Moody's changes its perception of Mexican banking from positive to negative

The rating agency Moody's changed the outlook for the banking system in Mexico from positive to negative. This is due to the uncertainty stemming from US economic policies that affect the performance of the Mexican financial sector.

Moody's also warned about the fragility of the Mexican banking system. The recent judicial reform has created an environment of uncertainty that, combined with external pressures, threatens the stability of the country's financial sector.

The agency detailed that tariffs would affect Mexico's manufacturing, automotive, and technology industries. This would lead to a depreciation of the peso and impact inflation.

"The increasing volatility of exports, exchange rate, and inflation will reduce banks' appetite for risk in 2025"

There will be pressure on portfolio quality

Moody's report highlighted that delinquency rates are likely to increase as consumer loans mature

"A slight deterioration in portfolio quality is expected. 2.0% of gross loans in 2024 have benefited from the increase in real wages and remittance growth"

Thus, it estimated a more moderate portfolio growth in the next 12 to 18 months, which would be single-digit compared to the 13% recorded in 2024. This is due to caution in the face of short-term confidence crises.

It highlighted that tariffs would further pressure banks' business volumes, following growth in 2024.

"However, banks will maintain prudent credit policies, which will limit the risk of a sharp deterioration in delinquent loans, and will keep existing credit loss reserves high," it specified.

It explained that the direct exposures of the sectors most vulnerable to tariffs, including agricultural, automotive, and textile represented only around 4% of gross loans in 2024.

It also highlighted that large government-related concentrations, including Petróleos Mexicanos (Pemex), remain a key risk in the system.

The firm emphasized that credit loss reserves and the capital of the Mexican banking sector remain solid.

Profitability will fall

Moody's Ratings mentioned that the profitability of the banking sector will mainly fall due to higher provisioning needs and the acceleration of digitalization. This is to face the growing competition from the arrival of new banks.

He pointed out that competition from low-cost online platforms remains intense.

"Competition from low-cost online platforms remains intense. A high benchmark interest rate, along with the moderation of portfolio growth, will limit the increase in margins"

Additionally, it stated that Mexican banks face high operating costs due to systemic inefficiencies, intensive cash use, and large branch networks.

Liquidity will continue to benefit from deposits

The rating agency pointed out that financing and liquidity will continue to benefit from large customer deposits.

Similarly, it noted that the government's ability to provide support is deteriorating. This is due to the weakening of policies and the institutional framework, which could underminefiscal and economic outcomes.

"Government support is moderate, as systemically important local banks have ample resolution tools," it stated.