Fitch: Trade May Draw More Foreign Banks to Mexico

Mexico's position among Latin American markets may draw further foreign banks seeking to boost operations focused on import-export activity, says Fitch Ratings. A number of banks have recently received regulatory approval to operate in Mexico. Meanwhile, retrenchments by universal banks, such as recently announced Deutsche Bank, tend to keep competitive dynamics in check.

Several factors explain why an influx of lesser recognized foreign banks to Mexico could continue. In particular, the recently signed Trans-Pacific Partnership opens a wider degree of trade opportunities with Asian regions. We also expect Mexico will benefit from the U.S.'s decision in August to permit U.S. exporters to ship U.S. crude oil to the country - a step toward greater energy capacity, one key to more private investments. Regulatory barriers to entry relative to other Latin countries are modest. Overall banking penetration in Mexico remains relatively low, with private credit to GDP at 31% (vs. 55% for Brazil). Profitability of banks in the Mexican system has held steady since the financial crisis, with net interest margins across the system around 5%, signaling that overall competitive dynamics in Mexico are relatively in check.

Recent examples of banks coming from Asia include Industrial and Commercial Bank of China and Korean Shinhan Financial Group. Each gained recent regulatory approvals to operate Mexican subsidiaries. Non-Asian regions could also be drawn into the mix, such as Brazil, which has generally shown limited interest in Mexico. Brokerage firm BTG Pactual and a newly created brokerage firm controlled by Itau Group have recently gained regulatory approvals. Finally, Spanish bank Banco Popular was recently approved as a shareholder of a local bank (25% stake) and Banco Sabadell as a new bank in the system. Other groups have entered the country with alternative financial vehicles and SPVs looking for geographic expansion and or diversification of funding through debt issuances in the local market.

Spanish banks BBVA and Santander, Citigroup's Banamex, HSBC Mexico and Scotiabank of Bank of Nova Scotia are long-standing examples of foreign banks already diversifying into Mexico - each is counted among the seven largest banks in the country, or G7. And many foreign banks already operate subsidiaries of global financial groups from various countries, including Spain, U.S., U.K., Canada, Switzerland, Japan, France and the Netherlands.

But there have been also moves into the country resulting in later departures. RBS, ING Group, BNY Mellon, and most recently, Deutsch Bank each entered and later retreated as problems affecting each parent's overall operations contributed to exits.

Some of foreign banks in Mexico operate a significant number of subsidiaries in both banking and brokerage sectors. The profitability measures (ROAs, ROEs) for those foreign banks with brokerage operations have outperformed those of foreign banks operating in Mexico without brokerage operations. Of the 35 brokerage banks in Mexico's system, 14 are foreign owned and comprise 37.8% and 77.7% of total assets under custody and net profits, respectively.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20151103006439/en/