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

Multiple positive factors point to outperformance of Brazil’s banks in 2019, but pensions reform risks remain.

UBS’s financial analyst Philip Finch believes that a potent mix of stronger than-expected-loan growth, improving net interest margins (as the country’s base rate, Selic, rises), a falling cost of risk (if pensions reform is passed) and improved efficiency ratios from branch rationalization will improve the profitability of Brazil’s leading banks.

Floating all these specific boats is the cyclical recovery of the Brazilian economy that should come this year. These strong numbers are based on expected growth of 3% (rebounding from a small recovery of 1.5% in 2018 and 0.5% in 2017 and a deep recession between 2014 and 2016).

As Finch notes, pensions reform is the key variable. All of the projections of 3%-plus growth are based upon the new administration of president Jair Bolsonaro being able to pass meaningful reform – and there have been encouraging noises that the new administration is making this social security reform a priority.

However, William Jackson, Capital Economics’ chief emerging markets economist, highlights the downside risks to this assumption: «The latest noises don’t mean pension reform is guaranteed. For one thing, it’s not clear that Bolsonaro himself is as committed to the reform as his economic team – it seems he has yet to sign off on the higher retirement ages being suggested and the shorter transition phase».

The politics are also obtuse: the plan will be politically unpopular and Jackson points out that it isn’t clear if the appetite exists within congress to push through unpopular and painful changes to the pension system.

Pensions notwithstanding, other banks are more bullish on this year’s macro-economic scenario: Bank of America Merrill Lynch forecasts growth of 3.5% in 2019 – above the 2.6% consensus – driven by «higher confidence indices and lower market rates, in our view, which should lead to a decline in unemployment rate and an improvement in credit market conditions, favouring especially private consumption and investment.»

Finch expects an average of 17.6% earnings growth for the large Brazilian banks in 2019, with return on equity improving 147 basis points to 19.5%.

Original story:Euromoney | Rob Dwyer
Photo:FreeImages.com/Bruno Neves
Edition:Prime Yield

Brazil’s newly appointed Finance Minister, Paulo Guedes, faces a daunting challenge: to bring Latin’s America’s biggest economy back to full health, following the worst recession in the country’s history.

Making matters more difficult, Guedes will have very limited time to implement urgent fiscal and structural reforms to avoid a new crisis.

For now, the country’s economy is evolving positively: GDP grew at an annualized rate of 1.4% in the third quarter if 2018, at the fastest pace in 18 months. Investment rose 1.6%, marking the first positive reading in four years. Although positive, it seems a fragile recovery as we look at the 13 million unemployed workers, a staggering fiscal deficit and a massive debt-to-GDP ratio.

Guedes, who will also be in charge of planning and development, has been dubbed by the Brazilian press a “super minister.” A former pupil of Milton Friedman at the University of Chicago, he argues for smaller government and privatization.

«As a ‘Chicago Boy,’ Guedes would like to privatize everything,» says Alfredo Saad-Filho, professor of political economy at SOAS University of London. «However, his ambitions have already fallen victim to the conflicts between the president and other players close to the administration, to the extent that Bolsonaro has already intervened repeatedly to contain Guedes.» It now appears that while utility companies Petrobras and Eletrobras will be privatized, lenders like Banco do Brasil and Caixa Economica Federal will remain state-owned, Saad-Filho notes.

Another challenge is restructuring the country’s pension system. «The sooner the better,» Guedes has stated to the press. The current structure—which disproportionately benefits public servants, who can retire in their mid-50s—costs 12% of GDP.

While Guedes economic views are fairly clear, it remains to be seen where Bolsonaro and a divided and unpredictable Congress land. As some observers have already pointed out, the country’s fate is in the hands of an economist who is getting his first taste of public service—and new lawmakers who don’t know much about the economy. «A very public conflict is mounting,» says Saad-Filho, «and it started when the administration was not even in power yet.»

Original story: Global Finance |  Luca Ventura 
Photo: Valter Campanato/Agência Brasil
Edition: Prime Yield

Brazil’s Outgoing central bank President told Swiss newspaper Le Temps that conditions remain in place for strong economic growth, while he warned against inflated expectations under the country’s new populist government.

