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Fitch: Mexican central bank's rate hike could pressure non-bank financial firms' profits

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Fitch: Mexican central bank's rate hike could pressure non-bank financial firms' profits

FitchRatings said on July 7 that the Mexican central bank's recent increases in the benchmarkinterest rate, including the latest hike of 50 basis points, will likely pressurethe profitability of Mexican non-bank financial institutions.

The centralbank, or Banco de México,on June 30 raised itsbenchmark interest rate to 4.25% from 3.75%, the third rate hike in the last sixmonths.

FitchRatings said July 4 thatthe profitability of Mexican banks may benefit from the recent increase in the benchmarkinterest rate.

However,profits of unregulated non-bank financial institutions "will be challengedby recent upticks," given that their funding base consists mainly of floating-ratewholesale facilities, which means a rise in interest rates will increase their fundingcosts, Fitch noted.

For example,companies in the microfinance and consumer finance segments will likely see lowernet interest margins since they will not be able to pass through the higher fundingcost to borrowers due to the already high rates and high competition, Fitch said.

The situationis slightly different for credit unions, cooperatives and Sofipos, which are allowedto take deposits from the public. Their funding costs tend to be lower than thoseof unregulated institutions, but it will take some time to increase interest ratesin their loan portfolio so Fitch does not expect recent rate hikes to benefit theirprofitability in the short-term.

Overall,despite Fitch's view that the higher benchmark interest rate will pressure the profitabilityof non-bank financial institutions in Mexico, no negative ratings actions are expectedin the medium term, the agency noted.

Fitchconsiders the main challenge facing these entities given the higher interest rateswill be to increase efficiency and to grow their operations to improve profitabilityin the future.