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LatAm Financial Institutions Monitor Q2 2024: Solid Profitability Despite Weakened Asset Quality

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Key Takeaways

  • Negative outlooks now represent 30% of total ratings, and include mainly among Chilean, Colombian, and Panamanian banks.
  • We expect asset quality to start recovering next year, profitability to weaken but remain sound, and the lending growth pace to remain modest.
  • Brazil's southern state Rio Grande do Sul was recently hit with devastating floods, the impact of which on local banks' operations is too early to assess.
  • The delay in U.S. monetary policy easing will continue to pressure LatAm borrowers.

Negative outlooks now represent 30% of total ratings, mainly among Chilean, Colombian, and Panamanian banks.   This ratio is lower than 40% in Q1 2024, but this is because of the negative rating action we took on six Peruvian banks on April 26. As a result, the outlooks on these entities are now stable. The rating actions on these financial entities follow our downgrade of Peru. We expect Peru's complex political landscape will persist in the run-up to the next presidential and Congressional elections. This, in turn, limits the government's capacity to implement more timely policies to boost the investment and economic growth outlook, in our view.

Solid profitability, due to a diversified business mix, and sizable levels of government bonds with high yields and margins enable banks to withstand credit cycles and wider credit losses.   Banks continue to maintain high provisioning coverage ratios, which help mitigate the impact of weakening asset quality metrics. Lower interest rates will pressure banks' margins and profitability but should remain sound compared with those of international peers, thanks to still healthy margins and recovering asset quality metrics.

Asset quality metrics have deteriorated across the region due to the soft economic performance, low credit growth, and pressure on the consumer and small and midsize enterprise (SME) lending segments.   Persistently high interest rates continue to take a toll on borrowers. Interest rates have come down in some countries like Brazil and Chile, but they remain high, while those in other countries of the region only dropped slightly. We expect asset quality metrics to stabilize by the end of this year and start improving in 2025 because of banks' conservative strategies during the past two years and as interest rates continue to fall.

We expect the lending growth pace to remain at single digits.   We expect a pickup in credit demand in the corporate sector once interest rates fall to affordable levels. But banks will likely continue to pursue conservative underwriting practices, given the tepid pace of asset quality stabilization. SMEs' credit quality is strained as internal demand remains modest, given the persistently inadequate flow of credit to these entities and high interest rates, as they typically are charged a higher cost of borrowing than that for large companies. And during periods of asset quality deterioration, the access to credit is further restricted.

Although it's too early to assess the full impact of flooding in southern Brazil, we believe the damage will be material and could hurt banks' asset quality, but losses for insurers should be contained.   We think there could be a significant fallout for the state's agricultural and services industries, private property, and public infrastructure. We also anticipate risks for SME and consumer loans, and credit cards. Rio Grande do Sul's agricultural sector is important for Brazil, and it has faced several recent setbacks. Overall, Rio Grande do Sul generates 5.9% of Brazil's GDP. The state's agricultural sector contributes about 69% of the country's total rice production and 8.6% of soy production. In addition, dairy products from the state represent 12.9% of Brazil's production, and Rio Grande do Sul accounts for 4.6% of the nation's livestock.

We placed our ratings on Banco do Estado do Rio Grande do Sul S.A. and Banco Cooperativo Sicredi S.A. on CreditWatch with negative implications because both have significant exposure to a flood-damaged area.   The CreditWatch placement reflects our view that the direct and indirect effects of flooding on the two banks are still unclear. In addition, we think there could be adverse implications for other Brazilian banks and insurance companies. However, the impacts may turn out to be nonmaterial or there could be mitigating factors that offset a deterioration in their business fundamentals. We estimate that the Brazilian banking system's exposure to the state is 7%-10%, and we will keep monitoring the quality of loans granted to borrowers in the flood-damaged area.

Growth paths will diverge across the region.  We project GDP growth in the region (excluding Argentina) to moderate to 2.0% in 2024 from 2.4% in 2023. Brazil and Mexico were the growth outperformers in 2023. We expect activity in both countries to decelerate in 2024, but still remain relatively strong, keeping the GDP growth pace above potential in both economies. Conversely, Chile, Colombia, and Peru were growth underperformers last year. We expect an improvement in growth in these economies this year, although GDP expansion will remain below potential. The macroeconomic outlook for Argentina

is highly uncertain as the new administration attempts to implement an aggressive fiscal adjustment, among other measures. We expect this will lead to a deep economic contraction this year, followed by a rebound in 2025.

