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LatAm Financial Institutions Monitor Q4 2024: Asset Quality Pressures Persist
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LatAm Financial Institutions Monitor Q4 2024: Asset Quality Pressures Persist

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Key Takeaways

  • We expect asset quality metrics across Latin American (LatAm) banks to remain under pressure due to persistently high interest rates and soft economic conditions, albeit mitigated by conservative growth strategies.
  • Still-high credit costs act as a drag on profitability but it remains sound relative to that of global peers.
  • Negative outlooks now represent 15% of total ratings on the regional banks, down from 30% in our last publication, mostly among Colombian and Panamanian banks.

We expect high interest rates and the lackluster economic backdrop to continue straining LatAm banks' asset quality metrics, partly offset by conservative growth strategies.   We expect lending growth to slowly pick up in 2025 but remain softer than historical levels. Banks will likely continue to pursue conservative underwriting practices, given the tepid pace of asset quality stabilization. In our view, credit demand will rise in the corporate sector once interest rates fall to more affordable levels. Nevertheless, banks will likely continue to focus on segments with stronger credit quality and on guaranteed loans to improve their asset quality metrics.

LatAm banks' provisions will likely remain high, denting profitability.   However, operating performance should remain solid thanks to banks' higher margins than those in peer countries. Regional banks will continue to operate with sound capitalization and liquidity. Healthy profitability, due to a diversified business mix, and sizable levels of government bonds with high yields and margins enable banks to withstand credit cycles and wider credit losses. Lower interest rates will compress LatAm banks' margins in general and profitability, but operating performance should remain sound compared with those of international peers, thanks to still healthy margins and recovering asset quality metrics.

Chart 1

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Chart 2

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Chart 3

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Negative outlooks now represent 15% of total ratings, mainly among Colombian and Panamanian banks.   This ratio is lower than 30% in Q2 2024, but this is because of our change in the industry risk trend of the Chilean banking system to stable from negative. This prompted S&P Global Ratings to revise its outlook to stable from negative and affirm its ratings on 12 rated financial institutions on Oct. 28, 2024. Thanks to its conservative underwriting practices, healthy margins, and prudent regulation, the Chilean banking system has remained resilient to the social unrest and ongoing political impasses that have dented the country's economic performance. Banks in Chile continued to post sound profitability metrics, manageable asset quality metrics, and healthy funding structure and capitalization. Even though they raised provisions to offset the deterioration in asset quality metrics, which was expected, healthy margins have allowed them to still post good bottom-line results. Credit lines, which the central bank offered during the pandemic to enhance liquidity, have matured in July 2024, and banks did not face any difficulties to repay them. Moreover, the implementation of Basel III has prompted banks to strengthen their capitalization metrics. They not only have done so by reducing dividend payments, but some banks issued AT1 instruments and/or they were capitalized with fresh new equity.

As a result, we're maintaining our economic risk score for Chile's banking sector at '4', with a stable trend. At the same time, our industry risk score remains at '3' with a stable trend.

On Oct. 15, 2024, S&P Global Ratings revised its outlook on Chile to stable from negative, reflecting our expectation of stabilization of the sovereign debt burden because of the continued commitment to fiscal consolidation and the recently approved fiscal responsibility law. As a result, we revised our outlooks on Banco del Estado de Chile and Scotiabank Chile to stable from negative.

Uncertainty over Brazil's fiscal, economic, and institutional policies and higher-than-expected inflation have increased market volatility, leading the central bank to raise its policy rate.   We now expect rates in Brazil to remain higher for longer. We expect interest rates to continue to rise into early 2025 until inflation expectations return to the central bank's 3% target. Persistently high interest rates are hurting Brazilian banks' asset quality metrics because elevated rates increase the debt burden on individual and commercial borrowers through higher financing costs. We also expect bankruptcy filings by small and midsize companies, which have already reached record levels in 2024, to continue into 2025.

