The Financial Sector in El Salvador is the Fastest Growing

Sector Overview

This indicator reflects banking activities and those carried out through cooperative banks, savings and credit societies, insurance markets, and pension funds. In the banking sector, activity grew by 6%, according to the Financial Performance Report of the Salvadoran Banking Association (ABANSA), which represents 11 commercial banks. This growth is sustained by the increase in deposits within the financial sector in El Salvador, which has also facilitated the flow of funds for lending.

“We are a country where our financial system relies on deposits. Deposits are the most important fuel we have as banks,” said Reynaldo Rodríguez, Treasury Manager at Banco Davivienda.

According to ABANSA, the total deposits in the financial sector in El Salvador have steadily increased, reaching $17.545 billion as of May this year. This marks a steady 4.6% increase compared to the previous year. The majority of these deposits ($10.805 billion) are on-demand, indicating a high level of liquidity and instilling confidence in the stability of the financial sector in El Salvador.

Interest Rates and Profitability

The sector has remained solid and growing despite fluctuations in international interest rates. After the Federal Reserve of the United States (FED) raised rates at least five times since 2022, causing changes in the global cost of money, interest rates in El Salvador gradually increased from January 2022 to an average of 5.57% for deposits over 180 days and more than 11.05% for loans exceeding one year.

According to Rommel Rodríguez, economist and project coordinator at the National Development Foundation (FUNDE), these rate hikes could improve banks’ profitability through a higher intermediation margin.

Another factor maintaining positive numbers in the financial sector in El Salvador is the benefits banks are receiving from short-term government securities (Treasury Bills and Treasury Certificates). This placement of loans to the government has allowed banks to earn returns of over 8% on these instruments. However, FUNDE’s economist notes that the government last updated the balance of credits extended by banks in December last year as part of a debt restructuring process.

Loans and Economic Impact

The increase in deposits has allowed money to continue circulating within the country. According to the manager of Davivienda, “The continued growth of deposits is good news for us because it creates opportunities for continued funding.”

ABANSA’s report shows that loans totaled $16.750 billion, marking a 5% growth compared to the previous year. Loans to individuals grew by 5.8%, while those to businesses increased by 4.7%, and housing loans saw a 3.8% rise. The main sectors receiving these loans were commerce, services, and electricity.

Rommel Rodríguez states that banks have sufficient liquidity to issue loans, which helps maintain other economic activities, albeit slower. The banking sector continues to finance various productive sectors even though their growth has slowed, as in the industry case. According to the Banking Ranking Report, as of June 2024, of the total loans ($16.840 billion), 33% was directed towards consumption, 17% towards housing, 15% towards commerce, and 10% towards the manufacturing industry. Additionally, $661.5 million of these loans have been refinanced, with the majority (52%) being consumer loans.

FUNDE’s analyst estimates that as long as banks continue to have sufficient liquidity, El Salvador’s financial sector will continue to grow for the remainder of the year.

Summary

The financial sector in El Salvador has demonstrated remarkable resilience and growth, emerging as the fastest-growing segment of the economy with a year-on-year increase of 10.1% as of April. Despite external pressures from rising U.S. interest rates, the sector benefits from a solid deposit base and favorable returns on government securities. Loans have expanded significantly, reflecting continued robust activity within the sector. The financial sector’s solid performance and liquidity are expected to sustain its growth throughout the year, supporting broader economic stability despite slower growth in other sectors.