Central America Banks: Solid But Less Profitable

In the last year, the sector was characterized by lower loan growth, lower returns and higher funding costs.

Wednesday, September 25, 2013

Fitch has presented its Special Report on the Central American Banking System, which analyzes the performance of the sector in the period between July 2012 and June 2013.

The rating company highlights:

Low Credit Growth:
The loan portfolios of most banking systems in Central America slowed their growth rates in 2013, in line with the downward revision of the region's GDP. In June 2013, the annual growth of loan portfolios of five Central American countries stood in the range of 6% to 12% in real terms, although it was only 2.2% in Honduras. According to Fitch Ratings, loans in the region will close 2013 with real growth of about 7% (2012: 8.9%). Panama will lead the growth of the loan portfolio, but inflationary pressures throughout the region will be an additional limit to real credit expansion.

Less Profitability:
Although the profitability of banks is good, it has decreased in 2013, except in El Salvador and Nicaragua. Fitch estimates that the return on assets of the Central Banking will close 2013 at 1.4%, slightly below the previous year (1.6%). The profit growth will be limited by higher funding costs and less growth of credit portfolios. Fitch does not anticipate improvements in the operational efficiency of the banks to offset the fall in profitability.

Major Funding Cost:
Funding costs could continue increasing, as international reference rates are pushing up and local governments incraese their domestic funding. Regulatory provisions, which increase liquidity requirements in El Salvador and Honduras will also play a part as well as the mitigation of currency exchange risks in Costa Rica. Up to June 2013, five of the banking systems recorded year on year increases in the cost of their interest-bearing liabilities, of between 13 and 112 basis points. Nicaragua, El Salvador and Panama recorded the lowest funding costs.

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More on this topic

Nicaragua: Bank Credit Maintains Growth

August 2016

In June 2016 the gross credit portfolio grew by 23% compared to the same period in 2015, led by personal, commercial and livestock credit, which grew by 32% and 25% and 26%, respectively.

From a report by the Central Bank of Nicaragua:

Central American Banks: Outlook 2015

January 2015

Slow growth is projected in El Salvador, very good performance in Nicaragua, stability in Panama, more competition in Guatemala and moderate growth in Costa Rica.

From a report by Fitch Ratings entitled "2015 Perspectives: Central American Banks":

Costa Rica:
Fitch Ratings has revised the outlook for the sector from positive to stable, because the agency does not anticipate substantial improvements in respect to the previous year. The system's profitability will remain low, with less than 1.0% ROAA. The results are limited because of the high dependence on net interest margin (NIM) and additional expenses in provisions for loan losses, due to regulatory changes that established gradual constitutions of general provisions for the best qualified loans. In addition, Fitch does not anticipate improvements in revenue diversification and also foresees a significant revenue exchange rate differential. This last factor has a significant influence on the results of the banks in Costa Rica.

Central American Banks: Special Report

September 2011

Fitch Ratings has issued a special report entitled, "Central American Banking: After the Crisis, a Disparate Evolution"

In Fitch's opinion the banks have shown a mixed performance in Central America during the period of the global financial crisis. At the same time, banking systems have dissimilar perspectives on future performance, reflecting different economic growth prospects in the region.

Central American Banking: Results and 2010 Perspectives

March 2010

According to Fitch Ratings, even though the economic scenario has improved, Central American banks face challenges related to the quality of their assets.

Central American banking systems have weathered the financial crisis relatively well. Even though profits fell considerably during 2009, industry solvency levels remain good.