Weaker economic growth and rising political risks will weigh on Bolivian banks' asset quality, and on their funding and liquidity profiles, according to Moody's.
In a report discussing its outlook on the Bolivian banking system, Moody's said it expects the political developments that led to the resignation of Evo Morales as president to take a toll on economic growth, increasing the pressure on the country's fiscal and foreign exchange buffers, which have already been hit by large fiscal and current account deficits.
As a result, banks' operating conditions will erode due to the likelihood of reduced business prospects and increased loan delinquencies, Moody's said.
Specifically, the rating agency expects banks' asset quality to deteriorate from strong levels amid a rise in problem loans. Heightened competition for customers in the housing and production sectors has increased systemic exposure to the same borrowers. Banks are also taking on exposures to segments in which the banks may not have enough expertise, the agency noted.
In addition, banks' funding and liquidity profiles face risks from the rising share of institutional deposits in its total funding as well as increased deposit dollarization.
However, Bolivian banks continue to have solid capitalization, supported by declining loan growth and capital consumption as well as a 50% regulatory cap on dividend payouts. The overall banking system's 12.2% total regulatory capital ratio is also above the 10% regulatory minimum, Moody's said.
Delinquency levels among local banks are also among the lowest in the region, while provisioning in terms of loan-loss reserve coverage is high and collateral use is widespread, the rating agency said.
Moody's also expects profitability of Bolivian banks to remain modest, although it cautioned against the adverse impact of interest rate caps, higher interest expenses and potentially higher provisioning.
Given increased policy uncertainty and sliding fiscal and external buffers, Moody's believes the government's capacity to provide support to banks in case of an economic shock has deteriorated. However, the rating agency said it still expects government support to remain high because of banks' credit mandate to the production sector, and a lack of a plan to shore up banks through a creditor bail-in.