Nicaragua: Prospects for Banking in 2018

Fitch Ratings forecasts that the performance of the banking system will remain stable in 2018, despite the expected slowdown in credit growth.

Wednesday, January 31, 2018

From a statement issued by Fitch Ratings:

Fitch Ratings-San Salvador-23 January 2018: Fitch Ratings has maintained its stable outlook for Nicaragua's banking system, considering that its financial performance is expected to remain adequate in 2018 despite the anticipated slowdown in credit growth. Banking system performance has proven to be consistent, benefiting from the positive trend of the local economy. On average, Nicaragua's real GDP growth was 5.2% between 2012 and 2016 while credit growth was 21.5%. However, since 2016 there has been a slight slowdown in the economy and in the main credit segments (commercial and consumer loans). Fitch expects the country's economic growth in 2018 to reach 4.5%. This would imply a lower dynamism for the banking sector, with credit growth expected below 15%.

On the other hand, a negative outlook for the banking sector is not likely in the short term. Such a change would only come from a substantial deterioration in the country's economic activity and in debtors' credit profiles,, which would significantly reduce the dynamism and credit quality of the banking system along with the considerable reductions in profitability.

Loan quality metrics for the Nicaraguan system should remain similar to previous years, with low delinquency levels but challenges such as the high dollarization of its loan book and maturity mismatches generated by current deposits mainly funding medium and long term loans. As of October 2017, past-due loans over 90 days represented 1%, which is in line with the last five-year average. Fitch anticipates slight increases in delinquency as a result of lower projected credit growth; however, past-due loans over 90 days should remain below 1.5% of total loans.

Banking system profitability will continue to be good in 2018, in Fitch's view. Operating returns could slightly decrease due to higher loan loss reserves from new regulation. Still, operating profits to risk weighted assets is expected to remain above 3%. In the second half of 2017, the regulator implemented countercyclical reserve requirements, which provide greater loss-absorption capacity in adverse business cycles. Likewise, profitability will remain sustained by high loan-book revenues and low cost of funding.

Credit growth projections and income generation indicate that capitalization levels will remain adequate in 2018. As of September 2017, the system's Fitch Core Capital ratio was 13.6%. The Nicaraguan banking system has reasonable capital levels, commensurate with the size and volume of its operations. Capital levels have benefitted in recent years from internal capital generation that has been aligned with its growth.

In Fitch's view, recent approval of the accounting framework based on International Financial Reporting Standards, which should be adopted as of 2019, will not have an impact on operations of the banks. A relevant factor to consider is that the banking system is small in size relative to its peers in the region, with total assets of USD7.654 million as of October 2017, which combined with low bank penetration will continue to drive its growth and future performance.

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Nicaragua as seen by Fitch Ratings

August 2017

The rating agency highlights growth at rates of 5% achieved in the last five years, but estimates that in 2017-18 this will fall to 4.5%, partly due to the effect of a reduction in financial flows from the program with Petrocaribe.

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