he boom in lending led by Brazil’s state-owned banks in the years after the global financial crisis has slowed. These institutions are still handing out loans aplenty — but at a much slower rate than in previous years.

At the same time, the country’s privately-owned banks are also showing a sense of restraint. They have shown little appetite to muscle in as state-owned banks slow their pace. Rather, they are pursuing a path of moderate expansion, and limiting their growth to low-risk areas.

There are exceptions, of course: Spanish banking group Santander is due to complete an offer in October to buy the roughly 25% of its Brazilian subsidiary it does not already own. In late July, Santander also announced it was taking a 60% stake in a new 600 million real ($265 million) joint venture alongside Banco Bonsucesso, a local firm specializing in payroll-deductible loans.

The move fitted the bank’s plan, announced in 2013, to increase its share of payroll lending, as a way to expand with good-quality assets, Jesús Zabalza, chief executive of Santander Brasil, said when the deal was announced.

“Payroll lending plays a key role in this, as it is a low-risk product that helps us build our relationship with clients,” he said in the announcement.

But beyond low-risk products like this, the outlook for loan growth in Brazil remains restrained. The central bank expects a 12% expansion in credit this year — a far cry from the boom years of the past decade, which saw the stock of credit-to-GDP more than double to reach 56.3% of GDP today. In 2013, banking sector loan growth, at 14.6%, was already lower than at any point since 2007.

Like its peers, Itaú-Unibanco, the country’s biggest private bank, is keeping a subdued profile in the lending market. Marcelo Kopel, the bank’s director for investor relations, says the strategy is to “work with less risk in the balance sheet” in order to become “more resilient”.

“We are not focusing on market share,” he says. “This year has been slower than expected.” Itaú’s loan book expanded by 9.6% over the 12 months to end of June. Its joint venture in payroll loans with Banco BMG, for example, was one of the main drivers of growth. Itaú’s mortgage book also increased by 26%.

Itaú’s loan portfolio is set to diversify further though, with a six-year agreement announced in July with the US Overseas Private Investment Corporation (OPIC) and Wells Fargo, which will provide $400 million and $80 million, respectively, for Itaú’s loans business in small and medium-sized enterprises in northern Brazil. Country-wide, however, Itau’s lending to small and medium-sized businesses decreased by 4% in the 12 months to end June, while car loans also fell by 25%.

Second-quarter results for Bradesco, meanwhile, showed it to be one of the most modest performers in terms of loan growth, with an 8.1% year-on-year credit expansion. Luiz Carlos Trabuco, the bank’s chief executive, noted in the quarterly earnings presentation that lending typically increases toward the end of the year, however.

Low risk appetite

Weak loan growth is unlikely to be catastrophic for banks’ profitability in the short term. Treasury and fixed income transactions helped Bradesco, for example, register a 28% increase in net income in the second quarter of the year, compared to the same period in 2013.

Yet banking sector-wide, according to central bank figures, year-on-year credit expansion in Brazil slowed to 11.8% at the end of the second quarter. State-owned banks grew loan portfolios by 17%, while foreign and domestic private banks’ loan books grew by 8.1% and 5.6%, respectively. State-run financial institutions account for 52% of overall lending.

Luiz Angelotti, Bradesco’s director of investor relations, tells LatinFinance the state-owned banks have become less aggressive in lending, increasing interest rates. But Brazil’s economic downturn means it is still difficult for the private banks to step up to fill their place, says Angelotti. “We followed a different policy [to the state banks] and managed to make progress [in lending] thanks to a small number of transactions in the corporate segment, but the economic slowdown has limited the opportunities,” he says.

Angelotti foresees faster credit expansion in the second half of the year: again, largely thanks to payroll lending and mortgages. But the retraction in riskier segments continues. Bradesco’s car loan portfolio fell by 13.8% in the first half of the year, amid a decline in consumer demand, as indebted families struggled to cope with inflation running at around 6.5%. The bank’s lending to small and medium-sized enterprises registered an increase of just 3.2% in the same period.

