LatAm Financial Institutions Monitor 3Q2020: Climbing Out Of A Deep Plunge

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21 Oct, 2020 | 14:35
Latin America

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Banks in Latin America continue to navigate through the COVID-19 storm. Asset quality will weaken, credit costs are on the rise, and profitability is falling due to the pickup in provisions, along with lower fees and compressed margins, especially in countries where the government-guaranteed and low-margin loans represent a high share.

Loan moratoriums will delay nonperforming loan (NPL) recognition by about a year. While banks are not required to raise provisions for loans that were renegotiated due to COVID, major banks in the region significantly boosted their provisioning levels. High levels of informal economy, fragile conditions for small and medium enterprises, and low levels of government support in some countries will hurt asset quality in the region. On the other hand, banks' healthy margins helped cushion the impact of rising credit costs, a similar scenario to previous crises.

Chart 1

Chart 2

Chart 3

We expect strong credit growth in countries in which governments and regulators offered meaningful incentives. For example, Brazil's robust lending growth is as a result of the high credit demand from the corporate sector, amid attempts to boost liquidity to prepare for the difficult times, and the liquidity measures provided by the government. Lending has also picked up in Peru and Chile due to the government guaranteed loans. On the other hand, Mexican banks will post a soft credit growth due to the weak economy and low incentives for banks to lend. In 2021, we expect credit growth to moderate, as government measures will dissipate, and we forecast a modest economic recovery in the region.

Chart 4

The recovery from the worst of the COVID-19 pandemic is underway across the major economies in the region, albeit the pace varies from one country to the next one, largely influenced by the extent and status of lockdowns, as well as by the magnitude and effectiveness of government fiscal responses. A substantial downside risk to growth across the region will be the potential for bouts of social instability, with implications to investment due to the outsized impact of the pandemic-induced downturn on lower-income households in an already polarized political environment in most Latin American countries.

Brazil's economy, despite having one of the highest numbers of COVID-19 cases, performed better than we expectations that we made in the second quarter. Less stringent lockdown measures, significant government stimulus to households, and strong exports to China helped explain the second-quarter GDP results. We expect GDP to contract 5.8% in 2020 and grow 3.5% in 2021. Conversely, Argentina, Colombia, Peru, and Mexico performed worse than we expected. This was due to relatively stringent and lengthy lockdowns in the first three countries and due to Mexico's limited fiscal package. We currently forecast GDP in Argentina, Mexico, and Peru to fall more than 10% this year, and 8% in Colombia. Chile's economy is performing broadly in line with our expectations, and we have kept our 2020 and 2021 GDP forecasts unchanged at a 6.5% contraction and 5.5% growth, respectively.

Government Measures Have Mitigated The Pandemic's Impact On Brazil's Economy

The central bank's comprehensive set of measures has helped cushion the impact of COVID-19, and provided incentives for banks to boost lending and support the corporate sector. Therefore, we now expect credit growth to be about 12% this year, driven by corporate lending. On the other hand, the likely asset-quality deterioration led banks to substantially increase provisions for credit losses, jeopardizing bottom-line results. However, the economy seems to be stabilizing, which will help steady asset quality as loan moratoriums (granted to about 21% of total loans) are phased out. However, risks to asset quality remain, given the still fluid trends in economic activity and employment.

Foreign Exchange Volatility Raises Concerns Over Argentine Banks' Deposit Stability

The banking industry continues to suffer from the exchange rate volatility and concerns over customer deposit instability due to the political unrest. The long lockdowns and complicated political conditions are undermining an already weak economic activity, which will hurt asset quality. Banks remain liquid given the history of deposit instability, and leverage (measured by loans to GDP) continues decreasing, while the rising exposure to the sovereign through central bank notes and government bond is a concern.

Extended Loans Cushion Chilean Banks' Asset Quality

In the first half of the year, lending grew fairly rapidly, with a large portion of credit lines guaranteed by the government (through the FOGAPE program) as part of authorities' measures to ensure credit availability. Chilean banks' asset quality metrics haven't plummeted, given these measures, including extending existing loans (affecting about 20% of total loans). However, we expect asset quality metrics to start deteriorating in the last quarter of this year and in 2021, as extended loans start to come due. In the meantime, banks are bulking up their provisions (both specific and additional) to cover the potential future losses.

Weakening Asset Quality Will Eat Into Mexican Banks' Profitability

Economic recovery will take longer in Mexico due to the pre-pandemic structural weaknesses and the relatively small policy response to the crisis caused by COVID-19. Therefore, we expect credit expansion to remain subdued. Mexican banks, in general, entered this crisis with historically low levels of nonperforming assets (NPAs) and credit losses. This reflects the relatively low banking penetration and conservative lending practices. However, COVID-19 will hit asset quality and profitability. The banking regulator approved a relief program for borrowers, which represent around 20% of total loans. Although banks can defer increasing their provisions, they have been anticipating a potential deterioration in asset quality.

