Spotlight on Brazil's Credit Growth

Brazil Credit Growth
Brazil Credit Growth
The rise of Brazils new middle class and associated demand for credit has flashed the spotlight on its financial system stability. Outstanding household loans grew to BRL731.53 billion in May 2013, rapidly outpacing overall nominal Gross Domestic Product growth. During the same period, household loans accounted for approximately 25.1% of Gross Domestic Product (compared to 23.0% during the same month of the previous year). The growth in overall banking credit as well as recent and on-going banking crisis in Europe and North America (resulting from insolvency) has prompted greater scrutiny over the stability of Brazils financial system. While the banking industry has had a return on equity (ROE) of between 10-15% since late 2012, recovering from the low to negative profitability observed from the November 2011 to October 2012, the ROE has fallen far below its pre-crisis levels when it exceeded 15% (indeed it was above 20% from mid-2005 to late-2008). Despite the recovery, the ROE has declined, falling to 11.84% during March 2013 from its recent high of 13.25% in November 2012. The relatively low profitability of Brazils financial institutions somewhat coincides with weak growth. Real GDP growth fell below 1% year on year during the first three quarters of 2012 before gradually improving after that. The decline in ROE occurred despite the increasing use of leverage across the banking sector, which has consistently exceeded 9.5 times equity since the second quarter of 2011; increasing leverage, despite lower returns, leads to questions about the robustness of the Brazilian financial system in the event of a financial crisis. However, adjusting for the different risk weighting of assets and the associated capital tiers, Brazils regulatory capital to risk-weighted assets ratio stands at a relatively comfortable 17.02% as of March 2013 well above the regulatory minimum of 11% and the 8% prescribed by the Basel Accords. This is in line with the Brazilian Central Banks prudential regulatory standards, which are largely geared towards the gradual improvement of credit quality. This includes the Central Banks tough stance on reducing the non-performing loans (NPLs) in the financial system; the NPL ratio stabilised at 3.6% as of May 2013 from a recent high of 3.9% during October 2012. While the household-related NPL ratio was higher at 5.3% as of May 2013, this was lower than the 6.0% figure observed during its recent high in the same month of the previous year. The president of the Brazilian Central Bank, Alexandre Tombini has recently commented that the national financial system has high levels of capital, liquidity and reserves to prepare for the eventuality of possible mass defaults. This, he mentioned, was further facilitated by strong macroeconomic stability, good growth prospects and prudent regulatory oversight, all of which are factors that are attracting the investment interest of several international banks. Presently the Central Bank is examining 18 foreign institutions from 14 different countries interested in forming subsidiaries in Brazil. Brazil Credit Growth While a return to pre-crisis profitability for Brazil’s financial sector remains contingent on growth in the real economy, strict and vigilant regulations suggest that the Brazilian financial sector would remain somewhat resilient to short-term liquidity shocks. However, the rapid credit expansion in the country may require continued monitoring for signs of rising credit delinquencies. Contributed by Bruno Vasconcelos, CEIC Analyst Back to Blog
18th July 2013 Spotlight on Brazil's Credit Growth

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