Fitch: Growing Agribusiness Financing in Mexico Poses Challenges and Opportunities

During 2015, Mexican commercial banks’ agribusiness financing grew 22.1% year over year. Fitch Ratings notes, however, that even though this is the highest rate in the last six years, the number of creditors has remained relatively stable. The reason is that some institutions have focused on clients with more borrowing capacity within the sector.

While the stable number of customers served contrasts with financial reform’s aim to include more of the population in the banking system, there are other non-bank financial institutions (NBFIs) involved in this segment such as Credit Unions, Sofipos, Sofomes and Cajas Populares, which generally offer their services to smaller clients on the primary sector, broadening the borrower financing base.

Despite the inherent risk of high borrower concentrations, Fitch estimates that the potential threat to the banks that make up most of the primary sector financing would be relatively mitigated, because on average, agricultural loans represented less than 5% of their business loan portfolios.

Fitch notes that the abnormally high loan growth recorded in 2015 coincides with the only uptick in the agribusiness trade balance since 1997.

In Fitch’s view, these events could explain why some of the largest banks providing financing to the primary sector have increased the size of the sector’s loan portfolio during 2015 by up to 50%, while the amount of the whole banking system’s portfolio in this segment almost doubled over the last six years. Both figures include loans for agriculture, forestry, livestock and fisheries.

Fitch notes that these credits are exposed to risks that are beyond their ability to control, such as phytosanitary or weather events, particularly freezing during autumn and winter, drought in the spring-summer period, or hurricane season covering both agricultural stages. However, most segment creditors receiving resources from FIRA or from other development banks, directly or indirectly, or through banks and NBFIs, have refined their insurance coverage against such non-financial risks.

Fitch estimates that within the primary sector, the banking system has reported (weighted by size of portfolio) nonperforming loans averaging between 2.1% and 3.2% during the last six years.

In recent years, some NBFIs in the segment have tried to increase their institutionalization and access to funding by obtaining a bank license. However, regulatory and operational costs of this banking model are important but the foregoing opportunities are driving growth for these entities to lending in the primary sector to seek their growth targets.

For 2016, we believe there is still room to increase lending within the agribusiness sector, as it has consistently represented 8% of the market value of the entire chain. Therefore, it is likely to see portfolio growth above 20%. In addition, Fitch expects the nonperforming loans ratios to remain relatively stable.