A proposal by Mexico's incoming government to limit certain banking fees could have negative implications for the country's banks and may reduce the sector's profitability, according to Fitch Ratings.

For now, the proposal is only a legislative initiative, and there is no guarantee that it will be approved. However, some of the largest Mexican bank stocks fell sharply on Nov. 8 after Ricardo Monreal, the Senate leader for Mexican President-elect Andres Manuel Lopez Obrador's Morena party, proposed to eliminate fees for ATM cash withdrawals, checking account balances and requesting bank statements, among other things.

The shares of certain European banks with subsidiaries in Mexico were also hit hard.

Fee income is a "significant source" of earnings for Mexican banks, representing on average 18% of the banks' total operating income in the last five years, Fitch said.

"Fees also provide banks with a healthy diversification of their sources of income," the rating agency added. "The fees have supported the continuous generation of banking profits, even in times of economic stress and in past low interest rate environments, which is one of their greatest credit strengths compared to other banking systems in emerging countries."

Fitch further believes that if the proposal is approved, it could generate medium- and long-term negative impacts on efforts to increase financial intermediation and inclusion in Mexico. The proposal's approval "could discourage current and new banking participants and possibly have a negative impact on the supply and terms of financial products," Fitch said.