Category: Banking

Peru, March 9, 2021 – The Government of Peru (A3 stable) issued an emergency decree to allow banks to restructure loans under its state guarantee programs Reactiva Perú and FAE-MYPE until 15 July 2021 and also allow an additional 12-month grace period during which borrowers will repay only the interest portion of their loans.

By allowing banks to restructure existing Reactiva and FAE-MYPE loans through mid-July, allowing an additional grace period, and providing state guarantees for up to 98% of a loan (depending on its size), banks have strong asset-risk protection for longer. However, Peruvian banks also risk reduced interest income dragging down their margins.

The Reactiva Perú program was set up in April 2020 and is a PEN30 billion ($8.9 billion) state-guaranteed credit facility that provides working capital to small and midsize enterprises (SMEs) and large corporates. The program aims to relieve liquidity strain and limit the number of loan defaults among corporate and SME borrowers, which supports banks’ asset quality and the economy. The FAE-MYPE program targets small and micro agricultural producers and will be used by banks as well as credit cooperatives.

Under Reactiva, banks were awarded state guarantees in auctions that ensured the lowest rate for the end user for a 36-month loan with a 12-month grace period of no capital repayment. The government provides a guarantee to the lending bank for 80%-98% of the loan on a pro rata basis, depending on the size of the credit.Lending under the Reactiva Perú state-guarantee for corporations and SMEs now accounts for around 16.5% of total loans, according to Central Bank data. The program ended on 30 November 2020 which was the last date when state guarantees could be applied for.

Problem loans in Peru were 3.4% at year-end 2020, 75 basis points higher than year-end 2019 before the pandemic. However, government aid such as the Reactiva program is key to mitigate an expected deterioration in credit quality. The four largest banks in the market – Banco de Crédito del Perú (Baa1/Baa1 stable, baa21), Banco BBVA Perú S.A.(Baa1 stable, baa2), Banco Internacional del Perú – Interbank (Baa1/Baa1 stable, baa2) and Scotiabank Perú (A3 stable, baa3) – hold around 90% of total loans to midsize companies and almost 100% of total loans to SMEs and are the greatest beneficiaries of the Reactiva program.

However, the additional grace period will reduce Peruvian banks’ interest income as capital on restructured loans need not be paid, which will compress their net interest margins. We estimate that the average rate on Reactiva loans with a 24-month maturity is 1.6%, well below average rates on other loans. In 2020, bank net interest margins fell by 100 basis points as provisioning expenses rose 120%; net income to tangible assets fell to 0.4%, from the 2.1% 2016-19 average. With the ability to restructure loans and allow borrowers to pay only interest, the new measures will allow banks to keep their loan-loss provision expenses in check, which will aid their net income.

Under the new measures, loans of up to PEN90,000 can be restructured without any requirement, loans between PEN90,001 and PEN750,000 can be restructured if the borrower’s sales fell by 10% in the fourth quarter of 2020 versus fourth-quarter 2019 and for loans between PEN750,001 and PEN5 million, borrowers must show that fourth-quarter sales fell by 20% versus 2019.

Credit Outlook: 15 March 2021. Pg. 17
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United States, November 18, 2020 – Google parent Alphabet Inc. (Aa2 stable) announced that it will launch Plex Accounts next year, a digital bank account offered within its Google Pay app in partnership with 11 US banks and credit unions. Google’s expansion into the distribution of consumer banking services is credit negative for US banks because it will increase competition for customer relationships, and in particular, competition for deposits, US banks’ primary funding source.

The launch of Google Pay Plex Accounts is an example of big tech’s expansion into retail financial services. It capitalizes on the rising popularity of digital wallets, an example of the widening application of digital innovations in financial services that we expect will continue to drive disruption across banking. Digital innovation and a flourishing financial technology sector present a threat to US banks.

Alphabet’s expansion into retail financial services distribution is consistent with our central scenario that large nonfinancial institutions intent on enhancing customer engagement will partner with incumbent banks to distribute financial services. Alphabet’s ability to partner with US banks and credit unions demonstrates the increasingly low barriers to entry for firms with large existing customer bases to distribute consumer financial services including deposit offerings. Digital innovation and changing customer behavior have lowered such barriers that historically included building out an expensive branch network.

US banks’ balance sheets are built on a foundation of low-cost, sticky deposits. Google Pay Plex Accounts will have no fees for monthly service, low balance, overdraft or in-network ATM use, and market its user-friendly interface and capabilities. Many US banks have similarly introduced online-only deposit products with low to no fees and/or high interest rates to capture additional deposits and customer relationships. Over time, increasing competition could raise deposit costs, pressure deposit fees and increase the need for banks to invest in emerging technology to attract or maintain customers. Failure to respond risks driving shifts in market share to those banks who best meet customer expectations.

