Will Latin American banks’ resilience continue?
Banking was not easy in 2020, particularly in markets traditionally characterised by volatile growth. For example, Latin America’s largest country, Brazil, had yet to recover from the corruption scandal that sunk its economy five years earlier when the Covid-19 pandemic struck.
The country’s four big banks — which are also Latin America’s largest — are solid enough to absorb economic shocks. Still, their profitability took a hit and while keeping in the black, pre-tax profits at Itaú Unibanco, Banco do Brasil, Banco Bradesco and Caixa Econômica Federal shrunk by double digits — up to 87% for Itaú, which also ended the year with a worsened capital-to-assets ratio.
Things were different for BTG Pactual, the fifth largest locally owned bank (sixth if Santander’s Brazilian subsidiary is included in the mix.) BTG Pactual, which focuses on investment banking, managed to close 2020 with one of the highest return-on-capital ratios in the region: 23.4%. Within national borders, it was surpassed only by a much smaller peer, Banco Daycoval, which specialises in corporate loans and services, as well as some personal credit products.
Further north in the region, Colombian banks entered the year after enjoying a better economic environment. Gross total loans grew for all of the largest five banks, either marginally or up to about a tenth. The rates range from 0.41% for Bancolombia, the country’s largest bank both by assets and Tier 1 capital, to 9.85% for second biggest Banco de Bogotá.
"BTG Pactual, which focuses on investment banking, managed to close 2020 with one of the highest return-on-capital ratios in the region"
Analysts worry, however, that this growth was the result of excess liquidity and government subsidies, which suggests that the expansion of those portfolios may be temporary. Like their Brazilian peers, pre-tax profits were slashed at double-digit rates at all of Colombia’s largest banks.
In another key Latam market, Mexican banks had to deal with a tardy government response to the pandemic, which put at risk not only the health of the public but also that of the economy. The resemblance between the — initially dismissive — attitude of both the Mexican president, Andrés Manuel López Obrador, and Brazil’s Jair Bolsonaro is striking.
Nonetheless, lenders came through 2020 looking relatively unscarred. Some, like market leader Banco Banorte, even expanded their Tier 1 capital and assets size from the previous year. Things may be different by the end of 2021, as analysts fear that the slow vaccination campaign and the still necessary lockdown measures will continue to affect lenders and their clients.
Finally, two banks from the Caribbean deserve honourable mentions. Trinidad and Tobago’s Republic Financial Holdings banking group is among the names that have improved Tier 1 capital the most in 2020 in the region; while Banco de Reservas, the Dominican Republic’s state-owned lender, had the fourth highest return on capital across Latin American and the Caribbean region.
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BTG Pactual outperforms Brazilian peers
With the second worst Covid death-toll in the world, a poor vaccination campaign and social unrest, Brazil has struggled through the best part of the past 12 months. Things improved momentarily towards the end of 2020, when banks felt that their earlier economic forecasts – more hopeful than those of international observers – had been vindicated. In the end, gross domestic product dropped by 4.1%, signposting 2020 as the worst year in economic terms in four decades.
For Brazil’s largest banks, this resulted in a deterioration of activities: shrinking assets, smaller loan portfolios and bigger non-performing loan ratios. Economic conditions naturally took a hit on profitability. Return on equity and return on risk-weighted assets fell compared to the previous year for four of the country’s big five banks. Profit margins also went south for three of them, with Itaú Unibanco, the biggest of the group, seeing its profit margin dive from 26.39% in 2019 to 5.15% in 2020.
Although not immune to the local environment, the bank that most often bucked the trend was BTG Pactual. While its operating income shrank in comparison to the previous figure, total assets, loans as well as the amount of deposits it takes from clients rose. These figures are, however, all a fraction of those of Brazil’s four banking giants – BTG Pactual’s total assets are just 12% of those at Itaú, for example. BTG Pactual also has a far greater focus on investment banking, compared to the broader banking model of the other four. And while active in corporate lending, it does not engage with retail customers. These factors might help explain its better performance.
Based on the combination of a series of eight indicators, which include profitability, asset quality and soundness, BTG Pactual has comfortably outperformed its peers. In fact, taken individually, the bank has come on top in six of the eight categories, and with comfortable margins too. Its overall performance score keeps second-placed Banco do Brasil at a good distance.
For its part, Banco do Brasil did particularly well where BTG Pactual scored the lowest: in the soundness and leverage indicators. The former indicator looks at banks’ capital assets ratios and their change from the previous year; the latter considers the liabilities-to-assets ratios and, again, their annual change. State-owned Banco do Brasil is also the country’s second largest lender, both in terms of assets and Tier 1 capital. Brazil’s other mammoth state-owned lender, Caixa Econômica Federal, is fifth in terms of overall performance; while Banco Bradesco is third by size and by performance.
