Why Mexico’s Bank Bonds Are Hot Even as Economic Growth Fizzles

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As Mexico heads for its third straight year of disappointing growth, the top-performing industry in the bond market is the one that’s most intertwined with the economy: banks.

Dollar-denominated notes from Mexico’s financial firms have returned 4.7 percent over the past year, data compiled by Bloomberg show. That’s more than double the country’s corporate-bond average. It also beats the advance for emerging-market financial bonds globally.

It’s not a coincidence, according to Fitch Ratings. The banks’ slowdown in loans to companies and consumers has had the effect of strengthening their capital cushions -- giving more loss protection to bondholders, Fitch said in a report this week. And that should put the banks in a good position to resume loans once the economy picks up.

“The different crises in Mexico have disciplined the banks,” said Claudio Robertson, money manager at San Diego-based Investment Placement Group, which owns bonds from BBVA Bancomer SA, Grupo Financiero Santander Mexico SAB and Banorte SAB. “They turned to a more conservative business model.”

Among the country’s biggest banks, Santander Mexico’s bonds due in 2024 are the top performers, returning 6 percent in the past year. Bancomer’s bonds due in 2020 gained 5.2 percent.

According to Moody’s Investors Service, Mexican banks have the highest capital ratios in Latin America at 12.2 percent of risk assets, followed by Argentina’s at 12 percent and Brazil’s at 11.1 percent.

‘Comfort Zone’

Average earning assets of Mexico’s seven largest banks, including loans, trading securities and cash, have grown at an average rate of 9.8 percent over the past 15 months, according to Fitch. That compares with growth that typically ran over 40 percent in the 2000s, prior to the financial crisis.

David Olivares, a banking analyst for Moody’s in Mexico City, estimates that banks’ lending will grow just under 10 percent this year. That would be the lowest since 2010, based on regulatory data.

It’s partly a reflection of the drop in loan demand. The economy is projected to grow just 2.7 percent, based on estimates compiled by Bloomberg. When President Enrique Pena Nieto took office, growth was 4 percent.

Mexico’s peso dropped 0.4 percent to 15.4108 per U.S. dollar as of 1:39 p.m. in New York.

Historic Lows

As in other parts of the world where policy makers have reduced benchmark interest rates to historic lows, Mexican banks have managed to maintain earnings growth thanks partly to low funding costs. In April, banks’ net interest margins averaged 5.34 percent, not too much lower than the 5.41 percent average during the past five years.

A risk is that banks choke off lending too much, delaying an economic recovery, said Alexis Milo, the chief Mexico economist at Deutsche Bank AG in Mexico City.

“There are reasons for this low lending on both the demand and the supply side that complement each other,” he said. “Banks have reached a certain comfort zone where they charge relatively high fees and they have market segments with low risk.”

Indeed, banks have made up for part of the reduction in consumer and business loans by lending more to government entities. In 2014, such lending grew 24 percent.

“If banks have a lot of their funds invested in the government, that makes their risk drop and their capitalization rise,” Olivares said. Going forward, “well-capitalized banks have a chance to grow more.”

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