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S&P: 2018 set to be a turning point for credit growth in LatAm

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S&P: 2018 set to be a turning point for credit growth in LatAm

Credit growth among banks in Latin America and the Caribbean is headed for a turnaround in 2018 as economic conditions in the region become more favorable, senior analysts at S&P Global Ratings said.

"Next year should mark a turning point for credit growth as slightly stronger economic prospects should boost credit demand which banks are eager to satisfy," analysts said in a conference call discussing its regional outlook for sovereigns and industries in 2018.

Excluding Argentina, credit growth in nominal terms should reach 8% on average next year, a modest improvement from an expected 6% for 2017, said Cynthia Cohen Freue, an S&P director and sector lead for financial services ratings. However, this is still lower than the double digit loan growth recorded by the region's banks prior to 2015.

And while economic prospects should improve, political uncertainty could counter some of its benefits, with significant presidential elections scheduled in some of the regions largest economies. Many corporates will delay their investment decisions as they "wait-and-see" for those electoral outcomes, Cohen Freue said. Still, the analyst maintains a relatively stable to a slightly positive prospect for credit penetration in the region.

In terms of asset quality, S&P expects credit quality metrics to slightly improve due to increasing credit growth and a healthier economic environment, coupled with lower inflation and interest rates.

Interest rate margins should be relatively steady for 2018, Cohen Freue said, pointing to tempered inflationary pressures and expectations for stable reference rates. In turn, profitability among the region's largest banks will remain stable, except in Argentina, where inflation rate is expected to decline and which could weaken the revenues among lenders.

Capitalization is also expected to rise due to the still-strong internal capital generation of the largest banks in the region, the analyst said.

Among the region's biggest economies, S&P currently holds a negative economic risk trend on the banking sectors of Brazil and Chile while having a positive trend on those of Argentina and Panama. In Brazil, pressures on the financial system arise from the still challenging conditions in the country that could result in higher losses, possibly coming from high levels of renegotiated loans, than the current base case.

In contrast, Argentina displayed significant improvement, leading to the upgrade of the banking assessment and the assignment of a positive trend.

"These reflect improvements in the business and economic conditions that will allow the private sector to prepare over cycles. We also see improvements in the regulatory framework of the country," Cohen Freue said.

Meanwhile, nonbank financial companies will still face high funding costs, although some have counteracted this effect with longer tenors on their debt profile, enabling them to reduce financing risk.

Prospects for structured financing, fintech firms

Regional corporates will face favorable credit conditions in 2018 that could foster asset diversification across the region, such as residential mortgage-backed securities in Argentina, covered bonds in Brazil and more traditional securitizations across a number of LatAm countries, according to Cathy de la Torre, S&P's director and lead analyst for structured finance ratings.

Like the case for credit growth, political uncertainties could curtail securitization opportunities, de la Torre warned. Still, the analyst expects ratings stability and adequate collateral performance in the region due to the current composition of the structure finance portfolio.

The analyst highlighted specifically increasing opportunities for new originators, particularly among Latin America's growing number of financial technology companies. Fintech companies, she noted, can serve as a credit alternative for consumers who are not targeted by traditional bank, as well as for small and medium-sized enterprises, which typically face more difficulties in sourcing financing for their working capital needs.

Origination practices in the sector is advancing strongly across the region as a response to technological advancement and the reduction of costs, de la Torre noted. And with that, she expects increased securitization participation among fintech firms in the coming years, especially given talk of industry regulation in countries such as Argentina and Mexico.

However, de la Torre also cited key risks identified among fintech companies, mainly operational risks, a short-track record of performance and a change in competitive dynamics.

"It's still too early to predict how banks will react to this competition or how deep this market will develop, but ultimately, [there is the issue of] how underwriting policies could be loosened up to attract more customers," de la Torre said.

S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.