Full crisis fallout on Central America banks? It’s a waiting game

Coronavirus fallout is hitting banks in Central America and Dominican Republic – but the true extent of the impact may not be seen for months to come.

Lenders in the subregion, as across the rest of Latin America, have implemented loan relief measures which have largely shielded metrics for now.

Operating environments – impacted by domestic lockdowns and global spillovers through trade, tourism and remittances – will weigh on banks and as the terms of relief schemes end, the full impact of the crisis will likely be revealed.

“In many countries, this deterioration in the loan portfolio and bank profitability will be seen more towards the end of 2020 and even 2021,” Rolando Martínez, a Fitch senior director, said during a webcast hosted by the rating agency.

The pandemic barreled into Central America at a particularly unfortunate time. 

Governments were already struggling to balance the books. Reduced tax collection rates stemming from the economic disruption wrought by the pandemic, combined with greater spending demands, has piled on the pressure. Fitch has a negative outlook on five out of six sovereigns in the subregion.

On the banking system rating front, in March, as the coronavirus storm clouds started gathering, Fitch revised to negative the outlook for all banking sectors in the subregion – a move it had already executed for Costa Rica and Panama.

“Our outlook on the performance of the economy, the macroeconomic dynamism, and the performance of the sovereign ratings has had a direct effect on the outlook for the international ratings of the banks and the actions Fitch has taken in the past five months,” Martínez said.

“The financial performance of banks … will be impacted by the economic contraction of 2020, an increase in unemployment, the prolongation of business disruption, among other factors,” he said.

Fitch forecasts the subregion to contract 5% this year, a smaller deceleration than estimated for Latin America as a whole, which the IMF expects to contract 9.4%.

A light amid the gloom is stronger foreign reserves, although countries are still exposed to shocks delivered through the tourism and remittances channels.