Latin American peers have recently shown worsening defaults; in Brazil the trend has been going on since 2020

Brazilian banks may be a few steps ahead of their Latin American peers in the credit cycle, assesses UBS BB. According to analysts Thiago Batista and Olavo Arthuzo, institutions in Mexico and the Andean countries have only started to show a worsening in defaults in recent quarters, while in Brazil this trend began in late 2020.

“This trend (of worsening) is clearer when we assess the quarterly data, whose numbers for Brazilian banks seem to potentially indicate that they are ahead of their regional peers in the credit cycle,” they said in a report sent to clients.

UBS calculated the average default rate for the largest banks it covers in Brazil, Mexico and Chile and Colombia. The Andean countries have the highest rate, at 3.1%, but the Brazilians, who come soon after at 2.9%, have been seeing an increase for longer. From the country, Itaú Unibanco, Bradesco and Santander Brasil were included. In Mexican banks, the average default rate is 1.8%.

The institution points out that throughout 2020 the large local banks considerably increased their coverage rates against possible defaults, but the default data fell. “Aside from differences in methodology between the banks we cover, it is remarkable how Brazilian retail banks had an artificial improvement in defaults in 2020″, UBS underlines.

That improvement, the house points out, came with government credit programs, bank-led renegotiations and other initiatives, most of which have now closed.

A worsening in defaults is expected by UBS analysts for Latin America as a whole. The bank predicts a gradual deterioration as a combination of riskier credit portfolios and high inflation erodes purchasing power and income.

According to the bank, Mexican banks have been more conservative in setting aside provisions over the last ten years. Brazilian banks should be the most exposed to risk, given that in the first quarter of this year 41% of their portfolios were loans to individuals, the highest volume in a decade. Colombian and Chilean banks, by this metric, have the least risky portfolios.

Original Story: E.Investidor Estadão | Matheus Piovesana 
Photo: Photo by Cesar Fermino in FreeImages.com
Translation & Edition: Prime Yield