CREDIT PROFILES AND RATING MIGRATIONOF BANKS IN LATIN AMERICA

Pinaky Pratyangira PaliwalRoll No. 961Semester V

Under the Expert Guidance of Prof. Rituparna Das

CREDIT PROFILE

• A credit profile is a document which provides information about someone's credit history.

• Credit profiles are used by lenders and other agencies which offer credit to determine someone's creditworthiness, and they are also utilized by prospective landlords and other people who might have an interest in someone's credit history.

• A good credit profile will make it easier for someone to access credit, and a bad credit profile can become a major stumbling block.

WHAT CONSTITUTES CREDIT PROFILE?

WHAT CONSTITUTES CREDIT PROFILE?

CREDIT RATING MIGRATION• Credit Migration or Credit Rating Transition refers to upgrading or

worsening in a credit's ranking and credit grade over time. It is the migration of a debt instrument from one rating to another rating over a period of time.

• This movement indicates the change in the credit quality of the instrument assessed by the rating agency.

• The International Rating Agencies such as S&Ps, Moody's, and Fitch assess the credit quality of the entire debt instrument in their portfolio and assign a rating to the credit quality.

• This rating changes as and when new information is available about the obligor's financial health.

RATING PROCESS

ADVANTAGES OF CREDIT RATING

LATIN AMERICAN ECONOMY

• Latin America, for many years a continent beset by turbulent economic problems and an underdeveloped banking industry, has emerged over the last decade as a highly promising region.

• It comes at a time when the regions that have driven world economic growth – namely the US and Europe – battle their way out of the serious economic problems of the last few years.

• The banking industry around the world is undergoing fundamental change – new regulations are being implemented to prevent overly speculative practices, banks are being broken up or bundled up, and the industry is looking at how it can regain the trust of the general public.

BANKING SECTOR IN LATIN AMERICA

• While Latin America has faced its own challenges, it has developed a comparatively stable and enticing banking industry quite different to its European and North American cousins.

• The banking sector in LATAM has experienced much of the global upheaval seen in the rest of the world over the last couple of years.

• Banking is back in Latin America. While most of the rest of the world is still recovering from the global financial crisis of 2008, Latin American banks have recovered.

• Five factors have fueled that growth: a growing middle class, access to banks for the previously “unbanked” population, growth in deposits, a broader and expanding loan portfolio, and greater efficiency by Latin American banks.

BANKING SECTOR IN LATIN AMERICA

• Since the 1990s, the banking system has been through a financial liberalization process that involved its deregulation, regional openness to foreign bank entry and the decline of government intervention due to privatization. Despite this financial reform, Latin American banks are still vulnerable to macroeconomic and external shocks and to new risks such as market, credit and liquidity risks.

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• Mexico in 1994, Ecuador in 1999, Argentina in 2001, Uruguay in 2002 and the Dominican Republic in 2003 faced banking crises, the sources of which were macroeconomic or external shocks.

BANKING SECTOR IN LATIN AMERICA

• Brazilian banks have led the surge, occupying the top five spots on The Banker’s list of the best Latin American banks. They’ve done this mainly by focusing on the growth of the middle class.

• The middle class in Latin America has grown to 51% of the population in the major economies in 2011, from just 41% in 2001. That growth in the middle class has pushed per capita income to $11,900 from $7,600 a decade ago.

BANKING SECTOR IN LATIN AMERICA

• Despite the dominance of banks, the size of the banking system in Latin America is relatively small when compared to emerging Asia and Europe.

• The banking system in Latin America is approximately 35% of GDP, underscoring its lack of depth when compared to shares of 90% and 50% of emerging Asia’s and emerging Europe’s GDP, respectively.

OUTLOOK 2013• Moody's Investors Service changed to

stable, from positive, the outlook on the standalone bank financial strength ratings of three Brazilian financial institutions

• Moody's also changed to stable, from positive, the outlook on the long-term global local currency deposit, issuer, and debt ratings of eight financial institutions.

