TGB Regional Banking Monitor: Americas — Q3 2024

The regional picture

Monetary policy across the Americas diverged sharply in the third quarter of 2024 and the weeks that followed. The Federal Reserve cut the federal funds target range by 50bp to 4.75–5.00% on 18 September 2024 and by a further 25bp to 4.50–4.75% on 7 November. The Bank of Canada lowered its target for the overnight rate by 25bp on 24 July and on 4 September, and then by 50bp on 23 October, to 3.75%. Banco de México cut its overnight interbank rate target by 25bp on 8 August, 26 September and 14 November, to 10.25%. Banco de la República reduced Colombia's policy rate by 50bp on 31 July, 30 September and 31 October, to 9.75%. Brazil moved in the opposite direction: Copom raised the Selic by 25bp to 10.75% on 18 September and by 50bp to 11.25% on 6 November.

The inflation backdrop explains much of the split. Canadian CPI inflation fell from 2.7% in June to 1.6% in September 2024, and Colombian annual inflation eased from 6.1% in August to 5.8% in September. In Mexico, by contrast, headline inflation rebounded to 4.76% in October 2024, although core inflation continued to fall, to 3.80%. In Brazil, the Focus survey expectations for 2024 inflation cited by Copom rose from around 4.4% in September to around 4.6% in November.

Summed across these decisions, the Federal Reserve eased by 75bp, the Bank of Canada by 100bp, Banco de México by 75bp and Banco de la República by 150bp, while Copom tightened by 75bp. Copom's November increase was twice the size of its September move. By November, Brazil's Selic was the highest of the five policy rates and Canada's overnight rate target the lowest.

Bank data in this monitor come from supervisors, central banks and listed banks, and they refer to different dates and definitions. US aggregates refer to the third quarter of 2024 or earlier, Canadian bank results to the fiscal quarter ended 31 October 2024, Brazilian credit data to October 2024 and the Mexican, Colombian and Chilean system data mostly to September 2024.

United States: returns ease as deposit-cost growth slows

The Committee's own projections pointed to further easing. Its 7 November statement said labour market conditions had generally eased since earlier in the year and that inflation had made progress toward the 2% objective but remained somewhat elevated. The September 2024 projections put the median participant's federal funds rate at 4.4% for end-2024, 3.4% for end-2025 and 2.9% for end-2026. That median path implied a further 1.0 percentage point of easing during 2025. The September cut was not unanimous: one voting member preferred a 25bp reduction.

The Federal Reserve's Supervision and Regulation Report, based on results from a sample of 23 large banks, put their aggregate return on equity at 12% in the third quarter of 2024, against 13% in the second quarter. Large banks reported that deposit costs were still rising, but at the slowest pace since the first quarter of 2022. Loan growth was modest, and loan loss rates declined quarter on quarter at a majority of large banks for the first time in three years. The aggregate CET1 ratio of large banks was approximately 13% at the end of the third quarter, in line with the end of the second quarter. The Board's Financial Stability Report added that CET1 ratios had increased further across all bank-size categories in the first half of 2024.

Results at JPMorgan Chase and Wells Fargo show the spread around that average. JPMorgan Chase reported third-quarter net income of $12.9 billion, down 2% on a year earlier, with a return on common equity of 16% and a standardised CET1 ratio of 15.3%. Its net interest income was $23.5 billion, up 3%, and its credit costs of $3.1 billion included $2.1 billion of net charge-offs and a $1.0 billion net reserve build. Wells Fargo reported net income of $5.1 billion, a return on equity of 11.7% and a CET1 ratio of 11.3%. Its return on equity had been 13.3% a year earlier. Its net interest income fell 11% on a year earlier because of higher funding costs as customers moved into higher-yielding deposit products, and lower loan balances. Its annualised net loan charge-off ratio improved to 0.49% from 0.57% in the second quarter.

United States: large-bank results, third quarter 2024

Source: JPMorgan Chase & Co., Earnings release, third quarter 2024 results (Form 8-K, Exhibit 99.1), 11 October 2024; Wells Fargo & Company, Wells Fargo Reports Third Quarter 2024 Net Income (Form 8-K, Exhibit 99.1), 11 October 2024; Board of Governors of the Federal Reserve System, Supervision and Regulation Report, November 2024: Banking System Conditions, 21 November 2024.

Unrealised losses on securities holdings remain large. US banks reported fair value losses of $203 billion on available-for-sale securities and $308 billion on held-to-maturity securities as of the second quarter of 2024, a combined $511 billion. The available-for-sale losses were down from $248 billion a year earlier. The Federal Reserve noted that interest rates declined significantly in the third quarter but reversed much of that decline in October, so that fair value losses at the beginning of November were likely only modestly below their end-June levels. Commercial real estate remains a credit watchpoint: the delinquency rate on office loans at large banks rose to 11.0% in the second quarter of 2024.

