Mexican bank profits will take a beating if the Mexican government implements its proposal to ban certain banking fees, Moody's said, noting that such measure is a credit negative.

Banks would be negatively affected by the implementation of the proposed regulation because fees have anchored banks' very high earnings, accounting for about 17% of their net revenue, the rating agency said in a sector report.

The proposal targets to cut up to 50% of commission fees, including annual fees on credit cards, fees for money transfers to other banks and cash withdrawals using credit cards. A provision eliminating penalties for loan delinquencies of up to five days "would likely reduce the incentive for borrowers to make timely payments and lead to increased delinquencies," Moody's said.

However, President-elect Andrés Manuel Lopez Obrador's announcement that his incoming administration would retain the country's regulatory financial and economic framework would be positive for Mexican banks, despite the uncertainty on possible changes after the end of the three-year period, Moody's said.

If the government continues with the proposal despite the president-elect's promise, banks with high exposures to retail credit would be hit the most. In addition, competition could discourage banks from trying to impose higher interest rates to make up for the lost fee revenue.

Moody's noted that Mexican banks' fee revenue is similar to that of other major Latin American systems, except Brazil, despite claims from the proposal's author that bank fees in the country are excessively high.

The proposal further asserted that Banco de México implemented insufficient measures to control banking fees. For Moody's, the proposal's stand could threaten the central bank's independence, given that the constitution states that the central bank is the sole authority that could regulate banks' fees and interest rates.

Moody's also believes that the proposal fails to address the high level of informality and a weak legal framework, which is "the most important impediment to increased lending in Mexico."

Moody's stance on the proposed regulation echoes that of Fitch Ratings, which said that a limit on banking fees "could discourage current and new banking participants and possibly have a negative impact on the supply and terms of financial products."