Fitch: Mexican NBFIs that Convert to Banks Face Hefty Challenges

MONTERREY, Mexico--(BUSINESS WIRE)-- The Mexican Financial System is comprised of both banks and non-bank financial institutions (NBFIs), the latter normally of much smaller size, and more concentrated business profiles, according to Fitch Ratings. Over the past few years, some of the medium and large sized NBFIs have been pursuing their conversion to a bank in order to improve their funding profile, looking for a stable and cheaper source, such as customer deposits.

Nonetheless, the recently converted entities have faced high conversion costs, especially heftier regulatory requirements related to corporate governance strengthening, more advanced technologies and higher credit costs. In addition, the ability of these banks to gain a material share of customer deposits has been relatively limited, with deposits growing only moderately and gradually, in most cases.

In the past five years, the Mexican regulator has approved 13 new banking licenses, two of which were previously subject to certain regulatory frameworks, but only nine are currently operating. Historically, results for those converted banks that were previously non-regulated entities have been mixed, although in most cases their performance has been weak, while it took them longer than expected to reach breakeven. Newly converted banks reported average ROA and impairments during the period 2011-2015 of -2.3% and 4.5%, respectively, levels that compare well below the average of the Mexican banking system (1.7% and 2.5%).

Their results are still pressured by weak efficiency ratios (cost to income of 173.9%, average during the same period) due to high operational expenses mainly related to personnel and corporate governance structure, such as the creation of committees and mandatory areas or roles. Another big impact in costs comes from their migration to a core banking system, which results in constant investment due to regular adjustments according to their banking activities, especially when preparing to collect deposits.

Finally, one important change when converting from a non-regulated entity to a bank that impact results is the adoption of new rules to calculate reserves for impaired loans. In a non-regulated environment, these entities use different methodologies for loan loss provisioning, but usually their policies are weaker compared to those required by the Mexican regulator, resulting in big impacts when adopting the more stringent regulatory model. The hit taken with the creation of reserves upon migrating to banks was, on average from 2011-2015, 169.6% of the operating profit (Banking system: 46.5% during the same period).

In some cases, the converted entities had suffered higher than projected losses that had been compensated with subsequent capital injections in order to sustain the operation.

However, there have been some exceptions of successful transitions of NBFI's to banks. Fitch believes the success of such entities is highly influenced by their consolidated model in specific niches. Being leaders in their respective line of business proved to be a competitive advantage that they have maintained through the conversion process. Also, those entities were somehow prepared in terms of corporate governance practices and adopted stricter provisioning practices prior to converting into a bank. Fitch believes that in the case of the Foreign Exchange banks, their successful conversion has also been partially aided by their previous regulated figure. In most of these cases, the converted banks have stayed true to their core business helping them in the transition.

Additional information is available at www.fitchratings.com.

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160329006482/en/

Fitch Ratings
Ricardo Aguilar
Director Asociado
+52 81 8399 9124
Fitch Mexico S.A. de C.V.
Prol. Alfonso Reyes 2612, Edificio Connexity Piso 8, 64920
Monterrey, N.L. Mexico
or
Alejandro Tapia
Director
+52 81 8399-9156
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526
[email protected]

Source: Fitch Ratings

---

Serious News for Serious Traders! Try StreetInsider.com Premium Free!

---

You May Also Be Interested In

• Group Eleven Drills 6.9m of 18.3% Zn+Pb and 86 g/t Ag in 50m Step-Out, plus 4.7m of 67 g/t Ag and 0.88% Cu in 275m Step-Out Testing Deeper Cu-Ag Mineralization
• AmpliTech Group Announces Authorization of Up to $10 Million Stock Buyback Program and Terminates At-The-Market (ATM) Equity Offering
• Majority of Enterprises Hit by Executive Impersonation as C-Suite Becomes the Fastest-Growing Attack Surface