Salvadorian Banks: Fitch Annual Review & Outlook

El Salvador's banking system exhibited moderate growth in 2007, primarily aided by a continued increase in consumer loans and mortgages, as well as faster commercial loan growth, according to a Fitch special report published today, titled 'Salvadoran Banks: Annual Review and Outlook'.

Tuesday, April 15, 2008

In 2007, El Salvadoran banks' total assets expanded by 11.4% in nominal terms (5.8% in real terms), while overall net profits declined by 12.4%, due to higher provisions. Additionally, non-performing loans increased to 2.1% of total loans as of December 2007 (versus 1.9% in 2006), despite significant non-performing loans throughout 2007. However, loan loss reserves appear to be adequate and relatively stable in terms of both non-performing loans (120%) and total loans (2.5%).
'A significant increase in loan loss reserves negatively affected El Salvador's banking system's overall performance in 2007, and the overall loan portfolio quality declined as a result of deteriorating consumer loan quality,' according to Rene Medrano, Director in Fitch's Latin America Financial Institutions Group.
Nevertheless, Salvadorian banks continue to exhibit adequate capitalization and liquidity levels. The overall level of capitalization, defined as total equity-over-total assets, was 11.8% as of December 2007, similar to the level reported in 2006. Going forward, easier access to funding should allow the banking system to expand its loan portfolio while maintaining adequate liquidity.
In 2008, Fitch expects that the anticipated decline in interest rates over the next few months may lead to further growth in the demand for personal loans. As a result, consumer loans and mortgages should continue to drive overall loan portfolio expansion. Additionally, the arrival of well-established international banks should lead to better business practices throughout the system.
On the other hand, Fitch expects that greater political uncertainty in El Salvador, due to upcoming general elections, could limit private investment and loan portfolio growth in 2008, particularly during the second half of the year when the Banco Central de Reserva de El Salvador may raise minimum reserve requirements for local banks in order to ensure stability in the system.

The full report is available on the Fitch Ratings web site,

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