How Paraguay's banks are weathering the COVID-19 crisis

Paraguayan banks are forecast to benefit from an improving economic backdrop as central bank relief measures cloud the landscape in terms of asset risk and profitability metrics.

The country, a producer of agricultural commodities, escaped largely unscathed from 2020 pandemic fallout in terms of headline GDP impact, as an uptick in prices for its exports in the second half of the year helped offset weaker consumption.

Moody’s estimates the that grain and beef producer's economy contracted 1% in 2020 and that it will grow 4.5% this year, supported by commodity price strength.

In comparison, the IMF estimates Latin America contracted 7.0% last year  

Paraguayan banks saw loan growth of about 7-8% in 2020.

“That could easily be repeated or exceeded this year,” Moody’s assistant vice president Farooq Khan told BNamericas.

In a Paraguay banking sector outlook report, the agency said: “High agricultural commodity prices and recovery in other sectors will drive greater demand for credit and bank services. Competition among banks will be strong.” 

Interest rates are expected to remain at or around 0.75%.

Meanwhile, profitability is expected to remain stable at 2020 levels, but extensive use of provisioning deferrals – among measures announced by the central bank to support lenders amid the crisis – clouds detailed assessments.

On March 25, the central bank extended loan restructuring and provisioning measures for banks by an additional six months to year-end 2021, Moody’s said.

Under a June 2020 measure, banks were told all new loans could be provision-free for 18 months, with provisions recognized over the following 60 months.

As of January this year, 18% of Paraguayan banks' total loans on their balance sheets were under the central bank’s special measures and these could be restructured again.

“For us, it really obfuscates everything in terms of asset risk and profitability when we analyze these banks,” said Khan. “Certain banks have been provisioning as it were normal, some banks haven’t.”

The net income/tangible assets ratio of Moody’s-rated Paraguayan banks was 1.20% in 2020, down from 1.66% in 2019.  

In 2020, the problem loans/gross loans ratio stood at 2.12%, up from 1.97% in 2019 and 1.85% in 2018.

As of February, the banking sector NPL ratio was 2.67%. The ratio was 2.36% in the general crop segment, 1.50% in the cattle segment and 1.18% in the construction segment, according to central bank data. Ratios were highest in the retail sales and consumer segments, at 5.00% and 5.27%, respectively, in line with an historic trend.

Paraguay’s banking system is shrinking in terms of participants. BBVA Paraguay is merging into Banco GNB Paraguay, a process that could be completed this year. The US$250m deal between the foreign bank units was unveiled in August 2019 and deal closure was announced in January. 

BBVA has also pulled out of Chile and last year announced the sale of its US unit for US$11.6bn. 

Paraguay is home to 17 banks (set to drop to 16 following the completion of the merger). As of February, the system had a loan portfolio of 100tn guaraníes (US$15.5bn), according to central bank data. Total assets stood at 163tn guaraníes.

BBVA had a loan portfolio of 8.01tn guaraníes and GNB Paraguay 6.18tn guaraníes. The merged entity, based on February data, would become the second-biggest player by loans after foreign lender Banco Continental, whose loan book stood at 15.1tn guaraníes.