Brazil's credit expansion will slow sharply amid a sluggish economy and rising rates, which will likely discourage loan growth but allow banks to rebuild profitability.
Credit will expand 6.7% in 2022 after rising
During the pandemic, credit increased, serving as a "kind of retaining wall" in preserving economic activity, Febraban said. Now, forecasts are shifting lower as GDP estimates decelerate. Banco Central do Brasil expects an expansion of 1% this year, down from estimated growth of 4.5% in 2021. On top of that, inflation will lead to higher costs and higher interest rates, with banks likely to be more prudent about who they lend to.
"This year will be more challenging from a macroeconomic [perspective]," Renato Lulia Jacob, head of investor relations at Itaú Unibanco Holding SA, said in an interview. During its latest earnings call, the largest bank in Brazil by assets suggested that it will take a cautious approach in 2022, focusing on unsecured credit lines and recovering ground lost in personal and credit card loans for its top clients.
Rising rates to boost profitability
In February 2021, Banco Central do Brasil raised rates for the first time since 2015, the first of many hikes during the year, resulting in a bump from 2% in 2020 to 9.25% as of this year. Market expectations are for further raises, which could undermine appetite for loan growth and affect borrowers' ability to repay. Higher rates will likely increase funding costs for banks.
But while discouraging loan growth, bankers argue that rising rates will be an opportunity to rebuild loan margins and support profitability.
"While it will be a challenging year in terms of macroeconomics, the country's main banks should continue to maintain solid results, good profitability and comfortable levels of provision, capitalization and liquidity," Rubens Sardenberg, Febraban's chief economist, told S&P Global Market Intelligence.
In the years of the pandemic, big lenders' gross margins took a toll. Bradesco's net interest margin fell from above 7% in 2019 to 5.7% as of the third quarter of 2021. At Itaú, the annualized average margin with clients fell from 10% by the end of 2019 to 7.4% in the last reported period.
"Rising interest rates are beneficial for our margins and profitability," Lulia Jacob said. "It might affect certain products such as mortgages, but other segments are less sensitive to rate hikes such as personal loans."
A tougher economy
Personal loans are likely to be among the credit lines most affected, falling to 10% from 19% in 2021. Credit to companies may also halve, down to 7.4% from 14% last year.
Bankers expect 90-day non-performing loan ratios to pick up this year with an end to relief measures and flexibility that kept delinquency ratios subdued. In the Febraban survey, bankers forecast non-performing loan ratios to average 3.8%, in line with historical levels
"We are leaving behind a period of lower than average NPLs with basically the lowest NPLs that I can remember for retail," Lulia Jacob said. "There is nothing structural that has changed in Brazil that would signal that Brazilians became better payers than they were in the past."
Some private banks may increase lending in distinct segments with Banco Bradesco SA more optimistic approach than Itaú in its recent earnings call.
"We believe that 2022 will be a year of growth opportunities," Leandro Miranda Araujo, head of Bradesco's investor relations, said in the call. "We shall maintain the very good growth in our portfolio and increase net interest income."
The executive was confident that employment levels would rise in Brazil, leading to more clients and a greater demand for loans.