• Further, it changed to stable, from positive, the outlook on the long-term global foreign currency deposit, senior and subordinated debt ratings of 10 financial institutions and their respective foreign branches.

OUTLOOK 2013•  Moody's also revised to negative, from

stable, the outlook on the standalone bank financial strength rating of Banco do Brasil and has placed on review for downgrade the standalone bank financial strength rating, the long and short-term deposits and debt ratings of Banco Votorantim.

• As a consequence there was change in outlook to stable, from positive, on Brazil's government bond ratings as well.

OUTLOOK 2013• However, despite the downfall, Moody’s

rated banks in Latin America have defied a declining global trend for unsecured debt issuance by issuing a record $27.7 billion in unsecured long term debt.

• This record issuance is a 13.6% increase from last year“. This is when global debt issuance declined by 6% as bank restructurings and deleveraging, primarily in the Euro zone, weighed on the markets since the 2008-2009 financial crisis.

OUTLOOK 2013• Brazilian banks in particular have led the

way for debt issuance.

• Of the $87 billion of unsecured debt issued by Moody's-rated banks during the three-year period between 2009 and 2012, banks in Brazil have issued $55 billion, or two thirds, while banks in Mexico, Chile, Colombia, and Peru have issued most of the remaining third, or about $28 billion.“

• As per Moody’s is indicative of stable credit metrics and country fundamentals that have provided Latin American banks with improved access to capital markets, says the report.

OUTLOOK 2013• However, increased debt issuance by

banks is on balance credit negative, as it increases their reliance on wholesale markets and raises refinancing risk should investors become more risk averse to emerging market instruments, says Moody's.

• Still, refinancing risks are partially mitigated by banks ability to take medium and longer tenors in the international markets, notes the report.

RATINGS DEGRADATION 2013

OUTLOOK 2014

•  The outlook for banks in Latin America is stable despite an expected deterioration in credit conditions during 2014, says Moody's Investors Service in its special comment " 2014 Outlook -- Latin American Banks “

• "The banks' financial fundamentals will prove resilient to an expected deterioration in credit conditions over the outlook horizon," said Celina Vansetti-Hutchins, a Moody's Managing Director and author of the report. "Solid profitability and capitalization levels will ensure rating stability for banks across the region for the remainder of 2013 and 2014.“

OUTLOOK 2014

• Even under an adverse scenario, Moody's expects that LatAm banks would be able to absorb losses and meet regulatory capital requirements. However, the rating agency expects a cyclical deterioration of credit conditions across the region in 2014, driven by persistently below-trend economic growth, rising real interest rates and a consequent increase in asset quality pressures.

• The Brazilian economy has recovered only modestly from its sharp deterioration in 2012, while in Mexico, weaker-than-expected external demand has weighed on exports and again highlighted the vulnerability of Mexico to economic conditions in the US, says Moody's.

OUTLOOK 2014

• In the rest of the region, economic growth is expected to remain broadly stable and close to trend growth in 2014, says the rating agency. However, downside risks continue to dominate Moody's outlook, including a potential rise in real interest rates, pro-cyclical monetary policies leading to further liquidity tightening, and a weaker-than-expected external demand for commodities.

• Looking forward into 2014, LatAm banks will be challenged to mitigate the impact of rising fund costs and slowing demand on profitability, says the rating agency. In addition, the banks' asset quality is vulnerable to rising real interest rates.

OUTLOOK 2014• Indebtedness levels are at historical highs in the region, says

Moody's. Sluggish economic growth coupled with the rising rates will swell loan delinquencies and associated credit costs, and LatAm banks will need to make efficiency gains to maintain their relatively high returns, compared to their global peers.

• Standards & Poor’s cut the credit rating on 13 financial firms and put another 27 companies on credit watch negative.

• Nearly every known bank in Brazil was either put on credit watch negative or fell a notch on the Standard & Poor’s credit scale, including BTG Pactual, one of Brazil’s largest investment banks, and government behemoth Banco do Brasil .

RATING DEGRADATION 2014