Download KC Industry Focus Banking in Mexico Optimistic outlook for the banking sector

KC Industry Focus
Banking in Mexico
August 2014
Optimistic outlook
for the banking sector
Highlights
Mexican banking system is dominated by
seven main banks which hold nearly 80%
of the Mexican banking market.
Lending interest rate has been decreasing
in the past five years and stood at 4.25% in
2013.
Banking industry increased its profitability
substantially, ROA for 2012 was 19.89%,
ROE for 2012 was 2.73%.
Number of bank cards has been increasing
for past five years, in 2014 there were 16.19
million credit cards and 103.24 million
debit cards.
Recovering from the financial crisis,
Mexico currently stands as the 11th largest
economy worldwide, with a local stock
exchange valued at 451 billion USD in
2012, just second to Brazil in Latin
America. The Mexico’s banking sector
currently can be described as healthy and
stable. The active expansion of credit in
the country was mainly due to the
continuous financial and operational
strength of the country. ¹
Manufacturing exports saw considerable
growth after entering into GATT (General
Agreement on Tariffs and Trade) and
NAFTA. It grew from 8% in 1990, 18% in
1995 to 23% by the end of 2012.¹
By the end of March 2013, there were 44
commercial banks that operate in Mexico.
The seven main banks have concentrated
78.8% of all banking activities in the
country. ²
Engaging with foreign institution through
NAFTA (North American Free Trade
Agreement), allowing capital market
integration and eliminating restrictions
on trading, has opened the country to
foreign investments and consequently to
an economic growth.¹
¹ World Finance, Mexico’s reforms make the country
increasingly attractive to investors, 18 July 2014
² CEFP (Centro de Estudios de las Finanzas Públicas),
Indicadores del Sistema Financiero en México, May 2013
At a glance
The situation in the Mexico’s banking
sector is improving every day, thanks to
the financial reform passed in November
2013, as well to the favorable
macroeconomic conditions. Recently,
banks are lending more money, a factor
which was plaguing Mexico for long time
as banks were reluctant to take high-risk
clients.
Even though the growth is modest, it is a
great improvement from 2013, see Table 1.
Table 1. Total credit portfolio of commercial banks, in billions MXN,
June 2013 and June 2014
June
2013
June
2014
Annual change
(%)
Commercial credit
1,746
1,877
8.8%
Companies
1,266
1,354
7%
Financial institutions
94
112
19.80%
Governmental entities
386
411
6.40%
Credit to the Federal Government or with their guarantee
Credit to states and municipalities or with their guarantee
12
282
27
285
118.20%
0.90%
Credit to the decentralized bodies or with their guarantee
91
99
8.30%
Consumption
636
691
8.60%
Credit cards
Personal
Payroll
287
121
126
303
138
149
5.50%
13.80%
18.30%
ABCD
Automotive
Acquisition of goods
75
72
3
78
74
4
4.80%
3.50%
37.20%
Operations under capital lease
3
2
-45.40%
Other credits of consumption
24
21
-12.70%
474
540
13.90%
Middle and residential
395
456
15.50%
Social interest
79
84
6.30%
2,855
3,107
8.80%
Housing
Total
Source: CNBV (Comisión Nacional Bancaria y de Valores)
01
Economic Factors
Bank savings
Graph 2. Quarterly average growth rates
of bank savings in Mexico, 2012-2013
growth rate (%)
8%
6.9%
6.6%
7%
6%
5.1%
5%
4.0%
4%
3%
3.8%
3.7%
2%
2.1%
1%
0%
2012 Q1 2012 Q2 2012 Q3 2012 Q4 2013 Q1 2013 Q2 2013 Q3
Source: BBVA Research
Growth rates of savings in Mexico have been gradually
reducing since 2012. The real average growth rates of
traditional bank savings in the country decreased from
6.6% in the second quarter of 2012 to 2.1% in the same
quarter of the following year. In the third quarter of
2013, there was an improved performance, which can
indicate potential progress in the future (see Graph 2).
The growth of traditional bank deposits and total
savings has slowdown in 2013, this is a result of a lower
growth seen in both GDP and the IGAE (economic
activity index).
In 2014, the situation could shift, if the Bank of Mexico’s
growth forecasts are correct and economy will see
growth of 3% or 4%. The economic growth in 2014
could foster a more rapid increase in savings
for the year.³
³ BBVA Research, Banking Outlook Mexico, December 2013
01
Economic Factors
Bank Lending
Graph 3. Lending interest rate
in Mexico, 2008-2013
8.71%
7.07%
5.29% 4.92%
4.73%
2008
2009
Source: World Bank
2010
2011
2012
4.25%
2013
Mexico’s commercial credit market is
the smallest in Latin America. This is
because Mexican banks are reluctant in
lending due to the high risks and
expensive collaterals, this came as a
result of the collapse of the country’s
banking system in 1995. Banks prefer to
profit from high interest rates from large
and established companies, which
makes the smaller enterprises struggle.
