Mexican banks are facing a tougher-than-expected operating environment in 2019.
In the short term, a sluggish economy is constraining credit demand growth and forecasts for interest rate cuts will pressure net interest margins (NIMs).
In February, the Mexican central bank reported sequential credit growth of just 0.4%. The disappointing result at the beginning of 2019, when bankers had been hoping to see credit growth accelerating as the presidential election faded from sight, was hampered by a -2.2% month-on-month fall in government loans.
Expectations that the central bank will cut its policy rate (the majority of forecasts range between 0.25% and 0.75% cuts in the second half of this year) could exacerbate the banks’ performance by weakening NIMs. At a UBS Mexican banking conference in March, Banco Bajio and Regional indicated that every 100 basis point cut in policy rates would lower NIMs by 45bp and 14bp respectively, although both added that they would look to mitigate NIM pressure by lowering funding costs, hedging and growing non-interest income.
The larger banks are less exposed, with Banorte and Santander Mexico reporting much lower sensitivities to lower rates (lower NIMs of 2bp and 3bp respectively for a cut of 100bp to the policy rate), while for Gentera, a bank largely wholesale-funded, a 100bp rate cut could push NIMs up by 10bp.
