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Announcement:

Moody's: Mexican Bank Lending Continues to Grow from Historically Low Levels

22 Jun 2011

New York, June 22, 2011 -- Bank lending in Mexico likely will continue to grow from its still low levels relative to other Latin American economies, Moody's Investors Service says in a new report, with positive credit growth for the past three quarters indicating that the banking system may have reached a turning point.

"Our expectations for continued stable economic growth, relatively low interest rates, and controlled inflation favor an expansion of bank lending in Mexico," says VP-Senior Credit Officer and co-author of the report David Olivares-Villagomez. "In addition, the large commercial banks have some strong incentives to expand their lending activities."

Among these incentives are reduced margins as a result of persistent low interest rates. With the interbank reference interest rate expected to remain at 4.5% into the first half of next year, the spreads banks earn by investing their low-cost deposits in, for example, government securities have begun to decline.

"In addition to low rates, margins have been affected by the banks' gradual shift in recent years toward government and government-related loans, which are perceived as low risk," says Assistant Vice President and co-author Felipe Carvallo-Mendoza. "For these reasons, the banks are now feeling pressure to increase their earnings through more high-margin lending to the private sector."

Mexican banks also are seeing less benefit from lower provisions and cost cutting. While in 2010 their earnings benefited from a substantial decline in provisioning costs, this is unlikely to be the case in 2011. At the same time, the potential for further cost reductions is limited as banks have trimmed their operating expenses in recent years. Banks' results in the future, therefore, are expected to be more dependent on their ability to generate additional revenues from lending.

An improving legal environment involving property rights also is helping to boost bank lending. "Legal reforms and ongoing, though gradual, improvements in the court system and at enforcement agencies temper what historically has been a key obstacle to bank lending," Olivares-Villagomez says. He notes that banks are now more easily able to seize assets in the event of default, with residential property foreclosures, for example, now averaging two to three years, as opposed to six or seven years in the 1990s. Yet, "the property rights environment in Mexico will likely remain weak for the foreseeable future, posing a structural impediment to lending growth".

Bank lending in Mexico has historically been low relative to other Latin American countries such as Chile or Brazil. The Mexican government has gradually become more active in promoting and supporting lending to the private sector, particularly to small and midsized businesses. While the regional and smaller banks have increased their exposure to these business types by tapping government-sponsored and -guaranteed programs, the larger banks are becoming more attracted to these government facilities, which generally provide some form of credit risk protection and therefore are an attractive way for banks to broaden their borrower base.

The report is titled "Large Mexican Banks Continue to Grow Lending from Historically Low Levels" and is available on moodys.com.

*****

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, São Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

Mexico
David Olivares Villagomez
VP - Senior Credit Officer
Financial Institutions Group
Moody's de Mexico S.A. de C.V
JOURNALISTS: 001-888-779-5833
SUBSCRIBERS:52-55-1253-5700

New York
M. Celina Vansetti
Senior Vice President
Financial Institutions Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Mexican Bank Lending Continues to Grow from Historically Low Levels
No Related Data.
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