Low Interest Rates And Faltering Asset Quality Will Weigh On Colombian Banks

Measures to contain the economic fallout from the pandemic, along with the moderate monetary and fiscal stimulus, will help improve macroeconomic dynamics in 2021. In this sense, we expect credit expansion to regain strength next year after a pace of less than 5% this year. As a result of the pandemic, asset quality metrics will erode, pressuring profitability through the increasing credit loss provisions. Loans as part of the borrower relief program represent around 40% of total loans.

Banks Are facing Negative Rating Momentum

This is because of pernicious effects of the pandemic, oil price shock, and market volatility. However, S&P Global Ratings believes the following factors will help banks to navigate this turbulent scenario:

The generally high liquidity levels and low dependence on external and wholesale funding, because retail deposits provide the bulk of financial institutions' funding sources;
The healthy margins and provisioning coverage that provide cushion during times of economic stress;
The substantial support and flexibility that banking systems will receive from authorities to encourage lending to households and businesses, whether in the form of liquidity or credit guarantees, and relief on minimum regulatory capital and liquidity requirements; and
Our forecast of a 4.5% GDP growth in Latin America in 2021 after a sharp contraction of 8.5% this year (GDP weighted forecast includes the six largest economies), even if the pace of contraction and ensuing recovery varies considerably among countries.

Ratings Actions Due To COVID-19

Since the pandemic spread across the region, we have seen--as we had expected--a surge in rating actions. Charts 1 and 2 show the number of downgrades and outlook changes among the region's banks stemming from the pandemic up to Oct. 9, 2020.

Chart 5

On July 16, 2020, we revised the outlooks to negative from stable on three private Peruvian banks, reflecting the potential pressure on their risk-adjusted capitalization (RAC). This is because under a weaker economic risk assessment, we would increase the risk weights we apply to Peruvian banks. We also revised the outlook to negative on one subsidiary of a domestic financial group. The rating actions took into account the much more challenging economic conditions that Peruvian banks will face in the next couple of years. Despite the government's strong stimulus package, the quarantine and lower global demand for commodities have hurt Peru's economy. We believe the risk of mounting credit losses in Peru is higher than we previously expected, and could hamper banks' profitability and capitalization.

On Oct. 14, 2020, S&P Global Ratings downgraded the Argentina-based Banco Hipotecario to 'SD' from 'CC' and lowered the issue-level rating on its 2020 senior unsecured notes to 'D' from 'CC'. We lowered our ratings following the completion of the exchange offer for the 46.7% of the bank's outstanding $279.8 million series 29 notes due Nov. 30, 2020, because we considered this transaction as distressed in nature given the proximity of the notes' maturity date. In addition, our assessment of the compensation to credit holders is uncertain at this point, given the growing risk in Argentina since the bank launched the offer.

Following the exchange offer, we believe that the bank's refinancing risk will decrease because it has built up significant liquidity (excluding central bank reserves) in the last two and a half years to cover the remainder of the notes' maturity--about $149.2 million due Nov. 30, 2020--and because it has manageable maturities for the next 12 months. On Oct. 15, 2020, S&P Global Ratings upgraded Banco Hipotecario to 'CCC+' from 'SD' and the issue-level rating on its 2020 senior unsecured notes to 'CCC+' from 'D'.

On Oct. 16, 2020, S&P Global Ratings lowered its issuer credit and debt ratings on Corp Group Banking S.A. (CG Banking) to 'D' from 'CC'. CG Banking missed its bond's interest payment after the grace period ended on Oct. 15, according to the bond's indenture. The debt service consists of the interest payments on the $500 million notes of $16.9 million semiannually (due on March 15 and Sept. 15). Corp Group recently hired advisory consultants to evaluate the group's financial conditions and reorganize its debt structure. Negotiations with bondholders and other creditors are ongoing and potential outcomes remain unclear.

Key Banking Sector Risks In Latin America

The table below presents our views about the key risks and risk trends for banking sectors in Latin American countries where we rate banks. For more detailed information, please refer to the latest Banking Industry Country Risk Assessment (BICRA) on a given country. According to our methodology, BICRAs fall into groups from '1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10').

Selected Research

BICRA Changes

Over the past six months, we made the following changes to our BICRAs.

