OREANDA-NEWS. Fitch Ratings' sector outlook for Andean banks in 2016 reflects diverging trends in the Colombian and Peruvian operating environments on the one hand, and those of Ecuador and Venezuela on the other.

'While all markets have been sensitive to the decline in commodity prices, Colombian and Peruvian banks have largely adjusted to slower economic growth and are well situated to face current market conditions,' according to Theresa Paiz Fredel, Senior Director, Fitch Ratings. Fitch anticipates a cyclical deterioration in asset quality and financial performance in Colombia and Peru in 2016. However, this should not affect bank ratings or sector outlooks as credit metrics will remain in line with similarly rated peers (investment grade Latin American universal/commercial banks).

Regulation in Colombia and Peru is progressing toward greater alignment with international standards. The phasing in of BIS III capital rules (albeit with a local flavour) will result in a higher quality capital base for these systems. By contrast, the regulatory frameworks in Ecuador and Venezuela contribute to uncertainty as the risk of government intervention remains high.

Moreover, stable profitability at Colombian and Peruvian banks should offset the increased credit risk associated with lower economic growth and the loan seasoning from prior periods of high growth. However, in Ecuador and Venezuela, Fitch expects financial performance to deteriorate in 2016. A deceleration in asset and credit growth will help maintain adequate capital cushions in Ecuador. But higher credit costs could weaken already pressured profits. In the absence of macroeconomic adjustment, the Venezuelan system's impaired loans/gross loans ratio is likely to remain at current low levels due to inflation-induced growth, though capitalization ratios will remain under pressure. Based on the Fitch's forecast for average inflation in Venezuela of 123% in 2015 and 174% in 2016, banks are not likely to be profitable in real terms over our outlook horizon.