Loan Growth To Moderate In 2023, Though Risks To Mexican Banking Sector Are Limited

• Fitch Solutions revised its end-2022 forecast for loan growth in Mexico from 8.2% to 11.6% y-o-y, which will underpin 14.1% growth in total assets. The revision reflects the strong rally across asset, loan and deposit growth in the year through July 2022, as a result of favourable base effects after a sharp contraction in 2021 as well as the relatively robust performance of the Mexican economy in H1 2022.
• However, given that inflation was forecasted to stand at 8.6% y-o-y at end-2022, the growth in loans and assets will be notably slower – though still positive – in real terms. In 2023, Fitch forecasts that loan growth will slow to 8.4% y-o-y, due to less favourable base effects and the impact of a weakening economic outlook and high-interest rates. 
• The agency forecasts the Banco de México (Banxico) will hike its benchmark interest rate from 9.25% currently to an all-time high of 10.00% by end-2022, and lower it to only 9.50% by end-2023. This will raise the cost of borrowing throughout the Mexican economy, reducing loan demand. Additionally, weaker economic growth is anticipated as growth slows from 2.0% in 2022 to 1.4% in 2023 and elevated inflation will reduce appetite for consumer loans while lingering concerns about the direction of policy under President Andrés Manuel López Obrador (AMLO) will reduce investment.
• Fitch currently forecasts a 45-50% chance of a recession in the US in 2023. This would weigh heavily on Mexico’s economic outlook; while it could lead Banxico to cut rates more aggressively than expected to support growth
• Additionally, high debt servicing costs given elevated interest rates could lead to more households and businesses falling behind on repayments. While non-performing loans are currently contained, at only 2.34% this figure will pick up in the months ahead.
• While elevated interest rates in late 2022 and 2023 will suppress loan volumes and increase non-performing loans, they will also raise banks’ margins and profitability. In addition, indicators such as the asset-to-equity ratio and capital as a percentage of total liabilities stood at 9.2% and 10.9% in July 2022, compared to averages of 9.5% and 10.5% in 2015-19, respectively. Overall, the banking sector has adequate capital levels and a solid regulatory framework, which should support its stability.

(Source: Fitch Solutions)