RPT-Fitch: Diverging trends for Andean banks in 2014
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Dec 16 (Reuters) - (The following statement was released by the rating agency)
The outlooks for the banking sectors of Peru and Colombia remain stable while those of Ecuador and Venezuela are negative reflecting the sharp difference in operating environment and regulatory interference, according to a new Fitch Ratings report.
The Andean region illustrates the contradictions in economic policy choice among Latin American countries. These range from the Venezuelan government's heavy interventionism to the strong regulation and incentive framework applied in Peru. The results are not always that apparent in financial terms, but a closer look at the facts behind the figures helps clarify the strengths and shortcomings of these banking systems.
Even though Fitch Ratings forecasts decelerating growth in 2014 for all Andean banking systems, the causes differ. Fitch expects Peruvian and Colombian banks to grow about 12% - 15% as economic growth decelerates and banks digest the rapid organic and inorganic growth of 2012 - 2013. For Ecuadorian and Venezuelan banks, weaker economic growth and intrusive government intervention are hindering loan growth as banks face interest rate caps that prevent many loans from achieving an acceptable risk/reward balance.
While Colombian banks digest their latest acquisitions that could pressure capital ratios, Peruvian banks will grow in a very dynamic but lowly penetrated market. For Venezuelan banks, change could come from an economic shock, most likely a devaluation that could hinder real economic growth. Ecuadorian banks will face new tax laws and tighter provision requirements that will further limit profitability.
All banking systems are likely to deteriorate in some performance metrics. Fitch expects loan portfolio seasoning to affect asset quality throughout the region, though these metrics are expected to remain sound absent a major economic crisis. On the other hand, rising interest rates will affect profitability amid very competitive environments (Peru, Colombia) and government price fixing (Ecuador, Venezuela).
With the exception of Ecuadorian banks, all banking systems have significant capital generation capacity. Venezuelan banks are the most profitable in nominal terms, but performance depends on a deeply unbalanced economy. Peruvian and Colombian banks have more sustainable profitability, which, coupled with ample loan loss reserves and adequate capitalization, constitute a cushion against unexpected losses. Liquidity is sound in all systems; however, the investment portfolio's high exposure to weak sovereigns place Venezuelan banks at a disadvantage compared to peers.
Ecuadorian and Venezuelan banks' ratings are more sensitive to sovereign rating actions, as credit worthiness is directly linked to economic performance or actions of the local authorities. For Peruvian and Colombian Banks, changes in the sovereign ratings are less likely to directly affect bank ratings but constitute a credit positive (in case of an upgrade) or credit negative that would be a key factor to consider when rating these banks.
Though not Fitch's base case scenario, severe asset quality deterioration, weak financial performance, a global credit crunch that disrupts funding or, in the case of Venezuelan and Ecuadorian banks, further government intervention weakening the banks' balance sheets, particularly in terms of solvency and liquidity, could lead to a negative change in outlook for each country's banking sector.
The report '2014 Outlook: Andean Banks ' is available at www.fitchratings.com or by clicking on the link above.
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