Mexico bank fee proposal sparks backlash

Spurred by a proposal to prohibit bank fees, the worst selloff at Mexico's BMV stock exchange in seven years has been met with strong reaction from the banking industry, ratings agencies and the legislator behind the proposal.

On Thursday, the IPC index registered a drop of 2,727 points (-5.8%) to reach 44,909 points, accumulating a fall in the year of 10.5% in pesos and 12.8% in dollars. Bank stocks continued to plummet Friday, with the price of Mexico's second largest bank Banorte, trading at 98.7 pesos midday, having fallen roughly 19% since the BMV opened Thursday morning.

The strong market reaction was due to a statement from the ruling leftist party Morena outlining a legislative proposal that would prohibit banks from charging fees on a wide range of services.

The proposal also sparked a more than 6% hit for the BBVA stock on the Madrid exchange's IBEX 35 index – the stock's worst one-day hit since Brexit. Mexico's largest bank BBVA Bancomer provides roughly two-fifths of the Spanish parent's earnings.

The peso-US dollar exchange rate was still climbing in early afternoon Friday trading at 20.33:1, up from 19.84:1 Thursday morning.

Reaction from Fitch

In a phone call with BNamericas, Fitch Ratings' director of sovereigns in Latin America, Carlos Morales, said the rating agency's recent change in outlook for Mexico to 'negative' from 'stable' was not solely the result of last week's cancellation of the Mexico City airport project.

Morales said Fitch is watching events like the cancellation and yesterday's run on bank stocks, noting, "All of this [is happening] even before [president-elect Andrés Manuel López Obrador, or AMLO] takes office. [These events] will surely have an effect on economic performance, and it increases the noise to investors, and that could harm investment prospect as well." AMLO takes office on December 1.

"We still consider that the banking sector is relatively safe. In Mexico, the buffers are quite high. There's an aversion to risky loans in Mexico if you compare it to South America and other peers." said Morales.

"So, taken as a whole I don't think it would be a contingent liability for the government, we're not there yet. However, it does affect more the investor mood and business confidence. So we would expect lower growth, around 2% still, and that limits the capacity of the government to implement the budget that they want with this economic activity." he added.

Moody's weighs in

"The initiative to eliminate some bank fees is credit negative for the effects of Mexican banks, because it would affect their profitability, since they represent around 17% of net income," said Georges Hatcherian - analyst and assistant VP at Moody's Investors Service.

The initiative would eliminate a series of fees, such as credit card annual fees, fees on interbank transfers, and fees on cash advances on credit cards.

"The proposal also generates uncertainty about the direction that the new government of Mexico will take with respect to the independence of the central bank [Banxico], since it asserts that the measures taken by Banxico to regulate commissions have been insufficient," said Hatcherian in a note. "The cornerstone of Mexico's macroeconomic and financial stability over the past two decades has been the presence of an independent central bank."

Banks to defend fees

Mexico's banking association (ABM) said in a statement it would be carrying out its own study of the situation. "[ABM] will analyze the content of this project in order to identify its scope, establish its possible implications and dialogue with the relevant actors."

With regards to the figures presented in Monreal's proposal and provided by the country's financial consumer protection agency (Condusef), ABM said the information on fees "are incorrect."

In an interview with the Formula radio network, ABM president Marcos Martínez said the association would be providing its own details on fee structure and how they compare internationally and with parent companies abroad.

"We are going to be able to very clearly demonstrate that we are very competitive," he said.

Monreal ready for war

The lawmaker behind the proposal, senate majority coordinator Ricardo Monreal (pictured) of the Morena party, offered additional proposal insight on Friday morning, when speaking to reporters on Milenio TV outside the offices of AMLO's transition offices in Mexico City.

The comments from Monreal suggest that the proposal might have been met with some resistance from AMLO and/or his transition team.

"In the senate we do not accept anyone's scolding, that the legislators of Morena are totally autonomous and do not have to come to consult either the president-elect or any member of his team on any of his initiatives," said Monreal.

Reports surfaced Friday afternoon with comments from AMLO himself that his commitments to banks included not touching bank fees for now.

"What is my position? In the campaign I clarified that we were not going to make any reform in the first part of the government in fiscal matters," said AMLO at a press conference, according to local daily El Financiero.

AMLO also recalled that a few days ago he met with the president of Banco Santander, Ana Botín, who he told that they would not change the rules of the game for banks. "In this first stage of the government and to be more precise, in the first three years, no modification," he said.

In his Milenio TV interview, Monreal stressed that in no way would Morena withdraw the fee-reduction initiative and insisted that AMLO should respect the proposal and the legislators that came up with it. AMLO's only urgency, said the senator, was to remedy the banks' "abuses" of consumers.

The senator also offered words hinting that Morena may actually be looking in the end to adjust current fee structures and not remove them summarily.

"We are not against anyone, any banking institution even if they are from another origin we believe in globality and we respect foreign investments in Mexico and banking institutions, but we want to see Santander in Mexico applying the same fees as in Spain. We would like to see Scotiabank applying the same fees and interests as in their country of origin.

"We would like that in Mexico these banking institutions, like [BBVA] Bancomer, will apply the same fee rates in Mexico, because in Mexico there is a disproportion in conditions and interests. And for that reason we propose not only an empowerment but a self-containment - a deep revision - and we will continue."