Brazil’s banks have shrugged off the slow growth of their domestic economy and have been reporting strong growth despite macro-economic challenges.
The strong earnings season in Brazil’s banking system shows that the sector is ready to drive growth through renewed credit extension once the currency period of economic “re-adjustment” has been negotiated, Rubens Sardenberg, chief economist of Febraban, the banking association of Brazilian banks, told delegates to the Felaban conference in Medellin, Colombia in mid-November.
“The [Brazilian] banking system has tier-1 capital of 11% and core 1 and 2 combined of 12%: it is solid, capitalized and liquid despite the current challenges facing the economy,” said Sardenberg. “The banking system isn’t a source of weakness to the economy today, in fact it’s the opposite. It’s a potential strength, as a source of renewed growth through credit extension into the economy, once the readjustment comes and we start to have higher levels of growth again.”
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The banking system isn’t a source of weakness to the economy – it’s a potential strength through credit extension
Rubens Sardenberg
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In early November Itaú Unibanco’s third-quarter results showed the bank had its highest recurring return-on-equity (ROE) in nearly five years. The bank’s recurring profit was R$5.6 billion, with a 27.6% ROE, up 10% quarter-on-quarter. Adjusted net income hit R$5.3 billion, also up 10% quarter on quarter. Despite expectations of low growth this year (0.3%) and next (1.0%), according to a survey of 100 economists by the Brazilian Central Bank, Credit Suisse predicts earnings growth of 15% for the leading private and public banks. Profits have been buoyed by rising credit spreads as the country’s Selic rate goes through a further tightening cycle, with improving net interest margins.
The other large-cap Brazilian banks also reported strong – if not quite as spectacular – results, proving that policies implemented as the economy began to cool have enabled banks to accelerate profitability in the weakening economy. The private banks began to slow the growth of their credit portfolios as Brazil’s economic outlook deteriorated and they have focused on lower risk loans to prevent portfolio quality deterioration.
Filling the space
Meanwhile, Febraban statistics show just how much publicbanks have stepped in to fill the space left by the private banks: in 2007 private banks accounted for 44% of total credit, with public banks lending 34% (and international sources 22%).
Today the public banks are responsible for more than half of total credit in the economy, at 53%, compared to 32% from the private banks (and 14% internationally).
Also, research from Credit Suisse shows how effectively the private banks have increased risk controls on new loans: low risk loans (collateralized like mortgages or taken from source/payrolls) now represent 40.8% of Bradesco’s total portfolio in the second quarter of 2014, compared with 33.6% in the second quarter of 2011; Itaú has increased to 44.8% from 32.1% and Santander Brasil has increased to 50.8% from 37.3%.
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The public banks have also so far reported strong results, despite their faster loan growth. However, Banco do Brasil is slowing loan growth – with the bank’s management reducing guidance for loan growth from 14%-18% to 12%-16%. NPLs have increased, but only marginally so, with the headline delinquency rate increasing by 10 basis points in the quarter.
“Credit quality is not an issue for the private banks because, in part, they have responded with increasing risk controls, lowering credit growth and most of the new financing is in some way secured – through car or payroll loans. The real issue for the sector isn’t the quality of the portfolios, either corporate or private, but how to get growth back to the pace it was,” says Sardenberg, who says NPL performance suggests corporate credit quality is improving and individual’s credit is improving at the margin.
“The type of credit reduces the risk of a credit bubble in the economy,” he argues. “When you have short-term tenors and high interest rates [it is very hard to get leverage which is a condition of credit bubbles]. There is actually space for greater indebtedness given the low penetration of mortgage finance in Brazil, which will, in the course of the cycle, see higher rates of penetration and will help get the country back to a better rate of growth.”
Credit Suisse’s research backs Sardenberg’s bullishness on the banking sector’s resilience in the current slowdown and preparedness for resumption of lending – if and when economic growth resumes. It dissects aggregate indebtedness, which while likely to hit 47.4% by the end of 2015, is now made up of more ‘good debt’ – in other words mortgages.
“Banks are well prepared to face a more challenging macro environment,” reports Credit Suisse. “In the past few years, Brazilian banks have not only become stricter and more selective in their lending criteria but have also seen important changes in the mix of their credit portfolios. While both changes are positive from an asset-quality perspective, they differ in nature, as the former is considered to be customer related and the latter has more to do with the current profile of the banks’ credit profile, which is inherently more or less prone to credit risk… We believe the asset quality deterioration cycle will tend to be moderate in 2015. Whether it will continue that way in 2016 will depend on the rate of growth of the Brazilian economy.”
