Fitch Peer Review: Ecuador's modest economic and banking sector recovery

Friday, December 22, 2017

Press release from Fitch Ratings.

December 21.

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Fitch Ratings believes the incipient economic recovery in Ecuador (GDP has grown 0.7% in 2017, one year after a fall of 1.6%) has been underpinned by higher private sector consumption, and that further growth will be dependent on the pace of economic adjustment toward greater private investment. The operating environment in Ecuador highly influences the creditworthiness of the country's banks given the impact of the government's macroeconomic and regulatory policies on their performance.

"The Ecuadorian banking system is exposed to a higher degree of supervision, regulation and government control than other financial systems in the region," said Larisa Arteaga, Director. "However, risks of regulatory intervention have eased over the near term as the new government has sent positive signals to stimulate bank lending while reversing the ban on fees and commissions for certain banking services".

The positive trend on the largest Ecuadorian banks' asset quality reflects the modest economic recovery, which has improved borrowers' ability to pay, and has led to the expansion of the banks' loan portfolios and conservative risk appetite in terms of growing in riskier sectors. Fitch expects some deterioration in loan quality over the near term, considering the significant increase in restructured loans. However, Ecuadorian banks continue to minimize loan growth if necessary, which might help mitigate asset quality deterioration.

Fitch expects Ecuadorian banks' financial performance to continue to recover modestly in 2018, as a result of modest economic expansion, increased demand for credit and the banks' improved asset quality.

Fitch expects capitalization ratios to remain stable, aided by moderate asset growth in 2018. In Fitch's view, the lower capitalization of Ecuadorian banks compared with international peers (commercial banks in 'b' category) is mitigated by conservative reserve coverage for NPLs and lower risk balance sheets, which benefit from substantial cash and investment-grade securities holdings.

Ecuadorian banks exhibit a healthy liquidity position, which allows them to compensate for operating environment challenges and the absence of a lender of last resort within a dollarized economy. In Fitch's opinion, the banks' liquidity position will continue to be significantly better than that of other banks operating in similarly rated countries.

Link to full report: Peer Review: Ecuador's Shallow Economic and Banking Sector Recovery