Fitch: Colombia’s Banks Resistant to Weak Peso and Slow Growth

The strong U.S. dollar, Colombian peso (COP) depreciation and slow growth in Latin American economies are not expected to be serious threats to the credit strengths of Colombia’s largest private banks, says Fitch Ratings.

In a strong dollar environment, Colombia’s banks’ primary currency exchange threat is local creditors needing to service debt and repay loans in foreign currencies (such as U.S. dollars) when the creditors’ primary source of income is in COPs. Colombia’s first lines of defense against this risk are low levels of outstanding commercial loans denominated in U.S. dollars and, if required, a healthy level of loan loss reserves. Unlike many countries in Latin America, Colombia’s private banks average a very low 5% of total loan portfolios in U.S. dollars. Other major Latin American countries (Brazil, Mexico, Chile) average roughly 7.8%, with countries like Peru, Nicaragua, Costa Rica, Guatemala and Honduras north of 30%. Consumer and personal lending, which are typically of higher credit risk than commercial loans, are virtually entirely denominated in Colombian pesos. This is in contrast to Central/Latin American regions, where consumer and personal loans, and even mortgages in places such as Peru, may be made in U.S. dollar terms.

The largest Colombian banks, such as Banco de Bogota, Bancolombia and Davivienda, have operations spread throughout Central America representing between 20% and 35% of total assets. Such operations provide a benefit in terms of diversification given that Central American economies are less correlated with Colombia and more correlated with the slight but improving economic trends in the U.S. The devaluation of the COP will result in higher contributions to earnings from Central American assets relative to earnings from Colombian operations. This effect also results in a greater proportional increase on the COP value of Central American investments, but not the same increase on the banks’ COP denominated capital. Any capital ratio pressures from these regions’ growing contribution to overall balance sheet would be manageable, in our view.

On the liability side of the balance sheet, foreign funding is modest and debt service commitments in the short term are relatively small, generally representing less than 10% of total funding. Maturities are generally well laddered, ranging from two to 20 years. Fitch sees none of Colombia’s large banks facing any threatening foreign denominated bond maturity walls over the near or intermediate terms. Debt service denominated in non-COP currencies is helped by the banks’ foreign currency generating assets.

Colombia’s peso depreciation has been in line with that of other EM currencies over 2014, dropping 24% relative to the USD over the one-year period ended December 2014. Depreciation has accelerated in 2015, reaching a peak decline of about 31% (relative to Jan. 1, 2014) in March 2015 (or COP 2,667 per dollar). Declines of the COP have since receded. Colombia devaluation compares well with Brazil’s real (41%) and is roughly in line with Mexico’s peso (17%). Fitch’s sovereign view has established a base case of the currency hovering in the range of COP2400 to COP2500 per dollar through the end of 2015. Fitch anticipates that inflation will have a moderate uptick to 3.8% in 2015 but remain within the central bank’s target of 2% to 4%.

A weak COP should help exporters over the medium term, but for commodity exporters, we see little boost given the recent decline in prices. Fitch sees the credit portfolios of banks as well diversified, without major concentrations in sensitive sectors such as energy, oil and gas and agribusiness, each of which is not more than 5% of total loans. Where Colombian banks could expect some growth over the near term is in infrastructure projects, housing and nontraditional exports, which tend to be mostly local currency denominated loans.

Some declines in asset quality are expected from current levels, as recently originated loans season further and fewer loans are added; current NPLs are running below their historical average. While borrowers can be expected to feel the effects of slower growth and currency depreciation, oil services and certain retailers may see higher impacts from the macro slowdown, but the overall effects on commercial loan asset quality should be contained. Currently, typical levels of 90-day nonperforming loans hover near steady state levels of around 1.9%. Top banks increased capital levels during 2014 and could eventually absorb more substantive downside scenarios.

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.