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Honduras' banking industry is working to improve capital conservation to meet new regulatory targets, but the concentrated market is troubled by weakening asset quality.
A recent report by Fitch Ratings looked at six of the 15 banks operating in the Central American nation that dominate the banking industry, with three – Ficohsa, Atlántida and Banpaís – holding a combined 52% of total assets. The former two are domestically owned and the third a subsidiary of Argentina's Banco Industrial.
The local banking industry is undergoing a regulatory strengthening process, where the buffer for conservation of capital is required to reach 3% by 2019, and Fitch currently sees all six banks capable of achieving this goal.
However, despite the generally adequate metrics for the banks and their capability to reach the 3% target, the industry must contend with the sustained increase in defaults and restructuring of their credit profiles, said Fitch.
The ratings agency also stressed that much of the success of the foreign-held banks (Banrural, Banpaís and Davivienda) will depend on the level of support they receive from their parent companies.
Ficohsa and Atlántida are the nation's two largest banks, holding 18.9% and 18.6% of assets, 20.5% and 18.6% of loans and 17.5% and 19.9% of deposits, respectively.
Nevertheless, the two also have some of the poorest quality assets, characterized default rates of 2.5% for Ficohsa and about 3.4% for Atlántida, and the banks also have higher punitive fees than their closest rivals.
However, along with smaller player Banpaís the two boast adequate capitalization rates with strong support from investors, leaving all three well supported to reach the 2019 regulatory goal for capital conservation.
Ficohsa stands out as an industry leader in online tools, recently introducing an online platform for tax payments, and both Ficohsa and Atlántida have made headway in the insurance business in the region.
Seguros Ficohsa is the fifth largest insurer in Central America and one of the top 10 financial groups in the region.
Fitch said in its report that all six banks show fair profitability with operating income over risk-weighted assets estimated at around 2% with the exception of Ficensa, which has seen its profitability steadily drop in recent years, reaching only 1% last September.
The rate for Banrural has improved steadily from around -2% in September 2014 to about 2.2% in the same month of 2016.
Sitting generally in third place, Banpaís' market share consists of 11.1% of assets, 11.8% of loans and 10.0% of deposits.
The past-due portfolios of Banpaís and Ficensa are lower than the other banks at roughly 1.1% and 0.6%, reflecting the low appetite for risk at both entities.
While the default rate (1.6%) for rurally focused bank Davivienda (holding 6.5% of assets, 7.2% of loans and 6.4% of deposits) give it a similar credit quality to that of the much larger Atlántida, Fitch stresses the high level of restructured loans at the bank should be considered in its assessment.
Strong internal generation of capital in step with growth is providing support for both Davivienda and Ficensa (2.3% of market assets, 2.7% of loans, 1.7% of deposits) in their efforts to achieve the upcoming regulatory requirement of 3% for capital conservation.
With only 3.4% of assets, 4.1% of loans, and 2.7% of deposits, Banrural recently received an injection of capital that should help it reach the regulatory target.
The bank enjoys solid support from shareholders and its Guatemalan parent company, and Banrural is experiencing "accelerated" growth in funding as a result, according to Fitch.
However, Banrural's default rate (at about 3%) has been impacted by the integration of non-performing loans through its acquisition of another local bank, Continental.