Latin American banks rebound but face challenges

Last year was a period of recovery for Latin America and the Caribbean from the economic collapse caused by the Covid-19 pandemic. Regional gross domestic product (GDP) saw a 6.9% rebound in 2021, after most economies contracted in 2020. The increase was driven by strong demand in key export destinations and high commodity prices, according to the World Bank.

As economic growth resumed, banks’ performance increased in tandem. Most banks in the region saw growth in Tier 1 capital and total assets, as well as a surge in pre-tax profits. The banks are well provisioned from 2020 and 2021, according to analysts.

Brazil numerically dominates the top 25 table, with eight banks. Its four biggest banks, Itaú Unibanco, Banco do Brasil, Banco Bradesco and Caixa Econômica Federal, maintain their positions as the largest lenders by Tier 1 capital in Latin America and the Caribbean. Mexico’s Banorte and Colombia’s Bancolombia follow, but are well behind.

The top 25 Latin America and Caribbean banks table sees a new entrant this year: Brazil’s Banco Inter, which offers digital banking services. It saw the greatest growth in Tier 1 capital in the region in 2021 – 140.9% – and jumped 297 places to reach position 672nd in the main ranking. As such, Banco Inter joins the 25 highest movers table in fourth spot.

Colombian mortgage specialist Banco Davivienda and Argentinian Banco de Galicia also performed well, each with core capital growing by almost 50%.

Banco de Reservas, Dominican Republic’s state-owned lender, had the highest return on capital (ROC) across Latin American and the Caribbean region, at 41.84%. The other banks in the top five for ROC post ratios from 24.11% to 28.39%.

Banco Inbursa, Mexico’s second-biggest lender, had the highest return on assets (ROA) across the region, at 3.48%, and is the top performer in the country. Banco Hipotecario del Uruguay, Chile’s Banco Falabella, Banco da Amazonia and Banco do Nordeste do Brasil also feature in the top five for ROA.

Despite the regional rebound, risks are looming. Latin America entered 2022 in an environment of slower economic activity with growth projections revised downward following the Russian invasion of Ukraine.

Soaring global food and energy prices, and inflation across the region, are all adding up to create economic challenges. In 2022, average GDP growth for the six biggest countries in Latin America is expected to be 2%, according to S&P.

As a result of the softer economic performance and weaker credit growth, asset quality may weaken in 2022. Lenders will also face the possibility of higher non-performing loan ratios and more defaults.

However, higher interest rates are not expected to deteriorate banks’ margins and might help profitability and offset moderation in loan growth, according to analysts. Increases in provisions might not be necessary this year, which should help contribute to profitability.

Undoubtedly, Latin America’s outlook in 2022 will also be shaped by upcoming political events, including presidential elections in Brazil later this year.

Latin America and Caribbean top 25 banks ($m)

Latin America and Caribbean highest movers

Latin America and Caribbean top five ROC