Adapting to change in Mexico’s CIB sector

Corporate and investment banking in Mexico: Delivering value through new models

By Jaime Cantú, Andrea Cristofori, Helmut Heidegger, Gabriela Hernández, and Markus Röhrig
Corporate and investment banking in Mexico: Delivering value through new models

Mexico is among the most profitable markets for corporate and investment banks, and prospects are strong. However, the terms of success are changing.

Mexico is the fourth-largest economy in the Americas and has experienced yearly average real GDP growth of 1.9 percent in the last ten years. The Mexican economy has benefited from increasingly stronger macroeconomic fundamentals after the 1994 crisis, and has leveraged the creation of free-trade agreements to become an export-oriented economy.

Economic growth in Mexico, along with a stronger private sector, and an increasingly relevant position in the international trade scene, have had a significant impact on the corporate and investment banking (CIB) industry: CIB revenues have grown at 6 percent per year over the last ten years, mainly driven by transaction banking, which grew at 9 percent per year (exhibit). Lending revenues, meanwhile, grew by 3 percent (pushed by an 11 percent growth in lending volumes). Despite this robust growth, the penetration level of CIB in Mexico, measured as total volume/GDP, is still low (39 percent) compared to similar economies (e.g., 50 percent for Latin America overall).

CIB revenues and volumes in Mexico have grown steadily since 2009.

The profitability of the CIB sector in Mexico is healthy. However, profit margins have declined in recent years due to pressure on interests and fees. In fact, return on equity (ROE) for CIB firms in Mexico decreased from 27.6 percent in 2009 to 14.8 percent in 2017. Improvements in operational efficiency and a decrease in risk costs have helped to offset interest and fee pressure, but not enough to compensate for the decline.

Mexico’s CIB industry focuses on specific sectors and client sizes. Services, retail and wholesale trade, construction, and manufacturing—pillars of the Mexican economy—account for 70 percent of commercial banking lending volume. Meanwhile, large corporations account for 80 percent of commercial lending, with small and medium-size enterprises (SMEs) accounting for the remainder.

Mexico’s real GDP growth is expected to average approximately 2.5 percent, and yearly average inflation of about 4 percent, for the near term. Nominal CIB revenues are expected to grow four times faster (10 percent p.a.), with commercial lending (13 percent) and transaction banking (9 percent) contributing most of the growth. To tap into this growth, successful banks will adapt to the evolving competitive environment by better serving SMEs and capturing growth that follows from the formalization of the economy.

Three factors could further propel growth in Mexico's CIB industry:

  • further integration of international supply chains (Mexico is a global leader in number of international trade agreements)
  • an increase of investment and infrastructure development
  • the strengthening of guarantee funds programs

These factors—together with the emergence of partnerships between banks and fintechs, the adoption of new technologies to serve currently underserved segments, and incentives for the formalization of family businesses—could lead to revenue growth of between 12 and 13 percent per year for the industry.

Conversely, heightened regulation—for example, increasing capital requirements and tighter anti-money laundering regulation—and the advent of cheaper funding from foreign banks, could hinder the growth of the Mexican CIB sector. Under this adverse and more uncertain scenario, CIBs could adopt a more restrictive credit policy and decrease investments in innovation, which would reduce revenue growth expectations to 7 to 8 percent per year.

Regardless of which scenario takes shape, five trends will shape the Mexico CIB industry: continued pressure on profits; competition from new entrants and client in-house solutions; polarization of demand between commoditized digital products and tailored value-added services; digitization as a driver of value creation; and an increasingly competitive battle for talent.

McKinsey’s view is that these trends will require Mexico’s CIB firms to reshape their strategy around four coordinated actions:

  • Achieve commercial excellence
  • Digitize processes end-to-end
  • Redesign products and pricing strategies
  • Develop advanced analytics capabilities

The prospects for Mexico’s CIB sector are strong. Depending on a number of broader factors, profitability should continue along a sound and sustainable path. But individual banks will not profit by standing still. A number of trends are changing the terms of success in the CIB sector—tomorrow’s leaders will prepare now to compete in a new landscape.

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About the author(s)

Jaime Cantú is a knowledge specialist in McKinsey’s Mexico office, where Andrea Cristofori is a partner and Gabriela Hernández an associate partner. Helmut Heidegger is a senior partner in the Vienna office, and Markus Röhrig is a partner in the Munich office.

The authors would like to thank Sergio Waisser, Luiz Caselli, and Szabolcs Kemeny for their contributions to the report.