The Latin American banking sector is preparing to face a year of tough challenges. The context in which the financial industry has grown in the last five years is changing rapidly: the projected rise in US interest rates, the slowdown of the Chinese economy and the fall in the price of raw materials the region exports represent a change in scenario that threatens to become more pronounced next year. With GDP falling or stagnant in Brazil, Venezuela and Argentina, coupled with the economic slowdown in Chile and Colombia, and the still weak growth in Mexico, the main focus of banks in 2016 will be asset quality.
"Next year will be different to what we faced after the 2009 crisis: instead of seeing growth in loan portfolios, we'll be focused on how to manage the deterioration of portfolios," says Franklin Santarelli, managing director of financial institutions at Fitch Ratings in New York. "From 2010 to 2014 there was a significant expansion in credit, but now the maturity of that portfolio in a context of a weak economy could lead to a deterioration in asset quality." The focus will be especially in Brazil and Venezuela.
While we can expect an increase in delinquencies resulting in lower profitability, a positive factor for banks in Latin America is that they will enter this negative cycle with higher margins than those of financial systems in other emerging markets. Also, lower growth in lending in most countries will ease the pressure on bank capital. Neither will liquidity levels, although reduced, be any cause for alarm in 2016.
The good news, then, is that in general banks in the region appear to be prepared to face the changing economic environment. "Financial institutions in Latin America are less directly exposed to market conditions than any of the sectors we analyze, although in some countries banks face increasing challenges related to the local context," Moody's says in its recent report entitled Global Headwinds Pressure Credit Conditions in Region. Even so, political and economic uncertainties in much of Latin America in 2016 will test the financial and operating performance of banks and insurers in the region.