November 7, 2017 / 3:03 PM / 12 days ago

Fitch: Most Mexico Banks Ready for Basel III Liquidity Rules

(The following statement was released by the rating agency) MONTERREY/NEW YORK, November 07 (Fitch) It should not be difficult for Mexico's large and second-tier banks to meet new Basel III liquidity metric regulations says Fitch Ratings. However, the new rules may be a challenge for some small- and medium-sized banks and could require significant balance sheet adjustment. The introduction of a minimum liquidity coverage ratio (LCR) and net stable funding ratio (NSFR) should be credit positive for the banking system as a whole, improving resilience during cyclical downturns by increasing liquidity and reliance on stable funding sources. All Mexican banks are already in compliance with their respective statutory minimum LCR set by regulators. Mexican commercial banks have been required to report their LCR since 2015, with an original minimum requirement increasing 10% each year until it reaches 100%. The largest and second largest groups of banks, which represented 89.8% of banking system assets by 3Q17 end, will have the full 100% LCR limit imposed by 2019. For 2017, the minimum requirement is 80% for the seven biggest banks (G7) in the country, and it will rise to 90% in 2018. Medium- and small-sized banks are required to have an LCR of 70% for 2018; the LCR is 60% for the newest banks. The introduction of the LCR has already led to change, with banks prioritizing more stable funding sources, primarily mid- to long-term deposits. We expect this trend to continue. Mid-sized institutions especially have been shifting toward more stable funding by increasing deposit terms or raising long-term funding in local capital markets. Further, the G7 have been changing their funding composition. As a result, system deposits have grown an average of 10.8% per year over the past five years, in some years exceeding lending growth. This trend could lower net interest margins (NIM) by raising funding costs. However, we believe the short- to medium-term impact on profitability is unlikely to be significant for large banks or the banking system. We expect margins to remain at adequate levels over the medium term. The system's quarterly average LCR since 2015 was 181.5%, but this is skewed by the G7, which account for 80% of total system assets and benefit from stronger deposit franchises and better access to long-term capital market funding. Since the LCR was implemented, only one of 48 banks has been sanctioned by regulators for failing to meet the minimum required. All banks are currently in compliance with LCR regulations. Smaller banks that are highly dependent on wholesale funding and have less financial flexibility to adapt balance sheets are likely to face challenges in meeting new liquidity requirements. This is especially the case with the introduction of the NSFR, which should go into effect in 2018 if local regulators follow the Basel III implementation calendar. Local authorities stated that an NSFR requirement would go into effect in January of next year but have yet to announce any specific rules. Without the specifics of the NSFR regulations, it is difficult to determine the potential adjustment that may be required by some banks. However, we believe it likely that some mid- and small-sized banks will have to make significant balance sheet adjustments to meet the requirements, including managing assets to reduce required stable funding. In contrast, G7 banks should not face difficulties in complying with NSFR requirements. As with the LCR, they will benefit from their strong deposit franchises and greater ability to adapt their balance sheet. Tier II banks should also not face significant challenges with their balance sheets evolving to more closely resemble their G7 counterparts. Contact: German Valle, CFA Associate Director, Financial Institutions +52 81 8399 1116 Fitch Mexico S.A. de C.V. Prol. Alfonso Reyes No. 2612 Edificio Connexity, Piso 8 Col. Del Paseo Residencial Monterrey 64920 Alejandro Tapia Director, Financial Institutions +52 81 8399 9156 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582 4964 33 Whitehall St. New York, New York 10004 Media Relations: Benjamin Rippey, New York, Tel: +1 646 582 4588, Email: benjamin.rippey@fitchratings.com. Additional information is available on www.fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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