Ten years ago, Latin America Banks were well off the danger zone , while their world leaders counterparts were right on the middle of the financial Hurricane(2008).Most of the analisys were focused on the way to get through it all, but very few attention was even posibble to consider to look for explanation about Latin America Banking which seemed to be outperformance by any standard within the banking industry.Somehow these banks were consider to be underdeveloped just the way the markets they were focused on.Perhaps that assesment was representative of most banks in Latin America at that time, except for one key fact: these banks had a better sense of covering the systemic risks arising from the drivers of economic growth, specially risk seeking behaviour. As economic growth move up profit expetations, so it also push up risk tolerance. So , those banks with higher risk exposure because of its demographic scope such as to have 90% of population with bank accounts, go along with the sistemic risk. As soon as it comes along a sudden stop in economics growth, so it brings down riskier banks with it.
Brussels righlty thought that in such a case, it was necessary to have stronger insurance policies,(higher capital provisions), which was equivalent to make Banks less prone to systemic risk. This meant Banks became like the counter cycliccal filters of the systemic risk , instead of being the cyclical follower of it.That approach imply that while the economy is booming, Banks move cautiously with credit policies.On the other side, while the economy is weak , banks support the economy with more flexible credit policies.It is like the other side of a coin regarding the interest rate movements during economic cycles: High while it is expansive, low while it is recessive .
Mc Kinsey & Company (www.mckinsey.com), just released (July 29, 2019), a report about Latin American retail banking markets with interesting remarks, which comes as a reminder that it is not just to arrive first , but also to arrive well prepared.
The major findings shows that while ROE (Return on equity), between 2011-2018 was in the range of 8-10% for global bank industry ( in some cases with negative interes rate), Latin American retail banks ROE was 12,8% between 2012-2017 with consumer finance as the leading driver for such outcome. Latin American banks as a whole had a ROE of 14% in 2017.
Which are the explaining factors?.The same report explores some hypothesis which are revisited below:
a.- Latin american banks have a low risk demographic exposure. Only 30-40% of population over 15 years old, has a bank account. What they lose in terms of scope, they gain in terms of risk control. Banks in Developed countries, have up to 90 % exposure to a wider demographic segment.
b.- Growing population in the lower range age segment (25-35 years old), which means new younger workers on their way to get a job with potential rise in earnings. Quite on the contrary to the developed countries Banks which have older workers closer to retirement and looking for saving instead of spending.Young workers represent fresh look for new opportunities most latin american Banks look for. In fact when it comes to microloans , Latin American countries like Peru are among the leaders in that sub markets.-
It is also interesting to realize that there are association betwen Banks size with ROE and its variance. Thus, small Banks(43,7% of the sample) , have lower ROE (3,9%) and higher dispersion. Medium (24,5% of the sample),and large size banks(19,6% of the sample), have 13,1% and 13,6% ROE respectively and average dispersion and depending upon revenues, while Leaders Banks (12,0% of the sample), have higher ROE (15,2%), coupled with lower dispersion and depending upon efficiency.
However, no matter the positive outcome, there are also some weakness:
Mc kinsey report states the following weakness for retaiol banking in Latin America
a.- Lower cost efficiency
b.- Lowwer asset quality
c.- Lower provisions over asset(1,1%)
It follows that there is also a consistency between Bank risk behaviour, and the quality of the insurance policy to support it However, the main result is that Latin American Banks will be the growth leaders among global markets banking system through 2022.This means that services sector in Latin America, may become the new driver for economic growth.-
