LatAm banking: Keep an eye on the Andeans

Brazil’s banks – and Brazilian assets generally – have been rallying as new president Jair Bolsonaro manages to keep the honeymoon sentiment in the markets more or less on track.

At the same time, Mexican banks have been suffering from the end of the Amlo (Andrés Manuel López Obrador) honeymoon – lower GDP and loan growth is expected as the country’s new president sparked political risk fears when he scrapped the country’s $13 billion new airport and, more directly, threatening to impose fee caps on banks to limit the sector’s profitability.

Meanwhile Argentina’s banks remain the proverbial falling knives – brave investors may enter, but downside risks to valuations are still big, despite the dramatic sell-off.

New lending cycle

In such a polarised context, it’s worth taking a look at the dynamics at the Andean banks in Latin America. Like those in Brazil, banks in Chile, Colombia and Peru appear to be at the beginning of a new lending cycle as GDP in the Andean region underpins growing credit demand – projected by UBS to hit 10% in 2019 (up from 7.5% in 2018 and 4.6% in 2017).

Loan portfolio growth is expected to be particularly strong in Peru and Colombia, while asset quality is behaving well throughout the region. These countries’ cost of risk is also expected to improve, so investors looking for EM bank opportunities should take a closer look at financial institutions in the less volatile part of Latin America.

These are countries that make fewer headlines for a reason – and it’s not just because of scale. Keep an eye on the Andeans – the risk/reward ratio is compelling.