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Opinion

Are Brazil’s banks out of the woods?

Second-quarter results from Brazil’s largest banks, published over the first half of August, revealed a bounce in financial performance. But it may be premature to dismiss further asset-quality deterioration down the line.

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Brazil’s central bank finally cut its base rate – by a surprisingly large 50 basis points – at its meeting in early August. Bank chief executives have wasted no time in reporting increased credit demand and calling a peak to rising delinquencies.

If asset-quality deterioration is now in the rear-view mirror – and that is a big if – the outlook for a strong banking performance in the second half of this year looks good.

The CEOs certainly think so, with conference calls being dominated by expectations of a much better operating environment – lower rates, lower inflation, better credit demand (loans, debt issuance and other capital market deals) – as well as improving credit metrics.

In April, I took a deep dive into Brazil’s battlewith worsening credit risk. At the time, analysts told me that they been watching steep increases in non-performing loans across corporate and individual segments, and asking how these very un-Brazilian spikes in unsecured lending had been allowed to happen.

If asset-quality deterioration is now in the rear-view mirror – and that is a big if – the outlook for a strong banking performance in the second half of this year looks good

The big question was whether or not there was further deterioration to come.