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Fitch: Honduras Credit Card Reform Could Hinder Bank Profits
September 7, 2017 / 5:14 PM / 2 months ago

Fitch: Honduras Credit Card Reform Could Hinder Bank Profits

(The following statement was released by the rating agency) SAN SALVADOR/NEW YORK, September 07 (Fitch) A reform to Honduras' credit card law, due to come into force on Nov. 4, will likely have negative effects on profitability and growth for banks' credit card business, says Fitch Ratings. However, banks will likely shift lending toward other segments, and overall lending growth is expected to remain unchanged as a result of the reform. Key changes to the credit card law include limiting fees and administration charges, and the introduction of a maximum allowable interest rate of 54%, equivalent to around 2.7 times the current weighted average of annual nominal interest rates of domestic currency loans. The law also aims to improve transparency by mandating additional information be provided to customers and facilitates payment arrangements for delinquent cardholders by requiring banks to cancel their credit card accounts and place the balance in a personal loan at a lower interest rate. A similar law approved in neighboring Guatemala in 2015 limited loan growth and had a major impact on the profits of credit card issuers; however, it was subsequently suspended by the Guatemalan Superior Court in March 2016 after being in effect for only 23 days. The Honduran financial system is highly concentrated, and this is reflected in the credit card segment. The three banks with the highest credit card market shares accounted for 77% of total credit card balances as of June 2017. In turn, credit card loans accounted for over 10% of each bank's total loan portfolio. According to central bank data, 11 out of Honduras' 15 banks issue credit cards, and of these, eight reported levying credit card interest rates above the reformed law's 54% limit. In some cases, the maximum interest rate charged is substantially higher than the limit, with the median differential 14 ppts. Credit card lending contracted by 1.2% over the first half of this year, down from 2.6% growth over the same period in 2016. The new interest rate ceiling and limitations on fees/charges should further act to weigh on credit card growth and profitability. However, we expect banks to gradually shift lending to other consumer and commercial segments; thus, the reform is not expected to substantively affect overall lending growth, due to low levels of financial inclusion in the country. Fitch projects total system credit growth to come close to 10% this year, with consumer loans accounting for around 25% of this growth. By comparison, total system credit growth was 11.7%, with consumer loans accounting for 38.5% in 2016. Honduras' banking sector has had a negative sector outlook since December 2016, largely as a result of credit deterioration and significant debtor concentration. However, bank credit profiles are supported by stable capitalization and liquidity with moderate loan growth and profitability bolstered by high net interest margins. Contact: Marcela Galicia Director, Financial Institutions Fitch Centroamerica 3er. Nivel 79 Ave. Sur y Calle Cuscatlan San Salvador +503 2516 6616 Guillermo Marcenaro Analyst, Financial Institutions +503 2516 6610 Justin Patrie, CFA Senior Analyst, Fitch Wire +1 646 582-4964 33 Whitehall Street New York, NY Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available on www.fitchratings.com. 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