Once exclusively available to the well-to-do, credit has been descending the socio-economic ladder in Mexico and Brazil during the past few years. Easing interest rates and healthy growth, among other factors, are inducting more low-to-middle income borrowers into the credit culture club of Latin America's two bulkiest economies.
Depending on the particular asset class, ABS players have either been instrumental in firing up the growth or are poised to add fuel in the medium-term. And while delinquencies are on the rise with the waves of fresh credit converts, no one sees anything like the subprime mess on the horizon. Not yet, at least.
In Mexico, non-auto loan consumer credit and domestic ABS haven't been the best of friends. While mortgages are routinely pumped out by the securitization machine, consumer credit by originators other than state agency Infonacot has scarcely left a mark on issuance.
Department stores that a few years ago were expected to pile into ABS have stayed away and banks have yet to make much noise in the sector. But now that some big names have crossed the RMBS threshold-Banco Mercantil del Norte and HSBC Mexico, namely-bank originators are ready to look into cards, sources say. "Banks are working on ABS consumer programs," said Juan de Mollein, managing director at Standard & Poor's. "Interest rates have trended downward in the last two years, and now we've reached a critical volume and [established a] track record." Indeed, in the last year alone, consumer debt held by commercial banks hit Ps435 billion ($37 billion) in September 2007, up 24% from the same month last year (see table below). The credit card portion rose 32%.
This speed of growth may prove to be the irresistible force that brings banks into the credit card ABS market. Talk is that Banco Santander is readying a credit card deal, to come off a program sized at Ps5 billion. The bank's card portfolio has averaged 20% annual growth over the past five years, thanks to dropping rates, according to a source familiar with the bank. The government's benchmark 28-day Treasury is currently yielding in the ballpark of 7%, compared with 21% in 1999.
Other banks are expected to follow Santander's suit, possibly as early as next year.
Delinquencies, though, have followed in the wake of white-hot expansion. Poorer Mexicans who've taken on credit for the first time-shouldering interest rates that could run at 50% a year despite the economy-wide easing-are naturally more apt to default. To be sure, that has been the case. Delinquencies hit 6.4% for credit card debt in August 2007, up 1.5 percentage points from a year earlier. While certainly not alarming given the pace of growth, it's a number that everyone is watching a little more closely, sources say.
Interestingly, while credit card deals haven't been done as revolving domestic deals in Mexico-the style familiar to the U.S. market-they do have a past there as future flow deals, backed by receivables generated when travelers to Mexico make a purchase. The last public deal of that kind closed in February 2004, when BBVA Bancomer issued a $300 million transaction. In the late 1990s, Bancomer, along with Banamex, was a major issuer.
On the auto loan side, the market may soon break the stillness of the past few years, which has been punctuated by a truck loan deal from Navistar and a car lease program by Unifin. Sources said a substantial auto loan transaction from Ford Credit de Mexico has been put together by Bear Stearns. Sources at the structurer didn't return a call requesting comment by press time. Market sources said the transaction was private. While Bear isn't registered as a local broker-dealer, the deal could effectively be marking the shop's entry into the domestic ABS marketplace.
The other big lenders, GMAC, Volkswagen, and DaimlerChrysler, have all been active in plain vanilla issuance in Mexico but not in ABS. Sources said they might start looking into the latter as well.
Rising indebtedness among Mexicans in the middle-to-lower income strata has been in no small part powered by the mortgage industry. Sofols, the nonbank originators targeting these economic segments, have been growing their portfolios at a breathless rate for several years now. In August, total assets of mortgage Sofols hit Ps146 billion, from Ps56 billion five years earlier. The growth is particularly impressive considering how aggressively the leading originators have been shedding mortgages from their balance sheet in RMBS transactions.
In Brazil, the growth of credit has also been dramatic with the lower-to-middle income strata acting as key protagonists in the story. Whereas talk is also spreading of rising delinquencies in certain asset classes and socioeconomic sectors, there is one key difference from Mexico's overall indebtedness picture: mortgages are far rarer. Total mortgages outstanding-to-GDP in Brazil is around 2%, compared with more than 8% in Mexico.
The celebrities of Brazil's ABS consumer sector had for some time been personal loans that are payroll deductible (see table below). But the main originators of this asset, small and medium-sized banks, have pulled back after engaging in a bout of fundraising via IPOs and M&A activity with larger peers. Total issuance of personal loan ABS rated by S&P hit nearly R$1 billion ($560 million) in the first half of 2007, down from more than R$1.2 billion in the first half of 2006. The downward trend held for the second half, sources said.
"We'll see less of these securitized loans until [those banks] eat up the capital they raised in the markets," said Carlos Macedo, an analyst at Unibanco.
Auto loans might end up picking up much of the slack. Already ABS has seen significant volume from such originators as Banco Paulista, Omni Financeira, and Banco Votorantim. And origination in the sector hasn't been slackening either. "There's been record production of auto loans," said Bernardo Costa, an analyst with Fitch Ratings. "This should continue being one of the leading asset classes in Brazil."
The prospects for credit-card ABS are dimmer, with the major issuing banks facing little incentive to securitize those receivables.
As in Mexico, the novelty of a consumer culture among low-to-middle income Brazilians means that experts don't have historical models predicting how these borrowers would prioritize loans in a credit crunch. Naturally, with such low mortgage borrowings, at least one major asset class is out of the equation in Brazil. As for consumers holding more than one of the others, they will most likely prioritize based on cost, Macedo said. "They'd stop paying the most expensive loan," he added. "The one they can't afford not to pay is the payroll-deductible loan, then the car loan. The unsecured personal loan would be last."
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