Fitch: Mexican Banks Expected to Benefit If Rates Rise

NEW YORK--()--Large and medium-sized Mexican banks with solid deposit funding are likely to benefit from higher interest rates expected over the near to medium term, says Fitch Ratings. Rate increases have been signaled by the US Federal Reserve and generally impact the Mexican central bank's interest rate decisions, which we expect are likely to translate in some wider net interest margins (NIM) for the sector.

Mexican banks typically demonstrate asset sensitivity in a changing rate environment, meaning that the interest rates on new loans tend move up faster than the offering rates on customer deposits, which also will rise, but at a slower reaction speed. This dynamic historically has resulted in rising NIMs and modestly better profits for banks. The dynamic is not currently expected to change our stable outlook on the Mexican banking sector. However, higher asset sensitivity, if seen again, would be a factor supporting solid credit fundamentals for the sector.

Smaller and specialized banks are not expected to materially benefit from the upward trend in interest rates because their funding, often term deposits and wholesale loans, tends to be more interest rate-sensitive than core deposits. The availability and costs of these funding sources are likely to be quite sensitive given global uncertainty around how markets react to higher rates.

Average NIMs across the Mexican banking sector, currently just above 5%, have held relatively steady near that level for over five years. The most recent NIM peaks occurred at year-end 2012 and early 2013, near 6%. Prior to the monetary easing in the wake of the financial crisis period, NIMs were running nearer to 7%.

Many banks in Mexico exhibit a stable customer deposit base, even under times of economic stress, such as has been recently experienced. The amounts of outstanding loan portfolios usually move in line with customer deposits. However, as of March 2015, deposits were outpacing loan growth somewhat. Some loan growth would need to be realized over the near term to truly exhibit increased asset sensitivity.

An interest rates increase will also affect banks' trading portfolios by reducing the value of fixed-income security portfolios. Any negative effects on income from valuation declines could be sufficient to offset NIM improvements. In our view however, given the relatively small size of the trading portfolios as compared to their loan portfolios, the net effect of higher interest rates should still result in increasing bank incomes.

Notably, Mexico's central bank recently revised the remainder of its 2015 dates for announcing overnight lending rate decisions to just one day following the each of the upcoming rate decisions by the Fed.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Contacts

Fitch Ratings
Monica Ibarra
+52 81 8399-9150
Financial Institutions
Monterrey, N.L., Mexico
or
Bertha Perez
+52 81 8399-9161
Financial Institutions
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+ 1 212 908-0652
New York, NY
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Monica Ibarra
+52 81 8399-9150
Financial Institutions
Monterrey, N.L., Mexico
or
Bertha Perez
+52 81 8399-9161
Financial Institutions
or
Matthew Noll, CFA
Senior Director
Financial Institutions Fitch Wire
+ 1 212 908-0652
New York, NY
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com