Mexico's financial services reforms strengthen sector

Operating with comparatively high capital reserve levels, Mexico has a strong and profitable banking system. Both the commercial banks and the regulatory authorities have a prudent and conservative outlook on the way the sector is run. The banking system has enjoyed two decades of growth and stability. This cautious culture is a lasting and deeply ingrained response to earlier troubles, and in particular to the 1994-95 “tequila crisis” which saw the entire banking system come close to collapse. Recent adjustments to the regulatory framework, such as the 2014 banking reform, can be seen as fine-tuning an essentially robust industry framework that was put in place over the past two decades. However, banking penetration remains low and financial exclusion indicators are comparatively high: more than half the population does not have a bank account.

Current Performance

Financial services and insurance represented 4.6% of GDP in 2013, according to the latest available data by the National Institute of Statistics and Geography (Instituto Nacional de Estadí stica e Geografía, INEGI). Within that widely defined sector, commercial banks account for just over half of total assets in the financial system, followed by pension funds (known in Spanish as “administradoras de fondos para el retiro”, or Afores), investment (mutual fund) companies, development banks, insurance companies and brokerage houses, in that order. The financial system as a whole has been growing at an average rate of 10% per annum over the last four years (2010-14). As of March 2015 total assets in the commercial banking system stood at MXN7.32trn ($492.6bn). At that point there were 45 active banks out of a total of 47 registered banks in the sector. The industry has a high level of concentration: the top six banks controlled 58.7% of total assets and 60.2% of the total loan portfolio. Within that, the top two banks – BBVA Bancomer of Spain and Banamex (a US Citibank subsidiary) – took the lion’s share with a combined 29.6% of assets and 38.7% of loans. By assets the top six banks were BBVA Bancomer (22.3% of total assets), Banamex (15.3%), Santander (14.3%), Banorte (the only Mexican-owned institution among the top six with 12.5% of total assets), HSBC (8.4%) and Scotiabank (4.2%), according to the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores, CNBV). Capital requirements for setting up new banks are high (around $32m for a commercial bank, twice the level needed in Switzerland and three times that required in Panama or Brazil). Notwithstanding this barrier to entry, in 2014 two new locally owned banks were launched (Banco Progreso de Chihuahua and Banco Finterra); so too was a unit of the Industrial and Commercial Bank of China. In August 2015, the CNBV authorised the entry of Banco Sabadell of Spain and Shinhan Bank of South Korea.

Industry Concentration

According to data from PwC’s “Normatividad Bancaria 2015” report, the Mexican banking system typically scores around 1500 on the Herfindahl-Hirschman Index (HHI), a standard measure of industry concentration, which has a scale running from zero (theoretical perfect competition) to 10,000 (total monopoly).

Mexico’s competition authority, Comisión Federal de Competencia Económica, considers intervening with anti-monopoly and pro-competition measures in industries with HHI scores of above 2000. The commercial banks’ HHI score has been higher during the first period of bank nationalisation (1982-89) and again when there was a surge of foreign investment and mergers and acquisitions (2000-02). For comparison, Mexico’s HHI score in banking is a little lower than that of Chile and Brazil. In the US regulatory system, HHI scores of between 1000 and 1500 are considered to reflect moderate market concentration; scores of above 2500 are described as being unacceptably high.

According to the central bank, Banco de México (Banxico), the commercial banking industry’s concentration of ownership has not changed significantly over the past 20 years. Some industry analysts note, however, that only 5% of customers switch between banks. Leticia Armenta Fraire, an economic analyst at Tecnológico de Monterey, told local press, “This means costly and inaccessible services for the general public. In addition, there are only small differences in interest rates and other terms and conditions offered on loans. Services offered by the different banks are very similar because there is limited competition between them.” Banxico does, however, seek to promote competition within the sector.

For example, effective October 2015 new rules were due to come into force designed to “specify, clarify and simplify the methodology for calculating the annual percentage rate (APR) on loans”. The changes are designed to promote greater competition in lending.

