Link to Fitch Ratings’ Report: Fitch Ratings 2019 Outlook: Latin American Banks (Mounting Downside Risks) https://www.fitchratings.com/site/re/940367
The stable sector outlook for Latin American banks in 2019 reflects expectations for sustained modest growth in most countries. However, economic growth is expected to remain uneven, with risks to the downside given the confluence of external shocks, coupled with specific economic or political risks in selected countries, Fitch Ratings says.
A stalling global economy due to rising protectionism and/or increased volatility in international markets could lead to weaker than expected economic performance for LATAM banks. This could negatively affect Latin American economies through lower external demand and pressures on commodity prices. Lower external demand could translate into negative implications for lending growth, asset quality and profitability metrics.
Recessions in Argentina and Venezuela will likely continue into next year, with recent downward revisions to Brazil and Mexico’s growth forecasts. Peru, Colombia and Chile will have to rely more on domestic growth, as commodity prices may be less favorable in 2019. However, the economies of Colombia and Chile could benefit from improved investor sentiment following recent elections.
The normalization of U.S. interest rates is expected to continue into 2019, which could lead to higher funding costs for LATAM banks. Exchange rate volatility could also lead to asset quality risks for foreign currency loans. Most banks are well positioned to face tighter external liquidity conditions given solid liquidity levels and modest external financing needs. Nevertheless, higher than expected rate hikes could increase risks, particularly for those markets with greater external vulnerabilities or higher levels of dollarization.
U.S. monetary tightening could lead to domestic monetary tightening if the resulting local currency depreciation leads to a spike in inflation. This scenario could pressure funding costs and loan quality beyond our current expectations.
Implementation of Basel III capital standards and IFRS 9 is positive for credit fundamentals, with capitalization levels expected to remain stable in 2019 as retained earnings keep pace with loan growth.
Chile recently approved reforms to its General Banking Law; banks will have six years to comply with new capital requirements. Colombia is also phasing in Basel III-like capital rules.
Almost 68% of Fitch-rated banks in Latin America have Stable Rating Outlooks, with most other Rating Outlooks either Negative on Rating Watch Negative or have no Rating Outlook.
Banks are rarely rated above their respective sovereign, with rating actions on for banks mirroring any negative sovereign rating actions. Most of the Negative Rating Outlooks are related to sovereign rating actions in Argentina, Costa Rica, Mexico and Uruguay instead of a marked deterioration in financial performance.
There will be limited upside potential for bank ratings in 2019 as the sovereign’s ratings will constrain a high proportion of long-term IDRs. Currently, Fitch has Negative Rating Outlooks on five out of 20 rated sovereigns in Latin America and an additional sovereign on Rating Watch Negative.