Fitch: Growth in Payroll Lending Still Robust for Mexico's Banks

NEW YORK--(BUSINESS WIRE)-- Payroll lending by Mexico's private sector banks is on track for another year of high growth, far outpacing other consumer lending categories such as credit cards, personal loans and automobiles, says Fitch Ratings.

Fitch views payroll loans as relatively less risky than other consumer loans because payments are deducted directly from the borrower's payroll account, eliminating the willingness to pay issue that often causes other consumer loans to default.

Payroll loans outstanding stood at MXN175.7 billion as of May 2015, comprising about 24% of all consumer loans in Mexico (other than residential mortgages), up from 19% in 2011. The banking sector's outstanding volume grew 21% over the 12-month period ending May 2015, versus 17% in 2014. A chart of the growth rates in four major consumer loan categories across Mexico's banking system can be found here, highlighting the diverging trend between payroll and the other loan categories. The decline in personal loans shown in the chart is partially attributable the separation of personal loans from payroll loans on the part of Mexican banking regulators since February 2011. Fitch expects payroll loan growth to remain in the 20% range through the remainder of the year.

The non-performing loan rate (90 days past due) was 3.2% as of May 2015, lower than the average rate on the overall consumer loan portfolio, which stood at 5.2% also as of May 2015. Job turnover is the most common reason for asset quality weakness in Mexican payroll loans. The performance of loans granted to employees is materially better than the performance of loans to private sector employees, a demonstration of how steady employment affects these loans. However, a risk to the public sector segment stems from exposure to high political and operational risks due to the agreements with government entities, as well as their role in the collection process, which can cause recurring delays in the receipt of payments.

Small and midsized private sector banks and non-bank financial companies have gained a greater share of the market by leveraging multiple relationship channels to attract clients, including through ATMs. Efficiencies within a bank's technological infrastructure and origination processes are crucial to the adequate performance of payroll loans, and we believe that Mexican financial institutions have demonstrated good processes with regard to updating and automating of originations, as well as improvements in the identification of potential clients.

The range of interest rates on a payroll loan was between 13% and 39% as of April 2015, with an average of 25%, which is down from an average 30% at year-end 2011. Although competition for payroll loans has led banks to lower interest rates, payroll lending rates from banks are lower than payroll lending offered by non-bank financial institutions, and are lower than interest rates charged by credit cards, which average 42%. About 90% of payroll loans have a tenor between 24 and 60 months, with deferrals and extensions available in the case of job disruptions that place the borrower in risk of default.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150731005593/en/

Fitch Ratings
Monica Ibarra
+52 81 8399-9150
Financial Institutions
Monterrey, N.L., Mexico
or
Bertha Perez
+52 81 8399-9161
Financial Institutions
or
Matthew Noll, CFA
Financial Institutions Fitch Wire
+ 1 212 908-0652
New York, NY
or
Media Relations:
Alyssa Castelli, New York, +1 212-908-0540
Email: [email protected]

Source: Fitch Ratings

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