The American consulting firm assures that the average non-performing portfolio of consumer loans in the region, 3.3% in December 2023, is likely to decrease in the next 12 to 18 months.
According to a recent report by US consultancy Moody's, Latin American banks saw credit default rates rise in 2023, while consumer loans led the deterioration. Likewise, inflationary pressure and high interest rates between 2020 and 2022, at a time of recovery in consumption, contributed to the increase in household debt.
However, in most countries, these macroeconomic conditions are approaching historical norms and, together with stricter lending criteria for banks, we expect stability or an improvement in portfolio quality in the region in the next 12 to 18 months, although progress in this credit cycle varies from country to country.
Business conditions have improved, except in Colombia and Panama:
Inflation, the main source of pressure on consumer budgets since 2021, has decreased in most countries and is within or near central banks' target bands.
This paves the way for greater monetary flexibility in the region, which has already made progress in its implementation in the global context. Positive news on labor markets, except in Chile, and the gradual increase in investment, particularly in Mexico with nearshoring , have increased local demand for credit and banking volumes.
However, banks are likely to experience more adverse conditions in Colombia and Panama, where a slower economic rebound and disinflation pose potential difficulties for the recovery of trading volume and credit performance.
The quality of personal credits will improve:
Moody's projects that advances will be driven by stricter criteria for granting loans from banks from mid-2022 and by the increase in household disposable income. The region's average nonperforming consumer loan portfolio, at 3.3% in December 2023, is likely to decline over the next 12 to 18 months.
However, in Colombia and Panama, macroeconomic factors hinder a similar improvement. In Mexico, accelerated growth in riskier consumer loans and exposure to government-related entities, including Petróleos Mexicanos (Pemex, B3 negative), could offset the benefits of a more favorable operating environment.
Small and medium-sized enterprises (SMEs) will be a cause for concern as they remain susceptible to higher rates for longer. In Brazil and Peru, where banks are more exposed to smaller companies, government guarantees should help minimize losses in the event of default.
A lower provision for credit losses and a gradual rebound in credit appetite will increase profitability:
The consulting firm maintains that banks' appetite for granting loans is recovering as new crops of credit improve their quality. Lower rates will gradually boost corporate capital expenditures and demand for long-term loans.
Provisioning needs over the next 12 to 18 months will decline amid more favorable risk conditions, while banks will maintain strong credit loss reserve coverage to protect against unexpected losses.