In an interview quoted by Bloomberg, Ilan Goldfajn told that «the expectations are now very high in Brazil». The responsible, who is to be replaced as central bank president by Roberto Campos Neto, said the same source that to keep inflation in check Brazil must continue with economic reforms under the new government of Jair Bolsonaro.

«The idea is to continue the reforms and increase the flexibility of the economy», he said. «If the new government comes to put the accounts in order, the economy will gain in productivity».

Goldfajn also said Brazil’s inflation is under control and can remain so in coming years, with interest rates at a low level to stimulate the economy. He expects economic growth of 2.5% in March.

Original Story:Bloomberg |Andy Hoffman
Photo:  Arquivo/Marcelo Camargo/Agência Brasil
Edition: Prime Yield

Banco Santander grabbed 25% of the market for car loans in Latin America’s largest country, Brazil, in part by extending credit to borrowers shunned by other mainstream banks. As Reuters explained, that means financing working-class customers in need of cheap motorcycles and cars up to two decades old.

According to the same article, that business line helped power Madrid-based Santander through Brazil’s recent recession, even as domestic rivals Itau Unibanco Holding SA and Banco Bradesco SA hit the brakes, and other foreign banks such as London-based HSBC Plc and U.S. Citigroup sold their struggling Brazilian retail businesses.

Despite the risks of the high rates of default in this specific consumer credit niches, the fact is Santander is cruising in Brazil, where is the third-largest private sector bank. Its 90-day default ratio is the lowest among Brazil’s largest private banks, at 2.9% in September.

Year-over-year consumer loan growth in Brazil hit 22.6% in September, more than triple the industry average of 7%. Brazil unit profitability, which for years has lagged peers, jumped to 19.4% from 16.3% in the same period. That beat Bradesco, the country’s second largest private lender, and narrowed the gap with industry-leading Itau.

Santander’s increasing reliance on Brazil shows how emerging markets can still provide a jolt of growth. The Brazilian unit contributed 26% of group profits in the first nine months of 2018, up from 19% four years ago. Santander Brasil’s stock price has surged more than two thirds in the last 12 months, vastly outperforming the shares of its parent company, as well as those of Itau and Bradesco.

Still, Santander Brazil’s outsized auto loan portfolio, and its willingness to bet on borrowers and vehicles avoided by competitors, could presage a bumpier road ahead in a country with a history of economic volatility.

«Certainly, Santander’s growth strategy is a success story so far,» said Andre Martins, an analyst at XP Investimentos, to Reuters. «But the bank will be the one most exposed to defaults if the Brazilian economy turns down.»

Around 80% of the Brazil unit’s auto loans are on cars aged four years or less, and down payments are hefty, averaging 36%. «If Santander’s loan book were problematic, it would already have popped after a 3-year historic recession,» said Angel Santodomingo, chief financial officer for Santander Brasil. «Our success in credit quality is related to our ability to analyze and price individuals’ risk.»

Big data at the service of consumer credit

The bank is harnessing big data to glean information beyond borrower income and savings. And Brazil risk officers are using company tools that have proven successful elsewhere, including the United States, where Santander is a major subprime auto lender.

The bank has also embraced the internet to grow its business, leveraging online sales generated through WebMotors, a top car-selling website that it owns. Two years ago it launched an app that allows dealers to arrange car loans within minutes for buyers who provide eight pieces of information, an innovation that is now being copied by other Brazilian banks. That process had previously taken at least a day and required car buyers to provide reams of documentation. If a loan is approved, clients sign the contract digitally.

Santander plans to use that model to grow its consumer finance business in Brazil with loans for vacations, building materials and solar panels, according to Andre Novaes, head of Santander’s consumer finance unit. Many Brazilian banks have avoided such lending because of the high default risk and shaky collateral.

To safeguard its portfolio, Santander said it has encouraged highly-indebted clients to refinance and consolidate different types of loans in arrears into a single loan with more amicable terms.

Some bankers, however, view the practice as a way to mask Santander’s default ratio. We must remember that severe losses in 2011 forced Itau and Bradesco to stop financing low-end motorcycles, and to ban cars aged ten years and older from their portfolios. They also increased down payments and shortened loan maturities, which had stretched as long as 70 months.

Original Story: Reuters | Carolina Mandl
Photo: Santander
Edition: Prime Yield

With its focus on SME’s, Brazilian Bradesco banc is well set to grow with the country’s economy, according to Euromoney.

