• Latin American banks are indirectly exposed to the failures of Silicon Valley Bank and Signature Bank, which will increase risk aversion among institutional investors.
• S&P Global Ratings doesn't expect the rated regional banks to have a direct exposure to these two entities, nor do we rate local lenders with similar challenges.
• Major banks in the region benefit from stable retail deposits and sound franchises that should mitigate deposit volatility, but smaller and concentrated financial institutions and fintechs may suffer from the flight-to-quality effects.
• Asset quality deterioration due to sluggish economies and high interest rates remain the key risk for banks in Latin America.

The failures of Silicon Valley Bank and Signature Bank have no immediate impact on the ratings on Latin American banks. However, we could see the indirect effect--in the form of the institutional investors' increasing risk aversion--result in higher funding costs and scarce funding for the regional financial institutions. Such trends were already present across Latin America's banking sectors, but recent U.S. banking troubles will amplify them.

Local banks don't have material direct exposures to Silicon Valley Bank and Signature Bank, and none of the regional rated banks has a similar business structure or vulnerability to those of the two lenders. Latin American banks' exposure to unrealized fair value losses on their bond portfolios is manageable. Many invest their liquidity in sovereign bonds and in central bank notes at variable rates, generally linked to inflation. Therefore, the interest-rate risk tends to be contained. Moreover, local banks usually use hedges to cover for this risk. This is mainly because Latin American economies tend to be very volatile. As a result, banks in the region are usually less exposed to this kind of risk, especially those operating in economies that are more exposed to volatility.

Even though local banks are mainly funded by retail deposits, they still suffer from the tightening access to capital markets, as it lifts interest rates. However, refinancing risk in the short term is limited. We note that tech disruption and brokerage platforms allow clients to shift their deposits rapidly, which can heighten deposit competition and volatility. The mitigating factor is that deposits at those platforms are typically term deposits and individuals can't withdraw their investments until they mature. We consider that Latin America's major banks have sound franchises, which should support their funding profiles. Given concentrated funding profiles of smaller local financial institutions and fintechs, they may be more exposed to these pressures and subject to the flight-to-quality effects.

Challenging economic conditions in Latin America represent a major risk for local banks, in our view. S&P Global Ratings believes interest rates will stay high for a longer period than markets expected. Access to global capital markets has narrowed, while local banks tighten their underwriting practices. In addition, persistent inflation, higher financing costs, and limits on passing on those costs to prices represent a significant challenge for corporate borrowers' future performance. As a result, we expect regional banks' asset quality to deteriorate. Moreover, weak economies are squeezing consumers' disposable income, which will further pressure banks' asset quality.

Banks initially expected the pandemic to erode asset quality, but that didn't turn out to be the case, while their profitability improved sharply. This was due to the governments' extraordinary measures to support the economy. As such, the banking industry boosted lending to take advantage of high liquidity in the market, business opportunities, and sizable provisions banks have set aside during the pandemic. In our view, strong industry competition somewhat delayed banks' reaction to changes in economic and credit cycles. Fierce competition from fintechs also increased during the period of low interest rates, particularly for some products such as credit cards, while banks responded to competition by expanding their digital platforms and establishing partnerships with digital players. However, despite strong lending growth in the past few years, we believe that Latin American banks are well prepared to face external shocks thanks to their high provisioning and robust regulatory capital levels.

Related Research

• European Banks See Limited Contagion Risk From SVB, March 14, 2023
• Rated U.S. Banks Haven't Seen Widespread Deposit Outflows But Uncertainty Continues, March 14, 2023
• The Fed's Plan For U.S. Banks Should Reduce Contagion Risk, March 13, 2023
• Credit FAQ: How Unrealized Losses On Securities Affect U.S. Bank Ratings, Dec. 13, 2022