When Brazil’s banks reported their third-quarter results this month, the numbers showed again spectacular (and all-time record) profits – read more here (“Top 10: Brazilian Banks’ All-Time Record Profits“).

The figures hide strains in the system, including rising delinquencies. Yet, along with central bank data showing that credit growth in Latin America`s largest economy is still running at nearly 20 per cent, they seemed to confirm the underlying strength of Brazil’s banking sector despite the turmoil gripping Europe.

The resilient Brazilian banking sector of today is the product of the country’s near decade of stable economic growth, more inclusive development and better financial regulation.

A series of reforms in the mid-1990s and early 2000s coupled with lower inflation and interest rates have produced average annual credit growth of 22 per cent in Brazil since 2003. In 2002, total credit to the private sector amounted to 26 per cent of gross domestic product, today it is 47.3 per cent.

Much of the growth in loans to individuals has come from three types of credit that are considered more secure – mortgages, car and payroll credit. Payments on payroll loans are deducted directly from people’s salaries. 

The rapid credit growth in Brazil has led some commentators to warn that a US-style bubble is forming in the country, as households spend around one fifth or a quarter of their incomes on debt payments. In the US this ratio was 14 per cent when the bubble burst.

Most analysts, however, dismiss concerns over US-type credit problems in Brazil.

In the US, a flood of cheap credit fuelled an asset bubble in property. Brazilian credit, on the other hand, is expensive, at an annual average interest rate of 47 per cent, and short term.

Yet delinquencies have risen this year as inflation has eaten into borrowers’ incomes, prompting the government to increase interest rates. Consumer loan defaults – measured by loans in arrears for more than 90 days – were at a 15-month high in September at 6.8 per cent.

Beneath the impressive headline figures in the third quarter, Banco do Brasil’s profit actually declined compared to a year earlier after one-off items were stripped out. Its provisions for bad loans rose 24 per cent on delinquencies at an auto-leasing subsidiary, Banco Votorantim.

Santander Brasil, the largest foreign lender in Brazil, and Bradesco also boosted loan loss provisions in the third quarter. Itau’s ratio of non-performing loans (NPLs) rose from 4.5 per cent to 4.7 per cent during the quarter but some analysts said the increase was higher after adjusting for foreign exchange factors, renegotiated credits and charge-offs.

“The 20bps increase in 90-day NPL ratio does not reflect the real deterioration in asset quality experienced in the quarter,” Credit Suisse wrote in a report.

More weakness may be on the way, with the Brazilian economy slowing and consumer demand cooling. The sector is also hostage to global gloom on financials amid the crisis in the eurozone.

Source: Financial Times

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