As LatAm staggers, banks may extend loan relief, fatten provisions further

Banks in Latin America may extend borrower-relief programs if circumstances evolve unfavorably, and will likely continue building provisions over the coming quarters as COVID-19 headwinds continue to blow.

These are among the takeaways from a sector report published by rating agency Moody’s.

“Continued contagion and inconsistent stay-at-home measures could lead to a second or third wave of loan renegotiations, with grace periods being further extended to the end of the year or beyond,” the rating agency said.

Banks across the region started introducing the likes of loan repayment deferrals in the first quarter, to support pressured consumers and businesses. Across Brazil, Chile, Colombia, Mexico and Peru, this has protected nonperforming loan ratios, which held largely steady or, in some cases, dipped over the first six months of the year.

The terms of existing borrower-support schemes are ending and as things stand problem loans may only peak by year-end or 1Q21.

Moody’s said that “problem loans will peak in line with economic deterioration” and that further grace periods “will simply push the peak out.”

Fresh borrower-support relief measures may be more targeted at those who continue to struggle with repayment, Moody’s indicated. 

Phasing out of government relief schemes targeted at lower-income segments may also nudge up the needle on the NPL meter. 

Latin American economies are slowly gathering strength and are forecast to see positive growth in 2021, but with output levels taking several years to recover to pre-crisis levels. The crisis has generated a surge in unemployment and poverty. 

Latin American countries are tending to reopen their economies and global demand for their commodities and manufactured products has picked up. Countries that have used heavy fiscal stimulus measures to support companies and homes are forecast to recover faster.   

Meanwhile, other key risks on the radar are a potential spike in infection rates as countries ease restrictions, a new wave of social unrest and stronger global trade tensions, all of which may dampen Latin America’s economic prospects and erode already stressed fiscal metrics.

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World Bank chief economist Carmen Reinhart warned recently that banks could close their lending taps, creating headwinds for nascent economic recoveries.

Meanwhile, Moody’s estimates that banks in Brazil, Colombia and Peru will continue pressing the provisions button.

“Because the effects of the economic downturn are unlikely to end soon, we expect banks in these countries to continue to build provisions in the coming quarters, in line with expected loss models and potential revisions to the macroeconomic outlook,” it said.

Latin American banks are generally solid, profitable outfits. Systems with greater exposure to higher-risk portfolios, such as unsecured consumer loans or those with weaker credit quality metrics entering the crisis could face most pressure. 

In its latest results call, regional heavyweight Scotiabank said the bulk of its almost US$1bn provisions hit corresponded to unsecured consumer loan books in Peru and Colombia.

Scotiabank CEO Brian Porter said at the time that the bank was “very well provisioned” and that it had “factored in” possible delinquencies associated with customers exiting loan support programs and the like. 

Data as of June 2020. Source Moody’s

Brazil

Problem loan ratio: 2.9%

Percentage of portfolio corresponding to consumer loans: 38%

Chile

Problem loan ratio: 2.1%

Percentage of portfolio corresponding to consumer loans: 12%

Colombia

Problem loan ratio: 3.3%

Percentage of portfolio corresponding to consumer loans: 30%

Mexico

Problem loan ratio: 2.1%

Percentage of portfolio corresponding to consumer loans: 18%

Peru 

Problem loan ratio: 2.6%

Percentage of portfolio corresponding to consumer loans: 17%