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With Mexico’s economy coming under pressure from trade-driven stresses, the country’s big banks are facing rising credit risks and intensified pressure on earnings, says Fitch Ratings.

In a new report, the rating agency said that it has revised its forecasts for the Mexican economy down sharply due to the imposition of U.S. tariffs. 

As a result, it now expects 0% growth this year and 0.8% next year, down from its previous forecasts of 1.1% and 1.7%, respectively — with the economy falling into recession in the second and third quarter this year.  

Against this backdrop, Mexican banks will also face higher loan impairments and rising earnings pressure, Fitch said, as margins compress due to increased credit costs and lower interest rates.

“This is especially true for small to mid-sized banks whose lower capital bases and less diversified business models prone to be more sensitive to industries vulnerable to increased U.S. tariffs such as industrial, agricultural, automotive, construction, energy or mining sectors,” it said.

Yet, even for the big banks — Mexico’s seven large banks (including Scotia’s Mexican operations) represent about 70% of total banking assets — the onset of a recession will reduce the benefit of their more-diversified operations. 

“The impact will be felt beyond the most directly affected sectors, resulting in a weaker operating environment and stressing Mexican banks’ business prospects and financial performance. A domestic recession would broadly impact other corporate sectors, such as homebuilding, construction, and discretionary retail,” it said.

That said, the banking system overall is well-positioned to absorb these risks, Fitch said. 

“The banking system withstood the global financial crisis and the pandemic with bank downgrades during these periods only related to sovereign downgrades and not due to pressures to their standalone ratings,” it said.