The COVID-19 pandemic may have been intimidating for Latin America’s banks, but it hasn’t been devastating. Banks drew on their experience in handling the frequent crises that have rocked the region over the decades to not only keep afloat and support their clients, but to return to strong growth.

With support from central banks and governments, the region’s lenders managed their capital reserves cautiously and sustained their solvency levels after the onset of the pandemic in March 2020. They also kept credit lines open and renegotiated the debts of struggling families and small businesses.

The result has been impressive. Instead of collapsing like in previous crises, the banking sector is heading into the post-pandemic era on solid footing.

“Latin American banks entered the crisis with moderate rates of growth and applying conservative, prudent underwriting standards,” says Alfredo Calvo, a senior director at S&P Global Ratings in Mexico City. “They were not seeking aggressive rates of growth, and they had healthy balance sheets with adequate asset quality. Thanks to that, they were able to focus on the immediate problems caused by the pandemic.”

Banks weren’t immune to the health emergency, of course. But the damage was much less than had been expected, and their own health has improved since the first year of the pandemic thanks to their own prudence and a robust economic rebound. The Latin American and Caribbean economy recovered from a 6.5% contraction in 2020 with expected 5.2% growth in 2021, according to World Bank data. The rebound was led by vaccine rollouts, a loosening of mobility restrictions and higher commodity prices.

To keep from buckling after the pandemic swept into the region, banks fattened their capital provisions in anticipation of a tidal wave of nonperforming loans in 2020. They did this both of their own accord or at the behest of governments. Mexico’s regulator, for instance, told banks to suspend dividend payments.

According to McKinsey & Company, a management consulting firm, Latin America’s banks piled up $125 billion in capital provisions during the pandemic, more than the $93 billion in the 2007-09 global financial crisis. Yet the increase of delinquencies was less than had been initially feared. Nonperforming loans in Brazil, the region’s largest economy, fell to 2.17% of total loans in March 2021 from 3.17% a year earlier, with similar declines in Argentina, Bolivia, Chile and Uruguay, according to the latest data from Felaban, the Latin American Banking Federation. While some markets – Colombia, Mexico and Peru, for example – saw a rise in NPLs as a percentage of total loans over that same period, the subsequent release of some of the capital provisions in the region to $91.2 billion in March 2021 from a pandemic high of $99.6 billion in December 2020 helped boost bank profits in 2021. Net profits, according to Felaban, shot up 17% to $12.4 billion in March 2021 from $10.6 billion a year earlier. 

That was the case in Brazil, where the big banks that dominate the sector reported large profits in the first half of 2021. Itaú Unibanco, the country’s biggest bank, posted a profit of R$12.9 billion ($2.3 billion) in the first half of 2021, up 59% on the year. These banks acted prudently after the COVID-19 outbreak, putting them in a position to implement a more aggressive growth strategy in its wake despite the subsequent waves of the coronavirus and political uncertainties in the run-up to the October 2022 general elections, according to S&P.

“We are living in a favorable environment in Brazil, where the digital revolution along with the movement of financial deepening driven by the reduction of interest rates to historically low levels have helped to boost the market,” says Roberto Sallouti, CEO of BTG Pactual, which won LatinFinance’s Bank of the Year award in both Brazil and Latin America. “We had the best quarter of our history in the first half of the year, with impressive results in all our business lines.” 

A new approach

BTG Pactual, which has long been focused on capital markets, wealthier clients and corporate banking, is expanding its business in the higher-end retail market, especially small and medium enterprises (SMEs).

“We believe that the SME segment in Brazil remains poorly served, with few options and a restricted offer of credit,” Sallouti says.

BTG Pactual is not alone in this view. Across the region, lenders and regulators have been paying more attention to smaller businesses. This is not only for the growth potential of this market for banks, but because the sector is a big source of jobs, which is key for long-term economic growth and an increase in overall business opportunities for banks. According to the Organisation for Economic Co-operation and Development, 99.5% of all companies in Latin America and the Caribbean are SMEs, and they account for 60% of all productive employment in the region.

IDB Invest zeroed in on smaller businesses during the pandemic, winning Multilateral Bank of the Year. The Washington, DC-based bank rolled out a program to rally banks and large companies to channel more support to SMEs. In Mexico, for example, IDB Invest joined forces with the Mexican Business Council to club together more than a dozen companies to provide credit to more than 1,000 SMEs.

