The rating agency noted that banks will be less impacted by the lack of legal certainty than other lending institutions due to the diversification of their portfolio, as most of their portfolio is focused on consumer and high-quality business loans (22% and 47% of the total portfolio weight, respectively). While those portfolios of Small and Medium Enterprises (SME) and mortgages could be impacted, “since they depend on good legal certainty that guarantees the judicial execution of collateral in default,” the institution indicated, so these portfolios will face a slowdown in the placement of new loans.
In the analysis, Moody’s indicated that banks will also reduce their exposure to Non-Bank Financial Institutions (NBFIs), which most SMEs use to find alternative financing for suppliers.
“Many NBFIs in Mexico serve as the last mile for credit penetration and financial inclusion. Banks, guided by prudential criteria, could also reduce their exposure to NBFIs focused on pure or financial leasing, mortgage lending and SMEs,” Moody’s said.
The increased legal uncertainty in the country increases costs and negatively impacts financing lines, which in turn limits the growth of non-bank financial institutions, which have faced a series of defaults, bankruptcies and corrections in financial statements in recent years. The most recent case is the default of Operadora de Servicios Mega. “Mega’s announcement will only tighten financing conditions for most of the country’s NBFIs, adding more pressure to that already imposed by the judicial reform,” warned the rating agency.
In this scenario, the role of Development Banks will be key to mitigate the impact of the reduction in credit to SMEs, the mortgage sector and non-bank financial institutions, which is why Moody’s emphasizes the urgency of defining how the Development Bank guarantee programs will be implemented in the new administration of Claudia Sheimbaum.
