Brazilian Banks Seen Struggling in Lower Rate Environment

Last week’s further chopping of the Selic benchmark underscores the Brazilian government drive to lower interest rates, continuing to dim the outlook for Brazilian banks already grappling with higher delinquencies. With GDP numbers remaining weak, bold government action seems set to continue. In the long term, credit stimulus measures “choke capital markets which already face very strong headwinds from subsidized credit,” Mauro Cunha, president of the Association of Investors in Capital Markets (Amec) tells LatinFinance. “The government is using the wrong tool at the wrong time. It is increasing hazards as it pushes banks to extend credit to customers already facing difficulties,” he adds, noting that if unemployment creeps up by 2-3 percentage points, there will be serious consequences on non-performing loan levels. Default levels for businesses and individuals are hitting levels not seen in years, but at the same time banks are afraid of losing market share. This puts Brazil’s lenders in a difficult position going forward. Pushing loans is not sensible as a counter-cyclical measure, Fernando Rocha, chief economist at asset manager JGP in Rio de Janeiro, tells LatinFinance. He singles out car loans pampered with tax breaks in particular. “We have a problem with credit in Brazil households. Credit has increased very fast in the last two years while servicing of debt is still very expensive,” Mario Pierry, an analyst at Deutsche Bank, tells LatinFinance. “Overall credit demand is more catered for than in 2009 and consumer over-leveraging is much greater Banks are seeing conditions that are negative. Higher delinquencies and lower rates will reduce the yield on free cash and private banks face very stiff competition from public banks,” Celina Vansetti-Hutchins, analyst at Moody’s, tells LatinFinance.