Mexico’s financial sector has observed from the sidelines as international noise such as NAFTA renegotiations and oil price fluctuation shapes its performance for this year. And in an election cycle it has been rather difficult to estimate a headwind/tailwind ratio. Already baked into the cake, though, is a healthy and well-regulated banking sector that seems likely to be fueled by infrastructure projects and consumer credit, albeit somewhat subdued.
Banking: The Nature of the Beast
Notable about the sector is its asset concentration among key players, which extends market power. The top-seven players are the banking arms of financial conglomerates that also incorporate brokerage, insurance, and pension fund operations. Two local players are part of industrial conglomerates. A highly concentrated landscape sees around 70% of banking system assets in the coffers of the top-five institutions. Those same institutions also own around 80% of all ATMs and branches. The balance sheet of the nation’s banks in December 2017 climbed to MXN5.99 trillion from MXN5.86 trillion MoM.
Official data for 3Q2017 from INEGI points to demand-side economic activity as the key growth driver in the form of private consumption at 68% of GDP. As of 2017, development banks accounted for roughly 20% of private sector credit. More recently, as of January 2018 the outstanding balance of commercial banks’ credit to the private sector had risen 11.7% YoY (5.8% in real terms), down 0.3% MoM (12%), and 0.9% shy of the January 2017 print of 12.6% growth. Consumer credit saw a modest rise from 8.2% in December 2017 to 8.4% in January 2018 suggestive of improved household purchasing power.
The growth in business lending was more of a short-term affair, reflecting pronounced YoY peso appreciation in January. Loans to the private sector reached MXN2.35 trillion in December 2017 from MXN2.3 trillion a month earlier. Meanwhile, consumer credit rose to MXN1.32 trillion in 4Q 2017 from MXN1.29 trillion a quarter earlier, having averaged at MXN466.77 billion from 1994 to 2017.
According to the Annual report of the Financial System Stability Council (CESF), the external environment provides the greatest risk to Mexico’s economy, and, by extension, its financial universe. Smaller banks are specifically advised to tread carefully regarding buoyancy in consumer credit demand, and to keep their non-performing loans in check. Meanwhile, CESF concludes that the private sector component of resumed infrastructural projects, up 3% YoY at YE2017, could continue to fuel credit demand in that sub-sector.
The Fintech Explosion
With 60% of Mexicans lacking a bank account and close to 60% of municipalities lacking even ATM facilities, fintech, then, promises to have a bright future in Mexico, fueled by a highly skilled technology sector and myriad start-ups. Yet in a familiar pattern in EMs, roughly 90% of Mexicans have mobile phones. It is telling that the fintech sector represents 25% of all IT-related venture investments in the region. The latest sector study from Finnovista further reveals that in the 10 months leading up to July 2017, 80 new fintech start-ups put Mexico at the forefront of regional fintech innovation, with notable growth in insurance, lending, enterprise and personal financial management, and financial education and savings. Moreover, 46% of fintech start-ups are directly oriented toward financial inclusion.
a regional hub?
Legislation in March to regulate the fintech arena likely renders it more appetizing for foreign investment. The new forward-looking law encompasses not just the new types of business that the paradigm will spawn, but their available sources of capital for innovation, such as crowd-funding and the dealing of e-money. As such, it claims to foster innovation. Just how crucial the right legislation and investment are was evidenced in May, when a number of Mexican banks, likely victims of cyberattacks, witnessed sizable cash withdrawals according to Bloomberg.
Eduardo Guraieb, the Director General of Fintech Mexico, during an interview drew attention to Mexico’s ranking as the “13th or 14th-largest economy globally in terms of GDP,” as well as being the “biggest corridor for remittances in the world, which creates a huge opportunity.” Indeed, he asserts that “if Mexico were to become the regional hub for fintech, Mexico City would immediately be the center.” Pablo González, the CEO of Bitso, qualifies this enthusiasm by stating that the “law sets a high entry barrier (whereby) I am worried about (the killing of) a great deal of innovation.” That being said, he concurs that the “great thing about the law is that it promotes competition, and generally (with greater competition), services for consumers approve.
Sentiment in the capital markets is being shaped by unfolding economic factors such as the fate of NAFTA and wider US relations. March of this year clearly displayed this reality as tariffs of steel and aluminum emerged from the US White House, although moderation may result from realpolitik given the US’ dependence on Mexico as a trade partner, a two-way deal. In fact, while March saw EM currencies overall shed 0.3% against the greenback, the peso appreciated by 3.14%, to 18.25/USD at end-1Q2018.
At the stock market, the benchmark IPC Mexico index has historically peaked at 51713.38 in July of last year, having troughed historically at 14008.20 in August 2005. For 1Q2018, the S&P Latin America BMI, following the performance of 287 listed firms across Brazil, Chile, Colombia, Peru, and Mexico gained a quarterly 7.4%. The S&P Latin America 40 virtually saw a double-digit return. In contrast, Mexico, the region’s second-largest market, was hamstrung by aforementioned geopolitical woes, as well as looming elections. Duly, the benchmark index lost almost 7% for the quarter.
With cost a key determinant, even over perceived reliability, the market is prone to price competition. Penetration is at 2.3%, just shy of Argentina and Colombia’s 2.4%, but well short of the regional, Chile’s 4.2%. Yet as elsewhere in the financial sphere, digital solutions are gradually creeping into the mix rendering more direct and diversified options to tap the 130-million population. Furthermore, legislation will be vital in raising the count, not least by introducing mandatory civil liability coverage for automobile and services industries, but also mandatory natural disaster cover. In 2017, the local insurance sector posted a total of USD13 billion in direct written premiums, up 2.5% in nominal terms YoY.
Observers perceive the greatest potential among health insurance players based, again, on convincing numbers. Notably, the nation’s healthcare spend claims 5.8% of GDP, below the 9% average of OECD members. Also below the OECD average is the 7% of the population with health coverage. Even lower are the 2.8% covered by private policies. It appears that only through cooperation and coordination between public and private spheres can the numbers be raised, as has been the case in other quarters of the EM universe.
The election cycle in 2018 has added predictable volatility to the mix. But with the next administration in place, all eyes will again revert to macroeconomics and external noise for an assessment of the financial sector’s likely mid-term fate. Meanwhile, activity at the fintech coalface is transforming Mexico into a byword for financial innovation.