Bolivia

We have revised our BICRA for Bolivia to group '9' from group '8', and our industry risk score to '8' from '7'. We believe that liquidity pressures on the Bolivian banking system have risen due to the government's recent decision to allow borrowers to postpone loan payments until December 2020 in efforts to preserve the population's cash holdings during lockdowns. In addition, political instability amid the current presidential election could generate some deposit volatility, as was the case during the election in October 2019. This also adds risks to the banking system's funding and liquidity.

Peru

We have revised our economic risk trend for Peru to negative from stable. This reflects the much more challenging economic conditions that Peruvian banks will face in the next couple of years. Despite the strong stimulus package, social-distancing measures and lower global demand have hurt Peru's economy. We believe the risk of mounting credit losses in the country is higher than we previously expected, and could hamper banks' profitability and capitalization.

Costa Rica

We have revised our BICRA for Costa Rica to group '8' from group '7', and our industry risk score to '8' from '7'. For the past couple of years, we have observed a steady decline in the banking system's profitability. The impact of COVID-19 will exacerbate this trend, in our view. Interest rates declining to historically low levels are ratcheting up pressure on net interest margins and active lending rates for core banking products. This, coupled with the market distortion stemming from the preponderant market share of government-owned banks and highly dollarized balance sheets, is taking a huge toll on revenues. At the same time, loan-loss provisions and credit losses will increase as the pandemic crimps the economy and banks' overall financial profile.

Chart 6

Top Latin American Banks

We based the selection criteria on the number of banks we rate in those countries relative to the region, ranked by total loans.

