Fitch: Will loan growth (and earnings) finally recover for Mexican banks?

Fitch Ratings' Sector Outlook for Mexican Banks remains Stable. Fitch considers a revision of the industry outlook unlikely during 2015, given the moderate expected economic recovery and developing downside risks from the global environment. However, various banks could have upside rating potential, especially those that currently have a Positive Rating Outlook and are able to continue strengthening their credit profiles.

Fitch also considers a revision of the Rating or Sector Outlook to Negative highly unlikely, given that this would only occur with a deterioration of the operating environment to the extent that materially weakens capital and liquidity profiles, not only asset quality and earnings.

Fitch expects Mexico's GDP growth to speed up to some extent in 2015 to roughly 3% in real terms. However, material downside risks are developing, especially from global factors, which can jeopardize the materialization of stronger economic growth. Among key risks, the fall and volatility of oil prices might be detrimental to Mexico's prospects, as well as a potential change in the low interest rates by the U.S. Fed.

Fitch has stated that Mexican banks could comfortably sustain annual nominal loan growth rates in the 12%-15% range for a number of years, given the low level of financial intermediation. However, loan growth has been subdued as a result of the relatively poor economic performance, and it slowed down further in 2014. Fitch expects a modest recovery of loan growth in 2015 (10%-12% in nominal terms) but below the medium-term prospects.

Mexican banks' earnings are relatively exposed to the low interest rate environment because balance sheets are still mostly deposit funded. Market consensus is that interest rates have nowhere to go but upward. However, the timing, pace and magnitude of such a trend is uncertain. While the medium-term effect of higher interest rates should be positive for banks' margins and earnings, material short-term volatility could arise from the immediate effect on marking to market the debt securities portfolios held by most banks (especially major banks).

While the impairment ratio tended to stabilize during 2014, the opposite is true for provisions and charge-offs. Positively, most of the impact from the exposure to defaulted homebuilder's has now been absorbed. Therefore, Fitch believes that charge-offs and provisions peaked by YE14. These metrics should gradually decline, assuming no major deterioration of the economic outlook. Fitch's baseline scenario for asset quality is that most metrics will stabilize close to current levels, with potential for mild improvements in loan loss provisions.

Moderate loan growth in recent years has driven stability in key capital and liquidity metrics. However, Fitch expects that capital and liquidity will be increasingly challenged in 2015 and thereafter by the confluence of slightly higher loan growth, potentially lower earnings and the adoption of more stringent regulations aligned to Basel III liquidity standards. Fitch expects a growing reliance on longer tenor non-deposit funds and, therefore, a sustained but gradual deterioration of the loan-to-deposits ratio in coming years.