Because of the pressures on asset quality metrics, Brazilian banks will likely need to increase provisions in 2025, which will squeeze their profitability. In addition, banks' focus on lending to larger corporation with stronger credit quality intensifies competition. The tougher competition, along with banks' focus on secured lending, strains margins.

To offset the negative effects, Brazilian banks are increasing the product mix with their current clients--offering investment, insurance, and cash management products--to boost profitability. Improving their efficiency is also an area of focus. Specifically, banks are improving the functionality of mobile apps so that customers can increase business volumes without raising costs, which also improves customer experience and satisfaction. Given Brazilian banks' sound business diversification and the significant share of banks' total income coming from fees, we believe they will continue to generate sound profitability even when margins are compressed.

Mexico's slowing economy and persistently high interest rates will curtail banks' lending growth, asset quality, and profitability.   Banks' asset quality will slip, but conservative lending practices will cushion the impact. A faltering economy in 2024 and 2025 and high interest rates will weaken banking customers' ability to pay their debts. However, we expect asset quality metrics to remain at adequate levels.

We do not expect significant changes in the banking system under the new administration. We expect commercial banks to continue to account for 45%-50% of total lending, and we believe these entities' loans will expand at 4%-5% in real terms in 2024 and 2025. Credit demand will moderate as the economy slows and investor confidence weakens. As long as the domestic debt market remains calm, banks can provide funding to large and midsize companies with adequate credit quality. Loans to individuals will mostly consist of credit cards and secured consumer products.

The flagging quality of unsecured consumer loans in Colombia weakens asset quality.   High interest rates and inflation are eroding households' purchasing power and pressuring banks' asset quality. If the recent nonbinding agreement between the government and banks spurs credit growth, metrics could improve in 2025 and 2026.

Substantial provisions and high funding costs will keep Columbian banks' profitability below trend. Weak asset quality will require banks to continue increasing provisions. However, we think banks will maintain credit loss reserves higher than nonperforming assets, which could temper the erosion in profitability. The central bank is cutting rates, and we expect the policy rate to drop to 7.50% by the end of 2025 from 13.00% in 2023. This will ease banks' funding costs during the following quarters.

Revised GDP growth forecasts for 2024 and 2025.  We have recently raised our 2024 real GDP growth forecast for the region by 20 basis points to 1.4% (or 2.3% excluding Argentina). However, we have also trimmed our forecast for 2025 by the same magnitude to 2.0% (or 1.8% excluding Argentina). The main changes to our country-specific GDP growth forecasts are for Brazil, Colombia, and Mexico. We now expect Brazil's GDP growth of 2.8% in 2024 and 1.8% in 2025. Fiscal stimulus, which is keeping household consumption high, partly explains this strong growth. We revised down our GDP growth forecasts for Mexico to 1.6% in 2024 and to 1.5% in 2025. The shift from above-trend to below-trend growth happened earlier than we expected this year--in the first half rather than the second half--due to softer manufacturing and services sector activity.

Table 1

S&P Global Ratings GDP growth forecasts
2019 2020 2021 2022 2023 2024f 2025f 2026f 2027f
Argentina -2.0 -9.9 10.4 5.3 -1.6 -3.5 3.3 2.2 2.5
Brazil 1.2 -3.6 5.1 3.1 2.9 2.8 1.8 2.1 2.2
Chile 0.7 -6.4 11.6 2.1 0.3 2.4 2.2 2.5 2.5
Colombia 3.2 -7.2 10.8 7.3 0.6 1.7 2.5 2.8 2.9
Mexico -0.3 -8.8 6.3 3.7 3.2 1.6 1.5 2.2 2.2
Peru 2.2 -11.1 13.6 2.7 -0.5 2.7 2.7 2.9 3.0
f--Forecast.

Table 2

Ratings component scores: Top LatAm 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 Constrained Adequate Adequate/Adequate b+ None 0 (4)

Banco Patagonia S.A.

