While large banks in Brazil are likely to benefit from a high-rate environment, sustained double-digit inflation could push loan default rates higher in the second half of the year.
Banks expect delinquencies in non-earmarked credit — loans that are not subsidized by the government through state-controlled banks — to reach 4.0% this year, up from 3.1% in 2021 and 2.9% in 2020, according to the latest survey from Brazil's domestic banking association, Febraban. Analysts expect risk management to be more extensive as banks become increasingly selective before issuing new loans.
As inflation continues to rise, topping 12% in the 12 months to April, borrowers are struggling to keep up with installments. The latest consensus on delinquencies from the Febraban survey, which is conducted every 45 days and gathers input from 19 Brazilian banks, ticked up from a previous 3.7% estimate.
Asset quality continues to show prospects of deteriorating given a likely rise in delinquencies in the second semester, the Febraban report noted, adding that delinquencies could moderate to 3.6% in 2023. The association declined a request to comment further on the specific impact of the rise in delinquencies on banks' business models.
Following an expansion of Brazil's economy of about 4.6% last year, most forecasts for 2022 fall between 0% and 1%, in part due to much tighter monetary conditions. In a bid to tame inflation, Brazil's central bank embarked on one of the steepest monetary hiking cycles in the world, raising the benchmark Selic rate to 12.75% on May 4, from a low of 2.0% in early 2021.
Deterioration of loan portfolios already began in the second half of 2021, mostly as a result of worsening inflationary trends and higher rates, Banco Santander (Brasil) SA executives highlighted on their first-quarter earnings call. "We have taken several measures to adjust our risk appetite in several portfolios, mostly individuals and small SMEs," CEO Mario Leão said. Santander's CFO, Angel Santodomingo, said macroeconomic conditions provoked a deceleration in portfolio growth.
The bank, the fifth largest in the country by assets, booked a 25% quarterly increase in provisions for loan losses in the first quarter, up to 4.61 billion Brazilian reais from 3.69 billion reais in the linked quarter and 3.16 billion reais in the year-ago period. Other major publicly traded banks in Brazil, such as Itaú Unibanco Holding SA, Banco Bradesco SA and Banco do Brasil SA had already begun raising provisions in the third quarter of 2021.
Nonperforming loans on personal credit grew to 4.7% in February, up from 4.1% in 2021, according to a recent report from Goldman Sachs. In contrast, NPLs for corporate lending are tracking at a low 1.5%, the bank said. Banks are likely to focus on safer loans to the corporate sector, as well as payroll lending and secured loans in the individual segment, as opposed to riskier assets such as personal loans, credit cards or SME lending.
Non-corporates in Brazil are bound to face "more demanding credit conditions" in the coming months, said Alberto Ramos, managing director at Goldman Sachs, as a result of high consumer indebtedness, rising rates, and the expectation of a weaker business cycle ahead.
Most Brazilian lenders expect the Selic rate to go as high as 13.25% in 2022. This would be half a point higher than what the central bank has signaled but is partly due to rising energy costs as a result of the war in Ukraine, which is further fueling inflationary pressures. Consumer prices were already on an upward trend, rising to 8.3% last year from 3.2% in 2020.
But for banks, higher rates can also mean fewer but more profitable business opportunities.
"In terms of interest margins, banks will surely earn more money while lending less," Luis Santa Creu, a bank expert at Austin Ratings, said. "Brazilian banks are used to working with inflation, and the loan mix will be beneficial to them given that spreads will be higher."
Brazilian banks have been able to rebuild net interest margins over the last quarters of 2021. Itaú Unibanco Holding SA, the largest bank in Latin America by assets, recorded a return on average equity of 16.8% in the fourth quarter of 2021, up from a low of 6.4% in the second quarter of 2020. The increase in profitability has been attained even as loan growth slowed down sharply.
The Febraban survey, which captures expectations from prominent banks such as Banco Bradesco SA, Banco do Brasil SA, Banco J.P. Morgan SA, Banco BTG Pactual SA and Banco BV SA, signals the loan book would expand 8.3% in 2022 and 6.6% in 2023. This would mark a sharp deceleration from the roughly 15% expansion seen last year as the economy reopened and consumers and clients benefited from multiple fiscal and monetary stimuli.
While some observers remain hopeful that inflation will be a temporary factor, it is likely that double-digit interest rates will stay in place in Brazil for several quarters.
The outlook for loan book expansion is uncertain, not only due to the current high levels of inflation, but also given the upcoming highly polarized presidential elections, in which President Jair Bolsonaro will face former president Lula da Silva, who is leading in most polls.
Companies might stall investments until the political scenario becomes clearer, after the Oct. 2 elections.
"It is likely that the Brazilian economy will lose the steam that it had at the beginning of the year," Santa Creu said. "As of the third quarter, elections will generate short-term views with little room for business planning."
As of May 11, US$1 was equivalent to 5.11 Brazilian reais.