Loans, investments and consumer confidence show growth in the face of challenges; Bank fundamentals generally remain solid.
Moody's Ratings has published its outlook for the banking systems of Argentina, Brazil, Chile, Colombia, Mexico and Peru. The findings provide an account of the current and future conditions of the banking sectors in these markets over the next 12 to 18 months, and areas of stability and potential growth are analyzed.
“The outlook for Latin American banking systems is diverse and reflects the unique economic and operational conditions of each country. Overall, we see a positive trend in loan growth, asset quality, gradual rebound in investments in the region and consumer confidence that will support banking operations in 2024.
However, some countries face challenges, despite largely positive economic dynamics, generated by factors such as inflation and policy changes. Despite these challenges, banks' financial fundamentals generally remain solid, supported by strong profitability, adequate capitalization and high liquidity reserves,” said Ceres Lisboa, associate managing director at Moody's.
Brazil's banking system maintains a stable outlook, with real gross domestic product (GDP) growth expected to slow to 2.0% in 2024, from 3.0% in 2023. Brazilian consumer confidence and Borrowers' debt-paying ability will be helped by inflation within the central bank's target range, favorable labor markets, and loosening monetary policy.
The operating environment for banks will remain stable as improving macroeconomic conditions will offset slow economic growth. Portfolio quality will continue to gradually improve, and consumer loan delinquencies have decreased since the end of 2023, thanks to banks' disciplined risk policies and high reserve coverage.
The outlook for the Mexican banking system changed to positive from stable, due to improved operating conditions and increased business volumes. Bank profitability is expected to continue benefiting from strong loan growth and lower funding costs, despite investments in digitalization and increased provisioning needs.
Additionally, the positive outlook reflects how portfolio expansion will benefit from growth in nearshoring-related activities and increased consumer confidence. The outlook for the Chilean banking system remains stable, with a gradual improvement in loan quality driven by falling inflation and lower rates.
Real GDP growth is expected to reach 2% in 2024 and 2.3% in 2025, against unchanged growth
2023. The implementation of Basel III favors Chile's capitalization levels. The outlook for the Colombian banking system remains stable, although our projection for banking operations remains challenged by a second consecutive year of below-trend economic growth, while inflation and interest rates take longer to decline compared to peers in the region.
Operating conditions will continue to put pressure on asset quality and profitability, although we expect them to remain stable after deterioration in 2023. The outlook for the Peruvian banking system remains stable, supported by gradual improvement in asset quality dynamics. portfolio and higher loan growth, despite the weak economic recovery in 2024.
A more moderate El Niño will limit credit losses, but political risks remain. Banks will focus on expanding lower-risk secured retail lending, including payroll loans and mortgages, while commercial lending should rebound as the economy recovers.
towards the end of 2024.
The outlook for the Argentine banking system remains negative due to severe operating conditions that restrict profit generation potential and banking activities. The expected recession, rising inflation in 2024 and the new government's ambitious reform agenda will impose significant implementation risks.
Changes in monetary policy, including recent interest rate cuts, will pressure margins and profitability overall, albeit from record highs in 2023. Despite these negative trends, banks' financial fundamentals remain relatively stable. solid, protected by strong capitalization, positive inflation-adjusted profits and high liquidity reserves, both in local and foreign currency.
