Two months after devastating floods in the Brazilian state of Rio Grande do Sul, S&P Global Ratings observed smaller-than-expected hits to banks' asset quality. Despite the major disruption in the state economy, we don't expect the flooding to weaken Brazilian banks' financial results this year. The economic activity of Rio Grande do Sul contracted by 9% in May 2024 compared with previous months, according to the Brazilian central bank. The services, tourism, and industrial sectors were the hardest hit. About 80% of the state's cropland was harvested prior to the floods, softening the impact on agribusiness. Strains were eased on small and midsize enterprise (SME) loans by the government aid. We observed a quicker-than-expected recovery in the retail sector especially among sellers of essential products such as supermarkets and pharmacies. Finally, the humanitarian support through donations helped diminish the impact on the population.
What's Happening
The extremely heavy rainfall and floods caused severe damage in the state of Rio Grande do Sul in May and June 2024. In addition, in the first half of 2023, the state suffered from a cyclone that caused intense rainfall and strong winds. For the second half of 2024, we could observe the appearance of La Ninã. This event increases the probability of droughts in Rio Grande do Sul, damaging mostly the agribusiness sector.
Why It Matters
Rio Grande do Sul's agricultural sector is important for Brazil's economy, and it has faced several recent setbacks. Overall, Rio Grande do Sul generates 5.9% of Brazil's GDP. The state's agricultural sector contributes about 69% of the country's rice production and 8.6% of soy output. In addition, dairy products from the state represent 12.9% of Brazil's production and livestock 4.6%.
Brazil's central bank delayed the recognition of loan losses on banks' balance sheets. The central bank announced relief measures, which included the allowance of grace periods for loan payments of up to 90 days without the need for an increase in risk classification. Additionally, the federal government has launched financial aid packages and donations programs, such as Programa Volta por Cima and SOS Rio Grande do Sul, which together total around R$300 million. Finally, multilateral lending agencies and the Brazilian Development Bank (BNDES) have announced long-term funding lines to local businesses, totaling more than R$30 billion.
We removed our ratings on Banco do Estado do Rio Grande do Sul S.A. (Banrisul) and Banco Cooperativo Sicredi S.A. from CreditWatch with negative implications. Despite the economic fallout from the floods, we view Banco Sicredi (BB/Stable/--) and Banrisul's (BB-/Stable /--) credit losses as manageable, which shouldn't erode their creditworthiness. Both banks maintained stable capital, funding, and liquidity metrics during the last three months. We don't expect the flooding to drag down financial results of these two banks this year.
What Comes Next
In our view, the effects of the floods did not weigh on other banks in Brazil. We estimate that the banking system's loan exposure to the state is 6%-8%, and we will keep monitoring the quality of loans extended to borrowers based in the flood-ravaged state. However, we don't expect the floods' economic fallout to damage banks' financial results. Also, contrary to our initial expectations, deposits increased across banks in Rio Grande do Sul because of the postponement of loan payments due in May and June, increasing liquidity of banking clients. Finally, we believe there is still risk of future adverse climate events in the region.
This report does not constitute a rating action.
| Primary Credit Analyst: | Leticia Marcante, Sao Paulo; leticia.marcante@spglobal.com |
| Secondary Contact: | Guilherme Machado, Sao Paulo + 30399700; guilherme.machado@spglobal.com |
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