Fitch Ratings believes that Brazil's banking system is adequately positioned to absorb the potential pressure from a downturn, according to a Special Report released today, titled 'Brazil's MPI-3: Traffic Light Flashes Yellow - Have the Banks Fastened Their Seat Belts?'.
Fitch recently moved Brazil to the MPI 3 category in its Systemic Risk Matrix, indicating the potential for systemic risk from sustained credit growth above historic trends, accompanied by marked appreciation of the BRL. Credit has risen by over 20% of gross domestic product (GDP) over the past four years to over 50% of GDP, its highest point ever (based on IMF broad credit definitions). (Please refer to the Special Report 'Banks Systemic Risk ', dated April 7, 2008).
'The Brazilian banking system looks poised to continue to grow faster than GDP in 2008. Its fundamentals and leading players have remained strong and are well positioned to absorb potential pressure on its growing loan portfolio,' according to Peter Shaw, Managing Director in Fitch's Latin American Financial Institutions Group.
While the development of the banking system seems robust, some risks remain. There is a lack of a well-proven credit culture in Brazil, as reflected in historically low levels of bank credit to GDP, and no reliable way to measure the overall indebtedness of individuals. Therefore, a sharp economic downturn represents the largest risk faced by Brazilian Banks.
The prospects for first half 2008 (H108) appear solid, as the momentum the banks have built to this point should assure continuation of the trends seen in 2007, and credit growth should continue, albeit at a more moderate level. 'Looking beyond H108, prospects for somewhat slower economic growth, as well as incipient regulatory efforts aimed at slowing loan growth, should combine to slow the torrid pace of loan growth, a development that Fitch would view positively,' said Shaw.
The results of such a slow down on the banks would likely be felt principally in 2009, as slower loan growth will lead to pressure on net interest income, while provisioning pressures will likely also press on operating margins, especially if higher local interest rates result in additional pressures on asset quality. While these results are unlikely to match those seen over the last four years, strong revenue streams should be able to absorb significantly higher provisions without requiring the banks to carve into their capital bases in order to absorb losses. Furthermore, solid private sector franchises of the large universal banks, combined with the two large public sector banks, continue to account for the lion's share of the system's assets, and the regulator continues to evolve toward global best practices, leaving the system well prepared to face the next turn in the economic cycle in Brazil.
The Special Reports, 'Banks Systemic Risk' and 'Brazil's MPI-3: Traffic Light Flashes Yellow - Have the Banks Fastened Their Seat Belts?' are available on the Fitch Ratings website, www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Contacts:
Peter Shaw, 212-908-0553, New York
Rafael
Guedes, 11 4504 2600, Sao Paulo
Valeria Salomao Garcia, 11 4504
2600, Sao Paulo
Maria Rita Goncalvez, 21 4503 2600, Rio de Janeiro
or
Media
Relations:
Christopher Kimble, 212-908-0226, New York
