SAO PAULO–(BUSINESS WIRE)–Global banks’ departures from Latin America will go on as they attempt to improve their return on capital by changing strategies and lowering their exposure to the risk presented in some Latin American markets, Fitch Ratings says. Citigroup‘s Brazilian and Argentinean retail banking operations are the latest units for sale that exemplify this trend.

The global banks have been leaving the region mainly for financial and regulatory reasons. More stringent capital rules, weaker earnings, credit losses and higher compliance and litigation costs, and an effort to focus on core strengths in larger markets, mean that global banks will continue to review their strategies to optimize their use of capital.

The risk presented by the economic prospects and the operating environments in some Latin American countries are also fueling their decision to leave. Fitch maintains a negative outlook on the sector in approximately half of the Latin American countries. Many have seen deterioration in asset quality, weak financial performance and some signs that credit will become scarcer.

We expect the operating and economic environment for banks in Argentina, Brazil, Costa Rica, Ecuador and Venezuela to further deteriorate.

We believe the international banks most likely to remain in Latin American are those that have strong franchises in the region. Santander and BBVA have well-established presences in the retail banking segment in key Latin American countries, and they traditionally were financially independent of their parent companies, which may limit the likelihood they would need support from their parent companies.

We also believe other international banks will focus on higher margin business and on the region’s largest markets such as Brazil and Mexico. HSBC’s subsidiary in Mexico forms part of its North American Free Trade Agreement strategy, and it plans to keep a corporate presence in Brazil to support its global connections. JPMorgan, BofA Merrill Lynch and Citibank, which operate in corporate and investment banking in the region, will also likely stay focused on those business lines.

Barclays and Deutsche are among the most recent to announce their exit or that they are downsizing operations in the region, following HSBC, Societe Generale and others that have further reduced their presence since the beginning of 2015. This strategy is not new for some of these banks and is a result of more focused capital planning as smaller and capital-consuming operations are under the microscope given new and more stringent capital rules and resolution regimes.

Some Latin American banks already expanded throughout the region, such as the large Colombian banks, which made acquisitions across Central America, and Itau Unibanco’s expansion with acquisitions such as Chile’s Corpbanca. Fitch’s outlook for the sector in most of these countries is stable. However, the deteriorating operating environment in other parts of the region poses challenges, especially for small to midsize Latin American banks that do not hold strong competitive positions in their markets and have limited options to withstand a longer negative business cycle.

Global banks exited Latin American countries during other periods of economic crisis as well. However, this time the exodus seems to be more definitive and not driven solely by the economic cycle. We believe these factors will mean that the global banks’ presence in the region should continue to decline and stay low for the long term, while some local and regional banks should further enhance their franchises across Latin American countries.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.