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  1. Analysis
April 27, 2017

High altitude, low stress? Trump and Latin America

By Patrick Brusnahan

The diplomatic relationship between the two countries may be feeling the strain, but Mexico’s payments sector is shrugging off concerns that US President Donald Trump’s protectionist threats could hit its fortunes, forecasting strong revenues despite monitoring portfolios more closely, writes Ivan Castano

“So far, we haven’t taken any provisions,” says Miguel Angel Laurencio de la Vega, investor relations director at Banorte, Mexico’s third-largest bank with roughly two million customers.

“Overall, consumption remains strong and there are no [portfolio] deterioration signs, despite future uncertainty.”

Employment continues to grow, with the nation adding 500,000 jobs in the past year, De la Vega adds. Unemployment stood at 3.6% in January, down 4.2% year-on-year, according to statistics institute Inegi’s latest data.

“If unemployment rises, that would give us a reason to act but so far our past due portfolio remains at 5%, which matches the industry’s, with an improving outlook,” De la Vega explains.

Banorte, which intends to double its payments market share to over 16% by 2022, matching arch-rival Citigroup’s Citibanamex, expects card revenues to climb by 14% to MXN8.2bn ($443m) this year, helped by soaring interest rates in Mexico.

The central bank, Banxico, has stepped up benchmark rates six times to 5.25% since Trump swept into the White House; the moves were aimed to shore up the plummeting peso and combat inflation which is hovering at 5%, well above its 2% target.

The actions have boosted variable credit card rates, lifting margins for the top three bank issuers: Spain’s BBVA Bancomer, Citigroup’s Banamex, and Santander.

The increases will add 200 basis points to the 28% average rate that Banorte charges for its silver, platinum and gold products, offsetting a slight decrease in its portfolio growth.

“This year, we will probably grow less in our portfolio but more in revenues,” says De la Vega, adding that last year its outstanding balance grew 10% to roughly MXN26bn.

Despite rising margins, Mexico’s economy is set to cool this year, with the government recently cutting GDP growth projections from 2.5% to 1.3-1.5%.

Latin America’s third-largest economy could slip into recession, however, if Trump’s toxic cocktail of threats to upend the North American Free Trade Agreement (NAFTA) – a 23-year-old free-trade agreement that has largely modernised Mexico – or impose heavy tariffs on Mexican exports come true, triggering a trade war between the two nations.

The US president also wants to tax the huge economic driver of remittances – money that Mexicans working in the US send home to their families south of the border – to build his proposed $15bn border wall, and has expanded immigration laws to expel as many as three million Mexican citizens.

The deepening uncertainties are putting investors and businesses on tenterhooks, triggering a sharp fallout in foreign direct investment that is unlikely to recover until the two governments tentatively wrap up negotiations to modify NAFTA by the summer.

Amid such risks, Banorte says it will focus on growing business with existing clients, largely shunning new ones or entering new market segments until Mexico’s prospects become clearer.

“We will be more cautious and seek to grow similarly to last year. We will not be launching any new products or targeting new market segments aggressively,” De la Vega notes. “Many of our customers use our cards very little, so the plan is to increase this through reward programmes and promotions.”

Others are also being cautious. BBVA Bancomer, which leads Mexico’s banking sector, has begun to lower card limits and more closely monitor its accounts, analysts say. Much smaller Inbursa, owned by telecoms tycoon Carlos Slim, is also becoming more selective, they add.

However, Jorge Benitez, analyst with broker GBM, has a sanguine outlook for 2017. He says issuers continue to enjoy high margins and improving credit quality, with interest rates hovering at 26.4%. This, coupled with an expected 9% rise in plastic issuance this year, will drive revenues up by 11% to MXN94bn.

“We are not that negative,” Benitez explains. “We don’t see signals of deterioration because consumer demand remains strong.”

That said, if the economy were to decline more than expected in the second half, something economists expect should a trade war erupt, lenders could suffer amid rising unemployment and defaults.

“We could see a small decrease in employment which would affect banks’ portfolios and they would stop issuing credit,” Benitez says.

To protect themselves, institutions could cut risky personal loans and raise their exposure to safer direct deposit credits, he adds. But even if that happens, the payment sector’s long-term prospects look bright because of Mexico’s low banking penetration.

“Credit cards represent 33% of the MXN4.3trn banking sector, where penetration is about 4% of GDP,” Benitez says, adding that Chile has an 80% banking rate while Brazil has 80%.

Enrique Mendoza, an analyst at broker Actinver broker, is more pessimistic, adding that a sharp economic downturn could severely hit issuers.

“Banks would have to provision very rapidly, even if there is a small default change from one institution or if credit bureau reports worsen,” Mendoza notes.

Joel Cortes, co-founder of consumer card comparison site Kardmatch, says issuers would struggle to pass on higher interest rates to customers who would likely fall behind on payments.

Top retailers Coppel, Liverpool and Walmart, which cater to the nation’s vast majority of low- and middle-income consumers, would be worst hit in this scenario.

By targeting less-wealthy shoppers whom banks typically shun, the firms have made a fortune, offering customers a cornucopia of store cards with ‘months-without-interest’ instalments. In the last five years other department stores, such as luxury chain El Palacio de Hierro, Saks Fifth Avenue Mexico and Sears de Mexico, have followed suit, issuing ludicrously long 12-18-month zero-interest credits, fuelling fears that they have over-hedged themselves.

“There is a bubble risk for these retailers,” says Cortes. “Of course, they are betting this won’t happen, but falling incomes will increase the probability of defaults.”

Liverpool and Coppel have buffered against these risks by charging higher prices for merchandise sold on credit, or charging above-market interest rates, however.

Cortes agrees that the payments market remains healthy. However, like Banorte, most issuers are concentrating on their existing pool of good-credit customers and casting ‘a strong eye’ on portfolios.

They have also cut purchasing rewards sharply. “No one is talking about this but rewards have fallen around 40% since 2012 [when the economy was growing at more robust rates] so now you have to spend 70% more to accumulate the same number of points,” Cortes reveals.

Cortes adds that 2017 “will be very boring” for new plastic launches or product innovation, except perhaps in the digital arena where online and mobile purchasing is growing strongly.

In particular, he highlights Banregio, a tiny lender based in northern Mexico, as this year’s top innovator after it launched a platinum card offering 1% cashback, 5% interest and no annual fee.

“You hardly see cards with such high rewards and low interest rates,” he notes, adding that the bank has an innovative online application feature.

“Banregio has an interesting philosophy which is sort of populist because it wants to be seen to be offering a product that won’t break your finances,” Cortes says.

That could chime well with impoverished Mexicans who have boycotted US brands Starbucks, McDonalds and Walmart in response to Trump’s calls that Mexico pay for his border wall, on top of his well-publicised insults against its population.

Cortes says the actions have not hurt the likes of Visa, Mastercard or American Express, which has a $2.2bn exposure that analysts say it is looking to trim.

“Each bank has customer complaints or issues, but nothing has changed because of Trump itself,” Cortes adds.

Meanwhile, De la Vega says Banorte is keen to grow its digital business, with Mexico’s e-commerce market growing rapidly amid falling mobile data rates which are catching up with leading markets in Brazil and Chile.

For example, it recently incorporated a ‘selfie’ identification feature to its mobile banking app, which it believes is unique in the market.

Banorte hopes to bring similar innovations to the fore to grow its card segment, which accounts for MXN55bn of its MXN559bn consumer loan portfolio.

“We want to develop our cards business mirror the 14% market share we have for our other loan products,” concludes De la Vega.

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