Central American Banks: Biannual Results and Perspectives

In Fitch's opinion (in the Special Report), the complex economic environment in the region is starting to have an effect on the performance of the banks in Central America.

Friday, August 22, 2008

"Results for the first half of 2008 indicate that the slump in the economy and the increase in inflation have weakened the quality of bank assets," indicated the report. "Possible increases in international and local interest rates to try to control inflation will complicate this situation," the report continues.

The cycle of expansion experienced by the Central America banking sector in the last few years has begun to weaken. In response to the deterioration of the quality of loans, banks in the region have slowed down their growth. Some banks have even reduced their exposure to risk by tightening credit approval policies. At the same time, the internal reorganization of banks acquired by their international counterparts and the difficult times facing the latter have limited the expansion of assets.

However, profitability has not yet been affected and compared to the results at the close of 2007 is still favorable. The transfer of loans to segments that offer better performance have helped to maintain the profit margins, while at the same time the banks continue to increase non-financial income. Nonetheless, results for 2008 are being threatened by greater spending in provisions that required due to the deterioration in loans, and is already evident in the performance of some of the region's banks.

In the next few years the climate will be even more competitive where larger banks that have access to more funding and capital will have an important advantage. Thus, the consolidation of internationally recognized banks in Central America has drastically changed the composition of the industry. The new shareholder structures have strengthened the risk profile of the banking systems, but at the same time have increased the level of concentration, creating important challenges for smaller banks. In Fitch's opinion, the national risk ratings of banks with domestic capital, especially the smaller sized ones, are more exposed to variations in market conditions.

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