Moody’s Guardedly Positive on Central American Banks

Continued economic growth will benefit banks in Central America, but the region’s dependence on the still-moderate US recovery, high dollarisation and high levels of inequality and economic informality still remain key risks, says Moody’s Investors Service.

The credit ratings agency (CRA) makes the assessment in its report entitled
‘Banks in Central America Should Benefit from Continued Economic Growth, but Risks to Stability Remain.’

“Banking systems in Central America remain small and underdeveloped, but lenders have managed to strengthen their franchises in recent years despite persistent economic vulnerabilities and generally weak public institutions,” said report author Georges Hatcherian, a Moody’s banking analyst.

“We note that key risks for banking performance in the medium term include the region’s dependence on a still moderate US economic recovery, high levels of financial dollarisation and the challenge of extending credit in highly informal economies.”

Nevertheless, the still-moderate depth of the region’s banking systems presents opportunities for growth, added Hatcherian.

Moody’s currently rates 10 banks in five Central American countries, including Costa Rica, the Dominican Republic, El Salvador, Guatemala and Panama. Systems in the region are shallow and economies are limited by large informal productive sectors and comparatively weak legal systems, says the CRA.

“While Central American economies are well prepared for tightening global liquidity, high dollarisation in the banking systems limits the efficacy of monetary policy,” said Ariane Ortiz Marrufo, a Moody’s sovereign analyst. Some banks in the region are more sensitive to refinance risk as interest rates increase, the CRA notes.

The region’s bank loan portfolios have historically been corporate-focused, but now banks are increasingly lending to retail customers, which will create significant growth opportunities albeit with higher risk, says Moody’s. The CRA expects lending to increase by around 10% on average over the coming year, as banks attract new customers into the formal banking system.

Currently the region lags its neighbors with only 33% average total lending of gross domestic product (GDP), compared to Latin America’s already low 40%, says Moody’s.

Panama stands apart, as it benefits from its status as an international US dollar banking centre. “GDP growth generally remains below the levels seen prior to the 2009 crisis, but has been steady in most countries for the past four years,” adds Marrufo. Moody’s expects regional economic growth to average around 4% in 2014.

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