Standard & Poor’s has issued a new report on Latin American banks, including a couple of Scotiabank subsidiaries.

The report notes that banks across the region improved their performance during 2004, and raising expectations for 2005. “With the exception of Uruguayan banks, the challenge to grow has been successfully faced by most banking systems,” S&P says. “Either with strong fundamentals – as in Chile and Mexico – or with a wavering grip – as in Argentina – lending activity, asset quality and profitability are showing improving trends across Latin American systems.”

Chilean banks’ performance was promising during 2004. Loans grew 10.4%, not only driven by the dynamism in the consumer and mortgage products, but also by an auspicious pick-up in commercial lending, which after years of stagnation, posted a 6.2% increase, S&P reports. “The very positive macroeconomic environment and improving sovereign fundamentals – the Chilean government credit rating was raised early in 2004 – encouraged economic agents’ increased demand for credit,” it adds.

In Mexico, new reserve requirements have not significantly affected banks’ bottom-line results or capitalization levels, it notes. “Although consumer lending continues to be the driver for growth, the commercial loan portfolio has finally begun to rebound, and there are good prospects despite increasing interest rates and 2006 elections,” it says. “In this sense, banks have been able to increase deposits, are liquid, and have enough capital to support loan growth. Standard & Poor’s Ratings Services expects income generation to begin being driven by increase operating revenues, especially net interest margins and fees and commissions derived from increasing intermediation volumes. As the loan portfolio increases, volatile trading gains should begin to have a lesser effect on bottom-line results.”

The improving economic prospects of Brazil, with a GDP growth of 5.2% in 2004, allowed Brazilian banks to expand lending activity by about 16%, it reports. Last year was positive for Argentine banks too. “The financial system finally recovered operating profitability; reported results, however, remain negative as the institutions are gradually recognizing the losses still hidden in their balance sheets by means of accounting forbearance,” it says.

Scotia painfully bailed out of Argentina several years ago. But S&P offers comments on its subsidiaries in Chile (Scotiabank Sudamericano) and Mexico (Scotiabank Inverlat S.A.).

“Scotiabank Sudamericano showed slightly higher profitability in 2004,” it says, but, “earnings still compare unfavorably to the system’s average and peer banks.” S&P says the bank has shown overall progress in asset quality, its main weakness in past years.

In Mexico, “Scotiabank continues to expand its lending business, and improve revenue generation. An 18% increase in the loan portfolio, led by mortgages and loan to banks and the increasing trend in NII/earning assets, was the main reasons for an operating revenues increase of 12%. Despite the bank’s efforts to improve efficiency, during 2004, the operating expenses-to-revenues indicator improved just slightly compared to 2003 and remains among the highest of the largest banks in the system,” it says. “Bottom-line results are above net income reported in 2003, but this was fueled by tax benefits… Past-due loans have reached a low level of 2.5%, and reserve coverage is conservative. With an aggressive strategy to penetrate the market, Scotiabank’s main challenge is to become more efficient.”