Uncertainty among banks over judicial reform: Moody’s

Credit institutions will enter a period of uncertainty while the regulations of the reform to the Judicial Branch are being defined, which was approved last week and published in the Official Gazette of the Federation (DOF), warned the Moody’s rating agency.

He noted that while the diversified portfolios of banks with a large part of their portfolio in unsecured consumer loans and large corporations would not see increased credit risks associated with the reform, the portfolios of small and medium-sized enterprises (SMEs) and mortgages could be affected, since they depend on a legal certainty that guarantees the judicial execution of collateral in a situation of default.

According to Moody’s, in the short term the negative effect will be that banks could slow down the issuance of loans until the legal uncertainty in some segments is resolved. It recalled that at the end of the first half of the year the mortgage portfolio of banks represented 19.3 percent of the total portfolio and contributed 7.4 percent of the accumulated interest income.

He pointed out that there will be a lower appetite, in the short term, for placement in both portfolios (mortgages and SMEs) as a result of the reform. until the uncertainty arising from its potential impact on the execution of guarantees is resolved.

He also anticipated that banks would see their already small exposure to non-bank financial institutions (NBFIs) reduced, as many of these institutions are the vehicles used by most SMEs to find alternative financing to that of suppliers.

Many NBFIs in Mexico serve as the last mile for credit penetration and financial inclusion. Banks, guided by prudential criteria, could also reduce their exposure to those entities focused on pure or financial leasing, mortgage lending and SMEs.the agency detailed.

He added that greater uncertainty could also translate into higher costs, which would ultimately impact new financing, credit lines, the sector’s growth capacity and credit penetration in the country in general.