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July 03, 2018

IMF published its staff report under the 2018 Article IV consultation with Honduras. Directors welcomed the stability of the banking system and commended the progress made toward adopting Basel III standards. They recommended sustained implementation of the recommendations of the Financial Sector Stability Review (FSSR). Directors called for careful monitoring of household debt, the concentration of consumer loans in public pensions fund portfolios, and the expansion of development banks toward first-tier operations. They also underscored the need for a further strengthening of the anti-money laundering and combating the financing of terrorism (AML/CFT) framework.

The report noted that the banking system remains sound and the credit gap is closed. Against the backdrop of improved financial conditions and lower risks, balance sheet buffers appear adequate. Non-performing loans (NPLs) to total loans remain historically low, profitability is high, and the leverage ratio, at 11%, is well below the crisis threshold rating. Meanwhile, balance sheet risks remain moderate. The report suggests that authorities should continue to implement the recommendations of the recent FSSR. Several FSSR recommendations have been completed, including production of a new supervisory manual with methodologies for risk-based supervision, improved training programs for inspectors, new AML/CFT rules, and additional information-sharing agreements with other regional supervisors to enhance monitoring of financial conglomerates. The mission emphasized the need to enhance the monitoring of household debt and mitigate risks associated with the large concentration of personal loans in the public pension fund portfolio. 

Stress tests on the banking sector, conducted by staff, show that the sector is broadly resilient to most standardized shocks. The tests show the banking sector resistance in managing interest rate, foreign exchange, and liquidity shocks individually, with capital adequacy falling below the regulatory minimum only in the combined shock scenario. The mission indicated that an abrupt increase in NPLs could put capital adequacy ratios close to the statutory minimum and recommended close monitoring of developments in NPLs, which have been at historic lows. Increasing credit from commercial companies is a potential risk that needs to be assessed. 

Related Link: Staff Report

Keywords: Americas, Honduras, Banking, AML/CFT, Basel III, NPLs, Capital Adequacy, FSSR, IMF

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