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Announcement:

Moody's: Mexican banks appear well positioned to withstand the challenging environment but the credit outlook for the industry is negative

 The document has been translated in other languages

13 Oct 2008

Mexico City, October 13, 2008 -- Despite the challenges of the global market turmoil, the Mexican banking industry seems "resilient," according to the annual review by Moody's Investors Service. Moody's emphasizes, however, that there is a negative credit outlook for the Mexican banking industry, which expresses Moody's expectations that the fundamental credit conditions in the Mexican banking system may sour over the next 12 to 18 months.

The negative credit-trend outlook reflects a weakened credit environment as a consequence of the global financial turmoil, as well as the effects that the global economic slowdown (and particularly the downturn in the United States) may have on the Mexican economy.

Moreover, the report's author, Vice-President David Olivares-Villagomez, noted that "Mexican banks have observed rapid asset quality deterioration, particularly in credit cards, because of the robust loan expansion reported over the past few years. As a result, both delinquency and credit costs are on the rise, and could negatively affect the banks' profitability", the analyst said.

Moody's also notes that liquidity has tightened relative to 2007 in light of loan expansion, but the largest Mexican banks remain liquid, which is an indication of their largely core-funding basis. Moreover, Mr. Olivares-Villagomez observed, "the banks show a low dependence on foreign currency funds and have instead been able to access the domestic market for their funding needs".

Despite the challenges, the agency concludes, Mexican banks appear well positioned to withstand pressures and sustain banking activity. In effect, Moody's outlook for individual bank ratings is largely stable.

Moody's estimates that bank loans could still grow at rates of 15% in 2008, largely on the back of consumer and commercial loans, despite the evident deceleration in credit card lending. "Although lower than the 25.4% loan growth reported in 2007",said Mr. Olivares-Villagomez, "we believe that this growth rate would be healthy for the system, by Latin American standards". Moreover, the country's still-low level of financial intermediation -- at 14.5%, measured as bank loans to GDP -- should continue to offer attractive growth opportunities over the medium run.

"Moody's is also comforted by the fact that Mexican banks -- particularly the dominant participants -- have a defendable ability to generate consistent and recurrent earnings as they focus on highly profitable retail activities," the analyst says. This feature, to a great extent, has kept Mexican institutions away from complex financial products and risky investments.

According to the report, the net interest margin of Mexican banks is ample at over 8% -- one of the highest margins in Latin America -- because most banks in Mexico benefit from the accumulation of high-yield loans in their balance sheets. They also have a solid base of low-cost funding, thus allowing for ample intermediation spreads. These wide spreads are expected to soften the effects of lending slowdown and rising credit costs. Banks also show a stable stream of fee-based income and very good operating efficiency, which add to profit generation.

The negative credit-trend outlook is drawn off Moody's macro-stress scenarios, as defined by its Global Financial Risk Unit. The core scenario incorporates the following assumption: as the economic activity in advanced economies experience a downturn, emerging market economies are also likely to suffer. In a scenario that emphasizes generalized deleveraging, Moody's assumes that the global economy may face a period of stagnation.

The report is titled: Banking System Outlook: Mexico.

* * *

NOTE TO JOURNALISTS ONLY: For more information please contact New York Press Information +1-212-553-0376; EMEA Press Information in London +44-20-7772-5456; Juan Pablo Soriano in Madrid +34-91-310-1454; Alex Cataldo in Milan +39-02-914-81-100; Eric de Bodard in Paris +331-5330-1076; Detlef Scholz in Frankfurt +49-69-707-30-700; Mardig Haladjian in Limassol +357-25-586-586; Alex Sazhin in Moscow +7495-641-1881; Petr Vins in Prague +4202 2422 2929; Tokyo Press Information +813-5408-4110; Hilary Parkes in Toronto +1-416-214-1635; Hong Kong Press Information +852-2916-1150; Sydney Press Information +612 9270 8102; Luiz Tess in São Paulo +5511-3043-7300; Alberto Jones Tamayo in Mexico City +5255-1253-5700; Daniel Rúas in Buenos Aires +54 11-4816-2332 ext. 105; Craig Jamieson in Johannesburg +27-11-217-5470; Jehad el-Nakla in Dubai +971 4 365 0284; or visit our web site at www.moodys.com

Mexico City
David Olivares Villagomez
Vice President - Senior Analyst
Financial Institutions Group
Moody's de Mexico S.A. de C.V
Telephone:+52-55-1253-5700

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

Moody's: Mexican banks appear well positioned to withstand the challenging environment but the credit outlook for the industry is negative
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