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US banks fortuitously pared exposure to Mexico in recent years

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US banks fortuitously pared exposure to Mexico in recent years

Banks have pulled back on their exposure to Mexico in recent years, led by Citigroup Inc., which continues to hold the greatest amount of cross-border assets among U.S. banks. The move could prove prescient as a new administration targets free trade agreements and ponders a border tax, which might end up benefiting banks that have enjoyed the recent run-up in rates.

Mexico's currency, the peso, has been hammered since Donald Trump's November 2016 presidential victory. From the Nov. 8 election through Jan. 20, the peso has declined by 14.7% relative to the U.S. dollar. Mexico played a central role in Trump's stump speeches throughout the campaign, from his promise to build a wall on the U.S. southern border to a pledge to repeal the North American Free Trade Agreement, which could harm the Mexican economy.

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Citigroup has, by far, the greatest amount of exposure to Mexico, largely through its subsidiary Grupo Financiero Banamex SA de CV. As of the 2016 third quarter, the bank reported $65.8 billion of exposure to the country in its regulatory filings. The figure towered over the $5.5 billion reported for HSBC North America Holdings Inc., the U.S. unit of HSBC Holdings Plc, the second-largest exposure in regulatory filings.

The figures are down notably from recent years. Citigroup's exposure shrank 23% from the 2014 third quarter through the 2016 third quarter. All other U.S. banks decreased their Mexico exposures by 13% over that time. Banks have to report the exposures only when exceeding certain thresholds, and the data include deposit balances, securities, federal funds sold and loans, along with many other types of assets.

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During Citigroup's Jan. 18 call to discuss 2016 fourth-quarter results, Citigroup management said they continue to press ahead with investment plans in Mexico, including branch modernization efforts and upgrading the core operating platform. During the question-and-answer portion of the call, analysts asked about the potential impact of policies from the new administration that target the country. CEO Michael Corbat said the bank has a long history of being able to react to policy changes.

"The stance the administration is taking we think is workable from what we've heard, and again, we maneuvered these types of things before, and we think we've got the ability to work with them in the future," Corbat said, according to a transcript. Corbat also said it was difficult to know how the changes will affect the bank's operations since there are few details available.

Trump has said he would target remittances to Mexico from U.S. consumers. Remittances to Mexico have increased in recent years, reaching $25.7 billion in 2015, compared to $24.0 billion in 2014. Regulations on remittances could harm money service businesses that facilitate the transfers. Rating agency Moody's recently issued a warning that Mexican corporations faced increased risk following Trump's victory, particularly if he pushes ahead with a renegotiation of the free trade agreement.

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Beyond blocking remittances and dissolving free trade agreements, the Trump administration could also harm businesses in Mexico via a border tax. On Jan. 23, Trump said he would lower corporate taxes while paying for it with a "substantial border tax," particularly for companies that move operations overseas. As part of the Republican party's mid-2016 sweeping proposal on reforming the tax code, the party proposed a border adjustment tax.

Some have called the policy a tax on domestic consumption. The rule would allow manufacturers to deduct capital outlays for domestic investment, causing some retailers who rely on overseas production to come out against the proposal. Tax policy analysts estimate the border tax would raise significant revenues, essential in paying for a potential reduction in corporate tax rates.

However, the border adjustment tax would not necessarily affect Mexico more than other foreign countries. The policy could still have significant effects for banks, likely to the positive. Analysts at Keefe Bruyette & Woods wrote in a Jan. 20 note that the policy should prove inflationary, which would benefit banks that have celebrated rising bond yields following the election. Also, the analysts wrote that the border adjustment would help pay for the tax reform that would benefit banks and that a failure to include the policy might force politicians to target a bank tax to pay for reform.

While Trump has espoused a substantial border tax for companies that move operations overseas, he is not necessarily a fan of the border adjustment plan. The Wall Street Journal quoted Trump in a Jan. 16 article as saying the border adjustment plan is "too complicated" and that he preferred something simpler.

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Click here to view the March 31, 2016 FFIEC 009a report and here to view the E.16 report.
Click here to download historical reports from the FFIEC website.
Click here to download the bilateral remittances matrices from the world bank website.