Mexico's Banking System. A Shelter in the Global Financial Storm for the Economy and Real Estate Market

As concerns mount in global financial markets about rising interest rates and inflation, coupled with the looming possibility of a recession in the United States, Mexico's banking system stands well-prepared to confront current challenges and maintain its status as one of Latin America's most profitable banking systems. This resilience is attributed to robust funding, high liquidity quality, and ample capital, as recently highlighted by Felipe Carvallo, Senior Vice President of Credit at Moody's Investors Service, during the "Norte Economico" podcast by Grupo Financiero Banorte.

This scenario holds particular promise and interest for the commercial real estate sector. According to SiiLA, over the past four years, the financial sector and the FIRE group (Finance, Insurance, and Real Estate) to which it belongs have contributed to the stabilization of office spaces in major Mexican cities.

From 2020 to the present, companies within the financial sector, including banks and brokerage firms, have accounted for 17% of Mexico's office space market, currently occupying over 1.2 million square meters nationwide. This sector has also driven demand for modern, high-quality office spaces, leading to increased construction and development of real estate projects tailored to financial institutions' specific needs.

Thanks to their robust investment capacity and adaptability to global economic shifts, the financial sector has proven to be a consistent source of stability and growth in the commercial real estate market, even during economic uncertainty. As the banking system continues to maintain its financial stability, it is expected to play a pivotal role in driving and sustaining the office space market in the country, offering investment and growth opportunities for both local and foreign investors.

The Pillars of Banking Stability in Mexico

According to Felipe Carvallo of Moody's Investors Service, financing, liquidity, and capital are the strengths of Mexico's banking sector.

Regarding financing, Carvallo pointed out that Mexico benefits from a base of granular and retail deposits, ensuring ample liquidity and significant margins to absorb credit and operational costs. This funding structure reduces the need to resort to costlier and riskier market financing sources, which has affected many financial institutions worldwide, including extreme cases like the bankruptcies of Silicon Valley Bank, Signature Bank, and Credit Suisse earlier this year.

Another strength of the Mexican banking sector is the high quality of liquidity within the system. Carvallo believes that much of this liquidity is backed by cash and other well-rated instruments, providing stability and security to the financial system and significantly reducing refinancing risks.

In terms of capital, Mexico has maintained high standards through implementing Basel III agreements for over a decade. These international banking regulations are designed to strengthen the financial stability of banking institutions and reduce systemic risk in the global financial system. According to Carvallo, with core capital nearly 200 basis points above the global average and the availability of loss-absorbing issuance features, Mexican banks are well-positioned to withstand financial crises and safeguard the country's financial system stability.

While analysts and financial institutions anticipate moderate economic growth due to increased investment in the country and prudence in loan growth over the next two years, Mexico's office real estate market is poised to continue experiencing gradual and sustained growth. This growth is partly supported by the solid position of the financial sector and its ability to maintain stability during times of economic uncertainty.

For more information on this and other commercial real estate market topics, explore SiiLA REsource or contact us at contacto@siila.com.mx.