LatAm lenders are pausing share buyback and dividend payments, as regulators take steps to mitigate the potential economic fallout from the coronavirus in the region.
As share prices plunged in the wake of the outbreak, highly liquid banks rushed to repurchase stock. Since mid-February, outflows from emerging equity markets have been double those seen in 2008. Brazilian equities have been among the hardest hit. In the last month, the 330 listed corporations in the local stock exchange lost roughly $570 billion dollars in market value, a 36.5% drop that wiped out three years of returns.
Major financial players in Brazil like IRB-Brasil Resseguros SA, Cielo SA, B3 SA - Brasil Bolsa Balcão, as well as midsize banks Banco Inter SA and Banco BMG SA all announced new buyback operations in the first quarter. In Mexico, Banco del Bajío SA Institución de Banca Múltiple, Grupo Financiero Inbursa SAB de CV and Banco Regional SA Institución de Banca Múltiple Banregio Grupo Financiero have been among the most active repurchasers in recent weeks.
Nonetheless, faced with limited visibility on 2020 income flows, banks will likely scale back operations and go into capital preservation mode even with their prices at historical lows, analysts say.
"It's not the right time to use capital this way," Carlos Daltozo, head equity analyst with Brazilian research firm Eleven Financial, said in an interview. "The main challenge is to protect the cash position. I don't see how, at this moment, a buyback could be an efficient way of allocating capital (since) they might need those resources in a potential prolonged crisis."
Some banks are already taking action. Mexico's Grupo Financiero Banorte SAB de CV, which announced March 12 it would purchase 1% of its outstanding stock, has put buybacks on hold. It is also likely the bank will cut dividend payments as well, as others already have.
Elsewhere, Grupo de Inversiones Suramericana SA announced a three-year 300 billion Colombian pesos buyback program in February, but has yet to determine whether it will push forward with it. In addition, Banco Santander Chile halved its dividend payout ratio in order to increase the bank's "capacity to support clients during the coronavirus crisis."
To protect the cash and serve
S&P Global Market Intelligence data shows Latin American banks are sufficiently capitalized to repurchase their shares if they wanted to, but an extensive crisis could leave lenders in a very tight spot. Analysts are already expecting an across-the-board rise in delinquencies as borrowers' income streams shrink amid the economic slowdown.
With the disease still in the early stages of spread in the region, regulators have warned banks to exercise caution. Mexican banking and securities regulator CNBV recommended banks suspend dividends, share buybacks and other payments. On April 6, Banco Central do Brasil capped dividend payments to minimum requirements and halted wage hikes for financial institutions until Sept. 30.
There is also the question of the critical role banks play in keeping their local economies afloat.
Central banks in Latin America have recently put together stimulus packages to contain the economic damage of the crisis. In most cases, assistance will be channeled through credit, leaving banks at the core of the strategy.
"The government is counting on private banks to carry economic stimulus resources to the end borrower," Eleven Financial's Daltozo said.
That assistance, however, will likely bring with it restrictions on certain capital management tactics.
"We cannot rule out that many of the support programs being announced will come with restrictions on dividend policy and other measures of capital preservation," Alejandro Garcia, a LatAm financial institution regional group head and managing director with Fitch Ratings, said.