COVID-19 could spark longer-term pivot on credit risk

December 18th, 2020 – The impact of COVID-19 forced Latin American banks to take huge provisions to absorb credit losses that could take months to materialize. But the pandemic also may lead some banks to shift their lending strategies for years to come.

Latin America has been among the regions hardest hit by COVID-19, pushing banks and regulators to grant credit relief to borrowers who may have otherwise defaulted. But the efforts also have clouded expectations of where credit deterioration ultimately will land. Many believe that banks will see a notable uptick in defaults once the relief measures end, but the magnitude is still a mystery that may not be fully known until mid- to late 2021.

Banks across the region have bulked up provisions in anticipation. But many banks also have adopted far more defensive lending standards, particularly to small and medium-sized enterprises and lower-income individuals. Both groups have been especially hard hit by the pandemic’s economic effects and are expected to take longer to recover.

But for banks, they are also higher-margin lending segments and so their shift away has contributed to tighter net interest margins, analysts say. Average spreads in Brazil, for instance, have narrowed by about 8 percentage points since February.

Even after pandemic-related risks subside, experts expect banks to maintain their more cautious stance within both consumer and SME lending.


Written by S&P Global – Market Intelligence

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