Almost 98% of the total companies in
the country are SME’s, providing around
70% of the total employment. In 2013,
the smaller companies received only 15%
of the total loans from the banks.⁴
⁴Bloomberg, Lowest Lending Rate in Region Slows Mexico´s
Economic Comeback, April 2013
Commercial bank lending was around 19%
of the total GDP in 2013 and, throughout the
year, the rate of growth of total bank lending
to the private sector has slowed down. The
average of a real annual growth rate of bank
lending from January to September 2013
decreased to 7% compared with10.4% for
the same period in 2012. The highest
slowdown was seen for consumer lending,
which fell from 18.4% to 11.5% for the first
nine months of 2012 and 2013, respectively.
The slowdown came as a result of a lower
growth in economic activity and
employment in the formal sector.⁵
Data from the World Bank shows that there
was a great decrease of lending rates from
8.71% in 2008 to 4.25% in 2013 (see Graph
3). With this improvement of lending rates,
the government aims to see growth in the
credit market and boost the country’s GDP.⁵
⁵World Bank, Data on Lending interest rate (%)
01
Economic Factors
Profitability
Solvency
The return on equity (ROE) increased substantially in 2012 ,
compared to a previous year. The return on assets (ROA) also saw
a sharp increase for 2012 (see Graph 5).⁷ From June 2013 to June
2014, the numbers from CNBV reveal that the average ROE stood
at 14.19% and average ROA stood at 1.50% .⁷
Graph 4. Mexican capitalization index - ICAP
(in %), 2007-2012
16.86%
16.52%
15.95%
15.95%
15.27%
Graph 5. Mexican commercial bank Return on
Assets(ROA) and Return on Equity (ROE), 2007-2012
15.69%
2007
2008
2009
2010
2011
2012
Source: CNBV
In 2012, the banking industry in Mexico presented a
capitalization index of 15.95% (see Graph 4). Nearly 89% of net
capital in Mexican banks is composed of basic capital, which has
seen its relative importance in relation to complementary capital
increase over the years as a result of retained earnings. Even
though the capitalization index are higher than the required by
regulation (10.5% its the new international criteria), banks could
increase their capital base to maintain dynamism seen in the past
two years.⁶
⁶CNBV (Comisión Nacional Bancaria y de Valores)
ROA
13.52%
13.12%
19.89%
ROE
11.58%
10.57%
9.61%
2.73%
1.41%
1.33%
1.29%
1.12%
0.97%
2007
2008
2009
2010
2011
2012
Source: World Bank
⁷CNBV (Comisión Nacional Bancaria y de Valores), Comunicado de Prenda Banca Múltiple,
June 2014
02
Social Factors
Accessibility
Graph 6. Accessibility to banks and
ATMs per 1000 km² in Mexico,
2008 – 2012
20.89
16.43
17.39
18.69
18.94
5.35
5.71
6.01
6.15
6.41
2008
2009
2010
2011
2012
Commercial Banks
Source: World Bank
ATMs
The small number of savings accounts and
delivery channels per inhabitant indicates
an insufficient bank penetration in the
country.⁸
Data gathered from IMF (International
Monetary Fund) shows that financial
institutions are gradually growing in
numbers. Commercial banks branches per
1,000 km2 increased from 5.35 in 2008 to
6.41 in 2012 while the number of ATMs
per 1,000 km² also increased from 16.43 to
20.89 in the same years (see Graph 6).⁹
Though there were significant increases in
bank branches, ATMs and point-of-sale
terminals, a large part of the population
still doesn’t use formal banking services.
Most of them are from the poorest parts of
the population or are living in rural areas
of the country. ¹¹
⁸ The Bank of Mexico, Mexico’s banking system: opportunities
from reform, May 2014
⁹IMF, IMF Data Mapper: Mexico
¹⁰ Federal Reserve Bank of Dallas, Reaching Mexico’s
Unbanked, July 2008
In 2012, 62% of adults aged between 15
and 70 who participated in the ENIF
survey responded that they didn’t have any
savings, current accounts or credit in any
formal financial institution. The top
reasons for their exclusion were:
• Inadequate income;
• Disinterest;
• Personal reasons;
• Insufficient access.
It was also stated that women are more
excluded than men. This is related to their
income-generating capability and
employment since most women in the
country tend to become housewives or
homemakers and their income is directly
related to savings.
Other significant reasons for the exclusion
were education level and geographical
factors.¹¹
¹¹ BBVA, Demand factors that influence financial inclusion in
Mexico: analysis of the barriers based on the ENIF survey,
December 2013
03
Bank Cards
Debit cards
In April 2014, there were around 103
million debit cards in Mexico, a
considerable growth compared with 2010.
An increase of nearly 40 million debit
cards just in four years (see Graph 7).¹²
Graph 7. Number of debit cards in
Mexico, in millions, 2010 April -2014
April
64.282
2010
75.839
2011
92.697
2012
95.754 103.214
2013
Credit cards
Card fraud
In April 2014, there were around 16
million credit cards in Mexico, it amounted
to 243,720 million MXN of the credit
available. The median effective rate per
account stood at 23.3% (see Graph 8).
