Mexican lenders led fixed-income offerings by banks in Latin America's six largest economies during the first nine months of 2020, closing a total of $5.59 billion, or 44.8% more than in the year-ago period. The surge contrasted with the decline in issuance by Brazilian banks, whose offerings plunged by 66.7% to $650.5 million over the same period.

The total amount of fixed-income offerings completed by banks in the region's six largest economies decreased by 5.8% to $10.26 billion, but the average amount per offering increased by 116.2% to $301.8 million, while the mean coupon rate rose to 5.14% from 4.88%.

Mexico saw the sharpest rise in issuances, as banks sought to benefit from the country's investment-grade ratings and a low-interest-rate environment, while concentrating on capitalization and liquidity levels.

"Larger banks are taking precautions and building up liquidity in case international markets are closed down the line," BBVA Chief Credit Strategist for Latin America Edgar Cruz Borges told S&P Global Market Intelligence regarding the uptick seen in Mexico.

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"As long as the window is open, banks will keep issuing, because it is one of the few ways for them to make money right now."

The funds from bond issuances will aid banks in their liability management and should allow lenders to shield some profitability, Cruz Borges said. "With such a weak economic recovery, that definitely won't be happening through loan growth," he added.

In the year through September, nine Mexican financial institutions issued 15 fixed-income instruments for an average $372.7 million per offering. That compares to the 24 issuances by nine banks worth an average $175.6 million per offering in the same period of 2019.

The average yield of those instruments whose coupon rates were listed in the prospectus was 5.95% this year, down from 6.24% in the same period of 2019.

Mexico's offerings included Banco Santander México SA issuance of $1.75 billion worth of senior notes due 2025, offered at a rate of 5.38%, which was "the largest placement of debt carried out in international markets by a bank in Mexican history," according to the lender.

Liquidity and investment grade

"There is excess liquidity in the world due to all the different stimulus packages, and combined with expectations of interest rates remaining low for quite a few years, fund managers are being led to seek out more attractive investment opportunities," José Angel Montaño, vice president and senior credit officer at Moody’s Investors Service in Mexico City, told S&P Global Market Intelligence.

Chile, Mexico and Colombia's investment-grade ratings helped to boost or maintain demand for the fixed-income instruments offered by banks in those countries which are taking advantage of a window of opportunity, Montaño said.

Investors are specifically looking at "higher-quality issuers that would justify the higher risk."

Montaño attributed the higher issuance by Mexican banks to their "very reasonable" concentration on capitalization and liquidity levels. "Banks depend greatly on liquidity and the solvency and quality of their balance sheets, as this enables them to handle any sort of bank run, or similar scenarios, which can make even well-capitalized banks go under," he said.

As long as uncertainty remains high, the level of issuance by Mexican banks could remain strong if they continue to see opportunities for offerings at attractive rates, he added.

The decline in issuances from Brazilian banks, meanwhile, is associated with the fact that Latin America's largest economy is not considered investment grade, while prospects of a recovery have become clearer, thereby reducing the need for banks to take on more debt.

"I don't doubt it has attractive investment opportunities, but it's not investment grade for us, and asset managers are being very selective," Montaño noted.

In Colombia, the only other country besides Mexico to register a sharp uptick in fixed-income offerings by banks, lenders are bracing themselves for the implementation of the Basel III regulatory framework in 2021, Andrés Duarte Perez, equity research head at Corficolombiana, told S&P Global Market Intelligence.

"This issuance will help Colombian banks adapt to the more demanding solvency criteria that Basel III will bring about next year," he said.

But according to Duarte Perez, lenders will also seek to reshuffle their funding mix by issuing more debt to compensate for the expansion of Colombia's total loan portfolio, which contrasts a recent decline in retail deposits. Indeed, the total level of deposits held in savings and current accounts fell by 0.8% between July and June, according to data provided by the Superintendencia Financiera regulator.

While no offerings were closed by Colombian banks since March, seven have been announced since then, contrasting the eight that were announced between March and September last year.