 CCC/Stable b+ Adequate Moderate Adequate Adequate/Adequate b+ None 0 (4)
Brazil

Banco Citibank S.A.

 BB/Stable bb+ Adequate Moderate Adequate Moderate/Adequate bb None 0 0

Banco do Brasil S.A.

 BB/Stable bb+ Very strong Moderate Adequate Strong/Adequate bbb None 0 (3)

Banco Bradesco S.A.

 BB/Stable bb+ Very strong Constrained Adequate Strong/Adequate bbb- None 0 (2)

Caixa Economica Federal

 BB/Stable bb+ Adequate Constrained Moderate Strong/Strong bb None 0 0

Banco Santander (Brasil) S.A.

 BB/Stable bb+ Strong Moderate Adequate Strong/Adequate bbb- None 0 (2)

Banco Nacional de Desenvolvimento Economico e Social

 BB/Stable bb+ Adequate Adequate Strong Strong/Adequate bbb- None 0 (2)

Banco Safra S.A.

 BB/Stable bb+ Adequate Moderate Strong Adequate/Adequate bbb- None 0 (2)

Banco BTG Pactual S.A.

 BB/Stable bb+ Adequate Moderate Moderate Adequate/Adequate bb None 0 0

Banco Votorantim S.A.

 BB/Stable bb+ Adequate Moderate Moderate Adequate/Adequate bb- None 0 1

Banco do Estado do Rio Grande do Sul S.A.

 BB-/Stable bb+ Moderate Moderate Moderate Strong/Adequate bb- None 0 0

Chile

Banco de Credito e Inversiones

 A-/Stable bbb+ Strong Adequate Adequate Adequate/Adequate a- None 0 0

Banco del Estado de Chile

 A/Stable bbb+ Strong Adequate Adequate Strong/Strong a None 0 0

Banco Santander-Chile S.A.

 A-/Stable bbb+ Strong Adequate Adequate Adequate/Adequate a- None 0 0

Banco de Chile

 A/Stable bbb+ Strong Adequate Adequate Adequate/Adequate a None 0 0

Scotiabank Chile

 A/Stable bbb+ Adequate Adequate Adequate Adequate/Adequate bbb+ GCP 2 0

Colombia

Bancolombia S.A. y Companias Subordinadas

 BB+/Negative bb+ Strong Constrained Adequate Adequate/Adequate bb+ None 0 0

Banco de Bogota S.A. y Subsidiarias

 BB+/Negative bb+ Strong Constrained Adequate Adequate/Adequate bb+ None 0 0

Banco Davivienda S.A.

 BB+/Negative bb+ Strong Moderate Moderate Adequate/Adequate bb+ None 0 0

Financiera de Desarrollo Territorial S.A. FINDETER

 BB+/Negative bb+ Adequate Strong Adequate Moderate/Adequate bb+ None 0 0

Financiera de Desarrollo Nacional S.A.

 BB+/Negative bb+ Moderate Strong Moderate Adequate/Adequate bb GRE 1 0
Mexico

BBVA Bancomer Servicios, S.A., Institucion de Banca Multiple, Division Fiduciaria

 BBB/Stable bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (1)

Banco Nacional de Mexico S.A.

 BBB/Negative bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (1)

Banco Mercantil del Norte S.A. Institucion de Banca Multiple Grupo Financiero Banorte

 BBB/Stable bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (1)

Banco Nacional de Obras y Servicios Publicos S.N.C.

 BBB/Stable bbb- Adequate Strong Adequate Adequate/Adequate bbb None 0 0

HSBC Mexico S.A.

