As in other areas of the world, global banks have been leaving the Latin America at a steady clip. Banks are mainly leaving for financial as well as regulatory reasons. Experts say stricter capital retention rules, slower growth and growing compliance and litigation costs have forced global banks to review their strategies to optimize their use of capital; unfortunately that means abandoning forays into emerging markets.
According to Fitch Ratings, global banks’ departures from Latin America will continue “as they attempt to improve their return on capital by changing strategies and lowering their exposure to the risk presented in some Latin American markets.”
For corporates, this means a scramble to find the product offerings that are fading away. As such, MNCs have been taking a second and even third look at their banking relationships. But the truth is, banking relationships have always been challenging in Latin America; still the latest wave of global banks divesting businesses across the region has upped the ante.
For many years, multinationals with centralized treasury operations tried to streamline their banking relationships, striving to have a main banking partner in the region. In reality, they ended up with a combination of global banks, depending on their local presence and product offerings, and local banks, when required by business needs or a particular countries regulatory mandates.
In the wake of Basel III and woes in certain countries, corporates started to build up their banking backup plans only to discover just this year that even some of their backups are leaving certain countries and lines of business.
Looking ahead, MNCs’ banking woes could begin to dissipate. That’s because Latin American economies, although currently facing their worst performance since the global financial crisis, could rebound. Low commodity prices and tightened monetary policies to contain inflation have been the culprits behind growth deceleration, so economists expect most economies to turn around in 2017. This is likely due to better internal consumption and a commodity price rebound. Some downside risk does remain however, owing to weak global demand, financial markets volatility and a rise in political conflicts in the region.
Bottom-line, in the current environment, MNCs are expected to have a busy year ahead reassessing their bank relationship strategy in Latin America.