Central Banking in 2012

A Fitch Special Report indicates better positioning in the face of external uncertainty.

Wednesday, January 4, 2012


Strengthened Financial Performance:
The banking systems of Central America and the Dominican Republic (hereinafter the region) will continue to strengthen their financial performance as the region continues to recover its rate of GDP growth, estimated at about 4% by 2012 under Fitch’s baseline scenario. Further expansion of credit, combined with less need to establish provisions for bad loans would spur growth in bank profits.

Moderate Growth Loan:
Fitch anticipates moderate growth in credit in 2012, led by locally owned banks. The banking systems that are most likely to exhibit higher growth are those whose countries have improved economic prospects. In this regard, the growth of the banking systems in Panama, Costa Rica and Guatemala stand out.

Stabilized Loan Quality:
Having absorbed nearly all impaired loans resulting from the last global financial crisis, banks will continue to have improvements in the quality of their loans in 2012. However, some banks in Costa Rica and the Dominican Republic could continue to have relatively high portfolio deterioration in the coming months, as relevant exposures remain in sectors where payment behavior may show irregularities.

Sensitivity to the Global Environment:
Although it is not Fitc’s baseline scenario, a relapse of major advanced economies, particularly the United States, would weaken the projected credit growth and put pressure on bank's profits in the region due to an increase in loan loss provisions. However, neither the stability nor the solvency of the banking system is threatened. In general, banks in the region are better prepared to face adverse conditions having stronger economic indicators, ample liquidity and predominantly domestic funding.

Regulatory Developments:
The regulatory frameworks of the region's banking systems continue gradually moving towards adoption of international best practices, driven by more proactive regulators in the area. In 2012 reforms could be adopted in Guatemala, which is important because it would bridge the gap in regulations of this country compared to the rest of the region.

Stable Rating Outlook:
The vast majority of international and national ratings of banks in the region remain unchanged, although it is possible that there are movements in both directions on the ratings of some banks.

What Could Change the Perspective

Weakening of the International Environment:
A more substantial deterioration in the operating environment than expected, materially impacting the financial profile of the banks, could result in some changes in the outlook. However, similar to that observed in the period 2008-2009, the changes would be limited to a small number of banks.

More on this topic

Fitch's Analysis of Banking Sector in El Salvador

July 2015

"While low growth rates of GDP restrict credit growth and earnings, expansion in consumer loans could weaken credit quality."

From a report by Fitch Ratings:

Fitch Ratings - San Salvador - (July 16, 2015): The largest Salvadoran banks have a strong ability to absorb losses, which protects them from the weak operating environment and asset quality pressures, according to Fitch Ratings' special report .

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.

More Profits for Banks in 2013

December 2012

Fitch Ratings has projected higher profit margins for Central American banks.

The outlook on the ratings of banks in Central America and the Dominican Republic in 2013 is Stable. Strong balance sheets and ample liquidity levels that allow them to face external risks, continue to characterize most banking systems, according to Fitch Ratings.

Central American Banks: Biannual Results and Perspectives

August 2008

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.

"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.

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