Despite its solid financial indicators, Moody’s maintains the negative perspective on the Mexican banking sector, this, he explained, in line with the weak economic recovery.
In its report, the rating agency highlighted that macroeconomic conditions will continue to be difficult during the next 12 to 18 months, with sluggish domestic demand, weak investment prospects and limited productivity growth, which will affect the growth of the Gross domestic product (GDP) from Mexico.
For Moody’sthe expectation of GDP growth for 2022 it is now 1.1% for 2022, and 2.1% for 2023, “down from 4.8% in 2021, and down from other large countries in the region.”
On the other hand, he pointed out that inflation will remain high in 2022, affecting the payment capacity of borrowers.
“Limited trade relations with Russia and Ukraine will limit downward revisions to GDP growth, but spillover effects from the military conflict will keep inflation high, at 7.3% in February 2022, and make it difficult for the target to return to normal. of 3% of the central bank”, he argued.
The agency added that the job recovery it has been weak, mainly in the informal and low-wage formal sectors, which, he said, will limit demand for higher-yielding banking products.
Bank finances will remain strong
Despite this situation, the rating agency trusted that the finances of the mexican banks remain strong as they have strict underwriting standards and maintain a well-diversified portfolio, which will support stable asset quality.
Earnings retention, high profitability and moderate loan growth would allow for capital stability, while the gradual introduction of new capital requirements will improve loss-absorbing capacity through 2025.
In this sense, he considered that the total regulatory capital ratio of the six largest banks will remain, largely in line with the current average levels of 18.6% as of December 2021, although he highlighted that some specific institutions will need to issue notes that can absorb losses before possible liquidation scenarios in the next two years.
Profitability will remain stable
Moody’s He added that Mexican banks maintain ample pricing power and access to low-cost core deposit funding, which will support net interest margins in an environment of higher interest rates and inflation.
“Profitability will remain stable over the outlook period, benefiting from good access to low-cost core deposit funding and a relative acceleration in loan growth amid higher interest rates in response to inflationary pressures. ”, he raised.
However, he stressed that operating expenses will remain high, due to the need to continue investing in technology and bank branches.
Finally, Moody’s noted that the government’s ability to support banks is deteriorating, as indicated by the negative outlook on the Mexico’s Baa1 credit rating.