Canada: faster easing, steady capital

The Bank of Canada accelerated in October. Its 4 September cut, to 4.25%, had followed a further slowing of inflation to 2.5% in July 2024. On 23 October 2024 it cut by 50 basis points to 3.75%, with the Bank Rate at 4%, after CPI inflation had fallen from 2.7% in June to 1.6% in September. It said the unemployment rate was 6.5% in September and forecast GDP growth of 1.2% in 2024, 2.1% in 2025 and 2.3% in 2026. The Bank said that if the economy evolved broadly in line with its forecast it expected to reduce the policy rate further. Its next scheduled announcement date was 11 December 2024.

Prudential policy stayed unchanged. On 18 June 2024 the Office of the Superintendent of Financial Institutions (OSFI) kept the Domestic Stability Buffer at 3.5% of total risk-weighted assets, so domestic systemically important banks continued to target a CET1 ratio of at least 11.5%. OSFI judged that systemic vulnerabilities remained elevated and broadly stable, while near-term risks were still low but rising.

Royal Bank of Canada and Scotiabank, which both reported fiscal 2024 results in early December, met that target with room to spare. Royal Bank of Canada reported net income of C$16.2 billion for the year ended 31 October 2024, up 11%, and a CET1 ratio of 13.2%. That ratio is 1.7 percentage points above the 11.5% target. In its fiscal fourth quarter RBC earned C$4,222 million, with an ROE of 14.3%, but its PCL on loans ratio rose 8bp from the prior quarter to 35bp. Scotiabank reported fiscal 2024 net income of C$7,892 million, against C$7,450 million in 2023, a return on equity of 10.2% and a CET1 ratio of 13.1%. Its fourth-quarter net income was C$1,689 million, including impairment charges of C$379 million related to its investment in Bank of Xi'an in China and certain software assets. Its fourth-quarter ROE was 8.3%, against 14.3% at RBC.

Scotiabank's provision for credit losses ratio fell 11bp from a year earlier to 54bp in the fourth quarter. Its impaired-loan provisions rose, however, because of higher formations in Canadian retail and commercial portfolios and in International Banking retail portfolios, mostly in Mexico, Chile and Colombia. That links Canadian bank earnings to the Latin American credit cycle covered later in this monitor.

Canada: large-bank results, fiscal year to 31 October 2024

Source: Royal Bank of Canada, Royal Bank of Canada reports fourth quarter and 2024 results, 4 December 2024; The Bank of Nova Scotia, Scotiabank reports fourth quarter and 2024 results, 3 December 2024; Office of the Superintendent of Financial Institutions, OSFI maintains the level of the Domestic Stability Buffer at 3.50% - Letter (2024), 18 June 2024.

Brazil: tightening into strong credit growth

Copom raised the Selic unanimously at both meetings, by 25bp to 10.75% on 18 September 2024 and by 50bp to 11.25% on 6 November. In November it put the Focus survey's inflation expectations at around 4.6% for 2024 and 4.0% for 2025, and its own projection for the second quarter of 2026, the relevant policy horizon, at 3.6%. Expectations for 2025 were unchanged from September, at around 4.0%. The committee also said that economic agents' perception of the fiscal scenario had significantly affected asset prices and expectations, especially the risk premium and the exchange rate. Copom said the pace of future adjustments and the total size of the tightening cycle would be dictated by its firm commitment to bringing inflation to the target.

The banking system enters the cycle well capitalised. The Banco Central do Brasil's November 2024 Financial Stability Report concluded that there was no relevant risk to financial stability. The system had a capital margin of BRL486 billion, equal to 32% of its aggregate regulatory capital, in the first half of 2024. Entities with a return on equity above 10% held more than 75% of banking-system assets in that period. The Financial Stability Committee held the countercyclical capital buffer at 0% at its May and August 2024 meetings.

New accounting rules for financial instruments take effect on 1 January 2025. Entities covering around 80% of credit exposures estimated that the change would add BRL35.6 billion to provisions, about 10% of current provisions, recorded against capital rather than earnings. That is equivalent to about 7.3% of the capital margin.

Credit has kept growing strongly despite higher rates. The credit balance of the national financial system reached R$6.3 trillion in October 2024, up 0.7% in the month, and twelve-month growth accelerated to 10.8% from 10.6%. Lending to companies accelerated to 8.9% from 8.1%, while household credit slowed slightly to 12.0% from 12.2%. The 90-day delinquency rate was 3.2%, unchanged in the month and 0.3 percentage point lower than a year earlier. It was 2.3% on lending to companies and 3.7% on lending to households. The cost of credit indicator stood at 21.7% a year.