Table 1

LatAm: GDP growth and S&P Global's forecasts
(%) 2021 2022 2023f 2024f 2025f 2026f 2027f
Argentina 10.7 5.0 -1.6 -3.5 3.3 2.2 2.5
Brazil 5.1 3.1 2.9 1.8 2.0 2.1 2.2
Chile 11.9 2.5 0.2 2.0 2.7 2.9 3.0
Colombia 10.8 7.3 0.6 1.1 2.8 3.0 3.1
Mexico 6.0 3.9 3.2 2.5 1.8 2.2 2.3
Peru 13.6 2.7 -0.6 2.7 3.0 3.1 3.2
f--Forecast.

S&P Global Ratings now believes that conditions for a monetary policy easing by the Federal Reserve won't be in place before autumn.   The Fed won't cut rates until it sees several consecutive readings of slowing month-over-month core inflation, in our view. Therefore, its first rate cut will likely come in December--several months later than we had previously forecast.

Some of that data points to the underlying momentum of the U.S. economy, which remained robust in the first quarter. At the same time, the Fed's preferred inflation gauge--the personal consumption expenditures price index--pointed to a reversal of the disinflationary momentum last year. Inflation readings from the last three months likely overstate the remaining excess inflation, but they still lower our confidence in a Fed rate cut happening before autumn--especially given the upside risk to our inflation outlook due to strong consumer demand. Lingering high interest rates in advanced economies will likely undermine the ability of LatAm central banks to further ease their monetary policy. Persistently high interest rates could undermine credit conditions for LatAm borrowers. As a result, banks' asset quality metrics and bottom-line profits could suffer.

As we had expected, LatAm banks continued issuing hybrid instruments.   The market has renewed its appetite for hybrid issuances, and LatAm banks are taking advantage. For example, Banco del Estado de Chile issued the $600 million 7.95% perpetual notes in April 2024. We rated these additional Tier 1 notes at 'BBB-', four notches lower than the bank's 'a' stand-alone credit profile. Hybrid instruments offer higher yields amid falling interest rates, but their features make them less favorable for investors than senior debt. We expect LatAm banks will continue to benefit from improved regulatory capital metrics. In addition, Chilean and Mexican banks will benefit from interest repayment not affecting profitability metrics, as it isn't reflected in the profit and loss statements.

Table 2

Rating component scores: Top LatAm banks
Institution Operating company long-term ICR/Outlook Anchor Business position Capital and earnings Risk position Funding and liquidity SACP/GCP Type of support Number of notches support Additional factor adjustment
Argentina

Banco De Galicia Y Buenos Aires S.A.U.

CCC/Stable/-- b+ Adequate Constrained Adequate Adequate/Adequate b+ None 0 (4)

Banco Patagonia S.A.

CCC/Stable/-- b+ Adequate Moderate Adequate Adequate/Adequate b+ None 0 (4)
Brazil

Banco Citibank S.A.

BB/Stable/-- bb+ Adequate Moderate Adequate Moderate/Adequate bb None 0 0

Banco do Brasil S.A.

BB/Stable/-- bb+ Very strong Moderate Adequate Strong/Adequate bbb None 0 (3)

Banco Bradesco S.A.

BB/Stable/-- bb+ Very strong Constrained Adequate Strong/Adequate bbb- None 0 (2)

Caixa Economica Federal

BB/Stable/-- bb+ Adequate Constrained Moderate Strong/Strong bb None 0 0

Banco Santander (Brasil) S.A.

BB/Stable/-- bb+ Strong Moderate Adequate Strong/Adequate bbb- None 0 (2)

Banco Nacional de Desenvolvimento Economico e Social

BB/Stable/-- bb+ Adequate Adequate Strong Strong/Adequate bbb- None 0 (2)

Banco Safra S.A.

BB/Stable/-- bb+ Adequate Moderate Strong Adequate/Adequate bbb- None 0 (2)

Banco BTG Pactual S.A.

BB/Stable/-- bb+ Adequate Moderate Moderate Adequate/Adequate bb None 0 0

Banco Votorantim S.A.

BB/Stable/-- bb+ Adequate Moderate Moderate Adequate/Adequate bb- None 0 1

Banco do Estado do Rio Grande do Sul S.A.

BB-/Watch Neg/-- bb+ Moderate Moderate Moderate Strong/Adequate bb- None 0 0

Chile

Banco de Credito e Inversiones

A-/Stable/-- bbb+ Strong Adequate Adequate Adequate/Adequate a- None 0 0

Banco del Estado de Chile

A/Negative/-- bbb+ Strong Adequate Adequate Strong/Strong a None 0 0

Banco Santander-Chile S.A.

