Moody’s Warns of Weaknesses in Central American Banks

News from Panama / Thursday, July 30th, 2015
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The banks Banco de Costa Rica, Banco Nacional and the Banco Industrial de Guatemala “will have to reduce the growth rate of their loans, since their core capital levels remain modest.”

From Moody’s press release:

Mexico, July 21, 2015 — Central America’s leading banks will need to slow the pace of their loan growth as their core capital levels remain modest, said Moody’s Investors Service in a new report.

The relatively low core capital levels at three of Central America’s largest banking franchises — Guatemala‘s Banco Industrial, Banco de Costa Rica (BCR) and Banco Nacional de Costa Rica (BNCR) — are credit negative. Moody’s said the banks, which have averaged 14% loan growth since 2012, need to slow the pace of their lending expansion in light of their core capital constraints.

“Core capital levels at Central America’s leading banks are not enough to maintain the current pace of growth over the long term,” said Moody’s Analyst Georges Hatcherian. “The low core capitalization at Banco Industrial, Banco de Costa Rica and Banco Nacional de Costa Rica will make it harder for these banks to confront rising local and regional competition.”

Low core capitalization relative to global peers drove Moody’s to lower its Baseline Credit Assessments (BCA) for all three banks in June 2015. The BCA of Industrial was lowered to ba3 from ba1, while the BCAs of both BCR and BNCR were lowered to ba2 from ba1.

Despite their different governance structures, all the three banks face pressures to core capitalization. For Industrial, a private bank based in Guatemala, high dividend payouts weigh on the bank’s capacity to generate capital. Although BCR and BNCR — public banks — do not pay dividends, both are required to transfer about 20% of their pre-tax income on average to government programs.

Moody’s said it believes the reported capital ratios at the three banks overstate their ability to absorb losses, given that they incorporate understated risk-weighted assets and low-quality capital, including goodwill from acquisitions at Industrial and illiquid government securities at BCR and BNCR.