Most of Latin America's largest banks have accumulated enough reserves to see them through the rest of the coronavirus pandemic given the likely scenario of widespread vaccine distribution in 2021, analysts told S&P Global Market Intelligence.

Based on the better-than-expected evolution of asset quality metrics and with the outlook of a more controlled COVID-19 pandemic on the horizon due to recent developments in vaccines, tests and medical treatments, the majority of the region's biggest lenders will either maintain current levels of quarterly provisioning or continue to lower them over the coming periods, the analysts said.

While only four of the 15 Latin American lenders with more than $50 billion in assets posted year-over-year drops in provisions during the third quarter, 12 of them reduced their reserve-building compared to the linked quarter.

"It's logical for provisions to remain above 2019 levels, but it's important to see if they are still creating provision buffers relative to what they've been doing this year," Cynthia Cohen Freue, an S&P Global Ratings analyst covering banks in Peru, Chile and Brazil, told Market Intelligence.

Overall, the banks' ample coverage ratios and positive results from deferment and restructuring programs will lead them to continue to ease their stockpiling, the analyst continued. Higher provisions are still a possibility, however, as long as risks of a second wave remain, she emphasized.

For the 12 institutions that reported loan loss reserves to problem loans ratios, the average third-quarter coverage ratio rose to 158.9% from 138.9% in the linked period. That's also well above the average of 120.2% posted for the third quarter last year, excluding Bancolombia SA, whose data was not available for that period.

Mexican outliers

The two largest banks in Mexico, Grupo Financiero BBVA Bancomer SA de CV and Grupo Financiero Banorte SAB de CV, were among the few exceptions that reported drops in provisioning in both annual and quarterly terms during the third quarter.

"Looking forward, they will either maintain the current level of reserves or gradually bring them down, as the results of deferment programs have been better than expected," Alfredo Calvo, an S&P Global Ratings analyst covering Mexican and Colombian banks told Market Intelligence.

The Mexican giants have found encouragement in that approximately 85% of the banking system's total deferred loans have resumed payments, while both the level of non-performing assets and write-downs remain below historic averages, Calvo added.

Both BBVA and Banorte front-loaded provisions in the first and second quarters and noted in their recent earnings calls that a sufficient level of reserves had been reached for what lies ahead, the analyst said. The banks' coverage ratios remain well above year-ago levels at 160.2% and 265.2%, respectively.

Brazilian recovery

Like their Mexican peers, Brazilian banks may also be turning a new leaf in terms of provisioning.

"In a baseline scenario, the worst may be over for Brazilian banks, because the economy has been recovering more than most other countries in the region, and banks are seeing that the level of additional restructurings that will be needed has lowered drastically," Cohen Freue said.

On a similar note, Luis Sales, head of equity research at Guide Investimentos, is not expecting any further hikes in provisioning.

"We don't expect more pandemic-related provisions for the big banks, and in some cases, we can even expect them to drop, since they are currently adequate in relation to risk levels," Sales explained.

While the end of emergency aid to low-income sectors and the end of deferments will bring higher delinquency rates, these are not expected to rise above the level seen during the country's 2015-2016 economic crisis when consumer delinquency climbed as high as 7.5%, he added.

"That said, provision levels are higher than during the 15-16 crisis, which in our view, supports a comfortable position for them," Sales concluded.

Chile, Peru and Colombia

Despite ongoing volatility in the political landscape, Chilean lenders' pandemic-related provisioning could to continue to fall in the coming quarters, according to Cohen Freue, while their coverage ratios will likely remain below 100%, as Chile's banks have historically posted fewer losses than their regional counterparts.

Their lower coverage ratios are explained by their larger mortgage and corporate portfolios, the analyst noted, also pointing out that "Chile is a country with comparatively more stability and higher GDP per capita."

"We do have a negative outlook for Chilean banks due to political concerns, but it is still far better than the rest of Latin America in terms of expected losses", Cohen Freue said, highlighting "the government has shown the capacity to support the economy through guaranteed loans and liquidity measures."

With regard to Banco de Crédito del Perú SA's soaring third-quarter provisions, Cohen Freue commented that "they don't really have a choice, as there is a very strong GDP component in IFRS provisioning requirements, and Peru has had one of the sharpest contractions in economic activity this year."

While political instability may affect investment, and asset quality is expected to deteriorate, particularly that pertaining to SME loans, a sharp recovery in GDP next year will bring much lower provisions.

The provisioning needs of larger Colombian banks, on the other hand, will probably speed up against the Latin American grain in the fourth quarter, according to Calvo.

"Provisions for these banks will remain, and will probably speed up in the fourth quarter, because we are entering a restructuring phase and some loans will have to be written down," the analyst said, noting the Colombian lenders have been comparatively slower in their provisioning this year.

Chilean lenders aside, Bancolombia SA and Grupo Aval Acciones y Valores SA held the lowest loan loss reserves to problem loans ratios among the 12 banks who reported the metric.

The outlook for Colombian lenders has nonetheless improved, as, like in Mexico and the Southern Cone, the results of deferment programs have also come in far better than expected, Calvo noted.

Larger banks automatically deferred many of their consumer and mortgage loans at first, but the regulator's second phase of postponements has come with stricter criteria to filter out those that don't truly need help, the analyst commented.

"That has changed the picture drastically, because now only 16% of total loans are taking part in deferments, down from 40% initially," Calvo added.