Key Takeaways

• Negative outlooks now represent 30% of total ratings, and include mainly among Chilean, Colombian, and Panamanian banks.
• We expect asset quality to start recovering next year, profitability to weaken but remain sound, and the lending growth pace to remain modest.
• Brazil's southern state Rio Grande do Sul was recently hit with devastating floods, the impact of which on local banks' operations is too early to assess.
• The delay in U.S. monetary policy easing will continue to pressure LatAm borrowers.

Negative outlooks now represent 30% of total ratings, mainly among Chilean, Colombian, and Panamanian banks.   This ratio is lower than 40% in Q1 2024, but this is because of the negative rating action we took on six Peruvian banks on April 26. As a result, the outlooks on these entities are now stable. The rating actions on these financial entities follow our downgrade of Peru. We expect Peru's complex political landscape will persist in the run-up to the next presidential and Congressional elections. This, in turn, limits the government's capacity to implement more timely policies to boost the investment and economic growth outlook, in our view.

Solid profitability, due to a diversified business mix, and sizable levels of government bonds with high yields and margins enable banks to withstand credit cycles and wider credit losses.   Banks continue to maintain high provisioning coverage ratios, which help mitigate the impact of weakening asset quality metrics. Lower interest rates will pressure banks' margins and profitability but should remain sound compared with those of international peers, thanks to still healthy margins and recovering asset quality metrics.

Asset quality metrics have deteriorated across the region due to the soft economic performance, low credit growth, and pressure on the consumer and small and midsize enterprise (SME) lending segments.   Persistently high interest rates continue to take a toll on borrowers. Interest rates have come down in some countries like Brazil and Chile, but they remain high, while those in other countries of the region only dropped slightly. We expect asset quality metrics to stabilize by the end of this year and start improving in 2025 because of banks' conservative strategies during the past two years and as interest rates continue to fall.

We expect the lending growth pace to remain at single digits.   We expect a pickup in credit demand in the corporate sector once interest rates fall to affordable levels. But banks will likely continue to pursue conservative underwriting practices, given the tepid pace of asset quality stabilization. SMEs' credit quality is strained as internal demand remains modest, given the persistently inadequate flow of credit to these entities and high interest rates, as they typically are charged a higher cost of borrowing than that for large companies. And during periods of asset quality deterioration, the access to credit is further restricted.

Although it's too early to assess the full impact of flooding in southern Brazil, we believe the damage will be material and could hurt banks' asset quality, but losses for insurers should be contained.   We think there could be a significant fallout for the state's agricultural and services industries, private property, and public infrastructure. We also anticipate risks for SME and consumer loans, and credit cards. Rio Grande do Sul's agricultural sector is important for Brazil, and it has faced several recent setbacks. Overall, Rio Grande do Sul generates 5.9% of Brazil's GDP. The state's agricultural sector contributes about 69% of the country's total rice production and 8.6% of soy production. In addition, dairy products from the state represent 12.9% of Brazil's production, and Rio Grande do Sul accounts for 4.6% of the nation's livestock.

We placed our ratings on Banco do Estado do Rio Grande do Sul S.A. and Banco Cooperativo Sicredi S.A. on CreditWatch with negative implications because both have significant exposure to a flood-damaged area.   The CreditWatch placement reflects our view that the direct and indirect effects of flooding on the two banks are still unclear. In addition, we think there could be adverse implications for other Brazilian banks and insurance companies. However, the impacts may turn out to be nonmaterial or there could be mitigating factors that offset a deterioration in their business fundamentals. We estimate that the Brazilian banking system's exposure to the state is 7%-10%, and we will keep monitoring the quality of loans granted to borrowers in the flood-damaged area.

Growth paths will diverge across the region.  We project GDP growth in the region (excluding Argentina) to moderate to 2.0% in 2024 from 2.4% in 2023. Brazil and Mexico were the growth outperformers in 2023. We expect activity in both countries to decelerate in 2024, but still remain relatively strong, keeping the GDP growth pace above potential in both economies. Conversely, Chile, Colombia, and Peru were growth underperformers last year. We expect an improvement in growth in these economies this year, although GDP expansion will remain below potential. The macroeconomic outlook for Argentina

is highly uncertain as the new administration attempts to implement an aggressive fiscal adjustment, among other measures. We expect this will lead to a deep economic contraction this year, followed by a rebound in 2025.

Table 1

S&P Global Ratings now believes that conditions for a monetary policy easing by the Federal Reserve won't be in place before autumn.   The Fed won't cut rates until it sees several consecutive readings of slowing month-over-month core inflation, in our view. Therefore, its first rate cut will likely come in December--several months later than we had previously forecast.

