat in Mexico City.
Past due payments on credit cards rose more than 31% in 2004 for a total of about $220 million in arrears, Mexico City's El Financiero newspaper reports. This merits close attention, warns a banking analyst. "Arrears are to be managed in absolute numbers not as a percentage of portfolio, so when there is rapid growth of lending, it tends to obscure non-performing loans because it seems like a small number," says a regional banking analyst and former banking supervisor.
Numbers will drive continued growth in lending."These are high-yield loans – they are contributing to high profitability for the banks," says Olivares of Moody's.
Credit expansion is concentrated in the high-yield portions of the credit portfolio: credit card rates run as high as 77% annually and mortgages average around 15% fixed rate for 15 to 20 years.
The investment portfolio of Mexican banks remains concentrated in government paper, which offers high yields and makes up 90% of banks' investment portfolio, says Olivares. Return on equity in Mexico's financial system is 11.5%.
Profits are also fuelled by a wide range of fees and commissions that, increasingly, are coming under scrutiny. Fees on everything from getting a cheque book to ATM machines to bounced cheques are so high that this year the central bank commissioned a study by international experts of the banking system, which found that concentration of the financial system and barriers to entry make bank services costly, reports Guillermo Ortiz, governor of the Banco de Mexico. Talks are underway between the authorities and the banks to make the payments system more efficient and less costly and to lower banking fees.
CHART:
Lending as % of GDP:
Consumer Loans:
1999: 0.7% of GDP (all-time low)
1994: 3.3% of GDP (before crisis)
2004: 2.3% of GDP
Mortgages:
2002: 0.9% of GDP (all-time low)
1994: 7.1% of GDP (before crisis)
2004: 1.0% of GDP
Business Loans:
2003: 5.2% of GDP (all-time low)
1994: 5.6% (before crisis)
2004: 5.6% of GDP
Source: Banco de Mexico