SAN SALVADOR, El Salvador--(BUSINESS WIRE)--Central American bank credit growth is decelerating in line with the downward revision of GDP forecasts, with Fitch Ratings forecasting seven percent growth by year end, according to a new report.
'Credit expanded between six and 12 percent in real terms year over year in five countries, while credit growth in Honduras lagged its peers at 2.2 percent,' said Edgar Cartagena, Director, Financial Institutions. 'A challenging operating environment and stronger inflationary pressures are key factors underlying the credit slow-down.'
Profitability remains sound but on the decline except for El Salvador and Nicaragua. The region's return on average assets should approach 1.4 percent toward the end of 2013, slightly below the 1.6 percent growth in 2012. Increased funding costs and slowing credit growth will limit further advances in profitability. Operating efficiency improvements will not be sufficient to compensate for declining profitability metrics.
Banks' funding costs may continue increasing due to upward adjustments in the international rates, coupled with governments' larger needs for local financing. Higher liquidity reserve requirements in El Salvador and Honduras resulting from the electoral cycles, and changes in Costa Rica's foreign currency risk management given new regulations, should affect the costs of funds in those countries.
As of June 2013, funding costs increased in five of the region's banking systems, ranging from 13 to 112 basis points year over year. Funding costs were the lowest in Nicaragua, El Salvador and Panama.
Credit quality should remain good despite decelerating credit dynamics forecasts. Delinquency ratios continued declining across the region, where nonperforming loans represented less than three percent of total loans. Loan impairment reserves cover past-due loans comfortably, with the exception of state-owned banks in Costa Rica.
Capital remains sound across the region, with El Salvador and Costa Rica boasting a strong equity base. Bank capitalization in Guatemala has remained stable, albeit lagging the regional average, while high asset growth has diminished Panama's capital ratios, particularly in medium and small banks, where equity position is relatively lower.
For more information, a special report titled 'Central American banks Profitability Under Pressure Despite Strong Balance Sheets' is available on the Fitch Ratings web site at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Global Financial Institutions Rating Criteria', Aug. 15, 2012.
Applicable Criteria and Related Research: Central American Banks Profitability under Pressure Despite Strong Balance Sheets
Global Financial Institutions Rating Criteria