Latin America Banking Sector

While in 2020 and in the first half of 2021 the expansion of the banking sector’s loan portfolio was prompted by government-sponsored programmes aimed at providing credit support amid the pandemic, loan growth in 2022 came from an increase in demand for loans by households and corporations following the economic recovery that started in 2021. In 2022, a healthy labour market led to a recovery in employment and real wages that spurred consumption and hence household demand for retail loans, while in the corporate segment, credit to small- and medium-sized companies (SMEs) continued to expand rapidly. However, as headline inflation surged well above the Central Bank’s target band, the financial authority embarked on an aggressive, hawkish monetary policy, taking the SELIC policy interest rate up to 13.75% by mid-2022, increasing the cost of credit for borrowers. This widened the net interest spreads for banks, helping institutions in the financial system to keep their profit margins high.

During 2022, economic activity in Mexico continued its gradual recovery process, with GDP reaching levels similar to those of Q4 2019, prior to the pandemic. As a result, banks’ loan portfolios increased by 12.4% y/y as of December 2022. In particular, consumer and mortgage loan portfolios rose by 14.4% y/y and loans to non-financial corporations went up by 12.5% y/y. The recovery of credit, as well as the increase in interest rates as part of a tight monetary policy, were reflected in an increase in financial margins. Profitability improved, with the banking system’s return on equity (ROE) and return on assets (ROA) ratios rising by 3pp y/y to 17.6% and by 0.3pp y/y to 1.9%, respectively, as of end-2022. Higher interest rates also increased demand for term-deposits in an attempt by investors to seek higher returns. The banks’ capitalisation and liquidity remained strong given that the system’s capital adequacy ratio (CAR) and liquidity coverage ratio (LCR) ended 2022 at 19% and 289.2%, respectively. However, the high inflation that has eroded households' purchasing power and reduced companies’ profits, as well as a surge in interest rates, is expected to lower credit demand and cause a rise in the share of non-performing loans (NPLs).

Argentina’s economy performed better than expected in 2022, explained by increased consumption and recovery of most affected sectors during the pandemic. Loan portfolio to the non-financial sector rose by 66.7% y/y to ARS 6,764.7bn as of December 2022. The Central Bank continued to support credit to SMEs by extending the Credit Line for Productive Investment programme until March 2023. However, in real terms, loan growth has been depressed due to high inflation, macroeconomic uncertainty and a cautious lending approach by banks. With respect to funding, term deposits exhibited an upward trend due to higher interest rates, as the Central Bank increased its reference rate from 38% at the end of 2021 to 75% as of December 2022. The banking sector’s profit margins remained positive with an ROE and ROA of 11.4% and 2.7% as of December 2022, respectively. The sector maintained high liquidity and adequate regulatory capital metrics to deal with high volatility.

In the first half of 2022, Colombia’s financial sector continued to consolidate the recovery that began in 2021, following the shock of the COVID-19 pandemic. The loan portfolio has gained traction, increasing by 16.7% y/y as of December 2022, due mainly to household consumption. The decrease in non-performing loans, in line with robust economic growth, allowed banks to reduce their provisions expenses. Additionally, the Central Bank has tightened its monetary policy to mitigate high inflationary pressures, which increased the intermediation margin, giving an additional boost to the profitability of the industry. Regulatory authorities and entities have continued to migrate to the Basel III Framework, reflected in the robustness of the sector. As of November 2022, solvency stood at 18% and the liquidity risk index reached 176%, well above the regulatory minimums of 9% and 100%, respectively.

Chile’s banking sector is well developed and has a level of credit penetration in line with that of high-income countries. Chile’s real GDP increased by 2.8% y/y in 2022, above the Central Bank’s projection of a 2.4% y/y rise. The industry’s loan portfolio rose by 10% y/y as of December 2022, mainly explained by consumer and mortgage loans. Profitability also recovered, due to low provisioning needs and improved margins, with the sector’s ROE increasing by 4.4pp to 21.1% at the end of 2022. Delinquency remained low, with some signs of deterioration in the consumer loans portfolio. The sector displayed high levels of liquidity and solvency and has improved its measures of capital adequacy since 2021, in preparation for the transition towards the full adoption of the Basel III framework. The Central Bank has also strengthened its monetary policy, increasing the reference rate to 11.25% as of December 2022. Therefore, term deposits rose by 39%, while current and saving accounts decreased by 16.6% y/y and 29% y/y, respectively, as of end-2022.