July 1, 2016 / 2:17 PM / 2 years ago

Fitch: Asset Quality Weakness Key Pressure for Brazil Banks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Brazilian Banks: Headwinds on Asset Quality Persist (Capitalization Still to Be Tested) here SAO PAULO/LONDON, July 01 (Fitch) Rising loan impairment charges are reducing profitability in Brazil's banking sector and this will affect banks' ability to generate capital internally, says Fitch Ratings. If Brazilian banks strengthened their capacity to absorb unexpected losses, this would mitigate the impact of the country's deep recession, which is forcing up non-performing loans (NPL). Sector-wide NPLs as a percentage of gross loans are rising, but the deterioration across loan portfolios is not as bad as might have been expected considering the weakness of the operating environment. At end-May 2016, NPLs represented 3.8% of total banking sector gross loans, up only slightly from the 3.4% reported at end-2015 and 2.7% at end-2014. NPLs in Brazil are reported once they are 90 days overdue, as is the case in many countries, and reported figures provide a backward-looking indication of asset quality. Our base case, which uses our forecast for a 3.8% contraction in GDP and a rise in the unemployment rate to 12% from the current 11.2%, is that the NPL ratio rises to 4.2% by end-2016. A more stressed scenario, using a 4.5% contraction in GDP and unemployment climbing to 14%, indicates that NPLs would reach 4.9%. Our forecast is that GDP will return to modest 0.5% growth in 2017 but we expect banks' asset quality to continue to deteriorate even as economic growth returns. Our base case assessment is that loan impairment charges will rise by about 20% in 2016 and continue to weigh on profitability. The system as a whole will, in our opinion, post modest profits in 2016 and 2017, but trends will diverge across the banks. Large, privately owned banks have fared far better than public sector, federal government-owned peers. Ratings assigned to private leaders Bradesco and Itau Unibanco are, at 'BB+', one notch higher than Brazil's sovereign rating, highlighting their still sound financial metrics and resilience. Small and mid-sized banks, with limited franchise, little diversification and higher single-name loan concentrations, have also been hit and we think this will continue to be the case. Basel 3 will be fully phased in by 2019. As additional capital buffers kick in and prudential deductions, such as of intangibles and investments in insurance and other financial companies, are taken directly to common equity Tier 1, some banks, notably Caixa Economica Federal and Banco do Brasil, both controlled by the public sector, might require additional capital from 2018 onwards. Recapitalising these banks may not be the government's preferred option and regulators could apply forbearance, as has been frequently used in the past. Seventy-eight per cent of our Brazilian bank ratings are on Negative Outlook as is the sovereign rating. Near-term growth prospects are weak and political uncertainty is high. A detailed update on Brazilian banks' credit profiles is included in a report published today and available by clicking on the link below. Contact: Claudio Gallina Director Financial Institutions +55 11 4504 2216 Fitch Ratings Brasil Al Santos 700, 7th floor 01418 Sao Paulo, SP Esin Celasun Director Financial Institutions +55 21 4503 2626 Janine Dow Senior Analyst, Fitch Wire +44 20 3530 1464 Fitch Ratings Limited 30 North Colonnade London E14 5GN Media Relations: Jaqueline Carvalho, Rio de Janeiro, Tel: +55 21 4503 2623, Email: jaqueline.carvalho@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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