Recent History

A key event explaining current attitudes in Mexican banking was the “tequila crisis” of 1994-95. At the time the incoming government of President Ernesto Zedillo (1994-2000) was confronted by a major balance of payments crisis and was forced to devalue the peso and move to a floating exchange rate system. Amid high levels of household debt and capital flight, and a sharp rise in non-performing loans, many commercial banks came to the brink of default: to avoid a general collapse in the financial system the government intervened, nationalising the most exposed banks and injecting capital to maintain their solvency. After a deep recession in 1995 (GDP fell 6.2%) the Zedillo administration presided over a recovery and began a series of reforms designed to prevent a recurrence of similar instability. This period and subsequent years saw the return of key banks to private ownership; the introduction of central bank autonomy and a modernised regulatory system; the creation of the Afores pension funds; and a public sector fiscal responsibility law designed to limit government deficit spending.

These and other regulatory strengthening measures implemented are often credited with successfully protecting the Mexican financial system during the global financial crisis of 2008-09.


The financial system as a whole now has a well-developed regulatory structure. The key institutions are the Ministry of Finance which plans, coordinates, evaluates and protects the financial system; Banxico, which promotes and develops the system and enjoys autonomy in monetary policy; CNBV which has an overall regulatory and supervisory role; and a number of other bodies such as the Institute for the Protection of Bank Savings; Insurance and Surety National Commission; the National Commission for the Protection and Defence of Users of Financial Services (Comisión Nacional para la Defensa de los Usuarios de Servicios Financieros, CONDUSEF); and the council for the stability of the financial system, which is responsible for analysing and identifying systemic risks.

Jaime González Aguadé, president of CNBV, told OBG that work on the regulatory framework has been intense. “Over the last two years we’ve had many structural changes, including a financial reform that involved amending 34 laws. That led us to change 200 of our circulars. We also adopted the latest Basel Committee standards, which meant we changed another 100 circulars. And on top of that every year, as part of our normal business, we need to update 30-40 circulars. And we restructured the commission internally and improved some of our processes.” González noted that the CNBV’s work does not end with issuing circulars: the commission must monitor and follow up their effective adoption by the banks it regulates.

Apart from the commercial banks, the federal government also owns a number of development banks, including Banco Nacional de Obras y Servicios Pú blicos that lends mainly to states and municipalities, Nacional Financiera that lends to companies, and Banco Nacional de Comercio Exterior’s (Bancomext), which lends to companies involved in foreign trade.

2014 Bank Reform

The government of President Enrique Peña Nieto introduced a new banking sector reform law in January 2014. The aim of the law was to strengthen the regulatory powers of the CNBV and CONDUSEF, to promote greater competition and reduce costs within the banking system, to strengthen the development banks, improve the system of loan guarantees and collateral, streamline the bankruptcy process, and formalise the incorporation of Basel III solvency rules into local regulations. To boost overall bank lending, one feature of the reforms was to allow commercial bank holdings to have non-bank assets on their balance sheets. This is intended to allow banks to set up infrastructure funds, helping the government’s objective of bringing more private sector funding into its infrastructure development programme.

Gabriel Casillas, chief economist and managing director at Banorte, has pointed out, “Now, we can put some of the holding’s money into the fund, and it will be completely separate from the capital of the bank, so we will still comply with Basel III capital rules.”

The reform also sought to tackle high borrowing costs. According to think tank Centro de Estudios Espinosa y Iglesias, the total cost of credit including commissions can exceed 50% on some loans. In commercial loans the cost of credit can be 11% for larger companies and 15% for small and medium-sized enterprises (SMEs). A study by CNBV indicated that Mexican lenders could spend as much as 32% of the value of a credit to recover an unpaid loan through the courts, compared to 9% in the US. Casillas noted that it can take three years to repossess a home where the borrower has defaulted, and that the judge deciding the matter will frequently lack specialist financial knowledge, dealing with the issue alongside an in-tray that includes murder and divorce cases. So the reform has created specialist financial courts, which are hoped to become operational by the end of 2016.

Carlos Rahmane, managing director of Exitus Capital, told OBG that the reforms will also effect consumers and eventually SMEs. “The most immediate impact we believe will be an increase in mortgage loans and consumer credit, but we are not expecting SMEs to benefit from this reform in the short term,” he said.

