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May 28, 2010

Looking for credit growth in Mexico

Banks in Mexico are starting to expand their credit card portfolios again after two years of deteriorating credit quality, but are wary of making the same mistakes they made in the last credit boom

By Verdict Staff

Banks in Mexico are starting to expand their credit card portfolios again after two years of deteriorating credit quality, but are wary of making the same mistakes they made in the last credit boom. Credit loss management tools and loyalty programmes are part of the solution, as Robin Arnfield reports.

 

Chart showing SCOTIABANK MEXICO loans – performing credit card and personal loansInternational banks are taking a softly-softly approach to the Mexican market as economic conditions recover.

A number of international banks were forced to take remedial action to clean up their portfolios in the aftermath of the financial crisis in the country, where GDP fell by 6.5% in 2009. But with growth of around 3% expected in 2010, Les Riedl, CEO of US consultancy Speer & Associates, says banks are looking to grow their portfolios – though more conservatively than in the past.

“With the stability and growth that has returned to the Mexican economy after the 2008-09 financial crisis, every large credit card issuer is looking at getting back into the lending market again,” says Riedl. “In 2008-09, because of increasing delinquencies, issuers had to stabilize their credit card operations through tightened underwriting policies and credit management procedures.”

“The timing is good for issuers wanting to expand in Mexico,” added Brian Riley, research director for bank cards at TowerGroup. “Credit card penetration is extremely low, as only 20% of the population have active credit cards, half the rate in Brazil or Argentina. In addition, the Mexican government recognizes that, as Mexico has a large informal economy, cards create more transparent accounting so that revenue can be taxed. The central bank, Banco de México, has welcomed foreign issuers in the past decade.”

 

Looking to expand

Chart showing MEXICO CARDS MARKET, credit quality – past due loansCanada’s Scotiabank is one of the international issuers active in the market and its experience has been typical of others in the country. It witnessed a decline in credit card volumes during the 2008-09 crisis, as well as a rising past due loan rate, but is now actively looking to expand its portfolio again.

Across the Mexican credit card industry, past-due loan rates rose from 6.9% to 10.5% between 2007 and 2008, before falling to 8.7% at the end of 2009, Manuel Armendariz Morales, the bank’s head of credit cards, says. Also, total Mexican credit card spending volumes fell by 20% to 25% during the crisis.

“We’ve cleaned up most of the problems we experienced with our credit card portfolio in 2008-09,” says Morales. “Our current credit card past-due loan rate is half what it was during the crisis. Also, spending volume by our credit cardholders is now 50% higher than it was before the crisis, due partly to the rewards programs we’ve introduced to encourage spending. We’re now in a good position to capitalize on market growth opportunities.”

At 31 March 2010, Scotiabank Mexico had MXN17.1bn ($1.3bn) worth of performing credit card and other personal loans on its books, down from MXN17.3bn at 31 December 2009 and MXN19.04bn at 31 March 2009.

In its first quarter to 31 March 2010, Scotiabank had MXN652m worth of provisions for credit losses, excluding recoveries, down 37% from the first quarter of 2009.

“The decrease was due to lower commercial loan provisions, and to lower retail delinquencies, primarily in credit cards and personal loans, due to Scotiabank’s active management of its loan portfolios,” the bank says in a statement.

HSBC is another international bank looking to start expanding its credit card business in Mexico. It doubled its market share between 2008 and 2009, but was hit by high levels of loan defaults when the financial crisis struck.

Part of this rapid expansion was due to Tu Cuenta (Your Account), a bundled account package that HSBC Mexico launched in 2005, offering a current account with a debit card plus a credit card that customers could apply for in the branch.

“Applicants would get instant credit approval and be issued with a credit card in the branch,” Irizarry says. “With Tu Cuenta, HSBC got a lot of new credit card customers, but also a lot of defaults.”

In 2009, the combination of tighter credit origination and underwriting policies within HSBC Mexico and a smaller consumer demand for credit led to a drop in the bank’s credit card transaction volumes.

“In order to encourage our credit card customers to use their cards more, we are offering a number of promotions during 2010, including rewards programs,” said HSBC Mexico spokesperson Yordana Aparicio.

At the end of 2008, HSBC Mexico Antonio Perdomo from Banamex to run the credit cards business, and Miguel Huller joined from Banorte as head of the retail bank.

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