Impact of Tariffs on Profitability and Risks for Mexican Banks, According to Fitch
The credit rating agency Fitch Ratings indicates that banks in Mexico are facing an increase in credit risks, as well as a deterioration in credit quality and pressures on their profits. All of this is a result of the weakened economic environment due to the tariffs imposed by the United States on Mexican exports. According to Fitch, the banking sector in Mexico will see its earnings impacted and a reduced profit margin due to lower interest rates and increased credit costs.
Smaller and medium-sized banks are in the line of fire, particularly those with lower capital reserves and less diversified business models. These banks are more vulnerable to industrial sectors that depend on U.S. tariffs, such as automotive, agriculture, energy, mining, and construction. As of December 2024, the seven largest banks in Mexico that Fitch has evaluated hold 71% of the total assets of the banking system. These banks primarily focus on lending to large companies and the public sector, in addition to consumer credit for high-net-worth clients. Although there is some level of diversification, the recession triggered by the tariffs will compromise the operating environment and have a negative impact on the overall financial performance of the banking sector. Other sectors, such as housing and retail, will also be adversely affected. Fitch clarifies that credit directed toward businesses will depend on how key industries associated with trade with the United States perform and on the confidence that investors have in Mexico. The banks’ exposure to these tariff-sensitive sectors is moderate: 1% in the automotive industry and 6% in construction. The depreciation of the peso poses an additional risk, although the moderate dollarization of the banking system (16.5% of loans and 15.6% of deposits in dollars as of December 2024) somewhat mitigates the impact of exchange rates. There was already uncertainty in the business climate in Mexico due to factors like judicial reforms and rising labor costs. This scenario is further complicated by uncertainty regarding the duration and intensity of the tariffs, which is already negatively affecting capital investment and consumer confidence. Fitch has significantly lowered its economic growth projections for the country due to the tariffs imposed by Donald Trump. The agency anticipates that real GDP growth will be 0% in 2025 and 0.8% in 2026, representing a significant decline compared to its previous forecasts. According to the Global Economic Outlook report published on March 18, Mexico could enter a technical recession this year, with a decline in production in the second and third quarters of 2025. In February, Banxico reduced the interest rate by 50 basis points to 9.5%. Fitch predicts that this rate will drop to 8% by the end of 2025 and to 7.5% by the end of 2026. Despite this discouraging outlook, Mexican banks have the necessary capacity to absorb the negative effects of the economic slowdown, according to Fitch's stress test scenario model. The agency emphasizes that the banking system has weathered previous crises such as the global financial crisis and the pandemic. Fitch adds that rating downgrades for banks during those times were more due to adjustments in the sovereign rating and not to specific weaknesses in the banking sector.
It is crucial to stay informed about how these conditions influence the local economy. Decisions made by banks and the government during these uncertain times will be key in stabilizing the financial environment. Improving consumer confidence and boosting private investment will be critical factors in reversing negative growth projections. Keeping informed and adapting to these changes is essential for any investor or business owner looking to thrive in this challenging economic landscape.
