Feb 19 - Despite credit restrictions sanctioned by the Central Bank of Costa
Rica (BCCR) in January, ratings on the country's Financial Institutions will
remain stable, according to Fitch Ratings. The reform will not alter the
ratings' fundamentals, which are driven by sovereign or institutional support,
in the majority of cases. Fitch also foresees that financial institutions whose
ratings are based on their intrinsic creditworthiness will be able to sustain
the impact of restricted credit growth.
The reform enacted by the BCCR places a ceiling of 9% in the accumulated growth
rates in credit to, and investments in, the non-financial private sector in both
local and foreign currency between the months of February and October by
financial institutions regulated by the Superintendencia General de Entidades
Financieras (SUGEF), the General Financial Institution Authority. The reform
also limits credit expansion in foreign currency by either 6% in entities
reporting an accumulated growth of equal or less to 20%, or by 30% of the annual
rate for entities surpassing the aforementioned growth. According to the BCCR,
these measures respond to the increased external capital flows, motivated
partially by interest rate arbitrage, and its effects in the appreciation of the
local currency, the colon. The measures also seek to contain excessive credit
growth particularly that denominated in foreign currency.
According to Fitch's estimates, this reform will primarily impact the smaller
and private banks and credit and savings unions. The limit enacted by the BCCR,
equivalent to 12.2% annualized, is close to the growth rate reported by the
domestic banking system during 2012 (13.45%). However, the limit is well below
the growth rates achieved by private banks (16.6%) and credit unions (21.57%).
Of the 59 institutions comprised in the agency's calculations, at least 35
exceeded credit growth rates of 12.2%, and nine of these institutions were
Fitch estimates that interest income foregone by the credit restrictions will
have a moderate impact in the results of the financial system. Assuming
stability in interest rates and the sustainability of last years' growth rates,
foregone gross interest income will be close to 90,000 million of colones (USD
180 millions) or 6% of last year's gross interest income generated by the
restricted assets. The median of foregone interests relative to last year's
operating income is 12% for those banks exceeding the limit. For credit unions,
this ratio is 11%.
The temporary nature of the reform, together with the short horizon between its
announcement and implementation, impairs the ability of the financial
institutions to adjust their strategies to compensate for the credit
restrictions. Nonetheless, some entities may delay their investment plans.
Residential mortgages and consumer loans, the leading growth sectors, will be
the most impacted by the credit restriction, according to Fitch. Additionally,
this credit restriction will increase the already elevated exposure to
securities issued by the state and the BCCR.
The national financial system comprises 59 institutions, including commercial
banks and other private financial intermediaries: credit and savings unions,
housing mutuals, private finance companies, exchange bureaus, and the Caja de
Restricted credit assets include loans and investments in the non-financial
private sector extended by financial intermediaries regulated by SUGEF. As of
the fiscal year ended in 2012, these assets accounted for 11,778,746 million of
colones (USD 23,557 millons).
The measure was enacted by the BCCR on Jan. 30, 2013, effective from Feb. 1,
Additional information is available on 'www.fitchcentroamerica.com' or