Latin American banks are sufficiently capitalized to withstand ongoing turmoil as effects from the financial crisis and the commodity shock bleed into regional economies, provided that these conditions do not extend longer than three months, analysts say.

The rapid slowdown in the global economy stemming from the novel coronavirus outbreak is already generating spillover effects in Latin American countries. Supply chain disruptions, commodity shocks and restrictions to market access all make up a grey outlook for the region. And recently enacted quarantine measures to contain the pandemic — such as the nationwide lockdown imposed in Argentina March 19 — can only add pressure to domestic companies already suffering to maintain their top-line growth.

"You are being hit by so many things," Sergi Lanau, a deputy chief economist at the International Institute of Finance, said in an interview. "Even if you don't have as many infections you already know there is a big shock coming."

Mexico and Brazil, the two largest economies in Latin America, are expected to contract this year. Bank of America recently reviewed its forecasts downward to a 4.5% GDP fall in Mexico and a 0.5% slide in Brazil. In general, LatAm GDP is expected to shrink by as much as 1.6% this year as consumption is affected by the partial shutdown within the region.

Brazilian authorities recently revised their 2020 GDP growth forecast to zero from 2.1%, in an economy ministry report published on March 20.

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This new bleak baseline scenario leaves indebted companies at risk, as their capacity to fulfill financial obligations could come under stress.

"The outlook for company income and their stability darkens quite a bit," Alejandro Garcia, managing LatAm banks director with Fitch Ratings, said in an interview.

Regional banks benefit from a "pretty good starting point" as they are "adequately" capitalized and show "reasonably good" asset quality metrics, according to García. Capitalization and liquidity metrics are solid across LatAm economies and have risen over the past years.

But if the crisis exceeds the three-month period, however, analysts warn that the outlook for banks could change dramatically, potentially requiring government assistance in a scenario where companies fail to repay their outstanding loans.

While banks have decreased their exposure to sectors like oil and metallurgy — which have been impacted by the commodity shock — they have been expanding their loans to some of the sectors that will be hit by social distancing and shutdown measures, such as transportation and retail.

Loan portfolios for companies in Brazil have remained flat through 2019, leaving banks in a better position to withstand turmoil amid supply chain and trade disruptions. But even so, banks are bound to suffer from their exposure to these sectors and to the services industry.

The transportation sector accounts for 9.3% of the total corporate loan portfolios and grew by 7.7% in 2019 to 136.78 billion reais. Brazilian banks have as much as 40.93 billion reais in outstanding loans to airlines and maritime transportation companies, December 2019 data by Banco Central do Brasil shows.

Retail loans meanwhile amounted to 292.25 billion reais, up 10.2% from the year before, contributing to 19.9% of the total corporate loan portfolio. The construction sector — totaling 65.57 billion reais or 4.5% of the books — has also been impacted.

The effect of the coronavirus outbreak on these sectors is already evident. Revenue in tourism and transportation fell by 36.1% year over year in the first week of March, according to local media reports. Meanwhile, a recent report by the Brazilian airport chamber suggested most airlines' cash positions are not sufficient to cover three-months worth of operating costs. The airline and lodging sectors are among the most vulnerable to the crisis due to their weak liquidity positions, Moody's highlighted on March 17.

In Mexico, the retail and construction sectors account for more than 30% of corporate loan books, according to Banco de México data. Retail loans tallied 487.66 billion Mexican pesos — or 16.2% of total lending to companies — while construction loans totaled 453.03 billion Mexican pesos, or 15% of total credit to companies.

"Throughout the region, you'll find these sectors hold a material presence in banks' loan portfolios," Fitch's Garcia said. "In the end, there is a reason why we are known as emerging markets. Infrastructure has been a recurring theme over the last years given the need to gain productivity."

"Banks will face a challenging period to manage these loan books," he said.

"I don't think the system will be in trouble as long as the crisis is temporary," Miguel Ribeiro de Oliveira, an executive director at finance association Anefac, said in an interview. "If it goes as doctors say, two or three months, then it's not that bad from the banks' perspective."

"But of course, if the crisis prolongs for a whole year and things run out of control then naturally they'll be in trouble," he added. "If the economy remains shut for much longer then it is inevitable for companies to fail to meet conditions to repay debt and banks would have to assume the costs. And the government would have to come to the rescue."

As of March 26, US$1 was equivalent to 5.01 Brazilian reais.