Third-quarter 2018 results back up this optimism. The bank’s earnings grew 6% during the quarter and 14% year on year, which was the strongest bottom line expansion among the large banks.

Following the announcement of the results, Bradesco’s president, Octavio de Lazari, predicted further growth next year. «We have the appetite to continue to grow our credit portfolio and to grow a lot,» he said – though he declined to give any specific forecasts for either credit or earnings growth in 2019.

Perhaps more importantly, the bank also had the best net interest margin versus non-performing loan performance ratio in the market, with core net interest income increasing by 4% while NPLs (90 days) fell by 30 basis points. In the bank’s critical small and medium-sized enterprise segment (to which it has a larger exposure than its competitors), it managed to cut NPLs by an impressive 74bp in the quarter – with corporate NPLs stubborn due to three specific large defaults.

The performance in SMEs is encouraging for the bank. The loan portfolio to this sector increased by 3.6% in the quarter (corporates by just 0.4% and the individual’s segment by 1.8% quarter on quarter).

Bradesco’s overall loan portfolio is tilted more to the higher-returning segments than its competitors, which leads analysts to argue that it is best positioned to grow with the Brazilian economy.

BTG Pactual bank analyst, Eduardo Rosman, hailed the third quarter results as showing that the turnaround, “something investors have been waiting for some time”, has arrived.

«The big improvement in NPLs and particularly the better dynamics seen in the SME business line make us more positive on the prospects for the bank,» Rosman wrote in his third-quarter results report to clients. «In a scenario where Brazil’s GDP recovers, we tend to believe Bradesco’s ROE has room to expand and reduce the gap to its main competitor Itaú. It could also get back the number two ROE position recently lost to Santander.»

Bradesco’s ROE was 19.1% in the third quarter and Carlos Firetti, market relations director at Bradesco, thinks this level will more likely be a new floor rather than a peak. «We believe we have reached a new level of ROEs and we still focus for expanding,» he says. «We believe that the economy, the improvement in the economy, the opportunities that will arise from it, with more loan growth, and also the maturity of many of our initiatives, will allow us to actually look for higher profitability levels.»

Original Story: Euromoney
Photo: Bradesco
Edition: Prime Yield

US data analytics firm FICO has acquired Brazilian credit risk management consultancy GoOn, gaining wider access to thousands of potential clients in the Brazilian financial market. The values involved in the deal were not disclosed.

Founded in 2002, GoOn provides risk consulting services for the entire consumer credit life cycle. It is reported to have many deep-pocketed clients in Brazil’s banking, retail, insurance, and real estate sectors. Moreover, it has trained more than 12,000 credit management professionals and most of whom work for its clients.

FICO’s technology assets, combined with Goon’s skilled human talent, will create a powerful company in Brazil’s credit market, say analysts.

Original Story: Nearshore Americas | Narayan Ammachchi
Photo: GoOn
Edition: Prime Yield

The new heads of two Brazilian state lenders, BNDES and Caixa Econômica Federal, said in during their swearing-in ceremony that they will depend less on Treasury funding in coming years, in a sign President Jair Bolsonaro government wants to redefine the role of public-sector banks.

According to the officials, the new administration also plans to make development bank BNDES and mortgage lender Caixa Econômica Federal speed up repayment of Treasury loans. The strategy marks a departure from an economic model championed by previous left-wing administrations that funneled public funds to BNDES and other state banks to create “national champions.”

Economy Minister Paulo Guedes said such policies are «regressive» in a speech where he pledged that public-sector lending by public banks should focus on credit for the unprivileged and let the private-sector handle most lending.

At a swearing-in ceremony for the bank executives, new BNDES head Joaquim Levy said its lending activity should be adjusted in line with the equity of its shareholder, the federal government.

Carlos Thadeu de Freitas, the financial director of BNDES, told two local newspapers that the bank aims to return up to 100 billion reais ($27 billion) in loans owed to the Treasury in 2019.

BNDES had planned to repay 26 billion reais to the Treasury this year, but raising that figure would allow the government to cut public debt faster as is the desire of Bolsonaro’s new economic team, Freitas said.

«The BNDES has to reinvent itself,» Freitas was quoted as saying in newspaper O Estado de S.Paulo. «It cannot compete with private banks, providing working capital to companies which have other means to access such lines.»

