08:00 | New York (U.S.), Jul. 23.
Highly liquid balance sheets, strong local deposit franchises and limited foreign funding should mitigate direct risks to Latin American (LATAM) bank credit profiles from rising U.S. interest rates, Fitch Ratings says.
However, exposure in the region varies, and tightened liquidity conditions could elevate asset quality and profitability challenges over the medium term.
Rising U.S. interest rates in 2017, and thus far in 2018, have resulted in tightened external liquidity conditions and increased risks for currency depreciation in some major
LATAM economies.
Argentina, and to a lesser extent Brazil, have experienced the greatest external pressures, thus far, while other economies have shown greater resilience.
There are multiple potential risk transmission mechanisms for
LATAM banks from rising U.S. rates. Currency volatility could lead to heightened asset quality risks to banks' foreign currency (FC), or U.S. dollar, loan portfolios, as well as affect access and cost of foreign funding.
More broadly, U.S. monetary tightening could result in domestic monetary tightening if local currency depreciation leads to a spike in
inflation.
Aggressive monetary response can drive a broad-based increase in
credit risk, as the cost of servicing debt in local currency becomes more expensive, which can further reduce the supply of credit and pressure economic growth.
Regional banking systems are generally well-positioned for
Fed tightening under our base case for well-signaled, gradual U.S. rate hikes.
Direct balance sheet risks are mitigated by low rates of dollarization in most countries, limited reliance on foreign funding and/or limited currency asset liability mismatches for most major banking systems.
For the six largest LATAM countries in the region, Brazil, Mexico, Argentina, Colombia, Chile, and Peru, the direct effect of currency depreciation on banks' FC-denominated loan portfolios is limited because of low asset-liability mismatch and generally low dollar loan exposure.
However,
Fitch notes asset quality could come under some pressure for countries with higher levels of FC lending, as it becomes more difficult for borrowers that are not FC generators to service loans.
All major banking systems have sufficient liquid assets to more than cover all outstanding gross external debt. Even if external market financing becomes more challenging LATAM banks in the countries previously mentioned should have sufficient liquidity without affecting their overall credit profiles.
Ratings for LATAM banks will likely remain closely tied to Sovereign Ratings, as most of the largest banks in the region are rated at, or above, the level of the sovereign, or in the case of state-owned banks are based on sovereign support.
Fitch has a Stable Outlook for the Sovereign Ratings of the six countries in this report. However, if material deterioration arises in the macroeconomic environment for these countries, it could negatively affect our sector outlooks.
Currently, none of the banking sector outlooks for the countries covered in this report are negative.
(END) NDP/RMB
Published: 7/23/2018