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Since CIB is the largest bank.... this might even have some positives.
Arnold Layne
High interest rates weaken Colombian banks - S&P
NEW YORK, June 25 - Despite its relatively strong position among Latin American emerging markets, Colombia's current high interest-rate environment will hurt the asset quality and lending margins of Colombia's financial institutions and will accelerate the consolidation well underway in the industry, Standard & Poor's reports this week.
A special report featured in this week's Standard & Poor's Credit Week examines the strengths and weaknesses of Colombia's financial institutions as well as their prognosis for survival in the current high interest-rate environment.
While the supervision and regulatory framework of Colombia's financial institutions are considered good and the accounts transparent, these strengths are diminished by an inadequate loan loss reserve position and lack of global supervision, analysts say.
"Colombia's weak reserve positioning in particular leaves its financial institutions with no buffer to absorb the expected loan losses," the report says.
Furthermore, flaccid loan demand and worsening asset quality are expected to cut the system's 1998 profits, and given the ongoing high real rates, credit demand is expected to remain weak.
Since February, interest rates have hovered around 22% in real terms. Lending rates float near 40 percent and the DTF (Deposito a Termino Fijo), the leading deposit rates, are in the 31% area.
"These higher rates will slow the nation's growth and push many marginal companies into default," the report says.
Standard & Poor's expects these pressures will be maintained throughout most of the year, diminishing hopes for a resumption of activity in the financial sector.
According to the report, Standard & Poor's analysts are most concerned about small banks and other nonbank financial intermediaries' ability to cope with the rapidly changing scenario.
"The nature of financial intermediaries' operations and their market reach are factors that raise concerns about their flexibility to deal with volatile conditions," the report says.
While analysts foresee continued deterioration in the financial profile of the Colombian banking system, the largest banks are expected to be less harmed by the current environment.
Analysts expect the environment to encourage further consolidation which in some cases will help strengthen the position of the larger banks.
"Substantial foreign direct investment in domestic institutions has provided state-of-the-art systems and technology, more conservative risk-management techniques, new products, capital flexibility, and a more competitive marketplace," the report says.
Despite the risks, Colombia's financial institutions are in a better position than others in the region. Analysts predict a rocky road and further deterioration in the sector as well as the elimination of institutions either through failure or merger.
"However, Standard & Poor's does not foresee the poorer prospects for the industry costing the public purse, as is did in the mid-1980s, given the successful reforms it has since implemented and the entrance of foreign capital into the larger and stronger banks."
12:09 06-25-98
Copyright 1998 Reuters Limited. |