In the same vein, Caixa will sell stakes in four subsidiaries to repay loans to the Treasury, said Pedro Guimarães, its new chief executive. The plan will involve the insurance, cards, asset management and lottery units.

Original Story: Reuters |Marcela Ayres
Photo: Caixa Economica Federal
Edition:Prime Yield

Standard & Poor’s Global (S&P) expects Brazilian banks to significantly raise credit granting in 2019, given the greater economic growth prospects. The international rating agency forecasts a 10% expansion in the total credit portfolio next year. As for 2018, S&P anticipates a growth between 4% to 6%, after years of contraction.

If this scenario is confirmed, the total credit ratio to GDP will rise to 47% in 2018 and 49%. The NPL ratio (for non-performing loans over 90 days), for its hand, should continue to gradually fall over the next two years, receding from the 3% level recorded in September. The Banks’ asset quality is expected to continue to improve and there should be a further moderation within the loan renegotiation levels, states S&P.

The credit growth should continue be headed by private banking institutions.

Original Story: Valor Económico | Sérgio Tauhat
Translation & Edition:Prime Yield

Brazil’s main banking lobby is going to deliver proposals aimed at reducing loan interest rates to the newly President-elect Jair Bolsonaro once he is inaugurated in January.

The information was told to Reuters by Bradesco’s Chief Executive, Octavio de Lazari, who explained that the proposals from industry group Febraban will include revamping brazil’s bankruptcy law and reducing mandatory notary services that elevate credit costs.

According to Reuters, the move comes as Brazil’s central bank has been looking for ways to cut consumer interest rates that average around 260% annually for revolving credit lines (central bank data). That figure compares with 6.5% for the country’s benchamark Selic rate.

Lazari also said that Bradesco expects its loan book to grow at a faster pace in 2019 than this year, as the Brazilian economy accelerates. Its corporate loan book is expected to grow close to 10% in 2019, and credit to individuals may grow at even higher rates, he said.

Original Story: Reuters | Authors: Tatiana Bautzer, Carolina Mandl, Rodrigo Campos
Photo: Banco Central do Brasil
Edition:Prime Yield

Brazil’s state bank Caixa Económica Federal has suspended the issuance of some new home loans in the “Minha Casa, Minha Vida” housing subsidy program.

In a statement to Reuteurs, the bank said it was not extending new loans in the so-called “bracket 1.5” of the subsidy program until the end of this year due do budgetary restrictios. Loans in that segment, which offer favourable terms to families earning up to 2,600 reais ($690) per month, will be restarted next year, the bank explained.

The announcement of this move knocked the shares of homebuilders and dealing a blow to low income consumers who rely on the program.

Original Story: Reuteurs
Photo: wikimedia commons /Gaf.arq
Edition:Prime Yield

Even as all major candidates in Brazil’s presidential election have expressed support for housing subsidy programs, the country’s October vote still brings risks for major homebuilders, a Moody’s executive said on Tuesday.

Airline profits could also take a hit if the election results hurt the value of Brazil’s real currency, Moody’s added.

Marianna Waltz, head of the ratings agency’s Latin America corporate finance team, said in an interview that no candidate was planning structural changes to Brazil’s popular “Minha Casa, Minha Vida,” housing program, which is key for homebuilders’ bottom lines.

But she said any deterioration in public finances following the election or a decrease in consumer confidence would leave the sector significantly exposed.

«It doesn’t seem that we are going to have material changes in the current regulatory framework, which is positive. That said – if the economy isn’t doing well, if there is a reversal in market sentiment, demand isn’t going to be there», she said. «In addition to that, if government fiscal accounts are not in good shape, maybe the policy framework is there, but in practice the money will not be there to be lent».

Waltz’s comments highlight risks to some of Latin America’s largest homebuilders. Real estate executives have sought to assure investors in recent months that any housing subsidy changes will be minor, though some analysts have flagged possible cuts post-election when politicians may have fewer qualms about cutting popular programs.

Brazilian go to the polls on Oct. 7 to vote for president, governors, and state and federal lawmakers. In the presidential race, right-wing Congressman Jair Bolsonaro is likely to face off against leftist former Sao Paulo Mayor Fernando Haddad in a tight runoff.

Original story: Reuters | Gram Slattery 
Photo: Governo do Brasil (www.brasil.gov.br)
Edition: Prime Yield