 BBB/Stable bbb- Adequate Adequate Adequate Adequate/Adequate bbb- GCP 1 0

Nacional Financiera, S.N.C. Institucion de Banca de Desarrollo Division Fiduciaria (CEDEVIS)

 BBB+/Stable bbb- Adequate Moderate Moderate Adequate/Adequate bb GRE 4 0

Scotiabank Inverlat - Bursatilizaciones de Hipotecas Residenciales

 BBB/Stable bbb- Adequate Strong Adequate Adequate/Adequate bbb None 0 0

Banco Inbursa S.A. Institucion de Banca Multiple Grupo Financiero Inbursa

 BBB/Stable bbb- Adequate Strong Adequate Adequate/Adequate bbb None 0 0

Banco Nacional de Comercio Exterior S.N.C.

 BBB+/Stable bbb- Adequate Adequate Adequate Adequate/Adequate bbb- GRE 2 0

Panama

BAC International Bank Inc.

 BBB-/Stable bb+ Strong Moderate Adequate Adequate/Adequate bbb- None 0 0

Banco General S.A.

 BBB/Negative bbb- Strong Very Strong Adequate Adequate/Strong a- None 0 (2)

Promerica Financial Corp.

 B+/Stable bb- Strong Constrained Adequate Adequate/Adequate bb- None 0 (1)

Banistmo S.A.

 BB+/Negative bbb- Adequate Adequate Moderate Adequate/Adequate bb+ None 0 0

Banco Nacional De Panama

 BBB/Negative bbb- Adequate Strong Adequate Strong/Strong bbb+ None 0 (1)
Peru

Banco de Credito del Peru

 BBB-/Stable bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (2)

Banco BBVA Peru

 BBB-/Stable bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (2)

Scotiabank Peru S.A.A.

 BBB-/Stable bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (2)

Banco Internacional del Peru S.A.A. - Interbank

 BBB-/Stable bbb- Adequate Adequate Adequate Adequate/Adequate bbb- None 0 0

BICRA Changes

Paraguay

On Nov. 6, 2024, we revised upward our anchor (the starting point for assigning an issuer credit rating) for banks operating primarily in Paraguay to 'bb' from 'bb-'. We believe industry risks affecting Paraguayan financial institutions have improved as banks' track record of sound profitability and adequate risk appetite has widened, while credit losses have receded amid more supportive economic conditions in Paraguay. The Paraguayan financial system's profitability has shown to be resilient in our view, as double-digit ROE have persisted even in times of economic malaise, weather shocks or higher inflation. Banks' capitalization also remained comfortable over the years, while lending has grown at moderate rates, which we see as additional signs of adequate risk appetite.

Chile

On Oct. 28, 2024, we revised our trend for Chile's economic risk to stable from negative. Chilean financial institutions have remained resilient--given sound profitability, manageable asset quality metrics, and healthy funding structure and capitalization--despite the country's challenging economic and political scenario since the social unrest of 2019.

Panama

On June 11, 2024, we revised our economic risk score for Panama to '6' from '5', considering economic challenges and worsening asset quality metrics. In our view, borrowers' pressured payment capacity in the country and deteriorated corporate loans to specific customers will keep banks' nonperforming assets above historical levels, at least for the next two years. As a result, we revised our assessment of credit risk in the economy to a weaker category. With the aforementioned change, we have also revised our economic risk trend for Panama to stable from negative.

Costa Rica

On May 23, 2024, we revised our economic risk trend for Costa Rica to positive from stable. We expect the banking system's economic imbalances to abate, reflecting controlled asset quality. The country's unemployment rate remains steady, while business confidence is rising, reflected in stable foreign direct investments in the free-trade zones, supporting GDP growth. We consider these factors will help the lending growth during the next few years.

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Selected Research

Commentaries
Research Updates
Economic, Sovereign, And Other Research

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:Sergio A Garibian, Sao Paulo + 55 11 3039 9749;
sergio.garibian@spglobal.com
Joaquin Jolis, Buenos Aires +54 1148912187;
joaquin.jolis@spglobal.com
Alfredo E Calvo, Mexico City + 52 55 5081 4436;
alfredo.calvo@spglobal.com

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