OREANDA-NEWS. The stable 2016 outlook for Mexican commercial banks is based on strong credit fundamentals to support economic uncertainties, according to Fitch Ratings. Even so, Fitch considers revision of the rating or sector outlook to positive an unlikely possibility, given the moderate expected economic recovery and downside risks from the global environment. Any upside potential will depend on extraordinary changes to credit profiles and a more benign operating environment.

Fitch also considers a scenario of revising the rating or sector outlook to negative as unlikely, as this would only occur with the operating environment deteriorating to an extent that weakens the banks' capital positions, liquidity profiles, asset quality, and core earnings materially.

Loan growth has been sustained in recent years under relatively unfavorable economic conditions. Lending activity is expected to continue to expand in 2016 at a similar pace (12%-14%), partially driven by the still-low level of financial intermediation in the country and some opportunities arising from structural reforms.

Fitch expects mixed effects from rising rates. The start of interest rate increases by the U.S. Federal Reserve is imminent and the increase will most likely impact the Mexican central bank's interest rate decisions, which Fitch expects will translate into wider net interest margins (NIMs) and, only gradually, improved profitability. But the risks related to such an increase include possible trading revenue volatility, retail asset quality pressures, and foreign capital outflows to stronger economies.

Fitch expects bank profitability will remain sound and possibly slightly improved due to rising rates, the resumption of growth in profitable products (i.e. credit cards) and additional expenditure controls. Downside risk for earnings could arise from higher competition, which might compress net interest margins, and higher interest rates.

Fitch's base case scenario is that asset quality metrics will remain stable in 2016. Under a more benign operating environment, Fitch expects adjusted impairment ratios will be sustained in the short term and gradually return to pre-crisis levels of 5.0%-5.5%.
Fitch expects banks to continue to prioritize stable deposit franchises and funding cost optimization in 2016 in light of the expected interest rate increase. In view of continued loan growth and adoption of more stringent liquidity standards, Fitch expects the banks' balance sheet liquidity to be stressed, albeit still adequate.

In addition, Fitch expects capital metrics to be increasingly challenged in 2016 and thereafter. Capital adequacy metrics could be somewhat pressured by the confluence of slightly higher loan growth and additional capital requirements, but this will be partially aided by higher core earnings. Bank capital ratios could fall to a range of 14%-15%, which Fitch would still deem strong.