Nonconventional policy responses and regulatory forbearance programs of Latin American (LatAm) governments and central banks to address the ongoing economic fallout from the pandemic have been supportive of the stability of regional banking systems, Fitch Ratings says.
However, the operating environment is expected to remain challenging over the medium term, as sector-wide measures to defer debt payments expire and losses normalize. This will continue to pressure credit costs and reduce profitability as provision levels remain elevated.
A resurgence or new coronavirus variants or a delay in the vaccine’s rollout could derail emerging market recoveries and pressure financial metrics. The majority of LatAm bank ratings remain constrained by either sovereign ratings or country ceilings.
Governments and central banks in countries such as Brazil, Chile, Colombia and Peru have been offering comprehensive fiscal and monetary measures, along with prudential and other banking system support.
These measures should allow for faster improvement in credit growth and lower pressures on profitability amid the region’s gradual economic recovery while helping to maintain banking systems’ liquidity and ability to extend credit by facilitating access to capital and stability of funding costs.
Fiscal and monetary support has had a significant influence on LatAm economic recoveries, affecting bank balance sheet capital, liquidity, loan growth and NPL levels. Temporary relaxation of liquidity requirements and the delayed implementation of prudential standards as well as the use of capital buffers in advanced Basel III economies have also been supportive of banking system credit.
While government support and policy responses have varied by country, loan forbearance programs have generally included deferrals or holidays for clients otherwise current on their payments.
There has also been a temporary relaxation of regulatory requirements in terms of loan classifications and/or past-due status and the ability to delay provisioning expenses.
