More Scrutiny for Mexico’s Bankers Threatens to Crimp Profits

  • New law requires governments to make loan, bond terms public
  • Fitch says lending to municipalities may be less profitable

Increased public scrutiny of Mexican banks may harm one of their biggest businesses.

A law signed by President Enrique Pena Nieto in April requires they now compete openly to lend to federal and local governments, which account for 24 percent of banks’ credit portfolios. The borrowers also must make public the terms of their loans and bonds. 

Before the law was passed, banks would compete privately, handling deals directly with governments which weren’t obligated to disclose the terms, including interest rates. Now, states will have to make all terms of credit deals public.

Greater transparency means lending to national and local municipalities may become less profitable for banks, which will now contend to offer the best deals, including lower interest rates, according to Fitch Ratings. The law is taking effect as outgoing and former governors of three highly indebted Mexican states -- Veracruz, Quintana Roo and Nuevo Leon -- face corruption allegations. On Aug. 1, Mexicans Against Corruption and Impunity, a nongovernmental organization, won a court ruling in the northern state of Chihuahua to block it from issuing more debt.

“What we are going to see is a much more controlled environment for banks who want to lend to local governments,” said Veronica Chau, a bank analyst at Fitch in Monterrey, Mexico. “We expect an impact on profitability.”

Grupo Financiero Interacciones SA and Grupo Financiero Banorte SAB are the two biggest lenders to local governments, according to the country’s banking regulator. In 2014, loans accounted for 68 percent and 22 percent of their portfolios, respectively, according to the banks’ most recent information.

The Mexican peso gained 0.9 percent on Monday to trade at 18.5848 per dollar at 12:03 p.m. in New York.

Interacciones’s press office didn’t return a request for comment. Banorte said the bank still sees growth opportunities in lending to states and municipalities, as banks currently lend the equivalent of about 3 percent of gross domestic product, which it said was a relatively low rate.

Before it's here, it's on the Bloomberg Terminal.