Basel III 

Mexico has moved rapidly to incorporate the Basel III standards on regulation, supervision and risk management in the banking sector. Basel III, agreed after the 2008-09 global banking crisis, sets higher levels of capital reserve requirements for different forms of bank deposits and other borrowings. José Antonio Quesada Palacios, client and market leader for PwC Mexico’s banking practice, told OBG that this remains one of the enduring headlines of the sector. “Mexican banks are the best capitalised institutions in the world. It is undisputed: the Basel Committee has recognised that Mexican banks have done the best job of incorporating the Basel III recommendations. As a result our banks are strengthened and well capitalised. For us this did not happen because of the crisis of 2008; Mexican banks didn’t have a crisis in 2008. They already had a robust supervisory and regulatory system in place. We caught the disease earlier, in 1994, and that led us to take the necessary precautions earlier.”


While the banking system is considered well regulated, there have been problems in the industry. In 2013 HSBC’s Mexican subsidiary was accused of money laundering for drug cartels, and the company was fined $1.9bn in the US. In 2014 Banamex revealed it had lost $400m in transactions involving fraudulent invoices from Oceanografía, an oil services company. Also in that year Ficrea, a popular financial firm (Sociedad Financiera Popular, SOFIPO), was intervened after its owner Rafael Olvera was accused of embezzling funds. In July 2014 CNBV declared Banco Bicentenario, a small local institution, bankrupt. In mid-2015 there were reports (not confirmed by parent company Citigroup) that the closure of Banamex USA – a bank specialising in cross-border transactions – was being considered. According to the Wall Street Journal Banamex USA was being investigated by the US authorities on potential money-laundering charges. Speaking to OBG, Jaime González, president of CNBV, said that in all industries there would be failures; the role of the regulator was not to prevent them happening, but to manage industry entries and exits while protecting the overall system. González said he was happy with the CNBV’s record on that count, noting in particular that it had acted pre-emptively in the Ficrea case.

Market Penetration

A major issue of concern for policy makers is that, on a number of indicators, Mexico remains significantly under-banked. According to World Bank data, in 2014 domestic credit extended to the private sector was only 31.4% of GDP, one of the lowest rates in Latin America. For comparison the rate in Germany in the same year was 80%; in Brazil it was 69.1%; and in Colombia it was 52.7%.

According to household surveys conducted by Gallup and the World Bank in 2014, only 39% of the population had a bank account (this had, however, increased from 28% three year earlier). Only 14% of adults had saved money in a formal account in the preceding year, less than the 18% who said they had saved informally through a club or through their families.

While just over half the respondents – 51% – said they had borrowed money in the preceding year, only 10% had done so from a formal financial institution. Under one-third of adults had a debit card (27%), under one-fifth had a credit card (18%), and just under one-tenth (8%) had a mortgage.

There are two ways of reading this data on the low penetration of banking services. One is to see it as a positive sign highlighting real opportunity for future growth. In effect, with total credit persistently growing at higher-than-GDP rates, bank penetration has been steadily if slowly increasing (as a proportion of GDP it is now double the 15.6% level achieved in the year 2000). But less positively it is also possible to see Mexico’s low bank penetration as an endemic problem that in effect sets limits to bank expansion and confirms financial exclusion as an enduring obstacle to economic development. For some, the dilemma lies between a well-regulated and narrow banking sector on the one hand, or a less tightly regulated, more expansive one on the other hand.

CNBV’s González, however, has suggested that this thinking may be a false dichotomy. “Following the crisis in 1994 and subsequent regulatory changes, Mexico became a country in the vanguard of bank regulation,” he told OBG. “It was the first country in the world to adopt the new Basel capital reserve standards. But it is possible to go too far the other way. Greece and Spain, for example, have had very high rates of bank penetration and relatively low prudence and that has taken them into the kind of crisis that Mexico lived through in 1994. Both things must be possible: high bank penetration and good regulation.”


At the root of the problem is the issue of informality – the large proportion of the economically active population that lives and works outside the formal tax and benefits system. There are various different ways of measuring this, and many different types of “informal” workers, ranging from street sellers, through to domestic servants, agricultural labourers, employees in SMEs and small family controlled enterprises. Using the wider definition favoured by INEGI, 58.2% of the population is “informal”.

