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Fitch: Honduran Banks' New Capital Requirements Credit Positive
March 8, 2017 / 5:42 PM / 9 months ago

Fitch: Honduran Banks' New Capital Requirements Credit Positive

(The following statement was released by the rating agency) NEW YORK/SAN SALVADOR, March 08 (Fitch) New capital requirements for Honduran financial institutions indicate progress toward adopting Basel III (BIS III) recommendations and will strengthen the system's loss absorption capacity, says Fitch Ratings. This should be credit positive for the banking sector. A National Banking and Insurance Commission (CNBS) decree announced earlier this year calls for changes in capital adequacy standards, including the introduction of a capital conservation buffer and a minimum leverage ratio. The regulation stipulates a transition schedule that will begin in June 2017 and incorporates the gradual implementation of a capital conservation buffer of 3% by December 2019, above the minimum capital adequacy ratio of 10%. A minimum leverage ratio of 4%, which includes off-balance sheet position is also to be implemented and complements risk-based solvency ratios. In line with BIS III, the regulation establishes restrictions on the discretionary distribution of funds when capital levels do not reach minimum requirements. The capital adequacy ratio established under BIS III is 8%, of which 6% is Tier 1 capital and 2% is Tier 2. BIS III places greater emphasis on common equity capital by establishing a minimum 4.5% common equity Tier 1 capital requirement that increases to 7% when including the 2.5% capital conservation buffer. In addition, BIS III allows for an additional counter-cyclical capital cushion (between 0% and 2.5%) during periods of excessive growth and significant credit risk accumulation. Local capital requirements above those established by BIS III could compensate for differences in regulatory capital calculations as Honduran banks may hold up to 50% of their total capital in the form of Tier 2 capital. Subordinated debt accounts for nearly 20% of the banking system's Tier 2 capital, which is not included under BIS III criteria. Fitch estimates that the current capitalization of rated Honduran financial institutions will allow them to comply with the additional capital requirements in 2017 and 2018 for most rated entities. However, the impact of the regulatory change will be greater for entities whose growth exceeds internal capital generation, as well as for entities that support their capital with a large proportion of hybrid instruments, such as subordinated debt. Fitch believes that the six rated banks are able to comply with these additional capital requirements, although they may have to moderate their growth targets, reduce their exposure to higher risk credit segments, raise capital or improve their internal capital generation to comply with future capital requirements. However, the current leverage ratio of the rated entities exceeds the minimum requirement for 2018 (4%). The steps taken to approach Basel III standards are credit positive for Honduran banks, although there is still room for further alignment, including designating domestic systemically important banks (D-SIB) and the introduction of liquidity standards such as a minimum liquidity coverage ratio and net stable funding ratio. Second and third pillar regulations covering supervision, risk management and market disclosure are included in existing local regulation and do not fall under global standards set by BIS III. With the aforementioned measures, Honduras joins other countries in Latin America, led by Mexico and Brazil, adopting more stringent capital regulations. Panama and Chile have followed by partially adopting BIS III rules. Contact: Jose Berrios Associate Director +503 2516 6612 Fitch Centroamerica Edificio Plaza Cristal, Tercer Nivel 79 Avenida Sur y Calle Cuscatlan San Salvador, El Salvador Rolando Martinez Senior Director + 503 2516 6619 Justin Patrie Fitch Wire +1 646 582 4964 33 Whitehall Street New York, NY Media Relations: Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available on The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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