Strong Growth Potential For Regional Banking, Despite Macro Headwinds



BMI View: We continue to see significant room for expansion of Latin American banking sectors in the coming years, and maintain our view that markets such as Mexico and Colombia have the strongest growth potential due expected robust real GDP growth and favourable labour market dynamics, which will bolster demand for financial services. Moreover, w e anticipate that these trends will continue to bolster Mexico and Colombia's scores in our Commercial Banking Risk/Reward Ratings.


Despite notable macroeconomic headwinds in the form of slowing growth in China and lower industrial metals prices, we continue to see relatively strong growth potential in Latin American commercial banking sectors over the medium-to-long term ( see 'Long-Term Banking Sector Growth Potential Remains', January 21). We believe that the most significant room for expansion is in markets such as Colombia, Mexico, and to a lesser extent Peru, which continue to lag behind regional peers like Brazil and Chile in terms of banking sector penetration. Indeed, we expect that relatively strong real GDP growth, as well as reforms to increase banking sector competitiveness in the case of Mexico, will boost demand for and access to financial services in the coming years. As such, we see the greatest upside potential for these countries' scores in our Commercial Banking Risk/Reward Ratings, with Mexico likely to overtake Brazil in the next few years.


Strongest Growth Potential In Mexico And Colombia


We have long highlighted Mexico and Colombia as the countries in the region where the banking sector has the most significant growth potential, due to a combination of relatively low banking sector penetration, and expected strong real GDP and real private consumption growth, as well as declining unemployment in the coming years. Indeed, we forecast average asset growth of 11.8% in Mexico and 18.7% in Colombia in the next five years, well above average expansions of 7.4% and 14.9%, respectively, during the previous five years.


In Mexico, we expect that recent economic reforms, as well as the country's close ties to an accelerating US economy will bolster headline real GDP growth in the coming years. Indeed, recently-passed financial sector reform will increase competitiveness in the banking sector and help bring down interest rates on consumer loans, which currently average 33.0% as compared to 16.0% for the sector as a whole, a factor that has constrained consumers' access credit in recent years ( see 'Credit Growth To Accelerate But Informality To Limit Banking Sector Expansion', April 16).


We foresee a similar story in Colombia, where the economy will see tailwinds from stronger real GDP growth in the US, its main trading partner. In addition, we believe that a two-year household deleveraging cycle is coming to an end, and expect that low interest rates - the policy rate stands at 3.25% following the central bank's 200 basis points of cuts between July 2012 and March 2013 - as well as declining unemployment will bolster loan growth in the coming months ( see 'Strong Growth Potential As Outlying Regions Remain Mostly Unbanked', March 17). Moreover, while strong growth in banking sector assets has seen the country's assets-to-GDP ratio increase notably in recent years, to an estimated 60.1% as of 2013, the ratio remains nearly half of those in Chile and Brazil.


Room For Expansion In Peru, But Macro Headwinds Temper Optimism


Peru has long been on the cusp of being one of our favourite markets in the Latin American region, as banking sector assets as a percentage of GDP are the second-lowest out of the major banking sectors in the region, at 46.8% as of 2013, suggesting significant room for further expansion. That said, Peru's high exposure to a structural slowdown in Chinese economic activity through the trade and investment channels tempers our outlook for the banking sector, in line with our view for slower average real GDP growth in the next five years than in the previous five. Nevertheless, our forecast for average growth of 5.1% between 2014 and 2018 means that the country will continue to post one of the strongest growth rates in Latin America. Moreover, we expect that the central bank's continued attempts to bolster credit growth through reductions in commercial banks' reserve requirements will bolster total loan growth in the coming quarters ( see 'Banking Sector Growth To Remain Strong, Although Asset Quality Declining', March 18). Due in part to these dynamics, we forecast loan growth to average 15.6% in the next five years, up from an average expansion of 13.6% during the last five years.


Challenges Ahead, But Unbanked Provide Long-Term Opportunity In Chile & Brazil


We see less significant potential for growth in the banking sectors of Chile and Brazil in the next few years, in light of our expectations for a period of more moderate real GDP growth, as well as already significant levels of banking sector penetration, with assets-to-GDP ratios well above 100% and loan-to-deposit ratios nearing if not above 100% ( see 'Subsidised Credit Key To Asset And Loan Growth', April 15 and 'Banking Sector Growth To Remain Off-Peak', April 9). Nevertheless, our forecasts continue to factor in relatively robust asset and loan growth in the next few years, with the expansion of total assets set to average 12.1% in Brazil and 10.4% in Chile between 2014 and 2018. This comes as both countries still have significant unbanked populations, with the latest data from the World Bank indicating that 55.9% of people age 15 and over have an account at financial institution in Brazil, while in Chile the figure stands at 44.2%.


Opportunities For Growth Outside Of Major Cities


As data indicate that a substantial proportion of Latin Americans remain unbanked, either lacking access to financial services or utilising informal channels, we have increasingly started to look at sub-national breakdowns of credit. Unsurprisingly, in Brazil, the Southeast, which is the main driver of the economy and the hub of the financial services industry, accounts for the most significant proportion of total credit ( see 'Subsidised Credit Key To Asset And Loan Growth', April 15). However, in recent quarters loan growth in the Northeast and Central-West has outpaced that in the Southeast, and given our view that the Northeast is poised to see stronger growth in the coming years, we believe that greater demand for financial services is likely to follow ( see 'Stronger Growth Ahead For Northern Regions', July 22 2013).


Similarly, in Colombia, we see strong potential for organic growth outside of Bogota given large unbanked populations. Indeed, in the country's south-eastern regions of Vaupes and Guainia only 28.6% and 38.6% of adults respectively have savings accounts, and less than 1.0% of adults in both regions have credit cards ( see 'Strong Growth Potential As Outlying Regions Remain Mostly Unbanked', March 17). We see significant potential for these numbers to increase in the coming years, as use of the formal financial system continues to expand.


Mexico & Colombia Likely To Climb In Risk/Reward Ratings


We expect the above dynamics will continue to be reflected in our Commercial Banking Risk/Reward Ratings, meaning that Brazil's score is likely to continue declining while the likes of Mexico and Colombia have greater upside potential. Indeed, we believe that Brazil is unlikely to regain the top spot in the region in the foreseeable future. We have previously noted declines in Brazil's 'risks' score on the back of deterioration in the 'country risks' component, and with the country's economic outlook set to remain relatively weak, we see little potential for a notable improvement in the score in the coming months. In contrast, we expect that the scores for Mexico and Colombia are likely to rise going forward, in line with our views for real GDP growth to accelerate and loan and asset growth to pick up.


From a global perspective, we note that Latin America has one of the highest average Risk/Reward Ratings at 64.1, below only that of Asia at 66.8. Strong scores in the 'rewards' component helps to make it an attractive market to invest in, as the large sizes of the banking sectors in countries such as Brazil and Mexico, as well as our forecasts for robust asset and loan growth in Mexico, Colombia and Peru bolster the 'industry rewards' sub-component. On the other hand, while the region posts a relatively strong score in the 'industry risks' sub-component, the average score in the 'country risks' component is weighed down by poor scores from Argentina and Venezuela.










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