Some smaller private banks have suffered even more in loan growth. Banco Pine, a mid-tier lender, has revised its credit-growth targets to between 0% and 5% for 2014, down from between 8% and 12% previously.

Chief financial officer Norberto Zaiet Junior, says Banco Pine has become more selective in lending, largely because of the gloomy macro-economic outlook: “We now assume that economic growth is going to be about 50% lower than what we thought at the beginning of the year, from nearly 2% to just 0.8%. Such a revision means that we feel less comfortable with the pace of credit expansion.”

The bank registered a 10% fall in profit in the second quarter from the previous year, even though its loan portfolio grew 11.5% over the 12 months. Growth is set to slow, however — indeed, loans fell 0.6% in the second quarter.

“It is not a matter of demand [for loans], because demand is there,” says Zaiet. “We see this in our contacts with clients. We just do not feel comfortable to increase our loan portfolio, due to the lack of macroeconomic visibility. We simply cannot answer the question: what will be the situation in 2015? […] We do not feel comfortable in expanding and allocating more capital.”

Central bank aid

In an effort to help the lackluster lending environment, in July and August, the central bank relaxed macro-prudential measures, lowering some risk-weighting rules. It also cut reserve requirements, allowing a possible 40 billion reais in additional lending.

That will spur lending in some riskier segments, including car loans, says Angelotti at Bradesco. “It is also possible to approach potential partners in order to buy their credit portfolios,” he says. However, he says that while the measures are positive for Bradesco, they are of greatest assistance to state-owned banks, which have faster-growing loan books.

This rapid loan growth at public banks was originally a counter-cyclical tool following the 2008 global financial crisis, says Ramón Aracena, Latin America chief economist at the Institute of International Finance (IIF). “This was a correct move at the time,” he says. “The problem is that the stimulus was not withdrawn. [… The state development bank] BNDES went on extending very cheap lending to uncompetitive sectors.”

Aracena says this splurge in lending by state-owned banks has not resulted in a large spike in bad debt, yet. State-owned Banco do Brasil, for example, reported non-performing loans at just 2% in the second quarter of 2014, although provisions increased by 9% quarter-on-quarter, and 8% year-on-year. “The level of non-performing loans is still low,” says Aracena. The problem, he says, is that this may not last, and increased lending by state banks may be adding an additional and unsustainable burden on sovereign liabilities.

“If non-performing loans start growing, and the regulatory body forces them to increase their provisions, then the government would have to increase the capitalization of the public-sector banks,” he says.

State banks’ loan growth is slowing, however. Ceres Lisboa, Moody’s vice president and senior credit officer in São Paulo says annual loan growth rates at the public-sector banks reached as high as 40% in the years following the global financial crisis.

In June this year, Banco do Brasil’s credit annualized growth stood at 12.5%; at Caixa Econômica Federal that figure was 28%.

“The public banks have reached a point where they cannot support loan growth at levels of up to 40%,” says Lisboa.

Tough environment

Conservative loan growth among the private banks has allowed them, too, to keep their level of non-performing loans low: around 3.5% in June, despite worries about the public banks crowding out private lenders.

But today, despite slower credit growth at public banks, and low bad debt levels at private banks, there is no sign of a pick-up in lending. “Private banks have reduced their loan growth in 2014 even more than they did last year,” notes Lisboa, while comments from private banks suggest this slow growth will continue for now.

One reason that private banks have not stepped in is bankers’ uncertainty around the country’s economy — as comments from Zaiet at Banco Pine show. That uncertainty is exacerbated by the October presidential election. “You have to create the right conditions in the economy. If the economy is growing below 1%, it is going to be very difficult for the [private] banks to increase their share,” says Aracena at the IIF.

The chances of a rebound immediately after the election, moreover, seem low. “2015 is already considered a low growth year, whoever is elected. There is bound to be some [macroeconomic policy] adjustment. It is going to be a very difficult year,” says Lisboa. LF