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IMF: LatAm banks face higher funding costs, lower profits amid regional recession

Continuingweak economic activity in most Latin American countries, including lower creditgrowth and higher sovereign spreads, could raise banks' funding costs and reducetheir profitability, the InternationalMonetary Fund warned in a report released April 27.

Althoughthere is no immediate pressure from nonperforming loans in most countries, "weakeconomic activity, the ongoing slowdown in credit growth in some countries, continuedlarge depreciations, high global financial volatility, and increasing sovereignspreads could reduce wholesale funding, raise banks' funding costs, and reduce theirasset quality and profitability," the IMF said.

Importantlyfor banks, real year-over-year credit growth to the private sector, adjusted inline with inflation, has fallen in 2016 in most countries in the region includingBrazil, Chile, Colombia, Peru and Uruguay, according to IMF data cited in the report.

In manyLatin American countries, which are facing lower commodity prices and weaker investment,there is a need to reallocate labor and capital out of resource-intensive sectors,the IMF said, adding this adjustment "is not easy and will take time."

In thisscenario, efforts to rein in inflation and improve fiscal discipline, particularlyin Argentina and Brazil, are crucial to mitigate the impact on sovereign spreads,which in turn affect corporate risk, the IMF said.

Goingforward, banks should monitor their balance sheets and asset quality "givenrising corporate leverage, modest growth prospects, and high dollarization in certaincountries," the IMF noted.

In addition,deleveraging pressures will likely increase as the IMF foresees an extended periodof low growth and higher funding costs.

In thiscontext, regulators should ensure "adequate bank capital buffers to containpotential spillovers from the corporate sector," the IMF said, adding thesecould be supplemented by "macroprudential tools" to contain potentialrisks.