Publish in Perspectives - Wednesday, March 11, 2015
Brazil’s top private bank Itaú Unibanco (photo) delivered a 24 percent return on equity last year, but is preparing for a slowdown this year. (Photo: Itaú Unibanco)
Brazil’s private banks are likely to follow conservative policies amidst weaker GDP growth and growing consumer debt.
Loans made by Brazilian banks to consumers and companies rose last year by their smallest amount since 2007, according to data released recently by the country's central bank. Economic problems in Brazil and skepticism about President Dilma Rousseff's ability to spur growth have crimped demand for credit in the region's largest economy. What is the outlook for Brazilian banks in the coming year? What does more selective lending by the country's banks mean for them as well as for consumers and businesses? How much will slower lending growth hold back the country's economy?
Ilan Goldfajn, chief economist at Itaú Unibanco: Brazilian banks will continue to experience moderate loan growth, focusing on generally safer portfolios (for example, payroll loans and mortgages) over the coming years. This moderate loan growth helps reduce the leverage of Brazilian families. Even considering the adverse macro scenario, we believe Brazilian banks will deliver decent earnings growth as a consequence of better portfolios, as well as sound service fees and insurance results, combined with strict cost control. Total outstanding loan growth has slowed since 2011. This downward trend is expected to continue this year. The more selective lending, together with the loan mix change toward safer portfolios, is reducing banks' margins, but it is also reducing the level of provisions. The overall delinquency rate in the system has remained stable at around 3 percent. Consumers are reducing their leverage, especially in loans such as mortgages. Over the last couple of years, families' level of indebtedness showed a clear contraction. Household non-earmarked outstanding loans are expected to decline 0.5 percent in 2015, in real terms, after a 1 percent reduction in 2014. Total consumption is expected to decline 0.6 percent this year as compared to a 0.9 percent rate of growth last year. For companies, the combination of stricter lending and the weaker macro scenario is reducing investment plans and is affecting business confidence. Outstanding loans to non-financial corporations are expected to decline 1.2 percent this year after growing by 3.1 percent last year. Industrial production is expected to decline 3.8 percent in 2015, after a 2.8 percent contraction in 2014. Slower lending growth is a result, not a cause, of weaker economic activity. Banks have become more selective because they operate in a riskier environment, which arises from higher macroeconomic uncertainty.
Bret Rosen, head of research at Jamestown Latin America in New York: Brazil's private-sector banks have a history of successfully navigating all types of economic backdrops. While the country's economy has been unable to deliver sustained economic growth for the last several years, its leading private banks continue to display rather impressive results. For example, during the fourth quarter of 2014, Itaú, the country's leading private bank, delivered a return on equity of 24.7 percent, and for the full year, ROE was 24 percent-profitability figures that would be the envy of most banks around the world, and a higher ROE than the bank realized in 2013. In 2014, the bank's non-performing loan ratio fell versus the prior year, while operating revenues rose 14.5 percent compared to 2013. However, going forward, the private banks are likely to execute a conservative stance, due to the absence of GDP growth and concerns about growing levels of consumer debt. Itaú is guiding the market to expect a lower rate of loan growth in 2015 versus 2014. System-wide, mortgages should continue to show impressive growth, as leverage for mortgages is low, and the ratio of mortgages to GDP of 9 percent is less than half of Chile. In contrast, consumer loans, and vehicle loans in particular, should see less emphasis. Meanwhile, the government's fiscal challenges imply a smaller role for state development bank BNDES going forward, and public banks are expected to be less aggressive in courting market share. Caixa's recent announcement that it would raise rates on a number of types of mortgages is representative of this trend; it issues around two-thirds of all mortgages in Brazil. Finally, the rising interest rate environment should also curb overall demand for credit in 2015. The benchmark Selic rate should stay above 12 percent for the near term, affecting rates throughout the system, and especially for consumer loans and credit cards. Mortgage rates, however, are less correlated to the Selic. Since banks are required to lend a certain percentage of designated savings accounts for home loans, mortgage rates do not necessarily rise in tandem with the Selic.
Drausio Giacomelli, head of emerging market strategy and economics at Deutsche Bank: Both supply and demand for credit have been affected by subdued economic prospects that are unlikely to change anytime soon. But private banks have been adapting to these worsening conditions ahead of time for years already, and they are reasonably well capitalized to weather these difficult times. They also maintain access to deposits and other sources of funding that suggest that they will not face meaningful constraints on this front. Public banks have increased their market share aggressively over the past years, and the potential fiscal implication of this increase are worth monitoring over the years. The Finance Ministry indicated it will tighten credit supply to reign in the situation. This will also be important to monitor. Credit constraints seem unlikely to pose crucial bottlenecks for Brazil's growth even if corporations and consumers do face tighter conditions. Depressed confidence and depressed initial conditions (with a large fiscal gap to plug, high inflation, a serious ongoing drought and the possibility of technical default by Petrobras) seem the binding constraints for investment and overall demand at this juncture.