Brazilian, Mexican banks show positive signs ahead of Q3 results

Tuesday, October 18, 2016

Though moving through distinctly different economic cycles, there is reason to hope for positive Q3 results from banks in both Brazil and Mexico, according to research from Swiss bank UBS.

UBS sees four constructive signs emerging in Brazil's large- and small-cap banks. Meanwhile, Mexican banks appear to be weathering an increasingly difficult macro scenario due to strong fundamentals and excellent credit growth, the report read.

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"Our positive stance reflects a combination of an improving top-down macro outlook and bottom-up fundamental prospects," noted UBS in the report.

Specifically, Brazil is seeing "an inflection in macro indicators; progress on structural reforms; positive earnings momentum on the back of peaking provisions; and the increasing relevance of Brazilian banks, given their size, liquidity and investibility."

UBS sees GDP growth moving back into positive territory to 1.0% in 2017 from the -3.3% forecast for this year. Likewise, the bank sees annual inflation declining to 5.1% next year from 7.0% projected for 2016.

From the bottom-up viewpoint, banks in Brazil are seeing a turning point in non-performing loans to "likely peak at the end of 2016 or early 2017."

Brazil's congress is making progress on government spending caps and working to attack its fiscal issues through reforms. These reforms are already on the way, and the bank sees them being passed by year-end. Looking ahead, pensions will likely be the subject of the next reforms.

Brazilian banks are also raising their interest rates faster than the central bank, as they have over the last year, which is boosting their bottom lines.

UBS looked at three large-cap Mexican banks with results season for Q3 fast approaching. It projects 22.9% year-on-year growth in adjusted net income for Inbursa for the quarter, a 14.4% increase for Santander Mexico and a 16.8% rise in net income for Banorte.

"Despite disappointing macro trends, bank fundamentals in Mexico have remained robust, with system-wide loan growth rising from 8.2% in October 2014 to 13.5% in August 2016, and healthy non-performing loans (down 53bp y-o-y)," read the report.

For Mexico, GDP growth is showing signs of weakness and risks to inflation are deteriorating, as stated by Mexico's central bank in the minutes of its September meeting.

"Higher policy rates (up 175bp since Dec 2015) should boost NIM and underpin earnings. We expect Mexican large banks to report another solid quarter of results reflecting elevated loan growth, flat NIMs and asset quality under control," said UBS.

The report showed loan growth at 12.8% year-on-year for Mexican banks in Q3 - higher than the 12.7% growth seen in Q2.

UBS also sees some strength in small-cap Mexican banks, "reflecting good loan growth, stable margins and asset quality." In the bank's sample of three small banks, it projects 14.6% year-on-year growth in net income for the third quarter.

On the downside, it sees deteriorating cost/income ratios, which will rise "45 basis points on a quarterly basis", as well as 22.7% (or -305bp) quarter-on-quarter decrease in return-on-earnings ratios.