“We have been very successful in providing services and money to SMEs via large companies and their supply chains,” says James Scriven, CEO of IDB Invest. “It is a more efficient way to reach out to SMEs if you use the channels that they already have with their banks in order to provide money and advice.”

Many governments in the region followed similar paths by using the expertise that banks have developed over the years through credit analysis to funnel financial aid to small entrepreneurs. In Paraguay, the government provided 80% guarantees for banks to lend to SMEs during the pandemic. In Chile, the government offered special COVID-19 credit lines through its small business loans program, providing support not only to the cash flow of these enterprises but also for debt refinancing and investments.

“We have implemented programs that helped us support 36,000 SMEs and 1,100 companies and corporations, as well as 1.4 million personal clients,” says Eduardo Osuna, country manager of BBVA México, winner of Bank of the Year in that country. “It consisted of payment deferrals, of both capital and interest, for four months, with the option to extend it by two further months, representing 24% of our loan portfolio.”

Dealing with debt

Banks also put a focus on debt restructuring to help clients survive the crisis. Governments and central banks supported this effort by approving regulation that reduced capital provision requirements to compensate for deferred payments, and by providing guarantees to loans made to struggling SMEs and families.

Thanks to these initiatives, many banks were able to extend relief to clients during the hard times. Banco Itaú Paraguay, for example, made pre-approved loans available to smaller companies and facilitated the restructuring of existing loans, with initial payments deferred by up to one year and the repayments stretched out for up to 48 installments. Around 1,000 small companies benefited from the program, says José Brítez, CEO of Itaú Paraguay, which won Bank of the Year in that country.

“We strived to provide oxygen to clients by implementing a plan to defer loan payments during the worst periods of the pandemic,” he says. 

Cynthia Cohen Freue, a senior director at S&P Global Ratings in Buenos Aires, says the measures taken by governments and banks in response to the pandemic have helped mitigate the impact.

“Asset quality has performed better than we expected, and although we see some challenges ahead, the performance of the banking system has been really good,” she says.

Banks are not out of the woods. An expected slowdown in region’s economic growth to 2.9% in 2022 and 2.5% in 2023, according to the World Bank, along with new waves of the virus and political instability are clouding the horizon. The presidential elections in Chile and Peru in 2021 brought a surge in polarization in those countries, and the same could be in store as elections loom in Brazil and Colombia in 2022.

Take the case of Peru, one of the countries most affected by the pandemic in the region with an 11.1% economic contraction in 2020. While the Peruvian economy rebounded with booming 12.2% growth in 2021, it is poised to stabilize at only 2.3% growth per year over the next few years, according to BBVA Research. The growth expectations are tempered by political instability. President Pedro Castillo, a leftwing populist who was elected by a whisker in June 2021, he has no control over a hostile Congress.

Even so, Fernando Bravo, head of Goldman Sachs in the Andean region, where the US-based bank won Investment Bank of the Year, is confident that Peru will continue to be an attractive destination.

“Peru remains, from the macro and fiscal perspective, one of the most solid economies in the region,” he says. “There has been interest from international investors to fund different sectors and different issuers in Peru, not only the government, but also in the private sector.”

Raising funds abroad

The interest has been matched by a rise in the supply of paper, as Latin American issuers returned to capital markets in the second half of 2020 and have remained active since. In markets like Chile, domestic money became less available as the pandemic progressed, making it more attractive for companies and governments to raise funds abroad.

“The local market has been shrinking in its ability to provide financing in local currency. We have seen that financing needs have been addressed at higher proportions by international capital markets,” says Luis Puchol Plaza, managing director of Goldman Sachs Chile. 


Another challenge for banks is to improve their environmental, social and corporate governance (ESG) performance, as investors put more attention on these nonfinancial factors as part of their analysis of where to put their money.

“The ESG trend is moving so fast that it is going from a nice thing to have to something that pretty much everybody is looking at. Some funds have said that if a company is not green, they are not going to buy their securities,” says Felipe García Ascencio, head of corporate and investment banking at Santander CIB, winner of Investment Bank in Mexico. “It has become a must-have very quickly.” LF