Mexico & Nafta - April 2011 (ISSN 1741-444X)

Mexican bankers are predicting that lending could rise at double digit levels in 2011, especially if the central bank remains a) relaxed about inflation and b) more concerned that any further strengthening of the peso against the US dollar may be dangerous for Mexican exporters.

In the year to January, consumer lending grew by a modest 5% year-on-year, but this represents a substantial pick up over the past three months. Indeed consumer lending only started growing year-on-year from November 2010.

Mexico has 41 universal banks, which have total assets of M$5.4 trillion (US$446bn). Total loans are just under M$2.14 trillion. The banks are well based, with reserves against non-performing loans equivalent to 193% (of non-performing loans). The biggest segment of bank lending is corporate loans, which stood at M$995bn at the end of January. Consumer lending stood at M$402bn and mortgage lending at M$359bn.

The country's two biggest banks, which are both foreign owned, BBVA-Bancomer (owned by Spain's Banco Bilbao Vizcaya Argentaria) and Banamex, owned by Citigroup, expect consumer lending to grow by between 12% and 14% in 2011.

Outstanding Mexican consumer loans have risen month-on-month since May 2010, when they reached an almost four-year low, according to the Comisión Nacional Bancaria y de Valores (CNBV). The loans totalled M$402bn (US$33bn) in January 2011, up from M$356.3bn in the same month in 2010. It is worth noting that in Brazil, consumer loans are 10 times higher, even though Brazil's GDP is only about 50% bigger. In Brazil, consumer loans were R$553.8bn (US$333bn), according to central bank data.

If Mexican banks are to fund such growth in consumer lending they are going to need more capital. Guillermo Ortiz, a former central bank governor and finance minister who now chairs Mexico's biggest locally owned bank, Grupo Financiero Banorte, said as much on 22 March during a presentation to investors in New York.

Banorte may need more capital than its rivals because its loan book looks riskier. According to CNBV figures, Banorte's non-performing loans in January amounted to 3.44% of its total loan portfolio. The average for the banking system was 1.99%, the same as in January 2010. Banorte's non-performers, however, had jumped from 2.34%.

• Banorte & Ixe merge
  On 8 March the government, the finance ministry and the Banco de México authorised the merger between Banorte and Grupo Ixe. The merged group will be the country's third biggest financial consortium behind BBVA-Bancomer and Banamex-Citigroup. The two companies announced their proposed merger on 17 November 2010.   Banorte had 8.3m customers for its bank and runs pensions for a further 8m people. It has a network of 1,100 branches. It also owns a Texas bank, Inter National Bank and has an operation in New York, Banorte Securities International. Ixe is more of investment banking business, offering commercial banking and private banking as well as car loans, mortgages, stock broking and investment management.

According to CNBV figures, banks have increased their lending to consumers and the construction industry. Construction loans now account for 24% of the banks' total loans, well above any other corporate sector. Inbursa, the financial arm of Carlos Slim, the world's richest man, has placed the biggest property bets in January, though overall Banamex is the still biggest property lender (albeit it  reduced its lending between January 2010 and January 2011). The quality of the Banamex loan book appears to be the highest in the banking system: less than 0.5% of its loans are non-performing. HSBC has done most to improve its loan portfolio over the past 12 months: its non-performers dropped from 2.43% to 1.6% between January 2010 and January 2011.

Perhaps mindful of the jump in Banorte's non-performers, Ortiz is one of the more bullish bankers on the direction of Mexican interest rates. He argues that the Banco de México will not increase interest rates any time soon, though he concedes that perhaps it may raise rates by 0.5 a percentage point in the first quarter of 2012. The futures markets, however, are forecasting that rates will be 0.75 of percentage point higher than their current 4.5% level  (so at 5.25%) by the end of the year.

Our view is that Ortiz is probably right and the futures markets are wrong. Mexico, along with Colombia, is the only major Latin American country that has not raised interest rates in the past 12 months. Mexico's consumer price inflation rate is the third lowest in the region after Chile and Peru.

The Banco de México's five-member board has kept the benchmark lending rate at 4.5% for a record 17 meetings, after cutting it from 8.25% on 15 August 2008.

So far there is no sign of inflation picking up, but this is probably due to the strength of the peso against the dollar. The consumer price index was up 3.1% percent in the 12 months through to mid-March 2011 from 3.6% in February. Even so, local economists are bearish about inflation. The consensus is that inflation will hit 3.9% by end 2011. We think inflation is unlikely to jump, unless there is some unexpected political development, such as a defeat for the ruling Partido Revolucionario Institucional (PRI) in the election in the Estado de México in July this year.

Bank deposits
Total deposits held by Mexican banks rose 8.5% year-on-year to M$2.42 trillion (US$200bn) at the end of 2010, according to the CNBV. Total loans in January were M$2.14bn, up 0.5% year-on-year. That's about 14% of GDP, less than a third of bank lending in Brazil.

BBVA-Bancomer had most loans with M$573.9bn, followed by Banamex with M$322.7bn. Mexican banks have been boosting their lending power by selling bonds in the local market. These bonds offer higher yields than government debt. Bankers expect Bancomer, Banamex, Inbursa and Santander to return to the local market because they've only sold a small amount of the bonds they have been authorised to issue. Santander, Mexico's third-largest bank by outstanding loans, is the most recent to issue. It sold M$3.7bn of two-year bonds, which paid 15 basis points more than the two-year interest rate future (i.e. 5.4%). Last November, Banamex sold M$7bn of four-year bonds, which yielded 28 basis points above the interest rate future.

• Nuclear: Mexico's only power station, at Laguna Verde, uses the same technology as the Fukushima powers stations which have caused such problems in Japan after the recent earthquake.  Opinion polls in Mexico suggest that public enthusiasm for nuclear power is diminishing. Nine out every 10 Mexicans, according to a poll by Marí­a de las Heras, believe that there is a substantial chance of a major accident at Laguna Verde. One reason for this may be that, unlike most governments in the world, Mexico has not announced any fresh checks or monitoring of its power stations. All the government has done is order senior nuclear officials to visit the power station and make any public statements about its safety from outside the plant. Mexico's long term energy strategy has envisioned an increase in nuclear power. The country has been planning 10 more nuclear power stations including two more generators at Laguna Verde.