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When Brazil’s banks reported their third-quarter results this month, the numbers provided a stark contrast with the developed world.
Itaú Unibanco, Latin America’s largest lender by market capitalisation, said net profit was 25.5 per cent higher than a year earlier while rival Bradesco reported a 14 per cent increase and Banco do Brasil 10 per cent. Santander Brasil, the country’s largest foreign lender, also reported better than expected third-quarter results.
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 financial system in Brazil is in very good shape,” says Andre Esteves, chief executive of BTG Pactual, Brazil’s largest independent investment bank.
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.
“Consumption was an important reason for the growth we have had recently in Brazil together with investment,” says Mr Esteves.
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. This places a natural limit on how much consumers can borrow. Mortgages are still tiny as a percentage of GDP and the credit boom has not been accompanied by a bubble in leveraged assets.
Mr Esteves says Brazil’s asset quality and risk compliance measures are also highly conservative because of the country’s history of financial crises. For instance, the controlling shareholders of a bank in Brazil have unlimited personal liability.
“So if something goes wrong with Pactual, people can get my house,” says Mr Esteves. “This is a very different philosophy than the US and Europe.”
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.
Most agree, however, that Brazilian banks remains remain well-capitalised and profitable, with an average return on equity of more than 20 per cent; traits that will help them weather the global crisis. The banks are also claiming that NPLs are cyclical and have stabilised.
“We can conclude the main problems for Brazilian banking shares will stem mainly from [the] international market,” says Aloisio Lemos, banking analyst at brokerage Ágora Corretora in Rio de Janeiro.
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