MONTERREY, Mexico--(BUSINESS WIRE)--Mexican Non-Bank Financial Institutions' (NBFIs) profitability will likely be pressured as a result of the increases in the target interest rate announced by Mexico's central bank, including the most recent increase of 50bp, says Fitch Ratings. As opposed to the effect on the banking system, whose profits benefit from interest rate hikes, NBFIs' net income will be challenged by recent upticks.
The funding base of most non-regulated NBFIs in Mexico is consists mainly of floating-rate wholesale facilities; thus, the rise in interest rates will almost immediately increase their funding costs. For some companies, such as those in the microfinance, consumer finance, and pawn lending segments, this will result in moderately lower net interest margins, as they will not be able to pass through the higher funding cost to borrowers due to the already high rates charged and the high competition in those sectors. NBFIs focused in agricultural or SME lending may have some leeway to increase active interest rates; however, this may take time as most of these are fixed-rate loans with longer terms, hence the companies are not able to immediately reprice their portfolios.
Some regulated NBFIs, such as credit unions, cooperatives and 'sofipos' (sociedad financiera popular in Spanish) are allowed to take deposits (or quasi-deposits in the case of the unions) from the public. Their funding costs tend to be lower than those of the NBFIs that rely on wholesale facilities, although they are more costly than banks' deposits. Those providing loans to SMEs or to the primary sector will also need some time to increase interest rates in their mostly fixed-rate-denominated loan portfolio. For this reason, Fitch does not expect the interest rate hikes to quickly benefit their profitability.
Despite Fitch's expectations that the higher reference interest rate will moderately pressure rated NBFIs' profitability metrics, negative rating actions in the medium term are not expected as a result. Current rating levels reflect the wholesale nature of their funding sources at generally higher funding costs, their concentrated and riskier business models, and above-average profitability that compensates for an above-average risk appetite. Fitch considers the main challenge of these entities in an increasing interest rate environment will be to make their operation more efficient and to grow their franchises in order to improve profitability in the future.
Fitch does not expect that this interest rate increase translates immediately into higher funding costs from development banks to NBFIs. These entities, on the contrary, have been offering more competitive rates in line with their policy banks nature and for the sake of higher financial inclusion, in line with government objectives. Fitch believes these banks will increase the interest rates they charge only gradually, and may compensate for the higher variable rate with a narrower spread, granting NBFIs time to cope with higher funding costs and adjust their strategies accordingly. Fitch considers development banks' role to be fundamental to the achievement of NBFIs' objectives in the future.
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