SUMMARY
Strengthened Financial Performance:
The banking systems of Central America and the Dominican Republic (hereinafter the region) will continue to strengthen their financial performance as the region continues to recover its rate of GDP growth, estimated at about 4% by 2012 under Fitch’s baseline scenario. Further expansion of credit, combined with less need to establish provisions for bad loans would spur growth in bank profits.
Moderate Growth Loan:
Fitch anticipates moderate growth in credit in 2012, led by locally owned banks. The banking systems that are most likely to exhibit higher growth are those whose countries have improved economic prospects. In this regard, the growth of the banking systems in Panama, Costa Rica and Guatemala stand out.
Stabilized Loan Quality:
Having absorbed nearly all impaired loans resulting from the last global financial crisis, banks will continue to have improvements in the quality of their loans in 2012. However, some banks in Costa Rica and the Dominican Republic could continue to have relatively high portfolio deterioration in the coming months, as relevant exposures remain in sectors where payment behavior may show irregularities.
Sensitivity to the Global Environment:
Although it is not Fitc’s baseline scenario, a relapse of major advanced economies, particularly the United States, would weaken the projected credit growth and put pressure on bank's profits in the region due to an increase in loan loss provisions. However, neither the stability nor the solvency of the banking system is threatened. In general, banks in the region are better prepared to face adverse conditions having stronger economic indicators, ample liquidity and predominantly domestic funding.
Regulatory Developments:
The regulatory frameworks of the region's banking systems continue gradually moving towards adoption of international best practices, driven by more proactive regulators in the area. In 2012 reforms could be adopted in Guatemala, which is important because it would bridge the gap in regulations of this country compared to the rest of the region.
Stable Rating Outlook:
The vast majority of international and national ratings of banks in the region remain unchanged, although it is possible that there are movements in both directions on the ratings of some banks.
What Could Change the Perspective
Weakening of the International Environment:
A more substantial deterioration in the operating environment than expected, materially impacting the financial profile of the banks, could result in some changes in the outlook. However, similar to that observed in the period 2008-2009, the changes would be limited to a small number of banks.
Source: Fitch Ratings Centroamerica
More on this topic
August 2008
In Fitch's opinion (in the Special Report), the complex economic environment in the region is starting to have an effect on the performance of the banks in Central America.
"Results for the first half of 2008 indicate that the slump in the economy and the increase in inflation have weakened the quality of bank assets," indicated the report.
September 2011
Fitch Ratings has issued a special report entitled, "Central American Banking: After the Crisis, a Disparate Evolution"
In Fitch's opinion the banks have shown a mixed performance in Central America during the period of the global financial crisis. At the same time, banking systems have dissimilar perspectives on future performance, reflecting different economic growth prospects in the region.
March 2012
Fitch Ratings believes that improving the level of efficiency in the banking system would result in a notable increase in profits.
The required improvements in efficiency in the banking systems in Central America could have a positive impact on earnings, on the internal generation of capital and, ultimately, on risk ratings, according to a report by Fitch Ratings.
September 2009
Fitch Ratings issued a special report: "Central American Banking: Evolution of the Crisis and Learnt Lessons".
In Fitch's opinion, the negative impact the international crisis had on Central American banks was very evident in 2009. The current economic context poses growing risks for the sector, as well as an important challenge for this year.
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