Brazil’s economic troubles have left the country’s banks grappling with a rising number of non-performing loans, but Fitch Ratings says the trend might soon change.
Brazilian banks’ Q1 earnings results point to “early signals of non-performing loan (NPL) stabilization that could mark the beginning of an inflection point,” Fitch said in a report.
Data from the Brazil’s central bank through mid-March showed the banking system’s NPL ratio increased marginally to 3.8% from 3.7% from three months earlier, Fitch said.
Corporate NPLs rose 0.3 percentage from the previous quarter, according to Fitch. But early NPLs, or loans that are overdue between 15 and 90 days, fell 0.5 percentage points to 4.3%. Retail portfolio NPLs were flat at 4%.
“This could indicate a broader turning point for the segment,” Fitch said. “Whether this will translate into a sustained trend remains highly uncertain. Fitch maintains that the operational environment will stay deeply challenging, with asset quality deterioration continuing to be a key risk in 2017.”
Share prices in Brazilian banks have risen sharply over the last year, as investors bet that President Michel Temer can implement fiscal reforms and help lift Brazil out of its worst recession in a century.
The central bank’s moves to cut interest rates have also added to the rally in banking shares, although some analysts have started to question whether some equity valuations in Brazil are too high.
Fitch said it believes any trend for NPLs will likely differ between private and public banks. “Private banks have likely been more proactive in provisioning, especially for large problematic corporate exposures,” it said. Public banks, Fitch added, face higher exposure to “weaker credit segments and lower loan growth.”