Table 2

Ratings Component Scores: Top Latin American Banks
Institution	Operating company long-term ICR/Outlook	Anchor	Business position	Capital and earnings	Risk position	Funding and liquidity	SACP/GCP	Type of support	Number of notches support	Additional factor adjustment
Argentina
Banco De Galicia Y Buenos Aires S.A.U.	CCC+/Stable	b+	Adequate	Weak	Adequate	Avg/Adequate	b+	None	0	(3)
Banco Patagonia S.A.	CCC+/Stable	b+	Adequate	Moderate	Adequate	Avg/Adequate	b+	None	0	(3)
Brazil
Itau Unibanco Holding S.A.	BB-/Stable	bb+	Very strong	Moderate	Adequate	Avg/Adequate	bbb	None	0	(4)
Banco do Brasil S.A.	BB-/Stable	bb+	Very strong	Moderate	Adequate	Above Avg/Adequate	bbb	None	0	(4)
Banco Bradesco S.A.	BB-/Stable	bb+	Very strong	Weak	Adequate	Avg/Adequate	bbb-	None	0	(3)
Caixa Economica Federal	BB-/Stable	bb+	Adequate	Weak	Moderate	Above Avg/Strong	bb	None	0	(1)
Banco Santander (Brasil) S.A.	BB-/Stable	bb+	Strong	Moderate	Adequate	Avg/Adequate	bbb-	None	0	(3)
Banco Nacional de Desenvolvimento Economico e Social	BB-/Stable	bb+	Adequate	Moderate	Strong	Above Avg/Adequate	bbb-	None	0	(3)
Banco Safra S.A.	BB-/Stable	bb+	Adequate	Moderate	Strong	Below Avg/Adequate	bb+	None	0	(2)
Banco BTG Pactual S.A.	BB-/Stable	bb+	Adequate	Adequate	Moderate	Below Avg/Adequate	bb-	None	0	0
Banco Votorantim S.A.	BB-/Stable	bb+	Adequate	Weak	Moderate	Avg/Adequate	bb-	GCP	1	(1)
Banco do Estado do Rio Grande do Sul S.A.	BB-/Stable	bb+	Moderate	Moderate	Moderate	Avg/Adequate	bb-	None	0	0
Chile
Banco de Credito e Inversiones	A/Negative	bbb+	Strong	Adequate	Adequate	Avg/Adequate	a-	Sov	1	0
Banco del Estado de Chile	A+/Negative	bbb+	Strong	Weak	Adequate	Above Avg/Strong	bbb	GRE	4	0
Banco Santander-Chile S.A.	A/Negative	bbb+	Strong	Adequate	Adequate	Avg/Adequate	a-	Sov	1	0
Banco de Chile	A/Negative	bbb+	Strong	Adequate	Strong	Avg/Adequate	a	None	0	0
Scotiabank Chile	A/Negative	bbb+	Adequate	Adequate	Adequate	Avg/Adequate	bbb+	GCP	2	0
Colombia
Bancolombia, S. A. y Companias Subordinadas	BB+/Stable	bb+	Strong	Weak	Adequate	Avg/Adequate	bb+	None	0	0
Banco de Bogota S.A. y Subsidiarias	BB+/Stable	bb+	Strong	Weak	Adequate	Avg/Adequate	bb+	None	0	0
Banco Davivienda S.A.	BBB-/Negative	bb+	Strong	Moderate	Adequate	Avg/Adequate	bbb-	None	0	0
Financiera de Desarrollo Territorial S.A. FINDETER	BBB-/Negative	bb+	Adequate	Strong	Adequate	Below Avg/Adequate	bb+	GRE	1	0
Financiera de Desarrollo Nacional S.A.	BBB-/Negative	bb+	Moderate	Very strong	Moderate	Avg/Adequate	bb+	GRE	1	0
Mexico
BBVA Bancomer S.A.	BBB/Negative	bbb-	Strong	Strong	Adequate	Avg/Adequate	bbb+	None	0	(1)
Banco Nacional de Mexico S.A.	BBB/Negative	bbb-	Strong	Strong	Adequate	Avg/Adequate	bbb+	None	0	(1)
Banco Mercantil del Norte S.A.	BBB/Negative	bbb-	Strong	Strong	Adequate	Avg/Adequate	bbb+	None	0	(1)
Banco Nacional de Obras y Servicios Publicos S.N.C.	BBB/Negative	bbb-	Adequate	Strong	Adequate	Avg/Adequate	bbb	None	0	0
HSBC Mexico S.A.	BBB/Negative	bbb-	Adequate	Adequate	Adequate	Avg/Adequate	bbb-	GCP	3	(2)
Nacional Financiera	BBB/Negative	bbb-	Adequate	Moderate	Adequate	Avg/Adequate	bb+	GRE	2	0
Scotiabank Inverlat, S.A.	BBB/Negative	bbb-	Adequate	Strong	Adequate	Avg/Adequate	bbb	None	0	0
Banco Inbursa S.A.	BBB/Negative	bbb-	Adequate	Strong	Adequate	Avg/Adequate	bbb	None	0	0
Banco Nacional de Comercio Exterior S.N.C.	BBB/Negative	bbb-	Adequate	Adequate	Adequate	Avg/Adequate	bbb-	GRE	1	0
Panama
BAC International Bank Inc.	BB+/Stable	bb+	Strong	Moderate	Adequate	Avg/Adequate	bbb-	None	0	(1)
Banco General S.A.	BBB+/Negative	bbb-	Strong	Strong	Adequate	Avg/Strong	bbb+	None	0	0
Promerica Financial Corporation	B+/Stable	bb-	Strong	Weak	Adequate	Avg/Adequate	bb-	None	0	(1)
Banistmo S.A.	BB+/Stable	bbb-	Adequate	Adequate	Adequate	Avg/Adequate	bbb-	None	0	(1)
Banco Nacional De Panama	BBB+/Negative	bbb-	Adequate	Strong	Adequate	Above Avg/Strong	bbb+	None	0	0
Peru
Banco de Credito del Peru	BBB+/Negative	bbb-	Strong	Strong	Adequate	Avg/Adequate	bbb+	None	0	0
Banco BBVA Peru	BBB+/Negative	bbb-	Strong	Strong	Adequate	Avg/Adequate	bbb+	None	0	0
Scotiabank Peru S.A.A.	BBB+/Stable	bbb-	Strong	Strong	Adequate	Avg/Adequate	bbb+	GCP	3	(3)
Banco Internacional del Peru S.A.A - Interbank	BBB/Stable	bbb-	Adequate	Adequate	Adequate	Avg/Adequate	bbb-	Sov	1	0
Source: S&P Global Ratings; data as of October 14, 2020. In the "Type of Support" column, "None" includes some banks where ratings uplift because of support factors may be possible but none is currently included. For example, this column includes some systemically important banks where systemic importance results in no rating uplift. §Holding company; the rating reflects that on the main operating company. Avg--Average. ICR--Issuer credit rating. GRE--Government-related entity. SACP--Stand-alone credit profile. Sys. Imp.--Systemically important. ALAC--Additional loss-absorbing capacity. GCP--Group credit profile. N/A--Not applicable. Sov—government support.

This report does not constitute a rating action.

Primary Credit Analyst:	Cynthia Cohen Freue, Buenos Aires +54 (11) 4891-2161; cynthia.cohenfreue@spglobal.com
Secondary Contacts:	Alfredo E Calvo, Mexico City (52) 55-5081-4436; alfredo.calvo@spglobal.com
	Sergio A Garibian, Sao Paulo (55) 11-3039-9749; sergio.garibian@spglobal.com
	Claudia Sanchez, Mexico City (52) 55-5081-4418; claudia.sanchez@spglobal.com
	Victor C Santana, Sao Paulo + 55 11 3039-4831; victor.santana@spglobal.com

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