When it comes to the credit limit, 80.7% of
credit cards have credit limit higher than
15,000 MXN, followed by 12.7% of credit
cards with a credit between 8,001MXN
and 15,000 MXN, then 4.9% with credit
between 4,001 MXN and 8,000 MXN, and
the last 1.6% with credit lower than 4,500
MXN.¹³
Credit card fraud has been rampant
in the country for many years. In an ACI
Worldwide 2012 survey’s, Mexico ranked
number 1 out of the 17 participating
countries with the most number of
financial frauds. This resulted in 44% of
Mexican respondents (n=290) saying they
have experienced card fraud in the past 5
years. Respondents also reduced the usage
of their cards, with 25% stopping the use of
the card for less than 1 month and 40%
stopping the use of the card for 1 to 3
months.
Graph 8. Number of credit cards in
Mexico, in millions, 2010 April -2014
April
To reduce the fraud rates banks should
implement fast recovery processes, sharing
fraud policies, educating consumers about
fraud, and notifying them when such
frauds occur.¹⁴
2014
Source: Banco de Mexico
12.41
13.47
2010
2011
14.87
15.98
16.19
2012
2013
2014
Source: Banco de Mexico
¹² Banco de Mexico, Payment Systems – Cards Data
¹3 Banco de Mexico, Indicadores básicos de tarjeta
de crédito, April 2014
¹⁴ACI, Global Consumers React to Rising Fraud:
Beware Back of Wallet, October 2012
04
Financial Reform
Recently, Mexico approved a multi-layered
financial reform that aims to strengthen
the institutional framework of Mexican
banks. This will allow more robust and
sustainable credit expansion, seek more
effective property-rights protection for
creditors and formally regulate and
promote completion among financial
intermediaries. Capital requirements of
the Basel III guidelines were also made
mandatory. These will potentially foster a
more competitive, consumer-friendly and
healthy banking system, and may
contribute to a potential economic
growth.¹⁵
The four pillars of the Mexico’s financial
reform can be seen on the right side.
01
02
03
04
New laws and regulations for Development Banking
The sector will be given more financial and regulatory
flexibility in order for it to be able to provide more loans,
particularly in areas which are priority to national
development.
Banks will not be allowed to offer “Tied Sales”
“Tied Sales”, which are sales conditioned to the
acquisition of a different product, will be outlawed.
Several measures will be taken for operations between
institutions to be more simple.
Financial authorities will be strengthened
Banks will be granted more securities in the execution
of contracts and collection of guarantees. Several laws,
such as the transparency and mercantile contest laws,
will be modified.
The sector will be strengthened
Norms with regards to capital quality requirements
will be turned into laws. The savings of users of the
financial system will be protected in all cases of
bankruptcy.
Source: Reuters Mexico, CNN Mexico and Aristegui Noticias
1⁵ BNP Paribas Economic Forum, Manuel Sánchez: Mexico’s
banking system – opportunities from reform, March 2014
05
Future Trends
Graph 9. Mexico banking sector predictions,
in millions MNX, 2010 -2017
5,417,240
4,670,035
4,705,533
3,554,398
4,239,219
2,989,708
3,519,484
2,516,239
2,789,787
While the economy will remain sluggish, it is believed the sector’s
margins are likely to be squeezed as a loan growth continues to
decelerate and banks maintain substantial buffers against any
increase in non-performing loans, eating into profitability.
Mexican economy is expected to accelerate, increasing the
corporate and consumer appetite for credit.
The Mexico’s banking system has an optimistic long-term outlook
for the coming years (see Graph 9). Stronger growth will boost
the corporate and consumer credit growth, while improved
macroeconomic environment will encourage a continued
reduction in loan loss provisioning.
2,123,686
*Forecast
2010
2011
2012
2013*
Client loan
Source: IMF, World Economic Outlook (WEO)
2014*
2015*
Client deposits
2016*
2017*
Even though the loan-to-deposit ration has been increasing
moderately in the recent years, it remained at a fairly healthy
95%, which indicates that the loans are fully backed by deposits
and below most others in the region. Stringent regulations on
commissions and fees, as well as increased competition are likely
to benefit consumers and increase overall loan growth, but
influence individual banks’ profitability. Mexico has the lowest
client loans per capita of any major Latin American country,
which indicates room for growth in the sector, which in turn
suggests solid profits for coming years.¹⁶
¹⁶ IMF, World Economic Outlook (WEO)
Contact us:
If you have more questions about the topic or wish to learn more about other
Mexican industries, please contact:
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Partner Clients & Markets
[email protected]
(55) 5263 6070
Manuel Flores de Orta
Sr. Specialist Manager Knowledge Management
and Knowledge Center Clients & Markets
[email protected]
(55) 5263 8543
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Consultant
[email protected]
(55) 5263 7536
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(55) 5263 7586
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