Some of that data points to the underlying momentum of the U.S. economy, which remained robust in the first quarter. At the same time, the Fed's preferred inflation gauge--the personal consumption expenditures price index--pointed to a reversal of the disinflationary momentum last year. Inflation readings from the last three months likely overstate the remaining excess inflation, but they still lower our confidence in a Fed rate cut happening before autumn--especially given the upside risk to our inflation outlook due to strong consumer demand. Lingering high interest rates in advanced economies will likely undermine the ability of LatAm central banks to further ease their monetary policy. Persistently high interest rates could undermine credit conditions for LatAm borrowers. As a result, banks' asset quality metrics and bottom-line profits could suffer.

As we had expected, LatAm banks continued issuing hybrid instruments.   The market has renewed its appetite for hybrid issuances, and LatAm banks are taking advantage. For example, Banco del Estado de Chile issued the $600 million 7.95% perpetual notes in April 2024. We rated these additional Tier 1 notes at 'BBB-', four notches lower than the bank's 'a' stand-alone credit profile. Hybrid instruments offer higher yields amid falling interest rates, but their features make them less favorable for investors than senior debt. We expect LatAm banks will continue to benefit from improved regulatory capital metrics. In addition, Chilean and Mexican banks will benefit from interest repayment not affecting profitability metrics, as it isn't reflected in the profit and loss statements.

Table 2

Selected Research

Commentaries

• Mexico's New Administration Faces Old Challenges, June 3, 2024
• Banking Industry Country Risk Assessment Update: May 2024, May 30, 2024
• Latin America Sector Roundup Q2 2024: Signs Of Slipping Credit Quality, May 15, 2024
• Uruguayan Banks Are Headed For Continued Solid Performance In 2024, May 16, 2024
• Your Three Minutes In Banking: Brazil Floods Could Take A Toll On Local Banks, Less So On Insurers, May 13, 2024
• Your Three Minutes In Banking: Brazil Floods Could Take A Toll On Local Banks, Less So On Insurers, May 13, 2024
• Your Three Minutes In Banking: Reasons Behind The Surge Of Hybrid Instrument Issuance In Latin America, April 8, 2024
• Mexico's Banks Are Well Positioned As Its Central Bank Starts Cutting Rates, March 21, 2024
• Global Shadow Banks Face Scrutiny As Risks Rise, March 20, 2024
• LatAm Financial Institutions Monitor Q1 2024: Fragile Asset Quality Stabilization Amid Sluggish Economic Recovery, March 5, 2024
• Large Brazilian Banks' Performance Varied In Stormy 2023, March 5, 2024
• Downside Risks Abound For Financing Companies In 2024, Feb. 19, 2024

Research updates

• Banco Mercantil Santa Cruz S.A. 'CCC+' Credit Rating Withdrawn At Issuer's Request, May 29, 2024
• Costa Rica's Banking Industry Country Risk: Economic Risk Trend Revised To Positive On Stabilizing Asset Quality, May 23, 2024
• Bladex 'BBB/A-2' Ratings Affirmed On Resilient Asset Quality Despite Uneven Credit Conditions; Outlook Stable, May 22, 2024
• Banco Cooperativo Sicredi Ratings Put On CreditWatch Negative Following Floods' Uncertain Impact On Cooperative System, May 9, 2024
• Banco do Estado do Rio Grande do Sul S.A. Ratings On CreditWatch Negative On Uncertain Impact From Floods On The Bank, May 7, 2024
• Operadora de Servicios Mega Downgraded To 'CCC-' On Rising Liquidity Pressures; Outlook Negative, May 7, 2024
• Nu Financeira S.A. Upgraded To 'BB' And 'brAAA' On Lower Competitive Risks; Outlook Stable, April 30, 2024
• Six Peruvian Financial Institutions Downgraded Following Same Action On Peru; Outlooks Stable, April 26, 2024
• Banco del Estado de Chile's Proposed Perpetual Notes Rated 'BBB-', April 23, 2024
• Banque Heritage (Uruguay) Upgraded To 'BB' From 'BB-' On Various Improvements; Outlook Stable, April 12, 2024
• Corporacion Financiera de Desarrollo's Proposed Senior Unsecured Notes Rated 'BBB-', April 11, 2024
• Banco de Galicia y Buenos Aires S.A.U.'s Planned Acquisition Of HSBC Bank Argentina S.A. Would Expand Credit Operations, April 20, 2024
• Argentine Banks Global Scale Ratings Raised To 'CCC' From 'CCC-' On Similar Sovereign Rating Action, Outlook Stable, March 15, 2024
• Banco BBVA Perú's Proposed Subordinated Notes Rated 'BBB-', Feb. 29, 2024

Economic, sovereign, and other research

• Insurance Industry And Country Risk Assessment: Mexico Life, May 16, 2024
• Insurance Industry And Country Risk Assessment: Mexico P/C And Health, May 16, 2024
• Latest Banking Industry Country Risk Assessment For Argentina Published, May 10, 2024
• RFC Process Summary: RFC Process Summary: Risk-Adjusted Capital Framework Methodology, April 30, 2024
• Guatemala Positive Outlook Revision Won't Immediately Affect Banking Industry Country Risk Assessment And Rated Banks, April 19, 2024