On other measures the proportion is lower. The key point is that the vast majority of these people are unable to open a bank account because to do so they need to present written details of their employer, salary and tax returns. While becoming formal improves access to state health and pension services, many Mexican workers are deeply distrustful of sharing financial information with the authorities and fear punitive tax rates or other negative repercussions. The government would like to see the banks doing more to increase financial inclusion. Yet some bankers are unwilling to extend their services to the informal sector if that means taking on too high a level of additional risk.

“The financial reforms sought to remove those obstacles that could be removed from bank lending, but the institutions still need to measure their risks. If Mexico remains under-banked, to some extent it will be because the banks can’t find more credit-worthy customers,” Sergio Martín, director of economic studies at Bancomext, a state development bank, told OBG.

Filling The Gap

Another way of looking at the divide is to say that the traditional banks still do not serve more than half the population. That excluded half of the population still has financial needs. A range of different types of organisations have sought to fill that gap with different types of services. Many of these are regulated, but some are not. They include micro-finance organisations, credit cooperatives, financial products such as supplier credit, and new and alternative approaches including mobile airtime credit lending (see Economy chapter).

One example of lending to the informal sector is Credi Nissan, a finance house that provides hire-purchase credit for buyers of Nissan automobiles. Ernesto Guzmán Vázquez, CFO and treasurer, told OBG, “We reach out to places the traditional banks don’t go.”

He explained that the firm will lend to people in the informal sector who can, despite the lack of formal paperwork, demonstrate their ability to pay in a series of on-site visits carried out by Credi Nissan staff at their businesses or places of work. Nissan also fits satfinder devices to vehicles, which enables them to be localised, immobilised and repossessed should cus-tomers fail to keep up with their repayments. Vázquez noted that Credi Nissan had in 10 years built up a loan portfolio worth MXN60bn ($4bn), making it equal in size to a mid-ranking traditional bank, and growing.

Developments outside the traditional banking arena could become increasingly important in the medium term. “Talking of megatrends in global banking, I would not be surprised if we were to see the shadow banks that have emerged in China and parts of Asia coming to large Latin American markets like Mexico, in areas where the traditional banks are not active. We are beginning to see credit being offered informally through social media; these operators do not even have to be in the country, they can be based in Miami or elsewhere. I think these kind of lenders will proliferate: regulators may not need to stop them entirely but they will need to follow what they are doing quite closely,” PwC’s Quesada Palacios told OBG.

Merger & Takeover Moves

There are signs that merger and acquisition (M&A) activity may be about to rise. One indicator is that a number of banks have been buying and selling loan portfolios. In March 2015 Banco Regional de Monterrey (Banregio) announced it was buying a MXN600m ($40.4m) loan portfolio from the International Finance Corporation. In the same month Banco Santander Mexico said it had completed the acquisition of a consumer loan portfolio from Scotiabank, worth approximately MXN3.2bn ($215.4m). Both operations were described by Fitch Ratings as moves to seize available opportunities rather than representing “a definitive trend in the Mexican banking sector”. However, the rating agency said that “the potential for more such transactions is aided by the still-low banking penetration in Mexico, the high competition in the sector, and the tendency of banks to focus more sharply on customers with proven credit histories”.

Since late 2014 Brazil’s Itaú Unibanco, the country’s second-largest bank, has been reported to be considering an expansion into retail banking in Mexico, where it has established a wholesale presence via Itaú BBA. At the time Ricardo Marino, head of Itaú Latam, was reported commenting that the Mexican banking sector was “closed up and consolidated” so that entry would be subject to market opportunities.

As PwC’s Quesada Palacios told OBG, “We may see more M&As in Mexican banking. Two things are required for that to happen: the first is that the head offices of international banks may adjust their strategies (and some have been thinking of refocusing regionally) and second that there may be some kind of disruptive change within Mexico.

“Each of these things is possible. And of course where one institution sees risks, another may see opportunities, so we could see moves by Brazilian, Chinese or other banks to enter the Mexican market,” he said.


Against a background of steady loan portfolio growth and a strong focus on private sector corporate customers, Mexico’s banking system is set for a good year in 2015. Much will depend on the strength of the wider economic recovery and how the country adjusts to the expected normalisation of US interest rates in the second half of 2015. Going into 2016 there will also be an increase in competition as the country’s structural reforms begin to have an effect; some established banking players may be subject to M&A activity.

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The Report: Mexico 2015

Banking chapter from The Report: Mexico 2015

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