Fitch: Mexican Banks' Slower Growth Aiding Capital Improvements

Slower loan growth amid Mexico's sluggish economic conditions is contributing to the modest improvements in the capital positions of the country's big banks, says Fitch Ratings.

The average capital ratios of Mexico's seven largest banks, including Banamex, BBVA Bancomer, Santander Mexico, Banorte, Banco Inbursa, HSBC and Scotiabank Mexico (Mexico's G7 banks), have improved over the past 15 months, even as the slowdown in the economy has reduced the demand for corporate and retail customer credit.

Slower loan growth is offset by good loan pricing, low funding costs and steady service revenues. Net interest margins have remained good, which supports the earnings strength that is contributing to capital ratio improvements.

The Fitch Core Capital to risk-weighted asset ratios of the G7 banks averaged over 15.5% at year-end 2014, compared to an average of 14.9% over the 2011 to 2013 period.

Average earning assets of Mexico's G7, which mostly include loans, trading securities and cash, have grown at an average rate of 9.8% over the past 15 months, compared with growth that typically ran over 40% prior to the financial crisis. Just accounting for the loan portfolios, growth averaged 8.6% over the past 15 months.

Interest expense on customer deposits-to-average customer deposits has been historically low among the G7. At year-end 2014, Mexico's G7 banks' average was 1.42%, while the average over the 2011 to 2013 period was 1.87%. Today's levels support the resilient interest margins contributing to the banks' core earnings performance.

Going forward, Fitch expects the capital ratios of Mexico's banks will trend lower as structural reforms take place and the demand for credit revitalizes. Nonetheless, we see the capital levels of these banks remaining at healthy levels and continuing their historically better-than-average levels relative to other systemic banks across Latin America.