Macro Analysis /

Mexico: Banking credit – The recovery continued in January

  • Banking credit declined 1.8% y/y in real terms, with consumer loans leading the move higher

  • Non-performing loans (NPLs) climbed to 2.5% of the total portfolio, worse in corporates and mortgages

  • We expect credit to keep recovering. However, performance will remain tied to the pandemic, as well as some other risks

Francisco Jose Flores Serrano
Francisco Jose Flores Serrano

Senior Economist, Mexico

28 February 2022
Published byBanorte
  • Today, Banxico published its banking credit report for January 2022 

  • Banking credit declined 1.8% y/y in real terms, better than the -2.7% of the previous month and our -1.9% forecast. This suggests a modest improvement in loans, positive considering a slight deterioration in the backdrop during the month 

  • Corporate credit maintained the largest contraction at -4.2%, remaining as the most impacted. Mortgages came in at +2.8% and consumer loans managed to return to positive territory at +0.8% after 21 months with an annual contraction 

  • Non-performing loans (NPLs) rose to 2.5% of the total portfolio. Consumer loans were unchanged at 3.2%, with mortgages and corporates increasing at the margin to 1.9% and 3.2%, respectively 

  • We expect banking credit to keep recovering in the short-term, in part with a more modest drag from lower annual inflation. However, performance will remain tied to the pandemic, as well as some other risks

Banking credit continues improving at the start of 2022. Commercial banking credit to the private non-financial sector contracted 1.8% y/y in real terms in the first month of 2022 (see Chart 1). This was practically in line with our expectation at -1.9%, but markedly better than the -2.7% of the previous month. Although figures remain under pressure from base effects, performance suggests a slight acceleration in the pace of the improvement. As such, we believe a more vigorous recovery has extended through the last five months. We also highlight that the result was positive considering a more challenging backdrop in terms of the virus, which seems to have triggered greater uncertainty across consumers and businesses (using survey-based data). The effect from annual inflation is favorable, with a decrease of 28bps to 7.07%. In this context, corporate loans fell 4.2% y/y in real terms, likely impacted by the abovementioned factors. Looking at the breakdown, 6 out of 13 sectors worsened relative to December (see Table 1). Those with the largest impact were mining (-5.6% from 2.7%), transportation (2.6% from 5.1%) and real-estate services (-8.2% from -7.0%). On the contrary, the most notable improvements were in mass media (2.9% from -3.2%), commerce (-5.2% from -6.9%) and primary activities (0.6% from -0.9%).

Mortgages came in at 2.8% from 2.7% in December. Inside, low-income housing credit worsened to -17.5% (previous: -16.0%), with residential higher at 4.0% (previous: 3.8%). Consumer loans stood at 0.8% from -2.1%, back in positive territory for the first time in 21 months. Details were favorable (Chart 2), with improvements across all categories. As such, we highlight payroll loans (3.5% from 0.8%), credit cards (0.4% from -2.8%), durable goods (-1.6% from -4.9%), and personal loans (-3.2% from -4.4%). In addition, ‘others’ rocketed to 17.0% (previous: 7.3%).

We think the improvement in this sector was positive –and the driver behind most of the increase in total credit– considering an impact to fundamentals –especially employment levels– and prevailing price pressures, especially at the core component. As a result, the increase might be explained by a more favorable outlook.

Non-performing loans rise to 2.5% of the portfolio. This represents a 20bps increase relative to the previous month. Inside, NPLs for consumer loans were unchanged at 3.2% (Chart 3). Mortgages were higher to 3.2% (previous: 3.1%), with corporates also worse at 1.9% (previous: 1.7%). We believe the adjustment is small and not at all a cause of concern, as levels remain quite low and manageable for banks. In this sense, cooperation between financial entities and regulators –such as the National Banking and Securities Commission (CNBV in Spanish), MoF and Banxico– will continue to be key to maintain and bolster the health of the system.

We expect an upward trend in credit to continue, albeit with some risks ahead. The last five months have shown a faster-than-expected recovery, suggesting that credit might be on pace to return to positive territory in a couple of months. However, and as portrayed by corporate loans, dynamism remains tied to economic activity and overall pandemic trends. As such, this is still the main challenge ahead. In addition, other key risks include: (1) Prevailing price pressures; (2) the tightening cycle from Banxico, resulting in higher interest rates; and (3) the pace of improvement in fundamentals (e.g. employment and remittances). Despite of this, we expect the overall trend to stay on the upside, with a more favorable base as annual inflation begins to moderate, along more outright dynamism in loans. By sectors, this is likely to be reflected in further improvements along consumer and corporate credit, still with the most room to make after the pandemic shock. Meanwhile, mortgages will probably remain more stable. On the health of the financial system, timely actions from regulators –as well as of other public and private institutions– reinforce the commitment of maintaining solid fundamentals.