Certain banking data as of June 2024

In early April 2024, a report from the Economist Intelligence Unit (EIU) pointed out problems in the Bolivian banking system, such as the contraction of deposits and credit and the increase in bad debts.

In response to questions from EL DEBER, the Financial System Superintendent (ASFI) dismissed the report, saying the banking system is in good shape and default rates are low compared to other countries. The Bolivian Association of Private Banks (Asoban) avoided commenting, saying it was “busy” with other matters.

However, three months later, ASFI released data showing that overdue and foreclosed loans increased by P1.6 billion between June 2023 and June 2024 and now account for 3.39% of the total portfolio, compared to 2.63% in June 2023.

The bad debt provision coverage ratio for the past due and foreclosed portfolio also fell from 1.25 to 1.16 over the same period. To maintain the previous year’s coverage level, the bank should have set aside an additional 718 billion pesos, equivalent to 78% of its profit in the first half of 2024.

Annualizing the system’s utility to June 2024, return on assets (ROA) and return on equity (ROI) would be 10% and 16% lower than in 2023, although there could be some favorable seasonality in the second half of 2024 that could narrow the gap somewhat.

The comparison between the deposits of the management in 2023 and those in June 2024 is misleading because we stumble upon a reclassification of the deposits of the management company, amounting to about Sh70 billion: in May 2023, they were reclassified as deposits of public entities, and now, ASFI has ordered them to be re-registered as “public” deposits.

Extrapolating this important public deposit figure to June 2024, these figures remain at nominal levels. But in real terms, if the INE CPI is taken as an adjustment factor, they fall by about BS4.7 billion (2.50%).

Three months after the EIU report was released, there is empirical evidence confirming its initial predictions of falling asset returns, deteriorating portfolios and stagnant deposits.

This leads us to evaluate another false assertion of ASFI: that Bolivia’s arrears levels are low compared to other countries.

According to the ASFI standards of the Bolivian banking sector, loans are reviewed individually and the corresponding forecasts are determined based on indicators generated before the assessment. For smaller amounts of credit, provisions are made based on a pre-established table of days in arrears for the last installment.

On the other hand, in all neighbouring countries, International Financial Reporting Standard 9 (IFRS 9) applies, where financial assets are initially stated at actual acquisition costs and then adjusted to the present value of expected future cash flows using the resulting effective interest rate –

Different studies on the implementation of IFRS 9 in the United States and Europe by PricewaterhouseCoopers (PWC), Deloitte (DL) and the European Banking Authority (EBA) show that as a result of adapting to the new standard, provisions for bad debt losses increased by about 25% according to DL, 25% according to PwC and 30% according to the EBA – and this was against the backdrop of a stable economy.

The delinquency rates of the Bolivian banking system are not comparable to those of our neighboring countries, because the ASFI standards stipulate that provisions are constituted only when it is clear that a borrower is in non-payment or financial deterioration, without taking into account the systemic risk of the sector, expected losses, the present value of expected losses or the probability of default. This approach is mechanical, limited and incomplete.

To overcome the economic crisis, it is necessary to make market data transparent using proven and widely accepted methods such as IFRS 9. As with any difficult decision, the sooner action is taken, the more effective the solution will be and the lower the cost for everyone.