S&P Global Ratings believes higher-for-longer interest rates in Brazil will weigh on the asset quality of Brazilian banks. On Sept. 18, 2024, the Monetary Policy Committee of the Brazilian central bank increased the Selic policy rate by 25 basis points to 10.75%. This was the first rate hike since August 2022, and aligns with expectations of a prolonged pause in Brazil's rate-cutting cycle considering uncertain dynamics for global monetary policy and domestic inflation.
What's Happening
During the first half of 2024, Brazilian banks reported solid results on strong net interest margins and a lower cost of risk. This reflected better credit underwriting following the spike in nonperforming assets in 2022 and 2023, which had increased delinquency in credit cards, personal loans, and small and midsize companies. However, the worsening geopolitical landscape and higher-than-expected inflationary pressures in the domestic market have increased market volatility, leading the central bank to increase its policy rate. We now expect rates in Brazil to remain higher for longer.
Why It Matters
Higher-for-longer interest rates are likely to strain borrowers in Brazil, potentially weakening asset quality. We expect this to raise the debt burden on individual and commercial borrowers, which will have to cope with higher financing costs for longer. This, in turn, is likely to weigh on business volumes, asset quality, and financing conditions. We also expect small and midsize companies to face continued pressure and bankruptcy filings, which have already reached record-breaking levels in 2024, to extend into 2025.
What Comes Next
While we still expect banks' earnings to benefit from high interest rates due to strong margins, credit losses may rise. Nonperforming loans have remained stable in 2024, reaching 3.2% as of June. However, we anticipate they will rise to 3.5%-4.0% by year-end. We expect banks to maintain high provisioning coverage ratios to mitigate the impact of weakening asset quality. Profitability should also benefit from lower operating expenses and a greater focus on fees, which will help compensate for the pressure on asset quality.
We anticipate bank lending will remain subdued and credit growth will moderate. We forecast credit growth of 9%-10% by the end of 2024. Additionally, we believe banks will focus more on secured lending, such as auto and payroll deductible loans and mortgages, rather than credit cards and personal loans.
This report does not constitute a rating action.
| Primary Credit Analyst: | Guilherme Machado, Sao Paulo + 30399700; guilherme.machado@spglobal.com |
| Secondary Contact: | Sergio A Garibian, Sao Paulo + 55 11 3039 9749; sergio.garibian@spglobal.com |
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