S&P: Paraguay's Banks Have Room to Grow, But Quality of Loans Will Be Key

The Untapped Potential in Paraguayan Banking

Paraguay's banking sector is growing, but it still has a long way to go to catch up with its regional peers, according to Henrique Sznirer, Associate Director of Global Ratings at S&P. Speaking at the second edition of the Banking Convention organized by Asoban, Sznirer pointed to housing and consumer credit as the main areas where lending could expand significantly. Housing loans currently represent only about 3% of Paraguay's GDP, compared with 10% in Brazil, 33% in Chile and 7% in Colombia. Consumer credit accounts for roughly 10% of GDP, meaning the two segments together make up between 12% and 13% of the economy — less than half the ratio found in Brazil's market.

The room for growth is clear, but Sznirer stressed that expansion must be matched by a strong focus on loan quality. Rapid credit growth, especially in unsecured lending, can later lead to higher delinquency rates and volatility in credit losses. For the rating agency, what matters is not just how fast the loan book grows, but what kind of lending drives it. Mortgage loans, for instance, are backed by the property itself, offering lenders more security if economic conditions worsen.

Regulation is also moving in the right direction. The central bank has already introduced the Liquidity Coverage Ratio this year, and Sznirer indicated the Net Stable Funding Ratio could be adopted in the coming years. Meanwhile, S&P maintains a positive trend assessment on the Paraguayan banking industry's risk profile, citing steady regulatory and supervisory improvements. There is a one-in-three chance the agency could upgrade that assessment within the next two years.

Profitability remains in line with peers, though banks have seen margins squeezed by fiercer competition for deposits. The primary risk that S&P will continue to watch is a surge in credit that is not adequately collateralized. If the economy slows, borrowers with limited credit histories could become a source of rising defaults.

S&P's Analysis: Credit, Regulation, and the Risks Ahead

Where Paraguay's Credit Penetration Stands

The data points Sznirer shared underscore just how much headroom exists. When housing and consumer credit combined represent only around 12-13% of GDP, while the same measure in Brazil reaches 35%, the gap reflects both a lower starting point and a less developed credit culture. The low base suggests the growth runway could be long, provided the expansion is handled prudently.

The Quality of Growth Matters

Not all lending is equal in the eyes of a rating agency. Sznirer warned that growth driven by unsecured credit — with no collateral and little borrower history — can quickly turn into a problem if the economic environment deteriorates. Because many new bank customers in Paraguay still have thin credit files, there is limited information to predict their repayment behavior. In contrast, mortgage lending offers built-in collateral, which S&P views as a stabilizing factor. This distinction will likely shape how the agency evaluates individual banks' risk profiles going forward.

Regulatory Progress Moves in the Right Direction

The gradual adoption of international standards is a positive signal for the industry's stability. Implementing the Liquidity Coverage Ratio in 2026 was a concrete step, and the potential introduction of the Net Stable Funding Ratio would further align Paraguay with Basel principles. Sznirer described the process as slow but steady, a pace that balances ambition with the practical realities of a smaller financial system. For S&P, these regulatory advances are the main reason its industry risk assessment carries a positive trend.

The Profitability Picture and Deposit Competition

Paraguayan banks remain profitable, but the fight for deposits has become tougher. Sznirer noted that margins are under pressure as institutions compete more aggressively for funding. Still, the overall return on assets is in line with what other markets deliver for a similar risk profile. The ability to sustain that profitability while tightening underwriting standards will be a key test as credit expands.

S&P's Outlook and the Watchpoints

The one-in-three chance of an upgrade in the industry risk score hangs on two things: continued regulatory convergence and disciplined loan growth. If banks push credit too quickly — particularly to first-time borrowers without collateral — the rating agency could revise its view. For now, S&P is watching how the system manages the trade-off between deepening financial inclusion and preserving asset quality.

What This Means for Paraguay's Banks

• For bank executives: Focus growth strategies on mortgage lending, where the property acts as collateral. With housing credit at just 3% of GDP, there is a large untapped market that can be expanded without the same degree of risk that accompanies unsecured consumer loans. Building a long track record of low default rates in this segment could support a rating upgrade.
• For risk managers: Invest in stronger credit-scoring models that can assess first-time borrowers with limited history. As the customer base widens, the ability to separate good risks from bad will determine whether rapid credit growth leads to manageable delinquency or significant losses.
• For senior leadership: Anticipate tighter liquidity and capital rules. With the LCR already in force and the NSFR likely on the horizon, funding strategies should be adjusted now to avoid a scramble for stable funding later. Institutions that align early with international standards may be better positioned when S&P reassesses the industry risk.
• For investors: The positive trend driven by regulation offers a catalyst that could lift the credit outlook for the entire sector within two years. However, monitor quarterly loan growth and non-performing loan ratios closely; a sharp rise in unsecured lending without a matching improvement in underwriting would challenge the thesis.