A-/Stable/-- bbb+ Strong Adequate Adequate Adequate/Adequate a- None 0 0

Banco de Chile

A/Negative/-- bbb+ Strong Adequate Adequate Adequate/Adequate a None 0 0

Scotiabank Chile

A/Negative/-- bbb+ Adequate Adequate Adequate Adequate/Adequate bbb+ GCP 2 0

Colombia

Bancolombia S.A. y Companias Subordinadas

BB+/Negative/-- bb+ Strong Constrained Adequate Adequate/Adequate bb+ None 0 0

Banco de Bogota S.A. y Subsidiarias

BB+/Negative/-- bb+ Strong Constrained Adequate Adequate/Adequate bb+ None 0 0

Banco Davivienda S.A.

BB+/Negative/-- bb+ Strong Moderate Moderate Adequate/Adequate bb+ None 0 0

Financiera de Desarrollo Territorial S.A. FINDETER

BB+/Negative/-- bb+ Adequate Strong Adequate Moderate/Adequate bb+ None 0 0

Financiera de Desarrollo Nacional S.A.

BB+/Negative/-- bb+ Moderate Strong Moderate Adequate/Adequate bb GRE 1 0
Mexico

BBVA Bancomer Servicios, S.A., Institucion de Banca Multiple, Division Fiduciaria

BBB/Stable/-- bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (1)

Banco Nacional de Mexico S.A.

BBB/Negative/-- bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (1)

Banco Mercantil del Norte S.A. Institucion de Banca Multiple Grupo Financiero Banorte

BBB/Stable/-- bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (1)

Banco Nacional de Obras y Servicios Publicos S.N.C.

BBB/Stable/-- bbb- Adequate Strong Adequate Adequate/Adequate bbb None 0 0

HSBC Mexico S.A.

BBB/Stable/-- bbb- Adequate Adequate Adequate Adequate/Adequate bbb- GCP 1 0

Nacional Financiera, S.N.C. Institucion de Banca de Desarrollo Division Fiduciaria (CEDEVIS)

BBB+/Stable/-- bbb- Adequate Moderate Moderate Adequate/Adequate bb GRE 4 0

Scotiabank Inverlat S.A.

BBB/Stable/-- bbb- Adequate Strong Adequate Adequate/Adequate bbb None 0 0

Banco Inbursa S.A. Institucion de Banca Multiple Grupo Financiero Inbursa

BBB/Stable/-- bbb- Adequate Strong Adequate Adequate/Adequate bbb None 0 0

Banco Nacional de Comercio Exterior S.N.C.

BBB+/Stable/-- bbb- Adequate Adequate Adequate Adequate/Adequate bbb- GRE 2 0

Panama

BAC International Bank Inc.

BBB-/Stable/-- bb+ Strong Moderate Adequate Adequate/Adequate bbb- None 0 0

Banco General S.A.

BBB/Negative/-- bbb- Strong Very Strong Adequate Adequate/Strong a- None 0 (2)

Promerica Financial Corp.

B+/Stable/-- bb- Strong Constrained Adequate Adequate/Adequate bb- None 0 (1)

Banistmo S.A.

BB+/Negative/-- bbb- Adequate Adequate Moderate Adequate/Adequate bb+ None 0 0

Banco Nacional De Panama

BBB/Negative/-- bbb- Adequate Strong Adequate Strong/Strong bbb+ None 0 (1)
Peru

Banco de Credito del Peru

BBB-/Stable/-- bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (2)

Banco BBVA Peru

BBB-/Stable/-- bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (2)

Scotiabank Peru S.A.A.

BBB-/Stable/-- bbb- Strong Strong Adequate Adequate/Adequate bbb+ None 0 (2)

Banco Internacional del Peru S.A.A. - Interbank

BBB-/Stable/-- bbb- Adequate Adequate Adequate Adequate/Adequate bbb- None 0 0

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Selected Research

Commentaries
Research updates
Economic, sovereign, and other research

This report does not constitute a rating action.

Primary Credit Analyst:Cynthia Cohen Freue, Buenos Aires + 54 11 4891 2161;
cynthia.cohenfreue@spglobal.com
Secondary Contacts:Sergio A Garibian, Sao Paulo + 55 11 3039 9749;
sergio.garibian@spglobal.com
Joaquin Jolis, Buenos Aires +54 1148912187;
joaquin.jolis@spglobal.com
Media Contact:Jeff Sexton, New York + 1 (212) 438 3448;
jeff.sexton@spglobal.com

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