economy and politics

Interest rates will remain high and banks will lower their profitability

Interest rates will remain high and banks will lower their profitability

Moody’s issued a report with a stable valuation for the Colombian banking sector, which reflects that the Bank credit fundamentals will continue to support overall asset quality in the sector.

(Read: Analysts expect annual inflation in February to reach 13.24%).

Anyway, warns that a difficult operating environment will be ahead in the next 12 to 18 monthss, with factors such as the slowdown in real gross domestic product growth amid a contractionary monetary policy stance that will limit business growth opportunities and weigh on the repayment capacity of some borrowers.

Moody’s says that, however, the Asset quality challenges will remain manageable as delinquencies rise from record lows in 2022 and banks maintain an adequate level of reserves for credit losses.

In turn, it ensures that due to credit deterioration, provisions will remain high and affect profitability, while margins will be favored by high rates.

Portfolio spoke with Marcelo De Gruttola, analyst at Moody’s about the challenges facing Colombian banks in the coming months.

(Also: Why would the labor reform generate more unemployment? Fenalco responds).

How are you seeing the Colombian banking system?

We issue a stable outlook, but we have a view for the main factors.
Colombia had an outstanding recovery after the pandemic and this led the banks to recover the portfolio with good growth. As a result of that, there was a rebound in credit in all segments, especially consumer. However, slowdown and inflation are a risky segment.

And will that make credit deterioration a threat?

Yes, a deterioration that will be manageable due to the economic slowdown in Colombia, which is no exception compared to the countries of the region. In any case, the rates will remain high for a while.

And in the face of this challenge, how are Colombian banks doing?

Banks maintain loan loss reserve levels that will allow them to manage delinquency levels without significant capital impacts.
Yes, there will be an impact on the level of default. And banks will have to increase provisions, a factor that will affect profitability, which will be offset by the higher level of interest rates that allow them a good intermediation margin.

(Keep reading: Financial system begins 2023 with adequate performance indicators).

And how do you project the medium term for banks in terms of challenges and opportunities?

What we are thinking about for 2024, as the main negative point, are the operating conditions due to the slowdown, unemployment and what the high rates mean, which affects the volume of business, which will not be that of 2022 and this must be add the economic deterioration.

The banks are more diversified and prepared, although there are some focused on consumption, which may suffer further deterioration.

The lower growth environment and high interest rates make it difficult to operate and it is difficult to grow in an environment like the current one.

How much does the competition from fintech and neobanks represent for traditional banking?

Clearly there is competition but traditional banks continue to maintain their participation and also, in some cases have created their own digital channels. And they keep their quota.

We do not make recommendations to the banks, but we do mention the risks and what we see is that for the next 12 or 18 months they will not seek to grow as much and the demand for credit will be low. What is coming is a process of managing the portfolio and maintaining stability.


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