The IMF just reported that the global banks will need to contend with a $3.6 trillion “Wall of Debt” which matures within the next couple of years. These bank funding needs coincide with higher sovereign refinancing requirements, heightening competition for scarce funding resources, they said. With a jaw-dropping statistic like that, my mind immediately raced to assess the situation of Latin America’s banking system.

Given the region’s strong cultural ties to Spain, it is hardly surprising that Spain-based institutions such as Banco Santander SA (NYSE:STD) and Banco Bilbao Vizcaya Argentaria SA (NYSE:BBVA) have a strong footprint in Latin America’s banking landscape. To counter moderating growth and increasing risks of loan default in their home markets, these banks are seeking greener pastures such as Latin America to generate expansion.

But the Spanish government is not out of the woods yet, as far as its sovereign credit rating is concerned. So, that nation’s banks may be forced to replenish capital to meet regulatory requirements, rather than chase growth in other regions. That would be a big negative for the business prospects of subsidiaries the Spanish banks operating in Latin America. Although a blanket downgrade of 30 Spanish banks by Moody’s last month spared BBVA and Santander, you can bet that nervous customers and investors will be focusing more on developments in the country of Spain rather than their Latin American ventures.

So rather than viewing banking in Latin America as a monolith to be conquered by financial giants from outside the region, I adhere to a more focused country-by-country analysis.

The demand for banking services in Mexico should benefit from a young adult population (median age: 26 years), rising employment levels and a relatively low inflation rate. Moreover, the country’s 14% ratio of loans to GDP ratio appears modest compared to regional peers (Brazil: 66% and Chile: 76%). That leads me to look for progress in the banking services business in Mexico.

In Colombia, which is the emerging star of the region, bankers should be setting their sights higher following Standard & Poor’s ratings boost of the country. And it won’t just be corporations wooing bankers for a pie of the loan money. Given that only 60% of the population currently has access to banking services, sustainable expansion in the deposit and loan demand from the retail banking segment appears likely.

In spite of robust growth prospects, I believe that rising inflation has the potential to throw a monkey wrench in the works for the ambitious growth plans of baks. This phenomenon is evident in Brazil, where the government has resorted to a series of sharp interest rate hikes and taxes on consumer loans to rationalize bank lending activity. However, even as they are faced with the prospect of moderating loan growth, Brazilian banks are determined to squeeze out higher profit margins by widening the gap between the income from lending and the cost of borrowing.

Chile’s central bank has been active in an attempt to keep a lid on inflation without short circuiting the economy. Its latest move was to hike the nation’s benchmark interest rate by half a percentage point in response to a jump of 0.8% gain in retail prices in March (see “Economy Watch” below). I expect that banks operating in Chile will be able to piggyback on the strong 6.5% economic growth anticipated in the economy in 2011.

In Argentina, an economy that was battered by default on its international debt commitments in 2001, the credit culture is yet to take root. The limited access of customers to long-term loans, especially in housing, is a major cause for worry (the current mortgage loan portfolio of all banks is now about 30% lower than the 1993 total of $4.04 billion). As per my diagnosis, the tonic to revive Argentina’s banking system should include a mix of reforms and a gradual change in the society’s relationship to bank credit.

Commercial lending will be the focus area for banks in the region, given the larger average ticket size and the perceived lower credit risk from the segment. However, disproportionately high borrowing costs, a bitter pill for retail clients, baffle even Chile’s central bank President, Jose De Gregorio. Mr. Gregorio recently hinted that banks may be overcharging customers (consumer loans with a maturity of up to a year are charged at a whopping 36% rate, compared to 10% for commercial loans in Chile).

In a nutshell, as mentioned above, I feel that banks with an ability to independently raise funds without the need for support from an overseas parent will benefit the most from the promising business potential in Latin America. Moreover, given the evolving sovereign debt situation in Europe, investors should currently put their money on locally domiciled organizations in the economies with an improving business environment.

The IMF warning swings the focus in financials back to the balance sheet. It’s time to check debt maturity schedules of banks. And maybe it’s time for the nearly-bankrupted Cemex refinancing team to teach the bankers how to beg for capital.

That's my take on it. Happy trading!

Rudy

This was another good week for Latin American stocks with the leading stocks being:

• Vina Concha Y Toro S.A. (NYSE:VCO) +6.4%
• Brasil Telecom S.A. (NYSE:BTM) +5.3%
• Tele Norte Leste Participacoes S.A. (NYSE:TNE) +4.8%
• Brasil Foods (NYSE:BRFS) +3.2%
• Telesp - Telecomunicacoes de Sao Paulo S.A. (NYSE:TSP) +2.9%