Brazil: credit and banking-system indicators

Source: Banco Central do Brasil, Estatísticas monetárias e de crédito (October 2024 data), 28 November 2024; Banco Central do Brasil, Financial Stability Report, Volume 23, N. 2, November 2024, 30 November 2024.

Mexico: gradual cuts, stable capital, rising delinquency

Banco de México cut by 25bp at each of its three decisions from August to November. The August and September cuts were taken by majority, the November cut unanimously. In November the Board said it foresaw an inflation environment that would allow further adjustments to the reference rate. Headline inflation of 4.76% in October 2024 reflected supply shocks to the non-core component, while core inflation fell to 3.80%.

Banco de México's quarterly report said the Mexican financial system as a whole remained solid and resilient in the third quarter of 2024. The capitalisation index of commercial banks rose 10bp, from 19.29% in June 2024 to 19.39% in September 2024, as regulatory capital, particularly earned capital, grew faster than risk-weighted assets. The risk-adjusted capitalisation index rose from 15.37% to 15.64%, and credit risk measured by conditional value at risk fell from 6.01% to 5.84% of the loan portfolio.

Asset quality moved the other way. The non-performing loan index of commercial bank credit to the private non-financial sector rose from 2.20% in June 2024 to 2.28% in September 2024, with increases in consumer, housing and business credit. That is an increase of 8bp in one quarter. Scotiabank's report of higher impaired-loan formations in its Mexican retail book is consistent with that trend. With capital rising faster than risk, Mexican banks have room to absorb a further modest rise in delinquency.

Mexico: commercial-bank indicators

Source: Banco de México, Informe Trimestral Julio - Septiembre 2024, 27 November 2024.

Colombia: deeper cuts, shrinking loan book

Banco de la República cut by 50bp at three consecutive decisions, taking its policy rate from 10.75% after 31 July to 9.75% on 31 October 2024. A minority of directors favoured a larger 75bp cut at each decision: two in July and three in both September and October. Annual inflation fell to 5.8% in September 2024 from 6.1% in August.

Colombia's Financial System Coordination and Monitoring Committee said in October that credit institutions at August 2024 kept solvency and liquidity indicators above regulatory minimums. It put their annualised return on assets at 1.3%, relatively stable but below the average of the past five years, with profitability held down mainly by higher provisions. The Committee expected positive real credit growth in the first half of 2025. It also reviewed the indicator that identifies systemically important entities, which must build an additional capital buffer for 2025.

The Superintendencia Financiera's September 2024 data show the scale of the adjustment. Gross loans had recorded 18 months of negative real annual growth, with a real decline of 4.1% in September 2024. The arrears ratio for the total portfolio, measured on loans more than 30 days past due, was 5.1%, with microcredit at 9.6%, consumer loans at 7.6% and commercial loans at 3.9%. Provision coverage of past-due loans was 120.5% and the total solvency ratio of banks was 17.3%. Credit institutions' profits to September amounted to COP6.4 trillion, less than in the same period of 2023. Colombia therefore combines strong solvency with lower profits and a contracting loan book.

Colombia: credit-institution indicators, September 2024

Source: Superintendencia Financiera de Colombia, Actualidad del Sistema Financiero Colombiano, septiembre 2024, 15 November 2024.

Chile: lending contracts, profitability improves

Chile's Comisión para el Mercado Financiero (CMF) reported that banking-system loans fell 2.51% in real terms over the twelve months to September 2024. Commercial loans fell 5.01% and consumer loans 2.16%, while housing loans grew 1.62%. Housing was the only one of the three segments to expand. In September the 90-days-or-more delinquency ratio rose from 2.35% to 2.38%, the provisions index fell from 2.55% to 2.53% and the impaired-portfolio ratio held at 6%. Return on average equity was 15.68% and return on average assets 1.26%, both higher than a month earlier and twelve months earlier. The system's profit for September 2024 was CLP451,707 million (US$504 million), down 10.39% on August but up 9.90% over twelve months. Chilean banks are therefore growing earnings without growing their loan books, while delinquency drifts slightly higher.

Cross-country comparison

Americas banking monitor: system indicators

Source: Board of Governors of the Federal Reserve System, Supervision and Regulation Report, November 2024: Banking System Conditions, 21 November 2024; Royal Bank of Canada, Royal Bank of Canada reports fourth quarter and 2024 results, 4 December 2024; The Bank of Nova Scotia, Scotiabank reports fourth quarter and 2024 results, 3 December 2024; Banco Central do Brasil, Financial Stability Report, Volume 23, N. 2, November 2024, 30 November 2024; Banco Central do Brasil, Estatísticas monetárias e de crédito (October 2024 data), 28 November 2024; Banco de México, Informe Trimestral Julio - Septiembre 2024, 27 November 2024; Superintendencia Financiera de Colombia, Actualidad del Sistema Financiero Colombiano, septiembre 2024, 15 November 2024; Superintendencia Financiera de Colombia, Conclusiones Sesión N° 91 del Comité de Coordinación para el Seguimiento al Sistema Financiero, 4 October 2024; Comisión para el Mercado Financiero (Chile), CMF informa el desempeño de bancos y cooperativas supervisadas a septiembre de 2024, 30 October 2024.

