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Japanese banks with Mexican ops wary of shift in US trade policy

Japan's megabanks will be watching developments in North American trade policy closely as Donald Trump begins his four-year term as president.

The lenders, which face low margins at home, have been following in recent times their automaker clients to Mexico, which is used as a manufacturing base serving the U.S. market. Any negative shift in trade relations between the U.S. and Mexico under the Trump administration could have worrying ripple effects for these megabanks.

"We see Mexico as a very important market, and there should be further new investment potential," Takeshi Kunibe, president of Sumitomo Mitsui Banking Corp., said during a Jan. 19 press conference in his capacity as chairman of the Japanese Bankers Association.

As of September 2016, parent Sumitomo Mitsui Financial Group Inc.'s exposure to Mexico was US$3.2 billion. While this is small in comparison to the megabank's exposure to the U.S. and China including Hong Kong, at US$200.8 billion and US$39.2 billion, respectively, Mexico is a larger market for the Japanese lender than developed European economies like Norway, Italy and Luxembourg.

Automobile production has been growing in Mexico for seven consecutive years through 2016, of which roughly 80% was exported, mainly to the U.S., The Nikkei reported. All of Japan's major carmakers have expanded operations in the North American country as a production hub to cover the Americas. For instance, Toyota Motor Corp. in November 2016 began construction of a new factory in Mexico.

Following in the footsteps of automakers, Japanese banks have set up offices there to meet these companies' needs. Mizuho Financial Group Inc.'s Mizuho Bank Ltd. plans to establish a banking unit in Mexico by March, while Sumitomo Mitsui Banking in December 2016 announced a 1.1 billion Mexican peso capital increase at Mexican unit SMBC SAPI DE CV SOFOM ENR to enhance its ability to provide loans. The local unit was established in 2014.

However, the banks' plans to expand in Mexico may be altered if the U.S. president follows through on the plans to reverse the U.S.' trade deficit with Mexico and what he views as unfair trade practices by its neighbor to the south.

Trump has promised to renegotiate the North America Free Trade Agreement soon with Canadian and Mexican leaders to provide more favorable terms to the U.S., and is scheduled to meet with Mexican President Enrique Peña Nieto on Jan. 31 to discuss various matters, including trade, White House Press Secretary Sean Spicer said Jan. 21.

Automakers that produce in Mexico and export to the U.S. have been a target of Trump's ire, with Toyota singled out in one tweet and threatened with a tax on its vehicles exported to the U.S.

What kind of impact Japanese car manufacturers and, in turn, Sumitomo Mitsui Banking's Mexican unit would see from a change to U.S. trade policy is hard to predict at this moment, but foreign companies in Mexico may be forced to revise their investment plans if Trump follows through with protectionist policies, Kunibe said.

"If Japanese carmakers downsize operations in Mexico and regular financial services are no longer necessary, banks may reduce investment to levels lower than originally planned," said Katsuyuki Hasegawa, chief market economist at Mizuho Research Institute.

However, depending on the outcome of any NAFTA renegotiations, Japanese automobile manufacturers would need to consider shifting operations elsewhere, Hasegawa added. "Already-done investments would produce some write-downs, but smaller operations in Mexico does not mean a decrease in global car business," he said.

As of Jan. 20, US$1 was equivalent to 21.74 Mexican pesos.