NPL&REO News

Banking sector has just moved to a new lending cycle

Analysts believe that the Brazilian banking sector has just moved to a new lending cycle.

Brazil’s central bank latest data (from November 2018) shows that origination for earmarked loans picked up sharply over the last year, reaching R$302 billion ($80.2 billion), the highest level since December 2015.

After two years of contraction in the loan book, 2018 was a year of inflection; with economic activity picking up in 2019, analysts expect this accelerating trend to continue.

UBS’s financial analyst Philip Finch believes the recent compression in NIMs will be alleviated during the year: «We expect the Selic rate to start increasing in mid 2019, reaching 8% by the end of the year, which together with better mix should offset competition pressure on NIMs. We currently forecast NIMs flat in 2019, on average, for the banks under our coverage

Consensus expectations are for system-wide credit growth of around 8% year on year, with volumes and a better mix (skewed towards SMEs and consumer growth) boosting profitability.

Better NPL ratios

Strong credit growth should also coincide with better asset quality – reductions in non-performing loans and lower provisions – which will drive the large Brazilian banks.

Marcelo Telles, analyst at Credit Suisse, says: «[90 day] delinquency ratios have declined substantially from its recent peak in mid-2016. Delinquency for individuals currently stands at the lowest level in 10 years, while corporate delinquency has declined to pre-crisis levels, though seemingly with plenty of room to improve, as it still stands substantially higher than historical levels».

Provision expenses should increase below loan growth, slightly lowering the cost of risk from 2.90% to 2.85%, below the previous annual low of 3.1% in 2014.

«We see upside risk to our [forecasts],» says Finch. «Most banks still have high levels of excess provisions, meaning that a better economic activity level can lead to clients’ ratings upgrades, translating into lower provisioning. Moreover, as sector loan mix has become considerably more defensive, with a greater portion of collateralized lending, we believe there is scope for [cost of risk] to fall to new lows, although how much lower could also depend on how quickly banks re-risk their loan books.»

Telles agrees: «We expect cost of risk to continue to improve in the next few quarters, driven mainly by Bradesco and Banco do Brasil. After gradually normalizing two years down the road, we assume the cost of risk will start to rise again, as credit growth, expected to pick up this year, should be led by high-yield segments

«In other words, we attribute the higher cost of risk to changes in the portfolio mix, not to any deterioration in delinquency levels on a product-by-product basis, thus not necessarily affecting risk-adjusted returns

Original story:Euromoney |  Rob Dwyer
Photo: FreeImages.com/Marcel Krings
Edition: Prime Yield

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