Mexico Bank Bulls Goaded by UBS Ignore S&P, Moody’s Warnings

  • Lenders’ shares gained after rating outlook cut to negative
  • UBS’s top Mexico bank stock picks include Inbursa, Banorte

Equity investors are dismissing S&P Global Ratings’s and Moody’s Investors Service’s threats to downgrade Mexican banks. 

While Mexico’s benchmark IPC stock index has fallen 4.4 percent since the rating companies changed their outlook on the banking industry to negative Aug. 23, an index of lenders including Banregio Grupo Financiero SAB and Grupo Financiero Santander Mexico SAB has only lost 0.8 percent in that span.

Mexican banks have been ratcheting up lending despite a growth slowdown in Latin America’s second-biggest economy. That’s troubling to Moody’s, which says the surge is unsustainable at a time when the nation’s oil industry is in shambles and the peso is in freefall. Mexico is itself in danger of being downgraded, posing a risk for banks, says S&P.

But to UBS AG strategist Philip Finch, these concerns are overblown. UBS expects earnings-per-share for Mexican banks to jump 14 percent this year -- well above the 1 percent growth projected for emerging-market peers -- thanks to the increase in lending and improving asset quality. The lenders will also get a boost to margins from rising interest rates, Finch said.

“I am surprised by those comments -- that they think loan growth is excessive and creating risk,” he said from London. “GDP expectations are coming down, but we’re not talking about recessionary risk. From a balance-sheet perspective, Mexican banks are extremely well-capitalized."

Finch’s top picks include Grupo Financiero Inbursa SAB, Grupo Financiero Banorte SAB and Banregio. UBS has buy recommendations on all three stocks.

Total outstanding loans held by Mexican banks rose 15 percent in July from the same month a year ago to 4.1 trillion pesos ($215 billion), according to data published Aug. 29 by the country’s banking and securities regulator.

Moody’s is worried the loan surge is putting banks at greater risk of suffering delinquencies as the economy flags. The central bank slashed its growth forecast for the second time this year after the economy shrank 0.2 percent in the second quarter. 

The peso, meanwhile, has tumbled 10 percent in 2016, the second-biggest drop among major currencies.

The lenders are also vulnerable to Mexico’s struggling oil industry since they have “significant” exposure to suppliers for embattled state-owned crude producer Petroleos Mexicanos, Moody’s analysts led by David Olivares said in their Aug. 23 report.

The mounting problems at Pemex, as the company is known, is one of the reasons Mexico is itself in danger of having its ratings lowered. A sovereign downgrade could trigger downgrades for six commercial private banks in Mexico, S&P analyst Arturo Sanchez said.

Still, UBS’s Finch expects Pemex will receive financial backing from Mexico’s government that will “help alleviate credit risks.” He also points out that the nation’s banks have just 4.6 percent of credit exposure to Pemex and its suppliers.

And while the lending pickup in Mexico is outpacing the emerging-market average, the Latin American country has historically been home to relatively slow loan growth. As recently as 2013, Mexican banks lent the least among Latin American peers.

The recent increase comes on the heels of reforms introduced in 2013 to boost competition in the financial industry and expand access to credit.

“Mexico stands out as one of the few countries across EM where we appear to be at an early stage in the credit cycle, which makes it interesting,” Finch said.

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