Economics: Credit to the private sector starts its slide

MEXICO - Report 16 Mar 2021 by Mauricio Gonzalez and Francisco González

All components of finance to the private sector have begun to show signs of weakening, just as had been expected. While commercial banking solvency indexes were still suggesting late last fall that the system is relatively well capitalized on average, some banks were in barely satisfactory ranges. The non-performing loan portfolio coverage and the expected loss indexes tell a similar story even as there were growing signs of more trouble ahead for wages and household incomes that could increasingly force debtors into the difficult choice between taking on more debt or ceasing to service their existing obligations. Those developments are all the clearer in data for full-year 2020 and this past January.

Total financing issued to the non financial private sector, both to businesses and households, has decreased by an annual 2.4% in real terms, either by decision of the borrowers or concerned lenders in question or as business and consumer lines of credit fell in real terms, a fate that only the longer-term segment of mortgages managed to avoid. The Central Bank’s capitalization index (ICAP) continues to trend higher and suggests that the cause for that rise is a very similar climb in the non-performing loan coverage index (ICOR). Moreover, banks are having to expand their loan loss provisions, and bank capitalization levels are not as high as they appear at first glance when we incorporate the probability that debtors may default on the credit portfolio.

Meanwhile, banking system credit risk as a percentage of total loan portfolio showed an 11.09% increase as of December 2020 in response to a rise in default correlations and increased default risk in both the consumer and housing portfolios. In a context of falling credit and persistent economic weakness there are no clear strategies on the federal government side, nor on the banks that face the biggest challenges in dealing with the increasing risk of experiencing a larger rise in non performing portfolios.

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