Of the five policy rates covered, only Brazil's rose over the period, yet its credit was still growing at 10.8% a year in October 2024. By contrast, Colombian and Chilean loan books were shrinking in real terms in September 2024. The Banco Central do Brasil saw no relevant risk to financial stability, and Banco de México described its financial system as solid and resilient.

Outlook and risks

For US banks, the main exposure is to longer-term yields: the Federal Reserve judged that fair value losses at the start of November were likely only modestly below the $511 billion recorded at the end of the second quarter. In Canada, the Bank of Canada's guidance points to further cuts, while OSFI held its Domestic Stability Buffer because it judged near-term risks low but rising. In Brazil, higher policy rates and a fiscal risk premium meet a system with strong capital and a BRL35.6 billion provisioning charge to absorb from January 2025. In Mexico and Chile, delinquency ratios are rising slowly from low levels. Mexican banks start from a stronger capital position than in June, with the capitalisation index up to 19.39%, and Banco de México has signalled further adjustments to its reference rate. In Colombia, the question is whether lower policy rates revive lending before weak profitability erodes the capacity to provision. Bank total solvency of 17.3% in September 2024 gives the system capital to absorb that adjustment.

Primary sources: Board of Governors of the Federal Reserve System, Supervision and Regulation Report, November 2024: Banking System Conditions, 21 November 2024; Banco Central do Brasil, Copom statement, 266th meeting: Copom eleva a taxa Selic para 11,25% a.a., 6 November 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (7 November 2024), 7 November 2024; Bank of Canada, Bank of Canada reduces policy rate by 50 basis points to 3¾% (23 October 2024), 23 October 2024; Banco de México, Anuncio de Política Monetaria, 14 de noviembre de 2024, 14 November 2024; Banco de la República, Junta Directiva: decisión de política monetaria, octubre de 2024, 31 October 2024; Banco de México, Informe Trimestral Julio - Septiembre 2024, 27 November 2024; Comisión para el Mercado Financiero (Chile), CMF informa el desempeño de bancos y cooperativas supervisadas a septiembre de 2024, 30 October 2024; Superintendencia Financiera de Colombia, Actualidad del Sistema Financiero Colombiano, septiembre 2024, 15 November 2024; Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement (18 September 2024), 18 September 2024; Bank of Canada, Bank of Canada reduces policy rate by 25 basis points (24 July 2024), 24 July 2024; Bank of Canada, Bank of Canada reduces policy rate by 25 basis points (4 September 2024), 4 September 2024; Banco de México, Anuncio de Política Monetaria, 8 de agosto de 2024, 8 August 2024; Banco de México, Anuncio de Política Monetaria, 26 de septiembre de 2024, 26 September 2024; Banco de la República, Junta Directiva: decisión de política monetaria, julio de 2024, 31 July 2024; Banco de la República, Junta Directiva: decisión de política monetaria, septiembre de 2024, 30 September 2024; Banco Central do Brasil, Copom statement, 265th meeting: Copom eleva a taxa Selic para 10,75% a.a., 18 September 2024; Royal Bank of Canada, Royal Bank of Canada reports fourth quarter and 2024 results, 4 December 2024; Banco Central do Brasil, Estatísticas monetárias e de crédito (October 2024 data), 28 November 2024; Board of Governors of the Federal Reserve System, FOMC Projections materials, September 18, 2024, 18 September 2024; Board of Governors of the Federal Reserve System, Financial Stability Report, November 2024: Leverage in the Financial Sector, 25 November 2024; JPMorgan Chase & Co., Earnings release, third quarter 2024 results (Form 8-K, Exhibit 99.1), 11 October 2024; Wells Fargo & Company, Wells Fargo Reports Third Quarter 2024 Net Income (Form 8-K, Exhibit 99.1), 11 October 2024; Office of the Superintendent of Financial Institutions, OSFI maintains the level of the Domestic Stability Buffer at 3.50% - Letter (2024), 18 June 2024; The Bank of Nova Scotia, Scotiabank reports fourth quarter and 2024 results, 3 December 2024; Banco Central do Brasil, Financial Stability Report, Volume 23, N. 2, November 2024, 30 November 2024; Superintendencia Financiera de Colombia, Conclusiones Sesión N° 91 del Comité de Coordinación para el Seguimiento al Sistema Financiero, 4 October 2024.