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LatAm banks post collective gains in Q1 as tensions ease

Latin American bank indexes collectively performed better during the first quarter of 2017 as compared to their overall showing in 2016, with Brazil broadly leading the pack.

Within the region, Brazilian banks had one of the strongest showings within their peer group, with the SNL Brazil Bank index's average total return hitting 22.4%.

The Brazilian banks' performance in the first quarter continues a rebound from far weaker results amid a crippling recession and widespread corruption scandals that pushed returns to negative territory in 2015. Continued gains afterward came amid optimism on President Michel Temer enabling necessary fiscal measures, including limits on government spending through spending cuts and tax reforms, as well as expectations that the worst is now over for Brazil's economy.

Moody's expects Brazil to display GDP growth of 0.9% in 2017 and 1.5% in 2018, while also forecasting a notable decrease in inflation. Meanwhile, Banco Central do Brasil set its full-year growth expectations at 0.5%.

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Optimism is also high that Brazil will ultimately overcome its litany of corruption scandals. In the recent revision of Moody's outlook of Brazil's sovereign rating to stable from negative, the rating agency said that there is a reduction of risk of contingent liabilities from government-related entities, mainly linked to oil giant Petrobras' troubles which had been dealt through measures including improved management practices.

The SNL Brazil Bank index reached its peak on Feb. 22 with the total return reaching 32.5%, in the same day that the central bank slashed the country's benchmark interest rate.

Meanwhile, the SNL Mexico Bank index spent much of the first quarter in negative territory before bouncing back in the final days of March to produce a 13.4% total return. The volatility in the index came amid fear over potential policy and trade changes from U.S. President Donald Trump, who took over the White House on Jan. 20. The Mexican bank index plunged significantly in the aftermath of Trump's win in the U.S. presidential election and as the country faced growing concerns about its prospects for economic growth.

More recently, however, the Mexico index has been gradually rising, as concern over the magnitude of the impact U.S. policy changes would have on the country have subsided. Recent economic figures for the country suggest that it may have thwarted a worst-case scenario, with the country's trade balance showing improvements in recent months and the peso within striking distance of pre-election levels. Announcements from the White House also point to a less aggressive approach regarding the renegotiation of NAFTA, giving some breathing space for Mexico.

The Mexican central bank has also been actively raising its benchmark interest rate in response to the uncertainty brought about by possible changes in U.S. policies toward the country under Trump.

Risks remain, however, especially with the growth prospects of the country. The central bank cut its economic growth forecast for 2017, now projecting growth to hit between 1.3% and 2.3%. Moody's also pared its growth forecast to 1.4%. Fitch Ratings noted that Mexico faces increased downside risks to its already lackluster economic growth, with negative effects reverberating on public debt stabilization. In addition, uncertainties still linger as Trump has yet to announce his definitive policies regarding Mexico and as an incoming presidential election looks to reshape the political landscape in the country.

The SNL Caribbean bank index also remained in negative territory for much of the first quarter, but has slightly improved its position from year-end 2016 with its total return hitting 1.1%. Meanwhile, the SNL Southern Cone Bank index mirrored the upward trajectory for the broader region as its total return improved to 12.0%.

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