Itaú Unibanco, the country’s largest bank, comes fourth for performance. Notably, it managed to contain the shrinking of its loan portfolio as well as of its assets. It also secured the second biggest growth in terms of deposits. While best-performing BTG Pactual nearly doubled its deposits to about $11bn, Itaú Unibanco expanded its total by about 24% but to a much more sizeable $155.6bn.
Toronto Dominion Bank heads Canada’s big six
Government programmes to support banking clients during the Covid-19 pandemic meant all of Canada’s six largest banks came through 2020 largely unscathed. Their profit margins, however, were far lower than the previous year, while return-on-equity and return-on-assets ratios shrunk too.
But profitability is not the only indicator on which to assess a bank’s performance, and The Banker analysis is based on a combination of factors that include asset quality, operational efficiency and leverage. The best overall performance score goes to Toronto Dominion Bank, which showed much higher growth than its peers, as well as better efficiency, return on risk and liquidity indicators.
Desjardins, Canada’s largest co-operative group, is second in the overall performance table thanks to its exceptionally good asset quality, soundness and leverage indicators. Of note are its particularly low total impairment charges, which are a component of the asset quality indicator. Third overall is Bank of Montreal, followed by Royal Bank of Canada (RBC), in fourth place.
RBC showed the best profitability indicator for 2020. During a testing year, Canada’s largest bank also managed to secure the highest profit margins, the highest returns on equity and on assets, and the second-best asset utilisation ratio, which measures revenues generated in relation to the bank’s assets. RBC is optimistic about its future profitability, saying earlier this year it believes the economy will accelerate by mid to high single-digits in 2021, on the hope that interest rates would begin to rise sooner than expected.
RBC is followed by Canadian Imperial Bank of Commerce and Scotiabank in fifth and sixth place, respectively, in terms of overall performance.
Corporate lending dried up in 2020, and banks focused on mortgages instead as the housing market began to heat up. As a result, total loan portfolios for Canada’s big banks barely moved last year, while total deposits saw double-digit growth in almost all cases (Scotiabank being the odd one out, with 3.6% growth in deposits). Toronto Dominion Bank was the lender with the largest such growth, of 30.1%.
Things may begin to look up for Canada’s big six as earnings for the second quarter of this year are larger than those for the same period in 2020. With the exception of Dejardins, the same is true compared with the first three months of 2021.
After the struggles of last year, earnings growth was driven by significantly lower loan loss provisions, according to rating agency Fitch. The current low interest rate environment, however, threatens net interest income despite some positive movement in mortgage portfolios. Other analysts warn that corporate clients may still hold on to the record amount of cash that they have been piling up during the pandemic.
Banco de Bogotá takes Colombian performance prize
Despite signs of an economic recovery at the end of 2020, weak credit demand during the year did not help Colombia’s banks. Unsecured consumer loans took a hit because of prolonged lockdowns and high unemployment rates, as rating agency Fitch recently noted in a May research note. And while commercial loans and mortgages grew last year, this was the result of excess liquidity and government subsidies — suggesting the growth of those portfolios may be temporary.
Based on The Banker’s analysis, gross total loans grew, either marginally or up to about a tenth, at all of Colombia’s largest five banks. The rates go from 0.41% for Bancolombia, the country’s largest bank both by assets and Tier 1 capital, to 9.85% for second biggest Banco de Bogotá.
The allowance for loan losses understandably rose for all big lenders too. For the largest four, the ratio between those allowances and the loan portfolios rose by between 100 and 270 basis points (bps) compared to the previous year — though for Banco Popular, the exception of the group, it rose only by about 5bps.
Non-performing loans (NPLs) were contained, with ratios rising from the previous year but still nominally not surpassing 5%. The highest NPLs-to-total loans ratio was for Banco de Occidente, at 5.02% compared to the previous 4.1%; the lowest was for Banco de Bogotá, at 3.3% versus a previous 3.1%.
Fitch notes that the rise in NPLs was contained thanks to the second wave of payment relief programmes, which have only expired this June. It expects, however, that after that date, there are likely to be material credit losses. Retail loans and exposures to vulnerable economic sectors, which include services, transportation and infrastructure, are most at risk.
Overall, the worst changes were in profit margins, which plummeted for all the banks. Returns on equity, in particular, were considerably lower for two of the five: Bancolombia and mortgage specialist Banco Davivienda.
In last year’s challenging environment, some big lenders did better than the others. Based on indicators that include loan and deposit growth, NPLs, cost-to-income ratios, returns and asset quality, Banco de Bogotá showed the highest overall performance score. It topped the growth, profitability, operational efficiency, return on risk and liquidity individual rankings.
Banco Popular, on the other hand, leads in the three remaining indicators of asset quality, soundness and leverage. It has also the second highest score for profitability and return on risk. Banco de Occidente, Banco Davivienda and Bancolombia are in third, fourth and fifth place in terms of overall performance, respectively.
