Low risk lending to drive credit growth in new era of cautiousness - Moody's

Thursday, June 23, 2011

Mexican banks are basing their resurgent loan growth strategy on much more prudent fundamentals, as they continue to lick their wounds from the country's credit card crisis in 2008, ratings agency Moody's senior Mexico credit analyst, David Olivares, told BNamericas.

"Although the pre-crisis growth rates are still not here, the good news is that we expect growth to be very controlled in terms of risk," he said.

The analyst noted that Mexican banks were hit by a double whammy in 2008, as the international financial meltdown unfolded at the same time as a home-grown credit card crisis.

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"The banks therefore became more cautious, [and] stopped lending with the same intensity as before to sort out the problems with the credit cards. Now we are observing the gradual recovering of credit activity, and we have at least three consecutive quarters of good growth."

Moody's expects bank lending in Mexico to grow 15-20% this year, as the country's financial system recovers from the crisis.

This is below the pre-crisis annual growth rates of above 20%, but a significant improvement on the 3% and 10% increases seen in 2009 and 2010, respectively.


The new growth spurt has been driven by regional and local governments, which have doubled their share of the banking sector's loan portfolio to 14% between April 2009 and April 2011.

"Without a doubt, the risk profile of states and municipalities has been very attractive to the banks as these credits count with a government guarantee in one form or another," Olivares said.

The analyst pointed out that local authorities use the funds received from the central government under Mexico's public finance system as collateral for their commercial borrowing.

"The banks see this as a pretty attractive risk picture and have expanded significantly in this area. We therefore see the government sector as an area where the banks can continue growing," he said.

According to Olivares, a downside to government lending growth comes from new financial regulations, which requires states and municipalities to raise their cash reserves.