Banking Looks Brighter In Latin America
Banks in Latin America withstood the crisis and the downturn like few others in the global financial system. They financed loan growth with domestic sources of funding, such as deposits, and avoided many of the financial instruments that proved toxic in the developed world. Lessons learned from several past crises had also resulted in a healthy combination of well-capitalized banks and strict financial regulations and supervision.
However, banks did suffer in terms of loan growth, asset quality and profitability from the crisis and the downturn, even though many managed to grow their loan portfolios profitably while keeping bad loans under control. The notable exception was Mexico, where the deep recession saw lending contract and loan quality deteriorate sharply, especially in consumer lending and credit card financing.
Economic growth to spur lending. Most regional governments handled the crisis effectively and ratings agency Moody’s expects the region to expand 3.8% this year, after an estimated contraction of 2% in 2009. Latin American banking federation Felaban sees the strong financial health of the banking sector as a key factor behind the region’s rapid recovery from the economic downturn. Regional growth this year will be positive for lending and other banking products and services as:
–consumer confidence and spending pick up;
–the employment situation improves;
–more investments are made by both local and foreign business.
Brazil and Peru are likely to lead loan growth this year among the region’s main markets as both these economies could expand around or above 5% in 2010.
However, loan growth will not return to precrisis levels in all Latin American countries this year as consumer lending, which drove much growth, was hit hard by the downturn.
Several large state banks gained significant market share last year, especially in Brazil and Chile, due to their active role in ensuring financing was available at a time when private-sector banks reduced their credit supply. Lending this year will again be led by private banks, which are now looking to take advantage of the region’s economic recovery and to regain terrain lost to state banks in 2009. Banks will also enjoy better asset quality this year as the payment capacity of individuals and companies improves along with the economic situation, which should contribute to stronger bank earnings.
Bank penetration advances. Despite favorable growth prospects for the region’s banks this year, access to basic financial services among the poor, small businesses and people in remote locations will remain at very low levels. It has been a permanent challenge over the years for banks and authorities alike to improve this situation, but progress has usually been slow. Last year did see some important advances on this front, especially in Mexico, where a new distribution system is set to bring many low-income individuals into the financial system
Outlook. Banks in several Latin American countries will enjoy double-digit loan growth this year as well as low levels of bad loans and strong profitability, making it an attractive sector for international investors.