While Bancolombia comfortably remains Colombia’s dominant name, Banco de Bogotá’s assets grew at a much faster pace. Furthermore, Tier 1 capital expanded for Banco de Bogotá but shrunk slightly for Bancolombia.
Inbursa outperforms Mexican rivals
Few countries were spared the devastation brought by Covid-19 on lives and livelihoods. Few were run by governments that publicly downplayed the threat posed by the pandemic.
In Mexico, the tone was set by president Andrés Manuel López Obrador, who — even after seeing other countries succumb to the virus — encouraged Mexicans to continue with their normal lives. Movements were restricted only after some delay; and once vaccines became available, rollout was slow, resulting in the number of administered doses equivalent to fully vaccinating only about 15% of the population as of the middle of June.
Analysts expect that despite a likely economic recovery this year, the slow vaccination rate and the ongoing lockdown measures will continue to put pressure on Mexican banks. Consumer and investor confidence will remain weak, according to rating agency Fitch, limiting banks’ room for growth. Asset quality is also likely to deteriorate and dent profitability, as many loan repayment deferral programmes ended at the end of 2020 and bank customers are likely to remain under pressure.
Those forbearance programmes kept Mexican banks’ non-performing loans (NPLs) in check last year. Among the largest five locally owned lenders, NPL ratios ranged from Banco del Bajío’s 1.1% to Banco Azteca’s 4.7%, according to The Banker’s analysis of banks’ annual reports.
Overall, BanRegio showed the best asset quality score of the group. The score is based on the combination of a number of ratios: allowance for loan losses to gross total loans, NPLs, impairment charges to total operating income, and the change of these from a year earlier.
Banco Azteca is the lender that grew the most in terms of assets and loans. It scored worse than all other five banks, however, in terms of asset quality as well as return on risk, an indicator that combines the return-on-risk-weighted assets ratio with its annual change.
Banco Inbursa, on the other hand, is the lender that on an aggregate level outperformed all others. Mexico’s second largest local name — though less than a quarter of the size of leader Banco Banorte — Inbursa showed the highest profitability, operational efficiency and return on risk scores. In terms of profitability, the combination of its return-on-assets and return-on-equity ratios, profit margins and asset utilisation ratio was higher than all other large local banks.
Inbursa was also the only bank in the group to keep pre-tax-profits at similar levels as the previous year’s, with only a 6% drop compared to the double-figure drops and a pre-tax loss of the others. It was also the only lender to improve its cost-to-income ratio as well as its return-on-risk weighted assets ratio.
While retaining its clear dominance in terms of assets and size of its loans and deposits portfolios, Banorte is only third in the overall performance ranking.
Morgan Stanley leads as US banks feel profit squeeze
Cushioning operations from the Covid-19 crisis proved tough even for some of the largest banks in the US. For most, profit margins shrunk year-on-year, while pre-tax profits were lower than previously reported for six of the country’s top 10 banks.
Wells Fargo showed the largest drop, closing 2020 with a pre-tax profit that was less than 3% what it secured a year earlier. Based on overall performance, the San Francisco, California-based lender is last among the group of 10.
At the other end of the table is Morgan Stanley, which did particularly well in terms of growth metrics. These look at annual percentage growth in assets, loans, deposits and operating income. The Wall Street bank set itself comfortably ahead of all its large US peers.
Interestingly, out of this group, Morgan Stanley showed the largest improvement in its gross loan portfolio — though in absolute terms, the size of its loan portfolio is only about a quarter of that of JPMorgan, Bank of America and Wells Fargo. Similarly, Morgan Stanley showed the biggest growth in deposits too, though again from a low basis compared with its peers.
While generally the traditional banking model based on taking deposits and making loans has been under pressure because of expectations that its contribution to banks’ total earnings would be lower, there are exceptions — even among banks for which these activities represent a larger part of the business.
PNC Financial, for example, focuses on retail and small and mid-sized corporate clients and, based on The Banker’s analysis, tops the profitability ranking. This metric takes into consideration return on assets, returns on equity, profit margin and asset utilisation ratios, as well as their annual change. Pittsburgh, Pennsylvania-based PNC Financial also leads the return on risk and soundness tables, and is third in the overall performance table.
Second in the overall list is Truist Bank, which shows the best leverage indicator. This measure takes into consideration the total liabilities-to-total assets ratio and its annual change. In 2020, Truist also had the most improved asset utilisation ratio, now the second highest in the group of 10 after Morgan Stanley.
Like PNC Financial, Truist also has a strong deposit and loans activities relative to its size. The bank, headquartered in Charlotte, North Carolina, was born from the merger between SunTrust and BB&T at the end of 2019, in a deal that created a new large national player.
PNC has also grown, after completing the acquisition of BBVA’s US operations this June. Other changes may follow, as some observers believe the pandemic will cause smaller banks and foreign players in the US to review their options.