Mexican Banks Bullish On 2011 Prospects, Credit Growth

Barring major global economic shocks, Mexican banks are extremely optimistic about their growth prospects for 2011.

Consumer banks have charted double-digit growth this year in most of their product lines, extending credit to a broader swath of individuals and companies while plowing profits into branch expansions. Executives at the country's top banks say those trends should continue into next year.

"The recovery of consumer and producer confidence, as well as the trends we have seen in recent months, indicate that we're going to keep seeing a recovery in the banking sector and surely double-digit growth in all credit segments during 2011," said Ignacio Deschamps, president of Mexico's banking association and chief executive of the country's largest bank, BBVA Bancomer.

Mexican banks have expanded their customer base in recent years, although the country is still relatively under-banked compared with Latin American peers such as Chile and Brazil. Deschamps said that Mexican banks catered to 42 million clients as of April, up from 28 million five years ago. BBVA Bancomer alone has expanded its client base to 12 million from 9 million in recent years. Mexico has a population of 112 million.

Rich fees and rapid expansion from a low rate of penetration for banking services make Mexico a key profit center for a number of international banks, including Banco Bilbao Vizcaya Argentaria SA (BBVA), Citigroup Inc. (C), Banco Santander SA (STD), HSBC Holdings PLC (HBC) and Bank of Nova Scotia (BNS). Combined, the local units of these five banks accounted for 67% of the 5.418 trillion pesos ($437 billion) of assets in the system at the end of September, according to data from banking regulator CNBV.

Lending is on the rebound after a retrenchment and surge of bad debt in 2009, when the Mexican economy contracted 6.1%.

Bank credit expanded 7% in the year through September, bringing the combined loan balances of the country's 41 financial institutions to MXN2.061 trillion. Bad debt represented 2.5% of the total portfolio at the end of the third quarter, an improvement over the 4% level reported in June 2009.

Mexico's Finance Ministry expects the country's gross domestic product to grow 3.8% next year after expanding by around 5% in 2010.

Moody's Investors Service raised its outlook on the Mexican banking system to stable from negative Thursday, citing the banks' sound funding and improving asset quality. Moody's analyst David Olivares-Villagomez said that Mexican banks need to loosen their grip on credit, though, to truly tap their near-term growth potential.

Starting in 2011, Mexican banks and non-bank finance companies will no longer be able to charge their own clients fees for withdrawing cash, checking account balances, or for making deposits and loan payments. Lenders will also be limited in the fees they can charge for late payments and account overdrafts.

Luis Pena, chief executive of HSBC's Mexican unit, said that many banks have already adjusted their fee structures as part of their internal business strategies. "Customers aren't stupid -- they'll just conduct transactions at their own banks," he said. Mexico represented 2% of HSBC's $11.1 billion pretax profit in the first six months of the year.

Industry participants expect the fee changes to potentially curb investment in new ATMs, while having little impact on profits, even though income from commissions and fees represent 30% of the banking industry's total revenues. The hefty fees are a by-product of hikes that followed the 1995 financial crisis, as banks tried to compensate for tighter lending.

Scotiabank's Mexico chief executive Nicole Reich de Polignac said her group grew its pretax profit by 42% in the year through September to MXN2.06 billion and that she's "very optimistic" about her bank's prospects for 2011. Scotia's Mexican unit accounts for 5% of the Canadian parent's total profit.

Banamex, Citigroup's Mexican unit, said it advanced to top rankings in savings, investment accounts and pension management this year. The bank granted MXN140 billion in credit to Mexican families, or 12% more than in the previous year, and grew its deposits to MXN1.2 trillion. Banamex grew its portfolio of investment accounts by 60% to MXN300 billion, while expanding its assets under management for Mexican pensions known as Afores to MXN240 billion, covering the retirement accounts of 6 million Mexicans.

"We promise to double our efforts so that these numbers that make us so proud are not a one-time thing," Banamex chief executive Enrique Zorrilla said.

--By Amy Guthrie, Dow Jones Newswires; (5255) 5980-5177, amy.guthrie@dowjones.com

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