Moody's Downgrades Outlook for Mexican Banking System to Negative Amid Trade Tensions and Economic Slowdown in 2025

Moody's Ratings has changed its outlook for the Mexican banking system from positive to negative, citing trade tensions with the United States and an anticipated economic slowdown in 2025. Despite the banking sector's fundamental strengths, Moody's projects a deceleration in economic growth to 0.7% in 2025, attributing it to reduced public spending, institutional changes, and uncertainties in trade relations with the U.S. These factors are expected to strain macroeconomic dynamics and diminish banks' business volumes. The agency also noted a weakening capacity of the government to provide support, aligning with a decline in policies and the institutional framework, which risks undermining fiscal and economic outcomes. Institutional changes, such as the judicial reform and modifications to regulatory entities, are seen as contributing to slower economic expansion. Potential tariffs from the U.S. administration could adversely affect Mexico's automotive, manufacturing, and technology sectors, potentially leading to peso depreciation and inflation, as well as limiting interest rate cuts and loan demands. Moody's anticipates that increased volatility in exports, exchange rates, and inflation will reduce banks' risk appetite in 2025. Despite prudent origination standards, Moody's suggests that past-due loan ratios are likely to increase as consumer loans mature amid moderating portfolio growth. The agency forecasts single-digit portfolio growth over the next 12 to 18 months, down from 13% in 2024, reflecting caution amid short-term confidence crises. However, reserves for credit losses and capital remain robust, aiding in loss absorption. Bank profitability, after reaching near-record levels, will depend on increased provisioning needs and accelerated investments in digitalization to address competition from new banks using these technologies. Financing and liquidity are expected to continue benefiting from ample customer deposits.