The 11 US banks and credit unions partnering with Alphabet to offer Plex Accounts, including Citibank, N.A. (Aa3/Aa3 stable, baa11), would benefit from an inflow of consumer deposits and the potential to deepen new customer relationships. Citibank, N.A. and the other partnering banks will also have an early-adopter advantage in evolving their digital strategies to meet new customer needs. With the accelerating use of mobile payments and rising popularity of single-click digital wallets, incumbent banks need a strategy to stay in the customer-facing part of the payments business.

Alphabet will offer Plex Accounts within its own digital ecosystem, Google Pay, which provides a level playing field for partnering banks. However, the lack of friction within such a digital environment could ultimately increase competition among financial institutions, on and off the platform. Alphabet’s expansion into the distribution of financial services would align with big tech strategies to increase the scope and appeal of their digital platforms through enhanced customer engagement and a further strengthening of their consumer value proposition.

The launch also provides a blueprint for other firms with large existing customer bases keen to capture an increasing share of consumer activity and build customer loyalty. Increased user engagement enables these firms to capture valuable data and boost revenue. In our view, partnerships in which banks cede control of a large share of customer relationships pose the greatest risk to incumbent financial institutions. Such developments increase the risk of our alternate scenario, where big tech firms control a larger share of distribution and displace incumbents that fail to execute timely, effective digital strategies.

Credit Outlook: 23 November 2020. Pg. 16
Moodys

Mexico, September 15, 2020 – Banco de México (Banxico), Mexico’s central bank, announced that it will extend until February 2021 pandemic related liquidity and credit measures implemented in April and which were to expire 30 September. By renewing these support measures, the government is maintaining facilities aimed at softening the negative economic and market effects of the coronavirus pandemic, which have strained bank operating conditions and investor and consumer confidence. Mexico’s economy remains weak, reflecting uncertainty about domestic policy and the US economic recovery, its largest export partner.

In Mexico, coronavirus-related measures mostly focus on liquidity, funding and some temporary rescheduling of payments, and less on subsidized credit programs or household income support, as in other countries in the region. Because Mexico’s coronavirus infection numbers are still high, risks of extended social distancing rules threaten to delay economic recovery, limit the recovery of employment and maintain low corporate earnings, which will weigh on credit conditions for at least the next 24 months.

Since 21 April, Banxico has made MXN750 billion ($35 billion) available as part of its pandemic-related relief measures (see exhibit), those now extended until February 2021. The central bank has also opened its discount window to a wider range of corporate and government securities (a measure also available to development banks), lowered banks’ reserve requirements, offered secured financing at low rates and asset swaps to small and midsize enterprises (SMEs). The credit facilities directed to the SME segment most affected by the pandemic totaled MXN350 billion, a relatively small amount versus other Latin American governments’ credit lines.

Although the size and reach of the government’s package are more limited than sponsored programs implemented in other large economies in the region, the extension points to the government’s preventative stance against prevailing risks and uncertainties associated with the pandemic. The size of the measures also reflects the current administration’s commitment to fiscal austerity.

The Mexican financial system’s exposure to the SME segment, which has been most vulnerable during the economic downturn, is low and limits the need for government-sponsored aid to the sector. As of June 2020, Mexico’s systemwide loan book had about a 7% exposure to SME loans, versus 18% for Brazil and 24% for Peru. Mexican banks’ loans to large corporations, a segment with a healthier liquidity position than that of SMEs, comprised 60% of gross loans. Additionally, corporates withdrew from banks’ committed credit facilities at the outset of the pandemic, particularly in March and April, when there was a sudden drop in economic activity and heightened market volatility.

At the same time, the government has already announced that it is finalizing the regulatory framework to extend other pandemic related credit forbearance measures, including the waiver on provisioning requirement for renegotiated loans, which will support a second round of relief programs to be offered by banks to customers that continue to struggle to recover repayment capacity amid the deep economic recession.

Credit Outlook: 21 September 2020. Pg. 11
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Brazil, July 28, 2020 – Brazil’s Confederação Nacional do Comércio de Bens, Serviços e Turismo (the national confederation of commerce of goods, services and tourism or CNC) published its July survey which showed that consumer indebtedness had reached record levels and that delinquency pressures have intensified. The rise in household indebtedness is credit negative for Brazilian banks with significant consumer lending exposures, mainly large retail banks, because it will lead to higher asset risk on banks’ balance sheets and be reflected in rising problem loan levels as well as renegotiations and restructurings. The increase also illustrates the challenges Brazilian consumers face in managing their loan exposures.

The record level of indebtedness is particularly credit negative for Brazilian banks with large exposures to unsecured consumer lending. Such banks include Caixa Economica Federal (Ba2 stable, ba31), Banco do Brasil S.A. (Ba2/(P)Ba2 stable, ba2), Banco Bradesco S.A. (Ba2 stable, ba2), Itau Unibanco S.A. (Ba2 stable, ba2) and Banco Santander (Brasil) S.A. (Ba1 stable, ba2), which combined account for the lion’s share of consumer lending in Brazil.

Higher indebtedness indicates rising asset risk, particularly amid challenging economic conditions in Brazil because of the coronavirus pandemic. We expect Brazil’s economy to contract by 6.2% this year, with high unemployment negatively affecting household income. Since the onset of pandemic, banks’ problem loans ticked up to 3.3% in April from 2.9% in December 2019, driven largely by rising problem loans for consumers, which rose to 4.1% in April from 3.6% in December 2019 (see Exhibit 1). However, 90-day problem loans have since ticked down to 2.9% for the system as of June 2020 and to 3.6% for consumer loans as banks began renegotiating their loan exposures amid rising asset risk.

Based on available central bank data, BRL594 billion of loans were renegotiated and received loan payment extensions due to the pandemic between 16 March and 29 May, which equates to about 16.5% of total systemwide loans as of June 2020. Loans to households and small and midsize enterprises (SMEs) comprised 91% of these renegotiated loans. The payments were deferred for of up to 180 days and equal 11% of the sum of all renegotiated contracts (principal plus interest), most of which supported SMEs and households.

At the onset of the coronavirus crisis, the central bank eased provisioning requirements for any accruing loans being renegotiated until September 2020. The measures that postpone provisioning will likely delay credit losses, requiring banks to reinforce reserve coverage levels during the third and fourth quarters. In this context, rising household indebtedness to a record level in July is a sign that asset risk pressures will continue to build on banks’ balance sheets

The results of CNC’s survey showed that 67.4% of all Brazilian families have debt outstanding, the highest level on record since 2010. The levels of indebtedness were driven by lower income households, defined by those who earn up to 10x the minimum wage, of which 69% of families were indebted. For households earning over 10x the minimum wage, the level was at 59% as of July, elevated compared with historical levels (see Exhibit 2).

The CNC survey also showed that the percentage of families in the lower income group with debt payments in arrears rose 260 basis points from a year ago to 29.7%, while for higher income groups the level was 11.2% versus 10.6%, indicating rising delinquency pressures. The percentage of households unable to pay off their debts also rose in July across both income levels – up 240 basis points to 13.7% for lower income households and up 150 basis points to 4.9% for higher income households.

For indebted households, 21.6% have more than 50% of their monthly earnings dedicated to debt service, and the largest type of exposure is credit card debt, according to the survey. Following that category is payment by installments via booklets. Both categories are unsecured consumer loan classes, highlighting that banks are particularly susceptible to a deterioration in borrower repayment capacity.

Credit Outlook: 3 August 2020. Pg. 16
Moodys

Chile, June 16, 2020 – The Chilean central bank (BCCh) announced a $16 billion expansion of its Conditional Financing Facility for Incremental Lending (FCIC) program and introduced an $8 billion special asset purchase program as the coronavirus pandemic continued to spread across Chile, raising the prospect of an extension of the lockdowns. These measures together represent 10% of GDP and will add toBCCh’s original $8 billion bond purchase program and previously approved credit lines under the FCIC program totaling $24 billion. The central bank’s new funding will complement a recent $12 billion emergency plan announced by Chile’s President Sebastián Piñera on 14 June.

The expansion of the FCIC will provide Chilean banks with low-cost funds that will support their ability to lend to clients despite the ongoing crisis. Meanwhile, the asset-purchase program will allow banks to convert bonds issued by the BCCh and other banks into cash, supporting liquidity needs related to large-scale interest or principal payment deferrals.

Access to financing will also support companies’ liquidity position, which has worsened significantly because of the crisis and ultimately will increase the future expected recovery for banks on loans to small and midsize enterprises (SMEs) and their employees. Although the additional facility targets higher-risk SME financing, the government’s executive branch earlier announced the expansion of the guarantees offered by the Small Entrepreneur Guarantee Fund (Fogape), which will mitigate asset risks and encourage the further use of the new funding.

The FCIC offers banks cheap financing at the policy rate, which the central bank on 16 June kept unchanged at 0.5%. This rate is well below the average funding rate for Chilean banks of about 2.4% as of March. The lower rate will support profitability at a time when we expect credit costs to remain high because of the higher risks posed by pandemic’s continued spread in Chile, which may extend lockdowns beyond second-quarter 2020. Banks’ loan-loss provisions have already increased to 1.7% of gross loans as of April 2020, from 1.3% in 2019.

Fogape guarantees cover 30%-80% of a loan, mitigating asset risks for banks and have contributed to a robust 6% expansion of banks’ commercial portfolios between April and February. The use of the original FCIC credit lines had already reached about $20 billion, or 83% of the original limit, indicating high demand by Chile’s largest banks. According to the Chilean Bankers Association (ABIF), banks have approved $8.8 billion of loans with a Fogape guarantee, of which $6.4 billion had been disbursed as of 12 June.

Credit Outlook: 22 June 2020. Pg. 8
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